Bush Adviser Sees Clouds Over Economy
By George Hager
Lindsey, 44, a former aide to presidents Ronald Reagan and George Bush and a one-time Federal Reserve Board governor, worries about the declining national savings rate, increasing U.S. indebtedness to foreigners, and the possibility of a global meltdown and a recession in the United States.
Where some see the best U.S. economy in a generation, Lindsey -- whose sunny disposition and self-deprecating manner belie his gloomy outlook -- sees looming disaster. "I'm a little bit nervous about where we're headed right now," he said recently at a policy seminar.
He got out of stocks when the Dow Jones industrial average was at 8500 and doesn't regret it, even now that the Dow is hovering just under 11,000. "We have a bubble; the bubble will burst," he said. "I sleep at night. I'm delighted."
All this may sound much too downbeat for a political campaign, but history teaches that it's precisely the sort of ammunition a challenger needs to oust an incumbent.
In 1992, presidential candidate Bill Clinton thrived on economic gloom as his consultants reminded one another, "It's the economy, stupid," and Clinton hammered President George Bush with the accusation that he was indifferent to the joblessness that lingered after the 1990-91 recession.
Now, with the economy booming, Lindsey is looking to do for Bush's son in 2000 what Democratic economic advisers did for Clinton in 1992. If Gov. Bush and Vice President Gore are their parties' nominees, Bush will need to make a compelling case that the Clinton-Gore economy is not as sound as it looks.
If things are as bad (or could get as bad) as Lindsey suggests, Bush will have plenty to talk about. For example, Lindsey, who wrote a book defending the Reagan-era tax cuts, said he has worked with Bush on a package of tax cuts that would spur investment and growth, return the budget surplus to taxpayers and -- crucially, in Lindsey's view -- act as an insurance policy against the day when the U.S. economy turns down.
Lindsey traveled to Austin last Thursday to give Bush a final briefing on economic matters before the governor's first foray into presidential campaigning. Bush goes to Iowa on Saturday to deliver a new speech laying out the broad themes of his campaign. An aide said Bush is unlikely to go into detail about his proposals this soon.
Lindsey and a team of 10 other economic advisers -- mostly veterans of past GOP administrations, such as chief Reagan economic adviser Martin S. Feldstein and chief Bush economic adviser Michael J. Boskin -- have worked to help Bush assemble an economic plan, but they are leaving it to the candidate to announce it.
The group has a decidedly right-of-center tilt, but in keeping with Bush's centrist tendencies and his determination to sell himself as a "compassionate conservative," Lindsey's group is staying away from the rightward edge of GOP economic thought.
For example, while former vice president Dan Quayle is pushing a 30 percent across-the-board cut in tax rates and fellow GOP candidate Steve Forbes is renewing his call to rip up the tax code and replace it with a flat tax, Bush's advisers shy from such proposals and say instead that they would settle for flatter rates and a broader tax base -- the sort of widely acceptable changes that underpinned the nation's last major bipartisan tax reform in 1986.
Lindsey has a reputation among both friends and critics for being bright and persuasive. "He's smart, he knows a lot," said Henry Aaron, a senior fellow at the Brookings Institution who often disagrees with Lindsey on policy matters. "In a debate on a platform he would be formidable."
Lindsey also gets high marks for not being stuffy. He calls himself "an egghead" and describes his current work as an international economics consultant this way: "I get to fly around the world and watch it fall apart. Fortunately, I make money in the process."
Lindsey insists he is a boring guy: Besides trying to make economic policy, he said, his only other interest is spending time with his wife and their 7-year-old son and 5-year-old daughter. He claimed to have no hobbies beyond taking his son "to tee-ball practice and Kings Dominion." He and his wife used to entertain, he said, but no more, at least not adults. "We entertain other 7-year-olds sometimes," he said.
But he also has a reputation for hard-edged partisanship. His light self-mockery can quickly shift to the sort of barbed sarcasm and political trash-talking that is comparatively rare among economists but is the accepted vernacular of presidential campaigns.
In a recent policy seminar, Lindsey mocked Clinton's Social Security overhaul proposal, saying that "it didn't even pass the laugh test in his own party." He charged Clinton with rejecting Louisiana Democratic Sen. John Breaux's proposal for overhauling Medicare "so Al Gore would have an issue to run on." And he said the decline in military spending during the latter part of the Bush administration and the Clinton years was shameful: "We have done more than neglect it, we've run it down."
Lindsey's partisanship is no accident. Unlike many of his colleagues, he gravitated from academic economics to politics early on, leaving Harvard after getting his master's degree to take a staff job on President Reagan's Council of Economic Advisers in 1981-84. He returned to Harvard to get his doctorate and teach, but in 1989 he was back in Washington, this time as a policy adviser to President Bush, who nominated him to the Fed in 1991. According to accounts at the time, Lindsey's chief credential was his tax-cutting conservatism, which appealed to White House Chief of Staff John Sununu.
It was during his Fed tenure that Lindsey became best known to the general public, for an incident in 1995 when Toys R Us turned him down for a credit card. He gleefully leaked the story to the Wall Street Journal, noting that it illustrated his contention that allowing computers to parcel out credit cards can lead to boneheaded errors.
Lindsey's economic proposals, particularly his insistence on tax cuts, have now put him on a collision course with Democratic orthodoxy, even though both he and Bush have broadly hinted that their plan will couple tax breaks for better-off taxpayers with the sort of relief Democrats favor for moderate- and low-income families.
Lindsey believes that today's tight fiscal policy (caps on federal spending plus pressure not to cut taxes) puts a dangerous burden on the Fed to keep tweaking interest rates to keep the economy humming. The Fed's interest rate cuts have helped boost stock values, but Lindsey said that means the current economic boom has been sustained in part by a dangerously overvalued stock market. He said a tax cut is crucial to ease the over-reliance on the Fed and to stave off a recession if the economy begins to falter.
"Why have I called for a tax cut? Because we really can't afford to have a recession," Lindsey said. "There are a lot of risks in the economy right now."
Talking tax cuts is red meat for GOP audiences but a red flag for some Democrats. Princeton economist Alan Blinder, once a colleague of Lindsey's at the Fed and just recently signed up as an economics adviser to Gore, said tax cuts would stimulate consumer demand and further heat up the economy, provoking the Fed to raise interest rates to cool the economy back down.
"I find this idea a little wild," Blinder said. "With the economy as strong as it is now, anybody who's advocating a tax cut for stabilization purposes is just going to be in favor of cutting taxes at all places at all times. . . . The Fed is not sitting there in Washington thinking that demand needs any more stimulus."
The disagreement between the two former Fed governors could be a preview of a campaign debate that would match two equally acerbic campaign advisers and two candidates with plenty to fight over. One of the Clinton administration's signature policy changes was the 1993 budget package that raised tax rates for the wealthiest taxpayers; at the same time, the package sharply cut taxes for low-income people by aggressively expanding the earned income tax credit, which is aimed at the working poor.
Bush and Gore also may be headed for a bitter clash over Social Security. While both have effectively endorsed some form of private investment accounts as a way to shore up the program, they split sharply on the crucial question of how to fund those accounts.
Bush and many Republicans favor a system that would shift part of the existing Social Security payroll tax out of the current system and into private retirement accounts. Gore, Clinton and most Democrats insist that that would jeopardize core Social Security benefits, and they insist that any private system be an add-on that would leave the current program alone.
In a recent policy address, Lindsey suggested diverting 2 percent to 3.5 percent of the current 12.4 percent payroll tax to private accounts. Any reform plan should "move increasing amounts of Social Security revenues out of [the current system] and into individually controlled savings accounts," he said. "That's the answer."
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