Evans, Novak, Hunt & Shields

Lawrence Lindsey Discusses the Bush Economic Policy Plan

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

ROBERT NOVAK, CO-HOST: I'm Robert Novak. Al Hunt and I will question President-elect Bush's top economic adviser.

AL HUNT, CO-HOST: He is Lawrence Lindsey, newly named as assistant to the president for economic policy.

(BEGIN VIDEO CLIP)

HUNT (voice-over): President-elect Bush brought top businessmen and corporate executives to Austin to endorse his tax cut as integral to economic recovery.

PRESIDENT-ELECT GEORGE W. BUSH: I say recovery because a lot of folks in this room have brought some pretty bad news, that their sales are slowing, that they're having to trim back their work force.

HUNT: While the Austin meeting was in progress, the Federal Reserve unexpectedly cut interest rates. The president-elect broke President's Clinton's policy of not commenting on central bank actions.

BUSH: I am pleased that the Fed has cut the interest rates. I think the cut was needed.

HUNT: At the same meeting, Lawrence Lindsey's appointment was announced. He earned his Ph.D. at Harvard in economics before serving as a presidential assistant in the Bush White House.

In 1991, President Bush made Lindsey, at age 36, one of the youngest governors of the Federal Reserve. He has served as George W. Bush's campaign adviser in economics and was a principal architect of his $1.3 trillion tax cut.

(END VIDEO CLIP)

HUNT: Mr. Lindsey, first of all congratulations. It certainly elevates our show to have a Harvard Ph.D. on.

You and Governor Bush have both issued some dire warnings about the economy, and you've suggested that you would consider moving up your backloaded tax cuts to make it more anti-recessionary. How would you do that, specifically?

LAWRENCE LINDSEY, BUSH ECONOMIC POLICY ADVISER: Well, I don't think the president-elect has done quite what you said. He said that we'll consider lots of things. Obviously he wants his tax cut enacted. The session, the data we've had this week, should erase any doubts in anyone's mind that the economy is having some trouble, that it needs some help. And whatever we can work out to give it the maximum help is what we're for.

HUNT: Well, of course, the backloaded tax cut wouldn't give it much help if you need it right now, and there have been reports that one of the things you are considering would be to lower withholding in the late spring or early summer of 2001. Is that right?

LINDSEY: We're considering lots of things.

HUNT: No, is that a good idea though?

LINDSEY: I think we're going to have to -- I'm not going to scoop the president. He's my boss, and -- excuse me president-elect -- and it's up to him to decide.

HUNT: Well, let me ask you this way then, just in a generic sense. Do you agree that if the purpose of this tax cut -- one of the purposes, short term, is anti-recessionary, that it is better to tilt it towards -- not towards upper-income, or as some supply-siders call them "the more productive element of society," but towards working- and middle-class people who spend the money? So is that the way any frontloaded tax cut should work?

LINDSEY: Well, I think that there are two arguments here. I think that you have made one. The other thing to keep in mind is that the top rate is the rate paid by the unincorporated business sector in America, the proprietorships, the partnerships, the small business corporations. They are being soaked at the highest rate they ever have been. And they have suffered the last eight years as a result.

If you really want to create jobs in America, you've got to pay attention to the top rate as well as to the other rates.

NOVAK: Mr. Lindsey, the people I've talked to are not so much worried about the purchasing power of ordinary Americans as a very, very frightening capital crunch from corporations in this country and around the globe. Some people think it is the worst such crunch since the invasion of Kuwait by Saddam Hussein in 1991 and approaches that. Are you concerned about a capital -- a cash shortage right now?

LINDSEY: There are a lot of companies that got capital fairly easily during the late '90s. That era is over. There is a sentiment change on Wall Street. Investors are kicking the tires a lot harder before they put down their money.

That process will work its way through. I think the key is to keep demanding the economy solid while the capital markets work through that adjustment. I think they will. I think as long as we're sensible about things, as long as we keep demand up, as long as we have a tax cut along the lines of what the president proposed, that we'll be able to work that problem out. NOVAK: There were some people who were startled, Mr. Lindsey, during the campaign that the Bush tax cut, which you helped craft and you played a major part, had no cut whatsoever in capital gains. As I infer from what you said, you agree there is some questions of capital availability right now. Wouldn't this be a very good time to cut -- to make an addition to your tax plan to have a cut in the capital gains rate?

LINDSEY: Bob, when Ronald Reagan left office, the top capital gains rate was 28 percent, the top rate on entrepreneurs was 28 percent. Now the capital gains rate is 20; the tax rate for entrepreneurs is over 40. What is wrong with this picture?

Yes, it would be nice if we could bring all tax rates down. That's not possible. The priority should be giving that high bracket a big cut, so that the unincorporated business sector in America can, once again, improve its cash flow.

That money comes right out of the cash flow of those companies. It is the most destructive form of taxation that we have as far as job creation and investment goes. And that, I think, is where one of our priorities have to be.

Al is also right. One of the things that came up during the summit, 31 percent of American households are having trouble paying their bills month to month. President Bush's tax cut -- contrary to what we heard during the campaign -- would cut the taxes on those typical middle-income families by $1,600 a year, $32 a week. That is a bigger increase in their real pay than they've got in the last eight years combined.

So we have to do both, Bob. We do have to help the entrepreneurs; we also have to help middle-class Americans.

NOVAK: But just quickly, you are saying no to cut in the capital gains rate, as I interpret what you're saying.

LINDSEY: As far as priorities go, you know, I've written on capital gains, I'm for a lower rate. But as far as priorities go, the main thing we have to do is get the proposals through that President Bush ran on and won on.

HUNT: Mr. Lindsey, you talk about that 31 percent cut for middle-income Americans. The one group that you provide no tax relief to at all, are almost 30 million of working poor Americans, who don't pay any income taxes, but they get socked by the payroll tax. That's that $20,000-a-year waitress with two kids who gets absolutely nothing under your plan.

Would you be willing -- given the fact that the economy is going south, would you be willing to consider either something on the payroll tax or to expand the Earned Income Tax Credit for the working poor?

LINDSEY: In the case that you just mentioned, the fact that the net taxes paid by that individual are negative, the Earned Income Credit that she gets as a rebate, far exceeds all of her Social Security taxes.

We have a principle that we're for tax cuts. We are for cutting taxes on people who are paying them.

And I understand what you're saying. Those people are helped in other ways. They're helped by the health credit that President Bush proposed. They're helped by the education credit that he proposed. They're helped by the expansions in some of the direct programs that he proposed. But that's not a tax cut.

HUNT: But you would still be opposed to an ending of the Earned Income Tax Credit or the minimum wage -- or increasing the minimum wage, which...

LINDSEY: Quite the contrary. President-elect Bush ran on a program that he would support a minimum wage increase.

What he asked for was flexibility. The right minimum wage in Manhattan is not the same right minimum wage in the Rio Grande Valley.

HUNT: So let states opt out of it.

LINDSEY: To let states pick the minimum wage that's appropriate for their economic conditions. That is common-sense economics.

NOVAK: Mr. Lindsey, one quick question before we take a break. Many years ago, the only people who talked about reducing the national debt were the most conservative, hide-bound Republicans. Now it's the liberal Democrats who talk about reducing the national debt. Aren't they really just talking good, old-fashioned Republican doctrine?

LINDSEY: Well, I don't want to characterize what the other side is saying. Obviously, we are going to pay down the national debt. We're probably going to pay off the national debt. It might be as soon as before the end of this decade.

That's going to happen. The public wants it. And maybe we should say, you know, good that we have a bipartisan consensus on this one.

NOVAK: OK. We're going to have to take a break, and when we come back, we'll ask former Federal Reserve Governor Lindsey whether the Fed acted with too little, too late.

(COMMERCIAL BREAK)

HUNT: Mr. Lindsey, you served in the Federal Reserve for five and a half years. This week, when the Fed cut the interest rates by half a point, you and Governor Bush both praised it and suggested that it was an indication the Fed really thought the economy was getting into trouble right now.

If that's the case, if that's what the Fed thought, didn't they wait too long to cut interest rates?

LINDSEY: I don't think so. Of course, I'm a member of the Central Bankers Union, which comes with being a former governor. And we have a saying, "The Fed is always right." And I will hold to that.

This has been a very tricky time to see what's going to happen to the economy. You know, we've had these alleged slowdowns for five years running, and they've never materialized. So I think the Fed was a little bit skeptical.

The fact is, though, the data has come in overwhelmingly and the anecdotal evidence is also absolutely overwhelming. And I think the Fed saw that and took the action as soon as it was clear that we really needed some help for this economy.

HUNT: The markets are already assuming there will be another Fed cut in the interest rates at the end of the month. That being the case, since the markets are assuming that now, if they don't do it, will that create a problem?

LINDSEY: Whatever the Fed does is right.

HUNT: So therefore, whatever, sir -- even if they don't increase rates, that's right; if they do increase rates, that's right?

LINDSEY: Alan Greenspan and his colleagues will do the right thing for America. I'm convinced of that. And I mean that sincerely aside from my obligations as a former central banker.

NOVAK: Mr. Lindsey, when you -- I think you're a very talented man and I think America owes you a lot of credit.

Mr. Lindsey, I think when you were surprised on Wednesday when you were down in Austin at the economic forum and the Fed had this emergency cut without actually having a meeting of the Open Market Committee. And you said something then that you said twice to us. You said, "Great; the Fed is always right."

Now, if I'm not mistaken, no governor of the Federal Reserve in recent years has dissented as much from Chairman Greenspan as you did. So if you -- if the Fed is always right, were you always wrong when you were making those dissents?

LINDSEY: I dissented four times in 41 votes. And that made me, I guess...

NOVAK: More than anybody else.

LINDSEY: ... more than anyone else. I think that is was an issue of timing in general. In fact in all four cases, the Fed eventually did...

NOVAK: What I'm asking, is you don't really think they're always right? I mean, nobody's always right, are they?

LINDSEY: I think that if you look at the record of the Federal Reserve over the last 20 years in bringing inflation down, in keeping the financial markets stable, in keeping the rate of inflation stable, it is a master stroke. If only governments could all work that well, we would all be very satisfied. NOVAK: Let me just raise one other thing, President-elect Bush as we showed in the beginning of this program, down in Austin, praised the Fed for its action. President Clinton, on the advice of his economic advisers, never commented on Fed policy. But you praised the action of the Fed; that means you can pan it if you don't like it. Are we entering a new question, where we have a critic instead of a cheerleader in the White House in dealing with the Fed?

LINDSEY: I don't think so. I think President-elect Bush's comments have been very consistent on this. Early on, he called on President Clinton to reappoint Mr. Greenspan. He has consistently supported Mr. Greenspan's actions. And I think he's been fully consistent on it.

HUNT: Let me ask -- let me change the subject for a second, if I may. There have been widespread reports that the Bush administration is not going to be as enamored with or attached to a strong dollar as the Clinton administration was. Is that a fair comment?

LINDSEY: No. The Clinton -- excuse me, the Bush administration is committed to a strong dollar. Remember, it was the Clinton administration that talked down the dollar when it first came to office. They made a terrible mistake. They undermined the economies of Southeast Asia as a result. And I think we've all learned a lesson.

HUNT: So no change in dollar policy in the short run?

LINDSEY: We believe in a strong dollar.

HUNT: Let me ask you this. I'm confused. What is your job, Mr. Lindsey? There was a National Economic Council under President Clinton; Bob Rubin was the first head of it. Is that going to be your job? Is there a National Economic Council?

LINDSEY: Yes, there is.

NOVAK: And you will have Cabinet rank as Mr. Rubin did?

LINDSEY: I will not have Cabinet rank. I am the director of the National Economic Council and assistant to the president for economic policy.

NOVAK: This Republican Congress that we've had in the last six years, as the surplus has grown, has become more and more enraptured with spending. This last year, they spent vastly more than President Clinton, as liberal Democrat, had requested. They had, in fact, surpassed the Democratic liberal Congresses of Tip O'Neill, if you can imagine that. Are you and the Bush administration going to do anything to curb those free-spending Republicans in Congress?

LINDSEY: Well, I think the key here is that, when Congress has money, it will spend it. That is a point we made repeatedly during the campaign. I think it's been validated. The appropriators' party is the biggest party in the Congress. After all, you know, I think the basic strategy of any congressman should be to bring home as much as he can to his own state and get the guys in the other 49 states to pay for it. There's only one constitutional office that can say no; that has the whole country's interest at heart. That's the presidency. And George Bush is not a cheerleader for more spending, unlike the man he succeeds.

NOVAK: Before we take a break, you're a Harvard professor and you know economics, certainly. Is it possible to have a sustained economic prosperity when you've had very high taxes and high interest rates as we have had in the last six months?

LINDSEY: Well, I think that you're right, both are high. What's particularly high on the interest rate score is not necessarily the level of riskless rates but the spreads out there that the small business sector has to pay and the high-risk sector has to pay. We have to find some way of bringing those spreads down. And the best way of doing that, I think, is to restore the cash flow, to improve cash flow particularly in the unincorporated sector.

NOVAK: And that requires a tax cut.

LINDSEY: That requires a tax cut.

NOVAK: We're going to take another break, and, when we come back, we'll have the "Big Question" for Larry Lindsey.

(COMMERCIAL BREAK)

NOVAK: The "Big Question" for Lawrence Lindsey, assistant to the president for economic affairs.

Mr. Lindsey, you shocked a lot of people in America last year when you said that you were so nervous about your stock investments that you had sold all your common stock because you wanted to sleep well at night.

Now, looking at the economy and the stock market now, which was a little shakier -- was when you said that, would you tell the Americans and the people watching this program that they probably ought to get out of the stock market?

LINDSEY: I'm not going to give advice. Maybe have learned my lesson. I think people should invest according to what they can live with, as far as their risk tolerances, as far as their needs go. That's really what I was doing.

I had to stay liquid. I had family obligations, you both know well about. And that and my hatred for even taking changes and losing money, I think, is what drove me to do what I did.

NOVAK: What would say, though, to Joe Six-pack, that he ought to put it in his shoe or something rather than take chances?

LINDSEY: Absolutely not. I think the right thing to do is, you know, talk to an investment counselor who knows you situation. And you're going to end up with a diversified portfolio. And some of it's going to be for the long term, some of it's for the short term.

Turned out my retirement accounts I still had some stocks in, like TIAA-CREF, which I brought back at Harvard days. It's done great. Much better than my Social Security returns. And I hope that we can have these kind of personal accounts for all Americans, so they can do as well as I did.

HUNT: Mr. Lindsey, you are, as we said earlier, on the Federal Reserve for five and a half years, so you know Chairman Greenspan, you know the Fed. Yet, during the Clinton administration, the Treasury chief, whether it was Lloyd Bentsen or Bob Rubin or Larry Summers, always the chief liaison for the Federal Reserve and Mr. Greenspan. Under the Bush administration will you be that liaison?

LINDSEY: Oh, I think that the relationship between the secretary of Treasury and the Fed chief will continue. Obviously, we'll continue to talk, and I imagine the CEA chairman will also be talking to...

(CROSSTALK)

NOVAK: the Council of Economic Advisors.

LINDSEY: Council of Economic Advisors.

HUNT: So all of you will.

Who will be the chief economic spokesman in the Bush administration?

LINDSEY: The Treasury -- the secretary of Treasury.

HUNT: So that won't change from the Clinton administration. But you all will be dealing with Chairman Greenspan.

LINDSEY: No, I think you asked who will be the primary person to deal with the chairman; that will be Paul O'Neill.

NOVAK: Just quickly, do you share some doubt that Paul O'Neill, the industrialist has been named to Treasury, has a very long learning curve to be able to handle that job?

LINDSEY: Paul O'Neill is one of the most talented men in America today. He is trained as an economist. He has run two companies very, very successfully. And he is going to be a great secretary of Treasury.

HUNT: Mr. Lindsey, again, congratulations. Thank you for being with us. And I'll talk to you if I have problems with the stock market.

Bob Novak and I will be back in a moment with a discussion.

(COMMERCIAL BREAK)

HUNT: Bob, Larry Lindsey, when he was in the White House, at the Fed, was noted for his outspokenness, refreshing candor. I think now that he's in that seat of power in the White House, we're going to see a much more cautious approach, as we saw today.

NOVAK: Reading between the lines, there's no question that he and the administration are worried about the economy, not in some kind of a decline in confidence, but in the credit crunch on capital. But the thing I got was I didn't see any changes in policy to take care of this true crisis.

HUNT: Bob, the real change in policy is that we have to take care of the working poor people in this country, which, unfortunately, the Bush policy does not do. I hope they'll talk to Tommy Thompson over at HHS, who knows, if you want to keep the working poor working, you got to give them some more sometimes.

NOVAK: I will say this, Al. Contrary to all the things you wrote about nobody's interested in tax cuts, Larry Lindsey and George W. Bush are interested in tax cuts. That's what's going to be the story of this year: Will we get tax cuts and save the economy or not get tax cuts and it'll go down the pump?

I'm Robert Novak.

HUNT: And I'm Al Hunt.

Coming up in one half-hour on "RELIABLE SOURCES," are the media being fair to conservatives named to the Bush Cabinet?

And at 7:00 p.m. on "CAPITAL GANG," more on the Bush transition and changes on Capitol Hill, with Senator Orrin Hatch of Utah as the guest.

NOVAK: That's all for now. Thanks for joining us.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com