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CNN Novak, Hunt & Shields

Interview With Lawrence Lindsey

Aired August 17, 2002 - 17:30   ET

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. Mark Shields and I will question one of President Bush's top economic advisers.
MARK SHIELDS, CO-HOST: He is National Economic Adviser Lawrence Lindsey.

(BEGIN VIDEOTAPE)

SHIELDS: President Bush closed his economic summit at Waco, Texas, with a warning.

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: I say as plainly as I can to CEOs: If you break the law, we will hunt you down, we will arrest you, and we'll prosecute you.

SHIELDS: The president also revealed what he planned to do with an extra $5 billion for homeland security sent to him by Congress on a take-it-or-leave-it basis.

BUSH: I understand their position, and today they're going to learn mine: We'll spend none of it.

SHIELDS: No member of Congress was invited to Waco, and Democratic leaders were openly critical.

REP. RICHARD GEPHARDT (D-MO), MINORITY LEADER: If the meeting was a PR exercise in a way just to defend what is the policy we're operating under, then this was a bad failure. We need a different kind of meeting to come up with a new policy.

SHIELDS: An economics professor at Harvard, Lawrence Lindsey entered government service as a White House staffer in the Reagan administration. In 1991, the first President Bush named Lindsey, at age 36, to be a governor of the Federal Reserve System. He became George W. Bush's top economic campaign adviser in 1999.

(END VIDEOTAPE)

SHIELDS: Lawrence Lindsey, looking at the Waco meeting, the consensus seems to be that agreement was lower taxes and less regulation. Yet in the post-9/11 world that we live in, if anything, Americans overwhelmingly embrace more activist government to provide personal and national security, and in the post-accounting scandals, they want a more activist government. Is there a collision here with economic consensus and political reality? LAWRENCE LINDSEY, PRESIDENT BUSH'S NATIONAL ECONOMIC ADVISER: Well, I think America has a lot of challenges. You know, we've had a stock market that started declining at the beginning of January 2000, we had a three-quarter recession in 2001, we had the first attack on America since the 1940s.

I think what people want is pragmatism. They want something that works. I think across the board economists looked at last year's tax cut as very well timed. The Blue Chip Consensus called it the best timed tax cut in history. I think the response after 9/11 was good.

And I think that the same thing is true on the corporate governance issue. People want to make sure that crooks are punished, and they are being punished. And we want to make sure that it doesn't happen again, and I think that's the gist of the law the president just signed.

SHIELDS: Well, if pragmatism is the order of the day, why was no Democrat invited to Waco?

LINDSEY: Lots of Democrats were there. We didn't do a list. We didn't checks Rs and Ds before they went and a lot of raised the issued. But afterwards, you know, something sent us the list and there were 43 Democrats who not only voted Democrat, but gave money -- enough money to show up on the Federal Election Commission scoreboard.

So, you know, this was across the board, this was all of America. There were labor union people there, there were CEOs there, Republicans and Democrats. I think there were -- it was a real cross- section of economic America.

SHIELDS: But no Democratic member of Congress.

LINDSEY: And no Republican member of Congress. You know, here we talk to each other all the time in Washington, and begins to become a little bit of an echo chamber. What Waco offered us was a chance to listen to people outside the Beltway, people on the front lines of the economy, and find out what they were thinking, what they thought was going on and what they thought we should do differently.

NOVAK: Mr. Lindsey, you have had the opportunity for some private conversations with the president quite recently. With the economy not in perfect shape, as you will be first to admit, I'm sure, what, beyond what he has done, does the president have in mind to cure the economy?

LINDSEY: Well, first of all, we are moving forward. We've had three quarters of growth. I think if you look behind the headlines you'll see the basis of continued growth. Last quarter, for example, household income, which is income after taxes, after inflation, grew at 3.8 percent. That's enough for people to not only maintain their lifestyles, but to increase spending. And also to save more. We had savings hit a four-year high last quarter.

So what we're see is, as long as income flows to people's households enough to increase spending and let them repair their balance sheets, the economy's going to continue to move forward.

NOVAK: But I talk to business people, particularly entrepreneurs, and they're having a hard time borrowing money. There's a credit crunch going on -- a big spread between the startup firms and the blue ribbon firms. Some economists have called this a symptom of deflation. I never hear anything from the administration about this credit crunch. Don't you consider this a serious problem?

LINDSEY: Well, there's no question that there is a lot of perceived risk in markets now. We had to do a lot of sorting out, the markets have been doing a lot of sorting out. But I think that the Fed is doing a fine job keeping interest rates low. We had interest rates hit a 38-year low earlier this week.

I think in general, again, after...

NOVAK: But if they can't borrow money, it doesn't matter how low they are, does it?

LINDSEY: Well, but after a recession, after an attack, in a world which is riskier -- legitimately viewed as riskier than we used to think it was, the fact that the American economy is growing three straight quarters and is growing at a 3 percent rate I think's pretty good. I think it's a tribute to the vitality of the American economy, to the entrepreneurial spirit, to the strength of America. I wouldn't shortchange us at all.

SHIELDS: On the subject of the Fed, Chairman Greenspan, on his July 16th testimony to Congress, emphasized the fiscal discipline he said of the late 1980s and the early 1990s is contributing immensely to the economic growth, the long-term economic growth. Part of the bad economic news of the last year is that just on payments on the national debt, the deficit, over the administration's own figures, which would pay $700 billion over the next 10 years last year, now they've projected that to $1.793 trillion that we're going to have to spend.

Tell us what the economic consequences of that are. I mean, that money doesn't buy a book or fill a prescription or build a bridge.

LINDSEY: Well, what we've had, again, is a big adjustment in this country, coming off a period of a lot of excesses, coming out of a recession, with our first attack. We have to spend money to prosecute the war on terrorism, to defend the homeland, and we have to do so in an environment which is coming out of a recession.

In those circumstances, you throw all that together, we're going to have a deficit this year about 1.5 percent of GDP. That's below the historical average.

What we have to do, Mark, is to make sure we don't waste money. We can't spend money on frivolous programs. We have to make sure that each dollar the government spends goes to a good use. And that's been the president's policy, that's why he did what he did earlier this week. SHIELDS: On the subject of other economic news, which isn't as bright, the weakening dollar. To what degree is that discouraging of foreign investment in this country?

LINDSEY: Well, I think that, in fact, if you look at the dollar over time, the dollar is probably above where it was for most of the 1990s. We've given back, oh, perhaps, a quarter of how much we ran up, all the way up to a peak.

You know, the markets are going to trade the dollar up and down. What our strategy is, though, is to maintain a strong dollar by making America the best place in the world in which to invest and by keeping the purchasing power of the dollar; that is, keep inflation low. The Fed is doing a fine job of that and we have to have the appropriate tax and regulatory policies to continue to encourage investment here.

NOVAK: Mr. Lindsey, you used to be known as a supply-sider, maybe you still consider yourself one. But one of the arch principles of supply-side economics is the value of a capital gains tax cut. I think I've asked you about this several times in the last two years. Do you think now the time has come, with the problems of investment in this country, for a capital gains tax cut?

LINDSEY: Well, there's no question that -- and as the president has said, that we need tax reform. We have a tax code that is far too complicated, that over-taxes savings, that over-taxes investment, and we need to make adjustments in that.

We have a very clogged legislative agenda. But, Bob, I agree with you, we have to do something about this problem. What we did in the '90s made the situation worse and we have to now start turning the clock the other way.

NOVAK: Is that a yes, that we need a capital gains tax cut? I didn't quite get what the final answer was.

LINDSEY: The answer is, we need tax reform. We need tax simplification and we need lower taxation of capital on all fronts.

NOVAK: OK. We're going to have to take a break, Mr. Lindsey.

And when we come back, we'll ask what President Bush thinks should be done further about corporate corruption.

(COMMERCIAL BREAK)

SHIELDS: Mr. Lindsey, even after the accounting reforms endorsed by the administration -- when you joined the Reagan administration, the average CEO in this country made 42 times more than the average worker. The latest figure is that the average CEO makes 532 times more than the average American worker. Does that bother you?

LINDSEY: Well, I certainly don't think government should be setting people's salaries. I think people should be get paid what they are worth. And when you have someone who created a new idea, created a new product, does a good job, he should be compensated for it.

I don't believe, and I know the president doesn't believe, that people should be compensated if others did not share in the wealth. Having CEOs take big bonuses while the company stock is running down is wrong. If the CEO helps make others, workers, shareholders rich, great; he should get rich too. If he didn't, he doesn't deserve the money.

SHIELDS: Was he getting not enough in the Reagan years, then, the average CEO?

LINDSEY: Again, I think it depends on the job the person does. I don't think you can generalize. I think, again, some people are worth every penny they get paid and some aren't. That's the way it is.

But I think the key is that we have to link the pay that CEOs get with actual performance and not phony performance.

NOVAK: On the "LOU DOBBS' MONEYLINE" every night they run a little box on how long it's been since Enron collapsed -- it's been 257 days at the end of this week -- and how many people have been indicted in corporate corruption scandals from other companies -- 18 -- how many have been indicted by Enron: 0. And the implication is that the Enron people are buddies of this administration.

I know this is a Justice Department business, but a lot of people in business wonder why is it that the Enron people aren't being indicted.

LINDSEY: Bob, you're right, it's a Justice Department issue. I don't know anything about the prosecution of cases.

I do know that our Justice Department is vigorously pursuing this case. It might be that it's a more complicated case -- that's what they seem to say in the newspapers. I don't have the answer to your question. It's a matter for the justice process and not a matter for politics.

NOVAK: Mr. Lindsey, on the other hand, business people that I talk to who feel that this conservative Republican administration has gone too far on the accounting reform bill, which was hurried through, they're worried about the accounting reforms that's going to be put into place, worried that it's going to be a too harsh a treatment of business that will kill the goose that laid the golden egg. As an economist, do you have some fears of that?

LINDSEY: I think we have to catch the crooks. I don't think any CEO that I've talked to likes the idea of having people out there with the same title that he has or she has that, you know, basically rob their shareholders. I think it gives the entire name of business a bad name. And getting those people in handcuffs and getting them tried and having them face the consequences of the law is the best thing we can do to restore integrity to American business.

That's the message that I hear from CEOs. SHIELDS: Mr. Lindsey, you've been an early advocate of allowing workers to devote part of their Social Security payment to an individual retirement account, which opponents call privatizing Social Security. And I wanted to find out from you, that given the present economic system and the projected commission -- the president's own commission -- that it would cost $1 trillion to transition to that system to cover the existing payments already owed the retirees, does it make it impossible, given the fiscal situation we're in now, as well as the political reality of a stock market that has just gone through a certain hemorrhaging?

LINDSEY: Mark, it makes even more sense to do it. Because the bottom line, from what the commission said, the bottom line from what the Social Security Administration said, is that right now we have an actuarial hole in Social Security of something like $4 trillion. The plan that the commission recommended would eliminate that hole, meaning the fiscal position of the U.S. government would be better off by $4 trillion than it is now with Social Security reform.

Yes, there would be transition costs. But the fact is, those transition costs would be more than made up by gains from the reform and we'd wipe out the current hole in Social Security.

The only guarantee in Social Security today is that under current law, if we don't make any changes, sometime in the 2030s every American on Social Security is going to get a 30 percent cut in their benefits. I think that's wrong. I think we have to do something to stop it, and the best time to stop it is right now.

SHIELDS: Where would you get that $1 trillion in transition costs now?

LINDSEY: Well, I think what you have to do is remember, you're making the government better off by $4 trillion over time. If you can improve -- to use a business word -- the balance sheet of the federal government by $4 trillion, there's no trouble in temporarily borrowing money to do that.

SHIELDS: Mr. Lindsey, United Air Lines has hired former Congressman Bud Shuster, one of the real powers of Capitol Hill, as a lobbyist. United Air Lines wants, what some people would call, a bailout -- government payment. They're in bad trouble. What is the Bush administration's position on the United Air Lines bailout?

LINDSEY: Well, remember, after September 11th the president went to Congress and asked for $5 billion for the nation's airlines. They had been badly hit by the events of September 11 and they needed a cash infusion.

Mark, you asked about pragmatism. I think that was a very pragmatic move. It kept the airlines afloat in a very difficult time.

They also authorized $10 billion in loans if the airlines needed it and if the airlines restructured in a way that would make them profitable so the government could be paid back. Those are the conditions. That's what's in the law. We have a three-member board to make a decision based on the facts before them -- the financial facts -- as to whether or not the government's going to be repaid. If UAL meets those conditions, if UAL establishes a basis by which they can assure the government the taxpayers are going to get their money back, then they should get the loan. That's the condition laid out by Congress and that's what I think we should do.

NOVAK: So they don't need a big time lobbyist like Bud Shuster, they can get it just if they do as you said.

LINDSEY: I'm a great believer that the best way to do things in Washington is to be straight up. And hiring lobbyists, I don't think is the right way to do it. Congress has laid out the rules of the game, and we have to apply the rules of the game.

NOVAK: OK. 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 Larry Lindsey.

Mr. Lindsey, you sold all your stock when the Dow was at 8,500 on the way beyond 10,000. It's on the way back now, not much over 8,500. To give a boost to the American economy, a confidence to the American people, would you consider now, just as an act of patriotism, to reinvest in the stock market?

LINDSEY: Well, I sold my stock in part because I have three kids, and at that point I had an ailing mother-in-law who had just moved in with us. I couldn't afford to have money anywhere but where it was safe. I couldn't take any chances.

I still have the three kids, and my pay's gone down now that I work for the government. I would recommend that all Americans do -- they read the financial press, they do what's in their own self- interest, they look at their own financial condition and they not risk money.

NOVAK: So you wouldn't make a purchase as a patriotic act then? You don't feel that's necessary.

LINDSEY: Bob, you get Congress to give us all a raise, and I'll invest.

SHIELDS: Speaking of reading the financial press, one of the most celebrated investment advisers, Jack Grubman, who had touted WorldCom all the way as it fell and contained to urge investors to buy, raising serious questions about conflict of interest and all the rest of it, just is leaving now with a $32 million platinum parachute, while employees who were laid off at WorldCom still haven't gotten their severance pay. I mean, what should we do about this?

LINDSEY: I think it's awful. I don't know how people can possibly think otherwise. I don't think he deserved it. But again, that's how we work in the system. And, you know, I think he was very unfortunate.

SHIELDS: Is there nothing that we can do though? Are our hands tied? Are we impotent to do anything about it as a people?

LINDSEY: Well, the company that paid him is not (ph) going through bankruptcy. They made that judgment that they were going to fulfill the rest of the contract. And no, that's -- we may not like it, we may criticize them on shows like this but, you know, we have a free enterprise system where the government does not tell people how much they should make even when it seems obscene to us.

SHIELDS: OK. We have to take a break. Thank you so much Lawrence Lindsey for being with us.

My partner, Robert Novak, and I will be back in a moment with a comment.

(COMMERCIAL BREAK)

SHIELDS: Bob, this year, when Republican candidates are making a mad dash away from anything like privatization of Social Security, Larry Lindsey continued to endorse it strenuously; said it was worth borrowing a trillion dollars, the cost to do it so, because it would be in the long-range interest.

NOVAK: He sticks with the Bush program. And, you know, I tried to see whether he's worried about this credit crunch and these new programs -- capital gains cut, that sort of thing; didn't get an answer from him on that.

SHIELDS: He did show some genuine, personal, moral outrage at the news that Jack Grubman, the celebrity analyst who led people to invest in WorldCom when they shouldn't have, is walking away with a $32 million platinum parachute.

NOVAK: He was also, kind of, outraged about Bud Shuster lobbying for United Air Lines.

But I really do believe that Larry Lindsey has developed into the best economic spokesman in the administration. I don't mean to insult Paul O'Neill, but Lindsey, I think, does a very good job in presenting the president's case.

I'm Robert Novak.

SHIELDS: I'm Mark Shields.

Coming up at 7 p.m. Eastern on "CAPITAL GANG," has the economy reached bottom or is it still in freefall? And the president's working vacation. With our guest, Democratic Congressman Marty Meehan of Massachusetts.

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

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