CNN NOVAK, HUNT & SHIELDS
Interview With Lawrence Lindsey
Aired January 12, 2002 - 17:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
AL HUNT, CO-HOST: I'm Al Hunt.
Robert Novak and I will question President Bush's chief economic adviser.
ROBERT NOVAK, CO-HOST: He is Lawrence Lindsey, director of the National Economic Council.
NOVAK (voice-over): President Bush this week alerted the nation that he will submit the first federal budget with a deficit since 1997.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: It makes sense to spend money necessary to win the war. It makes sense to spend money necessary to protect the homeland. And we're in a recession.
SEN. JOSEPH LIEBERMAN (D), CONNECTICUT: The federal government is going deeply into deficit for the first time in four years. And I think to solve that problem and to meet our national needs, like security and defense, we've got to put everything on the table.
NOVAK: The president called for Congress to reconsider his stalled economic stimulus package, as new reports showed 2001 ending with the worst holiday shopping season in a decade.
Meanwhile, the collapse of the Enron Corporation eclipsed the economic news. As the Justice Department announced a major criminal investigation, the White House revealed that Enron chairman Kenneth Lay in October warned two Cabinet members of his company's problems.
BUSH: I have never discussed with Mr. Lay the financial problems of the company.
NOVAK: Lawrence Lindsey, a former Harvard economics professor, was named as a governor of the Federal Reserve Board by the first President Bush. He joined the presidential campaign of George W. Bush in 1999, and was the major architect of the candidate's economic plan.
NOVAK: Lawrence Lindsey, it's difficult to comprehend -- for many people to comprehend how two Cabinet members, Commerce Secretary Evans and Treasury Secretary O'Neill, could be told by Kenneth Lay of the imminent doom of this huge corporation and not pass it on to the president. Did they make a tremendous mistake in keeping their mouths shut?
LAWRENCE LINDSEY, WHITE HOUSE ECONOMIC ADVISER: Well, I don't think so. Again, given the time we're talking about, it's obvious that Enron was in trouble.
We were all concerned about what it might do to some of the energy markets. My staff was monitoring the energy markets to make sure spreads weren't widening.
But there was no need to do anything. The markets functioned perfectly. And as a result, there was, sort of, the crisis that didn't happen. It was, as it were, a non-event.
NOVAK: You're saying there was no crisis?
LINDSEY: As far as affecting the markets, the market -- the natural gas market, the oil market, the energy futures market, all the markets that Enron had been a major participant in functioned well.
Obviously, there is a crisis here for the people who worked for Enron, that were shareholders of Enron, who have lost a lot of money. The president expressed his concern yesterday about that. He asked the secretary of labor and treasury and commerce to see what we can do about 401(k) rules. He's asking others to see if we can't do something about disclosure requirements in the future.
But as far as the national economy goes, everything has functioned well in spite of that problem.
NOVAK: You're saying, sir, that the situation where some of the really big heavy-hitters at Enron got out without losing a dime, while the smaller people lost their life savings, you think it is the government's role to try to avoid reoccurrences of that phenomena?
LINDSEY: Absolutely. And that's why the president is instructing us to look at changes in the rules that might be needed to accompany that; why the Justice Department is engaging in investigation; the Labor Department is engaging in an investigation, with regard to pensions where it is responsible.
The administration has been monitoring this from the beginning. And where there are questions about the laws or rules or regulations the relevant agencies are on top of them.
NOVAK: One more question, sir, on Enron. Do you believe that, with the tremendous association of this administration, all the way from the president down to shareholders, people getting paid by Enron -- you received a $50,000 consulting fee in the year 2000 from Enron -- do you think that this is a really political problem for this administration?
LINDSEY: Well, Enron has lots of consultants, has made lots of political contributions. They were the major contributors to Ann Richards, for example. Ken Lay was the chairman of Ann Richards' business council when Governor Bush first ran. They just finished another check to the Democratic Senatorial Campaign Committee. People in both parties have received benefits; there's no question.
The important thing here is that American capitalism is not crony capitalism. In America, when a company makes a mistake, even when it's a big company, even when it's well politically connected, that that company bears a responsibility to it decisions.
HUNT: Well, you said a few days ago that Enron was a tribute to American capitalism. Would you tell..
LINDSEY: What was the...
HUNT: That was a direct quote, a tribute to American capitalism, because the government let it fail. What I want to know is would you tell those workers who lost -- some of them who lost their life savings, while the fat cats, the big executives made out like bandits, would you tell them it's a tribute?
LINDSEY: What I think was a tribute to American capitalism was that we were allowing -- we did not have phony capitalism. We did not allow a political connection...
HUNT: But you don't think the dichotomy between the top and the bottom is a tribute to...
LINDSEY: Absolutely not. That's not...
HUNT: OK. All right, all right.
LINDSEY: What is important here is that we have an economy in which connections aren't what matters. What matters is your ability to produce a product and sell it to the consumer and I...
HUNT: Did Kenneth Lay or any other top Enron official contact you in the several months before they declared bankruptcy? Did you have any conversation with him?
LINDSEY: I had no conversations with Ken Lay...
HUNT: Or any other top official at Enron?
LINDSEY: Or any other top Enron official.
The "New York Daily News" reported on Friday that in its bankruptcy filings Enron lists you as a creditor. Do they owe you money?
LINDSEY: They owe me no money. I...
HUNT: So they're just wrong?
LINDSEY: What -- again, I have asked why this could happen. What I am told is that in bankruptcy filings, it is common practice to list everyone to whom you have paid money in the last two years, because one of the things that bankruptcy court wants to look at is whether or not there were payments that went out the door right before -- whatever it might be.
But no, Enron does not owe me money and I -- as far as I'm concerned, I'm not a creditor.
NOVAK: Mr. Lindsey, the -- you and other persons in the administration a year ago were not predicting the recession that we are now in. You've been optimistic about getting out of it. But the news is bad. Ford today -- or on Friday announced a global layoff of 35,000; 22,000 in America -- North America. And most analysts were saying the recession will not end until the third quarter, maybe not the fourth quarter. Can you amend your judgment now to say we're going to have hard times all through the year 2001 -- 2002, I'm sorry?
LINDSEY: No. As you noted, we did forecast trouble in 2001. I think we should have got credit for having been right about that, when we were told we were having happy times. We were having trouble in 2000. Industrial production peaked in June of 2000.
What I have said and I believe is that the preconditions for an expansion are in place. We have very lean inventories. That is usually the key to the beginning of an economic expansion.
But that one reasons is that we have an insurance policy. And the insurance policy, quite frankly, is what the president suggested pass, it then passed the House twice, that was stalled in the Senate. Because we shouldn't take any chances here. This is the opportunity for the economy to revive. The preconditions are there. Let's not have another year of slow growth.
NOVAK: But Dr. Lindsey, Jack Kemp and Jude Wanniski supply- siders have been predicting that you can keep cutting taxes all you want, keep cutting interest rates all you want and you still have a problem of monetary deflation. Do you think now that perhaps, since these tax cuts and interest rate cuts have not revived the economy, they have a point?
LINDSEY: Quite the contrary. I think textbook economics has worked. It includes tax cuts, it includes interest rate cuts. We had -- we just finished, and Enron is an example, a period of quite a bit of financial excess. During 2000 alone, $4 trillion worth of household worth -- net worth was wiped off the books.
That's the big effect.
We sensed there was a problem. On January 3, the president had an economic summit. It was last January 3 in Austin. He proposed an economic stimulus package. The Federal Reserve cut interest rates.
Because of that we probably would have avoided any negative quarter, including the third quarter. Osama bin Laden came along, knocked us off our feet again. What should we do? Hey, textbook economics worked the first time. Let's use textbook economics a second time. We need a stimulus package; we need more tax cuts.
HUNT: Well, let's stay on that. You talked about the stimulus package as an insurance policy, and I want to ask you one quick question before we go to a break.
You have embraced that House bill, but the Congressional Budget Office this week -- it's run by a Republican -- analyzed that tax cut and said the three positions that you support -- accelerating the cut in rate to 25 percent for upper- and middle-upper-income taxpayers, for ending the corporate alternative minimum tax, and for giving a tax break for foreign businesses -- that none of those would have anything but a small or negligible impact on stimulus.
Don't you think, if that's the case, it's time to go back to the drawing boards and come up with something that will actually stimulate the economy?
LINDSEY: Well, first of all, the CBO report had lots of caveats in it. It was requested by the Democrats...
HUNT: No, but it was done by the CBO.
LINDSEY: But excuse me. Almost every private-sector forecast -- DRI, MacroAdvisers -- have estimated what the president proposed as being exactly what the economy needs, as was the first tax cut. It is retail sales that have held this economy together. Retail sales, I think, were the result of the tax cut that the president proposed.
What we're proposing now to do is to extend that into the investment side, because it is investment that is driving right now.
HUNT: Dr. Lindsey, we're going to take a break right now.
But when we come back, we'll ask Larry Lindsey about runaway spending and high interest rates.
NOVAK: Lawrence Lindsey, your administration has pretty well ignored Senator Majority Leader Tom Daschle's alternate proposals for stimulating the economy. As I understand it, he is proposing tax breaks for businesses that add on new workers and expand. What's wrong with that proposal?
LINDSEY: Well, there's nothing in particular. The question is, what is the best thing to do to get this economy going again?
The first thing we know is that one-time, short yields don't work. You need long-term incentives. And what we're proposing is bringing those rates down, as part of a long-term incentive; a three- year incentive to invest, that's a long-term incentive.
Back in the '70s we tried a lot of these one-shot, one-year deals. The economic evidence is clear: They don't work.
NOVAK: Do you think your calling Senator Daschle an obstructionist is conducive to getting an agreement? Or do you really have no hopes of getting an agreement with him?
LINDSEY: Well, you know, I think the difference here is that the president has the responsibility for being the leader of 280 million Americans. The Senate majority leader is the leader of 51 Democrats in the caucus, in the Senate. They come at it from different perspectives.
And, you know, I am somewhat encouraged. Senator Daschle seemed a lot more open to being willing to move a stimulus bill when he came back from hearing from voters in South Dakota that they want one.
HUNT: What do you think of the various spending initiatives that Senator Daschle has proposed: more for the Nunn-Lugar bill to prevent terrorism abroad, more homeland security, more for health and science research? What do you think of those?
LINDSEY: Al, I have the same thing about any spending proposal. I think it needs a cost-benefit analysis. You know...
HUNT: ... too much?
LINDSEY: I think that what the president has done, what we've done at OMB, is to take a look at how much money is needed, take a look at each program to see whether it'll pay, and then propose the ones that we think meet the cost-benefit test. That's the right thing to do.
HUNT: But you said in his spending proposal implicit, even though it didn't call for a tax increase, would be higher taxes.
Your priorities are a little bit different -- a little bit more in defense, a little bit bigger tax cut. The bottom line is, of course, wouldn't implicit in your plan also be either more taxes or to dip into the Social Security trust fund?
LINDSEY: There are -- the president is going to be proposing a budget at the end of this month. I think you're going to find that that budget meets the test I've just laid out. We're spending money cost-effectively. We are going to be returning to budget surplus in the not-too-distant future.
We're right now fighting a war, problem on the homefront, and we're in a recession. It's only natural that you would have, in the short term, a recession.
NOVAK: But Dr. Lindsey, let's be candid. There are people on both sides of the aisle on Capitol Hill, in Congress, who have taken this war as an opportunity to really open the floodgates on spending, raising appropriations far above your proposal.
Isn't that true? Don't you -- there's no caps anymore, no restrictions on spending. Don't you have a prospect of runaway spending by Congress? LINDSEY: Well, you know, last year the Congress dared to increase spending beyond what they agreed to with the president. The president told them, "No," and guess what? They stuck to the agreement. The president of the United States is standing there with the veto power if necessary to make sure that we do not have runaway spending.
NOVAK: He will veto appropriations bills this coming year?
LINDSEY: He certainly did last year -- he threatened to last year, and the Congress did the right thing. And I think the same thing will happen this year if necessary.
HUNT: Dr. Lindsey, the Federal Reserve, your alma mater, has cut interest rates 11 times over the past year -- short-term interest rates. Long-term rates haven't budged; why?
LINDSEY: Well, long-term rates have come down somewhat this year. We had a big refinancing boom in November.
I think it's, in part, that we have a lot of private-sector borrowing. Corporations have gone out there to refinance their balance sheets, get their short-term debt off, take on long-term debt. It's a very natural thing to have happen.
So I don't think this is a significantly different turn in the business cycle than what we've seen in the past.
HUNT: Your former colleague, Alan Greenspan, who, as you know, supported your tax cuts, was asked several months ago about this during a Senate hearing. And let's put up on the screen for our viewers to see this exchange he had.
Senator Schumer asked Chairman Greenspan, "You thought long-term rates hadn't come down enough. Is that due to the tax cut?"
The chairman replied, "I think it's basically due to a series of things: one, tax cuts; two, expenditure increases which were higher than expected; and three, the economy."
Senator Schumer said, "So the tax cut did have a negative effect on this?"
And Chairman Greenspan said, "Oh, yes, no question."
Does Alan Greenspan just not understand long-term interest rates?
LINDSEY: I disagree with the implication here that it was the tax cuts. Remember, the tax cuts this year amounted to only 15 percent of the change in the deficit. Most of the change was economic change and, in fact, spending increases were even more than the size of the tax cut. So I think if ranked anything, if you look at any of the numbers, you have to conclude that the tax cut that helped turn the economy, stopped the economy's fall, is a very, very minor part of the problem when it comes to our fiscal situation.
HUNT: Dr. Lindsey, we're going to take a break right now. But when we come back, we'll have "The Big Question" for Larry Lindsey.
HUNT: And now "The Big Question" for Larry Lindsey.
Dr. Lindsey, you have insisted that any change in scheduled tax cuts would amount to a tax increase. Several weeks ago, Florida Governor Jeb Bush, in order to meet their budget shortfall, delayed a scheduled tax cut on stocks and bonds in that state. Did Jeb Bush increase taxes on Floridians?
LINDSEY: I have to stick with what I said.
HUNT: So he did. Jeb Bush is a tax increaser. One out of two in the family, right?
NOVAK: That was a very short answer.
NOVAK: Dr. Lindsey, the Bush-Lindsey economic program of the 2000 campaign prominently included Social Security reform; you had partial privatization, getting people to contribute some of their money in the stock market. Would you say right now, because of the change of conditions, that Social Security reform is dead for this Congress?
LINDSEY: Oh, I don't think so. I mean, the Social Security commission was very explicit. They urged the Congress to debate this extensively for a year.
Now, do I think it'll pass this year? I'm not so certain. But what we need is more discussion.
You know, last year we had a lot of education done on Social Security. I think there's going to be more done this year, and I think the advantages of personal accounts and letting people have more control over their retirement savings is pretty clear.
NOVAK: You mean, when you say more discussion, is it up in the air whether the president's going to support that approach?
LINDSEY: Oh, not a bit. The president's going to be pushing it all year long. But the commission was quite clear that what we should have is a period of discussion so that the Congress can be brought along.
NOVAK: Lawrence Lindsey, thank you very much.
LINDSEY: My pleasure.
NOVAK: Al Hunt and I will be back with a comment after these messages.
(COMMERCIAL BREAK) HUNT: You know, Bob, it was perfectly legit for Larry Lindsey to be an Enron consultant before he went to the White House. And the company falsely listed him as a creditor in their bankruptcy findings. But I don't think he's going to get away, or the White House is going to get away, with his explanation that O'Neill and Evans, his Cabinet secretaries, had no obligation to tell the president when Enron tried to lean on them.
NOVAK: That's the administration's biggest problem. I thought it was very interesting, as a Republican, did something that's a little hard for Republicans to do. Dr. Lindsey said that the government has an obligation to take care of the ordinary people who got wiped out in this scandal, while the rich executives made out fine.
HUNT: The cardinal rule of top White House officials and ex-Fed people is you don't criticize Alan Greenspan. He didn't violate that rule today, but it's clear that he and Alan Greenspan have a different view on long-term interest rates. The chairman thinks the tax cut had an affect.
NOVAK: I'd say he came close.
Lawrence Lindsey was on this program about a year ago, and I think he has really improved as a spokesman for the administration. I really do think he is one of the more effective spokesmen for the economic program, and he is a 100 percent supporter of the Bush plan as written.
HUNT: George Bush?
I'm Robert Novak.
HUNT: And I'm Al Hunt.
NOVAK: Coming up at 7:00 p.m. on "CAPITAL GANG": Is the Enron bankruptcy becoming a full-fledged Washington scandal? The latest on the war on terrorism. And our "Newsmaker of the Week," Nebraska Senator Chuck Hagel.
HUNT: Thanks for joining us.
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