Semi-Daily Journal

Larry Lindsey Endorses Strategic Trade Policy

Larry Lindsey has always been a supply sider: believing that the benefits in terms of enhanced work effort and productivity from cutting marginal tax rates are enormous, at least a full order of magnitude larger than I believe the evidence shows. (The fact that the Reagan tax cuts were followed by large deficits and the Bush-Clinton tax increases were followed by large surpluses should give him pause.)

Now it turns out that Larry Lindsey has become a strategic trader: someone who believes that the government, by imposing selective tariffs and quotas in the interest of important and strategic industries, can "pick winners" and shape the distribution of industries across nations in such a way as to ultimately enhance productivity.

Back in the Clinton administration, we economists spent a lot of time arguing against this strategic-trader belief: we argued that the U.S. government lacked the analytical capacity to make such judgments, that the U.S. political process was much too subject to industry lobbying for the government to be able to make good trade-industrial policy even if it did have the analytical capacity, and that the consequences of attempting such policies would be disastrous for world economic growth--that even if we did manage to grab a slightly smaller share of the surplus from world trade, the fact that we were endorsing beggar-thy-neighbor policies meant that others would as well, and that the size of the pie would shrink much faster than our relative share of the pie would grow.

By and large, we prevailed. And I think the expansion of world trade and the benefits to the U.S. of participation in the international division of labor have shown that we were right.

Thus it is especially, especially disappointing to learn that to Larry Lindsey's fault of an excessive belief in the benefits of supply-side tax cuts is joined an additional huge fault: a vastly excessive belief in the ability of the U.S. to carry out a strategic trade policy, and a naive ignorance of the consequences of such a U.S. policy for the world trading system.

National Journal Magazine Archive

Larry Lindsey: Let's take steel first. I am not telling anything here that wasn't public. There were two legitimate economic points.... One argument is that tariffs are never good. I certainly taught that in my economics class. The other argument [represented by Zoellick and Evans] is a little bit more subtle. The world has excess capacity in steel. In any market where that is the case, price is going to be at marginal cost, and marginal cost is going to be below long-run average total cost.... Either you say, "OK, we'll let our firms exit, and we'll let other countries pick up [the business], and we'll just import our steel." Or you say, "Well, that's not a very tenable long-run strategy for any country, because you are effectively letting others pick which industries are going to prevail." Do you unilaterally disarm, or do you use laws that are now on the books?.... There is a sound economic case for doing what we did.

07-27-2002

WHITE HOUSE: `The President Has Confidence in Me'

It is one of Washington's hoariest rituals. Things start going wrong, and

soon a front-page story questioning the ability of a key aide to the

president appears. Sometimes these stories are the product of scheming

careerists, ideological opponents, or simply those hoping to deflect blame

from the president. The press plays its role, of course-outdated

complaints and vague charges can get an airing when the times seem to call

for someone to take a hit.



In the gathering storm over the economy-the biggest political challenge of

the Bush presidency-the top members of the president's economic team are

in the crosswind. Stories in major newspapers and news magazines have

revived old questions about the judgment of Treasury Secretary Paul H.

O'Neill, the people skills of Office of Management and Budget Director

Mitchell E. Daniels Jr., and the impartiality of Securities & Exchange

Commission Chairman Harvey Pitt.



On the question of who is coordinating the White House response to the

market turmoil, a number of these stories have criticized Larry Lindsey,

director of the president's National Economic Council. "The White

House seems a step behind in responding" to worsening scandals and

shaky economic confidence, said one Republican congressional staffer, who

is becoming alarmed about the party's prospects in November.



A former Reagan White House wunderkind, Lindsey later served on the

Federal Reserve Board and was the dominant economic adviser during Bush's

presidential campaign. He earned credit for designing and helping

implement Bush's big tax cut, but since then his influence seems to have

fallen sharply. By most accounts, politics has dominated many of the

president's economic policy decisions in the past year, such as his

decisions to embrace an expensive revival of agricultural subsidies and to

endorse trade protection for the steel industry. When some of Lindsey's

responsibilities were shifted last year to White House Deputy Chief of

Staff Joshua Bolten, a few anonymous sources blamed Lindsey's shortcomings

as a manager.



On July 24, with one eye on a much-needed stock market rally, Lindsey

spoke with National Journal staff correspondents John Maggs and Alexis

Simendinger. Reports of his decline, he said, were news to him.



NJ: The public seems to have the impression that the president's economic

team is not functioning very well. Why is that?



Lindsey: I don't know. You'll have to ask the people making the assertion.

I can't imagine. We all get together on a regular basis. Every Monday we

have lunch with the Treasury secretary. Every Wednesday and Friday we meet

right here [in Lindsey's West Wing Office]. I think we get together very

well-get along very well.



NJ: Do you think the economic team has done a good job of communicating

the economic policy of the administration? Is there room for

improvement?



Lindsey: Oh, I'm sure there is always improvement possible.



NJ: Does there need to be improvement?



Lindsey: I think that our goal here is to provide the president the best

advice possible, to anticipate events, and to have policies in place for

those events. And I think we did that.



In the case of problems in the market, here's a quote from President Bush

[when he was running for president] on December 1, 1999. This was when

everything was going great. [Reading] "Sometimes economists are

wrong. I can remember recoveries that were supposed to end but didn't,

recessions that weren't supposed to happen but did. I hope for continued

growth, but it is not guaranteed. The president must work for the best

case and prepare for the worst."



That was a pretty courageous thing to say in December 1999. The president

was ahead of the curve. He was out there willing to say things that were

not popular at the time, because he thought it was the right thing to

do.



NJ: Do you think the criticism of the economic team, whether it is

Secretary O'Neill or Mitch Daniels or you, could be harmful to the

administration or the president if it contributes to a lack of confidence

in the government? Does it concern you?



Lindsey: How can I answer that question? I don't know. Ask the people who

are making the accusation. I've been in Washington, unfortunately, for 20

years. For better or for worse, this is the way it happens, this is the

game, this is part of politics. It is not the most edifying part of

politics. I don't enjoy either doing it to others or having it done to me.

I'd rather focus on policy. That's what we're focusing on.



NJ: In a recent New York Times story you were quoted as saying that you

had the president's confidence, "as far as I know." Some saw

that as a signal that you didn't know whether you have the president's

confidence. Did you mean that?



Lindsey: I have no doubt that I have the president's confidence. It is

just that I don't like to be presumptive when it comes to the president of

the United States.



NJ: In an earlier interview, you summed up the NEC's role as

"bringing economic arguments to bear on the policy process."

Recently, I think, there is an impression that in several high-profile

policy debates-on steel trade and agriculture, for example-economics was

not a big part of the debate, and politics was the main consideration. Is

that true?



Lindsey: Let's take steel first. I am not telling anything here that

wasn't public. There were two legitimate economic points of view within

the economic team. One that [U.S. Trade Representative Robert] Zoellick

and [Commerce] Secretary [Donald L.] Evans put forward. Others, like Glenn

Hubbard [chairman of the Council of Economic Advisers], certainly have a

different view. One argument is that tariffs are never good. I certainly

taught that in my economics class. The other argument [represented by

Zoellick and Evans] is a little bit more subtle. The world has excess

capacity in steel. In any market where that is the case, price is going to

be at marginal cost, and marginal cost is going to be below long-run

average total cost. And that is the method by which firms lose money and

exit the market.



But this is a global issue. Either you say, "OK, we'll let our firms

exit, and we'll let other countries pick up [the business], and we'll just

import our steel." Or you say, "Well, that's not a very tenable

long-run strategy for any country, because you are effectively letting

others pick which industries are going to prevail." Do you

unilaterally disarm, or do you use laws that are now on the books, that

are on every country's books, that are consistent with [international

trade rules] to challenge that process? I can make a case for either one

of those. There is a sound economic case for doing what we did.



NJ: So economics was a big part of that argument. What about the big farm

bill [which increased agricultural subsidies]? Did economics go into

that?



Lindsey: Absolutely. With the bill that passed the Senate, we had three

economic objectives: The first was to keep the overall cost consistent

with the budget resolution. On that score, we reduced the price of the

Senate bill by 29 percent. By any objective standard, cutting 29 percent

is a victory. Our second objective was to have a bill that was consistent

with [international trade] rules. We have a bill that is just consistent

with those rules. The Senate bill was totally inconsistent with trade

rules. The third economic objective was to avoid going back to the bad old

days of permanent stockpiles and acreage allocation and all the rest. And

this bill does not do this; it does not fundamentally change the basis for

agriculture policy that was set up in the [1996] Freedom to Farm Act. Now,

do I think the ag bill was a perfect bill? No, there are onion subsidies

in the bill. I, personally, would never make the case publicly that onion

subsidies are a good idea. I'll probably hear from a congressman whose

district grows onions, but I don't think onion subsidies are a good

idea.



NJ: Are any agricultural subsidies a good idea?



Lindsey: I think that over time-and this is administration policy-the

right approach is to go to zero. But this is very much like the steel

answer. In a world in which the European Union has a $60 billion

agricultural budget, and Japan, which is less than half our population,

has a $30 billion budget, for America to put up $19 billion may not be

perfect, but we are the least of all. And what we have to do is convince

the rest of the world that free trade in agriculture is the right thing to

do. But no one believes that we will achieve that through unilateral

disarmament.



NJ: But there is a proportion of the public that believes those decisions

were made purely on politics and not based on economic principles. So your

advocacy of those decisions on economic grounds failed. It has not been

embraced, even by the president's supporters. So is that a problem when

you, as NEC director, cannot articulate effectively the economic

arguments?



Lindsey: Well, I have given the speech I just gave. I have answered this

question a hundred times in public. I have talked to reporters. It is not

that the arguments haven't been made. Now, maybe what I've just said

hasn't been persuasive.



NJ: Does that bother you, that, as much as the White House tries to defend

this on economic grounds, it still gets portrayed as politically

motivated?



Lindsey: My job is to present the president of the United States with the

best economic advice we can get. That's the job, and I think we are doing

that. I think we gave a close eye to the two cases you are talking about.

I think we did that in a timely fashion; I think we were ahead of the

curve on pensions and corporate governance. Whatever it may be, we were

ahead of the curve, that's what was important.



NJ: There has been some suggestion that a lack of confidence in the

president's economic team may have contributed to the recent depreciation

of the dollar. Is it true?



Linsdey: Oh, I don't think so. We could say the same thing about the

markets, but the European markets are down much more than the American

markets. Is that our fault? I don't know.



NJ: What is the best way to describe the administration's dollar

policy?



Lindsey: First of all, the secretary of the Treasury is the person who

says this, and I will reiterate what he has said. That we believe in a

strong dollar. Before I came into the administration, I am on the record

defining a strong dollar in an article for International Economy magazine.

A strong-dollar policy involves three things. First, it involves not doing

what the Clinton administration did in 1993, and that is talking down the

dollar. Deliberate devaluation is not something that should be tried on

the world's reserve currency. Second, a strong dollar means that the

purchasing power of the dollar must be preserved, and that means

supporting an anti-inflation policy by the Federal Reserve. Third, a

strong-dollar policy means that we should make America the premier place

in the world in which to invest. And I think we are pursuing policies

which do that.



NJ: So are people wrong when they say that the Bush administration has

sent confusing signals on the dollar?



Lindsey: I don't think there is any doubt what our dollar policy

is.



NJ: It was reported last fall that there were widespread concerns in the

White House about your managerial ability. And it was also widely reported

that some of your responsibilities were shifted elsewhere. Was this

accurate? Was there some change in your responsibilities?



Lindsey: No, I don't think there was any change. Now, after 9/11, there

was a lot of overlap between security, economic, and domestic issues. And

there was also a greatly enhanced premium on the president's time. So

there was much more coordination of what we call "policy time"

on the president's schedule. I thought it was essential. The president had

a lot of information, a lot of issues he had to deal with. And I thought

it was very appropriate.



NJ: It didn't have anything to do with you personally?



Lindsey: No, not as far as I know. Oh, wait-[laughter]



NJ: There goes that phrase again.



Lindsey: Look, I'm the wrong person to ask. You can ask Josh [Bolten,

deputy White House chief of staff]. But it happened right after 9/11, and

I think it was because the president's time was scarcer. Now we're back in

a pre-9/11 policy mode. The president is a very busy man, but we do have

policy time two or three times a week.



NJ: You have walk-in privileges?



Lindsey: I need to see him, I can walk in.



NJ: How often do you see him in a week?



Lindsey: For substantive meetings, the average is about three, it might be

four.



NJ: This past week, you have been in the midst of a Washington ritual-the

front-page story in which someone questions your influence and relevance

in the administration. How does that make you feel? Does it just roll off

your back?



Lindsey: I wish I had the time to read the papers. Maybe I don't wish I

had the time to read the papers. This is the fourth administration that

I've been involved with. For better or worse, this is just the way it

is.



NJ: Do you have any plans to leave the administration after the

elections?



Lindsey: [Laughing] After 2008? I have no idea. I have no idea what I'm

going to do. My wife wants me home, I'll be frank. My pocketbook wants me

out of here, but you can ask anyone [in the White House] that question and

you would get the same answer. My kids sure want me home.



NJ: Is it a good time to accelerate the president's tax cut?



Lindsey: I don't know. The president proposed that on October 1 last year.

I think it would have been a good idea if the Senate [had] passed it.

Business investment planning is done usually at the end of November, and

if we had gotten it to go through at that time, I think we would have had

a better investment climate. So I do think that was unfortunate.



NJ: After a speech about corporate excesses and the president's proposed

remedies, it was reported on CBS's MarketWatch on June 4 that you said

President Bush's support for SEC enforcement and rule-making implied that

legislation was unnecessary. By July 9, the president went beyond his

10-point plan and backed legislation on corporate responsibility, as did

you. Was there a change there?



Lindsey: I don't think I was ever quoted [that way], because the president

proposed legislation on this. Remember, the president proposed legislation

on this back in March [Bush's 10-point speech, March 7].



NJ: You would recommend that the president sign the Sarbanes corporate

responsibility bill?



Lindsey: Of course. It is important that we get legislation done, and this

is the legislation.



NJ: What about other tax cuts? The Washington Post reported you were

pushing for a tax cut on new investments in the stock market. How about

that?



Lindsey: I don't read the papers. You're asking me to scoop the

president.



NJ: Well, you've only got a few weeks before Congress departs.



Lindsey: That's a good thing, not a bad thing.



NJ: The New York Times story, the one you didn't read, questions your

relevance. Are you still relevant?



Lindsey: Am I still relevant? I don't even think about those things. I'm

here to do a job; I think I'm doing that job; the president has confidence

in me, that's all that matters.



NJ: There has been some controversy about the president's comments on the

stock market. What is the benefit of having the president speak out on

markets?



Linsdey: I don't think the purpose is a 10-minute bang. The purpose is for

the president to lay out, consistently, what his views are. And I think

he's doing that. The president should speak honestly and candidly, and I

think he's doing that. The great thing about this president is, he doesn't

try and pull the wool over anyone's eyes; he doesn't have any agenda. He's

a very up-front and candid guy. That's why we've survived some tough times

in the last 12 months. I think the most important thing in a crisis-9/11,

economic crisis, whatever-is to have a leader you can trust. That's why I

signed on with him in 1998.



NJ: Republicans in the past were very supportive of a balanced-budget

amendment. Would you be in favor of that now, or concerned that promoting

that would be contradictory?



Lindsey: Well, I think the kind of balanced-budget amendment that was

talked about was one that allowed for a lot of flexibility: There may be

exceptions for war; an exception that is sensitive to the economic cycle;

a balanced budget on a full-employment basis.



NJ: So that's still a good thing?



Lindsey: I think appropriate fiscal policy is a good thing.



John Maggs and Alexis Simendinger



National Journal