Mr. Lindsey goes to Washington - former Harvard University economics professor Lawrence Lindsey appointed as governor at the Federal Reserve - Interview

Chief Executive, The, June, 1992 by Joseph L. McCarthy

Once an economics professor at Harvard and an ardent Keynesian, Lawrence Lindsey, a governor at the Federal Reserve, is fanning the flames of the Reagan revolution and sounding the death knell for an economic orthodoxy in decline.

Ronald Reagan's decision to pull an untested idea into the 1980 presidential campaign - supply-side economic - posed the gravest threat to an economic paradigm since John Maynard Keynes shattered classical theory in the 1930s. Supply-siders, focusing on the supply-side, or incentive effects of tax policy, gained the upper band during the Reagan years. They maintained that revenue losses from tax cuts would at least be partly offset by increased investment and productivity. But since the president left office in 1989, the lips of his successor have parted, and state and federal taxes have crept steadily upward - virtually canceling reductions of the prior decade. As a result, many supply-siders lately have lamented disarray among conservatives and groused about the need for a new champion.

Enter Lawrence B. Lindsey, 37, a Harvard-trained economist and one-time devout Keynesian, confirmed last November as governor of the Federal Reserve's Richmond district. Lindsey, a member of the Council of Economic Advisers during the Reagan administration, says be originally thought the supply-side theory to be hokum and that explosive growth of the 1980s was the product of Keynesian demand stimulus. Further, he thought the reduction of the money supply engineered by Paul Volcker, Fed Chairman before the Reagan presidency, to be the pivotal factor in hacking down inflation. But after studying data in the wake of the Economic Recovery Tax Act of 1981, Lindsey discovered othewise. In a 1990 book, "The Growth Experiment: How the New Tax Policy Is Transforming the U.S. Economy," he makes a compelling case: While the Reagan tax reductions did drain revenues, they offset this loss by pumping up economic output between 2 and 3 percent.

Lindsey's bold pronouncements on taxation and growth stand in marked contrast to the more timid proposals of the Bush administration and an often painfully gradual approach to monetary stimulus taken by his boss, Fed Chairman Alan Greenspan. In his book, Lindsey called for:

* Eliminating all federal taxes for single people earning less than $6,000 and couples earning less than $12, 000. * Restoring IRA deductions with a ceiling of $5,000 per year. * Levying a single, marginal tax rate of 19 percent on all taxable income, including capital gains. * Taxing all compensation above $12,000, including health insurance and other fringe benefits.

Lindsey says the changes, though revenue neutral, would stimulate economic activity among all classes of taxpayers.

How did a supply-sider end up working first as an economic adviser to President Bush, and now as a Fed governor? The road to the Fed marble palace on Constitution Ave. was littered with obstacles.

Analysts interpreted the president's nomination of Lindsey in January 1991 as a signal that be was prepared to embrace a more conservative, pro-growth agenda. But the Senate delayed Lindsey's confirmation until late November - stringing out the bearings even longer than those for controversial Clarence Thomas, who was ultimately confirmed as a Supreme Court Justice. Senators from the Fed's Richmond district, comprising Maryland, Virginia, North Carolina and South Carolina, argued that Lindsey bad no direct knowledge of the region's agricultural and industrial interests. (He has lived in Virginia for three years, fulfilling statutory residency requirements for a Fed governorship.) But observers on the Right viewed the stall tactics as a partisan attack on supply-side economics. Indeed, some senators, including Michigan Democrat Donald W. Riegle, used the bearings to vent their anger over a laundry list of items, ranging from the Fed's unwillingness to ease interest rates more quickly to the mounting budget deficit. Riegle ascribed the latter partly to the Reagan tax cuts.

While Lindsey defends the platform put forth in "The Growth Experiment," he takes special pains to emphasize the common ground between himself, Greenspan and the president - including their mutual desire to cut the capital gains tax. Lindsey, whose term as Fed governor expires in January 2000, opposes most forms of fiscal stimulus, including those provisions riding piggyback in the Bush taxpackage.

In a wide-ranging conversation, Lindsey handicaps the Democratic presidential candidates, analyzes the prospects for economic recovery and elaborates on his blueprint for growth. CE senior editor Joseph L. McCarthy caught up with the shirt-sleeved governor in his opulent Washington office, replete with a 12-foot-high cathedral ceiling and a working stone fireplace.

SQUEEZING THROUGH THE BOTTLENECKS

What's the cause of the current recession?

Economics models suggest that any downturn in the business cycle is caused by a bottleneck in the economy. The current recession was caused by a whole bunch of bottlenecks arriving all at once.