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

Worldwide, we completely changed the way we regulate our banking system. We moved to stricter, capital-based requirements from reserve-based requirements.

There was also the Fed's decision to decelerate the rate of money growth to achieve price stability. People take out debt and arrange their positions based on certain expectations. Throughout the 1980s, we consistently had annual money growth of between 8 and 9 percent. We've now cut that to around 4.5 percent. People are either disappointed or they're surprised. But they're also less inclined to go into debt. That means funds are going to pay off debt instead of to buy goods, and that's a demand-side bottleneck for the economy.

Given these bottlenecks, I think the real story is not why we had a recession, but that the recession was relatively mild.

Do you think that interest rates are low

enough to quickly ensure a recovery?

I think the recent series of rate cuts has ensured that there is substantial monetary stimulus in the pipeline. But we're monitoring things closely.

SUPPLY-SIDE VICTORY

Do you favor a tax cut?

I think a capital gains rate reduction would be particularly beneficial. Another economic bottleneck is that we have had a record high average capital gains tax rate. That tends to put friction on the capital markets. But I don't think it's necessary to have a major fiscal stimulus. I've gone on record as advocating a revenue-neutral tax change, tinkering here and there to make the system more efficient.

Overall, federal and state taxes seem to be

creeping higher. Do you think that legislators

have lost sight of some of the lessons

learned in the Reagan era?

I think the picture is mixed. No one wants to go back to the pre-Reagan days of 70 percent taxes. I've read that the head of an ultraliberal, labor union-sponsored think tank here in Washington said that his idea of the top marginal rate was 40 percent. Well, to some extent, maybe what supply-siders should do is declare victory. If the field of debate is now whether the top rate should be 28 percent or 40 percent, Reagan has won the argument, and we're quibbling over the details.

It is true that we're seeing an upward trend in taxes and tax rates. On net, that's harmful to the economy. But I think it's the loss of a skirmish in a war that you've essentially won.

You've been quoted as saying that the next

battle is going to be on the spending side,

not the tax side. Con you elaborate?

We have to hold government accountable for providing a quality product, comparable to the money we pay in taxes. Take a look at the public school system. Some folks say the problem is a lack of funding. That's nonsense. During the 1980s, after adjusting for inflation, per pupil spending on education went up 25 percent. That's a whopping increase. And you don't see an improvement in quality.

The problem is that we have a highly unionized public-sector monopoly providing a shoddy product. The contrast with our higher education system is frightening. Higher education is a major export product in America. In that area, we have a system that's competitive, non-monopolistic, generally non-unionized - and vastly more efficient.