Author
Larry Lindsey was not President Bush's last nominee to the Board of Governors of the Federal Reserve System; however, because the Senate's approval process took more than 10 months for Lindsey, he was the last to gain approval. The longer it took, the more Fed watchers conjectured that Lindsey would become among the "most controversial" of the seven governors. His critics claimed that because Lindsey came directly from the White House, he would be too political and, more, he was an advocate of the supply-side point of view.
Now, a little over one year into his eight-year term as governor, Lindsey has surprised his critics with his balanced approach to monetary policy and his strong support of consumer and community interests. We caught up with Lindsey recently to discuss his role at the Fed.
See "Catching up with Lawrence Lindsey" in The Region, June 2001.
Region: You have said that Martin Feldstein, your thesis adviser at Harvard, taught you much of the economics you know. Why was it that you chose to study at the feet of Mr. Feldstein?
Lindsey: Marty is an exceptional guy. He was one of the most able economists at extending the theory of economics into real practice and I had always been interested in economic policy. I also have to say that Marty is probably one of the smartest people I have ever met. After I'd signed on with him, he impressed me because he could do logarithms in his head. He can take exponentials and come out with a number in no time. I have to resort to a calculator like most mortals.
Region: That sealed it.
Lindsey: That sealed it, that's right.
Region: Is there a single most important thing you learned from him, a concept or idea?
Lindsey: I don't know if it would be a single idea, it would be a method to economic science, which is to look at the data and follow the direction the numbers point to, telling you where the truth is, and never be ashamed to admit that your first idea was wrong. So I don't know if that's a particular economic concept, but it is a very good way of doing research and pursuing policy. If you're wrong, then say you're wrong and try a new approach.
Region: Is there anything on the current issues where you part company, you and Feldstein?
Lindsey: Maybe a little bit on tone or nuance. Most economists agree with each other more than they disagree, especially in comparison with non-economists. And I certainly agree with him on most issues. Maybe there are issues of tone on international matters, but by and large I think we're in agreement.
Region: In your book The Growth Experiment, you propose a tax code for the future. As I remember it, it contains some bold proposals. What were some of the boldest?
Lindsey: What I wanted to pursue was a continuation of policy in the direction of lowering rates and broadening the tax base. The way to do that is to get rid of some of the loopholes and exemptions that are in the tax code. I think maybe the boldest proposal would be to change the way we do business taxation, away from our current focus on profits toward a cash flow type tax. That would increase incentives for investment in new plant equipment and decrease incentives for borrowing. And I think that's the right direction to take our business taxes.
Region: Do you propose a change to IRAs?
Lindsey: I'm a big believer in the need for us to move away from complete reliance on our Social Security system, which will be in somewhat questionable health toward the middle of the next century, and toward a reliance on incentives for people to save for their own retirements. I proposed expanding IRAs to $5,000 a person from $2,000 and allowing people to withdraw the money when they have other needs in life, not to wait until they're retired. The first need you usually have is to buy a house and the next need, 10 to 15 years later, is college education for your children. People should be able to save for a whole range of needs.
Region: It seemed that the main line of investigation in your book was, as you put in it, that "Supply-siders proved more right than Keynesians on every practical issue in the debate of the early eighties." Is that correct?
Lindsey: Yes. The key words were "more right." It turns out, and it shouldn't surprise us, that no one has a monopoly on the truth. But when I looked at the numbers, it seemed to me that the supply-siders got about 70 percent and the Keynesians got about 30 percent.
Region: Did you have a reaction from your economist colleagues to the findings of this retrospective on supply-siders?
Lindsey: I have to say I'm still in the minority. Most of my colleagues, particularly in the last year, have been doing what I think of as revisionist history of the 1980s. I think that when all is said and done, and economic historians look back on the decade, they'll see that it was not a perfect decade. But if you compare where we were in 1980 with where we were in 1990 or even 1992, we were much better off at the end of the decade than we were at the beginning. We brought inflation down. We brought unemployment down. It was not a painless process but the overall tradeoff was certainly a better one in the '80s than it had been in the '70s.
Region: Does this point of view manifest itself at all in your policy deliberations at the Fed?
Lindsey: Not necessarily in a direct way because we're looking at monetary policy instead of fiscal policy. I think that if I bring any different kind of insight, it is perhaps a skepticism that fiscal policies will work the way that they're intended. And I sometimes raise a little flag of caution that, although the promises may seem very bright, here are some unintended consequences that are likely to follow, and we should at least inform our decision with those unintended consequences.
Region: You have often noted the efficiency of charitable organizations compared to government bureaucracies. Why has this been so important to you?
Lindsey: I have long believed that. We have a lot of social problems, and let me give you a statistic. At the moment, we have about 30 million poor people in America. And at the same time, the federal government is spending $150 billion on programs directly related to those poor people. States, of course, are spending still more. But if you just look at the federal share, it's $5,000 per poor person, or $20,000 for a family of four. So if you simply gave that money to the poor, you wouldn't have poverty, by the definitions of the poverty line. So something's got to be going wrong in the way we're doing things.
I think that the problem of poverty is more than a problem of just money. It has to do with questions of dependency and ability to get on in life. And there the government is not as capable as other institutions because to really solve a person's problem, you have to know them. And individual community organizations, church groups, what have you, have historically done well because they know the individuals with whom they're working. Government, because of its nature, is not good at doing that. I think in general that charitable organizations, because they are close to the place where the problem's actually occurring, are better at solving the problems of poverty.
There are two other advantages I think to the charitable approach as opposed to the government approach. The first is that people can contribute money only if they see that a charity is fulfilling its mission, and we in a sense have an ability to put a little market mechanism in there. If our good deeds, social deeds, were done through the charitable mechanism, money would flow to those who do a good job. There is no comparable mechanism when you pay your taxes. You don't have a choice when you pay your taxes who the money goes to.
The other advantage, and this comes from the economic statistics, is that charitable giving incentives turn out to be an efficient way of getting money to charities. For every dollar for taxes forgone in a charitable giving incentive, charities get about $1.30 in extra charitable giving. There are very few things the government does where we get a $1.30 worth of good, at a cost of only a dollar. We're often lucky, if we get 70 cents worth of good. And so I think the charitable deduction is an efficient way of funneling money to the efficient providers of services. We win twice by using them.
Region: We've noticed that you've been scheduling tours of neighborhoods and meeting with community groups while visiting major cities in Reserve districts and that you have "lectured" the banking community to prepare for fairness-oriented regulation in the 1990s, as opposed to safety and soundness in the 1980s. All of this is CRA-related, does this indicate that CRA (the Community Reinvestment Act) has become a top issue for you and that you are willing to be visibly official in its support?
Lindsey: I was appointed by Chairman Greenspan to head our Consumer and Community Affairs division. I'm the governor who's the chair of the committee that oversees that area. Now, I'll be up front about it. I didn't volunteer for the position. There's that old story about everyone else taking three steps back and me not knowing enough to do that and there I was standing up there as the volunteer. I didn't have particular expertise in the area. And that was the reason I started traveling around the country. I've been to about 20 inner cities talking to community groups and bankers to see what we can do to solve the problems there.
I think the obvious statement is there's no simple solution. Banks and the Federal Reserve are part of the solution. I don t think that I'm necessarily an advocate of the way CRA is done now. But the fact is that it is on the books; there's no obviously better alternative. And what we should keep in mind is that the most likely alternative is a very prescriptive way of lending, which would perhaps resemble capital allocation. And frankly, I think bankers can do a better job than Congress can at deciding who to lend to. So I'd rather keep as much discretion in the hands of the banking community as possible.
Region: But as you've explored the subject, it seems that you've become more enthusiastic about it, or more intellectually involved in the topic?
Lindsey: I certainly have become more intellectually involved in the topic. It is a very, very challenging area. And again, I'm the guy who tries to look at the data to come up with a solution. There is certainly a tremendous amount of profitable lending that can take place. I think the reason it's not taking place is that we have a series of myths that have grown up in America, myths about the status of minorities, for example. Most radio and television, if you look at it, portray members of minority groups in a very negative light. Yet, in fact, the majority of black families are in the middle class. Black families had bigger real income gains than whites during the 1980s. Black families are moving to the suburbs, looking for houses. The fact that myths may persist that there's not a market in serving minority communities is holding back social progress. So I'm doing what I can to try and dispel the myths. That's how I look at it.
Region: You have been willing to "get specific" on the issue of CRA with a number of recommendations, for example, sending in a pair of shoppers. How does that work? And what would you in most like to see happen?
Lindsey: My first belief is that regulators should not be the people who do that, but that banks themselves are the right people to do it. The reason is this. I think the evidence indicates that some discrimination exists, and it exists in spite of formal policies by banks not to have discrimination. Well, that means that the orders from up above aren't being carried out, and whenever that's happening, management should investigate why. Now, if I ran a restaurant and I wasn't getting the diversity of customers I wanted, I'd have some friends of mine come in who were not known to the staff, try out the food and the service, and tell me what they thought. That's all I'm suggesting that banks do here, because it may be that the staff is not even aware of subtle kinds of discriminatory practices they may be undertaking.
When I was a professor at Harvard, I was in charge of the freshman economics program and we had graduate students do the teaching. One of the points we emphasized to the graduate students was how easily one could offend someone in the class because of the nature of language. There's a wide variety of people from different backgrounds at Harvard, and even Harvard graduate students, who you'd think would be liberally inclined, oftentimes got tripped up. And I think what I'm really calling for is some consciousness raising in the banking community. The same way I tried to raise consciousnesses of the section leaders who taught freshman economics.
Region: Again this year Congress is questioning limiting Fed independence. Where do you stand on that issue? Or is it too hot to answer?
Lindsey: I don't think it's too hot to answer. It's not an answer that a Fed governor is particularly well endowed to answer because I supposedly have a vested interest. So I would phrase the question this way: I think it's a matter for the public to decide. If people think that Congress and the president should have more control over money and monetary policy, then they should support limiting the independence of the Fed.
On the other hand, if they think that controlling the money supply is the kind of thing that might lead to political manipulation, then they should support Fed independence. And I would phrase the question that way, without necessarily stating my position.
Of course, my position is I'm all for Fed independence. And I'm one of those people, even if I wasn't a governor, who would think that the dangers of politicizing the money supply are too great.
Region: Let's turn to the banking industry. Would you say that the problems of the banking industry are behind us or are they yet to come?
Lindsey: I would say they're mostly behind us. We have had tremendous success within the industry at reaching the capital standards that took effect in December. The overwhelming majority of banks and something on the order of 97 percent of all banking assets were in banks that were either adequately capitalized or well capitalized as of the end of the year. That is a tremendous success. While problems still exist, I think that the vast majority of the problems are behind us. And looking at the scope of the problems say from two years ago, I think the banking industry and the banking regulators really deserve some commendation. I think things worked out a lot better than anyone expected.
Region: So we're not looking at any kind of a December surprise in some other month?
Lindsey: No, there's no December surprise. I was quoted as saying that December 19 will be a non-event and it was a nonevent I know there were some people that grabbed some headlines saying that it would be an event, but it wasn't.
Region: You wrote an article for Forbes on income distribution which came to some sort of non-mainstream conclusions. Would you be be willing to talk about those?
Lindsey: I think they were mainstream conclusions because they were exactly what the data said. The reason I wrote the article is the Federal Reserve conducts a survey called the Survey of Consumer Finances, which is the best data collection we have on how households handle their money. But it's only a survey. In spite of efforts to try and oversample rich people, the data has some limitations. And it also ignores some pretty important areas. There were a number of people and at least one leading newspaper that took the data without understanding what it was and drew some really ridiculous conclusions from the data. What I pointed out in my article was how ridiculous their conclusions were. So I would say that I'm in the mainstream and they were the ones that were out of it, but they may disagree.
Region: Did the interpretation of that study have any implications for current tax policy?
Lindsey: Some may use it that way, but that was not the intent of the article. The claim that the newspaper made was that things are as unequal today as they were in 1929. In 1929 we didn't have a Social Security system. We didn't have primate pensions. Those are both numbers that were not in the survey. Yet, when you look at the value of Social Security and pensions to people's wealth, they amounted to almost half of all the wealth that was out there. So ignoring these two big factors was what led to their conclusion. The fact is that Social Security exists and private pensions exist. As a result, the distribution of income and wealth in America, and particularly of well being, is far more equal today than it was in 1929. It's so much more equal that it's laughable to conclude that things today are the way they were prior to say World War II. We have a whole different country.
Region: You quipped that you are an "M-2" type of guy. Could this also convey a serious message about your philosophy regarding price stability?
Lindsey: Right now there's a lot of debate about what M-2 means. No measure that we have is perfect but from everything I've learned and again looking at the data, M-2 tracks the performance of the economy better than any other indicator we have.
The way I would look at monetary policy is that in the ideal world, what you want to focus on is nominal GDP (gross domestic product) growth. The problem with using GDP is that we get a number for it 12 times a year and eight of those 12 are revisions of the other four. And there's also a very long lag between when it's occurring and when you finally get the number. As a result, you can't just use nominal GDP. M-2 is a pretty good proxy for nominal GDP. Now with regard to price stability, we want to have a rate of nominal growth that allows us ample room for real economic growth and just enough left over to take care of possible distortions in the measurement of prices.
Our staff thinks that the amount of distortion of prices may amount to 1 percent or 1.5 percent a year. If you also think that you have an economy that you want to have grow at say 3 percent a year, that suggests that you want to have nominal GDP grow at 4 percent to 4.5 percent. That's the kind of target I think in the long run we also want to have for M-2, because M-2 tends to track nominal GDP very closely.
Region: Your style has been characterized as "breezy and gregarious—the antithesis of the stereotypical cautious Fed official." How do you plead?
Lindsey: I don't know. I'll let other people decide that. I've learned that you should always take your job seriously but never take yourself too seriously. I hope to practice that. Perhaps some of the difference is a matter of I'm the 30-something, although 40-something is looming awfully close, and maybe 30-somethings behave a little bit differently than 40-somethings or 50-somethings.
Region: Of the current group of governors, you're the youngest. Does that have any significance?
Lindsey: You know where it did was in an area where I took a very strong position, and that had to with requiring levels of down payments for homes. The issue was called loan to value ratio. The original proposal was to have an 80 percent maximum loan to value ratio for homes—implying a 20 percent down payment. I don't mean to be critical of my colleagues, but I think I probably bought a home more recently than they did. And they may have put 20 percent down on their first home back when they bought their houses, but I don't know many people in their 30s who put 20 percent down on a first home. So I thought that was not a very good step and I opposed it.
Our staff estimated that 9 million American families would be frozen out of the housing market if we required 20 percent down. And I thought that was a significant number. As things turned out, the minimum requirement will be 10 percent down, or a maximum 90 percent loan to value ratio. I thought that was much more reasonable. And again, I think the reason I differed from my colleagues was I bought my house 10, 20, 30 years after they bought their first house, and I think I have a better appreciation for the current market.
Region: A generational difference?
Lindsey: A generational difference, yes.
Region: When you first came to the Board, some thought you would be too "doctrinaire." Now, that notion seems to have fallen away, especially in light of your community-oriented activities. Do you agree?
Lindsey: I never thought I was doctrinaire to begin with, so I think the first impression was probably the wrong one. Do I have a set of beliefs? Absolutely. I think that wherever possible, we should let markets run things. I'm a great believer in individual liberty, both political and economic, and I don't flinch from that position. On the other hand, I know that we have a role for government and the right balance to strike is to see how things can be done best. Can the market solve the problem better than government or is there some kind of fusion that would work best? By and large, I think when you look at the results, the market tends to win most of the time.
Region: Your nomination was hung up for more than 10 months and I'm not sure that everyone followed that or even knew that. What was the story behind the hang-up?
Lindsey: I'm probably the last person to know the story. I've heard all kinds of rumors. I think what it really comes down to was a division in government where there's no incentive for the Senate of one party to act speedily on the nominations of a president of another party, particularly in the economic area. I think that's what it really amounted to. I point out that my delay was not the worst case. The average delay for some of President Bush's appointments was something like eight months and there were, when I was approved, some people who had been waiting as long as two years. I'm all for the Constitution and advise and consent. I just wish they'd make up their minds and either advise and consent or tell the guy to go back to private practice. It's too long a time to wait.
Region: It must amount to a sort of psychological cruel and unusual punishment.
Lindsey: Well, yes, but I was really a lucky one. I was working for the president at the time, so I got to draw a paycheck. But suppose I was in the private sector? I doubt my employer, given our conflict of interest regulations, would have kept me on for 11 months. Even if I were at the university where they're probably more tolerant of these things, what would I tell my dean? "Well, I'm not sure about the spring semester, but I'll definitely be gone in the fall." And then there I would be in the fall, still waiting. I really think that some kind of time limit, it could be three months, is a good idea. Asking the Senate to decide on someone's fate in three months, I don't think is too much to ask.
Region: All that's written about you, there's very little about you personally. There's a great deal about your issues and activities in CRA, but people don't know much about you in a personal way. One of things I heard was that you and your wife are gourmet cooks. Is that right?
Lindsey: Yes, we enjoy eating it, too. Yes, we like to cook very much. We do pretty well together, we're a good team in the kitchen. From what I've heard, not many couples can claim that. But we work together well.
Region: Do you have a speciality?
Lindsey: We started off specializing in Oriental, but I think now we're more French traditional in our cooking or maybe nouvelle cuisine.
Region: And swimming is another of your interests?
Lindsey: Yes, we have a pool out back and unfortunately it's closed right now. But, yes, we enjoy swimming very much.
Region: And you do it recreationally, not in any competitive way.
Lindsey: No, not since graduate school. I was working on my master's then but I think, being governor, I'm too busy to do the amount of swimming I would need. But when we put in the pool, we made it long and narrow so it was the kind of thing where you're supposed to do laps instead of just goofing around.
Region: We have also heard that you have a near passion for political history.
Lindsey: I love to read both current events and also history. I think that we can learn a lot from the mistakes of people in the past and try not to repeat them. I suppose that's helped me out a little bit. I like to think it's helped me out in my current job somewhat.
Region: Has there been an area that's intrigued you?
Lindsey: No, I'm interested in mainly what I would call the economic history of countries, and unfortunately when I look at things, they usually end up with inflation at the end. But I think America is going to prove history wrong and will avoid the kind of inflationary outbursts that most other countries have found as the cause of their problems.
Region: Thank you Mr. Lindsey.
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