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
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
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
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
Region: Your style has been characterized as "breezy
and gregariousthe 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 homesimplying 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
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
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
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
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.
More About Lawrence Lindsey
White House Special Assistant to the President for Policy
Development during the Bush administration
Senior staff economist on President Reagan's Council of
Associate Professor of Economics, Harvard University