- The Washington Times - Monday, June 11, 2001

After five straight interest-rate cuts by the Fed, and with marginal tax rates falling next month, President Bushs chief economic adviser bullishly predicts that the U.S. economy will begin growing again later this year.
Larry Lindsey, a super-cautious supply-side economist who was bearish throughout the booming 90s and predicted that the decades economic bubble would eventually burst, now says the economys decline "is largely over."
It takes six months or so for Fed cuts to work their way through the U.S. economy, and possibly less time than that for tax cuts to change consumer and investor behavior. Mr. Lindsey thinks we will begin to see some effects in the coming months, especially when the lower paycheck withholding rates kick in on July 1.
In an interview in his second-floor office in the West Wing, an unusually expansive Mr. Lindsey announced that Mr. Bush is contemplating further tax cuts. This notion will cheer conservative supply-siders who think the tax cuts are not deep enough and take too long to phase in, and it will drive anti-tax-cut liberals crazy.
"I dont think the presidents tax-cut agenda is finished at all, nor the tax-reform agenda," he told me when I asked him whether Mr. Bush had achieved all he wanted on tax cuts.
"Further tax reform is certainly needed. The best tax code is one that is flatter and simpler, and Im sure that the president will be proposing changes in that direction," he said.
Senior White House officials tell me Mr. Bush will propose an even more ambitious tax-reform package in the future, not unlike the sweeping changes President Reagan made in 1986 to broaden the tax base and significantly lower income-tax rates, pushing the top rate down to 28 percent.
For now, however, Mr. Lindsey believes the economys decline has struck bottom and is poised to turn upward, propelled by a "very well-timed" combination of monetary and fiscal policy working together to keep the economy from falling further.
"The decline in growth, which started in the third quarter of 2000, is largely over," he said. "By the fourth quarter, well see that the tax cuts and the Feds interest-rate cuts have put a floor under the economy. The chances of further deterioration have been dramatically reduced."
"I would expect the turnaround late this year or early next year. I think the combined effects of the tax cuts and the Feds monetary easing will combine to effect that," he said.
Asked whether there is any chance that the sluggish economy, now growing at little more than 1 percent, could still tip into a recession, the former Federal Reserve Board governor labels such a suggestion "extreme."
"The odds are that we will not have a recession. The reason we are not going to have one is that the combined effects of monetary and fiscal policy will prove to be very positive as they kick in," he said.
Mr. Lindseys view of the economys health right now is mixed. He expected overall economic growth to be no more than 1 percent to 1.5 percent for the year.
"Were still having trouble in high-tech and manufacturing generally. All of the available statistical measures suggest that there are still problems in those sectors."
But he thinks the economy is holding up pretty well despite poor durable-goods orders and a declining or flat technology sector.
"The consumer seems to be holding up very well; that, plus the service sector, is keeping the economy in positive territory. Overall, the economy is doing well," he said. "The employment situation is still quite good, and real wages are rising."
"Historically, a 4.4-percent unemployment rate is a relatively good level. People have lost their jobs, and thats a tragedy. But on the other hand, the overall picture for the economy right now, on the wage side and the employment side, is reasonably good," he said.
To critics who think that the $40 billion in retroactive tax cuts which taxpayers will get in the form of rebate checks between August and September are too small to do much good in a $10 trillion economy, Mr. Lindsey notes that $40 billion represents about 1 percent of the nations gross domestic product this year.
"When the economy is only growing at about 1 percent, a 1 percent stimulus is quite a bit," he says.
Meanwhile, Mr. Bushs income-tax cuts are locked into automatic pilot over the next decade. Over the next five years, the pivotal top rates will be reduced from 39.6 percent to 35 percent, and from 28 percent to 25 percent.
Notably, the rate reductions will really begin showing their pro-growth moxie in 2004, when Mr. Bush will be running for a second term. By that time, if Larry Lindsey is right, the economy should be roaring forward on all cylinders, and Mr. Bush should win a second term in a landslide, giving him the mandate he needs for deeper and more lasting tax reform to come.

Donald Lambro, chief political correspondent of The Washington Times, is a nationally syndicated columnist.

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