Probing the Mind of Bush's Economist, Edward Lazear

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The stock market, taxes, the budget, and inflation were among the topics Edward Lazear, chairman of the Council of Economic Advisers for President Bush, and I chatted about in his office yesterday afternoon at the Eisenhower Executive Office Building adjacent to the White House. I will post a full transcript later, but here is the quick-and-dirty version for your perusal.

Lazear on the stock market's 3 percent drop: It's not an everyday occurrence, but if you go back and you look at how often it happens, it happens a little more than once a year on average. It's not that out of the ordinary.

On the chances of a recession: Our [gross domestic product growth rate] forecast for this year is the upper 2s, and I think we stand by that. ... If I had to time it over the year. ... this quarter might be a little below that simply because we are still living with the effect of the decline in the housing market.

On Alan Greenspan's opinion that the U.S. economy is in the later stages of the business cycle: I would not say that. I am not a believer in what goes up must come down. If the fundamentals are strong, we can have continued higher levels of growth for a very prolonged period.

On inflation: I am feeling good about inflation. ... I think the Fed is doing a good job. ... I think they know exactly what they are doing. ... As long as productivity continues to grow, I don't see any inflation pressures.

On the biggest risks to the economy: The big concern to my mind is anti-investment-from-abroad, protectionist sentiment that we are seeing grow right now. ... That is really bad news from my point of view.

On the shrinking budget deficit: I look to the market, and the market basically tells you if ... we are not paying [the debt] off quickly enough. The way you know that is to just look at interest rates. ... Interest rates have just not gone up. ... If interest rates are low, what that tells us is that government borrowing is not out of hand. ... Is the current budget deficit out of control? I don't think so, and all the evidence suggests the opposite.

On raising income taxes to fund Social Security reform or AMT [alternative minimum tax] reform: No. The answer is no. The president has said that he does not believe that higher taxes are either necessary or good for the economy. ... The president has said he wants to maintain his rate cuts. ... I don' t think there's any chance he would be willing to compromise on allowing to let rates go up. This is not a question of income distribution. This is a question of investments and making the economy grow.

On income inequality: It's a good thing when wages at the top grow because it means investments in skills are paying off at a higher rate than they paid off in the past. . . . What we want to do is give the people on the bottom a way to move up, and the way you move is through skills.

On the trade deficit: The reason for the trade deficit ... is primarily, to my mind, the capital account surplus. It's not the trade deficit per se. It's that people want to invest in the United States. ... I think of that as a good thing.

On whether government statistics overstate the rate of inflation: People who understand the issue are pretty much unanimous on that.

On whether outsourcing is a net plus or minus for the economy and workers: I think that trade is a net plus for the economy and workers. It's obvious that whenever you have trade, it adds new opportunities to the economy. ... But [it's like] technological changeĀ–that makes some jobs obsolete. Similarly, if you open up trade, some people are going to be affected by that, and we worry about that.