LOS ANGELES TIMES INTERVIEW : Laura Tyson : Controversial Economic Adviser Wins New Friends, Charms Old Enemies

Four months ago, Bill Clinton caused an intellectual furor with his selection of Laura D’Andrea Tyson for the post of chairman of the Council of Economic Advisers. Clinton’s naming of the 45-year-old Tyson as the first woman to become chief White House economist stunned and angered many old-line economists and outraged the academic Establishment.

They viewed this UC Berkeley economist as a renegade who held heretical (read: hawkish) views on trade and industrial policy and whose academic work had avoided the traditional macroeconomic focus of previous CEA chiefs. What was worse, from the perspective of many traditional economists, was that Tyson, a former member of the Los Angeles Times Board of Economists, had been selected over the profession’s most promising young star--Lawrence Summers, chief economist of the World Bank and a former Harvard professor. Summers, now at the Treasury Department and still on good terms with Tyson, had seemed to have a lock on the job until a controversy arose about his views on environmental protection and the Third World.

But the dire warnings of Tyson’s detractors--that she would be shut out of policy-making or that other top economists would refuse to work under her--have been disproved. Since January, Tyson has become a key member of Clinton’s economic team and was deeply involved in developing the Administration’s economic plan. She has also begun to settle into her new post--hiring two well-regarded economists to fill the other seats on the CEA. This past week, she moved her 10-year-old son to Washington to join her. Her husband, Erik Tarloff, a screenwriter, plans to move east soon.

Now, while continuing her efforts to sell the economic plan to the public and Congress, Tyson is also turning to work on many of the critical issues pressing in on Clinton’s presidency: international trade, defense conversion, health care and aid to Russia.

*

Question: What can the United States do now to help Russia that is different from what the Bush Administration tried?

Answer: I guess I would start by saying that we’re working with a set of very serious constraints. The constraints are that (the Russians) have a reform process, and the extent to which it moves forward or doesn’t move forward is something which we have fairly limited ability to influence. So the aid issue really becomes helping the reform process that’s (already) under way. It’s very hard for the G-7 (leading Western industrial nations) to really influence that.

I think that when the reform process picks up, (we can look at) issues like support for the unemployed in transition, support for training of entrepreneurs. The things that have been tried and worked well in Eastern and Central Europe would apply here. We want to maintain as much of the support as we can during the process.

Q: Does that mean that there will not be any large increase in U.S. financial aid?

A: I think that really depends upon--that would have to be in concert with the G-7. I think we would like very much to work with the G-7 to make a substantial commitment to addressing the problems of the Russian debt, addressing problems of getting food in, things like that.

Q: Now that the frenzy over putting together the budget is over and things have subsided, what’s it like to be here? Have you managed to settle into the job?

A: I have a feeling it’s never going to be quite settled. Settled is a word that never would apply to this job. Talk to me in July.

I expect the reason it’s never quite settled is because there are a tremendous number of issues. What we’re trying to do is achieve a balance between reacting in the short run, doing policy analysis, and thinking about what issues we ought to address over the long term so as to try to shape some thinking about the future. So that’s what we’re doing now.

Q: On the budget, why do we still need the stimulus plan when the economy is already recovering?

A: I don’t think an economy with an unemployment rate of 7% can be considered in good shape. You can look at the recovery, at the whole period of recovery and say, “My goodness, we still have an underutilization of workers.” So why not just use a package to try to help the economy move more quickly. Particularly a package which is also encouraging a shift in spending toward investments.

Q: Is there a consensus now as to what ails the California economy? How much is attributable to defense, for instance?

A: There’s a consensus about the things on the list. There isn’t a consensus about the weights of some of the things on the list. First of all, the California economy is viewed, I think correctly, from the point of view of its problems, as not one economy. There’s a sort of concentration of problems in one region, in the southern third of the state. Some studies point out that until the last couple of years, defense conversion in Southern California was being absorbed gradually. But now you have a slow California economy, and what California could absorb between ’87 and ‘90, we find much harder to absorb now. That seems to be the big problem.

Then you get to the next level, and you have problems in the real-estate industry and banking and lending. Then you get--and I think it’s absolutely the case--California is suffering, as other states like it are suffering, from a tremendous burden of unfunded mandates (from the federal government).

Q: Can you define what you think the Administration’s industrial policy is?

A: I think, more than an industrial policy, that there’s a technology policy. If you look at the technology policy, you could look at our clean-car program. You could say that’s an industrial policy. I actually see it as a new national mission. Why would you choose the (clean-car) strategy? We choose the strategy because we have environmental and energy concerns which are national. In order to address those concerns, it would be helpful to encourage or promote (changes in car technology) which address those concerns. That means, of course, by spillover effect, you’re doing something for the auto industry, perhaps. But that isn’t the intent of the policy. The intent is something which I believe is defensible as a national policy.

Q: What about Clinton’s suggestions of federal involvement with the aircraft industry?

A: This is an industry where there’s no point in history--and unlikely to be any point in the future--in which outcomes in that industry are not influenced by government policy. That has to do with the nature of the industry. It tends to be, by its own making, influenced by government, and it tends also to have a major dual-use character (military and civilian) so that governments always will be involved either to try to make the market more competitive, to develop more than one supplier, or they’ll always be involved because the major commercial aircraft producers are also the companies used for major military aircraft. So that one where we’ve already had industrial policy and we always will.

Q: So you don’t see a broad new industrial policy taking shape?

A: No, I actually don’t. I don’t see one in the sense that I guess it’s normally discussed and bandied about. Nobody’s sitting down and picking a bunch of industries that are the industries that we see are going to grow in the future. I just don’t see that. I think there’s an attempt to think about how the government can encourage innovation in the future. I think there’s an attempt by the government to make sure that market opportunities for U.S. firms around the world are there for them. I think there are some national missions like the clean-car mission which we think the U.S. government should support.

But it’s not a development strategy the way people think of pure industrial policy experiments--like Japan in the ‘50s. We are not saying, “Here’s the industries we’re choosing and here’s why we’re choosing them and we’re going to shift resources to them.”

Q: The Japanese have come up with an economic stimulus package, and the Germans have cut interest rates. Are either of those moves enough? The Administration has pushed both countries to make such moves to get the world economy moving and to ease trade tensions.

A: I think those are steps in the right direction. I think it’s very promising and encouraging that the Japanese and the Germans have been moving in the right direction, and I would assume . . . they’re doing that for their own reasons. They’re looking at their own economies and looking at the cost of lost output and unemployment.

Japan is in an excellent position here because what they need to do, both to handle some of their tensions with us toward their external (trade) imbalance and what they have to do for their internal security are exactly the same. So I think that we look to Japan to encourage a recovery.

Q: Will the Clinton Administration attempt to change course and actually set a bottom line on trade, in which we will demand that the Japanese meet certain targets on shrinking the trade deficit?

A: I haven’t been in any discussions of that sort so far.

Q: Are you looking at how the health-care plan will affect the economy?

A: We will do that. I think there are a number of decisions that have to be made before one can do that. We are looking at some of it. There has been some work, of course, on how health care affects the economy.

For example, we’ve certainly looked at all the studies which suggest that as health-care compensation has grown, overall, it hasn’t tended to compress the wage part of total compensation. There is some interesting, but mainly anecdotal evidence, that that might be starting to change. Anecdotal meaning that a lot of employers feel that while they might have been able to do that in the past, they can’t do that in the future. So we’re looking at those sorts of things. And as the package takes more shape, we’re--that’s one of our roles.

Q: What other role will you have in health-care reform?

A: First of all, we have a number of staff members who are involved in the various working groups on issues--how to finance long-term care or how to assess, how to look at the various managed-competition plans around the country and asses their results. Or how to assess, how to make predictions about how intensity of use might be changed if you open up opportunities, access to health care. So it’s really bringing those studies to the table.

In the discussions, there are people who are really experts on health care per se, but may not, haven’t really thought about, say, the issue of compensation, so we bring that up. Or the issue of how consumer incentives to purchase a particular service might change if you change the price.

It’s a pretty big chunk of things. There are a lot of health-care workers. The truth is there is already restructuring going on before there was any anticipation of any national health-care reform. Employers were starting to behave somewhat differently in terms of the kinds of packages they were offering. There already were developing pressures on this part of the economy.

I don’t know what we (the Administration) will do. There are a lot of decisions, a number of options. One of the things we (the CEA) will be asked to do is to say, “If you choose option A, then you might have this amount of effect, and you might want to think about that before you chose option A. If you choose option B, then you’re likely to get less.” If there’s less dislocation or cost, you might want to choose option B.

Q: Is there resistance to that? People saying, “Those darned economists?”

A: Oh, not so far, but you know, that’s part of the role of economists to be viewed that way. That hasn’t happened so far but I wouldn’t be surprised to see something like that.