Alice Rivlin

Alice M. Rivlin has a unique perspective on the government’s two key economic policymaking roles.

At the White House Office of Management and Budget, during the first 3 1/2 years of Bill Clinton’s presidency, Rivlin served first as deputy under director Leon E. Panetta and then as director herself. She played a major role in the preparation of Clinton’s controversial first budget shortly after he took office in 1993. And she presided over the budget agency when negotiations with the Republican-controlled Congress deadlocked in 1995 and most government agencies had to shut down, twice, because Congress did not provide them with their regular operating funds.

In February 1996, Clinton shifted her from fiscal policy to monetary policy, naming her vice chair of the Federal Reserve Board. A lifelong Democrat, Rivlin may have seemed an unusual choice to work under Fed Chairman Alan Greenspan, a Republican who was President Gerald R. Ford’s chief economic advisor. Yet, not once did she part company with Greenspan in votes on interest rates. In fact, the pair worked together toward the goal of permitting the maximum economic growth that would not reignite inflation.

An economist by training, Rivlin received her undergraduate degree from Bryn Mawr in 1952 and her PhD from Radcliffe in 1958. She has spent her entire professional life in Washington, serving on the staff of the Brookings Institution whenever she is not working for the government. She was assistant secretary of the old Health, Education and Welfare Department for a year at the end of the Johnson administration.

In 1975, Rivlin became the first director of the Congressional Budget Office, a job she held for eight years and still calls her favorite because it gave her a chance to shape the office as she saw fit--as a source not only of budget estimates but also of program analysis. Until the mid-1970s, Congress lacked the capacity to challenge the numbers and analysis of the White House, a situation that Democrats found intolerable when Richard M. Nixon was president and was “impounding” money, refusing to spend funds appropriated by Congress. Despite occasional criticism from members of both parties, the CBO still functions according to Rivlin’s design.

As if her government jobs did not fill her life, Rivlin, 68, also has served as chair of the board trying to get the District of Columbia government operating on a sound financial basis. She is married to economist Sidney G. Winter and has three children and three grandchildren.

In a long conversation last week, Rivlin sat down to review her government service over more than three decades. She chatted in her office at Brookings, where she is now working on the think tank’s federal-budget-analysis program, having stepped down from her job at the Fed in July.

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Question: It is often said that you were one of the more dovish members of the Fed when it came to inflation, that you emphasized economic growth over low inflation. Is that a fair characterization?

Answer: I think the hawk-dove thing is just plain silly, but you never can talk about the Federal Reserve without getting into it. We’ve had higher growth, lower unemployment and lower inflation than most economists had thought possible simultaneously.

Q: Including you?

A: Including me--and just about everybody else. In the early ‘90s or the mid-’90s, most economists thought that unemployment rates below 6% would give us rising wages and a tendency toward inflation. For more than two years now, we’ve had unemployment well below 5%, and inflation has been falling for much of that period. So all of the preconceived notions about how the economy works are being reconsidered.

Q: Is it true that during your three years at the Fed, you never voted on the opposite side from Chairman Greenspan on interest-rate policy?

A: That’s right. There have been very few dissents, and I have not been one of them. There was not great controversy during the period when I was at the Fed over what the Fed ought to do, at least not within the Federal Reserve itself. That was a period of very strong growth, when the conventional wisdom would likely have pointed in the direction of the Fed’s raising interest rates to protect against possible future inflation. On the other hand, the inflation didn’t seem to be happening, and there was the possibility that the economy really had changed in ways that had made it less inflation-prone with more capacity for productive growth. So there was a widespread disposition to wait and see what was happening, not to choke off the growth before there was any sign of inflation. Greenspan was definitely on that wavelength, and so was I.

Q: What has been holding inflation back?

A: There’s been downward pressure on prices during most of the recent period, through factors outside the United States. We’ve had a strong dollar, which makes import prices cheap. And the economies of much of the world have been quite weak, so commodity prices have been low. And prices of manufactured goods have been under downward pressure from weak demand all around the world. So lots of factors have kept U.S. inflation down, which may not be permanent.

The optimistic view is that the U.S. economy is in a very productive period and less inflation-prone than it was a few years ago and, therefore, that lower unemployment rates and economic growth rates in the 3% range are sustainable for a while.

Q: Persistent growth in workers’ productivity is necessary to keep the economy growing that much faster than inflation. The decline in productivity growth in the second quarter of this year gave some people pause. What do you make of it?

A: That’s the big question. I don’t think one quarter’s numbers tell you anything. If we can’t keep productivity growing at a healthy clip, then we will end up with inflationary pressure.

I think we’ve learned something else that economists didn’t expect about the influence of low unemployment on productivity, at least under these conditions. Economists used to think that as unemployment came down, businesses would be employing less and less skilled labor, and this would have a negative effect on productivity. But that hasn’t happened in this cycle. In fact, the low unemployment may have contributed to the increase in productivity, because it came at a moment when there was lots of technology available in computers and telecommunications and a new attitude toward the management of productivity on the part of managers. So what may have happened this recent period is that in the face of very low unemployment, managers were saying, “How can I run this operation more efficiently? How can I substitute computers for people? How can I train these people better so that they work more intelligently?”

Q: They couldn’t go out and hire more workers to meet rising demand, so they had to do better with what they had?

A: That’s right, and they were in a position to do that because of the technology. Management education plays a role here. We have a whole generation of managers who came through MBA programs learning how to downsize and right-size and restructure and re-engineer. When you get out there in your company, and find that you can’t hire workers, maybe, you think, this is the moment for re-engineering.

Q: Apart from productivity, you listed earlier some of the other forces--low energy prices, a high dollar and so forth--that helped keep inflation at bay. How long before these reverse and bite us?

A: The question “How long can the good times last?” seems to me the wrong question. The question ought to be, “What can we do to make the good news last?” The things we can do are, clearly, keep the budget surplus going and encourage investment in technology, and keep watching inflation so that if it looks risky it gets nipped in the bud. But don’t act more precipitously than necessary, because it’s certainly possible that this good economy can keep moving for some time. A vigilant Fed, a surplus in the federal budget and an emphasis at all levels on education, on training and on technology and investment are the things we most need to keep it going.

Q: Getting us on the road to a budget surplus was one of your accomplishments in your previous incarnation at the Office of Management and Budget. Even before that, during a time of huge and apparently indefinite budget deficits, you wrote a book in which you urged turning some federal functions over to the states as one way of staunching the red ink. Did you know something the rest of us didn’t?

A: The book came out in the summer of 1992. It dealt with the deficit, now of blessed memory, which seemed to be the major economic problem of that time. I proposed that it was very important to get the deficit down, and I proposed, somewhat diffidently, that a surplus in the federal budget would be an appropriate fiscal policy for the late ‘90s. That seemed a bit laughable at the time--we were not even close to balancing the budget--but part of my proposal for how to balance the budget at that time was that the federal government devolve to the states many of its responsibilities that had accumulated over the years that were not clearly federal, such as education and housing. Those are normal state responsibilities.

Q: You’ve been in the fiscal-policy maelstrom as director of OMB and at the heart of monetary policy at the Fed. How would you compare the two places?

A: They’re very different places to be, although they have some things in common, and one is a very strong, professional, nonpolitical staff. OMB is part of the White House and therefore a fascinating but very hectic place, especially in the period when I was there, when the entire emphasis of the government was on the budget. The first Clinton budget that we put together in 1993 was, I think, a history-making episode, and it was interesting to be part of that. We were working hard to turn around the then-escalating deficit. The president participated very heavily in this decision-making process. We put together a budget that had in it both tax increases and spending cuts. It was very controversial and it passed by one vote in each house. But it has worked out very well. As I said to the president in my resignation letter, we did the right thing and it worked. It worked much better than any of us had any reason to hope.

Q: You were at OMB right through the government shutdowns.

A: Yes, and that was a very difficult period, when the negotiations between the administration and Congress essentially broke down and the government was shut down twice. I think Congress learned a lesson that it may not easily forget. People like to rail against big government, but they don’t like to have their government services cut off. People were outraged when they couldn’t go to a national park or they couldn’t get their passport renewed or they couldn’t buy their house because they couldn’t get their VA mortgage. The outcry against Congress was very substantial and I think a good lesson for everybody: It’s not responsible for the government to close down in the context of a political battle. It did not redound to the credit of anybody.

Many conservatives who think people don’t like government had to think again. People don’t like government in the abstract, but they do want the government to go on doing the things [they] want it to do.

Q: The deal that finally got the government up and running was one factor leading to today’s budget surplus. Now that we’ve achieved the surplus, what should we do with it?

A: We should keep it. We should keep paying down the debt. The reason it’s so important to keep running a surplus has to do with the demographics that we find ourselves in. The population is aging quite rapidly, and that means that we’re going to have more retired people and fewer active workers in the future. To maintain the standard of living of both the retired and the active workers, we need to produce more. And the only way we can do that is to invest more in technology as well as in human development--education--so a higher saving rate is crucial to investment and a brighter future. We don’t have a high private-savings rate--quite the opposite--but what the government can do is run a surplus and buy back Treasury bonds and put money back into private capital markets. That will put downward pressure on interest rates and make investment attractive.

You might want less surplus or even a deficit in a bad recession. But right now the dumbest thing we could do would be to have a large tax cut and reduce the surplus and pour more money into an already possibly overheated economy.

Q: Moving from OMB in the very public White House to the secluded, secretive Fed must have been quite a jolt.

A: Compared to the White House, which is somewhat chaotic, in part because of the necessity of their dealing with all kinds of daily political events, the Fed was a very orderly place. Meetings occurred on time, and you knew what you were supposed to be deciding. It had a sense of order and deliberateness that neither the White House nor Capitol Hill has. *