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Economic Advisors or Policy Salesmen

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Times Staff Writer

In naming Stephen Friedman to a key post Thursday, President Bush finished a clean sweep of his bumbling economic team. The question now is: Will it matter?

The early signals are unpromising, and that’s bad for the administration, the economy and the country.

Conservative activists gloat that they exacted a pound of flesh for Friedman’s appointment, as well as for Bush’s choice of rail executive John W. Snow to replace Paul H. O’Neill as Treasury secretary.

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They say such administration heavies as political advisor Karl Rove were forced to assure them that both men, but especially Friedman, will put aside past worries about budget deficits and fiscal probity in favor of the White House’s tax-cutting, “pro-growth, pro-jobs” agenda.

“They told us [Friedman] will be a solid salesman for supply-side policies,” said Stephen Moore, who heads the conservative political action committee Club for Growth and spearheaded an anti-Friedman drive.

But if Friedman and Snow make salesmanship Job 1, at the expense of serious policy debate, the president will have a big problem. In fact, the Bush administration would become the first in the post-World War II era without at least one strong, independent voice on economics.

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“It would be historically unprecedented and very troubling,” said Brookings Institution scholar Stephen Hess.

Even at the height of the supply-side frenzy in the early 1980s, President Reagan had in-house critics such as Council of Economic Advisers Chairman Martin Feldstein and such powers in their own right as first-term Chief of Staff James A. Baker III and Treasury Secretary Donald T. Regan.

There would be another difficulty as well if Friedman and Snow were solely salesmen: They would be selling proposals they had no hand in designing, an arrangement that people with long Washington experience say is simply unworkable.

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It would reduce the pair to being “stiff-necked ambassadors, more worried about making a misstep” than about engaging in the give-and-take that produces policy, said Robert Z. Lawrence, a Harvard economist and Clinton-era CEA member.

If the advisor-as-salesman arrangement is bad for the administration, it could prove worse for the economy. That’s because with economic conditions so uncertain, White House fiscal policies may have to be more than just politically appealing or ideologically correct; they may actually have to work.

In coming up with such policies, the administration could use some frank advice from Friedman and Snow. The extent to which the country must now rely on the administration to prop up growth was driven home with this week’s release of minutes from the Federal Reserve’s November policymaking meeting.

The minutes show that Fed officials took one of the last steps available to them -- a half-point reduction in their signal-sending interest rate to 1.25% -- in part to avert the danger of deflation, a general decline in prices that the country has not experienced since the Great Depression.

“We got so enamored of [Fed Chairman Alan] Greenspan and monetary policy, that’s all we used the last few years,” said James W. Paulsen, chief investment officer with Wells Capital Management in Minneapolis. “Now that they’ve got only a few fractional cuts left, we’ve got to depend on fiscal policy” -- the kind of tax and spending plans that are up to the White House and Congress to devise.

The president already may have made a fundamental -- and potentially damaging -- decision before naming Friedman and Snow. In the immediate aftermath of the Republican victory in the November midterm elections, he declared that the administration’s first priority would be making last year’s $1.35-trillion tax cuts, now due to expire after 2010, permanent.

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Given the definitiveness of Bush’s statement and the spectacular fallout that resulted when his father, former President Bush, reversed himself after pledging “no new taxes,” the administration appears to have boxed itself in on the tax issue.

But making the 2001 cuts permanent will cost Washington hundreds of billions of dollars in lost tax revenue in the future, without, according to most analysts, doing anything to help the economy now.

“All it does is balloon the deficits in the out years,” said Hank Gutman, a partner in accounting giant KPMG’s Washington tax practice.

Where Friedman and Snow could make a difference is in advancing the administration’s case -- then cutting a deal -- in what is shaping up to be a battle between White House-sponsored supply-side tax cuts for investors and businesses and Democratic proposals to temporarily help lower- and middle-income Americans and cash-strapped states.

Among the strengths of the Bush White House are political discipline and unswerving loyalty to the president. Both were on exhibit in recent weeks as aides protected Bush by giving no hint of his plans to replace O’Neill and longtime economic advisor Lawrence B. Lindsey.

But loyalty can go too far.

“Loyalty does not mean slavishly following the party line if it’s not good for the country or the president,” said former Rep. Bill Frenzel (R-Minn.).

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Friedman and Snow “are going to be loyal to the president,” Frenzel said. “But they have got enough good sense and guts to tell him when he’s wrong.”

We had better hope so.

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