BOSKIN BULLISH-WITH SEVERAL `HOWEVERS`

Michael J. Boskin is chairman of the Council of Economic Advisers and President Bush`s top economist. More than a year after the recession began, and with prospects for a turnaround still uncertain, Boskin also is a man on a hot seat. Appointed to a post that had come to exert little influence in the White House-his predecessors had too often told Ronald Reagan what he didn`t want to hear-Boskin has become a close adviser to the president, as well as a regular tennis partner.

A longtime professor at Stanford University in Palo Alto, Calif., Boskin, 46, has a reputation within his profession that mirrors Bush`s image: a man of conservative beliefs and pragmatic bent. He signed on with Bush early, giving counsel on economic issues during the presidential campaign, and moved to Washington with the new administration.

Last week, Boskin talked with Tribune reporter Mike Dorning. He confidently pronounced the economy rid of the recession, but sounded cautious notes about the months ahead. He called for the Federal Reserve to energize the economy with more interest rate cuts and blamed the failings of the U.S. education system for the growing gap between rich and poor. This is an edited transcript of the interview.

Q-When will the nation recover from the recession?

A-The recession ended in the spring. A recovery has begun, but it is thus far modest. The turnaround is a national-average turnaround. It varies in its timing and pace from industry to industry and region to region. Our base outlook is for the economy to grow at a 2.5 to 3.5 percent rate in the second half of the year and slightly over 3 percent in the next year. However, as I always say, economic forecasting is a science, but an imprecise one.

Q-What`s the basis for your optimism?

A-Some good preconditions for growth have fallen into place. Interest rates are coming down on the short and long end. The end of the war obviously is good news. The uncertainty that created was eliminated quickly-oil prices declined and so on. All that is to the good.

On the other hand, we still have some problems. Credit conditions for people who primarily rely on the banking system rather than going directly to the commercial paper market, for example, have been a difficulty for many small- and medium-size businesses. There is potential for problems if growth slows more than expected abroad, and that would curtail our exports, which have held up quite well.

One great unanswered question in this situation is the fact that there has been a deeper-than-anticipated inventory liquidation, and many economists and private analysts who expect the economy to grow in the 4 to 5 percent range think it`s because there will be a big snapback in inventories. One question is, how much of a sea change has there been in inventory management? In my view, inventories will go partway back, not all the way back.

Q-When do you think the people who have been laid off in this recession will find work? Will they ever find jobs that pay something reasonably close to their former jobs?

A-Certainly, the overwhelming bulk of them will. Many people who were laid off in the recession have gone back to work. Some additional people will become unemployed, which is why the unemployment rate has been high. Our expectation is for the unemployment rate to decline. As we head into the end of this year and into next year, employment will continue to rise. The labor force has been growing, partly for demographic reasons, far more slowly. That, combined with the turnaround in the economy, should lead to gains in employment that will augur well for people who are currently unemployed.

Q-What would be your explanation for why the bottom tenth of income-earners, the poorest in our society, have seen their lot worsen in the past 10 years?

A-We have witnessed for the last decade or so a little more of a divergence in the incomes and returns to the people who are college-educated and the people who are only high school-educated. And we certainly, obviously, have a problem now with people who are high school dropouts and some problems in the inner cities, given the kind of subeconomies those people operate in, with families breaking apart and the adverse incentives welfare creates and so on. Drugs and crime are problems where it becomes profitable for people to take risks to get into socially unproductive activities.

Q-What`s the policy implication of that?

A-Well, there are a variety of things that need to be done, only some of which the government can do. But we`re trying to get a radical restructuring of the education system in elementary and secondary education. We`re trying to give people a stake in their futures in public housing by providing ownership of low-income housing to the poor rather than just leaving them in decrepit places that fall apart.

We have a serious problem in elementary and secondary education. Relative to other advanced economies, we`re close to the top in per-pupil expenditures on K-12 education, but we`re not getting very much for it. If you have school systems where there is no choice and competition, it is going to be very hard to get people motivated to perform and evaluated on that performance and accountable for that performance.

So the president, in conjunction with the nation`s governors, has launched a variety of programs to measure performance and to try to get choice and competition as a more central purpose in elementary and secondary education.

Q-Does it complicate your job much, especially in terms of ameliorating the recession, that between the debt overhang and the budget deficit agreement, you don`t have a lot of money to throw on the table?

A-Well, in many previous times of economic slowdown and recession, there has been an attempt to provide a fiscal stimulus. The evidence on the efficacy of such programs is quite mixed. One great concern we had is every time we put on a spending program, it turned out to become permanent. It became immortal. You have an economic downturn that is relatively short. This is no comfort if you`re unemployed, but it`s been relatively mild. The unemployment rate today is below the level we entered the 1981-82 recession.

Q-A lot of people now see inflation as headed below 4 percent. Does this mean the Fed should be more aggressive in stimulating the economy through lower interest rates? Real interest rates remain very high for a recovery.

A-I think it`s widely believed across a range of different schools of thought in economics, private analysts, people on various sides of the political aisle in government, that it is quite unlikely in the short and medium term that there is much threat of a re-acceleration of inflation. The substantial easing that has occurred recently has done more to lower interest rates, it has steepened the yield curve, but it has not generated the response in money growth that traditionally has occurred, even given the usual lags that occur in that regard. Just getting (money growth) back to where the Fed itself wants to be is obviously an important thing for the Fed to do, both for its own credibility and for the economy.

Q-Do you think the Fed will lower interest rates again?

A-I think that they will wind up having to do some more.

Q-What`s your personal opinion on extending unemployment compensation?

A-I believe that unemployment benefits ought to be extended in a limited way, temporarily, and they ought to be financed in a manner that`s consistent with the budget law, which requires them to be offset (with cuts in the budget elsewhere).

If extended benefits became permanent rather than becoming available only once in a while when the economy got in trouble, some people would stay unemployed longer rather than going back and finding a job.

The bill that Democrats have proposed has a lot of bad structural features to it quite aside from the budget problems: making it permanent, changing a variety of other things in an undesirable way, which we think would slow re-employment of the currently unemployed and be bad long-term policy. We favor targeting the program toward where it`s needed most, extending the benefits on a temporary basis, given the state of the economy. We`re very concerned about the human costs of unemployment.

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(Note: A Democratic bill passed by the House calls for a permanent extension in unemployment benefits whenever the unemployment rate climbs above a set rate. A Democratic bill passed by the Senate calls for a one-time 20-week extension of benefits because of the recession. Neither offsets the cost of the measure with other budget cuts.)

Q-If the Democrats hadn`t initiated this, would the administration have supported any extension at all? Were you discussing any?

A-Only in the context of analyzing the recession relative to others, the unemployment situation relative to others. But certainly we sent signals early on. Sen. (Robert) Dole back in late July, when this first became a big issue, was working on a bill, and we indicated that was what we supported.

(Note: Dole (R-Kan.) has proposed a one-time 10-week extension of unemployment benefits, the cost of which would be offset by auctioning radio frequencies and changing student-loan collection procedures.)

Q-The administration is projecting a budget deficit of nearly a billion dollars a day in 1992, and that`s using an economic forecast that`s more optimistic than the consensus of private economists. Is the budget deficit agreement working, or do we need to do something new?

A-The budget agreement I do believe has held well. Congress has shown, despite attempts to probe and bust the agreement by various people in various ways, relatively reasonable restraint in trying to live within the guidelines of it. If it holds, it will lead to the government borrowing considerably less, several hundred billion dollars less, over the next five years than it otherwise would have. How much it otherwise would have depends on lots of things, such as the state of the economy and how fast the S&Ls are resolved.

Q-There is a proposal in Congress to eliminate the independent caps in the budget agreement on defense and domestic spending. They point to changes in the Soviet Union that would allow deeper cuts in defense spending to offset domestic spending. Do you think that would be a good idea?

A-Not yet; perhaps at some future time, as the president has indicated. The world is still a dangerous place. We have a large reduction in military spending already built into the budget agreement, a 25 percent reduction over five years. We have lots of those same people in Congress complaining about closing military bases in their districts or anywhere else. So I think to a certain extent, people are being somewhat sanctimonious about it.

Q-Do you favor a so-called Marshall Plan for the Soviet Union?

A-I think that people have a lot of misinformation about the Marshall Plan and a lot of misinformation about what any large-scale assistance effort could possibly do with respect to the situation over the next couple of years. We will press forward with humanitarian assistance-food assistance and so on- and with a stepped-up technical assistance program in areas like energy and defense conversion, things that would be good for the Soviet Union. They`re spending a quarter of their GNP on defense. Shifting some of that into things people need in their consumer sector will do vastly more than (anything the U.S. could do.)

Q-The United State spends 12 percent of its gross national product on health care, and health costs continue to rise. Yet large numbers of Americans have no health insurance, and the nation has one of the highest infant mortality rates in the industrialized world. Is it time for the federal government to do something and, if so, what should it do?

A-There are no simple solutions to that. Because Americans have traditionally wanted a lot of choice, they have resisted programs that have led to rationing who can get what. They`ve wanted the best technology and the most expensive technology available widely, and so on. When you talk about trying to deal with controlling costs and providing access, you`re talking about making some major reforms in the medical industry and the way people are paid in it.

Some people have proposed something more like the Canadian system where they spend a smaller share of their GNP (on health care) than do we, but there is much more rationing about who can get what, and some age groups are ineligible for certain types of procedures, and things of that sort.

It is clear, if you look at businesses, rising health-care costs are one of their big concerns, so I think the political process will have to come to grips with this. But we are a long way from any national consensus on how to deal with it.

Q-Are the 1990s going to be years of slow growth compared to the post-World War II period?

A-Economic growth stems from two basic forces: the rate of growth of the labor force and the rate of growth of productivity. In the `70s and the first part of the `80s, we had a massive influx of workers-the baby boom, the second earners for families. We had almost no productivity growth. In the `80s, we had both, but productivity was still below our post-World War II average.

If we stick to a program of trying to increase our capital formation, improve our human capital in our education system, provide a climate of entrepreneurship, continue to open markets instead of close them, invest more publicly and privately in research and development, if we do all these things- and I think we are on a path to doing some of them-then I think productivity growth in the `90s can be high. And that should lead to rising standards of living.