STILL ON TOP

Gregory Mankiw's intellectual honesty has occasionally landed him in trouble. Not long after he became chairman of the Council of Economic Advisers in Washington, Mankiw suggested that the "outsourcing" of jobs, a hot-button issue in the presidential campaign, was actually good for America's economy. Mankiw, a top Harvard economist, recently shared other thoughts on George W. Bush's second-term agenda with NEWSWEEK's Michael Hirsh. Excerpts:

HIRSH: Are you worried about the large U.S. trade deficit? Is the dollar likely to continue to fall?

MANKIW: The trade deficit is a symptom of other developments in the world economy and should not be viewed in isolation. To some extent our trade deficit is a symptom of slow growth abroad. If Japan and Europe were to start growing more rapidly, they would buy more U.S. goods, which would reduce the U.S. trade deficit. The president has engaged other countries on promoting faster growth around the world, and has worked to open foreign markets to U.S. goods and services. In addition, if Americans were to increase national saving, that would reduce our reliance on foreign sources of capital to fund U.S. investment, which in turn would mean a smaller trade deficit. One way is to reduce the budget deficit. Another way to increase national saving is to encourage private saving through expansion and simplification of tax-deferred savings accounts. On your second question: I don't comment on the value of the dollar.

Are budget deficits a big concern?

The budget deficits, while manageable, are unwelcome. Deficits can put upward pressure on interest rates and crowd out private investment spending, thereby offsetting some of the expansionary effects of tax cuts. This is one reason why, as the president has said, spending restraint is so vital. The president is committed to reducing the budget deficit by half over five years.

What should we be expecting on tax policy in the administration's second term?