Questions for Vice President Dick Cheney

WASHINGTON (Fortune) -- Q: I've talked to a number of economists who provide advice to you, and say that you are very interested in business cycles. In late 2000 you were on "Meet the Press," and you actually predicted correctly, ahead of just about everybody, that a downturn was around the corner. That was Bill Clinton's economy. Now it's your economy. What's your candid assessment of it?

THE VICE PRESIDENT: Well, first of all, my track record as a forecaster, I'd go slow on. I did express the view that we were headed for a recession [in 2000]. Part of that, frankly, was based on my time [as] a corporate CEO and serving on several boards. I don't serve in those positions today and so I have a different perspective and also obviously different access to data. And I don't want to try to repeat that so-called success story. Once was enough. It's easy to get it wrong.

But based on the advice we get and what we're hearing from the economists we've talked to - both private sector and government economists - the view I hear most frequently expressed is one of continued optimism. And we have had a remarkable run so far - 50 months now of uninterrupted job creation.

We have gone through [this] period of time despite rising energy prices, [which] historically has precipitated slowdowns. It hasn't happened this time. I think in part that's because we're far more efficient in terms of how we use energy. We're still dependent, obviously, on foreign sources, and affected by those prices, [but] as we get more efficient and as we consume less energy per unit of output, the ability of those higher prices to adversely affect the economy has been diminished.

But we're getting to levels now, obviously, that nobody has ever seen before - we're starting to push $100 crude. So I don't want to make a hard and fast forecast. I don't see signs on the horizon of a significant economic slowdown, even though we do have, obviously, higher oil prices than we've had most of the time - pretty close to the historic peak. And obviously people have been concerned about what's happened to the financial markets, the sub-prime slowdown and so forth.

Q: There's been some criticism of the Treasury Department's so-called "super-S.I.V." plan, designed to help contain the sub-prime mortgage virus. One economist who advises you called it a "gratuitous bail-out." And Alan Greenspan has been quite critical of it. What's your view?

THE VICE PRESIDENT: I'm going to defer comment on that. Treasury Department has been dealing with that. And they don't need my help commenting on it.

Q: Do you think the administration or Congress should have a role in stemming the sub-prime mortgage problem? And if so, what should that role be?

THE VICE PRESIDENT: Well, it's of concern, obviously. We've had meetings on it. There's concern that the impact is especially severe on some folks who were persuaded to buy into the housing market with some of those mortgages. And I think everybody is concerned to make certain that people weren't taken unfair advantage of, or that the regulatory process was adequate, or that there was adequate transparency so that people weren't snookered, so to speak.

But there's also a feeling - at least I have, too - that we need to be very cautious about government intervening or somehow expanding the government role in this area. And the fact is, markets work and they are working. And people - [at] some of the big companies, obviously - have taken risks in the big financial institutions. And risk means risk. And there's an upside as well as a downside in some of the choices they've made - and I think we have to be careful not to have this set of developments lead us to significantly expand the role of government in ways that may do damage long-term for the economy.

I'm a big believer in markets and the free enterprise system, and cautious about granting government ever-more authority over our financial markets or our private sector. So I'm cautious, I guess, in terms of recommending some kind of fundamental change of policy.

Q: What about letting Fannie Mae and Freddie Mac get into the jumbo loan market temporarily?

THE VICE PRESIDENT: I'd be cautious about it. I remember when Alan Greenspan was Chairman of the Federal Reserve, he was very concerned about the GSEs [government-sponsored enterprises], and thought that their size has gotten so significant. Of course, an awful lot of people out there [are] operating on the assumption that these are government-backed entities - and of course they aren't. And so there's been concern over the years about the need for reform in GSEs, and to improve the oversight.

I'd be reluctant to see us go forward with a significant expansion in the role of GSEs and markets without making certain that we'd addressed those other issues that are of concern. They're so big that if something significant were to happen there, they could have a systemic impact on the economy. That's something we've been concerned about.

Q: Some of the economists who advise you are critical of the Fed in the early 2000s for loose money policies that they say led to this housing bubble. Would you agree with that?

THE VICE PRESIDENT: We try to have a variety of economists come in. They are selected because they do have different opinions. So I wouldn't want to be categorized or pigeon-hole myself in terms of the views that they express. I, as a general proposition, think Alan Greenspan was a good Fed Chairman, and consider him a friend.

Q: How do you view your personal role in the administration's economic policies?

THE VICE PRESIDENT: For starters, it's important to remind everybody [that] I'm the Vice President, that I'm not in charge of anything, that the arrangement I have with the President is that he wanted me to sign on to be an integral part of the team [in] certain areas.

I sit in on virtually all the economic policy sessions, [including] the Wednesday luncheon of economic principals. It's a way to keep up with what's going on in the economic arena. Ideas get kicked around. No decisions are made there, those all go up to the President. I sit in with the President when he meets with his economic advisers.

I get involved in the economic arena, as well, partly through my role on the Hill. I go up every Tuesday and participate in the Republican Senate policy lunch every Tuesday. Lots of times we have policy debates there. I was heavily involved in the '03 tax cuts, because we had a tie in the Senate, and I had to cast the tie-breaking vote.

Q: Let me turn to trade. I understand that you oppose, or have strong concerns about Russia joining the WTO. What are your concerns?

THE VICE PRESIDENT: Well, I would state it slightly differently -- not that I oppose Russia's involvement in the WTO. But there are standards and conditions that traditionally have been met by [WTO] members, more in order to obtain membership in the WTO. And I think the Russians ought to be held to the same standards.

Q: You opposed unilateral sanctions on Iran when you were CEO of Halliburton (Charts, Fortune 500).

THE VICE PRESIDENT: I did.

Q Now, of course, you have a different perspective, not only on questions such as sanctions that affect U.S. firms, but also on sensitive investments coming here. Do you see corporate interests colliding increasingly with national security interests as we move forward?

THE VICE PRESIDENT: There are clearly times when there's a conflict. And I think back -- you mentioned my time at Halliburton -- and I did have a problem with unilateral sanctions, in effect because what they do is penalize American companies. If it's not broad based, you end up creating significant competitive disadvantages for American companies

We're in a position now, when we look at Iran, where it's very, very important we succeed in our efforts to discourage the Iranians from enriching uranium and producing nuclear weapons. So you reach for any tool that's available, because you'd like to be able to resolve that diplomatically, peacefully, by economic means if necessary. And the last option you want to have to consider is the possible use of military force.

That's a whole set of considerations that a CEO doesn't have to worry about, that a private company doesn't have to worry about. But the President of the United States does. When the President sits down to make those kinds of judgments, he needs to have broad authority to act, even though that may be painful and frustrating for somebody in the private sector who has to live with it.

Q: Will the movement of capital in the global economy create more of these conflicts? For example, are you worried [about] China, for example, [which] owns so much of our debt? That's a concern that's been expressed in the political world. Will this cause new geopolitical dynamics down the road?

THE VICE PRESIDENT: There's a lot underway, when you think about the degree of integration of our economy with the Chinese economy. And [it's] not just China, it's global. It's one of the great developments of the 20th century, and obviously [it] is going to accelerate even in the 21st century, [to] the extent [that] we're a part of a world economy.

And it does raise complicated questions. National boundaries don't mean as much as they once did. If we restrict our military to say you can only buy American, we're going to miss out on a lot of important technology or important developments going forward, or greater efficiencies in terms of how we build our military forces. It's a different set of concerns and considerations than we've ever had before.

I'm not that worried about China owning our debt. I think they've got a big stake in the U.S. economy and how well we do. I think they understand that. And I think the notion that somehow they've got major investment in the U.S. Treasuries, that doesn't bother me.

Q: According to your biographer, Stephen Hayes, you had some reservations about supply-side economics in the '80s. Would you call yourself a supply-sider today?

THE VICE PRESIDENT: I would. The first time I ever heard the argument really advocated was with Art Laffer and Jude Wanniski, in the bar -- at the Two Continents bar over at [the] Hotel Washington, across the street from the Treasury building. This must have been -- it was in the Ford administration, probably '74, '75. And Art did whip out sort of a Sharpie, a Magic Marker, and a white linen napkin, and draw the Laffer Curve. First time I'd ever seen it. He may have drawn it before someplace else, but that's that first time I saw it.

I think he thought I might have some influence [with President Ford]. And the point Art was trying to make was basic supply-side theory; that by cutting taxes you change people's behavior, and they would work harder and produce more, and not only would the economy grow but the government would collect more revenue. It was a novel idea 30 years ago.

Q: And your reaction at the time?

THE VICE PRESIDENT: My reaction at the time was, well, that's interesting -- but I didn't run out and say, Mr. President, Mr. President, you've got to cut taxes. Over the years, especially during the Reagan years, I think a lot of us became supply-side advocates. I certainly reached that point where I believe that it is extraordinarily important to keep taxes as low as possible, and that that does produce significant benefits, not only for the economy, in terms of job creation and wealth and economic expansion, but I also believe it does produce more revenue for the federal government.

And I think one of the great things we've done in this administration is to cut the capital gains [tax] rate to 15 percent, the rate on dividends, to accelerate the rate reductions in the '03 tax package. I think that was a remarkable success story, and it's produced more revenue for the federal government, smaller deficits, and obviously kept our economy growing. And it's one of the big debates for the Democrats going forward -- they obviously are advocates of raising taxes, and we're not.

Q: If the tax cuts are allowed to expire, what will be the impact on the economy?

THE VICE PRESIDENT: It's identical with a big tax increase, [even if] politically you don't have to vote to raise taxes. When you raise the top rate, you see the 15 percent rate on cap gains and dividends and so forth go away, there's no question it would be exactly the same as if Congress sat there and passed a law to raise taxes. And it will slow down the economy. It'll have a big impact, especially when you raise the top rate. About 75 percent of those filers are, in fact, small businesses. And small businesses generate most of the job growth in the economy.

Q: The Democrats do, however, raise the equity question, that there's a growing gap between the rich and the poor, especially the super-rich. They've proposed raising taxes on the so-called super rich. And even the President has raised concerns about CEO salaries. Do you think there's any legitimacy to this income gap question, and using the tax code to address it?

THE VICE PRESIDENT: We already have a tax system that is very, very progressive. And people always ignore, or choose not to bring up the fact that the bottom 50 percent of wage-earners, I think, pay a little over 3 percent of the federal income tax in the country. It's less than 4 percent. The top 1 percent pay 36 percent of all the income taxes in the country.

So we're already at a point where we have excluded from income tax roughly that half of the population that's at the lower end of the income scale. That's a very progressive tax system. It means that the richest among us and the wealthiest are, in fact, paying the bulk of the taxes. And that's a decision we've made over time. To suggest that we ought to make it even more progressive than it already is, or raise taxes even further, or exclude even more people from the tax code, I think it would be a mistake.

Q: Are you concerned that CEO salaries have gotten out of whack?

THE VICE PRESIDENT: Those are decisions that need to be made by those individual companies and their boards of directors. I don't think you want the federal government in the business of dictating the salaries of CEOs. I'm sure there [are] some out there that I think are making too much money, but that's not my judgment to make; that's a judgment that their board made. If people have got a problem with a particular company, well, don't buy their stock.

Q: Do deficits matter, Mr. Vice President?

THE VICE PRESIDENT: They do. I've been oftentimes alleged to have made a statement that deficits don't matter. The conversation, as I recall, was in a political context. And then Ronald Reagan had, in the early stages of his administration, expanded the deficit. He did it through a combination, short-term, of major increases in defense spending at the same time that he was cutting taxes, and the deficit did increase initially.

But deficits -- if you're going to look at deficits, and you should -- you've got to evaluate them relative to other priorities. Another priority, for example, would be defending the nation in wartime. And you need to look at deficits relative to the total size of the economy, which oftentimes we don't do.

The deficit I'm really worried about, I think the biggest problem out there on the horizon, isn't the one that we spend most of our time debating -- discretionary spending on an annual basis. The big one is what's going to happen to our entitlement programs long-term. Social Security and Medicare. We've tried very hard in this administration...and we couldn't move the ball very far down the field.

Q: What worries you most about the global economy?

THE VICE PRESIDENT: I suppose it would be the kind of -- some kind of terrorist incident that would strike a major blow at the functioning of the global economy. If the terrorists were ever able to get their hands on deadlier weapons than they've used today -- acquire a nuclear weapon, for example, which we know they'd like to do, or come up with a biological agent of some kind that would kill hundreds of thousands of people, that kind of thing could clearly have devastating economic consequences.

[I also worry about] things they might try to do to interfere with the world's energy system and the supply of energy flowing to the world. Clearly the world depends on the global supply of oil, those markets. And that will continue to be true for some considerable period of time. So efforts to shut down the flow of oil to the world's economy could conceivably have a significant impact.

Q: Another historical question. You were involved in developing Nixon's wage and price controls. (Laughter.)

THE VICE PRESIDENT: It's not on my resume.

Q: How did regulating the cost of hamburger meat affect your political philosophy?

THE VICE PRESIDENT: It enforced my conservative tendencies. I was the assistant director of the Cost of Living Council and oversaw 3,000 IRS agents trying to enforce wage price controls. And it was a terrible idea. The federal government was going to be responsible for the price of hamburger or bread or gasoline or whatever might be out there. I always felt it was one of Nixon's most serious mistakes.

One of the reasons I have great respect and admiration for George Schultz was because when Schultz became Treasury Secretary, he also automatically became head of the wage price control program. And the very first morning he was in, he called a bunch of us to his office and closed the door, and said 'Gentlemen, how do we get out of these damn controls?' It was on my shoulders to do that, so he earned my undying gratitude when he had the wisdom to recognize that it had to be the first order of business.

But it seriously distorted the economy in many ways, as well as transferred in the minds of the public that Uncle Sam is responsible for all those decisions out there -- wages and prices and profits -- that affect their lives every single day. So if you were angry about the price of beef, you weren't mad at the local supermarket, you were mad at the Nixon administration. Those are the guys that are taking control over the price of beef.

Q: Any economic books you've read lately?

THE VICE PRESIDENT: I read Greenspan's book, ["The Age of Turbulence: Adventures in a New World."]

Q: And what did you think of his criticism of your spending habits?

VICE PRESIDENT CHENEY: Well, he was especially critical with respect to entitlements. And I thought his criticism of the government generally -- and he focused especially on the Congress -- it's hard to argue with.

Q: What was his inscription in your book?

VICE PRESIDENT CHENEY: That's private. He's still got a few secrets left.