In 1992, Alicia Munnell, research director for the Federal Reserve Bank of Boston, wanted to conduct a study of racial discrimination by area mortgage lenders. Known for her liberal politics, Munnell was discouraged by Fed officials, who wanted to duck the touchy issue. But she finally got the go-ahead from Fed governor Lawrence Lindsey, a George Bush appointee who headed up the central bank's minority-lending program. The study concluded that racial bias did indeed exist, and Munnell went on to become a senior economist in the Clinton administration. "Larry doesn't believe the government should give people a handout, but he thinks it should make sure they don't get screwed," says Munnell. "He's conservative, but he's also compassionate."

Hmm. Where have we heard that before? Yes, "compassionate conservatism" is George W. Bush's mantra, and Lindsey is the man the Texas governor has tapped to draft an economic agenda that fits the description. So far, the catch phrase is drawing a lot of snickers inside the Beltway as little more than hollow rhetoric. But Lindsey actually embodies that philosophy, which is why he's the perfect choice to develop a program that blends the bedrock conservative principles Bush must voice to keep Republicans happy with the populist touches he'll need to win the general election.

To put substance behind his campaign slogan, Bush wants to embrace a big tax cut, but he also wants to meet the "fairness" test when the Democrats play the class-warfare card. You see, the income tax has become very progressive during the Clinton years: The top 1 percent of earners now pay more than a third of all income taxes, while the bottom half pay just 4 percent. As Lindsey observes, "Any income-tax cut will be open to charges that it's just for the rich." To counter that accusation, the 44-year-old economist is looking for ways to direct sufficient tax relief toward middle- and lower-income groups.

One idea is to propose a bigger percentage cut in taxes for those in the 15 percent bracket. Another idea is to combine an income-tax reduction with a Social Security reform plan that diverts part of the Social Security payroll tax, which is more onerous for the average worker than the income tax, to personal retirement accounts that individuals can manage themselves. Lindsey and his six-man economics task force are also eyeing regressive levies they can slash, such as the telephone excise tax.

Besides a tax cut for the short term, Bush needs a big tax reform plan for the campaign. Lindsey's preference is an overhaul that, well, Bill Clinton and Al Gore could embrace. In what amounts to a replay of the last big reform, the 1986 Bradley-Gephardt law, Lindsey wants to reduce marginal rates, which have crept up from a high of 28 percent to 40 percent over the last 13 years. And he wants to broaden the base by eliminating most deductions except for charitable contributions and mortgage interest.

What does he think of Steve Forbes's flat tax, which would eliminate levies on capital altogether? Not much. "Maybe it's the populist in me, but capital should be taxed," says Lindsey. "The government spends a lot of money protecting it." That kind of rhetoric should play well with mainstream voters but won't endear Lindsey to hardline conservatives.

That's the same political problem Bush faces, which is why he and Lindsey seem to make such a good fit. Both are pragmatic rather than ideological, and each has a soft spot for society's underdogs. Bush signed up Lindsey late last year at the suggestion of Al Hubbard, a classmate of Bush's at Harvard Business School. Hubbard was working for Vice President Dan Quayle when he got to know Lindsey, then a White House policy adviser for Bush senior. "Larry is a big believer in helping the less fortunate," says Hubbard, who is now advising George W. The governor sees another attraction in Lindsey -- he talks in plain English, rare for an economist. "He can explain complex issues in terms that I can understand," says Bush, no policy wonk like Clinton.

Bush's interest in the disadvantaged might be chalked up to noblesse oblige. For Lindsey, it's the result of a very middle-class upbringing by two public school teachers in Peekskill, New York. Lindsey taught disabled kids in New York and learned microeconomics firsthand by running a hot dog stand in Maine for two summers before going upscale when he entered the doctoral program in economics at Harvard.

His father wanted him to become a lawyer, fearing he'd be unemployed as an economist. But Lindsey landed a nice job as a White House economist during Ronald Reagan's first term. After a stint teaching at Harvard, he joined the Bush White House as a domestic policy adviser, and then served as a Fed governor from 1991 to 1997.

A tax-policy specialist, Lindsey wrote a staunch academic defense of Reagan's supply-side tax cut in 1990, The Growth Experiment, based on data he collected for his Ph.D dissertation. But he's no hard-core supply-sider. In fact, his book concludes that a rate reduction pays for itself in the form of higher revenues only when the top rate is 50 percent or higher.

His rationale for a tax cut now is demand-side stimulus -- classic Keynesian economics. Lindsey views the stock market as one big speculative bubble that's bound to burst. When that happens, consumers' current spending spree will abruptly end and the economy will slip into recession. His antidote: a two- or three-year cut in marginal rates that puts money in people's pockets as quickly as possible.

As a Fed governor, Lindsey was a maverick when it came to monetary policy. He never aligned himself with the inflation hawks, who always favored tight money, or the pro-growth doves, who wanted to keep interest rates low. Though his monetary views did not leave much of an impression, Lindsey became a champion of the Community Reinvestment Act, the Fed-run government program that forces banks to increase lending in poor neighborhoods. Many conservatives despise CRA, but Lindsey saw merit in the program after spending a lot of time visiting inner cities. His conclusion: "There is a market failure. Not because of racism, but because it's considered a bad investment." In Lindsey's world, when the free market doesn't work, government has to step in to give people a helping hand.

You're going to hear more compassionate talk like that in the coming months as Bush articulates his "vision" for the country. First, though, he's got to settle on a set of economic principles Lindsey has been preparing for him. The economist was scheduled to fly down to Austin on June 2 for an early morning meeting the next day to discuss an economic agenda. But Lindsey had a personal conflict: His 7-year-old son was starring in a play the night of June 2 and Lindsey was wondering if the governor could push the meeting back a few hours so the economist could hop on the first plane leaving Washington on the 3rd. No problem, Bush said. He'd rearrange his schedule so Lindsey could watch his son's play. What a couple of compassionate guys.

A senior writer at Business Week, Owen Ullmann will be covering economic policy issues for USA Today starting in July.