September 3, 2002

The O'Neill Factor

By: Eric Cox

It is something of a miracle that Paul O’Neill is still the treasury secretary. The calls for his dismissal have been practically unrelenting since the day he was confirmed, and have been equally loud from both ends of the political spectrum. The Bush administration could hardly be afraid of any political fallout from forcing O’Neill into early retirement. The only alternative, then, is that someone high up in the White House likes him. Perhaps that is a sign of bad judgment, but it’s equally possible that someone up there knows something about O’Neill that his critics have missed.

The Left’s frustration with O’Neill stems from their unheeded calls upon him to “do something” about the economy–even if it is only to speak a few magic words that will supposedly restore the nation’s confidence. This is entirely consistent with their calls on the administration to “broker a lasting peace” in the Middle East, which in their minds boils down to the president making a few telephone calls and scheduling a summit. To liberals in Congress and the media, O’Neill’s refusal to utter a few optimistic platitudes is not only a terrible dereliction of duty, it is actually the cause of economic turmoil. It is thus not surprising that they would see the need to replace O’Neill, who steadfastly refuses to humor them.

It is odd, however, that conservatives should criticize O’Neill for exactly the same reason. In calling for O’Neill’s head last October, the editors of National Review wrote that “the secretary’s most notable effect on the markets has been to roil them with ill-considered remarks about the dollar.” This comment is puzzling for two reasons. First, it seems to assume, as many political journalists certainly do, that the economy is driven by the stock market, and that the stock market is driven by what Very Important People in Washington say. This is a simply ridiculous notion. Professional Wall Street investors spend quite a bit of money researching companies, commodities, and currencies to determine the best investment decisions; and anyone who has a day-trader in their family, or who visits any one of the hundreds of online chatrooms where these investors speak to one another, knows that they are highly suspicious of anything anyone on television has to say about the economy. They look at fundamentals. They examine stock charts as if they were tea leaves. If there are people out there basing their investment decisions on the offhand comments of people like Paul O’Neill, they are not acting in their own best interest and will soon enough have no money to invest.

It is a different matter, of course, when a Very Important Person’s words signal a real policy change. But this is the second reason why the National Review editors’ statement is puzzling. The “ill-considered remarks about the dollar” they refer to are O’Neill’s repeated statements that the Treasury does not directly control the value of the dollar. That people decide whether to buy dollars based on the strength of the U.S. economy relative to that of other world economies. O’Neill’s remarks about the dollar were not “ill-considered” at all. They were the truth, and it is about time someone in his position said them. But even if the National Review editors were concerned about some particular policy move, they obviously have no reason to fear any such thing from O’Neill, who, by his own admission, is not pursuing any kind of “dollar policy.”

Larry Kudlow, financial editor for National Review Online, also has called for O’Neill’s resignation, as have other writers on the site. Kudlow’s reasoning is largely based on differences of opinion over policy. He thinks, for instance, that a large capital gains tax cut will spur economic growth. O’Neill does not, absent reform in other areas of the tax code. (Neither, incidentally, does William Niskanen, former chairman of President Reagan’s council of economic advisors and current chairman of the Cato Institute.) But even if O’Neill agreed with Kudlow, the Treasury secretary does not have the authority to enact those policies. That is up to Congress and the president.

Kudlow and his National Review colleagues do level one convincing criticism against O’Neill and the Bush economic team generally. Namely that they are terrible at communicating the administration’s economic game plan. By the end of the Clinton administration, nearly every member of the cabinet could clearly articulate the ideas behind “Clintonomics”: fiscal responsibility in the form of balanced budgets leads to low interest rates, which spurs economic growth. (Of course this “policy” came into being only after budget surpluses materialized, whence it became a clever way of opposing tax cuts.) It would indeed behoove O’Neill and the rest of Bush’s economic spokesmen to enunciate a clear and consistent economic philosophy. The problem is, the administration doesn’t have one. It is difficult to reconcile across-the-board income tax cuts with increased steel tariffs, no matter how great a communicator you are. The blame here properly lies in the Oval Office, not the treasury department.

In the absence of an administration-wide message on economic matters, O’Neill does too often take the bait when journalists, hoping to make news, tempt him to say something–anything–that they can label “controversial.” O’Neill, a former CEO, is a blunt man. Often his words are reported out of context, but, as Michael Lewis wrote in a January 2002 profile of O’Neill for the New York Times magazine,

By far the larger category of O’Neill’s indiscretions are the many things he has said that are true, and that most people know to be true, but that Treasury secretaries are not supposed to say. Included are (a) his observation that despite decades of Treasury secretaries suggesting otherwise, the United States government does not pursue a “strong dollar policy” and that in any case the Treasury has no ability to affect the level of the dollar; (b) that the most recent House Republican economic-stimulus package is “show business” [a point the editors of NR agreed with]; and (c) that the real trouble in Argentina [at a time when the media were calling on the administration to bailout that country’s collapsing economy] is that “they don’t have any export industry to speak of. . . . And they like it that way.” It’s hard for sane people to see any problem with any of this. Some, for example, will point to the convulsion in the market for Argentina’s bonds that followed that last remark. So what? It’s now clear that the bonds would have convulsed anyway.

The argument that O’Neill tends to wander off the conservative reservation from time to time is equally irrelevant. O’Neill is not a conservative. He has supported a 50-cent gasoline tax and federal regulations on carbon dioxide emissions because he is concerned that global warming may be a real problem. But his positions on these issues have no effect on the role George Bush has asked him to play in the administration, nor do they reflect an ideological agenda.

O’Neill is not an ideologue; he is admirably pragmatic and hardheaded. As he did as the CEO of the aluminum company Alcoa–which he grew from profits of $4.8 million to $1.5 billion in fewer than seven years–O’Neill has made it his mission to transform the culture of the treasury department. In the process, he has apparently made enemies. Writing for NRO, Bruce Bartlett, a former Treasury official, bemoaned the fact that his friends at the department are chafing under O’Neill and are leaving in droves. However, there is no reason to believe that O’Neill is disappointed about this. The same thing happened at Alcoa when long-time employees felt that he was taking the company in the wrong direction. O’Neill’s style is to set one or two large goals at a time and focus exclusively on them until they are accomplished. (At Alcoa, his first goal was to improve worker safety dramatically as a means of increasing productivity in an industry that faces intense competition from cheap labor overseas. Lewis reports that workers at Alcoa–most of whom work with molten lava on a factory floor–now miss work because of injury twenty times less often than do workers at the treasury department, most of whom sit behind desks. And O’Neill has already cut workplace injuries at Treasury in half.)

O’Neill set himself three large goals for the present term of the Bush administration: pass a large tax cut, transform Social Security into a system of individual retirement accounts, and simplify the federal tax code. (O’Neill notes that the IRS employs 3,654 workers who do nothing but answer the 78 million telephone calls it receives from befuddled taxpayers; his goal is to eliminate those calls entirely.) This is a bold agenda by any standard. September 11 has made the accomplishment of the last two goals a real challenge, but O’Neill is working on them. If he achieves even one of them, he will surely be remembered as one of the most successful Treasury secretaries in history.

When asked by Lewis about his criteria for judging his own success, O’Neill answered, “It’s not, ‘Did we get some bill passed or did someone like what I said or wrote?’ What really matters to me is lasting institutional change.” Replacing O’Neill with a smooth-talking yes-man might be good for the administration’s PR, but it would surely mean abandoning O’Neill’s passionate commitment to achieving real change. It would also be personal betrayal of him. O’Neill didn’t take the job because he needed it; in fact, he was forced to give up stock options valued at $25 million to $250 million. When initially asked to take the job, he refused, preferring to spend his retirement years with his family. He had to be talked into it personally by the president. The fact is that O’Neill gets results, and conservatives are lucky to have him, whether they like him or not. He did not take the job to be popular, but to accomplish the three goals he has set out to achieve.

Which brings us back to the question of why O’Neill is still serving at Treasury despite the abuse he has taken in the press. In an August 28, 2002, column on NRO criticizing O’Neill, Bartlett wrote, “It has never been clear why Bush hired O’Neill.” Actually, Bush nominated O’Neill for one very good reason: Dick Cheney recommended him, having worked with O’Neill in the Ford administration. It is also worth noting that Cheney recommended Donald Rumsfeld, another former Ford administration colleague, for the Defense Department, and that before September 11 the calls to replace O’Neill were exceeded only by the calls–from some of the same people–to replace Rumsfeld, on the grounds that he was an offbeat thinker, a poor communicator, and an inept manager. Anything there sound familiar?

Rumsfeld’s critics, of course, were permanently silenced by the U.S. military’s extraordinary success in Afghanistan, whereas O’Neill’s critics have been emboldened by a still sluggish economy. If the economy has not fully recovered by next spring, as O’Neill has long predicted it will, the howls of “I told you so” from the Beltway crowd will become deafening. But if, on the other hand, the economy has started chugging along, O’Neill will be turning his full attention to Social Security or the tax code. In either case, if he is to accomplish what he set out to do, he will need conservatives to stand in his corner rather than nip at his heels.