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The Virtue of Loyalty
Why Paul O'Neill is wrong.

BY LAWRENCE B. LINDSEY
Wednesday, January 14, 2004 12:01 a.m. EST

Politics can be a rough sport. Paul O'Neill's departure after two years as Treasury secretary was not handled well. His bitterness, some would say, is quite understandable. But bitterness is a bad basis for objectivity, and any of Mr. O'Neill's reported views regarding President Bush and the conduct of economic policy do not comport with my recollection or with the public record. In fact, the president is what he claims to be--a compassionate conservative--and one with a grasp of how the world really works.

I first got to know President Bush in late 1997, when a mutual friend suggested we should meet. We had a series of meetings, each lasting several hours, during 1998 in the governor's mansion in Austin. The discussions were detailed and he was constantly asking penetrating questions, and telling me to "Say it in English" when my explanations were too wonky to be clear.

We shared a concern about the bubble that was developing in the financial markets. His concerns were not just theoretical. As a businessman, he'd suffered through the 1980s energy bubble in Texas and its collapse. Mr. Bush expressed particular concern at the human cost of the downturn, remembering families in Midland who lost their homes. This view that a bursting bubble was both an economic and human calamity shaped the Bush economic program both during the campaign and after his election.

On Dec. 1, 1999, the president unveiled his tax cut, saying that the economy might need an "insurance policy," and adding that "a president should hope for the best and prepare for the worst." This led to a very orthodox approach to handling economic weakness.

On the human side, the tax cut was disproportionately focused on middle-class families with children. The president overrode the recommendations of many of his advisers by explicitly eliminating the taxes paid by single parents supporting children on modest incomes. Being a single mom with kids, he explained, was the toughest job in America.

On Jan. 3, 2001, 2 1/2 weeks before taking office, the president held an economic summit in Austin. Businesspeople and others active in the economy came to give their candid and private views on the state of the economy. Although the official data at the time suggested all was well, these people said that the economy was sliding rapidly. This galvanized the president into pushing for rapid enactment of the "insurance policy" he had campaigned on. Interestingly, the Federal Reserve had reached the same conclusion, making the first of what turned out to be 13 cuts in the federal-funds rate, on the very same day.

Mr. O'Neill joined the administration in late January, without the benefit of this background. Convinced by his own judgment and by the official data that had been released during 2000 suggesting that the economy was doing fine, he sought to minimize the potential size of the tax cut. We now know, but did not know then, that the economy had started its decline in the quarter before the election.
One of Mr. O'Neill's suggestions was to have the tax cut trigger off if the government ran a deficit. The view had two problems--one process, one policy. Upon taking office, the role of the so-called policy shop in the White House is to implement the program on which the president campaigned and was elected. In all three administrations in which I served, a record was kept of these commitments that may seem inflexible to some. But it is the best method I know of to ensure democratic accountability for those who staff a new administration. While flexibility develops over time as circumstances change, Mr. O'Neill was advancing an idea that had been rejected in the campaign at a time when the governing process is most focused on carrying out the will of the electorate.

Of even more concern to me was the policy implication of the O'Neill proposal. The tax cut was there to cushion the economic downturn resulting from the bubble's collapse. Mr. O'Neill's plan meant that if the downturn was so severe as to cause revenues to collapse, the tax cut would have to be cancelled just at the time the economy needed it the most!

More generally, the policy-making process can be a frustrating one, and Mr. O'Neill certainly experienced that. Many issues arise that do not fit neatly into a single cabinet department's jurisdiction. For example, a trade issue such as steel tariffs affects the Commerce Department and U.S. Trade Representative most directly. But the Labor Department can be involved if firms might fail and their pension plans might be taken over by the government. The Office of Management and Budget can be involved because of budget effects, and the Treasury and the Council of Economic Advisers because of the economic impact.

The White House policy staff organizes these disparate agencies on an issue-by-issue basis, trying to discover and stop unintended consequences from a policy action that a single agency may have overlooked. From time to time, this interagency process looks like a "power grab" to a cabinet officer who sees an issue as being part of his "turf." When disagreements can't be resolved by the policy officials, the buck stops with the president, who makes the final call. Though it can be messy and time-consuming, the country is better served if all angles on a given decision are thoroughly vetted before it is implemented. In two decades of being involved in this process, I've never known anyone who thought they "won" on all the issues they should have.

Two of Mr. O'Neill's most troubling assertions about the decision-making process--that the president is not engaged, and that he (Mr. O'Neill) was shut out of the process--are simply false. Every night, the president goes home with a two-inch binder known as the Briefing Book. It contains the background material for each of the president's numerous meetings the next day. Having been grilled on the details in those briefing memos, I can personally attest that Mr. Bush does his homework. Woe is any official who is not prepared, because the president will be. I imagine the case method Mr. Bush learned at Harvard Business School was good preparation.

Each page of that Briefing Book must be cleared through a complex process run by the staff secretary. The White House policy councils must assure the staff secretary that the views of the relevant agencies are accurately portrayed. And since Treasury officials are regularly included in the meetings with the president, they have their own check. If Mr. O'Neill felt that material got to the president that blindsided him, he should have inquired within his own department.

It is in the area of tax policy that Mr. O'Neill seems most aggrieved, both about policy and process. Although he had been ebullient about the economy during much of 2001, 9/11 convinced Mr. O'Neill that business confidence needed a boost. He suggested a 15-point rate cut in the corporation income tax rate for two years. We took the idea directly to the president. But it was a nonstarter--it just did not comport with the president's view of helping the economy by helping working families directly. This was a policy decision, not a process failure.

During 2002, it became clear that although the first round of tax cuts had ended the recession, the lingering effects of 9/11 and the bubble's burst were still weighing down the economy. Mr. O'Neill favored focusing resources on two big long-term reforms: a complete privatization of Social Security and the abolition of the corporation income tax. Both ideas were examined in detail. Instead, the president opted to propose an acceleration of the tax cuts, which were being phased in over several years. Passed in April, these tax cuts were instrumental in jump-starting the economy in the third quarter of 2003. The economy will continue growing in 2004 on the back of sound policy.

To some, including Mr. O'Neill, those tax cuts were a mistake because they did not make fundamental structural changes. The president instead opted to make modest positive structural improvements while putting money in people's pockets and sustaining economic growth in the near term. But more important, these could be enacted in a timely manner.

A look around the world shows that the president was right. The experience of Japan, which has struggled for a decade trying to make structural changes, is instructive. Its economy has stagnated because the political process has neglected achievable reforms that would also help sustain growth while bigger changes occurred. The obsession of Europe with deficits is also instructive. Needed tax reductions and structural reforms were neglected because of short-term revenue effects. European deficits are high and rising due to economic stagnation, while unemployment is in double digits. America is widely hailed as the world's growth engine because we followed the right policies.
That is why the claim that the president's tax cut was supply-side ideology is so misplaced. The tax cuts met a demand-side need while advancing sensible improvements on the supply side. Radical supply-side ideas like abolishing the corporate income tax were vetted by the policy process and rejected. The process worked as it should, considering a full range of options and then selecting the most feasible.

In spite of our policy differences, Mr. O'Neill and I always got along on a personal basis. He is a smart, well-intentioned man with a long and distinguished career. He thinks big thoughts, and his efforts to combat AIDS and bring potable water to the people of Africa speak to a big heart. The month before he left office, he took considerable personal risk by flying to Afghanistan to advance America's war on terrorism. He, like others who leave private life at the peak of their careers, make a real sacrifice.

So, the circumstances of his departure were regrettable. But so too was his decision to make this book, "The Price of Loyalty," the capstone of his career. The book does a grave injustice to the president, to the truth, and to Mr. O'Neill himself.

Mr. Lindsey is a former director of the National Economic Council.