Paul O'Neill’s "Fundamentals"
Jude Wanniski
July 29, 2002


Memo To: Fans, Browsers, Clients
From: Jude Wanniski
Re: They are not too good

With the stock market down 30% since Paul O’Neill became Treasury Secretary, it is about time for President Bush to look around for a new finance minister. I’d kept my fingers crossed that he would step up to the job after the failure of the original Bush economic program became clear. That plan, designed by Larry Lindsay the President’s chief economic advisor, was a traditional approach to a very different kind of economic problem. I knew from the beginning that it would fail, and I spent serious time early in 2001 sending material to O’Neill and meeting with him and his senior staff in late March of that year. I warned them that the tax cuts and interest-rate cuts would not reverse the extremely rare form of monetary deflation that was being caused by the floating dollar, with no link to gold. As the meeting closed, he told me to let him know whenever I thought that he was saying or doing something that I thought wrong. He’d known me since 1974 and by reputation, so I was treated warmly and with respect. He was aware that when conservative Republicans howled with dismay at his confirmation hearings, seeing an old school Hoover budget balancer where a Reaganaut was what they wanted, I had defended him as having the potential to learn the ropes at Treasury -- just as he had successfully learned the ropes in corporate America.

In the two years that followed, I sent a steady stream of material to him through his chief aides. I did not hold back on my criticisms, but even my sharpest was of his “passivity.” He did not appear to be interested in the events that swirled around him, as if he were only a spectator to policies set in place before he arrived. On subsequent trips to Washington, I made attempts to visit with him again and got back apologies that he would be too busy to see me, but try again next time. When the corporate fraud legislation began making its speedy way through Congress after the Worldcom debacle, I thought he might weigh in with warnings about how excessive regulation would make it harder, not easier, for the economy to grow. When you tax business, less business is done. I did not have an opportunity to suggest a course of action to him because a month earlier he sent word to me through his chief of staff, Tim Adams, that he no longer wished to hear from me at all. In 1997, when I was warning Alan Greenspan on a regular basis how the monetary deflation was crippling the world commodity sector, he had his secretary call to tell me he no longer wanted to hear from me. I’d been meeting with Greenspan regularly since he became Fed chairman in 1987 and had known him fairly well since my days as associate editor of the WSJournal editorial page.

Nobody seemed to want to hear about the monetary deflation. They still don’t, although I have also argued that the reasons for the widespread accounting irregularities had to do with the business communities' surprise that the national economy did not respond the way the Bush administration, Greenspan, and even the Democrats, said it would. Chief financial officers would try to stretch the numbers as much as they could in hopes they would soon be rescued by a stock-market advance. Without it, the economy would not keep up with projections and corporate pension accounts would sink deeper an deeper into unfunded quicksand.

Instead of weighing in, O’Neill told Meet the Press a few weeks back that he did not mind if the Senate went too far in its regulatory excesses, as long as it was not ambiguous. It was the straw that broke the camel’s back as far as I was concerned. In backing the fraud bill as he did, he was a negative force -- no longer passive. The Dow Jones Industrial Average fell 1500 points as Wall Street pondered the damage it would do. When the details were announced last week, it was only two-thirds as bad as it might have been, so the market gained back 500 points. That’s still a thousand points that could be charged to O’Neill.

If he were showing any signs of creativity in his approach to the troubles in the market and the economy, he might earn a new lease on life. But it only gets worse. In his several television appearances over the week he repeated the same mantra over and over again: The economic fundamentals are good and it is his responsibility to maintain the fundamentals. On FoxNewsSunday I thought I counted 12 “fundamentals” and on Meet the Press I kept a running tally and counted 9. What is this all about? It could only have come from someone in Treasury who attributed the success of President Clinton’s Treasury Secretary, Bob Rubin, to his use of the same mantra. In his five years at the post, there was hardly a television interview he gave where he did not announce that the fundamentals were good. I never believed Rubin knew what he was doing at Treasury and that he got the job because he made $100 million at Goldman Sachs. But he was awfully lucky in coming aboard in 1995, having the advantage of the Republican tax cuts that came in 1997 and the performance of Alan Greenspan, before he fell afoul of the deflation. Whenever asked a question that might involve the economics around him, he would give his “fundamentals” answer.

O’Neill has had no such luck. He clearly has no idea what has hit the markets and the economy. In his appearances Sunday, as he insisted the economy was growing in sound fashion and that productivity was at a high level, he also explained the growing federal deficits as the result of the weak economy. Huh? And when asked what he expected to do on his trip to Latin America, he said he was going to talk to ordinary people to find out they thought about their economic conditions. All this is a reminder that when he first showed up at Treasury, he spent his first weeks touring the Treasury building to check out the safety procedures of the bureaucrats and clerical workers. In his recent tour of Africa with the rock star Bono, he further demonstrated a Captain Queeg capacity to run over his own tow line and focus on the missing ice cream. While the market was losing 1500 points since July 8, O’Neill was talking to ordinary people in Kyrgystan, about the fundamentals in Kyrgystan no doubt.