Treasury Matters
Jude Wanniski
December 18, 2002


Memo To: Fans, Browsers, Clients
From: Jude Wanniski
Re: Passivity at Treasury

Here is a client letter we ran around the six month mark of Paul O'Neill's stint as Treasury Secretary. O'Neill turned out to be a poor choice for Treasury Secretary, failing to show any interest in either entrepreneurial capitalism, supply-side economics or diagnosing the monetary deflation that afflicts the economy. At first glance, his replacement does not appear that much better, though it is early yet. All growth is the result of risk-taking and the frightening aspect of this for entrepreneurial capitalists is there is really nobody around this President who thinks automatically in those terms. Certainly Paul O’Neill did not, nor did Larry Lindsey. Nor does John Snow or Stephen Friedman, whose natural instincts oppose risk-taking. (Remember Bush the Elder’s Treasury Secretary, Nick Brady, boasting that he had attributed his success to never taking a risk.). Ultimately, the latest shake up may offer more of the same "passivity", without the impolitic remarks that punctuated O'Neill's tenure.

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August 23, 2001


In a way, it is difficult to criticize Paul O’Neill’s six months as Treasury Secretary because he has not done anything distinctive. When Bob Rubin had the job in the Clinton administration, I never criticized him because he did nothing at all of any importance. It was his deputy, Larry Summers, a Harvard Keynesian, who handled the big decisions on domestic and international economic policy, with the help of Federal Reserve Chairman Alan Greenspan. Rubin was trotted out from time to time to look handsome and pleasant and smart, and whatever question was asked of him, by a congressional committee or a financial reporter, his answer was the same: “The fundamentals are strong.” Where Rubin was practically an empty suit at Treasury, O’Neill seemed suited to the job, a wonder boy in the Ford administration at the budget bureau, and a great success in managing commodity companies, International Paper and Alcoa. In fact, O’Neill is a much more interesting man than Rubin and has a great many insightful and important things to say about the nature of government and its role in economic life. I’ve just finished reading the Washington Post Sunday Outlook piece on him, and the August 11 National Journal cover story, “The Iconoclast,” and am reminded of all this. He loves to simplify and solve complex problems.

He should be a fine Treasury Secretary, so how come he isn’t? Well, we must remind ourselves that Bush’s Big Economic Plan that is going nowhere fast was written by conservative Keynesians, from the same team that advised the President’s father. The tax plan was a stinker to begin with, shaped by Larry Lindsey in 1999 to mainly increase aggregate demand. There was no cut in the capital-gains tax on the grounds that capital taxation had enjoyed cuts in 1997. Lindsey really is a hapless figure, an incompetent economist with one of the most powerful posts in the government. But O’Neill sat back and watched as the Democrats bulldoze the administration into pushing the few supply-side tax cuts into the future and front-loading the bill with the tax rebates that Lindsey insists will get the economy rolling almost any minute now. When that does not happen, the Democrats will have a field day scorching the White House and GOP for squandering the budget surplus and filching from the Social Security/Medicare cookie jar.

O’Neill at least should be preparing to take charge when the economy does not respond, but when Bob Novak asked him last weekend if he would support the cut in the capital-gains tax that Senate Minority Leader Trent Lott is promising to tie into the minimum-wage bill, O’Neill simply said we can not afford it. The White House quickly distanced itself from that timid response. Budget Director Mitch Daniels, the only Reaganaut on the economic team, kept the door open for a capgains cut by at least saying he would like to look at the numbers. Given the likelihood that the monetary deflation will overwhelm even a capgains cut, should it somehow succeed in this new austerity climate, I had expected O’Neill at this point to be commenting on the possibility that deflation is the culprit. When Novak asked him point blank if he thought there was a deflation problem, he said he did not think so, and dismissed the fact that commodity prices are in the tank with what has become a standard line for him: Prices go up. Prices go down. Stocks go up. Stocks go down. He might as well be parroting Rubin: The fundamentals are strong. There really is no need for a Treasury Secretary if all we get are aphorisms.

O’Neill had been more than respectful in April when I warned him that neither the tax cuts nor the Fed rate cuts would rescue the economy, that only a controlled inflation to $325 gold would do the trick. He had greeted me warmly, reminded me that we had first met in 1975 when he was deputy budget director in the Ford administration, and assured me he had read all the material I had sent him through his staff. He gave me enough time to explain the deflation process and invited senior staff to sit in with us. When I left, he told me I should alert him if there was anything he said publicly that I thought incorrect. He had said so little that it was not until the Novak show last weekend that I thought he was incorrectly equating a “strong dollar” with productivity. They have nothing to do with each other, as evidenced by the collapse of productivity in Argentina, where the peso is kept as strong as the deflated dollar. Indeed, measured productivity has declined this year in the U.S. and will not recover unless the dollar “weakens” against gold. The problem is Greenspan. Where O’Neill bows to Lindsey on fiscal policy, he concedes monetary matters to his old friend Greenspan – who tells him there is no deflation and a strong dollar means productivity!

What’s left for O’Neill to do? Foreign economic policy. The only thing O’Neill has written thus far, except for prepared testimony, has been a harmless WSJournal op-ed offering gratuitous advice to Russia on how to succeed in capitalism. The only “crisis” he has faced as yet is in Argentina, which he swore up and down he would not bail out with tax dollars, going as far as to denounce Argentina as a profligate nation that should stew in its own juice. This week, of course, he signed off on an $8 billion IMF “bailout,” which will enable the government to pay a few creditors, but is really money down the rathole. O’Neill’s problem here is the economist he picked to be his international assistant secretary, John Taylor, a Stanford economist who might not do too much damage at the Federal Reserve, but who is as hapless as Lindsey is in his post. The only solution for Argentina is a 20% devaluation of the peso or, better yet, a 20% devaluation of the U.S. dollar, which would save both economies from further anguish. The IMF helped put Argentina into the stew by forcing it to raise taxes in exchange for the last bailout. It would of course help if Economy Minister Domingo Cavallo could roll back those taxes, which are helping smother growth. Instead, Taylor signed off on more IMF budget austerity, inviting riots in the streets. The spread on Argentina's sovereign debt fell 144 bps Wednesday on the news of the loan package -- but the spread still was at 1507 bps. If the package offered a real solution, the spread would have fallen by a thousand basis points. The Merval, which traded 5.5% higher on the news, would easily have risen 55% from its current beaten-down level. Clearly, O’Neill has not seen the last of Argentina.

I have not quite given up on him, because we have yet to run through the Lindsey/Greenspan plan and will not get a clear picture about their promised rebound for another month or two. To be as successful as he has been in his career, O’Neill must be the kind of man who admits error instead of cussing the fates. Right now, as Novak pointed out on his show, O’Neill is “on message,” which could mean he is playing the good soldier or that he really believes what is down will soon be up, with no effort on his part. He is hearing from the manufacturers, who are screaming about the strong dollar. But as both the NAM and General Motors have quieted down, I suspect that he has asked them to do so and to hope the economy turns up. When it doesn’t, they will be yelling again and so will the Democrats and the Republicans. That’s when we may see the real O’Neill.