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O’Neill: Show Us The Money
Bush's treasury-secretary designate is going to have his hands full.


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Larry Kudlow

George Bush’s treasury-secretary designate Paul O’Neill is going to have his hands full in the very first days of his appointment as chief economic officer for the new administration. After Alan Greenspan’s major blunder yesterday in failing to cut interest rates and expand the money supply, stock markets are hemorrhaging. And if there is a negative-wealth effect from the near 50%-collapse of the NASDAQ technology index this year, it will take its toll on the economy in the months ahead.

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So here’s a key thought for O’Neill, right off the top. There are three open seats on the Federal Reserve board waiting to be filled by Team Bush. At the very least, they should nominate independent thinkers who understand that markets and are smarter than Phillips Curves or Fed economic models. Alan Greenspan may be regarded as the maestro by Bob Woodward, but the bloom is coming off the maestro’s rose.

O’Neill needs to deal with this ASAP.

And that same bloom has completely come off the Clinton-prosperity rose as number after number shows that the economy is weakening at an alarming pace. Sales are down, production is down, housing is down, profits are weakening, consumer confidence is falling. Are the wheels completely coming off the economy? Maybe so. Right now, a negative real GDP for the fourth quarter cannot be ruled out, nor can a negative number in the first quarter.

As Clinton observed yesterday in his photo-op with Bush, it takes two declining quarterly GDPs to constitute an official recession. The outgoing president talked about a 2.5% growth slowdown. Frankly, even as an optimist, I don’t see 2.5% in the next two quarters. It may be too soon to make the recession call, but it’s not too soon to start worrying about it.

Now, Mr. O’Neill is certainly not a movement supply-sider, and there’s considerable grumbling in the ranks of my supply-side brethren. True enough, the Alcoa CEO came out for higher energy taxes ten years ago, and that was a mistake. And, as a career budget official in OMB before he moved up the ranks to become Gerry Ford’s deputy OMB director 25 years ago, O’Neill has no history of tax cutting or Laffer curves.

That said, however, there’s reason to believe that he will be a stronger treasury secretary than some skeptics think. In various speeches down through the years, O’Neill has been a strong advocate of tax reform and simplification. In fact, he has come close to calling for ending the corporate income tax altogether, pointing out from time to time that the compliance cost associated with corporate tax payments actually exceed the corporate tax-revenue yield to the government.

In a speech made in early 1990, O’Neill told a group at Indiana University that “the escalating costs of tax administration that are driven by an even-more complex tax code add nothing the to the value of our products…. Here is an area where the federal government could make a difference…. The ultimate reduction would come from simply eliminating the corporate tax. No tax. No tax departments.”

More recently, in early 1999, O’Neill told a group in Washington that the income tax “as it has evolved, has become a disaster…. The tax code is 7,000 pages and the regulations underneath it are another 14,000 pages. It is no longer possible for ordinary citizens to be sure they are complying with the law.”

So there is more to Mr. O’Neill’s tax philosophy than a mistaken energy proposal made years ago during the time of the Persian Gulf energy crisis. Surely, O’Neill will work hard as treasury secretary to implement Bush’s tax-reduction plan — a plan which has become not only more timely in view of the economic downturn, but also more politically potent in the midst of the changing economic landscape. If O’Neill did not agree with broad-based reductions in marginal tax rates, he would not have been vetted by Cheney or approved by Bush. Also worth noting, as a successful Alcoa CEO, it is likely that the low-key but studious O’Neill will gain considerable credibility among both Democrats and Republicans on the Hill, as he will among members of the press. Over the course of the Bush administration, it is also quite possible that O’Neill will be able to launch a full-fledged tax-reform and simplification policy that could move us towards the 10-20% flat tax-rate zone favored by voters in numerous opinion surveys.

Where the new treasury man will certainly need some help is in the world of financial markets, where he has not been visible and has little background. In truth, any major company CEO has experience in stock and bond financing. But certainly in the international areas of currency exchange rates, the IMF (where Bush wants retrenchment), and various debt problems springing up around the world, an O’Neill treasury will need strong players at the deputy, undersecretary and assistant-secretary levels to supplement his knowledge and policy-planning development. Names like Wayne Angell, Robert McTeer, Gerry Parsky, and David Malpass come to mind as supply-siders who could help enormously.



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