A week after suffering a major tax-policy defeat, Treasury Secretary Paul O’Neill resigned his post. But wait a minute — it turns out that he was asked to step down by President Bush. That news dribbled out after O’Neill’s press conference Friday, and in some sense it is a very important part of this shakeup.
Many observers believed that George W. Bush — the MBA president — was incapable of firing anybody. Putting it somewhat more mildly, many thought the president was too loyal to his appointees. (Former SEC chair Harvey Pitt might be the best example of this overly generous loyalty.) As it turns out, Bush has put tax cuts and the economy ahead of any one top-level staffer. Of course, for many months, people on all sides of the political spectrum have been calling for O’Neill’s head. Conservatives were early on this call as it became clear he had no sympathy with the supply-side model of tax-rate incentives to spur work and investment. Instead, he almost always argued demand-side theories that focused on consumer spending. Those failed Keynesian-type arguments were a great irritant to the supply-side fraternity.
Last week, O’Neill lost a critical policy debate to chief economic advisor Glenn Hubbard over a big-bang economic package that includes dividend tax cuts, faster implementation of last year’s personal tax cut, business investment incentives, enlarged IRA supersaver accounts, and other measures such as tort reform to curb legal abuses. Having lost this battle, it must have been quite clear to the president that it would be impossible for O’Neill to defend and market the new tax-cut package, which will undoubtedly be the center of next year’s domestic agenda. Basically, O’Neill didn’t buy into the package and he couldn’t defend it, so Bush cut him off. O’Neill never had any credibility on Capitol Hill or Wall Street. He dismissed the former as buffoons and the latter as irrelevant. So naturally, as the stock-market decline continued for most of this year, almost nobody on the planet defended O’Neill and almost everybody criticized him. Finally, Bush had enough.
Who to replace him with? White House insiders are saying a new Treasury appointee must be a true believer in the new tax-cut growth package, must be vetted and confirmed quickly, must be able to start quickly, and must “know how the place works.”
Former House Ways and Means chair Bill Archer, a strong proponent of tax reduction and reform, could handle the job well. Unlike O’Neill, Archer supports dynamic scoring, whereby growth-inducing lower tax rates expand the economic pie and throw off more revenues. Former Reagan economic appointees Manley Johnson and Wayne Angell share this mindset and are also possibles for the opening. Both are known to be informal economic advisors to Vice President Dick Cheney. Both are former Fed governors. And Johnson was an assistant Treasury secretary in the 1980s.
On Wall Street, either banker Ted Forstmann or New York Stock Exchange president Richard Grasso would be excellent choices. Each would pass the litmus test of being a strong believer in the supply-side tax package about to be unveiled by the president. So would magazine publisher Steve Forbes, who was also a strong advocate of reforming Social Security by providing young workers with the choice of investing some of their payroll taxes in personal savings accounts.
So, who’s the winner in all of this? Glenn Hubbard. It is expected that Hubbard, a key designer of the big-bang tax package, is likely to be put in charge of the National Economic Council as Larry Lindsey is vacating that position to move to the private sector. (Hubbard would retain his Council of Economic Advisors post, essentially merging the two staffs.) A former economics professor at Columbia University, Hubbard is articulate, has strong supply-side views, and has been a rising star in the Bush White House. Now all he needs is a congenial partner at the Treasury department. Another winner will be the American economy. You wouldn’t know it from listening to all the naysayers out there, but the U.S. economy has increased four consecutive quarters for an average growth rate of 3 percent with a 5 percent increase in productivity. Considering the terrorist bombings, the war, unprecedented corporate corruption, a plunging stock market, and new jitters over an anticipated invasion of Iraq, it’s a miracle the economy has grown at all in the past year.
But the president now wants that 3 percent growth to turn into 5 percent. And that is why he’s coming back with an aggressive new growth package and presumably some dynamic new officials to shepherd it through. Our MBA president knows all about the benefits of an expanding and profitable business. Now he’s searching for some new executives to apply the same lessons to the economy.