Paul O'Neill: Straight Talk from the New Mr. Money


The walls are nearly bare. The big desk is clean as a whistle. Treasury Secretary Paul O'Neill has barely put in his first full day on the job, and already there are questions. Does he share President Bush's passion for that big $1.6 trillion tax cut? Will his lack of Wall Street experience prove a liability in some future financial meltdown? On Jan. 23, the new Treasury chief took time out to discuss these and other issues with BusinessWeek. Fielding questions from Washington Bureau Chief Lee Walczak, Senior Writer Rich Miller, and Senior Economics Correspondent Howard Gleckman, O'Neill cautioned everyone to relax: He'll fight hard for the tax plan, doesn't see a recession as preordained, and has strong ideas about the way Washington ought to run -- like clockwork.

Q: Given the precipitous drop in growth and consumer confidence, can the U.S. avoid a recession?

A: I don't accept the word "precipitous," but there is no doubt that the economy has slowed. Final demand still looks good in some sectors, and some of what's going on is a consequence of inventory accumulation that needs to be worked off. What you can't know is the combination of consumer sentiment and balance sheets and expectations about income levels??hat does that add up to six months from now?

Q: You testified to Congress that monetary policy is more effective than tax cuts in fighting a slump. Does that conflict with the President's description of tax cuts as antirecession medicine?

A: The leadership of the country has agreed that we should have tax cuts. Seems to me the only debate is how much. Maybe there's a corollary question of how soon. It would be naive to say that we're going to send the President's proposal to the Hill, and they're just going to send it back for his signature. [But] the President feels he made a commitment to a certain level of tax reduction, and he will send it to the Congress.

It's my responsibility to articulate a convincing case that keeps each element in place. To the degree it ends up getting reshaped and the President doesn't agree that the reshaping is beneficial, I will fail. I'm frankly amazed at some of the headlines about the President and me being in different places on the tax bill. Wait until you see my colors in the battle, and you won't have any doubt.

Q: Are the rate cuts the most important element of the plan?

A: All the pieces are important, but if you're talking about an insurance policy against a recession, then the thing that will have the most immediate impact is the marginal rate cuts. They also have the most beneficial impact on low- and moderate-income families.

Q: You may be in luck, because that's the part of the Bush plan the Democrats want to keep while proposing to scrap the upper-bracket cuts....

A: The part they don't want to keep is interesting, too. The President's proposal would reduce the top marginal rate to 33% from 39.6%. That's two percentage points higher than when President Clinton took office. So it's not a place where we've never been before.

Q: Some question those big surplus projections the plan is based on. Now that revenues are slowing, are you certain that money is going to be there?

A: Relying on outside estimates -- not our own -- we've got a fair degree of comfort in being able to take the tax reductions, continuing to pay down the national debt, and paying for the specific initiatives the President has called for.

Q: Most incentives in the tax plan are directed at individuals. What are your views about business cuts?

A: Corporations don't pay taxes, they just collect them. That's a really important idea. If a business doesn't cover all its costs, including tax costs, it's not a business -- it's a failure. If you think about the cost to implement the tax system in the ideal sense, none of that adds value for goods and services. As the world becomes ever more competitive, resources wasted in our society are in effect a huge tax on the potential standard of living.

Q: Your predecessor, Bob Rubin, was often drawn into international crisis-management. Given your lack of a Wall Street background, are critics right to question your preparation for this role?

A: They don't think people who have run the kind of enterprises I ran, with operations in 36 countries, are international. They also think I just fell off a pumpkin truck.

Q: But what about the need to fight financial crises in a global economy?

A: When we have a crisis, it's a failure, a failure of anticipation. One of the things I would hope we are going to do here is create a process of "pulsing" people in different places around the world. I am talking about people who make real products and services [and] know what the order books look like. You can go to the Reuters screen and find out what all the [bond] maturities are or what minute-by-minute trading values are, but that doesn't tell you anything about what's going on in the real world. I believe it's possible to have an information-collection network that puts you in a position where you can better anticipate countries that are heading into a financial crisis. I'd consider myself a hero if I was never called on to [rescue] Mexico or Indonesia.

Q: The President's staff talks a lot about integrating national security policy with international economic policy. What's that mean?

A: Here's my view, having been through a lot of transitions: In the early going of any Administration there's a process of settling in. When you want to find out how it all works, wait until there are some events and then responsibilities are sorted out. Usually, it gets sorted out in favor of who knows what they're talking about and who can bring facts to the table. I have talked to [National Economic Council Director] Larry Lindsey and [National Security Adviser] Condi Rice and [U.S. Trade Representative] Bob Zoellick. There is a joint view that it's desirable to see if we can improve the degree to which U.S. policy doesn't mean a collection of agency or department ideas, but is truly well-considered.

Q: How worried are you about Japan's economic malaise?

A: Japan is facing a situation that is bigger than the [savings and loan] problem we had in the U.S. The Japanese know that. But not translating it into the financial statements of companies creates a problem of assets being squeezed and squeezed. [Fixing that] is a necessary step, and there's some indication they're leaning in that direction. And it would be hugely beneficial if Japan's economy lived in the world market, which means prices were market prices.

In the last 10 years or so, the fact that Japan has not been an engine for the world economy has been a passable condition, because we were doing such a great job. The fact that they have very low growth compared to the previous 30 years' record has exacted a huge penalty on their population. From a world point of view, it's necessary to think about that -- not to meddle in Japan's affairs but to think about the things we might do to help them deliver a real growth rate of 4% to 6% a year. There needs to be more than one engine for the world economy.

Q: At Alcoa, you were associated with corporate diversity. Do you support current affirmative-action policies?

A: I'll tell you what I believe. If you're going to have a great organization, people need to be able to answer three questions every day. Were you treated with dignity and respect by everyone you met? Were you encouraged to make a contribution that gave meaning to your life? And has someone noticed that you did it? If you can get those three things in an organization, everything else takes care of itself.

Q: Is that a yes or a no?

A: I really resist getting caught up with labels. I don't need to say yes or no to affirmative action. If you take those three principles, I don't need affirmative action because I'm treating everyone with dignity and respect, and I don't judge what color people are, or what gender they are, or what nationality they are.


Steve Ballmer, Power Forward
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