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Selling the Tax Cut
New Treasury Secretary Paul O'Neill must put the right spin on Bushonomics and deal with an ailing economy
When Paul H. O'Neill was named George W. Bush's Treasury Secretary, there were a lot of surprised faces on both Wall Street and K Street. Although he had a solid reputation as a top budget official in the Ford Administration and spent the past 13 years as chairman of Alcoa Inc., O'Neill wasn't on anybody's short list. First, Bush set out to find a Wall Street clone of Robert E. Rubin, but he was less than dazzled by his staff's picks. Then he flirted with the notion of signing up a savvy politician for the job, someone in the mold of former Nixon Treasury Secretary John B. Connally.
So how did he wind up with O'Neill, a cerebral numbers-cruncher with a gift for melding policy smarts and real-world business experience? The key for Bush was the Man From Alcoa's reputation as a corporate turnaround artist--and a strong nudge from O'Neill's old pal from the Ford days, Vice-President Dick Cheney. The clincher: O'Neill was a chum of Alan Greenspan and could help the Bushies court the Federal Reserve Board chairman.
What made the choice unusual, however, was the fact that Bush--legendary for picking people with whom he has personal bonds--barely knew the man who will handle his Administration's most crucial economic assignments. And there won't be time for a lot of schmoozing before he gets started.TALL ORDER. Even before he's settled in, O'Neill must design policies that keep the sputtering 10-year expansion going; act as chief salesman for his boss's controversial $1.6 trillion tax cut; tackle an energy crisis that Bush considers a direct threat to prosperity; and take charge of a strong-willed economic team (page 36)--a group that includes such Bush intimates as White House economic coordinator Lawrence B. Lindsey. In addition, he needs to guard against regional financial ruptures that might threaten the global economy. As Rubin found out, putting out economic flash-fires in spots ranging from Mexico to Asia has become an increasingly important part of the Treasury chief's job.
O'Neill has to grapple with these multiple problems while toiling on behalf of a politically weakened President. And he'll have to sell the tax cut to a deeply divided Congress. Already, supply-siders are voicing doubts about his resolve, fearful that the pragmatic O'Neill won't go to the wall for Bushonomics. The Treasury Secretary's blunt rejoinder: "The President will send up his proposal. It is 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."
O'Neill's first appearance on Capitol Hill left some with the impression that he is not fully committed to Bush's tax plan. In a Jan. 17 confirmation hearing before the Senate Finance Committee, he played down the value of tax cuts as a potent fiscal stimulus, an idea that has been pushed in recent weeks by both the President and Lindsey."AMAZED." But the new Treasury chief insists he is completely on board the tax-cut express. He is a longtime supporter of cuts in individual rates. And he argues that there is no reason to delay rate reductions as long as they can be done without busting the budget. "I'm amazed at some of the headlines about the President and me being in different places on the tax bill," says O'Neill. "Wait until you see my colors in the battle, and you won't have any doubt."
Tax cuts will be just for starters. O'Neill, who business associates say has an almost boundless appetite for ideas, will be a player on almost every controversial issue, from Medicare and Social Security reform to trade liberalization. The chronically skeptical O'Neill won't be shy about where he stands. Says Delos Smith, a Conference Board analyst who has known O'Neill for 25 years: "It might come as a surprise to the Administration that it's got a very independent thinker here."
O'Neill's eclectic mind and love of data are key reasons why he gets on so well with Greenspan. The two have remained close since the Ford Administration. In 1987, when Greenspan sat on Alcoa's board, he recruited his friend to take over the troubled company.
In the early days of the new Bush Administration, O'Neill will need to call on every ounce of that friendship. Because Bush commits so much of future projected surpluses to his tax and spending initiatives, O'Neill must gently persuade Greenspan to temper his view that it's best to use the windfall to pay down the national debt.
Bush the Elder and his Treasury Secretary, Nicholas Brady, got into an early feud with Greenspan, and many from that Administration still blame the Fed chairman for the recession that cost Bush reelection in 1992. Bush the Younger is going out of his way to cultivate Greenspan, however, and O'Neill will be the cultivator-in-chief. For his part, Greenspan couldn't be happier, bestowing his highest compliment on O'Neill: "He's an analyst. He tries to understand the effect of what he's going to do before he does it."
O'Neill's relationships within the Bush Administration are much less settled. His chief rival for policy influence will be Lindsey, who designed the tax package that O'Neill is trying to peddle. Although they share the same free-market philosophy, in some ways the two men couldn't be more different.
Lindsey has been a chronic bear on the economy, arguing that it's a bubble about to burst. O'Neill is dubious about the ability of economists to call turns and feels that the U.S. can still avoid a slump. Lindsey has been a vocal critic of bailouts of emerging-market economies. O'Neill isn't seen as a strong ideological opponent of the International Monetary Fund, which riles many right-wingers.
There is also a difference in style between the two men. The rumpled Lindsey is personally warm, ideological, and very political. The ramrod-straight O'Neill is reserved, pragmatic, and plain-spoken. "He's a little guy who sits up, looks you directly in the eye, uses very soft language, and is absolutely clear about what he's prepared to do," says Paul W. MacAvoy, a former colleague in the Ford Administration, now at Yale University. Adds GOP eminence grise George P. Shultz, who claims to have first discovered O'Neill: "He has a strong backbone. He knows where he wants to go, and he pushes."WATERCOLORS, NOT GOLF. O'Neill himself is convinced that when it comes to decision-making, the data will carry the day. "In the early going of any Administration, there's a process of settling in," he says. "Usually, it gets sorted out in favor of who knows what they're talking about and who brings facts to the table."
The former CEO is also more than a bit unusual in his willingness to measure day-to-day decisions against what he sees as an ideal goal. For instance, he is a strong believer in a vastly simplified, investment-oriented tax code. While at Alcoa, he helped bankroll research into a broad-based tax reform plan proposed in 1995 by Senator Pete V. Domenici (R-N.M.) and former Senator Sam Nunn (D-Ga.). The plan exempts all savings from taxation.
O'Neill, who started his professional life as a systems analyst, is an obsessive fact-sifter who gathers data like some people collect butterflies. He is almost the anti-CEO. He prefers dabbling in watercolors to golf. He unwinds by walking the Delaware beach where he has a vacation home and visiting the family's remote lakeside cottage in his wife's home state of Alaska.
When he was arguably the most powerful CEO in Pittsburgh, O'Neill started his day at Ritter's Diner, a modest neighborhood joint. "He comes in at 5:30 and has a newspaper with him," says restaurant owner Peter Velisaris. "He'll pick up a conversation with anyone. He talks about sports, politics, business, economics, anything and everything." Like all else about O'Neill, breakfast is taken in hyperdrive. Fifteen minutes after he arrives, he's gone.
An inveterate civic joiner, O'Neill was also deeply involved in Pittsburgh's urban renaissance. One task force on redoing the city's riverfront struggled with ways to make its plans fit with the miles of railroad tracks that abut the water. O'Neill had another idea. "The first thing Paul said is, `Why don't you move the whole railroad,"' says Thomas J. Murphy, the city's Democratic mayor. "He's very good at looking at the big picture and translating that into a plan of action." CSX Corp., the company that owns the line, is thinking about it.
But when it comes to international economics, some Wall Streeters are not so sure O'Neill can see the big picture quite as easily. They would have much preferred one of their own sitting atop Treasury. And they're worried that the former industrialist will junk the Clinton Administration's strong-dollar policy and try to boost exports by depreciating the currency--a strategy O'Neill rejects.CRISIS MANAGER? The Street also frets that O'Neill lacks the financial-market acumen to handle an international economic blowout marked by sudden outflows of hot money. "In a financial crisis, Wall Street will be very nervous about O'Neill, not because he isn't respected, but because he doesn't come out of the financial markets," says former Clinton Administration official Jeffrey E. Garten, now dean of the Yale School of Management.
O'Neill scoffs at the complaint. "They don't think people who have run the kind of enterprise I ran, with operations in 36 countries, are international. They also think I just fell off a pumpkin truck." Rubin, whom Wall Street saw as the ideal Treasury Secretary, agrees that O'Neill gets it. "If you run a major company, you have a lot of exposure to markets and to national economic matters," says Rubin, now head of Citigroup's executive committee.
Whatever his experience, O'Neill faces a tough task on the international front. Despite his support for a strong dollar, the weakening U.S. economy and falling interest rates could undermine the greenback. If that happens, will the avowed free-marketeer be willing to put his and the nation's credibility on the line to defend the dollar?
He'll face a similar challenge with Japan, which seems to be crumbling yet again, a decade after first falling into recession. Both O'Neill and Lindsey believe that Clinton's efforts to browbeat Tokyo into reforms backfired. But even Bush insiders concede that it is not clear whether a kinder, gentler approach will work any better.
The new Treasury boss also has caught flack for his stance on trade. Some Democrats are looking to him to protect the U.S. steel industry from what they claim is unfair foreign competition. Free-trader O'Neill says it is not government's place to shelter domestic industry in the face of worldwide overcapacity. But he believes that steelmakers should be allowed to get together to work out production cutbacks unfettered by antitrust laws.
That's exactly what O'Neill persuaded Washington to do for the beleaguered aluminum industry in 1993-94 when it faced a flood of cheap imports from Russia. But some question how such a stance squares with his oft-professed belief in open markets. "He's a free-trader until his profits go down. Suddenly he's no longer for free trade," says Richard I. Fine, a Los Angeles antitrust lawyer who unsuccessfully contested what he calls "price-fixing" by U.S. aluminum makers.
Backers, though, insist that domestic producers had no choice. And they argue that O'Neill's solution was better than erecting barriers to imports. "What are you going to do when an open industry is going to be destroyed?" asks former U.S. Trade Representative Carla A. Hills, who is another fan of O'Neill's.
The new Treasury Secretary's list of friends and admirers is long. But amid all the huzzahs, there are also plenty of detractors. Some conservative true believers have never accepted O'Neill's bona fides as a tax-cutter and consider him a defender of the corpocracy. A particular bone of contention is O'Neill's one-time advocacy of a hefty gasoline tax, an idea he felt was crucial to curbing consumption.
Indeed, O'Neill's views are so eclectic that close associates often have trouble fixing him on the ideological spectrum. Says CEO John H. Bryan of Sara Lee Corp.: "I might have known he was a Republican, but he's always been more issue-oriented than partisan."
That is precisely what worries hard-liners. "O'Neill is on probation" with the Right, says Terence P. Jeffrey, a conservative activist and the publisher of the journal Human Events. He charges that because of O'Neill's backing for antipoverty programs, "[he] has been a nemesis of conservatives since the Nixon and Ford Administrations."INSUFFICIENT OOMPH? Another issue with supply-siders is that O'Neill isn't a movement conservative, like a Jack Kemp or a Steve Forbes, and he doesn't profess that tax cuts have mystical powers. That, plus his pragmatism and ties to the Eastern Establishment, raise fears that he'll put insufficient oomph behind his tax sellathon. Those alleged heresies won't help O'Neill with the GOP base, but they may give the maverick some added credibility among Hill Democrats in the tax battle ahead. If they come to see him as a straight-shooter who's willing to bargain, it could make it easier to reach a deal.
A tax agreement should be easy to come by, though Bush won't get the $1.6 trillion plan he intends to send to the Hill. Democrats are murmuring about a final bill in the $600 billion-to-$800 billion range. There is broad consensus on marriage penalty relief and estate-tax breaks. And Democrats increasingly say they are willing to accept some tax-rate reductions.
But President Bush wants to slash rates across the board, shrinking the current rate structure--15%-28%-31%-36%-39.6%--to a system that climbs from 10% to 15% to 25% to 33%. The Democrats are howling that such a plan would give 40% of the benefits to the wealthiest 1% of taxpayers. O'Neill says those who pay the bulk of the income tax should enjoy the lion's share of a tax cut, but he--and Bush--will have to scale back those top-bracket rate cuts if they want a deal.
Even conservative Democrats, who will be the key to any final agreement, are skeptical about a tax cut of the size Bush is proposing. They are insisting that at least half the non-Social Security surplus be reserved for debt reduction, a strategy that would hold the size of tax relief at $600 billion or so.
O'Neill's task will be to find a compromise, all the while insisting that his boss is sticking fast to his tax-cut pledge. When a deal is finally hammered out, O'Neill will have to make it look as if Bush was dragged kicking and screaming into the accord. And if there's any heat to be taken for last-minute trade-offs, O'Neill will have to take it.NO SYMPATHY. O'Neill knows that corporate lobbyists are itching to add special-interest breaks to any tax bill that moves. But he is not terribly sympathetic. From a CEO's perspective, he told Congress, targeted preferences are little more than "inducements for something I'm going to do anyway." He notes that at alcoa he happily took such subsidies, but he adds: "I never made an investment decision based on the tax code."
Bush will roll out his tax plan within a month or so, O'Neill says. But that will just be the beginning of a grueling debate. "If O'Neill succeeds, he'll be the hero," says Stephen Moore, president of the pro-tax-cut Club for Growth. "If it goes up in flames, he'll be the goat."
No one knows this better than O'Neill, who has been on both sides of Washington's power games and understands the city's appetite for victims. But in a way that is almost unnerving, he exudes a quiet confidence in his ability to emerge a survivor. The fact is, O'Neill didn't come to Washington to be anybody's fall guy. Instead, he intends to be the unquestioned leader of an economic team that delivers on Bush's promise of more muscular economic growth. To O'Neill's way of thinking, he's faced tough turnaround situations before--and walked away a winner.By Howard Gleckman and Rich Miller, with Lee Walczak and Paul Magnusson, in Washington; Ann Therese Palmer in Chicago; And Pete Engardio in New YorkReturn to top