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Wanted: One Tough Economic Team


Despite four successful rounds of tax cutting, GOP insiders say George W. Bush has never been satisfied with his economic advisers. They have simply not been up to the task, observers say, of articulating their boss's expansive vision of a market-oriented Ownership Society. "The White House feels it has just never found the right economic team," says a GOP lobbyist with Administration ties.

Bush jettisoned his first group -- a fractious band of policy wonks led by Treasury Secretary Paul H. O'Neill -- in December, 2002, after he tired of O'Neill's freelancing and his aides' wrangling. The replacements, led by the boosterish John W. Snow at Treasury, have gotten along better and did a passable job of selling Bush's policies on the campaign trail. Still, insiders say the President wants an infusion of new blood and Beltway savvy, perhaps all the way to Treasury.

The challenges and the stakes are high. A new team must have the political skills to push through Congress Bush's controversial plans to reform Social Security and overhaul the tax code while coping with a stubborn budget deficit. It must have the financial market smarts to manage the dollar's decline and sell what's likely to be a debt-financed pension reform plan to skeptical bond traders. And it will need the economic knowhow to turn Bush's sketchy tax reform principles into a well-thought-out proposal that can spur growth.

With battle fatigue setting in across the Administration, the Commander-in Chief could use "more firepower and more pizzazz" in the economic ranks, says Gregory R. Valliere, managing director of Stanford Washington Research Group. Bush needs recruits "who can spin the story very adroitly -- especially to Wall Street and Capitol Hill."

SURPRISING CHOICE

The president took his first step toward reconstituting his economic team on Nov. 29 by tapping Kellogg Co. (K) CEO Carlos M. Gutierrez to replace longtime Bush friend Donald L. Evans as Commerce Secretary. A surprise choice, the Cuban-born Gutierrez hasn't been politically active and has never donated money to Bush. But his Hispanic heritage and his business ties could prove a political plus, especially as he labors to sell tax reform to small business and the entrepreneurial community.

What's more important, though, is who the President picks to take over two key White House posts. Ex-Wall Streeter Stephen Friedman is stepping down as head of the National Economic Council, while White House chief economist N. Gregory Mankiw is expected to resign in February to return to Harvard University. Tim Adams, a former Treasury official knowledgeable about the ways of Washington and the financial markets, is a leading candidate to replace Friedman. Along with Office of Management & Budget Director Joshua B. Bolten, Adams would form a potent White House team that could play a key role in tax reform.

Also potentially up for grabs: the big enchilada, the Treasury Secretary's job. A Bush loyalist and hyperkinetic salesman on the stump, Snow has signaled that he wants to stay on into next year to complete a tax-reform study. But an increasingly vocal band of advisers inside and outside the Administration are agitating for Snow to go sooner. To hear them tell it, Snow lacks the stature on Capitol Hill to sell the President's radical Social Security and tax plans. Indeed, his last-minute effort to clean up the pork-ridden corporate tax bill with its $140 billion in giveaways was all but ignored by lawmakers. Internally, he has been largely overshadowed in policy debates by Bush confidant Bolten. And while the Treasury chief has not triggered any major turmoil in currency markets, his repeated assertions of a strong dollar policy have begun to ring hollow as the greenback continues to decline.

Getting a new team in place can't come soon enough. While the President sidestepped Democratic attacks on his plan to introduce Social Security personal investment accounts, the initiative will still engender bitter opposition in Congress. A huge obstacle: making the case that benefits may have to be cut if the numbers are to add up. Also sure to raise hackles on Capitol Hill, especially among Republican budget hawks, is the plan to borrow up to $1 trillion to finance the transition.

GRAMM BOOSTERS

That's why some in the GOP are pushing for politically well-connected former Texas Senator Phil Gramm, now vice-chairman at UBS Investment Bank, to take over for Snow. A budget hawk himself -- he co-authored the 1985 Gramm-Rudman-Hollings Act, which aimed to reduce government red ink -- Gramm might have a better chance of selling Social Security changes on the Hill.

Tax reform may be even harder. While there's a consensus among Republicans on the way to reform Social Security, no such accord exists on overhauling the revenue code. Some want a national sales tax. Others want a flat levy on income.

It's not only Congress that the econoids will have to sell on Bush's reform plans. It's the financial markets, too. The extra borrowing Bush may seek to fund Social Security reform could prove hard for bond investors to swallow when they're already financing record deficits. And real difficulties could lie ahead for the dollar. So far, the greenback's decline -- it has fallen about 15% over the past three years -- has been trouble-free. But lately the drop has picked up speed, raising fears of a crash that could cripple the economy. That argues for naming a financial market pro, such as former Credit Suisse Group (CSR) co-CEO John J. Mack or California financier Gerald L. Parsky, a Treasury official in the Ford Administration, to assume Snow's job and ensure that there's no crisis of confidence in the financial markets.

While the Washington rumor mill churns, the only safe bet is that Bush will surprise everyone with some bold appointments. Judging by the agenda he has carved out for his second term, he'll need every one of those new recruits -- and then some -- for the battles ahead.

By Rich Miller, with Mike McNamee and Lee Walczak, in Washington


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