Something doesn't add up about the new Treasury Secretary nominated by George W. Bush. The supply-side conservatives who live for more big tax cuts on capital and upper-bracket incomes are actively leery about Alcoa chairman Paul O'Neill. Some grumble that he may be a talented corporate manager but that he's ill equipped for the top economic post in the Bush Administration. Meanwhile, George Becker, president of the Steelworkers union, loves the O'Neill selection. "I'm not an economist, I just go on gut beliefs," Becker said. "But Paul is a person working people and labor people can talk to. He is an industrialist who believes in the United States and has maintained a strong industrial base in the United States. I think this is far better than having another bond trader in that job."
Bush's choice has startled many quarters, including Wall Street, because O'Neill comes to the job from old-line manufacturing and with a reputation for independent thinking, albeit in the moderate Republican manner. Above all, he is not a banker or financier--the first Treasury Secretary since the Carter Administration to originate from the business realm that actually makes things (aluminum, in O'Neill's case). Yet, oddly enough, O'Neill is also a government pro. He spent sixteen years as a systems analyst and budget economist in the federal government, rising to deputy director of the Office of Management and Budget under Gerald Ford, before a brilliant business career at International Paper and Alcoa (both multinational companies are reviled by environmentalists--he's not Ben & Jerry's). But unlike the laissez-faire crowd, O'Neill understands the power of activist government to intervene in the private economy and has demonstrated a taste for doing so. At a minimum, he represents a refreshing shift from the free-market mantra that has ruled at Treasury for the past two decades.
"I negotiated with Paul for years--he's very tough but fair--and we've always been able to get a fair, decent contract," said Becker, whose union represents 22,000 Alcoa workers. "I had people I could talk to in the Clinton Administration too. They would listen and tell me how much they understand our pain. Then they went out and deep-sixed us. I like [former Treasury Secretary] Bob Rubin, but Rubin killed us in steel. He would say, Let the marketplace decide. Except, when financial firms got in trouble, they went to the rescue."
In contrast, as a business executive, Paul O'Neill artfully engineered a worldwide rescue for the aluminum industry and persuaded President Clinton to make it happen. Prices were collapsing in 1993 because the former Soviet republics were flooding the world market with cheap aluminum--devastating US producers like Alcoa. The temporary agreement amounted to a government-negotiated cartel--every producing nation reduced its output to prop up world prices--and it worked. Yet the political deal was done so skillfully that few in the media even noticed. And nobody complained about the scheme's contradicting Clinton's free-trade rhetoric. O'Neill knows where the levers are located and how to pull them.
While it would be nice to imagine that the Bush/Cheney team is sending a message about new ideological priorities with this appointment, their motivation is probably more pedestrian--personal trust, not policy. O'Neill comes from the same "old boy" circle of policy advisers that includes Dick Cheney, Donald Rumsfeld and, yes, Alan Greenspan during the Nixon/Ford years. He is a familiar old friend to all of them, experienced and capable, above all loyal. During George Bush Senior's ill-fated presidency, O'Neill took Alcoa out of the US Chamber of Commerce in order to endorse Bush's deficit-reducing tax increase--the one that got the President into permanent trouble with the party's right-wingers. Around the same time O'Neill proposed a $10-a-barrel tax on oil to force greater energy conservation. He supported Bill Clinton's more modest energy-tax proposal, which failed in 1993. He is quite willing, in other words, to break eggs over the GOP's antitax doctrine.
In another season, these qualities would have made for intriguing possibilities, but O'Neill's strongest asset--he's not from Wall Street--might also become a handicap in present circumstances, because the Bush Administration is assuming power amid a breaking storm--the collapsing stock-market bubble and deteriorating economic growth worldwide. Whether this event turns out to be good luck for Dubya or the ruination of his presidency will depend crucially on the smarts of O'Neill and a team of White House economic advisers that includes former Federal Reserve governor Lawrence Lindsey as principal counselor and, presumably, Stanford economist John Taylor at the Council of Economic Advisers. The old boys from business and finance gathered at the governor's mansion in Texas to throw in their advice, a private conversation that did not include the press and public.
The problem is that none of Bush's lead advisers have displayed any special feel for financial markets--especially markets that are scared and imploding. The conservative financial experts I talked with all delivered the same warning. "O'Neill needs to have a serious banker at his side, someone who has done a lot of financial restructurings and bankruptcies," one of them said. "Because that's what is coming."
O'Neill has been relieved of an obvious first challenge--coaxing the Fed chairman into cutting interest rates--because that job was done for him by the frightened financial markets. Falling stock prices and market interest rates, along with plummeting sales and production, delivered a message of terror--the markets' fear that Greenspan was dangerously behind events. He was thus compelled to start cutting rates. Many market players figure it's already too late, however, and Greenspan's wizard status is swiftly evaporating, at least among those who understand what's happening. So Bush's team will begin by blaming Clinton/Gore for the rising unemployment and corporate bankruptcies, while privately nudging Greenspan to keep on easing credit terms. A deep distrust toward Greenspan lingers in the Bush family--a sense that he broke promises and allowed high unemployment to linger much too long after the 1991 recession, effectively dooming George père's re-election campaign in 1992. This time, they will not wait passively on the chairman's wisdom, and Bush Jr. has real leverage he can apply. The seven-member Federal Reserve Board has two vacancies and a third one expected. The White House can surround Greenspan at the boardroom table by appointing friendly critics and even a possible successor.
A recession that comes early in a new President's term--and is over well before he's up for re-election--can wind up as smart political timing, but Bush may lose his Congressional majority in the process. While Ronald Reagan enacted a radical conservative agenda during his first year in office, his popularity sank as the ugly recession worsened; Democrats picked up twenty-seven House seats in the off-year election of 1982. By 1984, however, it was "morning again in America," and the Gipper won in a landslide. If Bush's advisers are as shrewd as they appear, they will push hard for their big ideas up front and, meanwhile, do whatever they must to reverse the economic bloodletting.
The more ominous possibility facing the Bush presidency is that given neglected realities inherited from the Clinton years, this downturn could renew globalized financial crisis in Asia, Latin America or elsewhere. Only this one could not be blamed on "crony capitalism" or other establishment canards. The $360-billion-a-year trade deficit in the United States has kept Japan and many developing countries afloat in recent years, though a long way from genuine recovery. If the United States becomes mired in recession, Americans will buy far fewer imports, and that will reignite financial failures in the exporting nations. Their panic can flow right back into the US financial system, with banks and brokerages demanding another round of IMF bailouts. O'Neill and company may find themselves standing in a circle of bonfires.
The specter of bad times coming does, of course, add momentum for major tax-cutting legislation--a centerpiece in Dubya's campaign--but it's not obvious how Bush's retrograde measure would actually help the economy (40 percent goes to the very wealthy, as that fellow Gore kept reminding us). Some elements, like abolishing the inheritance tax, may even generate drag on economic activity. The Bush team talks like conservative Keynesians, but in the real world, economic stimulus requires steeply progressive tax cuts--putting money in the hands of people who will promptly spend it. That means quick rate cuts or temporary tax credits that skip over the upper brackets for a change and deliver the money to the bottom half of the income ladder. Democrats are wrong-footed by events too. After several years of indulging in Coolidge-Hoover pieties about paying down the national debt, Democrats must scurry now to come up with a progressive--don't say liberal--tax-cutting proposal of their own. Clintonism is over, and they had better shake out the cobwebs quickly, because their choices on who needs tax relief and who doesn't will define them for the 2002 election and beyond.
The essential handicap in using fiscal policy to restart the economy (one that has always burdened Keynesian economics) is the problem of timing. In the best circumstances, it can take six or eight months to enact a major stimulus package, and even if the tax cuts are postdated to January 1, the money arrives too late to stanch the contraction. If Democrats are alert and public-spirited, they will propose a quick, emergency reduction in paycheck deductions with a commitment to support a second, broader tax measure later in the year. They should also call for stand-still protection for those working people drowning in debts who lose their jobs--a temporary safety net that keeps them out of bankruptcy until the economy revives. These and other measures are, of course, way beyond the present imagination of either party. More likely, the tax bill will turn into a special-interest bidding war in which both parties compete to pay back their accumulated obligations to lobbyists and contributors.
The new Republican majority, already frail and dubious, has been taken hostage by these economic portents even before it assumes power. A "normal" recession of brief duration might be manageable. A longer, more profound unwinding will shake the foundations of Republicans and Democrats alike.
We do need government regulation—not to build socialism but to save capitalism.
But as the bankers know, he loves some of us more than others.
Are sanctions ethical--or an ill-used weapon of mass destruction?
The economics of George W.
Let's not begrudge Dick Cheney his $36 million income last year.
Sure, it dwarfs the puny $744,682 reported by the President, but George
W. Bush represents old money, and he knows better than to be too showy,
particularly when you're running for office as a Joe Six-Pack kind of
guy. Better to roll over the income from inherited money into
Cheney didn't have time for such accounting niceties. Bush caught him
right in the middle of a tax year with that Vice President nod, and
remember, Cheney was only supposed to be advising Bush on the best choice
for Veep. How was Cheney to know he'd be forced to recommend himself as
the most qualified?
Still, just because he had become Vice President didn't mean he had to
take a vow of poverty. As Cheney told CBS News at the time, "I'd like not
to give away all of my assets to serve the public." And why should he,
since there's no law limiting the assets of federal office-holders or any
requirement that they give up their acquired wealth? Cheney had only to
look as far as Bush, who merely put his in a blind trust, no questions
Huge financial assets are now the norm for leaders of our
representative democracy, and it wasn't unexpected that the mostly
wealthy members of the Senate recently voted rich people like themselves
an enormous tax cut, albeit not as large as the one Bush wanted for
himself and his pals.
Cheney's assets are only at risk of taxation if he wants to leave a
huge amount to his heirs without paying additional taxes. Soon, even that
will no longer be a problem because Bush and Cheney are sensitive to the
unfairness of the estate tax to ordinary people like themselves, and they
want to eliminate it.
What was at issue during the campaign was not Cheney's assets or his
income but his future stock options in Halliburton Co. These being tied
to the rise and fall of Halliburton stock, presented a potential conflict
of interest because, as Vice President, it was conceivable that he could
influence stock prices. Under considerable pressure, Cheney decided to
donate those stock options to charity, but he was left with a bit more
than a hair-shirt.
Even after taxes, Cheney cleared more than $20 million in 2000. If the
Bush tax cut had been in effect last year, Cheney would've saved another
couple of million, to which he obviously feels entitled.
Don't forget, Cheney was playing catch-up after years in the public
sector, first as a congressman and then as Defense secretary. As it
turned out, he only had about five years in the private sector to cash in
his chips, and he didn't really know much about the energy business. When
he hired on to serve as the CEO of an oil services firm, he knew he would
have to justify the big bucks he was getting paid.
Fortunately for him and Halliburton, it all worked out in the end.
For the Texas-based Halliburton, there initially was some concern.
Only two years ago, with the company's stock floundering, the board of
directors chastised Cheney for the company's poor performance. But then
came the presidential election, and those same directors must have
figured they had died and gone to heaven after Cheney got the Veep nod.
That's when the board of directors turned around and rewarded him with an
incredibly lucrative severance package providing the bulk of his reported
$36 million income in 2000.
Can you blame them? Most of Cheney's working hours last year were
devoted to seizing the White House for the most avidly pro-Big Oil
presidency in US history, and servicing Big Oil is what Halliburton Co.
is all about. That and construction projects around the world that an
anti-environmental Administration now seems all too eager to facilitate.
Quite an impressive record for an executive who was just learning the
business. They knew the guy would be good; after all, as a congressman he
had one of most pro-industry voting records. And it was Defense Secretary
Cheney who had made the decision to privatize logistical support
facilities for the military, which gave Halliburton's subsidiary, Brown &
Root, huge construction contracts for the US military at bases
throughout the world.
Of course, as the former Defense secretary who'd saved Kuwait, where
Halliburton has huge contracts, Cheney was already known to be an
effective player. But how could Halliburton have known Cheney would be
this good? Not only did he help elect another Texas oil guy as President,
but if you look at the short record of the Bush-Cheney Administration,
when it comes to opening the environment for energy exploration, even
that most pristine area in Alaska, these guys know no limits.
Indeed, they must be guffawing down in Texas to have two good old boys
running the White House without a scintilla of shame. It's been oil money
If only George W. Bush were content to merely market nights in the
Lincoln Bedroom or issue some questionable pardons, the public would be
much better off. But no, the new President has taken the art of selling
White House access to an unprecedented level, with disastrous
consequences for millions of Americans.
While the media remain obsessed with trying to prove that the Clinton
Administration was on the take from corrupt fat cats, the Republicans
have unashamedly turned over the federal government to the very
corporations that purchased the dubious Bush electoral victory.
MBNA, the world's biggest credit card dispenser, which hooks your kids
with teaser rates that can quickly balloon to usurious proportions, is
about to get the bill ending bankruptcy protection for little people that
it had in mind when it led the Bush campaign contributor list.
The big corporate givers are all lined up with wish lists in hand.
"There is no longer any countervailing power in Washington; business is
in complete control of the machinery of government," former Labor
Secretary Robert Reich concluded recently.
In less than two months, the Administration has reversed workplace
protection for repetitive stress injury, betrayed Bush's campaign promise
to curtail industry carbon dioxide emissions that cause global warming
and revved up plans for Arctic drilling. For all of his belief in a free
market, the President used the club of the state to force mechanics at
Northwest Airlines back to work.
Not that congressional Democrats are without blame. As the bipartisan
support for the bankruptcy bill demonstrated, corporate contributions are
as compelling as they are pervasive.
Bush has indicated he's eager to sign this atrocious bill--an
identical measure was vetoed by President Clinton--which strips away a
century of protection for small debtors. No longer will holders of
unsecured debt, who average $22,000 a year in income, be given a fresh
start. Under this bill, such debtors who file for bankruptcy will not
have their debt eliminated under the easy-to-use Chapter 7 protection of
the Bankruptcy Code but will be forced to file a repayment plan under the
more rigorous Chapter 13. That places this unsecured debt on the same
level as all other claims requiring payment, such as child support and
alimony, leaving divorced spouses and their children competing with banks
for a claimant's paycheck.
At the same time, Congressional Republicans refused to accept any
amendments restraining the marketing of credit cards or the regulating of
usurious interests rates charged. These largely unscrupulous banking
practices that prey upon the young and gullible, with billions of mailed
solicitations a year, is what often leads people into bankruptcy.
What in God's name is going on? The Bible warns against these money
handler who charge usurious rates: "Let the exacting of usury stop" is
commanded in Nehemiah, where the word "usury" is applied to loans among
Israelites bearing a mere 1 percent interest. On a more secular note, the
California Constitution had placed a 10 percent limit on interest, but that has
been watered down by court decisions.
By those historical standards, the current average charge of 18 percent on
credit cards, often rising more than 24 percent, certainly qualifies as
"exorbitant," to use Webster's definition of usury. Indeed, the common
practice of the banks would seem to fall under the category of criminal
loan-sharking, but just try to find a prosecutor with the guts to
classify a leading bank as organized crime.
The analogy with loan-sharking is valid, given that both credit card
companies and gangsters loan money to people who have no means of
repayment. The gangsters compel repayment with the threat of physical
force, and banks will now have the legal intimidation of the courts.
Because Clinton vetoed this legislation, the banking industry weighed
in heavily for Bush in the last election. MBNA employees accounted for
$240,000 in donations to Bush, compared to $1,500 to Al Gore. The bank's
chairman hosted a $1,000-a-plate dinner for Bush, and the bank
contributed a nifty $100,000 to the Bush inaugural festivities.
Financial institutions, which gave Republicans $26 million in the last
election, have been rewarded with quick passage of the bankruptcy bill
that Clinton rejected. The big difference this time around is that Bush
has already stated that he will sign the bill, so there is no pressure on
Congress to build in even the most minor consumer protections.
This year alone, a million Americans, many of them young people
suckered into financing their education by maxing out their credit cards,
will attempt to use the bankruptcy court as a second chance, only to find
the door closed. They should thank Bush the next time an election rolls
During the past two decades, as random financial crises visited various fast-growing economies, we have become familiar, after the fact, with the profile of a developing country that's headed for
The giddy adoration of Alan Greenspan has come to resemble the stock market bubble itself and, when one phenomenon comes to its end, so will the other.
The continuing American bombing of Iraq has drawn attention away from the international debate over economic sanctions against Baghdad and their toll on the Iraqi people.