Secretary of the Treasury Paul O’Neill
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JIM LEHRER: And now to a Newsmaker interview with the president’s point man on taxes and the economy, Treasury Secretary O’Neill. He was deputy director of the Office of Management and Budget in the Ford administration. Most recently, he served for nearly ten years as chairman and chief executive officer of the aluminum maker Alcoa. Mr. Secretary, welcome.
PAUL O’NEILL: Thank you. It’s nice to be here.
JIM LEHRER: Sir, what is the principal purpose of the president’s tax cuts?
PAUL O’NEILL: To take the marginal tax rate down, to provide a doubling of child credit, to bring relief to… for married situations where people are being penalized for being married and to eliminate death taxes. In a broad sense it’s to bring a fairness to the tax system that we have and to use the fact that the current structure of the tax system is producing enormous excess funds over what are required to fund agreed public purposes, and to give the money back to the people who send it in.
JIM LEHRER: So it is not… the first purpose then is not related to the current slowdown in the economy?
PAUL O’NEILL: That’s exactly right. The ideas, as put together and espoused by the president over the last couple of years, were not circumstantially related to the economic condition of the moment. And so you asked me the principal purpose?
JIM LEHRER: Sure.
PAUL O’NEILL: The principal purpose has a very long tale and has a philosophical basis that goes well beyond the question of whether we’re in a down cycle or not.
JIM LEHRER: Because when he first proposed it more than nine months ago the economy was then booming.
PAUL O’NEILL: Exactly right.
JIM LEHRER: Okay. But now it is no longer booming. How do tax cuts fit into the current economic situation?
PAUL O’NEILL: I think they fit in, in this way. It’s something that I’ve been saying now over and over to members of Congress that I’ve had an opportunity to deal with. Mr. Greenspan has now taken two large, relatively large, reductions in interest rates and in effect said monetary policy believes that we need to be relaxing our pressure on the economy.
And where this tax proposal fits in to the economic situation is this. There’s now wide agreement that we should have a tax reduction and having that wide agreement, the only issue left is, what should its composition be? And what I’ve been saying to members of Congress is, if we made a decision in the private sector that we were going to give everyone a pay raise, we would not excuse ourselves for taking nine months to figure out what its composition was and delivering it to the people we decided to provide a pay raise.
And it seems to me it’s intelligent to enact the president’s tax proposals retroactive to January 1, 2001, and to get the money flowing to the population out there and really not be very interested in the economist’s argument about how many angels can dance on the head of the pin because I don’t think anyone would say giving money back to people as soon as possible is a negative thing to do for the economy, and it is for sure going to make some positive difference, and if it could keep us from going beyond the shallow slowing in the economy into a recession, then we should do it and we should do it now.
JIM LEHRER: But you say “if.” There’s no guarantee that if you got exactly what you wanted, which is tax cuts quickly and retroactively, that suddenly the economy would reverse itself?
PAUL O’NEILL: I wouldn’t disagree with you, but I would say this, and maybe it’s because I’m a person who likes safety. If you can have a belt and suspenders, why not have them both? Another way of saying, if you can take out an insurance policy that has some hope of protecting you from a downturn that’s serious, why wouldn’t you take advantage of the opportunity when everyone’s agreed already we should have a tax cut?
JIM LEHRER: Let’s take a step back. What is your analysis of how we got in this situation? It wasn’t very long ago the economy was booming along, everything was fine. As you said, the Fed wasn’t lowering interest rates; it was raising interest rates to slow things down. Everything was great. Suddenly one day we woke up and now everybody was saying just the opposite, and things were going just the opposite. Why? What happened?
PAUL O’NEILL: Well, first of all, I think none of these things really happened with the click of the fingers.
JIM LEHRER: That’s figurative.
PAUL O’NEILL: I understand how you characterize it. In fact, on a substantive basis, the economy began to show signs of weakening in August and September of last year, and then there was an acceleration of the pace of easing in November and December.
How did we get here? I think right now I would say it’s mostly a function of overreaching by the economy, and I would use as an example of that the automobile industry, not to find fault with them but just to use their fact base to make the point. The automobile industry has a standard that says as a normal… as a normal condition we’d like to have 60 days’ worth of automobiles in the pipeline between manufacturing and delivery to customers. And if you look at what happened to those inventories over this period from August to the first of January, they went from 60 days to 98 days — in spite of the fact that the automobile industry was increasingly providing discounts and rebates and other kinds of inducements to get people into the showroom– and I think what happens under this kind of condition is not just the auto industry.
In effect, business borrows forward from customers who are going to buy something. And then you get to a point where you’ve grabbed people and brought them into the showroom to buy a car three or six months earlier than they were going to and your inventories are mounting and you get to a condition where you just can’t keep doing it anymore because you can’t carry the inventory. And so you have to start laying people off and you have to start reducing factory hours in order to get back to an inventory level you can live with, and then you have this whole chain of events.
I think that’s what’s going on in our economy. We tried to reach a little bit too far forward. Consumers were consuming at a rate that was unsustainable. And so we backed down.
JIM LEHRER: What happened to the high-tech industry? It was supposed to be revolutionizing our economy and everything that we did, our lives, literally and then, boom, now it’s in trouble.
PAUL O’NEILL: See, I think all of that… there was a lot of hot air in all of that. Anyone who lives in the real world, I think, didn’t believe any of the hype and, you know, you don’t have to make money, you just have to have customers. That was never true. But people believed it nevertheless.
JIM LEHRER: People were almost giving away things at cost or below in order to get rid of product? Is that what you’re saying?
PAUL O’NEILL: No, no, no I’m saying with some of the high-tech stuff -
JIM LEHRER: Oh, the high-tech stuff.
PAUL O’NEILL: The high-tech stuff — there was this myth that you can have lots of customers and lots of revenue and you don’t have to worry about ever making money. It’s sometime out there in 22000 or something. In any event, I think one of the things that happened is that bubble burst because investors got tired of believing the rhetoric. In a way it was a tulip phenomenon of 1490 or whenever it was happened in the Netherlands. That was part of it. The other part of it is when the goods-producing industry slows down you see it backing up into things like yesterday’s report from Cisco that their orders are down. People start….
JIM LEHRER: Cisco is a big maker of the hardware that makes the Internet work.
PAUL O’NEILL: Exactly right. And so there’s a drop-back effect from them. When the automobile companies say we’ve got to cut back, they also get hammered for not making their earnings and so they’ve got to say slow down the orders from Cisco because we’ve got to make sure we make our earnings numbers.
JIM LEHRER: All right. Should people be worried about the economy now? What’s the diagnosis as we speak? Where are we headed? How serious is this?
PAUL O’NEILL: Hmmm. You know, I haven’t been here 15 years in the past and now 23 years in the private sector — and having the responsibility to make forecasts I must tell you….
JIM LEHRER: Your guess.
PAUL O’NEILL: Right. Take them all carefully. I think you can have a predisposition or a sense of where things are going. At the moment I agree with Alan Greenspan. I’ve looked at the data with Alan. I think we’re hovering around the zero rate of growth — I would say some place between minus 0.5 and plus 0.5 and in that range. No one really knows.
And the important thing is what happens over the next couple of months. Part of the reason that I think if we could see really quick action from the House and the Senate and they don’t say, you know, we need nine months to think this over, that in effect we’d get a net present value discounting process going on in our population; a simpler way to say that is people would see relief coming and they would know that they’re going to be able to pay their credit card bills, their credit extension is too broad out there. And we could rekindle the basis for another consumer-led growth period.
JIM LEHRER: As the Secretary of the Treasury– and you sit at your desk with the job of taking care of the economy– is that the only tool at your disposal now? Hoping that Congress passes this tax cuts in a couple of months?
PAUL O’NEILL: I guess I would say yes to that. In fact, I would say if I had it to do myself, I’d just do it. But as you know we’ve got to deal with 535 members of Congress. At the end of the day, whether we’re going to give the American people an insurance policy that holds out the prospect that we’re not going to have a deep recession is in the hands of the Congress. The president’s delivered his ideas and from this day until the day we have some resolution is the gap period for the American people in terms of whether we’re going to get it done early enough to avoid a serious downturn.
JIM LEHRER: And if anybody is sitting out there thinking, well, George W. Bush and Paul O’Neill are going to save us from a recession by themselves, forget it?
PAUL O’NEILL: We don’t have the ability to write any check that the Congress doesn’t authorize.
JIM LEHRER: Now what about Alan Greenspan? Does he have the power to say we’re not going to have a recession?
PAUL O’NEILL: I think he has great influence in sending a message and, in fact, more than a message but a tool to the markets with the interest rates, and that’s a useful thing to do. But I think one thing that he doesn’t have an ability to do, he doesn’t have an ability to send money to people so that they can reduce their credit card borrowing or pay their expanded energy costs and deal with the things of daily life that American people have to deal with. He can’t do that.
He can help on the capital formation and investment side, and he can help them on how big their credit card bills are because of interest rates — but at the end of the day it’s up to the Congress now to act on the president’s proposal to get money into the hands of real Americans.
JIM LEHRER: Much has been made about your long-time relationship with Alan Greenspan. What does that mean at a time like this for the country?
PAUL O’NEILL: It means that we talk to each other a lot and we know each other very well, and so we don’t spend a lot of time trying to explain, this is what I meant and what did you mean by this? We had lunch today and spent a couple of hours talking about the data that we see and the pieces of information we pick up as we wander around the world.
Yesterday I spent the day in New York and met with 50 of probably the highest name recognition people in world finance. And I had an opportunity to hear from them the things that they have on their mind. And this morning I met with the president — with the CEOs from the high-tech industry. And there’s, I guess I would say, broadly there’s a consensus of concern….
JIM LEHRER: What do they think? What is the consensus about?
PAUL O’NEILL: There’s a consensus that it’s very slow….
JIM LEHRER: Going to get worse before it gets better?
PAUL O’NEILL: Well, the evidence is really very mixed. You know, on the one hand, one of the people I spoke to yesterday who has a major activity in grocery stores said in previous times when there are downturns, he can see customers visiting stores more frequently and buying less on every trip which means there’s kind of an inventory function even at the individual customer level, when things are bad, of saying, “I’m not going to spend any more than I have to and I’m going to go more frequently to the store.” And he said he hasn’t seen that in this downturn yet.
Now, there are other people in different kinds of industries who say the volumes are still good but the prices are unbelievable because people are trying to clear out their inventories and do all the things that you do when you’re seeing the storm clouds coming. So the evidence is really very mixed right now.
Again one of the reasons to move forward quickly with the president’s tax proposal, it sends a signal to the people out there that help is coming in the form of tangible money that you can use for whatever you decide to spend it for, and just incidentally but not unimportantly, it’s more money than we need here at the federal level to discharge agreed spending for public purposes. And it does seem to me, coming back now to Washington after all these years, it’s remarkable that we have a conversation about whether we ought to send the people’s money back to them since it’s almost as though we captured it and we’re not going to let you have it back.
JIM LEHRER: But do you think it is going to happen?
PAUL O’NEILL: Indeed I do.
JIM LEHRER: Do you think it’s going to happen fast?
PAUL O’NEILL: Yes I do.
JIM LEHRER: Why do you think so?
PAUL O’NEILL: Well, you know, two months ago there was a big debate about whether there should be any tax cut. A month ago it became how much should it be and not whether we should have one. And just in the last couple of weeks, I think even as Senator Conrad who is not a fan exactly of the president’s proposal said, “Yes, his people want a tax cut and yes we should have a tax cut.” And so we’re really bargaining about how much and what the composition is.
JIM LEHRER: What about the Republicans who say we want an even larger tax cut than the President’s?
PAUL O’NEILL: The president said not on my watch. $1.6, thank you, is the Goldilocks tax proposal. It’s just right. It’s not too much and it’s not too little. And the president has been really firm in every meeting I’ve been in with him about how important it is that we not get ourselves back into a position where we can see $200 billion a year deficits forever into the future.
JIM LEHRER: What about the basic Democratic argument against this, the amount of this, not the concept but the amount, that there’s simply not enough guarantee that that money is going to be there in the long term? You heard what Senator Conrad said in our clip and I’m sure you’ve read it and heard it before.
PAUL O’NEILL: I’ve heard it directly.
JIM LEHRER: You cannot do all three things, they say: You cannot reduce the debt, cut taxes and do even the things President Bush wants to do in education and all of that at the same time.
PAUL O’NEILL: I think again, you know, I would stipulate the point that it’s really difficult to say with a straight face that anyone knows exactly what the economy is going to be like and what the revenue base is going to be in 10 years from now. I’d stipulate that. But it is possible to draw a cone of reasonable estimates. I think the [Congressional Budget Office] numbers are not a bad example of that.
One thing is absolutely sure I think. There is no doubt that we’re going to generate the Social Security surpluses and every one of those dollars are going to be used to reduce the federal debt. So we have a platform that says we’re going to reduce the federal debt by $2.5 trillion over the next 10 years even if we don’t use any general revenue to reduce the federal debt. And the two-and-a-half by the way is going to get it very close to the irreducible minimum.
The $1.6 trillion recommended by the president I think is also in a safe haven because even after obligating those two amounts, you’ve got over a trillion dollars worth of money over this next 10-year period that’s available for spending, and I think it’s within a cone of reasonable estimating that we’re going to be okay. In fact, I think that no one has made this argument but I think if we grow at our potential the number of surplus are going to be much bigger than $5.7 trillion because the current estimates don’t assume that we’re going to be able to sustain the level of real growth that we’ve seen over the last five years.
And I believe that we have only realized maybe 20 percent of the technology-led revolutionary productivity that we’ve seen in the last five years and so I think we have this prospect out in front of us of a period of prosperity that is unprecedented in the world and it’s going to throw off a lot more money than what we’re currently estimating.
JIM LEHRER: And that assumes no continuation of the slowdown.
PAUL O’NEILL: Absolutely. Well, it assumes from time to time we’re going to have overreaching by business as it tries to draw customers in that really shouldn’t be drawn in too early into a consumption decision and we’re going to have occasions when there are economic developments in other countries that mitigate against high rates of economic growth. But I tell you, I really do believe that we have in front of us a continuation of what we’ve had at the beginning of a golden era of economic prosperity.
JIM LEHRER: You realize you just made a forecast, Mr. Secretary.
PAUL O’NEILL: I did. I’m happy to make that one.
JIM LEHRER: All right. Welcome back to Washington. Thank you very much.
PAUL O’NEILL: Thank you. Nice to be with you.