Shake-up at the White House

RAY SUAREZ:

The resignations today of Treasury Secretary Paul O'Neill and senior economic adviser Larry Lindsey mark the first major personnel shift in the Bush White House.

Here to help us sort through today's developments are Robert Hormats, managing director of Goldman Sachs, an investment bank; Diane Swonk, chief economist at Bank One Corporation, a commercial bank; and David Sanger, White House correspondent for The New York Times.

David let's start with you. How were these departures handled and what brought them about?

DAVID SANGER:

Well, Ray, the only world for how they were handled was rather brutally and forcefully. It was quite a remarkable day. Remember, this is the president who really came to office with a reputation of not liking to conduct any firings and that's exactly what this was.

It wasn't a resignation, it was a firing.

Take a look at how they did it. The White House issued a very bland statement thanking both men for their service but really saying nothing terribly complimentary about what they accomplished. Throughout the day they made no effort particularly to hide the fact that senior administration officials led by Vice President Cheney had actually pushed them out the door.

That was some what remarkable, Ray, because of course it was Vice President Cheney who brought Paul O'Neill in when the president — back during the transition in November and December of 2000 — really didn't like the initial choices he had been given.

So it was an effort, as one administration official said to me, to really show that they were turning over a new leaf, that they wanted the day focused, get the markets focused on the fact they were ousting this group of advisers and I think probably as soon as next week you'll see the replacements announced. And that'll be a focus on them.

RAY SUAREZ:

Any word coming from inside the administration on why now? Did they want to get past the elections? Did they want to get past certain bad numbers that were coming out on the economy?

DAVID SANGER:

Well, Ray, they certainly wanted to get past the elections, because to do this before the elections would have been an acknowledgment that the path that they have been following is not considered successful, not only on Wall Street but within Republican ranks.

They wanted it done early so whatever the new team decides upon they have time to enact well before the 2004 campaign gets going.

And I think most importantly out of this, they wanted to make a clean declaration that they recognized the problem they have been facing. Now this is a difficult thing for any administration to do. For months, as criticism of Secretary O'Neill in particular mounted, you would get the ritualistic statements from the administration, as you get from any administration about how the presidents had full confidence in his team.

I went in about a month or two ago and sat down with Secretary O'Neill and he said quite explicitly at that time that he had receive no indication that there was a loss of confidence in him and he would serve as long as the president wanted him there. And I think he fully expected to stay on.

RAY SUAREZ:

Robert Hormats, what do you make of Paul O'Neill's departure at this time?

ROBERT HORMATS:

I think, as David pointed out, they went fresh people to develop a fresh policy. The economy is very weak; these unemployment numbers were very disturbing.

And they need to do something to demonstrate that George W. Bush is going to play a more proactive role in the economy than his father because this president is quite aware that his father lost the election largely because he seemed to be neglecting the economy.

Now they want to be proactive of new people, and I think they will come up with new policies relatively soon, which will include a tax stimulus of some sort that will help a variety of people: one, perhaps boosting investment, but two perhaps accelerating the tax cuts that were planned for 2004 that they might choose to implement in 2003 at least for lower income people, things like that that will demonstrate a hands-on approach to the economy, a proactive approach to the economy.

RAY SUAREZ:

Would you say at the time of his departure that we could look back and say Paul O'Neill was a good Treasury Secretary?

ROBERT HORMATS:

I think Paul O'Neill came to the job as a very unfortunate point in time.

The market was in the process of crashing, the economy was weakening. Corporate scandals took place shortly after his arrival. Those things cannot be blamed on Paul O'Neill, and it was unfair, I think, that people did blame him for some of this.

On the other hand, he did not prove to be particularly effective at forging a coherent new set of policies to deal with a new set of challenges for the economy.

And one of the problems is that there was a great deal of infighting among various people: The supply-siders on one hand what wanted tax cuts to help corporate investment, the demand siders who wanted perhaps more stimulus to help consumption. There never was a consensus on this. And, also one of the roles of the Treasury Secretary is to be the chief economic adviser to the president and to demonstrate that he is the person who has the president's ear.

The markets tended to doubt that after a period of time. His second role is to be a clear spokesman to Wall Street, to Main Street, to the business community, for the administration to be acknowledged as someone who could speak for the president and the administration. And after a period of time it became clear that O'Neill could not play that role. He wasn't clear in describing policies, and he wasn't particularly credible to a wide range of communities.

RAY SUAREZ:

Diane Swonk, your assessment of his time with Treasury?

DIANE SWONK:

Robert really hit the nail on the head in terms of how he did come into office at a very difficult time and the comparisons to Bob Rubin and the dream team, as they had it during the Clinton administration — although many of the problems that we saw were actually happening and seeded in the economy before the Bush administration took office.

I think Paul also — he's an extraordinary person. Anyone who has met him knows he is a thoughtful person who has his heart in the right place. But he may not have been well suited for this job. I think there was a message problem.

He was oftentimes in conflict with the administration; often times in sync with his own good friend, Alan Greenspan, who has also sort of talked about being more fiscally hawkish than I think the administration would like to be at this stage of the game. So I think really this was a weak link in the administration, their economic team was seen in disarray. They want to come out with their guns blazing as they get their new congressional team in place in the start of the New Year with an economic team. And I think the other issues that were raised, 'it is the economy, stupid.' It's really important.

This is sort of a — a son wanting to correct the sins of the father and not make the same mistakes. A lot of these people were in the former Bush administration. They learned that lesson well. My concern is what we get out of this is much more fiscal stimulus than we perhaps even need. We have a lot in the pipeline already in terms of monetary stimulus.

And at some point in time we're going to have monetary and fiscal policy in competition with the Fed raising rates even as tax cuts are coming through. And that's just not a good place to be. So I'm a little bit concerned that the problems that ail the economy are not necessarily ones that this administration can solve and, in fact, they may solve themselves on their own over time. But certainly in 2004 there's no question in my mind that this administration will get a lot more credit for it especially with this shakeup.

RAY SUAREZ:

David Sanger, we shouldn't forget about Lawrence Lindsey, who is credited as one of the architects of the Bush tax cut. Early after the president began his term and won that battle in Congress, Lawrence Lindsey was widely credited for that victory. What happened after that?

DAVID SANGER:

Well, it's very interesting because Mr. Lindsey was an extraordinarily influential adviser throughout the campaign, and of course Secretary O'Neill was running ALCOA still at that time.

So we thought when he came in, that the National Economic Council, which he ran and is supposed to coordinate economic policy, would become a powerhouse within the White House.

In fact, quite the opposite happened. Mr. Lindsey had a very difficult time dealing with Congress. He seemed not to be in complete accord with either Secretary O'Neill or with the Council on Economic Advisors. And over time it seemed that he was more and more isolated.

Something else strange happened in this, Ray. I used to cover the Treasury in the 1990s before I moved over to covering the White House. At that time one had the sense that the Treasury was very much at the center not only domestic policy but of foreign policy.

The big issues were questions of globalization; management of China and Japan policy, for example, took place at the Treasury and at the National Economic Council.

That all changed the minute that George Bush came in, and suddenly both these men seemed to lose a good deal of their portfolio. And I think over time they became marginalized in the debate. And of course much power in Washington is derived from whether you are sitting at the table when big issues are decided. These men were not.

RAY SUAREZ:

Diane Swonk will whoever takes the place both of Larry Lindsey and Paul O'Neill be expected to be part of that shift of priorities away from the war on terrorism and an international focus that the administration has had to a more domestic one in the run up to 2004?

DIANE SWONK, I think absolutely. I think the issue is there's a real scare out there that we're on the eve of yet another war with Iraq. I think it's very highly likely we'll be at war with Iraq.

And there's a little deja vu going on here. They want to get things more focused on — we care about the domestic front as well; we're not just focusing on foreign issues. I think that's a very, very important issue. The other issue is Glenn Hubbard in all this. Glenn is eloquent; he is very highly thought of on tax policy; he's a very sharp knife in the drawer and, with the administration, has come out looking very good. And I think there will probably be — if he wants to stick around a very large role for him coordinating the agenda with regard to the new economic team that we get put together.

I think he's been much more effective on Capitol Hill and much more effective in speaking the message of the economy than Lindsey or Paul were. And I think that's very important. So we have one player that is still there and whether he stays or not is still up for grabs but he certainly would a very strong player for the administration to have especially given the agenda they want to push a fiscal stimulus going forward. This guys has got a lot of credibility going forward on tax codes and taxation issues. And I think he would certainly lend that credibility to the administration, whether or not I agree they should be done now.

RAY SUAREZ:

Bob Hormats some quick final thoughts on the new secretary, whoever that may be, has to do right out of the box?

ROBERT HORMATS:

Well, he has to do several things.

One, figure out whether we need a stimulus, how much of a stimulus and what kind and to get it to the economy quickly.

Two, they have got to figure out how to help state and local governments. State and local governments are suffering; they are contracting at the time the federal government is trying to expand the economy. State and local governments have more of a burden for homeland defense. Tax revenues have declined. They've got a problem.

Three, how do you finance this war? We're financing the war plus increased domestic spending — plus a tax cut. That's the way we financed the Vietnam War. We've got to begin to make some spending priority decisions very quickly so we don't get big budget deficits not just this year, which is not a problem, because they need the stimulus, but three, four, five years down the road by military spending, domestic spending, and tax cuts. That's a big problem — out year fiscal responsibility over the course of this decade.

And then we've got the last issue, which is the international issue. We have a growing trade deficit, a growing current account deficit at historic levels. We have got to figure out how to deal with them — and a dollar that many people think is too high and is weakening the competitiveness of a lot of American manufacturers.

RAY SUAREZ:

Bob Hormats, guests, thank you all.