January 11, 2004

Notes: Suskind and O'Neill

Notes: Quotes from Ron Suskind, The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O'Neill.

Ron Suskind (2003), The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O'Neill (New York: Simon and Schuster: 0743255453).

p. viii: In March [2003], [Paul] O'Neill approached his former colleagues at the Treasury Department for... copies of every document that had crossed his desk. One day... he passed me a few unopened CD-ROMs. "This is what they gave me," he said... nineteen thousand documents... image files, meaning every document sent to O'Neill was xeroxed.

p. 10: O'Neill was a believer in the middle ground. Not in compromise so much. Or in horse trading.... Across four decades... he was sure he'd spotted a staid stoic truth... that on matters of policy there are answers--right answers--that eventually assert their primacy over political posturing. These right answers fall indiscriminately... along the left/right axis, or... new territory. [I]f everyone is honest about what they all know--and about what they've learned in this roiling process--an answer, a best remedy emerges. Illusion will have its moment, but there is, in fact, a discernible underlying reality.... In the end, it's all about process, O'Neill believed. Trust process and the ends take care of themselves...

p. 14: ...across a decade of often angry partisanship, an answer somehow took shape: Fiscal prudence works. A balanced budget means that the government won't be out borrowing billions and, thereby, driving up interest rates.... As Greenspan advised, and Clinton acknowledged, as far back as 1992, sellers of long-term debt tucked a significant premium... into interest rates because of their bleak certainty [of] ongoing budget deficits.... Balance the budget, while keeping inflation in check, and that premium would all but vanish. They were right...

p. 40: We're not going back into [deficit], Greenspan said. Paul nodded solemnly. For these two, it was a blood oath.... O'Neill--the budget hawk--already had a plan.... "We can strengthen our own hand on what to do with the surplus by articulating the principle of a dedicated flow to continuing debt reduction." He recited the line to Greenspan, who considered it for a moment. Fine--reeduction of debt is a priority--but what happens to the big item, the tax cut, if the surpluses evaporate? he asked. "Triggers," O'Neill said. "A good enough idea, if it can be sold."... Moving into deficit would "trigger" a host of reactions.... Fiscal policies based on the availability of a surplus would be altered if that surplus disappeared.... Neither man opposed a tax cut.... It was a matter of what was affordable, across an unknowable arc of ten years...

p. 42: O'Neill smiled. "Think you could find a way to mention triggers in one of your upcoming pronouncements?" Greenspan smirked, "Why me?" "Because I thought of it," O'Neill said with a friendly gloat. "That means you have to sell it."

p. 49: [January 14] All this became clear to Paul O'Neill and Alan Greenspan at the same instant, midway through the waning afternoon. When the centerpiece of the President-elect's plan for America--the $1.6 trillion, ten-year tax cut--was discussed, neither man felt comfortable mentioning the secret "trigger" pact to Dick Cheney. They couldn't be sure what Dick would think.

p. 57ff: ...the third day of the Bush administration.... Bush had O'Neill's memo--Paul figured they'd talk about that--and then they'd discuss whatever came up.... O'Neill... offered a fifteen minute overview on what he considered the informed opinion (that is, his and Greenspan's) [about the economy].... O'Neill referred to items of his memo.... There were a dozen questions that O'Neill had expected Bush to ask. He was ready with the answers. How large did O'Neill consider the surplus, and how real? How might the tax cut be structured? What about reforming Social Security and Medicare, the budget busters?... Bush didn't ask anything. He looked at O'Neill, not changing his expression, not letting on that he'd had any reactions.... O'Neill decided therefore to move from the economy to a related matter. Steel tariffs.... The President said nothing. No change in expression.... "I wondered, from the first, if the President didn't know the questions to ask," O'Neill recalled, "or did he know and just not want to know the answers? Or did his strategy somehow involve never showing what he thought? But you can ask questions, gather information, and not necessarily show your hand. It was strange."

p. 63: [Greenspan] suggested that a future tax cut "could include provisions [that]... limit surplus-reducing actions if specified targets for the budget surplus and federal debt were not satisfied. Only if the probability was low that... initiatives would send the on-budget accounts into deficit, would unconditional initiatives appear prudent. Now that the trigger proposal was unveiled, Greenspan ran through a wide range of cautions...

p. 67: [January 25, 2001] [Larry] Lindsey wrote a memorandum to chief of staff Andy Card--a way of getting it to the President without listing Bush as a recipient. The specific chgarge was that Treasury's Office of Tax Analysis (OTA) was unable to provide "the revenue cost for the President's tax proposal before the beginning of next week."... "I personally find this deplorable," he wrote. "I am puzzled that the OTA did not have a model of the President's tax proposal in an operable condition.... This must mean that not only was one not written since it was determined that the President would take office, but that none was written during the campaign either.... O'Neill got his copy of Larry's memo. he read it, half in disbelief. The criticisms of the tax office were absurd. His team wasn't even assembled--the office hadn't started working for this President until two days ago--and Treasury's assumptions... were sufficient [for]... early discussions.... On a second read, [O'Neill] realized that the letter was... a statement of loyalty. Lindsey was saying that he was a stalwart supporter of the President and that O'Neill was not. This was the breach O'Neill had feared: that the "honest broiker" was an advocate. Hard-eyed analysis would be painted as disloyalty.... [O'Neill] grabbed a printout of the memo and scribbled across the top: "Larry: This is bureaucratic chicken****. You must have something better to do with your time than send me memos such as this one."

One of the few moments--no, it turns out it's the only moment--Bush says anything substantive in the entire book:

p. 71 ff: President Bush echoed this view: "We're gong to correct the imbalances of the previous administration on the Mideast conflict. We're going to tilt it back toward Israel. And we're going to be consistent. Clinton overreached, and it all fell apart. That's why we're in trouble," Bush said. "If the two sides don't want peace, there's no way we can force them." Then the President halted. "Anybody here ever met [Ariel] Sharon?" After a moment, Powell sort of raised his hand. Yes, he had. "I'm not going to go by past reputations when it comes to Sharon," Bush said. "I'm going to take him at face value. We'll work out a relationship based on how things go." He'd met Sharon briefly, Bush said, when they had flown over Israel in a helicopter on a visit in December 1998. "Just saw him that one time. We flew over the Palestinian camps," Bush said sourly. "Looked real bad down there. I don't see much we can do over there at this point. I think it's time to pull out of that situation."

And that was it, according to O'Neill and several other people in the room. The Arab-Israeli conflict was a mess, and the United States would disengage. The combatants would have to work it out on their own. Powell said such a move might be hasty. He remarked on the violence in the West Bank and Gaza and on its roots. He stressed that a pullback by the United States would unleash Sharon and the Israeli army. "The consequences of that could be dire," he said, "especially for the Palestinians."

Bush shrugged. "Maybe that's the best way to get things back in balance." Powell looked startled. "Sometimes a show of strength by one side can really clarify things," Bush said...

p. 112: And around they went. O'Neill realized that [Glenn] Hubbard was convincing and not easily swayed and that he was attentive to the data in ways Larry [Lindsey] was not. He backed up his arguments. Throughout the discussion, O'Neill never mentioned his support of triggers, his conversations with Greenspan, or his fears about [fiscal] profligacy.... Instead, he rounded out the lunch by mentioning Greenspan's... [warning] that the surplus was not money in the bank. However you put it, O'Neill said, spending more money than we've got is irresponsible--and we need to figure out a way to stop that from happening. Everyone nodded, and O'Neill wondered how much access Hubbard would have to the President.

pp. 117-8: They entered O'Neill's office. The Pesident made a joke about the furniture. They sat down. O'Neill thought the time was right.... O'Neill made his case for triggers.... He explained the case for, and against, the conditionality of caps or triggers or sunset provisions. "It may blunt some of the tax cut's stimulus," O'Neill said, but the President would be eventually rewarded by the capital markets... "for continuing and advancing the virtues of fiscal prudence."

The conviviality had burned off. Bush looked at him with the flat, inexpressive stare to which O'Neill had become accustomed. "I won't negotiate with myself," Bush finally said. "It's that simple. If someone comes to me with a plan for this, and they have a significant amount of political backing, I'll sit down with them--talk it out. But until then, it's a closed issue."

O'Neill's mind raced. He wanted to run through what was knoweable about the illusory nature of any ten-year surplus estimate: how the $1.6 trillion number grew from a 1999 campaign proposal and no longer fit current economic reality.... "I wanted to say to the President that all sound analysis is about negotiating with yourself," O'Neill recalled. "That Alan [Greenspan] and I agree on all this, and we've been at it for forty years."

But [O'Neill] just nodded. The President made it clear that this was not about analysis. It was about tactics.

pp. 128-9: At this point in mid-March 2001, a very different model was becoming apparent. it caused confusion for senior officials like O'Neill, Powell, and Whitman.... Was it possible, O'Neill wondered, that the country thought it had elected a centrist when in fact it had empowered an ideologue? The incident with Whitman was the start of what O'Neill later called "a rolling revelation of the way this administration was operating."

"What became clear to me at that point," he said... not long after he left office, "is that the presence of me and Colin and Christie helped convince people that this would... be an administration that would look hard for best solutions.... That's what the three of us were known for.... Thinking back about how all of us started to be banged up so early on, from the inside, it now seems like we inadvertantly may have been there, in large part, as cover."

p. 153: [on Social Security]: Bush showed no response. He had checked out, and time was up. "I just thought we needed to have a real discussion," O'Neill recalled. "W needed to do some actual questioning and thinking. I'm the Treasury Secretary and I happen to have spent forty years studying Social Security. The Fed chairman and I are in agreement. I've even had real discussions with other presidents about the choices and consequences on this issue.... But he just sat back in his chair. His attitude was, 'I said this during the campaign, and whatever I said in the campaign must be right'." O'Neill, who had come to Washington dreaming of reforming Social Security, left feeling confused and deflated.

p. 174: Immediately, the White House's attack machine went to work--against O'Neill.... Larry Lindsey's office went into overdrive. "Up to this point, they'd been attacking O'Neill regularly with off-the-record stuff and 'senior official' comments," recalls one of O'Neill's top aides. "Now, it went to an almost daily footing... it got crazy. We would get calls every couple of days, all of them pre3tty much the same: a reporter would call with some out-of-context thing Paul had said at the weekly economics lunch or some metting with Larry. It wasn't even subtle. From the first month of the administration, every reporters in town knew they could get some inside punch at O'Neill just by calling Lindsey's office."

p. 219: Mitch Daniels became agitated. He blurted out, "Well, yes, but if you can't do the right thing when you're at 85 percent approval, then when can you do the right thing? I think it's time to say no." Everyone looked with surprise at Daniels--he has a way of expressing what others are thinking but don't say. Often, he'd find himself doubling back when he got an arched brow from Cheney or Rove...

p. 191ff: O'Neill, meanwhile, would head up the first active assault: the financial war [on terror]. But how? Over the next few days, O'Neill met with David Aufhauser, who, he decided, should act as an honest broker... organizing a fractious interagency group to track terror assets... seize some assets, and quickly. The President was to announce the new executive order on September 24[, 2001], launching the war on terrorism. He needed some assets to point to. "It was almost comical," Aufhauser said. "we just listed out as many of the usual suspects as we could and said, Let's go freeze some of their assets."

p. 171ff: One problem was that [O'Neill] didn't have a chair in the White House senior staff meeting... each morning at 7:30. Robert Rubin... had considered attendance at this meeting... among his most important victories. It placed Rubin's finger on the White House's pulse each morning.... Summers.... O'Neill wasn't going to ask, himself; he had his chief of staff, Tim Adams, inquire several times whether the Secretary could attend. "There was foot dragging and then no response..." While no one would head-on confront an official as powerful as the Secretary of the Treasury...

p. 162: May 22 [2001]... Greenspan arrived at the Treasury for breakfast with O'Neill. Their secret trigger pact had come up one vote short.... "We did what we could on conditionality," O'Neill said with momentary resignation.... "The first big battle is over, really. I think we fought well, we made our points vigorously." Greenspan said that wasn't enough. "Without the triggers, that tax cut is irreponsible fiscla policy," he said in his deepest funereal tone. "Eventually, I think that will be the consensus view."

p. 85ff: Powell began by discussing the new strategy for "targeted sanctions" [against Iraq]. But, after a moment, Rumsfeld interrupted. "Sanctions are fine," he said. "But what we really want to think about is going after Saddam." He then launched into an assessment of the broader U.S. goal of getting rid of Saddam and replacing the current regime with one more inclined toward cooperative relations with the United States and its Western allies. "Imagine what the region would look like without Saddam and with a regime that's aligned with U.S. interests," Rumsfeld said. "It would change everything in the region and beyond it. It would demonstrate what U.S. policy is all about." Rumsfeld began to talk in general terms about post-Saddam Iraq, dealing with the Kurds in the north, the oil fields, the reconstruction of the country's economy, and the "freeing of the Iraqi people."

The hanging question was how to arrive at this desired goal. Rice, Rumsfeld, and General Shelton talked generally about rebuilding the military coalition from the 1991 Gulf War.... Tenet talked about a coup and said the prspects for success were not particularly good. Powell said we "don't just want to replace one bad guy with another bad guy."... O'Neill thought about Rumsfeld's memo.... The sudden focus on Saddam Hussein made sense only if the broader ideology--of a need to "dissuade" others from creating asymmetric threats [to the United States]--were to be embraced. That was the why.

A weak but increasingly obstreperous Saddam mihg tbe useful as a demonstration model of America's new, unilateral resolve. If it could effectively be shown that he... was trying to build weapons of mass destruction--creating an "asymmetric threat"...--his overthorw would help "dissuade" other countries from doing the same. At least, that seemed to be the idea.

"There was never any rigorous talk about this sweeping idea that seemed to be driving all the specific actions," O'Neill said, echoing the comments of several other participants in NEC discussions. "From the start, we were builidng the case against Hussein and looking at how we could take him out.... And, if we did that, it would solve everything. It was all about finding a way to do it. That was the tone of it. The President saying, 'Fine. Go find me a way to do this.'"

The worst high-level meeting, ever:

p. 295 ff [November 26, 2002]: the White House's Roosevelt Conference Room:

The President... sat down. "All right, how are we doing?"

[Larry] Lindsey began, "I'm reminded, looking at the table, of a joke I heard from Prime Minister Koizumi of Japan, that he gets two opinions from each economist, and since, Mr. President, you have five economic advisers--"

"What are you talking about?" snapped Bush.

"Yes, sir. Your economic team agrees on the key elements of an economic growth and jobs package: reduce the double taxation of dividends, accelerate the rate cuts, and provide more epensing of investment losses. Let me now turn to Secretary O'Neill."

O'Neill shuffled some papers--thinking maybe Larry [Lindsey] and the President weren't getting on so well after all. But now that he knew about Cheney's [support for further large-scale tax cuts], it didn't much matter where Larry [Lindsey] was.

"... On balance, I am more optimistic about the U.S. economy than the group, and I remind you that I was right last year, and we've mostly been right this year in our real-time forecasts. And that leads me to believe we don't need a major, expensive stimulus package.... I am concerned that what we do now not tie our hands on major tax reform or on creating Social Security private accounts. And when I look at what we have got here, in this package of proposals, I am dubious that we can get anything enacted in time to do much good."

Bush looked at him quizzically. "What is your point about Social Security private accounts?"

"There will be a transition cost, Mr. President," O'Neill explained, surprised. "Perhaps a trillion dollars over many years. This will be more difficult to do with large budget deficits. It will also be difficult to keep Congress in check."

"We have had some success on the spending side, but also some setbacks," Bush said.

Gazing down the row, Bush now looked at [Glenn] Hubbard.... "I don't think of this as a stimulus package, but a growth package," Hubbard said. "The economy is facing headwinds.... The third quarter numbers were strong, but they borrowed from the fourth quarter..."

"Do we have to give it back?" Bush quipped, getting off a good one to big laughs.

Then to Keith Hennessey: "The priority should be eliminating double taxation of dividends. I think that the revenue loss will be much smaller than the static estimate," Hennessey said.... "We should also include more expensing of investments and accelerating the rate cuts. I think of this as an insurance policy, not against a double dip back into recession, but against 1 percent slower growth in each of the next two years."...

The Commerce Secretary echoed much of what had been said.... As usual, not a real discussion, O'Neill thought as he looked over at [Mitch] Daniels.... He knew Daniels was focused on the perils of rising deficits, but it would take gumption to air those concerns in a room full of tax cut ideologues.

"I think we need to balance concerns," Daniels said.... "You need to be out front on the economy, but I am concerned that this package may not do it. The budget hole is getting deeper... we are projecting deficits all the way to the end of your second term." From across the table came glares from the entire Bush political team. Daniels paused.... "Ummmm. On balance, then, I think we need to do a pacakge... accelerate the rate cuts and the double taxsation of dividends..." O'Neill looked with astonishment at Daniels... turn 180 degrees in midsentence.

Lindsey jumped in. "Mr. President, this is an insurance policy, and it is a bad time to go uninsured. With the world economy as it is, the United States is the only game in town."

Bush looked with disdain at Lindsey and went in anther direction. "We are slowing from third to fourth quarter, but O'Neill hasn't been wrong yet. Why have nominal wages stopped growing?" The answer was complex... the kind of academic discussion the President generally abhorred. But... Bush seemed to be encouraging unscripted exchanges.... "What we are proposing is good long-run tax policy," Lindsey said in a non sequitur, trying to get the President back on track.

Bush acted as if he hadn't heard him. "Are you proposing we accelerate all the tax cuts, or just for those in the middle? Won't the top-rate people benefit the most from eliminating the double taxation of dividends? Didn't we already give them a break at the top?"...

Hubbard: "Mr President, remember the high earners are where the entrepreneurs are."...

Bush seized on it. "This is about demand," he said. "I want this to work."

"It's also about the supply side," Lindsey said.

"Eliminating the double taxation of dividends is a game changer," Hubbard added. "Game changer" is one of Bush's favorite phrases.

Rove finally spoke up, a rare event in a meeting of this size. "You should be basing the package on principle--if double taxation of dividends is wrong, why... settle for just eliminating 50 percent...?" "Stick to principle" is another phrase that has a tonic effect on Bush....

Josh Bolten leapt into the fray. "This burns a big hole in the budget."...

Daniels, having changed direction only a few minutes back, now spoke as an ardent supply-sider. "Yes, but we get a lot back"...

O'Neill picked up... "The trouble with the double taxation is that... there's a strong chance it will all be dissipated.... He put forward an alternative: the permanent expensing of capital expenditures, which... prompts expenditures on capital goods that benefit the wider economy. He looked across the table and saw the President was befuddled. He quickly moved to hold the floor.... "We don't want to slam the door on our toes in the fourth quarter of 2004 after the current provisions expire."

Bush picked up on that last dangling reference to the date: "Just as long as we don't slam the door in the third quarter of 2004."

But Rove seemed intrigued by... expensing capital expenditures. "On the Hill, there is talk of a plan to change all the depreciable lives," he said, and then ticked off th enewly proposed intervals...

The President was now thoroughly lost. "What are you talking about?" he barked at Rove.

Hubbard moved to smooth things: "This should wait for a time when we do major tax reform."

Glenn thinks that a deficit of $200 billion pushes up interest rates by just three basis points [or .03 perent]," Josh Bolten interjected, bringing things back to the key issue of whether the dividend tax cut was affordable.

"That's right," Hubbard said. Sitting next to him, O'Neill shook his head. Greenspan and he had been running tables on the effects on deficits for years; that figure was wildly low.

Bush waved his arm dismissively. "Hold on. We're betting that revenue streams come back with growth and that we can hold the line on spending.... This focus on the top rate, is it a high priority? Again, won't the high end benefit most from the double-taxation elimination?"

No one seeme to want to reply. Eliminating the double taxation is a benefit heavily weighted to those who hold stock.... Of coures, the "high end" was the "base"--the income distribution of the proposed cuts was largely a political calculation searching for an economic rationale.... After a noticeable, pregnant pause, Dan Bartlett moved back to politics. "We are hearing from governors about state budgets."

Andy Card said, "We need a quick payoff, Mr. President."

Hubbard was intent that they not forget what had brought them here: "Elimination of the double taxation will boost stock prices and repair balance sheets."

Card jerked things back: "There is excess capacity, so why do we want to boost investment?"

O'Neill was pleasantly surprised. "Mr. President, the Business Round Table of the country's leading CEO's says the focus should be on boosting consumption demand.... I'm not sure that a tax cut that benefits mostly wealthy investors, many of whom will just push these gains into savings, will do much for demand."

Bush nodded.... The ideology of ongoing tax cuts seemed to make less sense.... Finally he spoke, haltingly. "The divided tax cut could repair corporate balance sheets," he said, feeling his way, "and that's a kind of growth package, isn't it?"...

Hubbard rushed to the President's aid. "Households who desire to save more can do so through higher stock prices."

Bolten attempted closure: "I think we have agreement.... Now, how big should the package be? How much extra... so we have something to give back in the legislative process?

The President didn't seem ready to close. "Didn't we do the investment package already? Wha twould you rather have? We went through this last year, are you telling me we did it wrong?"...

"There are headwinds," Hubbard said.

"Not additional headwinds," Bush countered. "They can say, 'They did it twice and it didn't work.' Why do we play our hand now, negotiate against ourselves? I want to stay with principle."

This seemed to be a cue to Rove.... Karl moved to tactics...

Daniels, still looking to redeem himself for his earlier deficit hawk comments, jumped to support Rove: "I suggest a $50 billion package--$50 billion a yeare--and that we go on the offensive, including accelerating the rate cuts, and expensing, and dividends."

The president seemed releaved, as though the key issues had been considered. "Thank you for all the briefing materials, this was good research. So when do we roll this out?"...

"Good, what I am hearing is that we roll out in mid-December," President Bush said as he began to stand.

Rove looked at the President with pride. "Stick to principle," he said.

On O'Neill's left, Daniels was still of two minds. "Not a typical Republican package," he muttered. "Definitely not."

A few comments:

  1. Mitch Daniels was, without a doubt, the worst Budget Director ever.
  2. Paul O'Neill is wrong about one thing--the economy did need extra stimulus--and right about two things: the package was largely ineffective as a short-run stimulus--it had an extraoardinarily low bang-for-buck ratio--and if you believe (as I do) that America invests too little, the right growth package is not one of savings incentives (divident tax cuts) but investment incentives (expensing, shorter depreciation).
  3. Glenn Hubbard says one true thing: the package was not a short-term stimulus package. He says one false--well, almost false--thing. Glenn Hubbard believes (and I believe) that if you run a deficit of $200 billion for one year and then return the budget to balance, that raises interest rates by 0.03%. (But if you raise the deficit by $200 billion and then keep that deficit at its higher level indefinitely, then the effect on interest rates is in the 0.5%-1.5% range.) And Hubbard does not say one important thing: the growth benefits from dividend tax cuts vanish if they are financed not by spending cuts but by higher deficits.
  4. For things to be this disorganized is strong evidence that Larry Lindsey was the worst Assistant to the President for Economic Policy since the job was invented: his job is to organize things so that meetings like this one are structured and coherent.
  5. One almost feels sorry for Bush. His Treasury Secretary thinks he cannot remember whom the members of the Business Roundtable are. His advisers are all trying to manipulate him by inserting phrases they think push hot buttons into their statements. People like Karl Rove talk way over his head about the number of years the tax code allows businesses to take to amortize asset purchases. Josh Bolten and Glenn Hubbard allow him to misinterpret what Hubbard's claim that a $200 billion deficit raises interest rates by only 0.03% means. One almost feels sorry for Bush. But not quite. One feels sorry for the rest of us.

p. 305: [Karen] Hughes... stopped the proceedings. "But there is uncertainty in this economy," she said.... "Real uncertainty that this won't solve."...

Bush stopped in midstride and looked hard at Hughes. He was silent for a moment. "The economic uncertainty is because of SEC overreach," he said pointedly.... O'Neill couldn't beleive what he was hearing--SEC overreach? No wonder the White House had backed off from... medicine for crooked executives... ceded the corporate governance debate to Congress. How, though, could the President believe the largely overwhelmed SEC had any significant effect on the vast U.S. economy?

p. 191ff: O'Neill, meanwhile, would head up the first active assault: the financial war [on terror]. But how? Over the next few days, O'Neill met with David Aufhauser, who, he decided, should act as an honest broker... organizing a fractious interagency group to track terror assets... seize some assets, and quickly. The President was to announce the new executive order on September 24[, 2001], launching the war on terrorism. He needed some assets to point to. "It was almost comical," Aufhauser said. "we just listed out as many of the usual suspects as we could and said, Let's go freeze some of their assets."

There were signs of trouble even before the Bush team took over. During the transition, Treasury Secretary-designate O'Neill had his first-ever extended discussions with Mr. Lindsey, who had served as Bush's economics tutor and would head the National Economic Council. Mr. O'Neill found Mr. Lindsey astonishingly bleak. "Larry was sure that we were on the brink of disaster ... and was convinced that deep tax cuts were the cure," Mr. O'Neill recalled. "Larry had grown up drinking the supply-side water," Mr. O'Neill said, meaning Lindsey believed that cutting tax rates spurs economic growth sufficient to stimulate offsetting tax revenue. But, Mr. O'Neill added, "He never mentioned this philosophy to me. I figured it was out of his system, [as with] most everyone else." Mr. O'Neill, a former deputy White House budget director, was more inclined to avoid budget deficits even if it meant forgoing tax cuts.

Mr. O'Neill began to view Mr. Lindsey as a partisan for deep tax cuts rather than an honest broker of competing proposals -- an advocate of one point of view who would soon sit about 30 feet from the Oval Office and a president with no experience managing national economic policy.

It would be important to pick his moment carefully to make his concern known. It was late on a weeknight. Two lifelong workaholics were still at their posts: Mr. O'Neill and Dick Cheney.

He marched to Mr. Cheney's office. "Dick, I think we need to talk," Mr. O'Neill said. He reasoned that Mr. Cheney would understand the importance of establishing sound processes to manage the White House and executive branch -- entities that were truly beyond human scale. Mr. O'Neill said that he was concerned that Mr. Lindsey was masquerading as the honest broker and was anything but. Without strongly positioned honest brokers and a rigorous, disinterested vetting of various proposals, Mr. O'Neill said, "all you've got are kids rolling around on the lawn."

The need to really "run the traps" on every potential presidential move was more important for this Bush than for his father or Gerald Ford, both of whom had vast experience in the federal government. God knows, Mr. Cheney would understand that as well as anyone.

Mr. Cheney listened, nodded, listened some more. Dick was not a talker. It was easy to paint what you hoped to see on Dick's concerned, pensive mien. But you could never be certain what he was thinking or what he would do. Mr. Cheney thanked Mr. O'Neill for his insights, and Mr. O'Neill left feeling that he had done his duty.

Mr. Cheney welcomed Mr. O'Neill and Federal Reserve Chairman Alan Greenspan into the foyer of his two-story brick town house, where boxes were packed for the move to the vice president's mansion. It was late in the afternoon of Jan. 14, the Sunday of the final week of the transition. They settled at the kitchen table, three men in ties, blazers, and slacks, CEO casual, making final preparations for the coming era.

They raced across topics, a kind of review of what had been already decided by the president's closest advisers. The president-elect had said little about foreign affairs during the campaign or since. Domestic issues were all anyone was focused on. The tax cut was the priority, they all agreed. After the close election, Mr. Cheney said, it was important that the new president score a clean victory on taxes. If it went the other way, opponents would feel empowered and all anyone would talk about was how he'd lost the popular vote.

But Mr. Cheney, speaking often to Mr. Lindsey, had been concerned that the economy was weakening fast -- a central issue both materially and tactically to the tax cut -- and asked both men to give their views.

Mr. O'Neill gave his "don't panic" rendition of what the numbers said and then added, "The best, first stimulus, truth be told, may be monetary policy." Leave it to the Fed and the power of lower interest rates.

Two hours passed. Mr. Cheney moved to close the circle. The shape of things to come? Tax cuts, Mr. Cheney said, front and center. A task force on energy, which he would run. And everyone stay in close touch about the condition of the economy. All other matters would move on a slower track. Mr. O'Neill left the meeting with a glimpse of the future: that Mr. Cheney would be the most powerful vice president of modern times.

When a president doesn't offer explanations, even to his most senior aides, the problems are many. Mr. Bush often ascribed action to a general "I went on instinct" rationale, leaving Mr. O'Neill and others in the cabinet to ponder the intangibles that drove the president -- from some sweeping, unspoken notion of how the world works to a one-size-fits-all principle, such as "I won't negotiate with myself."

Sitting in his office in mid-July, Mr. O'Neill sketched some notes for another serious talk he wanted to have with Mr. Cheney about effective process -- a way to handle decision making so that policy didn't get served half-baked and larded with political calculations. In his personal experience, the president didn't appear to have read even the short memos he sent over. During his weekly one-on-one with Mr. O'Neill, Mr. Bush sat, often for an hour, offering no response. He rarely asked questions in meetings. "The only way I can describe it is that, well, the president is like a blind man in a roomful of deaf people," Mr. O'Neill said. "There is no discernible connection."

Mr. O'Neill thought about how to add fiber to the policy process in this White House, and about how to persuade Mr. Cheney to take the lead. "I realized it would be hard to find things we did with Nixon or Ford that would be applicable for this president," Mr. O'Neill said later. He recalled Mr. Bush's unresponsiveness in large and small meetings. "This president was so utterly different from those men."

He stopped by Mr. Cheney's office. The fears he had harbored during the transition -- about "kids rolling around on the lawn" -- had been confirmed, he said. "You can't just move on instinct. You end up making too many mistakes," Mr. O'Neill told the vice president. "We need to be better about keeping politics out of the policy process. The political people are there for presentation and execution, not for creation." As before, Dick nodded. He thanked Paul, as always, "for his sharp insights."

On Sunday, Feb. 10, Mr. O'Neill and Mr. Greenspan went to the vice president's house for lunch. They sat in elegant wicker chairs on the sun porch while Mr. Cheney talked to them about steel. As Mr. O'Neill had warned the president in their very first meeting a year before, steel had become a problem. Mr. O'Neill's deep understanding of this industry from his days as chief executive of Alcoa had finally been tapped. There was dumping of steel onto the market by other countries, marked by so-called surges of lower-priced foreign steel. There were ways, Mr. O'Neill said, to get major steelmakers from the U.S. and overseas to the table to reduce the industry's excess capacity.

But another view was advancing -- the view that steel was mostly about politics, not about economics or the principles of free trade. There were political debts to pay. During the campaign, Mr. Cheney had made a commitment of support to steelworkers in West Virginia, a state the ticket carried. Karl Rove, the White House political director, was looking at Pennsylvania, Ohio and Michigan as crucial states in the upcoming midterm elections. They were inclined to impose major tariffs on imported steel, as a way of helping domestic steelmakers and protecting jobs in those states.

What's more, the White House legislative staff was hoping that it could trade support for steel tariffs for a vote or two in the Senate for legislation giving the president authority to reach trade agreements largely without congressional tinkering.

Mr. Cheney told Mr. O'Neill and Mr. Greenspan that Mr. Bush and he were going to make a decision on the steel issue. But, clearly, Mr. Cheney didn't want to end up in open debate with Mr. O'Neill, whose stance opposing curbs on steel imports was well informed, or with the unmanageable Mr. Greenspan, chairman of an agency independent of the White House.

So, he had granted them an audience. They were getting in early, he told them, before the battle started in earnest. Both men knew that the debate would be intensely political. Now was their chance, Mr. Cheney told them, to discuss their view of "the right thing to do." Their positions would be duly noted; there would be little more that they needed to say. Mr. Cheney said, "We'll make our decision and, then, that'll be that."

Mr. O'Neill and Mr. Greenspan both made the case that the largely bipartisan consensus on free trade was one of the great victories of the last decade; that the president would confuse many constituencies by flouting that consensus. Mr. O'Neill explained that tariffs would do little to offer long-term support to the U.S. steel industry. Mr. Greenspan pointed out that tariffs might actually violate certain World Trade Organization agreements. Mr. Cheney didn't show his hand. Mr. O'Neill left concerned that the meeting was largely tactical -- that the vice president had already made up his mind.

At 2 p.m. the next day, Feb. 11, a small army entered the White House Situation Room for a showdown. It was officially a National Security Council meeting, but the chamber was crowded with people who didn't spend much time at this table.

Robert Zoellick, the U.S. trade representative, and Commerce Secretary Don Evans laid out the issues. The International Trade Commission had recommended a range of tariffs in response to the surge in steel imports in 1999 and 2000.

Before getting into the main battle, a few of the players laid down markers for key constituencies. National Security Adviser Condoleezza Rice emphasized the importance of exemptions for Canada and Mexico. Mr. Zoellick discussed the idea of a pilot program to assist with the health care and pension benefits of steelworkers who lost their jobs, and then made several oblique references to the need to be mindful of "political realities." Mr. Cheney asked about the excess capacity in the U.S. steel industry compared with that in other countries. He was looking for a bit of us-versus-them capital with the Europeans to pressure them to shut some of their steel mills. In fact, almost three-fourths of the world's overcapacity was in the U.S. and Japan. The facts seemed to be going against Mr. Cheney, as he tried to build a case for tariffs.

Mr. Evans, who had been having regular tutorials with Mr. O'Neill, mentioned that "we actually have seen a 6% increase in price in the U.S.," a fact that undercut claims by American steel producers that dumping was driving down prices. "Whatever we do," Mr. Evans added, striking a note for free trade, "we have to be true to our principles."

Mitch Daniels, the budget director, then blurted out, "If you can't do the right thing when you're at 85% approval, then when can you do the right thing? I think it's time to say no."

Everyone looked with surprise at Mr. Daniels, who had a way of expressing what others are thinking but won't say. His comment seemed to tip the room. Is there any point, Mr. Daniels's outburst implied, when the political team says they have enough advantage that they are satisfied with their franchise and not constantly twisting the arm of policy?

Mr. O'Neill wondered about this as he broke his silence, which was so out of character it was drawing notice. "Well," he said, "certainly, there should be a high hurdle before we take this step" of imposing tariffs.

Soon the meeting was a free-for-all. "I think we have a split here," Ms. Rice said. "Do we take this to the president?"

This is what Mr. Cheney had been hoping to avoid -- a split. In fact, it was anything but a split. Nearly everyone seemed on one side; Mr. Cheney and Mr. Zoellick were on the other. A consensus on sound policy was colliding with a political favor.

Secretary of State Colin Powell spoke. "Why are we thinking about doing this?" he asked in frustration. "I have heard good reasons today not to do it, but I haven't heard one good reason to move forward with tariffs. We can't even say this will improve our steel industry."

Finally, it came back to Mr. Cheney. He mumbled that "imports are, in fact, way down from the surge. ... Our minimills are competitive," all arguments against tariffs. But then he added that whatever we do, the tariff-empowering statute says "we can review this in 18 months."

In other words, if what we do now is go with tariffs, it will be political bait, and in 18 months -- after the 2002 midterm elections -- we can effect the switch. Meeting over. [In March 2002, Mr. Bush imposed tariffs, though not as large as the steel industry sought. He lifted them in December 2003 after the WTO ruled that they violated global trade treaties.]

Mr. Cheney had shown up at a few of the regular meetings of the economic team. He didn't say much -- he never said much -- but his presence seemed to quiet the combatants, especially Mr. O'Neill and Mr. Lindsey.

Now, the group was meeting on the vice president's turf. As the meeting in Mr. Cheney's office progressed, it became clear that the vice president was ready to weigh in on what the president should do to bolster the economy, and his standing with voters worried about the economy, as the second half of his term began.

A package of tax proposals, led by a 50% cut in the individual tax on dividends, had been all but buried since Mr. O'Neill took his stand against it in early September. It came up infrequently, and always in the past tense -- what the administration was thinking of doing but couldn't afford.

After the midterms, though, Mr. O'Neill could sense a change inside the White House, from Messrs. Rove, Lindsey and others. A smugness. No one mentioned to Mr. O'Neill that the proposals were back on the launch pad. They knew better.

Now Mr. Cheney mentioned them again, how altering the double taxation of dividends would provide some economic stimulus.

Mr. O'Neill jumped in, arguing sharply that the government "is moving toward a fiscal crisis" and then pointing out "what rising deficits will mean to our economic and fiscal soundness."

Mr. Cheney cut him off.

"Reagan proved deficits don't matter," he said.

Mr. O'Neill was speechless, hardly believing that Mr. Cheney -- whom he and Mr. Greenspan had known since Dick was a kid -- would say such a thing.

Mr. Cheney moved to fill the void. "We won the midterms. This is our due."

Mr. O'Neill left Mr. Cheney's office in a state of mild shock. Yes, he knew Mr. Lindsey believed this brazen ideology. And Mr. Rove, and others. But to hear it from the vice president seemed to stop the world turning. The inscrutable Mr. Cheney had finally shown himself.

As he walked back to his office, Mr. O'Neill took Mr. Cheney's statement and started to pull it apart. Of course, in Mr. O'Neill's view, one of the most significant things Ronald Reagan proved was that deficits do matter -- and matter profoundly -- as demonstrated by the fact that undoing them took near 20 years of fiscal policy.

In January 2003, Mr. Bush proposed making dividends tax free to shareholders altogether. Congress didn't go that far, but did agree to reduce the top tax rate on dividends to 15% from 38.5%. By that time, Mr. O'Neill was back in Pittsburgh, fired in a Dec. 5 phone call from his longtime friend Dick Cheney.

Posted by DeLong at January 11, 2004 01:17 PM | TrackBack

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