Let me pick up the memo to Paul O'Neill I discussed in the last post:
Here is the document:
MEMO
To: Secretary O'Neill
From: Michele
Date: Tuesday 2/27/01
Re: Tomorrow's Press Conference Unveiling the BudgetYou and Mitch Daniels...
Likely Questions:
- If some agency budgets are growing faster than 4%, some other programs must be growing below that rate. You are cutting some programs, are you not? Which ones?
There is plenty of duplication throughout the federal budget. We have dozens of programs in various departments all targeting the same problem. We need to figure out which ones are working, and target our resources accordingly.- Are you cutting Customs funding and letting up on the war on drugs?
We are beefing up the war on drugs. The President's budget spends $35 million on the Western Hemisphere Drug Elimination Act to improve interdiction.- You say the "non-retireable" debt is $1.2 trillion, while CBO puts it at only $800 billion. Why the difference?
OMB and CBO have different assumptions about buybacks over the next 5 years. OMB continues the previous Administration's insistence that we no project buybacks beyond the current year. We haven't adjusted that position because I do not have all my debt management officials in place yet at Treasury to conduct a full review. In either case, a substantial amount of debt remains in 2011. More importantly, even the CBO's estimate of a higher amount of potential debt reduction does not alter the allocation of the $5.6 trillion surplus. WE have committed to locking away the $2.6 trillion Social Security surplus is locked away where it can only be used to pay down the debt. That $2.6 trillion in Social Security surplus would cover all possible debt retirement even if the CBO estimates turn out to be accurate...
Let me stop there, because there is a technical term for that last projected answer. It is a deliberate, conscious, important lie. Michele Davis, Paul O'Neill, and everyone else who reviewed the document knew that it was a lie: a decision to misinform whoever listened to the briefing.
A staff analyst at OMB had made a mistake in calculating the amount of "non-retireable" debt. His number had been passed on to Karl Rove, Karen Hughes, and the speechwriters. They had then put the $1.2 trillion number into the State of the Union Address. Nobody had never checked the number with anyone in Treasury debt management.
When the New York Times's Richard Stevenson heard the $1.2 trillion number, he checked it: he called ex-Clinton administration Undersecretary for Domestic Finance Gary Gensler, who told him no, that the number wasn't $1.2 trillion but $500 billion. "Gensler's right, isn't he?" O'Neill asked his aides. According to Ron Suskind, there were "nods all around." Suskind writes, "O'Neill was incensed. How could the White House political staff 'decide to do things like this and not even consult with people in the government who know what's true or not,' he ranted. 'This is complete bulls***!'"
But then came something that was even more complete bulls***.
Paul O'Neill decided to lie in order to cover up. Hence the claim in the document above that the "non-retireable" debt was $1.2 trillion. And then O'Neill hunkered down. When questioned by senators why the Bush administration was saying $1.2 trillion when Gary Gensler said $500 billion, "O'Neill demurred that 'honest people can disagree on the total'.... He hated to do it, he recalled, 'but I decided that contradicting the President on this one was a battle I couldn't afford to fight'."
I remember hearing about this issue in the late winter of 2001. I have been told that he lost credit with senators that day, as he appeared out of his depth on be one of the Treasury Secretary's core competencies. I don't think the senators considered the possibility that O'Neill was lying to them to protect the heinie of some speechwriter who didn't know that you check debt-managment issues with the Treasury's debt managers. I can barely credit it myself.
Certainly in retrospect--and in prospect too--this was a battle that Paul O'Neill could not afford not to fight. The lesson everyone in the White House learned was this: Ignore the Treasury, diss it, and it will cover for you (and make itself look like it's staffed by idiots as well). A much better answer, in my view, would have been for O'Neill to say, "It's not $1.2 trillion and it's not $800 billion, it's $500 billion." And in response to the follow-up say, "The $1.2 trillion number was an error, and the text of the SOTU was not properly circulated to the people in debt management who would have caught the error. We apologize for the previous miscommunication. Some glitches like this are bound to happen at the start of any administration." That would have taught a very different lesson, and left Paul O'Neill with a much better internal and external reputation than what he did do. It also would have been the thing that an honest straight-shooter would have done.
Posted by DeLong at February 5, 2004 09:20 PM | TrackBack | | Other weblogs commenting on this postLet's post this to Brad for comment.
If the Chinese have locked their currency to ours, and as a martial economy, can continue to produce goods at the same labor prices as before, and are investing all their liquid capital (profits from WalMart) in Australia, where that capital becomes AU$ denominated, then no matter what happens to the US$, the Chinese will still have a net-zero ledger gain of 8% per year at the current rate, the best in the world.
Americans, in turn, will see no effect, except foreign agricultural surplus will get more expensive, grapes in winter, salmon and li da. Trips to Europe will become a thing of the past, but who cares if we save the California vintners?
But the 3rd world? Plunging US commodity prices, especially agricultural, will exacerbate an already horrible problem. A glut of food nobody can afford, driving farmers off the land they can no longer make payments on. Worldwide 3rd world depression. Anarchy.
Maybe the neo-liberals know what they're doing? Or maybe, just maybe, they're the toadies to a higher, richer power in Europe and Middle East.
Why else would the US$ see intervention last week, and then continue its precipitous decline in the face of EU laissez faire?
Brad? The portents and omens?
Posted by: Vic Tor on February 5, 2004 09:28 PMMy thought: "Gee... O'Neill doesn't seem to know what the ---- (as he would put it) is going on with U.S. finances, and no one seems to want to make sure he knows unless he wrenches the knowledge from their cold, dead fingers. I wonder how John Snow is doing in there."
Posted by: Julian Elson on February 5, 2004 10:37 PMUnmasking my ignorance: Why would Bush (and Rove and Hughes) think the higher deficit number is better to report in the State of the Union? Why did knowing this number have such importance to select Senators?
Posted by: Cal on February 5, 2004 11:51 PMVic Tor,
In the scenario you describe the US dollar will fall. But at the same time you presume that the Chinese will keep their currency locked to it. How do you think they will achieve that? The only way to do it is by buying dollars - in other words, treasury bonds, just like they do now. Basically they are helping to finance their exports to the US. That may sound ineffectual, like giving away a free lunch, but once they stop doing it, to invest "all their liquid capital in Australia" their exports will become too expensive for the US and they will hurt their own industries badly. That is, by the way, why I donīt expect a currency crisis, or something like that, very quickly, even if the Bush government will continue its irresponsible policies.
Ciao, M.
Posted by: Motoko Kusanagi on February 6, 2004 12:49 AM"Nobody had never checked the number with anyone in Treasury debt management."
I am just pointing out a minor grammar mistake.
But if the chinese buy oil from ME with the dollars, they are reported to be building a strategic reserve, the the ME has the dollars.
Posted by: big al on February 6, 2004 04:03 AMTreasury professionals are idiots. CIA professionals are morons. State Department professionals are inept. British intelligence is a joke (except when we can say they told us about transactions in fissile material that never actually took place). UN inspectors completely miss thousands of gallons of banned toxins and germ cultures. Standard textbook economics are hopelessly behind the times. A president who got into, and through, Yale on the strength of his father's position, is a genius, has all the right answers, even when the aswers change. A president whose only success in business came though nepotism at one remove is simply far better at seeing the right answer to complex budget issues than a man with vast public and private experience, and a pretty good won/lost record throughout his career on the strength of his own intellect and effort. The treatment O'Neill (and his staff) got is just the natural result of the overwhelming imbalance in intellect and moral quality between O'Neill and Bush.
Posted by: K Harris on February 6, 2004 04:07 AMThere is a pattern to the info discussed here. Bush fiscal policy has been made without good economic numbers. The Lindsey memo tells us the Bush tax cut was never examined for its effect on the budget. We know from the Rx flap that the recent Medicare bill was passed without Bush being aware of his own budget numbers. Now we see that Bush does not know that only $500 billion in debt can not be retired instead of the $1.2 Trillion. We also learn that the president does not want to be told he is wrong or corrected in public. We learn that this this passion is so strong that ONeill is willing to mislead Congress.
This is the CEO corporate style. The prescient CEO makes the decisions that are always correct and is surrounded by yes-men that validate his genius. The insiders with most access can bend the CEO ear to their latest scheme. Ideas become policy without careful debate and consideration of multiple POV. This is no way to run a country.
Posted by: bakho on February 6, 2004 05:16 AMThis validates what we already know. Administration budget and economic numbers are unreliable. Now we know part of the reason. They fail to check with the experts who know the numbers. If they make a mistake, they lie to cover up rather than correcting the number. Pathetic.
Posted by: bakho on February 6, 2004 05:23 AMCal: "Unmasking my ignorance: Why would Bush (and Rove and Hughes) think the higher deficit number is better to report in the State of the Union?"
Presumably because the larger the non-retireable debt, the less call for a larger surplus in order to have the money to actually retire debt.
This isn't just not wanting to admit that a mistake was made. It's a deliberate lie, substituting a number that the administration wants for one that it knows to be true.
I think that at some point, naivete will have to fall, and people will have to start admitting that all Republicans are dishonest and none of them can be trusted with the public business. I can't think of any counterexamples from the last few Republican administrations.
Cal: in answer to your question, the Bushies have committed to a 50% reduction in five years. The larger the deficit is now, the larger the deficit can be in five years and still meet this goal.
Posted by: Jonathan Goldberg on February 6, 2004 06:46 AMThanks Rich. But non-retireable debt: does this number change every year? I assume this means that the debt can be called/paid off under the terms, but the debt is not tachnically mature or due. This means that portions may not be retireable this year, but they can be in the future. Maybe you want to preserve a projected surplus or plan for a surplus (to the extent you can) so that as soon as the debt becomes callable the money is there to pay it off. Wouldn't a prudent administration report these numbers out thirty years in a chart in every budget?
Posted by: Cal on February 6, 2004 06:47 AMRich
"It's a deliberate lie, substituting a number that the administration wants for one that it knows to be true."
Same tune as the major corporations were playing with the expected return on their pensions funds, No?
I mean despite serious losses on the investments of these funds, they still claimed 9% expected gains to pad their income balances.
The apologists on their side will say that the next year, where the expectations are, will be different. This is another aspect of PK's 'looting the future'. Similarly here, discard the reality in the hope that tomorrow things will get better and we'll be able to pencil in the right numbers then.
Seems to be a practice with a short half-life.
This bit: "...all Republicans are dishonest" is going too far ( and I am not a Repub), but this bit, isn't: "this administration is totally...".
calmo: "All Republicans are dishonest" is trivially untrue since you need only find a single example to disprove it. But in context, what I meant was "All recent Republican administrations are dishonest". I mean, didn't Reagan set the mold for all of the kinds of dishonesty we're seeing now? Those that weren't adopted from Nixon, of course. And while Bush I was far more competent than Bush II, I think that it was almost equally dishonest. No new taxes, anyone?
What Brad Delong often refers to is the "adults" in the Republican Party, as if there is a group of people that are capable of saving it from within. There aren't. In terms of important people within the party, there are only either more or less competent crooks. If people realize that, they might stop delusionally expecting the Good Vizier to replace the Bad Counselors.
Posted by: Rich Puchalsky on February 6, 2004 07:50 AMI think we lose the battle when we resort to expressions like 'The Worst President', 'all Republicans are dishonest', etc.
Better to look at each case, better to look at each 'Republican' and reach a conclusion no matter how tiresome and monotonous.
Otherwise it's just singing and we are no better than the cheerleaders on the other side.
Leopold, a frequent contributor on this blog, stated that his reasons for being here were 'to have fun'.
Me? I'm like that dog in the stair well--not too sure they'll support me and need some serious cajoling to keep going.
So McCain doesn't have a scrap of credibility for you?
It's not "bull****"; it's "bull----".
Posted by: joe on February 6, 2004 11:38 AMNice site. Keep up the good work.
Posted by: phentermine on June 6, 2004 08:08 PMIn dentibus anticis frustrum magnum spiniciae habes - You have a big piece of spinach in your front teeth
Dominus tecum - May the Lord be with you (Singular)
Iniuria non excusat iniuriam - One wrong does not justify another
In absentia - In one's absence