October 28, 2002
Why Are We Ruled by These People?

The Wall Street Journal's Alan Murray seems pushed to the edge of despair by the... fecklessness is the word, I think... of Treasury Secretary Paul O'Neill:


WSJ.com - Political Capital: ...Treasury Secretary Paul O'Neill seems to think he can talk the economy to good health. "The latest indicators look good," he told an audience at the University of Chicago last week. Really? Not the index of leading economic indicators, which has been down for four months in a row. Nor industrial production, which has been down two months in a row. Nor consumer confidence, which has been falling since midsummer. Nor automobile sales, off sharply from their summer highs. Nor sales at big retail stores, down last month. Nor durable-goods orders, which plummeted 5.9% in September.

Mr. O'Neill often reminds people that his record as a forecaster is as good as anyone else's. Fair enough. But we're not talking about forecasts here; we're talking about facts. The Treasury secretary should know better. He has long been friends with the nation's top economist, Federal Reserve Chairman Alan Greenspan. The two men talk frequently. But one has to wonder whether Mr. O'Neill has been listening of late. The Fed chief's view of the current economy is far less sanguine than Mr. O'Neill's, which is why further interest-rate cuts may be in the cards...

Despite O'Neill's Happy Talk,
Uncertainty Damps Economy

Treasury Secretary Paul O'Neill seems to think he can talk the economy to good health. "The latest indicators look good," he told an audience at the University of Chicago last week.

Really? Not the index of leading economic indicators, which has been down for four months in a row. Nor industrial production, which has been down two months in a row. Nor consumer confidence, which has been falling since midsummer. Nor automobile sales, off sharply from their summer highs. Nor sales at big retail stores, down last month. Nor durable-goods orders, which plummeted 5.9% in September. Mr. O'Neill often reminds people that his record as a forecaster is as good as anyone else's. Fair enough. But we're not talking about forecasts here; we're talking about facts.

The Treasury secretary should know better. He has long been friends with the nation's top economist, Federal Reserve Chairman Alan Greenspan. The two men talk frequently. But one has to wonder whether Mr. O'Neill has been listening of late. The Fed chief's view of the current economy is far less sanguine than Mr. O'Neill's, which is why further interest-rate cuts may be in the cards.

"June and July looked good," says former Federal Reserve Board member Laurence Meyer. "In September and October, it looked like the economy was decelerating more rapidly." Mr. Meyer now predicts growth of just half a percentage point in the current quarter, which as he notes, is "pretty close to zero."

There is one continuing bright spot in the American economy: housing. Thanks to low interest rates, Americans are engaging in an orgy of home-buying and refinancing, despite the other signs of economic weakness that surround them. The strength of the American housing market and the equity Americans are pulling out of their houses, is the shaky pillar on which the global economy now rests. But how long that pillar can hold is a matter of debate.

It's no coincidence that the economy's stall seems to coincide with the beginning of President Bush's campaign to wage war against Iraq. It's not that war is necessarily bad for the economy. Rather, it's the buildup toward war. Faced with the huge uncertainties associated with an assault on Iraq and faced with an economy that is providing little incentive for investment, businesses and investors are choosing to sit on their hands and wait for the clouds to clear.

Once the threat of war has passed, then Mr. O'Neill's optimism may prove warranted. The U.S. economy, after all, is still operating with less than 6% unemployment -- a level that in the past has been associated with booms, not busts. Mr. Greenspan argues that the economy's underlying productivity gains from new technologies appear to be continuing.

And even the housing boom looks to be on fairly solid ground. Fed officials agree with administration economists that a housing "bust," of the sort that hit the Nasdaq, is unlikely. Increases in housing prices can be explained largely by lower interest rates, rising incomes and demographic trends. And any fall in housing prices will be limited by the simple fact that people can't sell their homes as readily as they would unload a dot-com stock.

That means, that the best tonic for today's economic problems isn't new tax cuts or an economic-stimulus bill or even another Fed rate cut, but a successful war or a bloodless end to Saddam Hussein's regime. If arms inspections in Iraq simply delay the date of action, then the date of an economic revival may be delayed as well.

For months, pundits have been debating which is the bigger issue: war or the economy. But that debate is now over. War and the economy have become the same issue. And as long as they remain linked, many investors and businesses will want to wait until they see signs that the war is going well before making risky decisions.

* * *

Postscript: A number of people whose views I respect have chided me for a line in Political Capital last week about the struggle over who should head the new accounting-oversight board. I wrote that former FBI and CIA director William Webster is "78 years old, and it shows." Not so, say some of his distinguished tennis partners, who insist Mr. Webster is young for his age. So I'm backing off. William Webster is still the wrong man to head the new accounting-oversight board -- a job he was handed at an emotional Securities and Exchange Commission meeting on Friday. But he apparently plays a good game of tennis.

Posted by DeLong at October 28, 2002 08:43 PM | Trackback

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Am I right in thinking there is an election next week? What does Murray expect O'Neill to say? His position in the cabinet is or should be precarious enough as it is.
I thought all WSJ journalists were hard bitten, real-politik types. Given the way the NYT is going maybe I should start to read it.

Posted by: reghall on October 29, 2002 09:45 AM

OK, enough O'Neill bashing already!!! Why waste any intellectual thought on the guy.

The guy is NOT the Tresury Secretary in the true sense. He is just another political drone at the behest of the Whitehouse/Republican controlled by money. If their polling numbers told them that the hardcore, spoon-fed right wanted to hear that God made the earth flat, and they wanted to hear it an economic source, they would trot him out to say just that. If pressed, he would answer he is anti-choice, anti-tax, anti-gun control, would much rather spend money on defense to futher enrich his buddies than spend it on education etc. The guy is simply a mouthpiece, drooling at the chance to jump on every corporate board he can after his stint in DC. EVERYTHING coming out of Washington, from both sides, at this point is mindless drivel to claim some votes.
WOW! I feel much better now!

Posted by: BEM on October 29, 2002 10:55 AM

But the questions posed is not why does O'Neill act this way; it's quite clear, as you say, that it is purely political. The question is why are we ruled by these people? why don't we have a competent Secretary of the Treasury? Why don't we have an honest Administration? I fear it bodes ill for the future of our country.

Posted by: Dennis O'Dea on October 29, 2002 06:16 PM

I guess took the question as more rhetorical to point out that O'Neill is a goofball. As to the literal question, why are we ruled by these people? To me it's simple...money. Corporate interests currently buy better marketing. Grab on to a few hot-button issues that appeal to a vast majority of simpletons that vote, then you have free reign to manipulate issues that sail above their heads.

During his 1956 presidential campaign, a woman called out to Adlai Stevenson
"Senator, you have the vote of every thinking person!"
Stevenson shot back
"That's not enough, madam, we need a majority!"

Even at the local level you see it. Our Cincinnati city government has Charlie Luken riding the coattails of his Congressman father. Phil Heimlich is riding the coattails of his famous father, he of the manuever fame. David Pepper of son of Proctor & Gamble former CEO and president John Pepper. Pat DeWine is the son of Ohio Senator Mike DeWine. Vice mayor Alicia Reece is the daughter of local executive Steve Reece. All of these people are where they are today because of Daddy's money and position. I don't see any change on the horizon. These same people are waiting for the chance to run for Congress and continue the cycle. I agree with you, it does not bode well for the future.

Posted by: BEM on October 29, 2002 08:22 PM

To Dennis:

a) I guess you forgot this is a democracy. (Of course it may not remain so. Democrats seem to think that elections should be won by the judiciary (heck, laws should be made by the judiciary), rather than by following the rules (created by elected legislators) and actually winning a majority. THAT's what doesn't bode well for the future. We'll end up like Europe - controlled by elites who are out of touch with the common man.
b) I agree that the Sec. of Treas. could be more competent. But come on, it's not a position of power. All he can do is blab. His job is to blab. Just like the chairman of the council of economic advisors has to blab, on occasion. If you know any of these guys, as I do, you know this is true.
c) Yes, the previous administration was SO honest - paragons of virtue. Please.
d) On balance, corporations favor Republicans. Dems are in turned overwhelmingly supported by Big Unions (especially teacher's unions), Big Trial Lawyers, Big Hollywood, and some industries like abortion providers. Everyone is, to some extent, bought.

Posted by: Randy on November 1, 2002 10:40 AM

I don't really have much of an opinion on O'Neill, but I also am stumped by what his critics expect him, or for that matter, George Bush, to say. "Everything's going to hell! Run for the hills!" Would that improve things?

Posted by: Jane Galt on November 4, 2002 11:18 AM
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