I.O.U.S.A. (55 page)

Q:
Let ’ s revisit the conversation that you had with Vice President
Cheney prior to you being fi red. Can you discuss the difference
of opinion that you had in regard to tax cuts and defi cits?

Paul O ’ Neill:
Sometime after the election — it must have been mid - November — there was a meeting of the Economic Policy Group, including the vice president. As we sat at the table in the Roosevelt Room, we talked about where we were and where we were going. If I remember right, Glenn Hubbard made a presentation that was displayed on the screen at the front of the Roosevelt Room and showed where we were going and what different tracks looked like and GDP growth and the rest, including the effects of the proposed third tax cut. I made the c16.indd 217

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argument, which I had been making over and over again since maybe June or July, that it was not advisable to have another tax cut because of the need to fi x Social Security and Medicare and to have some money to smooth the fundamental redesign of the tax system. We needed to have in effect rainy - day money in the event that we had another 9/11 event — and at that point it looked like maybe we were going to go to Iraq, and it was not going to be cheap to do that.

So I argued that we should not have another tax cut because the economy was going to be in positive territory and doing okay through the next couple of years anyway without another tax cut, and there were all of these other compelling reasons not to risk a defi cit and not to risk adding more to the national debt.

And the vice president basically said, “ When Ronald Reagan was here, he proved that defi cits don ’ t really matter and so it ’ s not a consideration or a good reason not to have an additional tax cut. ”

I was honestly stunned by the idea that anyone believed that Ronald Reagan proved in any fashion, certainly not inconclusive fashion, that defi cits don ’ t matter. I think it is true on a temporary basis that a nation can have a defi cit and have a good reason for having a defi cit. I think the Second World War there was no way we could avoid having a defi cit, but when we came out of the Second World War we started running budget surpluses again and did that through the ‘ 50s and into 1960. It ’ s interesting, it ’ s really only been in the last 40 years or so that we ’ ve accepted the notion that it ’ s a bipartisan thing that we don ’ t have to have fi scal discipline.

A year ago there was this signing ceremony in the Rose Garden for the new Medicare prescription drug entitlement, and it ’ s going to cost us trillions of dollars. This event was not unlike any of the others in the Rose Garden on a nice sunny day, with the president sitting at the signing table with a bunch of grinning legislators behind him taking credit for this “ great gift ” they ’ re giving the American people. But none of their money was going to get given to make this happen, because the federal government doesn ’ t have any money that it doesn ’ t fi rst take away from the taxpayers.

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There was no mention of the fact that this in effect was a new tax on the American people, and we didn ’ t know how we were going to pay for it. It was only grinning presidents and legislators taking the credit for a gift, which strikes me as a ridiculous continuing characteristic of how we do political business in our country.

Q:
If we couldn ’ t afford it, why did we give it to the people?

Paul O ’ Neill:
If you can get 51 percent of the people in the Congress to agree with the President ’ s leadership initiative to say we ought to do this, that ’ s all it takes. And I think it ’ s regrettably true there are a lot of people who don ’ t understand that when they get a gift from the American people, it ’ s from the American people and it can only be paid for with taxes over time. I think the confusion is aided and abetted by the fact that it doesn ’ t feel like we ’ re paying for it. It ’ s a lot like running up credit card debt: As long as you can pay the interest charges on your credit card debt, you can live way beyond your means. In fact, we as a nation are living way beyond our means, and for a period of time, there ’ s no doubt we ’ ve demonstrated you can get away with it. But I think we only need to look at the fate of other countries who ’ ve lived beyond their means for a long time to see you inevitably get into trouble.

If you look at Germany in 1923, they got to a point where their currency was so worthless that you needed a wheelbarrow to haul the currency that was needed to buy a loaf of bread. You get infl ation where people stop investing in your national debt, when they say, “ We ’ re not going to loan you money because you ’ re not going to be able to pay it back. ” It ’ s the same thing that happens to individuals and families. When you get extended to the point that you can ’ t service your debt, you ’ re fi nished. You know, so you go through a calamity — either you go through a terrible infl ation, which is a way of having a national bankruptcy, and you destroy accumulated income and wealth, and in fact you have a taking from all the people because suddenly their fi nancial assets are worth nothing. You know, are we going to have that right away?

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for the American people, you bet — and now is the time to begin doing something about it.

One of the diffi cult aspects of this debt problem is that it ’ s not very transparent to people who are unschooled in fi scal and monetary policy. In a way, this problem ’ s a little bit like the famous example of if you throwing a frog into boiling water. If you throw him into the already boiling water, he jumps out right away. But if you put the frog in the pot of cold water and turn the heat on under it, the frog will let itself be boiled because it doesn ’ t respond to slow increase in temperature. Our debt problem is something like that. If we wait until we have a calamity and fi nancial markets shut us off because we ’ ve exhausted their belief that we can service additional debt, it ’ s too late. This is a problem that we need to deal with without letting the heat be turned up some more.

I would hope we can demonstrate we ’ re intelligent people that don ’ t wait until they create a calamity in their country before they deal with problems that are obvious to anyone who ’ s ever studied economic policy and fi scal policy and monetary policy. You only need to look around the world to see places like Argentina, Turkey, and Germany after World War II whose governments have effectively achieved a meltdown condition. Knowing this can happen to modern nations, we should not let it happen to ours.

Q:
What would you say to Americans who think economics is too
complicated to get their head around? Why is it important for
people to try to understand this and get a handle on it?

Paul O ’ Neill:
I think it ’ s really important for the American people to understand the basic principles that are involved in these issues. Otherwise it ’ s pretty diffi cult to make an intelligent choice about who should lead the nation. What do you want in a president? Are you happy to just have someone that seems to be charming and charismatic, or do you want someone that will make a diffi cult decision, or help us to make diffi cult decisions that are in the long - run interest of the people? I would argue we need to elect people who have deep values and leadership c16.indd 220

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characteristics that are probably expressed by a person who will tell you, “ I ’ m going to come and I ’ m going to tell you the truth about some things that you may not want to hear, but that you need to hear. I ’ m going to do my best to make them simple enough so that you can understand why we have to make some diffi cult choices. ”

I believe this is not all a bitter medicine that we need to take. I believe there are things that we can do as a nation that are good for the long - run condition of our nation, that reinforce the value structure of our nation. For example, to assure that when people get to be 65 years old, that they have fi nancial security. That is also consistent with becoming a truly saving nation, which is something we need to do.

Q:
Just going back to tax cuts one last time, do you have any
thoughts on why people say, “ Well, it goes back to the Reagan
thing: Supply - side theory says that tax cuts are all good because
it ’ s all going to work its way through the system and it ’ s all
good. ” Does that hold water? Does supply - side theory work
under certain conditions but not all conditions?

Paul O ’ Neill:
You know, I believe that it ’ s possible — not easy, but it ’ s possible — and for sure it ’ s desirable to have a simple tax system. I hate that the titles that get put on these things, but the idea of people paying, say, 15 percent or 20 percent of their income on a no - nonsense basis with no deductions and no credits has a lot of appeal to me. I believe simplicity is our friend in having a tax system that really works, and I think it ’ s also true the lower the tax rates, the better. But a modern nation like ours does need to collect money to pay for our needs that we share together, such as national defense or interstate highway system.

I also believe that in a just nation, all of the people who have means help to pay for the things that people who don ’ t have the means need. So, that if you have a very low income and you can ’ t meet your fundamental living needs, then we the people should give those people money. Now our tax code has been used and abused with tax credits and dependency allowances and the c16.indd 221

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rest to deal with this problem. I would much prefer that we did all of this on top of the table, partly because when you use the tax system for our social program purposes, people with very low incomes are left out. In order partly to adjust for that, we have a refundable tax credit which was instituted several years ago during the Clinton administration; it got some momentum and it ’ s been carried forward. I would much prefer that we be grown up enough so that we faced the fact that some people need fi nancial help from the people of the United States and we should write them a check.

And similarly, you know, we have tax deductions for mortgage credit because we believe (and I think this is a correct belief) that it ’ s a valuable thing for people in the United States to own their own home. But I wouldn ’ t do it with a tax credit or with mortgage deductions. I would do it by deciding how much do we want to encourage people, and then I would write them a check. I would write them a check so that we do all of our fi nancial business on top of the table instead of by stealth, instead of by discriminating among people based on their income level. I ’ d much rather help people in a straightforward fashion that has no obfuscation, no mystery, and no inequity because people with lower levels of income can ’ t use credits and deductions.

Q:
You and former Federal Reserve Chairman Alan Greenspan have
been friends for quite some time. How did that come to be?

Paul O ’ Neill:
I got to know Alan Greenspan in 1969 because he was the chairman of the Transition Group for Economic Affairs for the Nixon administration and I was in the Offi ce of Management and Budget. I got to know him then, and over the years, even after I left the government and he came back to be head of the CEA in the Ford administration, we worked really hand - in - glove during that time. After we both left the government, before he became the Fed chairman, I saw him in other settings. He was the president of a fi rm called Townsend Greenspan, I was in International Paper, we were both still interested in public policy. Then he was on the board of International Paper and I became president during that time. Also, I got recruited to be on the board of ALCOA and Alan c16.indd 222

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Greenspan was on the board of ALCOA, and had been of counsel and a board member at ALCOA for a long time. So our friendship was long - standing and around lots of issues, both public and private.

Q:
Correct me if I ’ m wrong — he ’ s the person who might have
made the deciding phone call when you were weighing whether
or not you wanted to come to Treasury?

Paul O ’ Neill:
Yeah, that ’ s true. When I was thinking about whether I should come to the Treasury, I had met with the president and the vice president in Washington at the Madison Hotel. I told them I would call them the next day and let them know whether I was going to accept or not, but I needed to talk to my wife fi rst. So I went to New York for a board meeting, and I was at the hotel that evening after the meeting with the president -

elect and vice president - elect, and Alan Greenspan called me there. They had called him, I guess, and asked him to call me and tell me how important it was that I come to the government and how much he would enjoy working with me again in a direct way.

And I appreciated this, but I thought it wasn ’ t going to make any difference because my wife ’ s opinion was a lot more important.

And she didn ’ t think I should do it, but was okay with me doing it if I thought it was the right thing to do. She was pretty sure it wasn ’ t the right choice, and as this has often turned out in life, she was right and I was wrong.

But in any event, early in the administration, we started working on a policy formulation, including the shape and dimension of a tax cut. Alan was deeply involved in those conversations and, of course, had a lot of standing with people in the Congress and in the nation, because he was looked at as an honest broker who would have a clean opinion about what ought to be done, what ought not to be done. During this conversation, I said to Alan that I thought this tax cut was okay, but that one of the diffi cult things to cope with was the reality that economic conditions might change, and if they change we might wish we had some of that revenue back that we were now talking about giving up on the c16.indd 223