Fire Paul O’Neill

With the U.S. economy still showing worrisome signs of a deep recession, the House last week passed a $100-billion fiscal stimulus plan by a near party line vote of 216 to 214. A tax cut stimulus plan absolutely is needed to resuscitate growth. The House bill is a modest plus for the economy, but the Tom Daschle-led Senate is very likely to eliminate the pro-growth provisions in it. The final deal that congressional leaders are now patching together will not stimulate the economy at all—and may actually do more harm than good for the nation’s financial affairs. While the House bill contains some beneficial provisions, such as business tax cuts and reduction in some personal income tax rates, if the Democratic leadership gets its way, the stimulus package could be crammed with tens of billions of dollars of additional government spending programs (on top of the 8% spending increase already approved for next year) and a goofy $13-billion "tax rebate" plan for people who don’t pay any federal income taxes at all. Even the House bill offers only a modest, probably insufficient, dose of steroids for the economy. Some 85% to 90% of the tax reductions would expire in two years or less. Temporary tax cuts mostly alter the timing of economic activity rather than the long-term level of production and consumption. The Democrats, not surprisingly, want the stimulus to tilt almost entirely in the direction of new federal spending. Yet, few if any of those programs would be temporary in nature. Congressional appropriators offer the gift of eternal life when they create programs. In the last four years not a single federal program of consequence has seen its budget expire. Moreover, Congress has already approved an excessive spending stimulus in its normal order of business. This year’s appropriations bills will grow by at least 8%, and that doesn’t even include the $40 billion in new spending approved in the week after September 11. Such spending sprees do not help stimulate the economy, they depress it. Japan’s government has tried to spend and borrow its way out of recession for 11 years, only to continue to sink deeper into an economic morass. The big story emerging here is that President Bush’s top economic adviser, Treasury Secretary Paul O’Neill, seems to agree with Daschle and House Minority Leader Dick Gephardt (D.-Mo.) that, when it comes to tax cuts, small is beautiful. O’Neill criticized the modest tax cuts in the House bill as "show business," which has infuriated conservatives such as House Majority Leader Dick Armey (R.-Tex.) and House Majority Whip Tom DeLay (R.-Tex.), who believe that O’Neill was undercutting their ability to negotiate a strong growth package with the Democrats and the Senate. That may have been by design. The White House has become so hyper-obsessed with preserving the aura of bipartisanship in Washington, the administration has effectively given Tom Daschle and Dick Gephardt veto power over our nation’s economic policy. They’re exercising their new powers by stymying any attempt to pass genuine economic growth policies. An economic revival in 2002 may not even be in the political self-interest of Daschle and Gephardt, who would like nothing better than to try to gain commanding majorities in the House and the Senate by running against the "Bush recession." Now in fairness to the White House, the media have raised their double-standard for political news coverage to new heights in recent weeks. Whenever, President Bush or congressional conservatives vocalize support for perfectly sound and rational policies—such as cutting capital gains taxes, accelerating the tax rate cuts in the original Bush package, insisting that tax cuts be the emphasis of the stimulus bill—they are skewered for piercing the veil of bipartisanship and trying to "exploit the disaster of September 11 for partisan gains." Democrats are rarely accused of trying to capitalize on the economic and military crisis to advance their left-wing agenda of more funding for federal social programs, raising taxes on "the rich," federalizing 28,000 new airport employees, and extending unemployment benefits to hundreds of thousands of laid-off workers. Popular President Must Lead President Bush must not engage in unilateral political disarmament for the sake of preserving a bipartisanship that is nonexistent on economic growth issues. The near-unanimous support for the war effort just hasn’t translated to the same high-mindedness on the domestic front. During the debate over the House bill, Texas Democrat Lloyd Doggett actually sank so low as to ask House Ways and Means Chairman Bill Thomas (R.-Calif.) whether there were any "tax breaks for Osama bin Laden in the bill." Doggett is a real charmer. If President Bush will only lead on the economy, Republicans and Democrats in Congress will almost certainly follow him. The President now has an 85% approval rating, and few on Capitol Hill are likely to want to face their voters after having torpedoed a major initiative by such a popular President. That is particularly true on the stimulus package, given that reviving our economy is critical to defeating the terrorists and their evil mission. Bush should start to redesign his economic game plan by firing Paul O’Neill and replacing him with either Steve Forbes or the retiring Sen. Phil Gramm of Texas. Either of these candidates would be a hawk on economic growth. This bold move would send resounding signals to the financial markets that Bush is fully committed to sound economic growth policies. O’Neill does not accomplish this for Bush. On the policy side, the White House must endorse a package of Reaganesque tax cuts to get us back on the bull market prosperity path of the 1980s and 1990s. This package must include a substantial capital gains tax cut; an acceleration of tax rate cuts that were in the tax bill that was signed into law this past May, and tax cuts for business to get industrial production and employment back up to their pre-September 11 levels at least. The conservatives on Capitol Hill whom I have talked to agree almost unanimously that Bush has a vast storehouse of political capital that he must now use or lose. He has proven that he can inspire the American public with his grit and determination to destroy the terrorist threat. But political capital is perishable—as George W. should have learned all too well from his father. There are two wars being fought. One is the war on terrorism. The other is fending off economic decline here at home. The President’s skill and attentiveness to the former stands in stark contrast to his handling of the latter.