Fire Paul O'Neill? Not Yet
Jude Wanniski
October 24, 2001


Memo To: Treasury Secretary Paul O'Neill
From: Jude Wanniski
Re: Fiscal Show Business

The National Review, I see, has joined the small but growing list of conservatives who are calling for your scalp. CATO's Stephen Moore, president of the Wall Street "Club for Growth," thinks you may be shaping up as the "Dick Darman" of the Bush administration. In case you have forgotten, it was Darman who, as director of the Office of Management and Budget in 1990, helped cut the deal with the Democratic Congress that tore up the "read my lips, no new taxes" campaign pledge of George the elder when he ran for President in 1988. Darman was certainly complicit in the White House decision to go that route, but he had plenty of help, from Fed Chairman Alan Greenspan and Senate Minority Leader Bob Dole (who was once described as "the tax collector for the welfare state). But it was really then Treasury Secretary Nick Brady, the President's best pal back then, who provided the critical push. If Brady had lifted his pinky finger in opposition, there would not have been the deal that not only raised tax rates, but also abandoned the other 1988 campaign pledge of George Bush to cut the capital-gains tax to 15% from 28%. Dick Darman actually tried to deliver on that pledge in 1989, but failed when he was outmaneuvered by Senate Majority Leader George Mitchell and Bob Dole threw in the towel.

You are really not in the same boat with Darman, Mr. Secretary, but conservatives have become so frustrated with the decline of the economy this year that they have decided to make you the scapegoat. They only have themselves to blame. Long before you hitched your wagon to the Bush campaign, conservatives like Steve Moore and Larry Kudlow (National Review columnist) were climbing into bed with the conservative Keynesians that gathered around Texas Governor Bush in early 1991 as he prepared for his run. I was appalled at the time and said so publicly, when I saw him pick former Fed Governor Larry Lindsey as his chief economic advisor. Larry was once a second-rate economist, but after spending several years rubbing shoulders with the bureaucratic Keynesian Ph.D. economists at the Fed, he has become third rate at best. It is Larry Lindsey who should have been fired long ago for his simple-minded demand-side nostrums about "putting money into people's pockets." But when so many well-meaning conservatives, including Jack Kemp, fell all over themselves in schmoozing Lindsey and his tax plan for the economy, how can they now be calling for his head? You see what I mean?

The only reason Im able to hang back from that lynch mob is that I fingered Lindsey and his team from the very start the same right-wing Keynesians from Harvard and Stanford who counseled our President's father. That's "the only reason," though. I've explained to my clients at Polyconomics that you have been a good soldier so far, marching into enemy fire on Capitol Hill in defense of a tax package that never impressed you to begin with. When you came out the other day with your comment that the tax bill emerging from the GOP House Ways&Means Committee was in good part "show business," you were right. There is very little in the bloated package that would have supply-side growth effects. But it would not have made so many conservatives angry if you had been more aggressive these last several months in taking part in shaping the overall administration policy to the domestic and international economy. Once you accept the idea that Lindsey runs fiscal policy and Alan Greenspan runs monetary policy, including the foreign-exchange value of the dollar, there really is nothing much for the Treasury Secretary to do except straighten out the furniture in the Treasury building. You have been "passive," the word I chose in a client letter I sent you a copy of in August. From my Wall Street clients, I've heard "dead weight," "invisible," and "rudderless."

As you know, I've been disappointed in your lack of interest in my deflation arguments, but there too I have to say it is no surprise given the fact that the same people who are after your scalp have shown no interest in it either. The economy is being dragged down by this slowly-growing monetary cancer, but if my old colleagues at The Wall Street Journal show no interest in taking it up, why should I expect you to do so? Maybe I do because you are the Treasury Secretary for the most important country in the world, and when our economy suffers from this cancer, the whole world suffers too. Larry Lindsey will never delve into this because it would involve an implicit criticism of Greenspan. And as I told you in March, when I explained the problem to you in your office, I specifically warned that because Greenspan five years ago dismissed the deflation warnings, we should not expect him now to admit to five years of accumulated errors. If the problem is going to be dealt with, it will have to be the Treasury Secretary, either you or your successor.