I.O.U.S.A. (53 page)

Paul O ’ Neill

Paul O ’ Neill says he enjoyed being the 72nd secretary of the U.S.

Treasury (2001 – 2002), even though the job lasted only 23 months.

O ’ Neill, who has been analyzing the U.S. budget since he went to Washington, served in the Bureau of the Budget, which later became the Offi ce of Management and Budget in the White House.

O ’ Neill came to American government in 1961 as a management intern, and stayed for 16 years through the Kennedy, Johnson, Nixon, and Ford administrations. The last 10 years of his tenure were spent at what was the Bureau of the Budget, which became the Offi ce of Management and Budget. There he became deeply involved in the issues of fi scal policy, budget balance, budget making, and helping presidents choose priorities for how we spend the nation ’ s money.

Then he moved to the private sector in 1977. In 2000, he was asked by President Bush 43 to come back to the government and be the secretary of the Treasury, which he did for 23 months before he got fi red for having a difference of opinion.

Q:
Budgetary challenges seem like something you ’ re extremely
well suited for. As a young person who came to Washington,
what was it about this that drew you in?

Paul O ’ Neill:
I initially came to Washington because I had been in an economics degree program at Fresno State in California, and [then] went to Claremont Graduate School with the intention to get a doctorate in economics. After a year there, the fi nancial pressure was great, and I had a wife and two children. So I kind of incidentally took an examination and was selected to be a management intern in Washington. I really liked the prospect of that a lot, because I thought if I was ever going to apply 205

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what I ’ d learned, especially macroeconomics, I needed to go to Washington, because that ’ s where the action was.

I had been interested in how nations govern themselves and how they express their priorities, and I found a natural affi nity when I went to the Bureau of the Budget, which turned out to be the Offi ce of Management and Budget. It was a great place in the early days when I was there, with probably 350 of the smartest people in the country on these issues. We decided how to help a president make priorities and how to help a president evaluate programs, and I found that really stimulating and fun. I never considered what I did to be work, even though it took most of my life for that period of time; the days were long and often it was seven days a week. I think, the last two years I was there, I was off both Christmas Days, and that was about it; the rest of the time I was on the line. I was really close to President Ford, and had gotten to know him when he was in the House and then when he became vice president. He loved using the budget as a policy - making tool almost as much as I loved working with him on it. It was really a fondness for the person and a great respect for his intellect about issues of priority setting the budget that made me really close to President Ford.

Q:
What presidents have you served under?

Paul O ’ Neill:
When I fi rst came to Washington, John Kennedy was the president, and honestly part of the reason I came here is that I really liked the idea of doing something that ’ s bigger than an individual person. But when I came I was a management intern —

I was so far out in the woods that the only time I ever got to see John Kennedy was when I was a prop and came to stand in the Rotary Drive in front of the White House when they had foreign visitors and they needed people to fi ll up the driveway. Then when I moved to the Offi ce of Management and Budget (which was still the Bureau of the Budget) Lyndon Johnson was president. I got to see the president on a fairly regular basis; I was still far away from him, but a lot closer than I had been as a management intern.

When Richard Nixon became president, I was in the upper reaches of civil service. Richard Nathan, who was recruited to be c16.indd 206

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a political overseer for the human resources part of the Offi ce of Management and Budget, selected me early on in the Nixon administration to be the point person on a lot of important Nixon initiatives, including a welfare reform. So I would go to all of the cabinet - level meetings and take endless copious notes and learn what Arthur Burns and George Shultz and Pat Moynihan and people like that thought about issues and how they expressed themselves . . . which I really found enormously valuable. It was during that time I got to really know the higher levels of a White House staff, including Nixon. I was really involved in the policy analysis and recommendations of the president about virtually everything in the government.

When Nixon left and Ford became president, he viewed the budget as a principal tool for making all kinds of policy, and myself, and the other people who were in the upper reaches of the Offi ce of Management and Budget, spent enormous amounts of time with the president in his offi ce or in the Cabinet room, going through every option for every program in the federal government, national defense, intelligence, every aspect of human resources and community development, and every aspect of how we raised money to pay for the things that we want. It was a time of great closeness, and he loved the idea that I knew a lot about the budget; in fact, he was fond of telling people that the only person who knew more about the budget than he did was me, which was a great fl attery.

Q:
Would you say that President Ford was more closely involved
in budgetary matters than any other president?

Paul O ’ Neill:
The way to compare President Ford ’ s involvement in the budget is to look back over the years. At OMB, we had people who ’ d been around for a long time, and we believed that the only person in modern history who knew more about the programs and policies that are incorporated in the federal budget at a level on par with President Ford was Harry Truman. They were the only two presidents who were capable of holding a press conference with hundreds of people from the media and basically answering c16.indd 207

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all the questions themselves without any reference to staff, about any detail you wanted to talk about.

Q:
What about President Bush 41? How involved was he in
budgetary decisions?

Paul O ’ Neill:
When Bush 41 became president, I wasn ’ t in the government, although he suggested that I ought to join his administration, which I declined to do. He did, however, make me the chairman of his Education Policy Advisory Committee, so I got to see him fairly frequently during his term. I would say his involvement in the budget was not like President Ford ’ s, but it was in some detail. One of the things I really liked about President Bush 41 is that when he saw that in his own judgment he ’ d made a mistake with the idea that he would never raise taxes, as in the famous “ Read my lips: no new taxes, ” he realized that was not the right position for public policy and had the courage to raise taxes. There was a great outcry when he did it, from people like the Chamber of Commerce, and I was so infuriated by their turning on him when he ’ d done the right public policy thing. I was then the CEO of ALCOA and I resigned ALCOA from the Chamber of Commerce in protest against their dissing of the president when he ’ d done the right public policy thing, whether they liked it or not.

And then I was out of government, although I still had involvement during the Clinton administration. I got to know Clinton pretty well when he was fi rst governor of Arkansas. I was the president of International Paper Company and we had big operations in Arkansas. He invited me in to talk with him about a lot of things, including global climate change and education policy and all the rest. And my sense is Bill Clinton was really deep into making budgetary decisions himself. I think maybe not as deeply involved as President Ford, but deeper than President Reagan for sure, and probably more detailed into things like welfare policy than most other presidents have ever been.

Bush 43 I found practically not involved in the detailed budget discussions. Early on, he asked me to serve on a committee with Dick Cheney and the then director of the Offi ce of Management c16.indd 208

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and Budget to review budgetary decisions, but in my experience he only saw the very tip of the iceberg and for sure he could never have done a detailed description of the budget. He could have done talking points, but if you asked him questions about retired offi cers pay, he would have drawn a blank. In his eyes, that ’ s not what presidents are for — they shouldn ’ t have to know that level of detail. I think it was a deliberate decision on his part not to be very involved in the detail, and to be what I would call a “ talking point president ” on these issues.

Q:
When you took over at Treasury, how would you characterize
the fi nancial health of the United States? Are you surprised at
where we are today?

Paul O ’ Neill:
When I moved into the Treasury as the 72nd secretary, what we inherited from the Clinton administration was an economy that had been rolling itself into a modest recession for a year and a half. By that time, the dot - com bubble had burst and the economy had slowed down, and we actually had some negative quarters that we didn ’ t really know about until Clinton was gone and Bush 43 was in charge. But on the fi scal policy front we were in a condition where we had, for the fi rst time in a long time, a budget that was in surplus.

I have to hasten to add that while it was in surplus, it was not in surplus on a federal funds basis. It was only in surplus because the trust funds were bringing in a lot of money and together, with federal funds and the trust funds, the Clinton administration was able to claim three years of budget surpluses, which we hadn ’ t seen since 1969. That was a year where we were in budget surplus with the use of the trust funds. The last year I think that we were actually in surplus on a federal funds basis, without using trust fund money, was in 1960, so we ’ d been at this now for 47 years of basically living beyond our means — especially if you think federal funds ought to be in surplus without using the trust fund money to calculate balance.

So in 2001, when Bush 43 took over and I took over at the Treasury, we were in a total surplus condition, and arguably c16.indd 209

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(I think this was a correct argument) we needed to reduce taxes because taxes had crept up to the point where something like 20

or 21 percent of the GDP was being effectively taken by federal government. Traditionally, our level has been someplace around 18 percent or maybe 18.3. So I think it was correct to say that we could afford to have a tax cut, which President Bush 43 had run on in the 2000 election, and he set out to deliver what he promised in the election and I think that was okay. The reason that I agreed to come in as Treasury secretary was because I saw lots of things in our economy and our society that needed to be done, and I was encouraged to believe that Bush 43 was up for the diffi cult political things that needed to happen to make course corrections. Those course corrections still include fi xing the Social Security and Medicare trust funds, and fundamentally redesigning the way the federal tax system works. I thought there was some prospect that President Bush would entertain the diffi cult political choices that needed to be made in order to act on these things, and I spent a lot of time thinking about these things over a period, better part of 40 years, so I was anxious to have a go at it.

Q:
How did it go?

Paul O ’ Neill:
The fi rst part was the easiest part. Cutting taxes is always a cinch — it ’ s only a debate about who gets the credit and how big the cut is. But then we had 9/11 and it really changed where we were. The economy was still slow, although we were actually having positive growth in the fourth quarter of 2001.

But there was still a lot of energy and President Bush himself was bringing this energy that we need additional tax cuts. I honestly didn ’ t think that was the right thing to do, because I continue to believe we needed the revenue that we were then collecting to work on the Medicare/Social Security problems. To work on fundamental tax redesign after 9/11 while worrying about whether there was going to be another attack or a series of attacks would cost hundreds of billions of dollars. So I was against further tax reductions at the time, especially as we got into 2002, as I became more concerned that we were also going to need money since it looked to me like we were sliding into a war with Iraq. I argued c16.indd 210

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during the second half of 2002 we should not have another tax cut because we need the money to work on important policy issues that would shape the nation going forward, and we needed to have, in effect, rainy day money for the prospect of Iraq and another set of attacks like 9/11.

That was not a popular view, and in fact, it led to a conversation with the vice president where he basically told me, “ Don ’ t worry about further tax cuts, it ’ s okay. Ronald Reagan proved that we don ’ t have to worry about defi cits. ” Which is really a shock to me because whatever you may think about Ronald Reagan, I don ’ t think he or anyone else has proved that it ’ s possible to ignore not just defi cits, but federal debt as well. I think it is true that you can be sanguine about defi cits for a short period of time, but you can ’ t be sanguine about mounting debt for the United States of America. When we, the Bush 43 administration took over, we had something over $ 5 trillion, maybe $ 5.6 trillion worth of national debt. Today I think the number ’ s $ 8.8 trillion. That ’ s not an innocent change, it is a monumental change in the debt service that we have to do in addition to and on top of all of the other things that our country needs to do.