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Treasury Secretary Paul O'Neill Discusses the U.S. Economy

Aired August 18, 2001 - 17:30   ET


ANNOUNCER: From Washington, EVANS, NOVAK HUNT & SHIELDS. Now, Robert Novak and Al Hunt.

AL HUNT, CO-HOST: I'm Al Hunt. Robert Novak and I will question the nation's chief financial officer.

ROBERT NOVAK, CO-HOST: He is Secretary of the Treasury Paul O'Neill.


NOVAK (voice-over): Non-government assessments of the economy had ranged from pessimistic to apprehensive.

MORT ZUCKERMAN, CHAIRMAN & EDITOR-IN-CHIEF, U.S. NEWS & WORLD REPORT: I think we are in an unprecedented economic downturn that is unprecedented at least since the end of World War II.

MARSHALL ACUFF, SALOMON SMITH BARNEY: We're going to continue to have a mix of good news and bad news. The only thing one can say optimistically is some of the bad news is no longer getting worse.

NOVAK: But at least the Bush administration's economic team is sounding an optimistic note.

LAWRENCE LINDSEY, WHITE HOUSE ECONOMIC ADVISER: We don't know exactly when growth will start picking up, but fiscal policy is now kicking in.

I think there's a lot of very good reasons to expect much more rapid growth in '02 than what we've seen in the last six quarters.

NOVAK: Paul O'Neill, the 72nd secretary of the treasury, joined the Office of Management and Budget as a civil servant during the Johnson administration and became its deputy director under President Gerald Ford. Leaving the government, O'Neill joined the International Paper Company, where he became president. He was chairman and CEO at Alcoa for 12 years, before returning to government this year after an absence of 24 years.


NOVAK: Secretary O'Neill, the Bush administration is predicting a 3.2. percent growth rate next year, much higher than anybody else is predicting. There's an awful lot of worry and pessimism. What do you know that the other forecasters don't?

PAUL O'NEILL, SECRETARY OF THE TREASURY: Well, in fact, I don't think we're terribly far off the range. And if you look at the way the U.S. economy has rebounded from correction periods in the past, in fact, a forecast of 0.2 is not out of order. Oftentimes, the rate of increase coming out of a correction is much faster than what we're foreseeing in our expectations for the next calendar year. So I think we're in a reasonable range.

NOVAK: Mr. Secretary, you're a close student of commodity prices. Except for oil, they're all pretty low. We just had a measurement of consumer prices which was very low the other day. Are we in a deflation?

O'NEILL: Well, I don't think so. You know, you're right, I do follow these prices closely, and I know what they're doing. You know, I think people need to be very careful about not making a one-time event or a few-days event into a trend. Again, if you follow these numbers like I do, you know that we've been up and down and up and down, and the numbers are not off of what seems like a reasonable level.

Oil prices are down. You know, I don't know anybody who thinks that's a bad idea. And they're down substantially from what we saw six months ago and what from most people were forecasting. That's a really good thing for an energy-based society like our own.

And so, no, I'm not troubled that we're in a deflationary period.

NOVAK: Mr. Secretary, the majority leader of the Senate, Tom Daschle, is out in Rapid City, South Dakota, but he's still watching you. And let's listen to what he said this week.


SEN. TOM DASCHLE (D-SD), MAJORITY LEADER: The Bush economy is souring, and we've got to find a way to resolve these issues prior to the time they get any worse.


NOVAK: A lot of people think that your tax cuts are not doing the job. The repeated cuts in short-term interest rates by the Federal Reserve are not doing the job. In response to Senator Daschle, do you have anything new you're going to do? Or are you just going to stand pat on the present policies?

O'NEILL: I think things are moving in a very constructive way. You know, we had a period, I'd say, 1998, 1999 and maybe part of the year 2000, where we had growing imbalances in our economy. The dot- com -- in effect, the equivalent to the tulip-bulb craze -- was at its height and growing.

I know lots of intelligent people who thought it was OK to make major investments in companies that not only had no earnings, had not revenue either and still had a market capitalization of $10 billion. That was not a situation that could endure. And the expectations about technology-driven growth being at a rate of 50 percent a year, that wasn't a sustainable condition. And so, what we've been seeing now since, let's say, a year ago is a natural correction in the economy, where the excesses of the previous three years are running out of the economy. And we're going through that process, and we're going to start moving forward.

And I think the fiscal policy changes, the tax cuts that have been put in place are very pro-return-to-growth. And the monetary policy changes Alan Greenspan have done are very much predictive of sustained and higher levels of (UNINTELLIGIBLE).

So I think we're on a good track. And I think we shouldn't get knocked off balance by day-to-day events and political rhetoric.

HUNT: Mr. Secretary, a much less optimistic picture of the U.S. economy was painted this week by the IMF, which said that the current accounts, trade deficits that we are running can not be sustained. And the IMF suggested that fiscal discipline in the United States is eroding. What did you think of that report?

O'NEILL: Well, first I'd make just one technical note. The report was issued under the name of the International Monetary Fund, but it didn't represent the position of the International Monetary Fund. What it represents is a collection of comments that were made by the nominees to the board of the International Monetary Fund.


O'NEILL: Well, I'll tell you. I'm not a great fan of comments from people who don't have possession of the facts and, from my point of view, don't even know how to think about the facts they do have.

There's a comment, for example, in this report that suggests the sky is falling because of the so-called current account deficit in the U.S. economy. And I think if you stop thinking about economics and 1940 when Simon Kuznets, the famous economist, invented the national income accounts, then you would really be worried about the current account deficit.

But I think most people have noticed in the last 60 years, the idea of the U.S. being a self-contained economy and therefore one that must generate all of its own savings in order to create the basis for investment simply has no awareness of what's going on in the real world.

HUNT: One group that does have command of the facts is the Congressional Budget Office, which the Bush administration...


O'NEILL: Yes, I think they're quite good.

HUNT: They say they're going to report in a week or so that this year you're going to have to dip into the Social Security surplus, even though just months ago they said it was a $125 billion surplus. Is that because of the huge tax cut?

O'NEILL: No. First of all, it's not clear to me that CBO is going to say we're dipping into Social Security. I think the number is still looking like $160 billion worth of surplus for the federal government in this fiscal year, which ends the end of September.

In the days when I first came to Washington, if we had been running a $160 billion surplus when the economy had a 0 percent growth rate, the so-called Keynesians would have been saying, "You're out of your mind." You ought to have at least a $200 billion tax cut because, instead of taking money away from the American people when the economy is running slow, we ought to give them back more money than they sent in.

You know, so it's really quite paradoxical that people are wringing their hands when we're running $160 billion surplus, that they don't think it's enough. I think it's really quite good that we're able to run $160 billion surplus when we have effectively zero growth in the economy or something close to that. But what it means is we're going to generate substantial surpluses beyond Social Security revenues when the economy returns to a more natural rate of real growth.

NOVAK: Mr. Secretary, the top tax writer for the Republicans in the Senate, Senator Chuck Grassley of Iowa, said there's going to be another tax cut. I want to ask you, when is the Bush administration going to ask for another tax cut and what kind of a tax cut will it be?

O'NEILL: The answer to your first question is, when we can afford it. And I don't know exactly what the composition will be. There are so many things that we need to do to our tax system. I have an opportunity now to go out and gauge people all over the country and talk to them about tax system. There is no issue that has broader agreement than that we need fundamental reform of our tax system so that ordinary Americans can understand what it is they're supposed to do.

NOVAK: Let me give you a question right here and now, and that is the Senate Republican leader, Trent Lott, I believe intends to put on, as an amendment to the minimum wage bill, a cut in the capital gains tax, which would certainly be welcomed by the investor community. Will you, the Bush administration, support that cut in the capital gains tax?

O'NEILL: You know, the president has been very clear for two and a half years about what the basic tenets are of his belief about how we should run our government and our society, and he's been true to those ideas good weather and bad. He said we needed tax reform, we needed to give American people more of their own money back to them, and he's delivered on that.

He's also said that he doesn't think that we ought to invade the Social Security revenue that's flowing in that represents this $160 billion surplus. And I think you will find he will be steadfast for that. And at the moment, unless somebody's got some magic way to free up some money that's otherwise being spent, then there's not room...

NOVAK: I take that as a no.

O'NEILL: ... there's not room for more tax reductions at the moment.

HUNT: Mr. Secretary, we only have a minute left. Just a quick, too, about the dollar. As you know, during the Clinton years the strong dollar was synonymous with a vibrant economy. Dollar has dropped about 8 percent, I think, in recent weeks, vis-a-vis the euro. Are the days of a strong dollar numbered?

O'NEILL: No. Absolutely not. I think the idea, the intellectual content in the idea of a strong dollar is that the U.S. should organize itself in a way that our rate of real productivity growth is better than what people are able to do in the rest of the world.

And the reason that we've had a substantial flow of money into the United States from people all over the world is because for quite a long period of time now we've been able to increase productivity at a faster rate than anyplace else in the world and people want to be where their investments are safe and secure and they don't face the risk of loss. And so we've had a strong dollar.

I think we will continue to have a strong dollar. We're not going to change our policy. I was amused, I was asked about this the other day, and I said we had to continuous and continuing policy. And someone said, "He didn't say it strong enough."

HUNT: Well, let me...

O'NEILL: The whole thing is ridiculous in some ways, Al, the degree to which people want to make something out of nothing.

HUNT: But on the substance, let me tell you what someone else has said. This is John Devine, vice chairman of General Motors, who I think represents a number of manufacturers in saying this, he says, and I'm quoting, "The strong dollar is destroying the manufacturing capability of this country." Does that worry you?


HUNT: He's just wrong?

O'NEILL: Well, you know, it's interesting to me, I'm the only one who ever seems to get follow-up questions. I wish whoever interviewed him had said, "And then what would you do, John?" And John would have said what he I think went on to say in a subsequent conversation: We know at General Motors it's our responsibility to organize ourselves in a way to produce value and create value, whatever the foreign exchange relationships may be in the world.

And, you know, in effect, to take the sting out of the comments he made about the strong dollar, which are ridiculous. People who are really good at what they do, in producing value, don't spend a lot of time haranguing somebody else about why they're not successful, they make themselves successful.

HUNT: Secretary O'Neill, we're going to take a break for just a minute, but we'll be back in a moment to talk to Paul O'Neill about global warming.


NOVAK: Secretary O'Neill, when the other industrial nations of the world were in Bonn, Germany, recently trying to improve the Kyoto global warming treaty, the U.S. was not present, was boycotting the meeting.

NOVAK: Since you believe that global warming is a danger, why in the world was the U.S. absent from that meeting?

O'NEILL: Oh, in fact, I think there was an assistant secretary there and listened to all of the discussions.

NOVAK: Didn't take part, though.

O'NEILL: Well, I think she took part in the sense of listening to the conversation and taking in all of the ideas that people had. So it's not true that we weren't there. We just didn't agree, and the president has indicated that he doesn't agree that the formulation that was developed in Kyoto is the right way to deal with the issue of the prospect of global...

NOVAK: And Bonn was not an improvement on Kyoto, the Bonn agreement?

O'NEILL: I don't think so.

HUNT: Mr. Secretary, you have been very critical of the Clinton administration's tendency to intervene any time there was a financial crisis. So let me just try to understand, what is the U.S. policy now as far as Argentina and Brazil are concerned?

I mean, my impression had been -- you'd said we're not going to get involved in Argentina, but you sent your top international man, John Taylor, down there. And you said the Brazilians, that they are a, I think, go-go, they-will-get-it-right kind of economy versus the Argentinians, who have had 70 years of problems, you say.

Do we have a different policy toward intervention for Brazil and Argentina?

O'NEILL: No. In order to make sense of this, one needs to start with principles. And it seems to me that the IMF and the World Bank have been important to the world. They're important now, and they need to be important in the future. I'll state that as a basic premise.

I think in order for the IMF and the World Bank to continue to merit and receive the support of the developed world in giving them money and supporting their programs, they need to be successful. It's not OK for them to always be, or most of the time be, associated with failure. And so, I think in order to have a higher degree of probability that interventions and assistance from the IMF and the World Bank actually create great value, the institutions need to look at what they've been doing and they need to change so that they're more likely to be successful than not.

HUNT: Argentina would not be a good bet in that...

O'NEILL: Well, I think this. Again, if you draw the lines around how you would like the world to work and articulate a policy, then you always hold that up as a basis for where you're trying to go. Now, it's obviously not possible to stop the world and the conditions that exist in order to make it fit with a policy objective that you have.

And so, as we've come into the government -- those of us in the Bush administration -- we've inherited the world as it was under Clinton, which included Turkey and Argentinian program that was put in place last November -- $41 billion from the IMF.

And Argentina is now, after the $41 billion intervention, in a very slippery position. And we're working to find a way to create a sustainable Argentina, not just one that continues to consume the money of the plumbers and carpenters in the United States who make $50,000 a year and wonder what in the world we're doing with their money.

HUNT: We are not going to stop the world; we have to stop this segment for just a minute.


We will be back in just a moment, however, with the "Big Question" for Paul O'Neill.


HUNT: Mr. Secretary, friends of yours have told me that you have complained that Washington isn't the real world. Is that your experience? And is the world you inhabited before, the CEO of Alcoa, is that the real world?

O'NEILL: Well, you know, I like Washington a lot. I started my career here. I was here for 15 years before I left. And in the time that I was in the private sector I was here on a regular basis. I like Washington a lot. I share with some of you an affection for the beach that's not too far away. And so I find this a very compatible place.

I like the people that are here because most of them want to make a difference and they're working on things that matter. That's the attraction of being back in Washington.

NOVAK: Do you think that the special interests, the lobbyists, the lawyers have a bigger influence in Washington than when you were here 24 years ago?

O'NEILL: No, I'm not sure they have a bigger influence. There's sure a lot more of them.

NOVAK: Thank you very much, Paul O'Neill.

Al Hunt and I will be back with a comment after these final messages.


HUNT: Bob, the secretary says our policy is still a strong dollar, but I tell you, the markets say otherwise, and in part, it's because of that big tax cut which we can't afford.

NOVAK: It's just a terrible tax cut, isn't it?


NOVAK: The thing with the secretary of the treasury is he indicated no new proposals to try to get the economy jump-started. And he said pretty frankly, he will oppose Trent Lott in trying to cut the capital gains tax. I was a little surprised how flat he was on that.

HUNT: Bob, he's such an anomaly. A guy who commands enormous respect from people as diverse as Alan Greenspan and John Sweeney, and yet he struggles in the wash and partly, I think, because coming from that world of the corporate boardroom CEO, it's a difficult transition to this political world.

NOVAK: But nevertheless, this is a different Paul O'Neill than six months ago. Six months ago, he was throwing out a lot of bombs, they were worried at the White House. He is on message right now. I don't think he said anything to us that would embarrass anybody, and it takes a little time to get used to being a Cabinet member instead of a CEO.

I'm Robert Novak.

HUNT: And I'm Al Hunt.

NOVAK: Coming up in one half-hour on "Reliable Sources": When does the media become part of the story? There's a conversation with PBS' Terry Smith and "Newsweek" editor Mark Whitaker on the depth of television coverage.

And at 7:00 p.m. on "CAPITAL GANG": President Bush's heartland tour; slicing the defense budget; and our "Newsmaker of the Week," counselor to the President Karen Hughes.

HUNT: That's all now. Thanks for joining us.



4:30pm ET, 4/16

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