To O’Neill, Ideologues Won the Tax-Cut War

For Treasury Secretary Paul H. O’Neill, the moment of truth had arrived. Seated in the Oval Office on Sept. 4, 2002, he looked President Bush in the eye and told him that another big tax cut could prove disastrous.

“Mr. President, if you start pushing through a second major stimulus plan, you run out of money,” O’Neill said, according to a new account of his two years as Bush’s Treasury chief. “You won’t have any money to do anything you want to do, such as changing Social Security or fundamental tax reform, for the rest of your term. Now’s the time to keep your powder dry. Any other path is not responsible.”

O’Neill knew he had presented Bush with a stark choice: If the president wanted to pursue the tax-cut plan being pushed by other administration officials, he would have to fire his Treasury secretary first.

“Got it,” Bush reportedly replied. Two months later, O’Neill was out of a job, and the tax cuts were headed for passage.

The fateful exchange, recounted in “The Price of Loyalty,” a book written by journalist Ron Suskind with O’Neill’s assistance, involved more than a contest of wills between two determined political leaders.

It underscored what, in O’Neill’s view, was a monumental struggle over policy priorities and the ultimate triumph of fiscal recklessness over budgetary caution within an administration split from the start between ideologues and pragmatists.

In the latter camp was Federal Reserve Chairman Alan Greenspan, who allied himself with O’Neill in a campaign to keep future deficits from getting out of hand.

In the end, O’Neill said, the ideologues prevailed.

O’Neill’s assessment is shared by some independent analysts, who say the wisdom of the tax cuts will be debated long after the initial furor over the book’s revelations of personality clashes and administrative spats fade from view.

Already a central issue in the 2004 campaign, the sudden shift from big surpluses to record deficits may leave as big an imprint on Bush’s legacy as the war on terrorism or the invasion of Iraq, some economists say.

“Without a doubt, he was a voice of caution,” former Congressional Budget Office director Robert Reischauer said of O’Neill. “He wasn’t listened to. He should have been the most important policy voice in this area.”

Robert E. Rubin, Treasury secretary during the Clinton administration, said Bush’s tax reductions set the stage for an “endless string of projected deficits” that could trigger a crisis of confidence in financial markets, dampening U.S. economic growth for years. “I haven’t read his book,” Rubin said of O’Neill. “But I don’t think we should have put in place either of those tax cuts.”

White House spokeswoman Claire Buchan said Wednesday that she had not read the book, but disputed any suggestion that Bush was not concerned about future deficits.

“He believes the budget needs to address America’s priorities, which are fighting the war on terrorism and promoting America’s economic security,” Buchan said. “The budget reflects those priorities. In addition, it reflects spending restraint in other areas.”

Not all administration observers agree with O’Neill’s interpretation of events, and some question the book’s accuracy.

Suskind, a former Wall Street Journal reporter and a winner of the Pulitzer Prize in 1995, said the book was based on extensive interviews with O’Neill and other administration officials, as well as 19,000 government documents, including meeting minutes and transcripts. O’Neill proofread the manuscript before publication, and dialogue “was vetted by all sides,” Suskind said.

Former Bush economic advisor Lawrence Lindsey, a tax-cut advocate who lost his own job soon after O’Neill left, wrote in a Wall Street Journal column published Wednesday saying that O’Neill’s descriptions of Bush and his economic policy “do not comport with my recollection or with the public record.”

The book, he said, “does a grave injustice to the president, to the truth, and to Mr. O’Neill himself.”

Conservative economist Bruce Bartlett said participants in a key tax-cut discussion described in the book told him that statements attributed to the president and other officials bear little resemblance to what was actually said.

“Mr. O’Neill may think he is getting revenge on a president he believes treated him shabbily,” Bartlett said. “But I think all he has really done is remind people of why he never should have been named Treasury secretary in the first place.”

According to the book, O’Neill said as much to Bush in late 2000, when the president-elect asked him to leave his position as chairman of Alcoa Inc. to become the nation’s chief financial officer.

“I like to say what I think,” O’Neill reportedly told the president-elect. “In Washington these days, that might make me a dangerous man.”

“We know all that stuff,” the book quotes Bush as replying. “Doesn’t matter. We want you to take the job.”

That same evening, O’Neill received a call from Greenspan.

“We really need you down here,” Greenspan said. “There is a real chance to make some lasting changes.”

O’Neill and Greenspan had worked together during the Ford administration and had stayed in touch. They considered themselves pragmatists and had supported President George H.W. Bush’s decision a decade earlier to abandon his no-new-taxes pledge, a policy reversal that helped rein in runaway deficits but alienated conservatives.

With the government expected to accumulate a $5-trillion surplus over 10 years, they supported the younger Bush’s campaign proposal to reduce taxes by $1.6 trillion. But they wanted to earmark part of the surplus for Social Security reform, and worried what might happen if an economic slowdown, combined with a big tax cut, caused the surplus to evaporate. Already, there were signs of a recession.

The two men forged an alliance to try to persuade Bush to accept budgetary “triggers” that would automatically scale back future tax cuts to prevent deficit spending, the book said.

“And so it was hatched: a secret pact,” Suskind wrote. “What they were doing felt perfectly natural. Two men with nearly 90 years of experience in and around Washington, colluding to prevent an elected president -- with virtually no experience in setting national economic policy -- from acting in a way that they were convinced was ill-considered. He’d thank them later.”

A Federal Reserve spokesman said Greenspan was in Europe and declined comment.

For several weeks, O’Neill and Greenspan tried to advance the trigger idea, the book said. Their stance put them at odds with the administration’s tax-cut champions, including White House economic advisor Lindsey and political advisor Karl Rove.

Ultimately, the trigger plan was shot down by Bush. “I won’t negotiate with myself,” he told O’Neill, refusing to modify his campaign pledge. “It’s that simple.” Three months later, the first tax cut became law.

The rejection of triggers was a setback, but it paled in comparison to Bush’s rebuff of O’Neill’s advice when the second tax-cut plan was being formulated in 2002.

By then, the fiscal outlook had deteriorated. Revenue had plummeted and analysts had concluded that previous estimates of tax collections had been overly optimistic. The war on terrorism, launched after the Sept. 11, 2001, attacks, was taking a big bite out of the budget. The government expected to post its first annual shortfall in five years, and anticipated surpluses were morphing into deficits.

Nevertheless, Lindsey and other tax-cutters were pushing for another big reduction, arguing that it would help stimulate the economy in the short term and promote growth over the long term. Once again, O’Neill and Greenspan feared that more tax cuts could drown the government in red ink and foreclose any possibility of Social Security reform.

It was against that backdrop that O’Neill entered the Oval Office on Sept. 4, determined to support fiscal restraint. “I’m going to make a stand on principle,” he reportedly told Greenspan before heading to the White House. “Call it a human sacrifice.”

After speaking his mind to Bush, O’Neill suspected his days were numbered. But it would be several more weeks before the tax-cutters overpowered the budget hawks. At one point during a fractious meeting in the White House Roosevelt Room, even Bush seemed to have doubts about a tax package that would bestow most of its benefits on wealthy Americans.

“Didn’t we already give them a break at the top?” Bush reportedly asked.

“Mr. President, remember the high earners are where the entrepreneurs are,” Mitchell E. Daniels Jr., director of the Office of Management and Budget, reportedly replied.

The president was persuaded. The White House assembled a plan that cut the tax on corporate dividends and accelerated rate reductions approved in 2001. Combined with the previous initiative, it set the government on a course that independent analysts now believe could add as much as $5 trillion to the national debt over 10 years.

For O’Neill, the punch line arrived on Dec. 5, 2002, in the form of a phone call from Vice President Dick Cheney.

“Paul, the president has decided to make some changes in the economic team,” Cheney said.

“And you’re part of the change.”