Friday, October 31, 2008

A Must Read Interview of Paul O’Neill

Friends, Today I share an interview that I found on the newsletter I received from "The Daily Reckoning" ( with obvious thanks. I have highlighted some important parts, but I recommend reading every single word of the text.


From the companion book to I.O.U.S.A.

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 Office 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 Office of Management and
Budget. There he became deeply involved in the issues of fiscal 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 fired for having a
difference of opinion.

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

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 fiscal policy front
we were in a condition where we had, for the first 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 (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 difficult political things that needed to
happen to make course corrections. Those course corrections still include
fixing 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 difficult 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 first 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 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 deficits.” 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 deficits, but federal debt as well. I
think it is true that you can be sanguine about deficits 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 [Fall 2007] 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.

Q: Toward the end of 2002, you wrote a report that said that the current
debt wasn’t the problem; it was the debt that we are stepping toward.
Shortly thereafter you were asked to leave. Can you explain to me what
happened the day you were fired?

Paul O’Neill: During 2002 I found myself being at odds with where policy
seemed to be going, I kept arguing that we couldn’t really afford another
tax cut and that we didn’t need one, since the economy was doing fine. But
my problems were not just differences about tax policy and social policy
and fixing Medicare and Social Security. I kept asking almost every week,
of the people from the CIA who briefed me, you know, where’s the evidence
for weapons of mass destruction? I see all of these allegations and
projections of trends from 1991 and what we knew in 1991, but I didn’t see
anything I considered to be evidence. One of the things I’ve been trained
to do for a long period of time is to know what you know and to
differentiate that from what you suspect or what someone alleges, so I
kept being a pain in the neck and asking, “Where’s the evidence? There’s
no evidence, there’s nothing I believe.”

Early in the administration, at a National Security Council briefing,
there were a bunch of photos put on the table and it was alleged that this
satellite picture of what looked like a warehouse that you could find
anywhere in the world was a production center for weapons of mass
destruction. I said, I’ve spent a lot of time going around the world,
producing goods all over the world, and have seen a lot of factories and
warehouses. How can you tell me this one is a center for producing weapons
of mass destruction? There’s nothing here that tells you that? You may
assign it that, but there’s nothing here that tells you that.

One of the things I found really interesting out of this experience is
that even today, people that I have a lot of regard for their intellect,
like Bill Clinton, still say they believed the evidence was there. I’ve
never had this conversation with him, but it’s hard for me to believe a
guy who’s as smart as he is doesn’t know the difference between an
allegation and evidence – especially someone who’s trained as he is as a
lawyer. I’ve been astounded, this is a bipartisan thing – people on both
sides don’t seem to get the difference between evidence and what they call
intelligence, which I would call not intelligence, just a bunch of
fabrications. So I was working my way to the margins of what endurance
that people had for me, both in economic policy and in everything else I
encountered. I have to admit some of the things that I said during this
period probably ought to have been tempered. For example, we were
struggling with trying to get the International Monetary Fund and the
World Bank out of the business of effectively bailing out private sector
lenders who’d given money to developing countries with the expectation
that the people of the United States and other tax-paying people around
the world would bail out the private sector lenders. I said (probably not
very advisedly), “Before we give any more money to Argentina, we ought to
make sure it’s not going to go to a Swiss bank account.”

Which was, I admit, not very diplomatic, but it was true – and
interestingly enough, in a few weeks a guy who had been the president of
Argentina said, without any prompting from me, “Well it was true he had
money in a Swiss bank account, but it was all his own.”

So in any event, as we moved past the election in 2002 and we had this
continued conversation, a really heated conversation with the vice
president about what I considered to be the inadvisability of a further
tax cut, I got a call, early in December. I was in my office having a
meeting with a group of people and my secretary came in and said, “The
vice president’s on the phone and would like to talk to you. The vice
president said, “The president’s decided to make some changes, and you’re
one of the changes. What we’d like to do is have you come over and meet
with the president and basically say that you’ve decided to go back to the
private sector, that you’re ready to quit your involvement with the

I said I didn’t think I needed another meeting with the president, thank
you very much. I thought I’d had plenty of meetings, and I thought he
probably didn’t need a meeting and I certainly didn’t need a meeting. And
I also said to him, “You know, I’ve been going along now for 65 years or
so and, you know, for me to say that I’ve decided to leave the Treasury to
go back to the private sector is a lie, and I’m not into doing lies. And
so what I want to do is issue a press release tomorrow morning before the
markets open so that they’ll have time to digest this news in case it
creates any stir. And I’ll send the president a note telling him I’m

And I think he was surprised by that. He didn’t try to argue me out of it,
I think probably because he’d known me long enough to know that it
wouldn’t do any good, that I’d made up my mind and that was it.

Q: What did it feel like to get fired?

Paul O’Neill: Well, it’s a first in my life – I’d never been fired before,
I’d only been promoted to ever-higher levels of responsibility. But it was
okay with me because I would have really been uncomfortable arguing for
policies I didn’t believe in. One of the things I actually said to
President Bush and Vice President Cheney when they asked me to come and
have lunch with them, and to ask me to serve as the secretary of the
Treasury, was that I had reservations about doing this. And one of the
reservations I had was that, having been the CEO of a very big corporation
for 13 years and the president of a very big corporation for the period
before that, I wasn’t sure how easy it was going to be for me to knuckle
under when I thought the policy was wrong. The thing I didn’t know is how
difficult it would be to knuckle under if you thought the policy was not
well vetted, that it was decided on the basis of ideology instead of what
was right for the country. At that point I really thought the decisions
were not being made on the basis of what was right for the country, they
were being made on the basis of what was right for getting reelected.

It’s probably altruistic, but I thought for a long time we need presidents
who are so devoted to doing the right thing with and for the American
people that they’re prepared to lose for their values and to hang their
values out in public for everyone to see them.

Q: Let’s revisit the conversation that you had with Vice President Cheney
prior to you being fired. Can you discuss the difference of opinion that
you had in regard to tax cuts and deficits?

Paul O’Neill: Sometime after the election – it must have been mid-November
– there was a meeting of the Economic Policy Group, including the vice
president. As we sat at the table in the Roosevelt Room, we talked about
where we were and where we were going. If I remember right, Glenn Hubbard
made a presentation that was displayed on the screen at the front of the
Roosevelt Room and showed where we were going and what different tracks
looked like and GDP growth and the rest, including the effects of the
proposed third tax cut. I made the argument, which I had been making over
and over again since maybe June or July, that it was not advisable to have
another tax cut because of the need to fix Social Security and Medicare
and to have some money to smooth the fundamental redesign of the tax
system. We needed to have in effect rainy-day money in the event that we
had another 9/11 event – and at that point it looked like maybe we were
going to go to Iraq, and it was not going to be cheap to do that.

So I argued that we should not have another tax cut because the economy
was going to be in positive territory and doing okay through the next
couple of years anyway without another tax cut, and there were all of
these other compelling reasons not to risk a deficit and not to risk
adding more to the national debt. And the vice president basically said,
“When Ronald Reagan was here, he proved that deficits don’t really matter
and so it’s not a consideration or a good reason not to have an additional
tax cut.” I was honestly stunned by the idea that anyone believed that
Ronald Reagan proved in any fashion, certainly not inconclusive fashion,
that deficits don’t matter. I think it is true on a temporary basis that a
nation can have a deficit and have a good reason for having a deficit. I
think the Second World War there was no way we could avoid having a
deficit, but when we came out of the Second World War we started running
budget surpluses again and did that through the ’50s and into 1960. It’s
interesting, it’s really only been in the last 40 years or so that we’ve
accepted the notion that it’s a bipartisan thing that we don’t have to
have fiscal discipline.

A year ago there was this signing ceremony in the Rose Garden for the new
Medicare prescription drug entitlement, and it’s going to cost us
trillions of dollars. This event was not unlike any of the others in the
Rose Garden on a nice sunny day, with the president sitting at the signing
table with a bunch of grinning legislators behind him taking credit for
this “great gift” they’re giving the American people. But none of their
money was going to get given to make this happen, because the federal
government doesn’t have any money that it doesn’t first take away from the

There was no mention of the fact that this in effect was a new tax on the
American people, and we didn’t know how we were going to pay for it. It
was only grinning presidents and legislators taking the credit for a gift,
which strikes me as a ridiculous continuing characteristic of how we do
political business in our country.

Q: If we couldn’t afford it, why did we give it to the people?

Paul O’Neill: If you can get 51 percent of the people in the Congress to
agree with the President’s leadership initiative to say we ought to do
this, that’s all it takes. And I think it’s regrettably true there are a
lot of people who don’t understand that when they get a gift from the
American people, it’s from the American people and it can only be paid for
with taxes over time. I think the confusion is aided and abetted by the
fact that it doesn’t feel like we’re paying for it. It’s a lot like
running up credit card debt: As long as you can pay the interest charges
on your credit card debt, you can live way beyond your means. In fact, we
as a nation are living way beyond our means, and for a period of time,
there’s no doubt we’ve demonstrated you can get away with it. But I think
we only need to look at the fate of other countries who’ve lived beyond
their means for a long time to see you inevitably get into trouble.

If you look at Germany in 1923, they got to a point where their currency
was so worthless that you needed a wheelbarrow to haul the currency that
was needed to buy a loaf of bread. You get inflation where people stop
investing in your national debt, when they say, “We’re not going to loan
you money because you’re not going to be able to pay it back.” It’s the
same thing that happens to individuals and families. When you get extended
to the point that you can’t service your debt, you’re finished.

You know, so you go through a calamity – either you go through a terrible
inflation, which is a way of having a national bankruptcy, and you destroy
accumulated income and wealth, and in fact you have a taking from all the
people because suddenly their financial assets are worth nothing. You
know, are we going to have that right away? No. But should the people who
are in positions of political leadership know that and anticipate it and
do something about it for the American people, you bet – and now is the
time to begin doing something about it.

One of the difficult aspects of this debt problem is that it’s not very
transparent to people who are unschooled in fiscal and monetary policy. In
a way, this problem’s a little bit like the famous example of if you
throwing a frog into boiling water. If you throw him into the already
boiling water, he jumps out right away. But if you put the frog in the pot
of cold water and turn the heat on under it, the frog will let itself be
boiled because it doesn’t respond to slow increase in temperature. Our
debt problem is something like that. If we wait until we have a calamity
and financial markets shut us off because we’ve exhausted their belief
that we can service additional debt, it’s too late.

This is a problem that we need to deal with without letting the heat be
turned up some more.

I would hope we can demonstrate we’re intelligent people that don’t wait
until they create a calamity in their country before they deal with
problems that are obvious to anyone who’s ever studied economic policy and
fiscal policy and monetary policy. You only need to look around the world
to see places like Argentina, Turkey, and Germany after World War II whose
governments have effectively achieved a meltdown condition. Knowing this
can happen to modern nations, we should not let it happen to ours.

1 comment:

  1. Just happened to read this now. Excellent one.. What I like about this guy is he's level headed and not a doom mongerer, elaborates problems that are existing and the urgency with which they need to be addressed. Incidently I was just reading something about Monitory and Fiscal Policy.


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