As promised, I watched the Senate Finance committee confirmation hearings on Paul O'Neill a second time, this time very, very carefully so I could catch as best I could every nuance in his thinking. Yesterday, I said I thought he was better than the picture given us by the NYTimes reporter who covered the hearing. Today I can say he is even better. There were things I had wished he would have said that he did not, but the good news is that I could not disagree with anything he did say. I can say from what I did see, I like the way he thinks through public policy issues.
1. Yesterday, I missed his answer on capital gains taxation when Sen. Trent Lott asked him about whether it could be added to the list of tax cuts, now that there is agreement the economy is weakening. O'Neill's answer, that a lower capgains rate has positive LONGER TERM effects in lowering the cost of capital, was only in relation to "my company," Alcoa. There was no discussion about its impact on capital formation at the grass roots or on small enterprise, where O'Neill probably has a blind spot.
2. He did say "the first line of defense is monetary policy," but where the NYT made a big deal out of that, O'Neill spent the almost four hours before the committee making cogent arguments for lower tax rates and deflecting questions from those Democrats who suggested we wait until we see how Fed policy will work. His arguments were not attached to any particular economic theory, but more strategic in nature. He presented two scenarios: 1) We get to September and find the weakness we are going through now has been an inventory correction and we didn't have to do anything to get the economy back on a 3 percent growth track. 2) We get to September and discover the weakness was more than an inventory correction, but we lost the chance to do something about it earlier in the year. Having lower tax rates in effect under one scenario or the other, he said, would not hurt the economy.
3. I mentioned yesterday that what impressed me most was O'Neill's repeated discussion about the unnecessary complexity of the tax code. Sen. Charles Grassley [R IA] led him into this area by noting there will be recommendations by the Joint Tax Committee in a few months on simplification. O'Neill was more enthusiastic about the idea than any other Treasury Secretary I've known, going back to my first discussions on the subject with the late William Simon in the Nixon years. I definitely get the sense that he is going to do something about this and sees the economic gains that would flow from it -- even though there was no mention of it in the Bush campaign. The excuse is provided by the Grassley query and the Joint Tax report.
4. When asked by Sen. Fred Thompson [R TN] about the "low savings rate" and the trade deficit and whether it concerns him, O'Neill was superb in answering that the number itself is something we should never worry about as long as we see it is the result of superior management of the US economy, which attracts capital from abroad. He correctly identified the foundation of the "savings rate" as the residue of the National Income Accounts designed by Simon Kuznets in the 1930's. This reminded me that O'Neill was as much a whiz kid when he was deputy OMB director in the Nixon administration as he has been a whiz in managing Alcoa. He also connected with Thompson who suggested that we should not be debating tax cuts just for short-term fixes, but for the health of the economy over the next decade.
5. He dealt with the "fairness" argument on cutting tax rates for the upper incomes by warning of the "tax creep" that occurs when you levy higher taxes on the upper earners when you need them, but when surpluses appear to redirect the funds to the lower incomes in an attempt "to change the distribution on the way back." It is the best argument that can be made outside the supply model to defeat the Robin Hood arguments of the liberals. That is, if we need to raise taxes on the well-to-do in the future because of some unforseen event, they should not already be taxed to the limit.
6. He was emphatic in stating that the national objective should be "Increasing relentlessly our productivity growth." While I don't think he understands or even has thought the effects of tax policies and monetary policy on productivity, O'Neill is clearly not burdened with Keynesian baggage.
7. Except for the top Democrat on the committee, Sen. Max Baucus of Montana, there were good connections made with O'Neill on all the topics of public finance that will have supply-side effects -- especially his awareness of the problems related to the Alternative Minimum Tax and the pension reforms that died in the last Congress. Baucus was pleasant enough in his questions, but is clearly a color-by-numbers Keynesian in his understanding of public finance.
8. O'Neill was clearly on Sen. Phil Gramm's wavelength when the Texas Republican said that if the tax cuts are even in the works, the stock market will rise and there will be an economic expansion on the come. The idea that you have to wait for the cuts until they put money in people's pockets is false, said Gramm.
9. Asked if he believes a steel industry is necessary for national security, O'Neill said he thought so, but that the government should not prop one up. It takes "leadership" in the steel industry to save steel, he said, as he made aluminum a winner at Alcoa. I'm still not sure O'Neill will be able to grapple with the monetary deflation that confronts us, as he was careful to indicate he would stay off Alan Greenspan's turf. The report by the Wall Street Journal's Paul Gigot that he will interview Charles Dallara for the International Undersecretary spot is worrisome, but somehow I think he would find in an interview that Dallara is another color-by-numbers Keynesian who serves the interests of the big banks in their dealings with the IMF, which is what he did when he was in the Reagan and Bush Treasury departments. Dallara is a protege of Fred Bergsten, the chief economist of the Institute for International Economics, which also serves the international interests of the banks. O'Neill has been a member of the IIE board, or so I'm told.