Paul H. O'Neill Treasury Department Established: 1789 2003 Budget: $$11.0 billion billion Full-time Employees: 116,700 O'Neill's Salary: $171,900 Web Site: www.ustreas.gov Overall Grade: D Back To Overview And Other Cabinet Grades

National Journal
© National Journal Group Inc.
Friday, Jan. 24, 2003

Paul H. O'Neill may have lost his job, but not his ability to mortify the Bush administration.

In his first interview after being forced out as Treasury secretary in December, O'Neill cast doubt on the wisdom of President Bush's new proposed tax cut and even on government's ability to do much about job losses anytime soon; he went on to downplay the nation's current 6 percent unemployment rate as mild by historical standards. The only consolation for White House officials was that, at least this time, O'Neill wasn't lobbing his trademark verbal grenades on company time.

But as much as Bush administration officials might like to put O'Neill's tenure behind them, it is now indelibly part of the record, a legacy -- for good and for ill -- that his successor must deal with. It's a legacy that is more complicated than either the administration's pink slip or the media's parting shots imply.

O'Neill is a smart, accomplished man who wasn't suited -- temperamentally or ideologically -- for the job. Despite an earlier tour of duty in Washington as a respected midlevel White House policy maker, and a brilliant tour of duty at the helm of aluminum-manufacturing giant Alcoa, he lacked political instincts. He disdained Washington's folkways and wasn't much for team spirit.

One of the former secretary's defenders, returning Senate Finance Committee Chairman Charles Grassley, R-Iowa, considers O'Neill's dismissal a commentary on "the frivolousness of American politics -- that you don't amount to a hill of beans unless you're glib, and look good on television and don't make any grammatical errors."

Indeed, O'Neill's blunt-spoken style made him a minor folk hero with business executives and fellow mavericks around the country who admired his straightforward honesty. "Guys who liked (John) McCain loved O'Neill," said one administration official. But the secretary's bluntness didn't sit well with the White House, Congress, the media or the financial markets.

To be fair, O'Neill clearly faced some daunting challenges. It wasn't easy to talk up an economy and stock market hung over from a decade-long party. Nor was it a trivial matter to launch a new war on terrorism-financing, in the wake of Sept. 11.

Moreover, within the Bush administration O'Neill was an outsider who had to compete with the economic and political advisers in the West Wing. And though a staunch believer in the power of free enterprise, he never bought into the full agenda of the libertarian and supply-side conservatives with whom the administration has cast its lot.

But O'Neill needlessly worsened his own plight. His penchant for sounding off in public not only supplied fodder for inside-the-Beltway jokes, but also generated real-world fallout by, for example, alienating key members of Congress and straining relations with friendly Latin American governments. Eventually, the weight of all the O'Neill-inspired controversies damaged the department's stature and morale and wore on his relations with the White House.

O'Neill did make some contributions of lasting value -- mostly in the international arena. For all the snickering that accompanied O'Neill's odd-couple tour of Africa with rocker Bono, this gesture and his leadership in creating the new Millennium Challenge Accounts could fundamentally change the U.S. approach to poor nations. Awarding aid that is based on need rather than politics and that is conditioned on countries' domestic reforms, gives heft to the administration's rhetoric about compassionate conservatism and about tackling the despair that provides a breeding ground for terror.

O'Neill also helped lay the groundwork for a discussion of sweeping tax simplification and reform, should the administration choose to proceed down that road.

Inside Influence Grade: D
Rarely has so much entree translated into so little influence. As one of very few secretaries with a regularly scheduled weekly meeting with Bush, O'Neill had far more access to Bush than most Cabinet secretaries. Yet even O'Neill's defenders are hard-pressed to think of many instances where administration policy bore his stamp.

O'Neill often lost out to longtime Bush associate Larry Lindsey, who turned the National Economic Council from a policy-coordination center into a policy-drafting shop. (Ironically, the White House fired Lindsey at the same time as O'Neill and has promised to return the NEC to its former coordination role under his successor, former Goldman Sachs Co-Chairman Stephen Friedman.) Lindsey had devised the 2001 tax cut during the presidential campaign, relegating O'Neill to the position of salesman. And it didn't help that O'Neill never wholly embraced Lindsey's fervent belief in supply-side economics.

Unlike Lindsey, O'Neill had no previous ties to Bush or the 2000 campaign. He was recommended to the president by Vice President Cheney, an old associate from Ford's administration and had his first real encounter with Bush at his job interview.

It seemed an auspicious match: Bush, who had already rejected several recommended candidates for Treasury secretary, was intent on hiring a "real-world" business executive, rather than a flashy Wall Street impresario. And the two hit it off at their first meeting -- gabbing for more than an hour. A few weeks later, O'Neill, who had neither sought nor particularly wanted the job, was installed at Treasury, just around the corner from the White House.

O'Neill quickly undermined his own influence by failing to grasp his place in the executive branch organizational chart: The former CEO was unable to revert to the role of a mere senior vice president.

At the first Cabinet meeting, O'Neill circulated a policy paper on fighting global warming -- not an item on Bush's agenda. In the midst of a tense National Security Council meeting about China's grounding of a U.S. spy plane in April of 2001, officials were debating whether to cancel Bush's pending meeting with Chinese leaders. During that discussion, O'Neill shocked those present by suggesting that if Bush did go to China, he should visit a Kodak plant to support the positive changes in China's economy, said one official who was there.

Another former White House aide said O'Neill used to argue with Bush past the point when an opinion was wanted -- apparently still expecting to win.

At least as damaging was O'Neill's tendency to depart publicly from the administration line.

Hill Clout Grade: D
President Bush has no stronger allies on Capitol Hill than House Republicans. Last year, after O'Neill publicly dubbed their stimulus proposal "show business," House Ways and Means Committee Chairman Bill Thomas, R-Calif., insisted on excluding the secretary from the final House-Senate negotiations on the bill. Treasury aides insisted that O'Neill was referring to a committee hearing on the proposal, not the proposal itself-but the damage was done.

And that wasn't the only time O'Neill gratuitously alienated members of the legislative branch. He couldn't seem to resist trying to take senators -- mainly Democrats -- down a peg, whether by haranguing centrist Sen. John Breaux, D-La., at a hearing on tax cuts, scoffing at the charts displayed by Sen. Carl Levin, D-Mich., at a hearing on tax havens, or engaging in a bizarre game of "one-downmanship" with Sen. Robert C. Byrd, D-W.Va., on which of them could claim humbler origins.

But even O'Neill's fans don't suggest he was a major player. The Senate Finance Committee's Grassley praised his willingness to pitch in. "He'd invariably call up at the beginning, or at some crunch time when you're trying to make some sort of a deal, and say, `Is there anything I can do to help?' " Grassley said in a December interview. But the critical deal-making actually took place directly between Grassley and his Democratic counterpart, Max Baucus of Montana -- without O'Neill. "Maybe I didn't take advantage of O'Neill's offer.... Quite frankly, even though I would take calls from whoever wanted to talk to me, I just moved ahead on the tax bill."

In Congress, at Treasury and outside Washington, observers praise many of the department's key aides -- including former and current Assistant Secretaries for Tax Policy Mark Weinberger and Pam Olson, and Undersecretary for Domestic Finance Peter Fisher. Since almost all of the top Treasury officials were White House picks, however, O'Neill gets only reflected credit. By the same logic, he gets reflected demerits in some quarters for the less-than-stellar performance by Undersecretary for International Affairs John Taylor and Assistant Secretary for Economic Policy Richard Clarida.

Political Imperatives Grade: F
Realistic or not, a key responsibility for a Treasury secretary is to instill public confidence -- at home and abroad -- in the U.S. economy and the president's economic policies.

But O'Neill had a purist's disdain for the political theater that role required. He instead took the view that the stock market and the economy were largely beyond government's ability to manage, that government pronouncements on these topics were therefore irrelevant, and that political hand-wringing notwithstanding, the underlying economic picture was comparatively bright. Plenty of outside economists agree with him on at least this last contention, but for the purposes of this job, that was beside the point.

"It's all about sound bites, deluding the people, pandering to the lowest common denominator," O'Neill griped in his post-Treasury comments, which he made during and after the January 10 taping of a public-affairs program co-produced by the Pittsburgh Post-Gazette and KDKA-TV in Pittsburgh. "I didn't adjust" in Washington, he said, "and I'm not going to start now."

Thus, back in February 2001, O'Neill wouldn't confirm that the U.S. supported a strong-dollar policy, because, he said, "a strong dollar is the result of a strong economy." After his remarks caused the dollar to sink on world markets, Treasury had to issue a statement affirming U.S. support of a strong dollar after all. In July of last year, when the press harped on the fact that O'Neill was AWOL in Eastern Europe as the U.S. stock market and economy were floundering, he said he was "constantly amazed that anybody cares what I do."

Nor did he consider diplomacy to be part of his job description. On the eve of a scheduled trip to crisis-ridden Brazil last July, O'Neill remarked on television that that country needed sound policies to ensure that aid "doesn't just go out of the country to Swiss bank accounts"-gratuitously tarring Brazil by referring to an unrelated scandal involving the Swiss accounts of former (and perhaps future) Argentinean President Carlos Menem. That comment prompted a 5 percent drop in the value of the Brazilian real and an angry demand for an apology from Brazil's outgoing president. "To make those remarks at this time was exceedingly unhelpful," said Michael Mussa, a senior fellow at the Institute for International Economics and a former official at the International Monetary Fund.

When O'Neill did try boosterism, his efforts often fell flat. After the September 11 attacks, when the re-opened financial markets plunged, O'Neill predicted that sellers would be sorry, and that the stock market could return to its record highs within 12 to 18 months. It has yet to come anywhere close.

But perhaps most important was O'Neill's inability to lead the hallelujah chorus on administration policies-especially its push for sweeping tax cuts as an all-purpose cure for the economy. As Congress considered Bush's first tax cut, O'Neill raised questions about its capacity to stimulate the economy-a view he had to quickly revise. His off-the-record criticisms of the administration's tariffs on foreign steel invariably leaked. O'Neill's blunt-if oblique-criticism of Bush's tardy disclosure of his sale of Harken Energy stock when Bush sat on that company's board of directors in 1990 was surely not what the boss wanted to hear. And in his post-employment interview, O'Neill made it clear he was not sold on the virtues of Bush's new proposed tax cut. "I would not have done it," he said, arguing the money should have instead been used to help finance a shift to a system of private investment accounts within Social Security.

Running The Department Grade: D
At Treasury, O'Neill hoped to replicate the managerial successes he'd scored at Alcoa-which have been immortalized in a Harvard Business School case study. But although he achieved some of his narrow objectives, he appears to have failed at what was arguably his primary task: building a strong and influential agency. Indeed, during O'Neill's tenure, morale suffered and the agency's influence waned.

As at Alcoa, he succeeded in reducing the time needed to finish the department's year-end accounting from five months to three days, and he made strides in reducing the number of employee workdays lost to injuries.

But some staffers found O'Neill's obsession with safety-including the so-called "neatness checks" in which O'Neill personally inspected offices for offending piles of paper-an odd priority for a Treasury secretary facing such pressing economic challenges.

Employees reacted even more negatively to O'Neill's insistence on replacing some Treasury's offices with cubicles. The goal was to promote teamwork and efficiency and to break down administrative hierarchies. Although the policy had been hailed as a brilliant innovation at Alcoa's sleek new state-of-the-art aluminum-and-glass headquarters on the Pittsburgh riverfront, it caused major unhappiness at Treasury. Besides contesting the merits, career employees complained that the decision was forced on them, despite the pretense of consultation. "It was supposed to be unhierarchical, but it ended up being even more hierarchical," said one political appointee who has since left the department.

Similarly, some former Treasury aides say that this administration has relegated the career staff to the sidelines, a marked change from previous administrations. "There's a sense that this administration has made all the decisions at the top and does not consult or use lots of staff," said the departed appointee.

Of course, not all of Treasury's morale problems were of O'Neill's making. For example, the source of unhappiness for the department's law enforcement workers-in the Secret Service, U.S. Customs, and the Bureau of Alcohol, Tobacco, and Firearms-is their impending transfer from the home of Elliot Ness to the new Department of Homeland Security.

But perhaps the most serious and pervasive morale problems at Treasury derived from the steady stream of O'Neill-engendered controversies. A case in point, says one former Treasury employee, was O'Neill's initial refusal to place his assets in a blind trust. "This was in marked contrast to his predecessors, who were acutely aware of the need to protect the stature of the Treasury secretary, of not creating unnecessary negative stories." That flap would turn out to be just the beginning.

On policy matters, O'Neill and his deputy Taylor spread confusion about the administration's stance in the international finance arena. Although O'Neill arrived in Washington largely echoing conservatives' get-tough position on IMF bailouts, the United States has ended up supporting record levels of aid to troubled countries. "Verbally, [Treasury] took a much harder line, then effectively backed away from it," said IIE's Mussa. O'Neill and Taylor were widely seen as repeatedly contradicting one another about the merits of an IMF proposal to set up a bankruptcy system for nations-needlessly antagonizing the Bush-appointed U.S. representative to the IMF and leaving the international finance community perplexed about U.S. policy.

Need A Reprint Of This Article?
National Journal Group offers both print and electronic reprint services, as well as permissions for academic use, photocopying and republication. Click here to order, or call us at 877-394-7350.