Treasury Secretary Paul O’Neill, singled out for criticism from a variety of critics, is getting a bum rap.
I’m not a big fan of the Bush administration’s economic policies, but O’Neill deserves credit for doing a workman job, if not a brilliant one.
Just what has O’Neill done wrong in the past 18 weeks — and especially the past couple of weeks — in the eyes of his critics? And if he’s not up to par, what is it that we really want a Treasury secretary to do?
Let’s look at O’Neill’s rap sheet first.
He has been criticized much more frequently for what he’s said or for what he didn’t do rather than for what he’s done.
Soon after his confirmation, O’Neill raised a stink with an offhand observation that exchange rates are largely set by market forces and that his department could do little to make the dollar stronger or weaker.
This is about as obvious as noting that the sun rises in the east or that we all must die some day, but loudmouths in Congress and on Wall Street immediately protested. The Bush administration, they said, was abandoning a “strong dollar policy.”
None of the critics could articulate exactly what it was that the Clinton administration had done or what the Bush regime should do to make the dollar strong, but Secretary O’Neill was forced to kowtow to this silly know-nothingism and abjectly plead that there was no change in policy.
Later in 2001, he remarked to a reporter that financial crises in Latin America are part of a familiar and cyclical pattern. No historian would disagree with that, but Latin American leaders and investment firms that had lent to countries such as Argentina cried foul.
The subtext here is that O’Neill apparently was implying that the U.S. should be less quick to get involved in bailouts of governments that encounter fiscal or foreign exchange crises. A lot of very respected economists agree with him. There is a mounting body of evidence of the moral hazard involved in bailouts.
International lenders make imprudent loans knowing that the International Monetary Fund and U.S. Treasury will ride to the rescue if default threatens.
Non-economist observers on the left and right have made the same charge for years.
That particular rhubarb faded away, but was reopened several weeks ago when the secretary commented that Brazil’s problems were political rather than economic and that there was no good justification for using U.S. taxpayer dollars to remedy any problems caused by Brazilian voters.
Again, this was the simple and obvious truth, even if a bit undiplomatic. But the Brazilian real fell sharply in response to the perception that the United States would oppose any major bailout of that country by the IMF or others.
But criticism of such international verbal peccadilloes paled in comparison to what was raised a week ago. O’Neill — gasp, gasp — actually went on a trip while the stock market was falling!
Exactly what he could or should have done if he had canceled his international visits was not clear. Should he have emulated Herbert Hoover and his own boss, President Bush, by issuing correct, but largely irrelevant, statements that the U.S. economy was fundamentally sound?
It is pretty clear that there is little he could do to influence what was happening in equity markets. Nor would I or many other citizens feel comfortable with a cabinet member deciding when equity markets went too low – or high.
Nor should he, which is the important lesson to keep in mind here.
Paul O’Neill is Secretary of the Treasury. He’s the latest in a line that began with Alexander Hamilton 213 years ago in George Washington’s first administration. Historically the Treasury collected taxes and paid out money in response to appropriations made by Congress.
The Treasury has been a player in economic policy-making, but never has had a monopoly. The Office of Management and Budget, the President’s Council of Economic Advisors, various congressional committees, and even the presidents’ personal economic gurus, such as Lawrence Lindsey, often have more say in economic policy-making than does the Treasury.
It has never had the powers of a European or Latin American Ministry of Economics. That is good, and there is no reason to change matters.
Economic research and practical experience over the past three decades demonstrated the limitations of Keynesian economic micro-management. Less can be more in economic policy as well as architecture.
O’Neill may not have the polish of Robert Rubin, the brain power of Larry Summers, the Wall Street status of C. Douglas Dillon in the 1960s or the personal fortune Andrew Mellon had in the 1920s.
He may not make much of a mark in the history books. But much of the criticism directed against him is simply wrong. And we don’t need to change his job description.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.