The end of 2002 will mark the third year in a row of falling stock prices, which is the ultimate vote of no confidence in the opportunities facing American business. But the year also ends with a potentially revitalizing shake‐up in the president’s economic team.
Treasury Secretary Paul O’Neill is replaced by CSX railroad chairman John Snow; National Economic Council Chairman Larry Lindsey is replaced by a lawyer and retired investment banker, Stephen Friedman; and Securities and Exchange Commission Chairman Harvey Pitt is replaced by William H. Donaldson, who founded part of Donaldson, Lufkin and Jenrette. The SEC chairman, in turn, will soon be involved in picking someone to head the new Accounting Standards Board.
Outside the limelight, there are also two absolutely critical vacancies for key Republican legislators to fill — namely, the directors of the Congressional Budget Office and the Joint Committee on Taxation. The treasury secretary is by far the most important of these positions. Fortunately, John Snow is almost overqualified for the job. He combines experience in managing a business with the intellectual credentials of a PhD in economics and a law degree. We worked together on Jack Kemp’s tax reform commission in 1995; I was the research director and Snow was a commission member. I found him extraordinarily insightful and clever, able to communicate and persuade with ample technical skill and a dose of charm. More to the point, John Snow is enthusiastically committed to reforming the tax system to tear down the distortions and disincentives that hobble economic growth. Those who have been skeptical about this appointment are about to be pleasantly surprised.
Paul O’Neill did not lose the job because he was outspoken, as many claimed, but because he was outspokenly incorrect. His comments on economics in general and tax policy in particular were typically muddled. Just before his resignation, The Wall Street Journal reported that, “Treasury Secretary Paul O’Neill appears skeptical about a dividend‐tax cut.” Since that happens to be a top priority of the White House, O’Neill should not have been surprised that informing reporters about his skepticism was equivalent to resignation.
Snow is much better prepared, intellectually and as a matter of conviction, to speak up for such important tax policy initiatives, including speeding‐up the painfully slow 2004 – 2006 reductions in tax rates. I expect he will take care to ensure that each such incremental improvement will be moving in the direction of deeper, more fundamental tax reform.
Some blame the timid timing of the 2001 tax cuts on Larry Lindsey, who was unfairly rushed out of the nebulous position of “director of the National Economic Council.” This is one of those made‐up Washington plum jobs with no particular purpose except to make some politically influential person feels important. Although some reporters refer to this post as the president’s “top economist,” that role clearly belongs to the chairman of the President’s Council of Economic Advisers (Glenn Hubbard), even though the ranking spokesman on economics is the treasury secretary. Adding a third economic guru is like adding a third wheel to a bicycle: It isn’t necessarily progress.
The position of NEC chairman was created to make room at the table for Robert Rubin, who had previously been co‐director of Goldman Sachs along with Bush’s new choice, Stephen Friedman. Their successor was Jon Corzine, now a Democratic senator from New Jersey. There long been a revolving door with federal officials coming from or going to Goldman Sachs, a Wall Street investment bank that is famous for bipartisan generosity to political campaigns.
Many conservatives worry about Friedman’s largely honorary position with the Concord Coalition, an organization more fascinated with estimated future budget deficits than with current economic reality. Similar hints of guilt by association likewise blamed John Snow for having associated with the Committee for a Responsible Budget and Business Roundtable, two other outfits that often echo the belt‐tightening economics of Herbert Hoover. In such cases, however, is usually wiser to judge businessmen separately from the many groups they belong to, often for the prestige and connections involved. In any case, the CEA chairman and the new Treasury Secretary are skilled economists, so Friedman’s relatively inexpert opinions are unlikely to prevail regardless of what he thinks or says.
When it comes to the new SEC chairman, the best we can expect is a calmer, more professional approach than we had from his publicity‐hungry predecessor. Those who expect too much from the SEC always wind up disappointed. Dubious accounting gimmicks at Enron, WorldCom, Lucent and Xerox, for example, were discovered by internal whistle‐blowers, never by SEC investigators.
The Accounting Oversight Board is starting life as another wobbly third wheel. The SEC already had ample authority to investigate and sanction sloppy accounting practices. A new five‐member Oversight Board, dominated by lawyers and lobbyists, will have no choice but to rely on experts from the leading accounting firms, which adds little but whimsical uncertainty to the process.
Earlier in the year, politicians tried pretending that all our economic problems were simply a matter of bad bookkeeping and a few crooked businessmen. If only we would pass a “tough” accounting reform bill and indict executives from Enron and World Com, so the story went, then investor confidence would be restored and everything would be just fine. As a result, Congress passed the hastily written Sarbanes‐Oxley law, Arthur Andersen was put out of business, and executives from four companies were indicted for fraud. Yet stocks nonetheless tumbled much further.
The prescription failed because the diagnosis was wrong. The reason most stocks lost half their value was that profits fell by half. Business costs and debts were up; prices and sales were down. The economy has real problems, not just accounting problems. The belated recognition of that fact is the reason President Bush has turned his attention toward tax policies that were mishandled in 2001 and why he removed a treasury secretary whose preferred tactic was to simply forecast that the next few quarters will be better.
This will be the first opportunity Congress has had to simultaneously appoint new directors for the powerful Joint Committee on Taxation (JCT) and Congressional Budget Office (CBO).
The division of bureaucratic turf between the JCT and CBO makes as little sense as the CIA and FBI being unwilling to share information about terrorists. The JCT estimates tax receipts and the CBO estimates economic growth. As a result, the JCT assumes the economy will grow precisely as the CBO predicts regardless whether tax rates are doubled or cut in half. And the CBO goes along with JCT estimates of the revenue effects of tax changes without ever questioning the economics involved.
Both of these critical positions should be held by experts in the economics of taxation, not lawyers or accountants, and they need to communicate with each other about the ways in which their forecasts can be made more realistic and more integrated.
Why does this matter? Because the JCT can slaughter any tax proposal in infancy by issuing totally unrealistic estimates of how much revenue will supposedly be lost. And the CBO can likewise sabotage even the best of tax plans by either ignoring or downplaying the economic benefits.
In the final analysis, whoever controls the seemingly boring process of estimating tax revenue and economic growth is likely to have more to say about the fate of President Bush’s new round of tax relief than all the president’s economic advisers combined. People matter for policy, but numbers often matter more. The president does not pick the heads of the JCT and CB0, but the legislators involved had better choose carefully and wisely. In the past, bad numbers have too often proved the undoing of good policies.