Take It Outside, Boys

By John F. Dickerson and Karen Tumulty/Washington

It was Dick Cheney, a friend from their days together in the trenches of the Ford Administration, who lured Paul O'Neill from the executive suite at Alcoa and persuaded him to become George W. Bush's Treasury Secretary. Federal Reserve Chairman Alan Greenspan loved the choice, the Vice President boasted in private two Decembers ago--and surely what made Greenspan happy would tickle the markets too. Except it didn't work out that way. A respected executive whose blunt talk the President at first found refreshing, O'Neill never emerged as a persuasive advocate for the Administration's economic policy--in part because he never accepted its central belief that the cure for any ill is more tax cuts. So it made a kind of Washington sense that Cheney was the one to telephone O'Neill one afternoon last week with the news that the President had decided "to make a change."

Within hours, chief economic adviser Lawrence Lindsey, stranded in the snow at his suburban Virginia home, got a call from chief of staff Andrew Card. He wanted to meet the next day. In a time-honored Washington version of hara-kiri, Lindsey offered his resignation before he was fired. The next one expected to go, probably next month, is the head of Bush's Council of Economic Advisers, Glenn Hubbard, who wants to return to teaching. His departure would complete the housecleaning that began when Securities and Exchange Commission chairman Harvey Pitt resigned on election night. Though the abruptness of last week's moves was startling--not least to the two men ousted--it wasn't entirely surprising. Bush's economic team has long been viewed as the weak link in a popular Administration, and both O'Neill and Lindsey were prone to gaffes that embarrassed the boss. "They lack the ability to conceive, the ability to execute and the ability to sell economic policy," said an Administration official. And that pretty much sums up both their job descriptions.

It didn't help that long-simmering policy feuds between O'Neill and Lindsey--at bottom reflecting the mutual distrust between a corporate honcho and an intellectual--were getting increasingly personal. Lindsey was fingered for leaking damaging criticism of O'Neill and Hubbard. At strategy sessions with Bush, O'Neill frequently interrupted Lindsey to disagree with him. "There was no creative tension," says a senior aide, "just tension." After the bloodletting last week, staff members for each man blamed the other for their boss's misfortune. For a White House that prides itself on unity and order, it was an exceptional day. "Emotions around here are pretty raw," said a senior White House official.

Better sandbox skills are all the more critical as the economy keeps producing nasty surprises such as last week's report that 40,000 more Americans were out of work (not counting O'Neill and Lindsey) and that the unemployment rate had risen to 6%, up from 5.7% the previous month. With the next presidential election less than two years away, "we recognize that we can no longer blame this on our predecessor," says a senior White House adviser. Nor can the Administration afford to prolong domestic turmoil as it seeks to rally public support for a possible war with Iraq. If Bush's attention is going to remain overseas, it becomes even more important that his domestic house be in order. "The President wants to be able to offer a plan in the State of the Union," says a senior Administration official, "and he wants to have a fresh, competent team that he can hand it over to."

For months the White House economic team has been working on a package of tax cuts to goose the flagging economy by increasing business investment and encouraging investors to wade back into the stock market. "The idea is growth," says a senior official involved in economic planning. "We can't have 8% unemployment by 2004."

The unveiling of new plans will begin in the weeks before the President's annual January address to Congress. Though advisers warn that Bush has not signed off on the final recommendations and that the new team members will have some input, the package is likely to include:

EXTENDING TAX CUTS. The $1.35 trillion tax cut passed in 2001--and set to expire in 2010--will be made permanent.

REDUCING TAXES ON DIVIDENDS. Advocates say a cut in taxes on dividends paid to shareholders would spur business investment and improve the stability of U.S. corporations by encouraging them to issue stock rather than borrow money.

ACCELERATING DEPRECIATION. Proponents say allowing companies to write off their capital investments more quickly would encourage them to spend more on factories and equipment.

BOOSTING RETIREMENT SAVINGS. Options under consideration would allow greater contributions to 401(k) plans and protect them against big losses.

Whatever the final shape of the package, the White House is looking to put together a new team that is camera ready. O'Neill and Lindsey not only were unskilled at presenting the President's plan but often made news with wayward public comments. Lindsey once called the Enron debacle a "tribute to American capitalism." He speculated on the cost of going into battle with Iraq when the rest of the Administration was downplaying war talk and the President was preaching fiscal discipline. O'Neill repeatedly made pronouncements that were far too candid for the markets' delicate constitution, and he had a habit of speaking dismissively of proposals--including the plan for economic stimulus through tax cuts--even as the White House was feverishly pushing them.

The White House is looking for at least one new member of its economic team who can speak the language of the financial markets and calm them when necessary. "The model is Bob Rubin," said a White House insider of the Goldman, Sachs co-chairman, who headed the National Economic Council (NEC) and then the Treasury Department during the Clinton Administration. Bush advisers say Stephen Friedman, who co-chaired Goldman at Rubin's side, is being courted heavily for the NEC job. But candidates for other spots on the economic team have also been sought among nonfinancial companies. Though Bush recognizes that his lifelong skepticism of Wall Street may have shaken its faith in his policies, he has not lost his view that business leaders who borrow to build things, rather than those who do the lending, are the ones who know best how the real economy works.

The new economic team will face high expectations for quick progress amid a contentious political climate. "If they don't have a good plan, it doesn't matter which team they've got," said outgoing Senate majority leader Tom Daschle. With deficits returning, the new Treasury Secretary's confirmation hearings are certain to become a forum for Bush's critics, who say he has tossed aside fiscal discipline to give handouts to the wealthy. Administration officials scoff. Says a senior aide: "Show me somewhere in history where someone has paid a political price for deficits." That's exactly the kind of talk that could spook the bond markets. So while it's easy to write off Lindsey and O'Neill as bunglers, they may not be such an easy act to follow until the Bush team gets the sound track right. --With reporting by Michael Duffy and Adam Zagorin/Washington

With reporting by Michael Duffy and Adam Zagorin/Washington