The exuberance, as Greenspan might put it, didn’t last long. By Friday, stocks were once again diving, and economists continued their gloomy predictions of a coming economic downturn. The numbers certainly don’t look good. New claims for jobless benefits are inching upward. Orders for manufactured goods like cars and heavy machinery have dropped off. New-home sales are falling. And retailers nationwide reported weak Christmas sales, a sign that consumers–after a long spending spree–are beginning to worry about their savings accounts.
Bush campaigned as the candidate who would keep the good times rolling. Instead, he will inherit an economy that is certainly slowing. For now, it’s tough to say just how bad things might get. In the best case, many economists believe, we’re at least looking at a cooling-off period, in which the economy drops from its extraordinary height back down to a more normal altitude. But other practitioners of the dismal science warn that the country might be headed for a long and painful recession. For Bush, that’s a nightmare scenario that threatens to throw his presidency off balance from the start–forcing him to focus on the economy at the expense of other issues on his agenda.
The new president is counting on a trio of experienced advisers to figure out how to shore up public confidence in the economy, and quickly. Inside the administration, two serious, brainy conservatives, Treasury Secretary Paul O’Neill and economic adviser Larry Lindsey, will be the primary architects of a Bush recovery plan. Their main focus: a sweeping tax cut they believe will bolster the economy over time by putting cash in people’s pockets. Yet it will likely be Greenspan, now in his 14th year as Fed chief, who will exert the most influence over the economy in the coming months–as he has under every president since Ronald Reagan. Working independently from his office at the Federal Reserve’s marble temple on Constitution Avenue, he floats far above the political battles inside the West Wing. Unlike Lindsey and O’Neill, he does not need to clear his decisions with the president–or, as Bush discovered last week–even give him advance notice. Yet Greenspan may have a much closer relationship with Bush’s team than he has had with past administrations. As it turns out, O’Neill, Lindsey and Greenspan are a remarkably tight-knit group. They have known and liked one another for years. Greenspan and O’Neill first worked together in the economic trenches of the Nixon administration. Lindsey later served under Greenspan on the Federal Reserve Board. O’Neill and Lindsey frequently sit on panels together at meetings of Washington’s American Enterprise Institute think tank. Though their personal styles are different, and inevitable disagreements will crop up, there is already an easy rapport among them.
They’re going to need it. Lindsey, O’Neill and Greenspan won’t have the usual luxury of a months-long learning curve, or time to ease into the job. Blaming Bill Clinton for the slowdown may work for a while, but after a few months voters will want answers, not excuses. To succeed, Bush’s new moneymen must appear decisive and in control from the first day, convincing a jittery public–and a skeptical Congress–that they know precisely what they’re doing, even if they’re not sure themselves. “They’ve got to get this right the first time,” says former Congressional Budget Office director Rudy Penner, “but they do have a little time.” Lindsey told NEWSWEEK that the Bush White House will push early on for the tax cut. “Absolutely. When he announced his proposal, Governor Bush said it was an insurance policy if the economy took a downturn,” he says. “And that looks like what’s happening.”
Intense and somewhat humorless, O’Neill may emerge as the most powerful pitchman for the tax cut. At 65, he’s had a long career in and out of government, mastering the not-always-gentle art of persuasion and learning how to make allies of potential foes. O’Neill toiled as a soldier in the Nixon and Ford administrations, eventually rising to the rank of deputy director of the Office of Management and Budget. There, he became friends with two Ford higher-ups–White House chief of staff Dick Cheney and Greenspan, chairman of the Council of Economic Advisers. Years later those friendships would pay off. In 1987 O’Neill was head of International Paper when Alcoa, the world’s largest aluminum company, went looking for a new CEO. Greenspan, an Alcoa board member, recommended his old friend O’Neill for the job.
O’Neill adhered to a brutal work schedule, heading to work at 4:30 each morning and often staying at the office late into the night. (In Washington, the incoming Treasury secretary is already being compared to Greenspan, who famously rises before dawn to ponder the economy while soaking in a hot bath.) O’Neill shunned the traditional luxuries of his post, driving himself around town and working alongside his employees in a “Dilbert”-style cubicle. “He insisted on cubicles for everyone,” says Marina Whitman, an Alcoa board member. “I’m not sure his senior executives were all that wild about it.”
In O’Neill’s 13 years at Alcoa, profits soared to No. 1 in the industry. O’Neill became a fanatic about worker safety, cutting injuries by 90 percent. His dedication to rank-and-file workers won him the grudging respect of the tough United Steelworkers Union. He also won the admiration of George W. Bush’s father. O’Neill was an early supporter of the elder President Bush’s controversial and deeply unpopular tax hike–and yanked Alcoa out of the U.S. Chamber of Commerce when it opposed the president.
When the younger Bush began casting around for a Treasury secretary, Cheney recommended O’Neill for the job. O’Neill now says he is an ardent supporter of tax cuts. He has also pledged not to interfere with the decisions of his old friend Greenspan, who has called O’Neill an “exceptionally talented person.” In the months before his appointment to Treasury, O’Neill had complained in public about Greenspan’s string of interest-rate hikes. But no longer. “I understand my place in this,” O’Neill told reporters in December, “and that place is to let Alan Greenspan make monetary policy.” Even so, some people close to O’Neill believe he will become frustrated with the slow pace of government work, especially after years of running his own show. “He’s impatient with large bureaucratic organizations, including his own,” says Harry Pearce, vice chairman of General Motors, where O’Neill was once a board member. “He’ll probably become impatient with government too.”
O’Neill’s counterpart, Larry Lindsey, has long been the man Bush turns to first on the economy. When Bush began mulling a run for the White House, a friend recommended Lindsey as someone who could explain economics to the candidate in plain English. The two men hit it off immediately. Patient and friendly, Lindsey shared Bush’s philosophical enthusiasm for tax cuts, and went to work on the details. “George W speaks very highly of Larry, and trusts his judgment,” says Michael Boskin, chairman of the Council of Economic Advisers under the elder Bush. “Larry has enormous access to, and the confidence of, the president-elect.”
At 46, Lindsey has decades of experience in Washington’s policy wars. A devoted Reaganite, the former Harvard professor served for three years as a staff economist on Reagan’s Council of Economic Advisers. But his real Washington education came in 1991, when he was tapped to serve on the Federal Reserve Board under Greenspan, who taught him how the real political economy works. In his recent book, “Economic Puppetmasters,” he praises Greenspan’s “political courage.” A longtime advocate of finding ways for the government to help the disadvantaged, he pushed through new rules at the Fed requiring banks to lend money to the poor and minorities. Recently, he and his wife adopted a child from war-torn Kosovo.
Lindsey was an early skeptic of the boom times. An economic consultant, he turned bearish in 1998, selling off his own stocks and warning that high consumer debt, among other things, would eventually lead to a market downturn. The tax-cut plan he wrote for Bush was “based on the need to fix what’s wrong,” Lindsey says. He doesn’t believe we’re quite in a recession yet. “But,” he cautions, “certainly there are signs of real distress in a lot of sectors of the economy.” Plenty of the CEOs sitting with Bush and Lindsey last week agreed with the diagnosis. Now it’s up to Bush’s team to sell them–and us–on the cure.
