Buried Treasury

by Noam Scheiber | August 11, 2003

For a man whose chief selling point was his supposedly silver tongue, Treasury Secretary John Snow's first major foray into the international currency markets left something to be desired. Responding to a question from George Stephanopoulos on ABC's "This Week" in mid-May, Snow let it be known that he had no real attachment to the strongdollar policy favored by the Clinton and Bush administrations. "Well, you know, when the dollar is at a lower level, it helps exports. And I think that exports are getting stronger as a result, yes," Snow opined. The dollar promptly dropped to a four-year low against the euro.The immediate question was whether Snow had meant to reverse eight years of economic policy with what was, after all, a casual remark. And Snow appeared to answer that question in the affirmative late that same week when he dismissed the dollar's decline as "fairly modest." On top of that, he told reporters, a "strong dollar" really means a dollar that is "something people are willing to hold" and that is a "good medium of exchange"--which came as news to the world's currency traders, who'd previously assumed a strong dollar primarily meant something that could be traded for a lot of foreign currency. The dollar abruptly began its second nosedive in as many weeks the following Monday, May 19, leading Ari Fleischer and Treasury spokesman Rob Nichols to rush out to assure the press that, as Fleischer put it, "The dollar policy is unchanged." It was only when the president himself fielded the dollar question during an interview in late May that currency traders finally stopped scratching their heads. The dollar's recent fall, the president enunciated, was "contrary to our policy." The greenback's decline quickly halted, and it has since steadily gained ground against the major foreign currencies. Still, it was a significant embarrassment for Snow: After all, a Treasury secretary who's seen as monkeying around with currency markets for domestic reasons rapidly undermines his own credibility--particularly when his pronouncements are subsequently contradicted by the White House. But perhaps the most remarkable thing about the dollar fiasco is that Snow was probably doing exactly what the administration wanted him to do. Talk to most conservatives, and they'll insist that Snow was not behaving like a bumbling neophyte or a loose-cannon maverick but rather a loyal aide faithfully executing White House policy. "Personally, I think he was speaking [the] administration line," says Club for Growth President Stephen Moore. "The White House wanted the dollar to fall--they were buying into the idea that it was hurting the balance of trade. It wasn't one of these things where he was speaking out of school." The episode helps illustrate why conservatives have been elated with Snow since he replaced Paul O'Neill as Treasury secretary in January. Like mainstream observers in the media and elsewhere, conservatives thought O'Neill was a disaster; they just thought so for different reasons. O'Neill had been widely derided for his cavalier comments about foreign currencies (he once triggered a mini-run on the Brazilian real) and his ham-handed response to last year's corporate scandals. But conservatives' main complaint with O'Neill wasn't his erratic behavior. It was his lack of unswerving loyalty to the White House. Which is why they greeted Snow's reckless comments about the dollar policy--which to an outsider looked an awful lot like the kind of gaffe to which O'Neill had been prone--with enthusiasm rather than dismay. "The problem with O'Neill was that he was a free agent all the time," says Moore. By contrast, "The one thing about John is that he will be and has been a total loyal soldier to Bush." But the real trouble with O'Neill wasn't a lack of loyalty; it was a lack of authority. And, while his lack of personal credibility may have contributed to this, his more fundamental problem was that he served in an administration that relies almost exclusively on White House insiders to make economic policy and expects its Treasury Department to do little more than unquestioningly sell that policy to the public, the markets, and Congress. "O'Neill showed up here from time to time on things," says one Senate Democratic aide. "Usually, it turned out that whatever position he took was being undercut the next day or in a matter of hours by the White House." If anything, then, Snow's quiet acquiescence in the humbling of his own department is a step in the wrong direction. Every White House faces pressure from its ideological base to promote an extreme economic agenda: For Democrats, it's excessive spending and overregulation; for Republicans, it's radical tax- cutting and deregulation. Both tend to favor using the tax code for wild (and highly inefficient) experiments in social engineering. In administrations where Treasury--which houses easily the largest and most competent collection of economists and tax lawyers in all of government--has influence, the worst of these ideas die a peaceful death. But, in administrations such as this one, where Treasury is weak, ideologues carry the day. President Bush's marginalization of the Treasury Department represents a significant break with precedent. "Every [other] administration really sort of figured it out; they used people [at Treasury]," says a former senior Treasury economist who served in the Reagan, first Bush, and Clinton administrations prior to serving in this one. "They didn't worry about whether they agreed--we were encouraged to raise issues." This economist recalls, for example, that many of the professional staffers in the Reagan years were skeptical of an early White House proposal, known as the "federalism initiative," to send a slew of federal programs back to the states. "We told them that some sorting out of responsibilities makes sense, but this particular idea is crazy. They said, `Fine, just get the numbers straight.'" At the outset of the current administration, by contrast, "The first task I was given, I was handed a book. They said, `We need a summary by next Thursday.'" This menial task, says the economist, "was a message. The sort of [job] you give undergrads." The Treasury Department's current lowly status stacks up particularly poorly compared with its role in the Clinton administration, during which a succession of powerful secretaries catapulted the department to unprecedented prominence. President Clinton's first Treasury secretary, former Senator Lloyd Bentsen, became indispensable for his ability to navigate Capitol Hill. "He had a lot to do with getting the '93 budget through," says one former Treasury official. "He understood the Senate, and those were one-vote margins." His successor in 1995, Robert Rubin, had developed a tremendous personal rapport with Clinton, first as an economic adviser during the 1992 campaign, then as head of the president's National Economic Council (NEC). And, thanks to Rubin's mentoring and his own outsized intellectual stature, Clinton's third and final Treasury secretary, Lawrence Summers, enjoyed similar sway with the White House. Gary Gensler, undersecretary for domestic finance under Rubin and Summers, notes that, even after Rubin moved to Treasury, he continued to attend the daily morning meeting of senior White House staff. "He was the only Cabinet officer during the entire term that was in [the Oval Office] every day. And, when he stepped down, he secured for Larry Summers the right to go, too." The result, says one Treasury economist, was "there was always a feeling when Rubin was there--and probably Summers--that, if the Treasury Department really didn't want something to happen, ... the secretary could go to the Oval Office and do what needed to be done to exercise influence." Indeed, the traditional role of the economists and tax lawyers at Treasury has largely been defensive--to stop bad ideas emanating from the White House before they see the light of day. And Clinton's Treasury certainly did that. One former official recalls how an early incarnation of the White House's hope college tax credit required students to be drug-free in addition to maintaining a B average. "The IRS would have had to try to figure out whether all the parents filing for credits--whether their kids are drug-free." The proposal was dropped, this official continues, after "the office of tax policy spent time making clear to people that this is not something the IRS should try to do." But Treasury's influence under Clinton extended far beyond playing defense on White House initiatives and into the broad direction of economic policy. Though he famously complained about being shut out of the inner sanctum of the White House, Bentsen nevertheless played a critical role early in the Clinton administration. As Bob Woodward describes in his book Maestro, Bentsen reached a "gentleman's agreement" with Fed Chairman Alan Greenspan prior to Clinton's first address to Congress: The administration would try to cut the deficit by $140 billion over four years, and, in return, Greenspan would be less inclined to raise short-term interest rates. With Greenspan's imprimatur, Bentsen and Rubin (who served in the White House at the time) beat back efforts by the president's more liberal political advisers, James Carville and Paul Begala, to lower the deficit-reduction target. When Rubin moved to Treasury in 1995, he managed to leverage his personal influence in the White House into institutional advantages for his new department. On domestic policy, Treasury's reach extended to social policy issues, such as health care and welfare reform. "Every time something had to happen, it needed financing, and they had to come to us," explains one Clinton Treasury official. "[Clinton Health and Human Services Secretary Donna] Shalala's crew would say, `We don't need you [to be involved].' ... Then they would come at the last minute and say, `We know you have twenty million dollars in your back pocket.'" The pattern extended even to foreign policy, where Treasury took the lead on a series of bailouts--Mexico in 1995, Thailand and South Korea in 1997 and 1998--in the aftermath of several high-profile currency crises. "We argued that, in order to do large bailouts, you have to understand the financial dimension, and we're the only agency that does," recalls one international financial official. Even previously obscure Treasury agencies rose to prominence under Rubin. Says one former official in Treasury's Office of Economic Policy (OEP): "It's traditionally been a backwater office. But, because of a set of personalities in the few years I was there, ... it was right in the middle of whole a bunch of policy debates." Among other issues, OEP weighed in heavily on global warming and tobacco legislation. The Bush administration's desire to reduce Treasury's prominence was evident as early as the presidential transition in December 2000. According to Gensler, who regularly interacted with incoming Bush Treasury officials during that period, "There was quite a feeling amongst the transition group that--we heard indirectly and directly--they thought some of the ascendancy of Treasury during Clinton days needed to be adjusted." Some of that may have been no more than a reversion to the pre-Clinton status quo, with the National Security Council and the State Department reclaiming responsibility for some areas of international economic policy. But it soon went beyond that, with the department's economic and legal professionals finding their input into policy decisions dramatically scaled back. Under Clinton, says a former Treasury economist who served in both administrations, "We were right in the policy process. We got into the president's briefing when they discussed developing the Social Security plan. .. . We found less of that in the O'Neill days. [Top Treasury officials] were less interested in hearing contrary views to what they had in mind"--a change the economist believes originated with the White House. Part of the problem was O'Neill's unwillingness or inability to protect his bureaucratic turf, which one former Treasury official says became evident at O'Neill's very first senior staff meeting. Rather than focus his comments on Treasury's role within the administration, as many had anticipated, O'Neill spent 30 to 45 minutes talking about workplace safety. "A lot of people thought, `There's not a lot of lawyers getting hurt here,'" the official complains. O'Neill's refusal to protect Treasury's prerogatives meant that, when it came to formulating economic policy, Treasury was often left out in the cold. "A strong secretary finds out that there are people making tax policy going around him; he puts a stop to that," recounts another economist who served in both Treasury Departments. "It wasn't clear that O'Neill had the inclination or political might to do that."; "But more important than O'Neill's personal limitations as a bureaucratic operator was..." But more important than O'Neill's personal limitations as a bureaucratic operator was the White House's determination to formulate economic policy with little input from Treasury. "A lot of things were developed outside the building without much influence from inside the building. People [at Treasury] don't like that--they are the people who know the most about the nuts and bolts of these policies," says the same economist. The White House even controlled much of Treasury's interaction with Capitol Hill. Gensler, who speaks frequently with his successor at Treasury, Peter Fisher, observes, "If you're the head of domestic finance--Fisher--someone relevant to the White House, you're not allowed on the Hill without chaperones from the White House." (A Treasury spokesman says Treasury officials visit Capitol Hill unattended except in matters directly important to the White House.) During the Clinton administration, by contrast, Gensler regularly negotiated directly with members of Congress without being accompanied by anyone from the White House Office of Legislative Affairs. From the outset, the White House has also dictated much of Treasury's policy agenda. Several officials who'd stayed on from the Clinton Treasury Department recall a major push to study the feasibility of dynamic scoring--a way of accounting for tax cuts that minimizes their cost by factoring in the anticipated effect on economic growth. "The pressure was significant," recalls one economist. "The pressure came from the White House, and Treasury went along. " Others describe being lobbied by White House officials on behalf of conservatives outside the administration. "You might get a call from [then- White House Deputy Chief of Staff] Josh Bolten to someone in O'Neill's office saying, `Here's the letter, what do you think? What's the policy? This guy's real important to us,'" says one former official. On other occasions, conservative activists lobbied Treasury directly. This same official remembers the department being roped into a project at the behest of anti-tax activist Grover Norquist, who wanted Treasury to issue an official document, known as a guidance, advising nonprofits of the amount of political activity they could engage in while maintaining their tax-exempt status. (Norquist had earlier written a letter to Treasury on the matter: "Recently we have seen liberal pressure groups scaring religious organizations with the idea that they will lose their nonprofit tax status if they allow political candidates to speak and distribute information on policy issues. Although they are legally allowed to do this under existing law, most religious organizations are easily intimidated and cannot afford the thousands of dollars for a confident legal opinion.") "Grover called someone in the secretary's office saying, `We've got to have this.' He would call constantly," says the official. (Norquist allows that, "I've talked to [current Assistant Secretary for Tax Policy Pam] Olson. ... I've talked to [Olson's Bush administration predecessor Mark] Weinberger lots. ") The official recalls no similar interaction with outside interest groups during the Clinton administration. Sometimes such outside pressure produced dramatic changes in Clinton-era policies. Late in Rubin's tenure at Treasury, for instance, the United States had begun participating in an international initiative to crack down on tax evasion by reining in tax-haven jurisdictions--often Caribbean countries, such as Antigua and Barbados--and by increasing information exchange between countries (so that, for example, the U.S. government would know when a citizen earned money abroad). By the time Summers took over at Treasury in 1999, the process was already well under way, with an American delegation chairing the relevant committee at the Organisation of Economic Co-operation and Development in Paris. But enthusiasm for the project vanished when the Bush team took over in late 2000. "The new people came in and hated it. It was anathema to them," recalls one Treasury official involved in the initiative. "It was the first thing they focused on." Worse, it wasn't so much White House economic officials as political hands--and activists outside the administration--who led the charge to undercut the anti-tax-haven efforts. "There were people who worked for [Karl] Rove. ... [Heritage Foundation economist Dan] Mitchell was associated with that. Norquist came in on this. They talked to everybody." In the end, the information-exchange portion of the project was salvaged when Deputy Treasury Secretary Kenneth Dam managed to convince the White House that the political fallout from abandoning it wasn't worth the trouble. But the feeling at Treasury was that the effort had been scaled back considerably under political pressure from outside groups. No White House official more consistently bullied and outmaneuvered Treasury than Glenn Hubbard, the former chair of the White House Council of Economic Advisers (CEA). As a deputy assistant secretary in the Treasury Department during the first Bush administration, Hubbard had the advantage of knowing how Treasury operated and could circumvent the department entirely when it suited him. For example, one of Treasury's official responsibilities is to estimate the revenue loss for every tax proposal that comes out of the administration, a process known as "scoring." The process is a perennial flash point between the White House, which wants the costs as low as possible, and the professionals at Treasury, who pride themselves on the soundness of their numbers. "In the Clinton administration, there had been pushing back and forth--where the White House says, `Score this lower; you're not taking into account this or that,'" says one economist who served in both the Bush and Clinton Treasury Departments. But, adds a former Treasury tax official, "Because Hubbard was at one point deputy assistant secretary, he knew all the people. He could put direct pressure on [them]. ... Downward pressure. No question." One of Hubbard's most ingenious moves, say these officials, was to hire away a scorer from Treasury in mid-2002 and install him at CEA, giving Hubbard additional ammunition against Treasury's numbers. All of which left Hubbard in prime position to push his signature initiative, the exclusion of stock dividends from income taxation, to the top of the administration's economic agenda last fall. Between Hubbard's growing clout and the departure of some top economic officials who'd been less enthusiastic about the idea, such as NEC head Lawrence Lindsey and Weinberger, there was "no one to say no," according to one former Treasury official. Little surprise, then, that Hubbard's brainchild ended up accounting for roughly half of the $700 billion tax-cut package the administration unveiled in January. When Snow replaced O'Neill, many outside the administration expected Treasury to reassert itself on policy matters, particularly since Hubbard was planning to leave the White House in late February. But the administration and Snow himself made clear that Bush's marginalization of Treasury was structural, not simply the result of particular personalities. As Snow himself has described his role to The Wall Street Journal, "Our job is to make the best possible case for the [president's] proposal, to argue it, to carry the message. ... The Treasury secretary at best is a pinch hitter." And that, according to most accounts, was about the extent of Snow's involvement in Bush's tax cut earlier this year. According to one Republican Hill staffer, "[Hubbard] was involved up until the time he left. ... [The tax cut] was kind of already set in terms of economics and broad policy. They'd set the matrix. At that point, it was more the Treasury folks talking about how you flesh out the four corners." Indeed, the one time Snow appears to have roused the ire of the White House and its conservative allies was when, during the debate over the tax cut, he told a Wall Street Journal reporter that he would consider deferring the proposed acceleration of some income tax cuts if it would help move the package through Congress. Moore recalls a conversation he had with a chastened Snow shortly after the incident: "I said, `Let's don't start compromising with ourselves. We do that, and we move the debate in the Democrats' favor.' He agreed. He said he wasn't thinking when he said that." Apart from that incident, there has been little or no evidence of Snow's having policy views of his own on any subject. Once an avowed deficit hawk, Snow trotted out a familiar White House line to finesse his support of the administration's new budget-busting tax cut at his confirmation hearing in January. "Let me say, the deficits we're looking at are relatively modest compared with the GDP, and the debt levels are relatively modest versus the GDP, " Snow told the Senate Finance Committee. "Getting the American economy strong is the best way to service that debt. Reducing taxes stimulates the economy and puts us in a better position to do that." (Never mind that in 1995 Snow publicly brooded that deficits of this magnitude could undermine growth by adding two percentage points to long-term interest rates.) Snow hasn't put his foot down even on matters normally left to the Treasury secretary's discretion. At the behest of the White House, for example, Snow is now pushing a former Illinois state official named Glen Bower for a seat on the federal tax court. "The guy is just not suitable to be a tax-court judge. It's blatant and obvious," says one Democratic Senate staffer. (Bower reportedly owes several hundred dollars to the IRS in back taxes and interest.) "There's no way they would have pushed it under O'Neill. ... [Snow] is playing politics." In fact, politics seems to be much of what Treasury does these days. According to this same aide, Snow speaks frequently with the ranking Democrat on the finance committee, Max Baucus, who pushed for Snow's confirmation back in January. But, whereas Baucus thought of O'Neill as a "decent, independent thinker" if not an altogether influential Treasury secretary, he has formed an entirely different opinion of Snow. "He thinks [Snow is] just a political hack, in there to do what Rove wants," says the aide. That view conforms reasonably well to a description of meetings between Rove and Snow that The Weekly Standard's Fred Barnes offered in the spring issue of The International Economy: "A measure of where Treasury stands is the location of the Rove meetings: Snow goes to [Rove's] office." The effects of this power dynamic are starting to show. Earlier this year, Treasury collaborated with the White House and the Office of Management and Budget on a study that used dynamic scoring to lower the cost of the administration's tax-cut proposal by about one-third. But the study was reportedly squelched amid concerns that it was too blatant and political a massaging of the numbers. "Without a doubt, that's how it would be seen," Senate Finance Committee Chairman Chuck Grassley told The Wall Street Journal in May. (An administration official insists the study was never completed.) But such concerns apparently don't always carry the day. This week The Washington Post reported that the Treasury Department's Office of Tax Analysis recently took the "unusually political step" of calculating the effects on various "tax families" of Democratic plans to repeal Bush's tax cuts--something you'd expect from the Republican National Committee, not career economists at Treasury. The height of Treasury's crass politicking under Snow came in June, when Olson, the assistant secretary for tax policy, devoted several lines in a speech to attacking billionaire investor Warren Buffett, who had earlier come out against the administration's dividend tax cut. The way Olson saw it, the tax cut "means a certain Midwestern oracle [Buffett]--who, it must be noted, has played the tax code like a fiddle--is still safe retaining all his earnings. Perhaps, however, the equalization of tax on dividends and capital gains will even cause some of his shareholders to lose their complete affinity for capital gains." One Clinton-era Treasury tax official was flabbergasted: "I saw Pam Olson being quoted as taking out after Warren Buffett, and I couldn't believe that. ... Picking on a particular taxpayer was unbelievable to me." (According to a Treasury spokesman, Olson wasn't referring to a specific taxpayer but a "handful of opinion leaders that talk about the tax code.") This week, the administration dispatched Snow, Commerce Secretary Don Evans, and Labor Secretary Elaine Chao on a "Jobs %amp% Growth Tour" of the Midwest to highlight the "[m]ore than 1.7 million taxpayers in Minnesota, and another 1.8 million taxpayers in Wisconsin, [who] will have lower income tax bills in 2003 as a result of President Bush's Jobs and Growth Act," as the Treasury Department's website put it. It's a telling announcement. Commerce and Labor, two bureaucracies with little economic policy-making roles to speak of, have traditionally been dumping grounds for a president's political cronies (think Bill Daley and Alexis Herman). And this administration is no different: Evans was Bush's fund-raising chief; Chao is Kentucky Senator Mitch McConnell's wife. Because of their limited policy-making roles, the Commerce and Labor secretaries have often been sent off on political errands across the country, talking up the president's policies at events and rallies. The difference in this administration is that the Treasury secretary gets sent along with them.

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