Treasury Secretary no foe of government

In Treasury Secretary Paul O'Neill, a central question of George W. Bush's presidential campaign has been turned on its head.

Voters last year asked: Is Bush at heart too conservative to deliver the unity and moderation in Washington that he has promised? For O'Neill, though, the question is whether he is too moderate and ideologically flexible for a President and Administration that have staked out clear, conservative positions that do not brook easy compromise.

Unlike Vice President Dick Cheney, Bush economic adviser Larry Lindsey, and the President himself, O'Neill has never been a tax cut warrior. Quite the contrary. O'Neill supported the two biggest tax increases in history: George H.W. Bush's 1990 hike, and Bill Clinton's 1993 increase. Both plans showed a clear preference for deficit-controlling fiscal rectitude over supply-side obeisance to lower taxes. "He's never been very big on tax cuts," said William Niskanen, a former Reagan economic adviser and a one-time colleague of O'Neill's in the Ford Administration.

Bush has said he wants to reduce U.S. dependence on foreign oil by reducing taxes and regulation for the oil industry. O'Neill, in contrast, unsuccessfully lobbied the elder Bush for a $10-a-barrel tax on crude oil to spur conservation, a position that has been endorsed by Al Gore.

Unlike the new President, and virtually all leaders of U.S. industry, O'Neill has prominently declared that global warming is an imminent threat, and that business should accept the idea of limiting carbon dioxide emissions. He has even endorsed the idea of a carbon tax, which would make industry pay for the right to pollute. And although unions unanimously opposed Bush, they have been unified in their praise of O'Neill and his conciliatory approach to labor relations as chaiman of the Aluminum Company of America.

O'Neill comes from outside the circle of close Bush advisers. If he is a Bush outsider, though, he's a Cheney insider. He was a trusted ally of Cheney when the latter was President Ford's chief of staff, and O'Neill ultimately served in that Administration as deputy director of the Office of Management and Budget.

O'Neill's philosophical differences with Lindsey, a die-hard defender of supply-side economics, are the closest thing to a controversy over Bush's economic team. But bureaucratic considerations could determine who gets the upper hand early, Niskanen said. Lindsey has been detailed to lead a crash effort to review the final regulatory splurge of the Clinton Administration, something that could sidetrack him for weeks. Niskanen noted that O'Neill has something else in his favor: It is rare for a White House adviser to exert more influence on economic policy than the Secretary of the Treasury, the person most of the country recognizes as the spokesman on such matters. Niskanen recalled that Reagan economic adviser Martin Feldstein decided to go public with his conflict with Treasury Secretary Donald Regan and was quickly sent packing.

O'Neill is unusual for his background in industry. Only three of the 22 Treasury Secretaries since Franklin Roosevelt's Administration have been primarily men of industry. All the others have come from Wall Street, and most saw the Treasury Secretary's job, at least in part, as safeguarding the interests of Wall Street. O'Neill might, for example, be less prone to bail out investors in some failing Third World economy. But any Treasury Secretary will find it hard to ignore a plea from the Street.

If O'Neill's 24 years as a business executive indicate anything, it is that he seems very comfortable with government assuming a large role in assisting the private sector.

This can be seen, for example, in his approach to global warming. Although O'Neill opposed the Clinton Administration's plan for mandated limits on carbon dioxide emissions, he broadly hinted that a crash program of government-assisted research could produce new technologies to achieve the same results. In a speech, O'Neill said that it would cost $500 million to make aluminum smelting superefficient, but that "nobody in the industry is in a position to do it on their own." O'Neill made his pitch for a government-industry partnership, including perhaps a waiver of antitrust law, to President Clinton at the White House.

Another, more far-reaching initiative shows the same predilection for a big-government solution. As chief executive of Alcoa, O'Neill spearheaded what was possibly the Clinton Administration's broadest effort at intervention in the free market.

In the early 1990s, after the collapse of the Soviet Union and its military, Russia flooded the market with three things vital to maintaining superpower status: steel for ships and tanks; uranium for nuclear weapons; and aluminum for aircraft. When prices for steel and uranium fell in the United States, producers in this country won anti-dumping penalties against Russia, actions that raised prices and in some cases limited imports. By contrast, O'Neill mounted a huge lobbying effort to enlist the Clinton Administration in a much more sweeping approach to the aluminum glut-a global agreement in which all producers, including competitors in Europe and the United States, would agree to specific limits on production, solely to boost prices.

Wait a minute. Wouldn't that be a cartel, a violation of the most basic principles of antitrust law? Absolutely, but it's not illegal, as O'Neill must have known, because of a principle called "State Action Immunity." Roughly translated, it means that if the government is involved and assents to an action that would otherwise break the law, then it is legal. This is the defense that the Clinton Administration offered in its settlement of the tobacco litigation, which fixed prices to keep the tobacco companies afloat, but did so in the context of a government-approved agreement.

But the aluminum agreement went much further. In past cases, the federal government has presided over trade agreements that assigned production quotas to entire countries but didn't attempt to coordinate or influence the output of U.S. companies. The aluminum agreement, however, ended up assigning production quotas not only to Russia, but also to the individual European and American companies that turn out most of the world's production. "It was an unusual agreement in that respect," said C. Fred Bergsten, director of the Institute for International Economics. "I didn't think it was a good idea at the time, and I said so" in an opinion article published in The Wall Street Journal.

The aluminum pact had a pernicious effect outside the United States, Bergsten said. It placed severe limitations on one of Russia's primary sources of hard currency. At the time of the 1993 pact, aluminum accounted for 30 percent of all Russian exports to the United States. Bergsten noted the irony of the United States' demanding, on the one hand, that Russia embrace free enterprise but on the other insisting on the kind of industrial production quotas that were a hallmark of Soviet central planning.

The Justice Department tried to derail the negotiations, and so did Laura Tyson, Clinton's chief economic adviser. Aluminum is a pretty small industry, but the agreement went through, in large part because of O'Neill's clout. To overcome Justice's final objections, aluminum company executives fashioned a fig leaf: Instead of directly negotiating production quotas, each wrote a proposed quota on a piece of paper, without identifying the company. After several rounds, the U.S. and European sides reached the desired cut in production. And the Administration threw in $250 million in loan guarantees for Russian aluminum producers.

The agreement worked-for a while. A 2.5 million-ton surplus of aluminum dropped to 500,000 tons, and aluminum prices more than doubled. Alcoa, which made virtually no profit in 1993, earned $375 million in 1994 and $791 million in 1995. The cost of the aluminum deal, however, was much larger for users of aluminum, such as Boeing Co. According to a rough estimate by the Institute for International Economics, higher aluminum prices cost the U.S. economy $2.5 billion a year, or about $500,000 per aluminum worker (there are about 5,000 production jobs in the industry). Given the average metal worker's salary, aluminum companies pocketed most of that amount.

By the middle of 1995, however, two things had happened-first, the surging U.S. economy had increased demand for aluminum so much that U.S. and European producers were under pressure to add capacity. At the same time, Russian producers started exceeding their quotas, but the strong demand kept prices comfortably high for U.S. producers. The aluminum deal effectively collapsed, but with few complaints from the now healthy U.S. aluminum industry. Higher prices, and Alcoa's strong record of cost-cutting and innovation under O'Neill's guidance, helped the company rack up earnings of slightly more than $1 billion in 1999. Like most CEOs, O'Neill is a free-marketeer who was willing to make exceptions that helped his company.

His experience at Alcoa has left O'Neill very suspicious of Russia's reform promises, a suspicion that will endear him to conservatives. Many Democrats, on the other hand, will welcome his ideological flexibility. O'Neill could be the embodiment of Bush's successful centrist Administration, or the man to blame if the tax cut plan is done in by partisan strife.