The recent stock market sell-off is the first real domestic
challenge to George W. Bush's leadership. So far, he has not handled it
well. In particular, his speech before the New York Stock Exchange on July 9
was ill-conceived and badly received. The immediate fall in the stock market
cannot be attributed to any other cause. While I think Bush's effort was
well-intentioned, it was not very well thought through and appeared to have
been written by his political advisers, with little input from his
Of course, Bush deserves to know what the political implications
of his actions may be, but he also needs to be advised on the economic
implications. It appears that the latter is not as good as it should be,
because his economic advisers are speaking to him through a cacophony of
multiple voices. On the other hand, Bush's political advice comes through
clearly and distinctly from Karl Rove.
In the long run, what is good for the economy is good for both
the stock market and a president's political standing. Bill Clinton is the
best possible proof of that. Year after year, he survived political scandals
that would have destroyed most of his predecessors. He did so, in large
part, because people were willing to overlook them as long as the economy
was strong and their financial wealth was increasing.
As I see it, there are two structural problems with Bush's
economic policy operation. First is that he mistakenly retained the Clinton
administration's system, which is built around the National Economic
Council. This organization was created by Clinton to mirror the National
Security Council. However, the difference in nature between economic policy
and national security makes any comparison invalid. The result has been to
diminish the influence of those organizations traditionally given primary
responsibility for economic policy: the Treasury Department, Council of
Economic Advisers, and Office of Management and Budget.
Secondly, Bush has a personnel problem. Treasury Secretary Paul
O'Neill increasingly appears ill-suited to the job, and NEC Director Larry
Lindsey tends to muddle the advice Bush receives from his other economic
advisers. Lindsey should play a purely coordinating role, but instead often
tries to drive policy himself. The result is that there is insufficient
coordination, making Bush's economic operation too weak structurally to deal
with current economic problems.
Fortunately for Bush, the opportunity to make some positive
changes may soon present itself. There are continuing reports that OMB
Director Mitch Daniels will soon leave to pursue a political career in his
home state of Indiana. There are also reports that O'Neill has tired of the
Treasury job, evidenced by the many foreign junkets he seems to spend most
of his time on lately.
Should Daniels leave and O'Neill be nudged out, Bush would have
a tremendous opportunity to reorganize his economic operation in ways that
would greatly improve it. By moving Lindsey over to OMB, he would greatly
increase the clout of this important agency and remove the NEC as an
impediment to the clear flow of economic advice. As it is, the NEC simply
gets in the way of Treasury and CEA, but cannot be ignored because Lindsey
is Bush's most trusted economic adviser. At OMB, he will be in a much better
position to use his talents and could revive an agency that has been
somewhat moribund since Dick Darman was director in the first Bush
Should O'Neill move on, Bush should name Alan Greenspan as his
replacement. As Treasury Secretary, Greenspan would immediately raise the
stature of the administration's economic team to that on the foreign policy
and defense side. I believe that this is a move guaranteed to raise the
stock market by several hundred points immediately.
With Greenspan at Treasury and Lindsey at OMB, I believe Bush
would have a much better economic policy structure than he has now. Not only
would it strengthen the advice he gets from these two important agencies,
but it would allow people like CEA Chairman Glenn Hubbard to come out from
under Lindsey's shadow within the White House. Without Lindsey at the NEC,
that agency's influence would naturally diminish, no longer muddling the
economic policymaking structure.
This may not be the perfect fix, but it is one I hope Bush
seriously considers. The longer he waits, the more his economic problems are
likely to mount, which eventually will become political problems, as well.