U.S. Economy Improving, More Stimulus Isn't the Answer, Rubin, O'Neill Say

The U.S. economy will improve slowly and another round of fiscal stimulus probably wouldn’t be effective, former Treasury secretaries Paul O’Neill and Robert Rubin said.

Rubin, who served under Democratic President Bill Clinton, said the U.S. is “going to have slow and bumpy growth,” an interview on CNN’s “Fareed Zakaria GPS” aired yesterday. A “major second stimulus” might create more uncertainty and undermine confidence, he said.

Companies concerned about demand won’t expand facilities or hire new employees until sales have improved, said O’Neill, who was Treasury secretary under Republican President George W. Bush. “We are moving forward at a pretty gradual pace,” he said. “But I don’t think things are terrible.”

The world’s largest economy may be cooling in the second half of the year as a scarcity of jobs limits consumer spending. At the same time, concern about the surging fiscal deficit has prompted President Barack Obama to urge lawmakers to let the Bush administration tax cuts for the wealthiest Americans expire this year.

While Rubin backed Obama’s stance, O’Neill reiterated that he strongly opposed the Bush tax cuts of 2003 and said the president and U.S. lawmakers need to focus on overhauling the entire tax system rather than on the expiring cuts.

Not ‘Intelligent People’

“The tax code we have is proof we’re not an intelligent people,” said O’Neill, a senior adviser and consultant to New York-based Blackstone Group LP. “The president could earn a lot of credit and he could make a huge difference if he would lead the charge for fundamental tax reform,” which might include a “consumption-based tax.”

Obama wants to let the tax cuts expire for households earning more than $250,000 a year and maintain them for households earning less than that. The tax reductions, enacted in 2001 and 2003, expire on Dec. 31. Treasury Secretary Timothy F. Geithner has said the government can’t afford to extend tax reductions for the wealthiest group, as the breaks don’t pay for themselves in economic growth.

Rubin said he’d create an estate tax, increase taxes for the top two brackets of upper-income Americans and leave in place the middle-class tax rates “for a limited period” because economic growth will take time to quicken. He would also try “over the next six months to put in place a very serious beginning of deficit reduction that would take effect at some specified time in the future.”

Delay Elimination

Rubin urged delaying the elimination of tax cuts on the middle class because of the “vulnerability” of the economy and the high unemployment rate.

The economy grew at a slower-than-projected 2.4 percent pace in the second quarter as consumer spending slowed and the trade deficit widened, government data showed on July 30. U.S. companies in July hired fewer workers than forecast, and economists in a Bloomberg News survey project unemployment will be slow to recede after reaching a 26-year high of 10.1 percent in October 2009.

O’Neill advocated steps to help Americans see a brighter future. Something “simple” such as a value-added tax instead of the income tax and corporate income tax “would give reassurance to the markets that we’re coming back” and spur investment and savings, he said.

Jobless Rate

Private payrolls that exclude government agencies rose by 71,000 in July after a June gain of 31,000 that was smaller than previously reported, according to Labor Department figures released in Washington Aug 6. Overall employment fell by 131,000, reflecting the dismissal of temporary census workers, and the jobless rate held at 9.5 percent.

The Clinton presidency, when 22.8 million jobs were created, “was a remarkable period” and the president “was terrific on economic policy,” Rubin said. The country is in a much different position now, he said in response to a question about how the U.S. could create jobs more rapidly.

“Obama has done a lot, given the current circumstances in which he has been operating,” Rubin said. “But he now faces these enormously complex issues,” and “I think we’ve all got to try to find some way to help make the system work better.”

The weak July payrolls report intensified a debate among economists over whether Federal Reserve policy makers will take an incremental step this week toward providing more stimulus. U.S. central bankers said in June that additional monetary stimulus “might become appropriate” if the economic outlook “were to worsen appreciably.”

Fed Chairman Ben S. Bernanke last month said the central bank is prepared to take further policy actions if the economy “doesn’t continue to improve.” Bernanke said last month the Fed may at some point maintain stimulus by investing the proceeds from maturing bonds into U.S. Treasuries.

To contact the reporters on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net Shobhana Chandra in Washington at schandra1@bloomberg.net

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