Online Extra: Q&A with the OMB's Mitch Daniels

Bush's budget czar talks about the $1.35 trillion tax cut plan, clearing regulatory underbrush, entitlement reform, and more

White House Budget Director Mitch Daniels, the man President Bush affectionately calls "The Blade," hasn't cut a big public swath through Washington. Daniels likes it that way. He plans to keep a low profile at the Office of Management & Budget. But that's not to say he doesn't have big plans for the agency.

In an Apr. 26 interview with BusinessWeek Washington Bureau Chief Lee Walczak and White House Correspondent Richard S. Dunham, Daniels laid out an expansive agenda. The key elements: streamlining regulations, entitlement reform, and a new stress on management reforms -- plus lots of spending restraint. Here are edited excerpts from the conversation:

Q: What's your assessment of the President's achievement with the size of his tax cut?

A: Seven-eighths of a loaf.

Q: Is that good?

A: Yeah, it's good. Only yesterday some people were debating where there would be or should be any [tax] relief at all. Now we're down to splitting the last few hairs.

Q: First-quarter GDP came in at a surprisingly good 2%. Does this mean the slump is ending?

A: First of all, this is [only] the first estimate. It's subject to revision. I just think it's way too soon to celebrate.

Q: Are you as optimistic on the President's drive to rein in federal spending and to get rid of some of those specially earmarked projects lawmakers like to tack onto pending bills?

A: It's too soon to tell. Let's just say it's round two of a 15-rounder. Our objective is to achieve a budget resolution at or near the President's proposal, and then to make it stick. That will take eternal vigilance.

Q: How can you budget without knowing the recommendations of Vice-President Cheney's energy task force or Defense Secretary Donald Rumsfeld's review of Pentagon needs?

A: That's an excellent question. One thing not to do is to [put in] some plug numbers based on estimates. That simply becomes the floor and starts the bidding war, and that's why we resolutely decline to do that.

Q: How do you do deal Senate Appropriations Chairman Ted Stevens of Alaska or Majority Leader Trent Lott of Mississippi, senators noted for aggressively promoting state interests?

A: With realism and good humor. If it's earmarks, we've indicated that we mean business. We think the practice has gotten out of hand and needs to be dialed back. But it has always been a part of the process and sort of a necessary lubricant. If you look at the run-up over the last few years, we think it's really problematic, both in terms of the amount of spending it leads to and in terms of trampling executive and state decision-making.

Q: Why weren't you more aggressive going after corporate welfare in your fiscal 2002 budget?

A: First of all, as a footnote, "corporate welfare" is your term, not ours. You won't find "welfare" in the budget anywhere. [But] I think there is a general skepticism about subsidies of private economic activity. So we did define a number of examples, and we're serious about them. It seems to me the reform proposals we've incorporated are as aggressive as anybody has tried for awhile. We'll see what kind of luck we have with those, then take a look at others.

Q: The President talks a lot about bipartisanship, but do you think we're seeing a lot of it in the wake of the hardball tactics on the tax bill?

A: The President is going to keep on working to create a coalition. This first [tax] round has had the usual bumps and grinds, but I think we'll look back on it as a reasonable outcome. And it will happen with some accommodation with centrist Democrats. I think that that'll be the pattern. That has been his pattern as governor, and it certainly fits the circumstances of a closely divided Congress.

Q: With partisanship on the rise, are you still optimistic about some of your other top goals, such as getting private Social Security accounts or reforming Medicare?

A: I don't know what others thought, but these were always very ambitious goals. One reason I was drawn to come to work for President Bush was he was obviously prepared to go after big game. But under any circumstance, even if there had been a large [GOP] majority, no one should have imagined that reform of Medicare would be easy -- let alone [revamping] Social Security. Until President Bush, no political candidate ever even mentioned that. To me, what's exciting is that we have a President who's prepared to give it a go.

Q: How much damage has the stock-market meltdown done to the Administration's push for private Social Security accounts? Doesn't this underscore the risks?

A: I don't think folks with that view are giving the American public enough credit. I'm been very impressed with the maturity of the investor, which now includes most Americans. Many thought that there might be a major recoiling on the part of people who had never seen anything but a rising market. I don't think we've seen that at all. I'm not saying [reform] will be easy. But people seem to know that for today's younger worker, the Social Security status quo is very insecure, and promises only a lousy return.

Q: How can you hope to reform Medicare if Congress hands out the carrot -- a new prescription drug benefit -- before the stick of cost savings?

A: I can't put it much better than you just did. I think that a drug benefit, poorly constructed -- [which is a] characteristic of a separate, free-floating drug benefit -- is likely to cost a terrifying amount of money. That alone may sober people up.

To my way of thinking, the second most important reason to reform Medicare is financial solvency. The most important reason is it ought to deliver better health care than it does. One major defect of the current system is that pharmaceutical therapy is not integrated, as it is for most younger Americans, so that patients and physicians can trade off the use of drugs against other interventions.

Q: You obviously know a lot about this because of your experience as an executive for Eli Lilly, but will you have to recuse yourself in future policy debates to avoid the appearance a conflict of interest?

A: I don't intend to, because I don't know how you could do this job [without weighing in] on something like health care. So what I did was to take the absolutist approach to divestiture and liquidate everything [in the way of stock holdings]. I went on, however, to stipulate in my agreement that if anything should ever float through [my office] that is Lilly-specific, I will recuse myself.

Q: What are your plans on the regulatory front?

A: Regulatory review is an immensely important mission. By some estimates, federal regulation imposes three quarters of a trillion dollars of taxes on the economy each year. That's a third as big as the budget. So we want to have the best staff of the regulatory office scrutinize new and existing regulations as carefully and professionally as we can.

Q: Do you think President Clinton left you a minefield of last-minute regs?

A: Yeah, I think to some extent. But we have to take the responsibility for that. The place was booby trapped, but we knew it. You've got to look for the wires. However, once we get past the "night deposit" that our predecessors left us, we're almost to the point where we can deal with regulations on something other than an ad-hoc basis. I'm most concerned about setting up the [regulatory review] office in a way that will bring to bear top-flight science, economics, and analysis.

Q: How do you plan to do that?

A: Well, there are questions here about the thresholds -- what we'd treat as a significant regulation. We'll make sure those threshholds are low enough that we're looking at everything that we practically can. We're going to try to look earlier in the process so that regulations don't arrive over here in such defective condition that we always have to be undoing them.

Q: We keep hearing that the OMB is going to stress management issues. How?

A: That's going to mean a very aggressive offensive, most of it along the lines of what the President laid out in his campaign. As soon as we got the budget outline out the door, we defined a management agenda I'll be going over soon with the President. We will eventually make it public.

One goal is the integration of performance measurement and the budget. Congress has passed bills [on the subject], but they've not moved on this. That's at the top of our agenda. There is also a human-capital issue: The President wants to de-layer the government and to have more people involved in customer service. But there are also issues of quality [measurement], of course, and retention of the best people.

Q: The President is very interested in the high-tech privacy area. What might this mean for the OMB?

A: Privacy will be a very important theme of this Administration. The President is very personally committed to this. In fact, a person who has been with him a long time said to me a couple of weeks ago that one area where [Bush] is consistently underestimated is in the intensity of his commitment and interest in personal privacy. I want to make sure that, particularly in the regulatory area, we have accountability and we are alert to opportunities to extend privacy protections.

Q: Some analysts, looking back on George W. Bush's record in Texas and on his general philosophy, have dubbed him a "big-government conservative." Your take?

A: Well, I don't like the terminology, but I understand the point. The President himself has spoken of government that is limited but activist. So I think that is accurate. I think he has a properly skeptical view about the scope of government. But where federal action is appropriate, he wants his Administration to be active and effective. Sort of underline "effective," though, because that's the part that will be different. I'm talking about measuring performance.

Q: How much actual budget experience did you have before you stepped into this job?

A: People think if it didn't happen in Washington, it didn't happen, right? It's true, in my previous experience [with the Reagan Administration], I had sort of limited involvement with the budget. But I used to come over here to OMB. I had federalism issues, and I would sit in on select sessions. My view is that 15 years of business [experience] in the intervening period was excellent preparation. People make assumptions about the complexity of this job. I say it's only half as complex as corporate finance. In business, there are two sides of the income statement. Here, we just add up the expenditure side.

Q: After a lucrative stint in the private sector, what caused you to move back to Washington again?

A: I have not moved my family. That's the worst part -- although I always say it's probably better for a budget director to live where people still think a trillion dollars is a lot of money. [The OMB post] was an opportunity not to be missed. I was very fulfilled doing what I was doing. Great, intriguing job in a great company with great prospects. But the nature of this job and this President made me come back.

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