A Talk with Paul O'Neill

The Treasury Secretary on economic growth in the U.S., Japan, and Europe, on steel imports, and on tax havens

George W. Bush's first trip to Europe as President, along with the recent news that growth has turned negative in long-suffering Japan, has the international economy on the front burner. BusinessWeek Washington Correspondents Rich Miller and Howard Gleckman sat down with Treasury Secretary Paul H. O'Neill on June 12 to discuss global and domestic economic growth, U.S. efforts to crack down on cheap steel imports, and a dispute between the U.S. and other major industrialized nations over tax havens. Here are edited excerpts of that conversation, a shorter version of which appears in the June 25 issue of BusinessWeek:

Q: How does the U.S. economy look?


I [am] optimistic that we're going to move up the growth curve through the third and fourth quarters of 2001. If we're able to start moving back up, [the rest of the world] will follow.

Q: How concerned are you about the economic outlook overseas?


With Japan, I'm encouraged. I think the negative 0.2% real growth in the first quarter is not much of a surprise. More important, the prospects are for a change in policy. Prime Minister Junichiro Koizumi has indicated he's going to do things in a different way and fairly soon. He's saying [Japan] needs to get by the Upper House elections [on July 29] and then begin to act. I think that's good.

Righting Japan's growth situation is something that's only within the grasp of the Japanese political system. It's not something you can impose from the outside. There isn't enough money to pick up the responsibility for the bad loans that they've got. They need to be written off.

Opening up their economy to foreign ownership and world prices is something only they can do. We can be supportive. But this is really up to them.

Q: What about Japan's bad loans? Have they recognized the problem?


Some quibble about the amount. But it's a hell of a big number.

Q: Probably bigger than the Japanese government says?


Probably. But the issue of dealing with the bad loans is more important than exactly how [big the number] is. Once they start cleaning up [those] loans, the process will have its own momentum. They'll free up reserves that now have to serve as reserves for colossal amounts of bad debts. It's like having an elephant in the room. It sounds like Koizumi not only recognizes the elephant but he's also going to get it out of the house.

A lot of the bad debts have already been marked [down] in the real world. The books still reflect the bad numbers, but their operating practices reflect the real numbers. So the dislocations [from formally writing them off] could be much smaller than people fear. The unemployment effects may not be too great.

The really important part of this is to make sure that, going forward, banks make viable loans to enterprises that can fully service capital flows on a world-competitive basis. Otherwise, they're going to have a rewind of the same problem. They could become really formidable in the world economy if they were freed of these problems that they've got now. They could set the standard for what it means to be competitive in the world.

Q: What about Europe?


I'm not too surprised by the slowdown. It makes our own return to higher growth important for the whole world. It's quite important for Japan to play a much stronger growth role than they have in the past 10 years. It's also important for the Europeans to work at the top end of their potential. For the whole world to grow at 3% or 3.5%, or maybe a little bit better than that, you need to have all cylinders firing.

Q: The President has been criticized for taking the first steps toward protecting the U.S. steel industry from foreign competition. What's your response?


Look at what the President said. The critical piece was a directive to figure out a solution to the world's problem with steel, to see if it isn't possible to fashion a solution that holds out some prospect that the industry will be able to service the real cost of capital.

For most of the past 40 years, the industry has been in various stages of extremis. Today, [many] prices are 75% of the real cost of production. It's not just a U.S. problem. This is a problem that's shared around the world.

[Think about] the individual actions that countries have taken with quotas and voluntary restraints, subsidies in the form of direct government grants, and loans and forgiveness for energy costs. All these things have been unbelievably painful for the individuals who have been dislocated by this tortured process of restructuring the world's steel capacity.

When things haven't been going well for 40 years, it may be worthwhile to see if there isn't some way to think ourselves out of this box. I don't think we've got a magic solution. But we know that the interventions that have taken place up to now haven't worked very well or lasted very long. It's time for a new idea. My [goal] is a vibrant steel industry that has no subsidies and no protection anywhere in the world.

Q: In that world, how many companies are there going to be?


Lots. Why not? There are reasons to produce lots of different goods locally. You can't defeat the transportation costs. It's [also] responsiveness to the marketplace. Where time is a crucial variable, proximity to local demands is very important. I'm not one who fears we're going to end up with two companies in every industry controlling the world. The highest level of real value added is going to be a very complex set of equations related to response time and a different reality about the idea of scale.

For the longest time, the world was moving in a direction that said bigger is always better. About 1960, we went through that magic point where it wasn't true anymore. The bigger things got, the more complicated they became, the more difficult it became to deal with supply-and-demand cycles and to have the ability to change technology. You're going to see a process of winnowing that's going to be structured around the ability to understand and deploy ideas in the world. And capital and location decisions will follow that.

Q: Other industrialized nations want to curb tax havens. You're backing away from that initiative. Why?


We have two principles. We will do everything that we can to collect every dollar owed under our tax laws by working in cooperation with other countries. And we will not interfere in other people's tax systems. Those seem to be really clear principles.

I'm in charge of enforcing our tax laws. I need information if people are trying to unfairly escape their responsibilities in the U.S. But what should I do if Ireland or some other country has a different notion about how to [tax] capital flows? What should I do to them? What would you have me do?

Q: What about countries that allow American citizens to evade U.S. taxes?


I want to stop that. We want all the information that's necessary to ensure that our tax laws are fully enforced and to reciprocate by providing that same kind of information around the world. Period.

Q: You've also said you're rethinking U.S. rules that attempt to curb money laundering by requiring banks to disclose cash transactions. Why?


How big is money laundering in the world? Let me know when you find out. Then let me know [how much] money all the governments in the world are spending on the subject of money laundering, What are we getting [for it]? When you get the answer to that, let me know that, too. This isn't just about money laundering. It's about everything that's inside the portfolio of the Treasury Dept. I'm intent on knowing how close we are to solving [problems], and what the unit costs of success are.

Before it's here, it's on the Bloomberg Terminal.