That nagging math problem

Dwarfed by other news yesterday, the Congressional Budget Office (CBO) updated their budget projections reflecting the new tax law and spending plan. Over the next ten years, the just over $21 trillion debt is expected to increase by $11.7 trillion bringing it to about $33 trillion. Before these two changes, it was expected to increase to about $31 trillion.

The CBO also said the deficit should rise to $804 billion by 2018 fiscal year end. Last year it was $665 billion. Further, the annual deficit should pass $1 trillion by 2020 and stay there.

There are many in Congress today who have screamed bloody murder in the past over rising debt and got elected under the banner of the Tea Party. I have seen footage of members who called this a crisis when it was only $8 trillion and then $13 trillion. They were right then, but now debt and deficit don’t seem to matter as many voted for a law to increase it.

I have seen some recent discussion about the need for a balanced budget amendment. To be frank, that won’t do. We need more revenue than expenses. The tax law passed in December is projected to increase the debt by $1.5 trillion, but Congress knew that then and still passed it, even many of these Tea Partiers.

I said this before, but I believe the tax law passing is extremely poor stewardship, even malfeasance. We are borrowing from our future to try to make an economy, that was in a 103 consecutive month growth period with seven consecutive years of 2 million plus job growth, even better.

To be frank, we cannot cut our way out of this problem. The math will not work. We must also have more revenue than we had before the tax cut. At some point, a future Congress and President will get all the flak for abruptly addressing this problem. Yet, they will be the better stewards, far better than the current President, Congress and their predecessors have been.

Bill Clinton takes a lot of heat for his womanizing, rightfully so, but he handed a surplus budget and smaller debt to George W. Bush. Bush went against the advice of his Treasury Secretary and passed a tax cut and then we invaded two countries draining our budget. And, my biggest criticism of Barack Obama is he shelved the Simpson-Bowles Deficit Reduction Committee report failing to use it as very good starting point for change.

Folks, like climate change, this math problem is not going away. We must address our debt now or it will be much more severe later. And, if people think it does not matter, that country we are imposing tariffs on owns a lot of our treasury bonds, bills and notes. They have floated the idea of stop buying them even before the tariff war. That also makes it a security risk as well.

Who is Paul O’Neill and why should his opinions matter?

I am in the middle of a fascinating book by Charles Duhigg called “The Power of Habit – Why We Do What We Do In Life and Business” and a very useful example appears involving Paul O’Neill. The name rang a bell for another reason, but more on that later. Who is Paul O’Neill? O’Neill was the CEO who turned Alcoa around during his tenure from 1987 – 2000. He joined a company in turmoil, and under his leadership, the value of the company doubled and the annual revenue went from $1.5 Billion in 1987 to $23 Billion. How did he help Alcoa achieve these results?

Ironically, when he made his first speech to investors and stock analysts, they came away unimpressed. He was not a well-known quantity having served as a in the VA Administration, Office of Management and Budget and as a Vice President and President of International Paper. Yet, what he said in that speech gave everyone pause. He said “I want to talk about worker safety.” He went on to discuss how Alcoa had a horrible safety record and his goal was “to go for zero injuries.” Many stock analysts were stunned by this focus as he did not use any of the typical words around synergy or rightsizing, etc. Several told their clients to divest of Alcoa stock after that meeting. One analyst later said “It was the worst piece of advice I gave in my entire career.”

Why the focus? The purpose of the book is to understand the role habits play in everything we do. If you can find a keystone habit and get someone to change it, then other better habits will follow. Companies were no different. O’Neill recognized before he took the job, he needed to help Alcoa change, but the unions did not trust management, communication was poor and processes needed changing. So, he decided to focus on the one thing everyone could agree on – worker safety. By focusing on worker safety, he would help change that habit and watch it spillover.

O’Neill instituted a policy that his managers had to notify him of an accident in the company within 24 hours along with a plan on how we learned from it and how we could avoid it happening again. Many thought it was just window dressing, but two weeks into his tenure, a young man acted rashly to fix a machine and was killed. O’Neill took this to heart and said “I killed this man. All of us in this room killed this man.” Everyone saw this was meaningful and things started to change. But, it was more than safety improving. To receive a report within 24 hours with a plan, a leader needed to know about the accident, what happened and how it could be avoided. Communication up and down the ranks improved, so the safety improvements could be conveyed and understood.

To improve safety, though, you had to improve processes. You had to make things easier to work with and provide the equipment to be safe. Not only did safety improve, but so did productivity. And, with these better communications, ideas from the manufacturing floor started to flow up. Some of the ideas had been bottled up for years, but now people felt empowered to share them. And, before the internet got up and running, they were using an intranet to communicate these ideas which kept them ahead of the competition and let information pass quickly. So, the company took off, because of O’Neill’s purposeful focus on one keystone habit – let’s make our jobs safer.

Where the name sounded familiar is O’Neill became President George W. Bush’s first Secretary of the Treasury in January, 2001. However, with all of his success and track record, he was fired by December 31, 2002. Why? O’Neill was very outspoken in his criticism over the now famous “Bush Tax Cuts” and our going to war with Iraq. As Secretary of the Treasury, he had seen a report that said the US had a looming deficit problem that would require tax increases and spending cuts. That report was suppressed by Bush and we went ahead with the Bush Tax Cuts that unbalanced our surplus budget left by President Bill Clinton aided by his Chief of Staff, Erskine Bowles.

Quoting a footnote in the book, Duhigg notes “However, O’Neill’s politics did not line up with those of the President Bush, and he launched an internal fight opposing Bush’s proposed tax cuts. He was asked to resign at the end of 2002. ‘What I thought was the right thing for economic policy was the opposite of what the White House wanted,’ O’Neill told me. ‘That’s not good for a treasury secretary, so I got fired.'”

I put O’Neill’s quotes in bold for effect. I would add that Warren Buffett, another pretty smart cookie, largely said the same thing at the time. Buffett said “You are giving me a tax cut I do not need.” So, just to state the obvious:

– we had a balanced budget, even a small surplus;

– President Bush wanted to push tax cuts to stimulate the economy;

– his Secretary of Treasury, a pretty competent leader, reads a report that forewarns of deficits down the road and tells the President and Vice President Dick Cheney (by the way, he recommended Cheney to Bush’s father for Secretary of Defense), that tax cuts are not the right answer for the economy and we need increases and spending cuts;

– the President and Vice President (who wielded more power than many VPs) ignores his advice and asks him to resign;

– we now have budget deficits heightened by the Bush Tax Cuts and two unfunded wars; and

– we continue to fight over these Bush Tax Cuts and need to raise revenue as well as cut spending to address the deficit, two ideas the suppressed report and fired Secretary of the Treasury espoused in 2002, eleven years ago.

Hindsight is usually 20/20, but the last bullet is very important. We have leaders who refuse to see that we must increase tax revenue and cut spending. No greater authorities than Alan Simpson and Erskine Bowles reached that same conclusion in the Simpson-Bowles Deficit Reduction Commission report. O’Neill, a very successful and competent CEO told his bosses, Bush and Cheney, this very thing and got fired. He also told them this before it would happen and before Bush actually threw gasoline in the fire and made it worse. Not to beat a dead horse, but Presidential historians have also noted President Bush as one of the worst presidents we have ever had and contrary to what his brother Jeb said last week, history will not judge him any better looking back from a future date.

So, to recap. Paul O’Neill, Warren Buffett, Alan Simpson and Erskine Bowles, all pretty capable people, said we need tax increases and spending cuts to address our deficits.However, O’Neill said it in official capacity as Secretary of Treasury and got fired. And, now we are living with not only the failure to act, but actions taken by Bush that are perpetuated today. I think O’Neill and these other people’s opinions matter and we should listen to them.