December 7, 2002

     Treasury Secretary Paul H. O'Neill's failure to generate confidence on Wall Street cost him his Cabinet position yesterday, as President Bush seeks a steady hand to guide a fragile economy.

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     "The Treasury Department has become the Washington embassy for Wall Street, and you need someone who has the confidence of Wall Street and the contacts, and I think we will end up with someone like that," said Kevin Hassett, an economist at the American Enterprise Institute.
     Mr. Bush was described by administration officials and outside advisers as displeased with the inability of his economic advisers to develop a consensus for an economic stimulus package he wants to propose when Congress convenes in January.
     The White House has been holding private "listening sessions" with business leaders in recent weeks to develop the stimulus package. Instead of Mr. O'Neill sitting at the table, however, the advisers heading that effort were Karl Rove, the president's political strategist, and economic adviser Lawrence Lindsey, who also submitted his resignation yesterday.
     Mr. Bush fired Mr. O'Neill, the former CEO of Alcoa, and Mr. Lindsey, both of whom submitted their resignations at the president's request. Mr. Lindsey will return to his lucrative international economic consulting business.
     With the twin pressures of the war on terrorism and the likelihood of a costly war to overthrow and disarm Saddam Hussein's regime in Iraq, the White House could not afford another year of the economic ups and downs that characterized most of 2002, administration officials said.
     The consensus forecast among blue-chip economists is for the economy to slow down in the current fourth quarter and for slightly better growth early next year.
     In an interview last month, Mr. Lindsey said it was difficult to forecast where the U.S. economy was headed because the war on terrorism and a war in Iraq "have economic and psychological effects that are very difficult to evaluate and predict."
     "Uncertainty is high," he said.
     Mr. O'Neill, in his two-year tenure as Treasury secretary, also suffered from a tendency to voice positions that sometimes ran counter to administration policy. He angered many House Republicans when he criticized a stimulus package they crafted.
     Not long after he took his job he appeared to question whether tax cuts were needed to stimulate the economy. He also came under some criticism and even ridicule for taking a global tour of impoverished countries with rock star Bono of the band U2.
     Mr. Lindsey, a former Federal Reserve Board governor, has been Mr. Bush's economic adviser from the beginning of his presidential candidacy and was the chief architect of his $1.3 trillion tax-cut plan. But he tended to be bearish about the stock market's future and was somewhat more pessimistic about the economy in the short term.
     Feedback from business leaders at the White House "listening sessions" in the past two weeks also fueled the president's decision to replace his two advisers.
     "You have to accept the fact that the economy is not in the best of shape. Talk to real business people, and things are not great. This is the president's and his party's economy now," said a key business lobbyist who described the tenor of the White House discussions.
     "You can come to only one conclusion, that the highest domestic priority has to be to revive the economy," he said.
     With control of the presidency, along with the Senate and House, in Republican hands when Congress returns in January, the administration is aware that the party will be held responsible if the economy continues to remain weak next year and going into the 2004 elections.
     Mr. Hassett said Mr. O'Neill was unable to generate confidence and garner support on Wall Street in the face of a sluggish economy, adding that the administration needs a big Wall Street name to replace him.
     "There is nothing that quite gives someone gravitas and the credibility from having made a fortune trading in the financial markets, and he didn't have that," Mr. Hassett said.

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Updated at 9:30 a.m.