Updated from 1:57 p.m. EST
On a day the nation's unemployment rate reached its highest level in seven months, President Bush moved to shake up his economic policy team and eliminate one of the staunchest administration critics of further fiscal stimulus.
Economic experts say the resignations of Treasury Secretary Paul O'Neill and Bush economic adviser Lawrence Lindsay weren't a surprise. There's been speculation in political circles for months that the White House would move to revamp its economic policy team after the November election.
Indeed, some say they expect the White House to move quickly in naming a successor to O'Neill, whose habit of speaking his mind on everything from
to the economy had caused political headaches for the Bush administration and occasionally thrown currency markets into turmoil. It's likely the White House could name a successor to O'Neill as soon as next week to avoid unsettling the stock market.
"My guess is these resignations wouldn't have been announced if they didn't have a name ready," said David Wyss, chief economist for Standard & Poor's, the credit rating agency. "O'Neill had lost credibility. There was this feeling they needed to do a housecleaning on the economic policy side."
There has been speculation that the White House may look to Wall Street for a successor to O'Neill. Several weeks ago, Charles Schwab's name circulated as a potential successor. The discount brokerage king played a major role in a White House economic policy forum.
Other potential candidates, according to Mickey Levy, chief economist with Bank of America Securities, are Peter Fisher, a Treasury undersecretary; Glenn Hubbard, chairman of the White House Council of Economic Advisors and Martin Feldstein, a Harvard University professor. Fisher, who voted this week to deny an emergency government loan to
, is also said to be under consideration for the top job at the
Securities and Exchange Commission
Economic and policy experts say the president also may want to send a message to the public that the White House is going to spend more time focusing on the economy, especially in light of the surprising three-tenths of a percent rise in the nation's unemployment rate.
But experts differ about the kind of fix the White House may settle upon to stir the ailing economy.
In recent days, there have been rumblings in Washington that the Bush administration will push for a new round of tax cuts, especially now that the Republicans will control both houses of Congress. One the White House is said to be looking at is a reduction in the tax on stock dividends.
Roger Ibbotson, a finance professor at Yale University and president of the economic consulting firm Ibbotson Associates, said a reduction in the tax on dividends would be useful because it could encourage more investment in the stock market and prompt more companies to make payouts. He favors taxing dividends, such as capital gains, rather than an outright elimination of the tax.
"If you tax capital gains and dividends differently, then you end up setting up tax arbitrages," said Ibbotson.
Right now, dividends are taxed twice -- once at the corporate level and a second time for individuals.
Indeed, the push for new tax cuts, such as the one on stock dividends, may be speeded by O'Neill's departure because the former
chief executive was believed to have been resistant to more tax changes.
"O'Neill has been the most opposed to President Bush's tax cut plan," said Gerald Cohen, Merrill Lynch's senior economist, in a research note to customers. "With O'Neill's departure, Bush now likely has full support from his cabinet for his tax cut."
However, liberal economic policy experts fear that the White House will now seek to replace O'Neill with an aggressive tax-cutting proponent. And they say more tax cuts won't necessarily create more jobs.
"Unfortunately, the administration seems to think that a tax cut is the sole solution to every economic problem," said Lawrence Mishel, president of the Economic Policy Institute, a liberal think tank.
In his resignation letter, O'Neill, the first member of Bush's cabinet to resign, said: "It has been a privilege to serve the nation during these challenging times."
His tenure at Treasury was controversial almost from day one after he initially vowed to keep nearly $100 million worth of Alcoa stock while in office. After a firestorm of controversy, he agreed to sell the stock.
While O'Neill is the first cabinet member to resign, he is the second high-profile Bush appointee to announce he was stepping down under fire. Last month,
Securities and Exchange Commission
Chairman Harvey Pitt announced he would step down after a series of missteps as the nation's top securities regulatory cop.
More than a month after Pitt announced his resignation, the White House still hasn't named a successor. Pitt remains on at the SEC as a lame duck chairman.
Policy experts say the White House cannot afford to take that long in naming a successor to O'Neill.