(MONEY Magazine) – Whoever succeeded Bob Rubin and Lawrence Summers as Treasury Secretary would have had a couple of tough acts to follow. Both Rubin and his protege Summers had the good fortune of running the nation's finances in a period of nearly unprecedented peace and prosperity. Paul O'Neill wasn't so lucky. He inherited a faltering economy. Plus, the iconoclastic industrialist was often at odds with his boss. Now comes John Snow. Accustomed to making the trains run on time at CSX, Snow knows that as Treasury Secretary it's his job to shovel the coal, not drive the train. In our interview, he did just that.

INSANA: A recent poll from the New York Times suggests that most Americans are more worried about the economy than they are about the war, and yet the unemployment rate's at 5.7% and incomes are still going up. Why do you think there's so much trepidation?

SNOW: I think the war does play into the cloud over the economy. Beyond that, there is a basic apprehension that you encounter as you go out and talk to business executives or employees about how robust this recovery is. There's a lot of talk about it being fragile. There's a lot of concern about that. That's why the President's growth package is so important. We figure the best way to ensure that we stay on the recovery path is to give the taxpayers more discretionary income now and let them know that income will be available to them year after year.

Q. You were in the private sector at a company that feels economic cycles very acutely. What did you think was wrong with the economy when you were running CSX?

A. Manufacturing is recovering at a much slower rate than it normally does in a recovery period, and I think two things besides the war are contributing to this state of affairs. One, certain amounts of wealth have come out of the economy as a result of the stock market meltdown. Two, businesses are not undertaking renewed capital expenditures.

Q. Why?

A. Because they don't see their own profitability returning as fast as they would like. Businesses invest when they see prospects for profits. They aren't seeing those prospects for high returns right now, so they're sitting on their capital. We've had lots of recessions in this country over the past century. This is unique. In a typical recession, there is an inventory buildup, which causes firms to trim capital spending, reduce employment, let inventories run out, and then rehire and get their enterprises going again. With the lean inventories that characterize the modern economy, I don't think we can look at the inventories as you would in prior recessions. This is an investor-led recession, where the stock market wealth effects have had a disproportionate effect in producing the situation and restraining the recovery.

Q. How would the Bush economic program fix that?

A. The President's plan addresses both the short-term issues that affect the economy and the longer term. The immediate effects are most visible from putting a lot more money in people's pockets. The child credits of an additional $400 per child will put a lot of money into an average young married couple's pockets, and it'll make them feel a lot better about their current circumstances. But the important thing is, it'll make them feel better about 2004, 2005 and 2006. And accelerating the lower rates that were going to be put into effect in '04 and '06 means sizable additional purchasing power in the hands of millions and millions of Americans.

All of us in the field of economics feel pretty modest about what we know, but one thing that I think we do know with a high degree of certainty is that people's current behavior is a function of how they see themselves over some longer period of time. And as we make people feel better about their economic circumstances out into the future, they'll spend and invest more today.

And, of course, small business will get a more generous depreciation allowance that will help them invest more in new equipment. That's important in an economy that is starved for new business investment. And it's small business, you know, that creates most of the jobs.

Looking longer term, the centerpiece is the ending of the double taxation on dividends. That will mean that a lot of people--a lot of average people--will have more real income. After the proposal is enacted, a $1.50 dividend, which today is only worth $1 to you, will be worth a full $1.50. And you multiply that out, that'll be a sizable amount of money. But--and this is really the critically important point--companies will pay more dividends because they will see it as a way to reward their shareholders. We always get more of anything we tax less. So if you reduce the tax on sin, you'd probably get more sin. Reduce the taxes on dividends, you get more dividends. You'd pay more as an investor for a company that could yield you a dividend of $1.50 rather than $1, right?

Q. Absolutely.

A. So the market cap of that company would immediately rise. Economists can differ on how much. I don't think any would dispute the fact that it will have quite a significant effect on the current valuation.

Q. Do you believe the economy can't recover until the stock market does?

A. I think the recovery of the stock market will play a more important role in the recovery of the economy than it ever played before, because the stock market is built into the psychology and the fundamental economics of the country in new ways. We've become an investor society.

Q. The administration has pulled out all the stops to explain to the American people why Saddam Hussein has to go, being an enormous threat to both national and global security. And yet in the aftermath of the biggest bubble in the history of financial markets, no such hyperbole is being used. Why don't you come out and say, "Listen, if we don't have a Marshall Plan for the U.S. economy, we're Japan or we're the U.S. in the 1930s"?

A. I don't think we need a Marshall Plan. I do think we need good policy. Tax policy is a central piece of that, but it's not all of it. Regulatory policy plays a part. Trade policy plays a part. Fixing things like the tort system plays a part.

Don't underestimate the power of this tax package: 500,000 additional jobs by the end of the fourth quarter of this year, a million and a half conservatively estimated by the end of the fourth quarter next year, two million in 2005. And even more important, increasing the real returns on equity, encouraging equity capital formation, creating a larger capital stock--that means American workers will have more of the tools that make them more productive. Then their productivity goes up, which leads, in turn, to their having a higher real wage rate. Growth is an absolutely necessary condition to get back into fiscal balance.

Q. If the war doesn't go as quickly as planned, what kind of contingency plan, in the absence of the passage of this program, does the Bush administration have for the economy?

A. I'm going to defer on that one. It wouldn't serve any useful purpose for me to speculate.

Ron Insana is co-anchor of CNBC's Business Center and author of Trend-Watching, published by HarperBusiness.