If the supercommittee fails to reach a deal by November 23, it will trigger across-the-board spending cuts. Alarmed by the increasing probability that this worst-case scenario will come to pass, members of Congress are considering adjusting the trigger or eliminating it altogether.
“The sequester will never take place,” Rep. John Garamendi (D., Calif.) promised the New York Times. “It’s not going to happen.”
Should this effort succeed, “it would be a disaster,” says Henry Paulson. In an interview with National Review Online, the former secretary of the Treasury argues that the trigger is essential to financial markets’ faith in our government. “It would really hurt our credibility if [Congress] said after the fact, ‘Oh, we really didn’t mean for that provision to exist, and now we’re going to repudiate it.’”
Paulson distills the ethos of Washington, D.C. — and the need for a trigger — in a single sentence: “It’s [got] to be so bad to not have a compromise that one will get done.” Not that he considers every politician irresponsible. He knows several members of the committee — “I couldn’t have a higher regard for [Sen.] Rob Portman [R., Ohio], for instance” — and believes “they won’t want to fail.”
And that’s encouraging, because they must succeed. Cutting $1.2 trillion over ten years “is not a heavy lift,” Paulson maintains. Rather, it’s a gesture — an indication to markets “that our government can function.” Optimistic that the committee will reach a deal, Paulson speculates, “It can help create some momentum toward doing the sorts of things that we need to get done . . . though they will probably be done after the election.”
What are those sorts of things? Reforms. “Tax reform, energy reform, entitlement reform, reform in terms of our education and training,” Paulson suggests. Our tax system’s flaws are particularly prominent today. “We need more revenues,” he contends, “because revenues are something like 15 percent of GDP today, and for years they’ve averaged at least 18 percent.”
“The question,” he adds, “is what form of taxes will give us the revenues we need and let us create jobs and be competitive. I don’t think anybody would argue that our current tax system is the one that does that. Neither you nor I believe that this committee at this point in time is going to give us a tax system we need.”
What would such a tax system look like? A lot like the one proposed by the Simpson-Bowles commission. “Broaden the base and eliminate so many of these preferences and deductions and loopholes,” Paulson counsels. He calls the commission’s report, which the president quickly discarded, “a missed opportunity.”
He’s no Johnny-come-lately on entitlement reform. In his recent book, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System, Paulson relates that Pres. George W. Bush and he toyed with the idea of his spearheading the effort. Asked whether the current secretary should lead on this issue, Paulson says simply, “I know [entitlement reform] is very important to Tim Geithner.”
Despite his zeal for reform, Paulson advocates a take-it-slow approach for the economy’s sake. Lamenting “a national tragedy in terms of foreclosures,” he argues that “we really need to use Fannie Mae and Freddie Mac to do anything that’s reasonable to provide financial support to the mortgage market” — in the short term, at least. In the long term, “those agencies have got to be just radically reformed and downsized.”
More broadly, Paulson warns that efforts to prevent foreclosures, well-intended though they may be, are delaying the inevitable. As a result, “we’ve got this big overhang on the market which is driving down housing prices and ultimately hurting all Americans.”
But the answers to our problems lie within our power, and Paulson advises that we not go hunting for scapegoats. To Mitt Romney’s proposal that the U.S. designate China a “currency manipulator” and slap retaliatory tariffs on its exports, Paulson replies, “I don’t think it would be very successful if another sovereign nation tried to [intimidate the U.S. that way]. And frankly . . . I don’t think currency has as much of an impact on our trade relations with China” as some other public figures do.
The former secretary has weathered several crises in his life, and he remains cautious about the U.S.’s prospects. But daunting as closing the deficit is, he concludes, “if we act now and if we do it in a comprehensive manner, we can do it in a way that [spreads] the sacrifice throughout society” fairly.
It’s heartening to hear.
— Brian Bolduc is an editorial associate for National Review.