Henry Paulson made his first public speech as U.S. Treasury secretary last week at the Columbia Business School. His talk combined both positives and negatives that suggest he remains an unknown quantity in terms of how he will approach economic policy.
Paulson’s comments about the 2003 tax cuts were encouraging: He noted their “major role in this recovery” in that they helped restore market, investor, and consumer confidence. While in a perfect world he might have added that tax cuts are most effective for their long-term impact on worker incentives to earn the next dollar, this point is arguably immaterial. The Kennedy tax cuts were passed based on Keynesian presumptions, but they had the same supply-side impact as the Reagan tax cuts that were passed with the producer in mind.
While Paulson spoke of the income gap in the United States, he very encouragingly pointed out that of “American families earning the median income,” many “are on their way up the income ladder.” “Rich” is a fluid concept in the U.S., as evidenced by the major differences between the 1982 Forbes 400 and its membership today.
The same applies to the bottom and top fifths of earners over the matching timeframe. The concept of wealth is not a static one: A growing economy that continues to add workers at the low end of the income scale means that the income gap will always be wide, but also irrelevant.
Paulson spoke of his desire to fix the looming entitlement problem, though his wish to do so in bipartisan fashion could be problematic. The 1982 Greenspan Commission supposedly “fixed” Social Security, but more realistically this bipartisan plan added greatly to our unfunded liabilities, not to mention the fact that those who would have most benefited from a twenty-year stock market rally did not. Bipartisan solutions are only useful if they lead to expanded ownership of our future retirements with a commensurate drop in future federal liabilities.
Importantly, Paulson said he would “be a strong advocate for free trade, and added his concern “about anti-trade rhetoric” “coming from some quarters here and around the world.” Stock-market history is pretty clear on the question of protectionism, so it’s a positive that someone with Paulson’s stature is on the right side of this argument.
Paulson hewed to the Bush administration’s public view on the dollar: “a strong dollar is in our nation’s interest and … currency values should be determined in open and competitive markets.” This somewhat contradicted his earlier comments about the weaker U.S. economy at the beginning of the decade, which largely resulted from our strong-dollar policy. Currencies aren’t so much set by markets as they are paper concepts traded in markets in response to central bank and government policy. A strong dollar is every bit as problematic as a weak dollar in that changes in its value retard investment and harm the debtor-creditor relationship that is so essential to economic growth. A stable dollar should be the goal, not a dollar with an ever-changing value.
Implicit in Paulson’s commentary about markets setting currency prices is the desire on the part of the Bush administration to force China to strengthen the yuan as a way to supposedly improve the mythical trade “imbalance” between the U.S. and China. Paulson should know that the Japanese yen has risen 67 percent versus the dollar since 1971, while Japan’s trade surplus with the U.S. has reached its highest level in twenty years (as reported in May by the Wall Street Journal).
The dollar weakened on the day of Paulson’s speech at Columbia, and while his dollar comments were arguably marginalized by interest-rate and geopolitical uncertainty, it has to be remembered that a weaker, inflationary dollar would also achieve the dollar/yuan value spread that the Bush administration seeks.
Paulson’s dollar commentary should also be viewed in light of what he said about oil prices, specifically that they are largely attributable to “an increasing demand for oil, particularly in rapidly growing and developing emerging markets such as China and India.” The problem here is that since June 2001, oil in dollars is up over 170 percent, versus being up roughly 70 percent in euros.
Paulson’s comment that “We are too dependent on foreign sources of oil” is a misnomer, considering that oil is a world commodity. He noted that we should “encourage market-based solutions” to the supposed energy crisis, but only after mentioning the value of ethanol, a source of energy that has largely been a creation of companies with top-notch lobbyists in Washington.
Regarding Sarbanes-Oxley, Paulson spoke highly of “Corrective measures to address corporate scandals” which “increase investor confidence.” No doubt this sounded good, but the Dow Jones Industrial Average was mostly flat in between the implosions of Enron and Worldcom; it only went into freefall once passage of Sarbanes-Oxley became a reality. Going back six years, stocks have been mostly flat. With that in mind, it would be hard to say that these “corrective measures” have done anything for investor confidence.
While those in favor of tax cuts and free trade should be mostly encouraged by Paulson’s words, much of what he said should raise questions. Politics no doubt come into play here, so it’s probably safe to say that Paulson’s views on Sarbanes-Oxley, the dollar, and energy are far more nuanced than his speech would suggest. Still, for all of his success on Wall Street, Paulson possesses the unique ability to leave politics and platitudes aside, and speak forcefully about how we should approach economic policy. In that sense, last week’s speech was a bit wanting.
–John Tamny is a writer in Washington, D.C. He can be reached at firstname.lastname@example.org.