Tough challenges for Hank to tackle

Marketplace Staff May 31, 2006

KAI RYSSDAL: Henry Paulson is getting mostly positive press today. The Goldman Sachs CEO was nominated Tuesday to be the new Treasury secretary. Even Senate Democrats are saying nice things. The Treasury secretary is typically the guy who markets the President’s economic plan. But commentator Robert Reich says Hank’s got a tough job ahead of him.

ROBERT REICH: Last time I saw Henry Paulson was at our college graduation, almost exactly 38 years ago. He had been a tackle on the football team and was heading to business school and then into the Nixon administration.

Although Hank did reasonably well at Dartmouth, I wouldn’t have said he was bound for success, certainly not $30 million a year running Goldman Sachs, and now as Bush’s great hope to bail out his failing economic policies.

Wall Street is delighted one of their own is going to be at Treasury’s helm, and the White House feels confident Paulson will be able to sell the administration’s policies better than his predecessors, Paul O’Neill and John Snow. I wish my old classmate well, but let’s get real.

The reason consumer confidence is dropping, the dollar is dropping, the stock market is dropping, and Bush’s ratings are dropping is not because the Administration has failed to sell its economic policies. It’s because those policies are fundamentally flawed.

If America continues to go deeper into debt, it makes no difference who’s running the Treasury. And it is going deeper into debt because households aren’t saving, and because the President continues to cut taxes while spending more and more on the wars in Iraq and Afghanistan, on corporate welfare to the pharmaceutical industry —disguised as a Medicare drug benefit — on subsidies for big agriculture, on pork and earmarks.

Even if Paulson convinces the Chinese to further revalue the yuan, it won’t change these fundamentals. The dollar will continue to drop, interest rates will continue to rise, and the economy will be in deep doo-doo, as the President’s father used to say.

Paulson is a deficit hawk, although he supported the Bush tax cuts. So, what gives? He can’t honestly think Bush can balance the budget by just cutting spending. But unless he can get Bush to stop the spending and also roll back his tax cuts, all of the action from now on is in the hands of the Fed and its one lever, short-term interest rates. Which means Ben Bernanke is the man to watch, not Hank Paulson.

RYSSDAL: Robert Reich was Secretary of Labor in the first Clinton administration. He’s now a professor of policy at the University of California-Berkeley.

One more thing about Ben Bernanke and interest rates before we move on. The Fed released the notes from its last meeting today. Looks like we were lucky to get off with just a quarter point bump in short term rates. Mr. Bernanke and company talked about a half-point hike.

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