Business Daily from THE HINDU group of publications
Monday, Jul 03, 2006
Money & Banking - Insight
Impressive command over economic complexities
The confirmation hearing for the US Treasury Secretary-designate, Mr Henry Paulson, was a wide-ranging exercise as much a test of the US legislators' command over the complexities of economic governance as of the nominees' competence, says S. VENKITARAMANAN, describing the proceedings.
Mr Henry Paulson's nomination as Secretary of US Treasury has already been commented on in this column. I watched with interest the confirmation hearings as they were broadcast live by Bloomberg on June 27, 2006, and was particularly impressed by his constructive responses to various questions posed to him by US law-makers. He was suave and firm in his replies, showing a quiet confidence and command over economic complexities.
The confirmation process is unique to the US, among leading democracies. Cabinet officers and officials of equivalent rank are nominated by the President and then subjected to an intensive scrutiny by law-makers. The confirmation hearing is far-ranging. It is as much a test of the US legislators' familiarity with and command over the complexities of economic governance as it is of the nominees' competence. I was particularly struck by the friendly, non-adversarial bipartisan position taken by Senators of both leading parties.
The mood was set by a dramatic intervention by one of the US legislators at the very beginning. He held up a cartoon published by a leading American newspaper, which depicted the Treasury Secretary nominee as being asked: "You are being appointed as Treasury Secretary of the USA. Where is the treasure?" The cartoon answers that the treasure is in Beijing, obviously a reference to the huge contributions China makes to the US borrowing programmes.
The US is obviously on a borrowing spree because of its twin deficits and depends critically on support by a wannabe global power China, a potential rival in economic and political terms. The US legislators did not obviously expand on these related issues of global rivalry, but that was the inarticulate major premise.
Mr Paulson is eminently qualified to help the US decide on the China question. Newspaper reports say that he has made 70 trips yes, seventy trips! to China while he was CEO of Goldman Sachs. He has also been on the Advisory Board of Beijing's prestigious Tsinghua University School of Economics and Management. Mr Paulson's erstwhile bank has sold more stock than any other firm in initial public offerings in China and purchased a stake in China's biggest bank. He has the right credentials to solve China-US issues.
Quizzed on the size of the fiscal deficit, Mr Paulson did not rise to the bait and offer a tax raise as a solution. He struck to the Administration's position that raising taxes may hurt growth. He mentioned that the US fiscal deficit is at 2-2.5 per cent of GDP and felt that growth was the preferred way out. He was particularly pointed in his references to the Clinton Administration's tax cut, which had helped put the economy on a growth path.
However, he was not a believer in the flawed proposition that lower taxes pay for themselves an offshoot of the Laffer curve originated in Ronald Reagan's time when the proposition was put forward that lower taxes may mean more revenues. True, there are some circumstances in which cutting taxes promotes growth impulses, but it is not self-evident.
Will not raise taxes
The takeaway from Mr Paulson's evidence before his confirmation hearings is that he is not about to raise taxes and will perhaps let Bush's tax-cuts stay. He stated very clearly that keeping taxes low and collecting them in a simple and fair manner that does not distort economic decision-making is a key to economic growth.
In their discussions, the US legislators stressed the problems on the fisc. There was a reference to the gap between taxes due and taxes owing. Obviously, in Indian jargon, this is a reference to tax arrears. There was concern about the problems faced by the Internal Revenue Service in terms of software and staffing. Familiar problems for us in India dealing with the inefficiencies of the Tax Department, their under-staffing and their inadequate capacity to handle software! Hopefully, US experience in this regard should teach us not to stint on essential outlays on improving our tax administration as well.
While there was a good deal of inter-play between the US legislators and Mr Paulson on the Chinese exchange rate management, the Secretary-designate played it cool. He seemed to appreciate the problems faced by Chinese authorities in making rapid exchange rate adjustments.
He was all for making a move to flexibility but noted the changes already made. His emphasis was on liberalising the capital account, subject to stronger financial institutions, for which his suggested remedy was, predictably, introduction of foreign investment. Although the two are not directly linked, he seemed to set greater store by increased competitiveness implicit in greater foreign participation.
What was clear from the hearings was that the US has in Mr Paulson a mature and well-balanced intellectual about to take charge of the country's finances. It seems, all the members, irrespective of party affiliations, were agreed on supporting Mr Paulson's nomination. He is not in any way minimising the challenge. Talking about tax reform, for instance, he said two-and-a-half-years - the remaining Bush term - is too short to implement far-reaching changes. But, he seemed to be clear about the direction the US has to take.
What the US legislators did not quiz Mr Paulson on is as significant as the issues they raised. He was not asked about the likely collapse of the US dollar and the need for restructuring international finances to prevent a hard landing.
These are, no doubt, delicate issues and need a fair and balanced studied approach. The need for a new Bretton Woods Conference was nowhere raised. After all, the US law-makers are highly America-centred and the issues raised in regard to external matters were those having an American connection.
Particularly, the US legislators did not press Mr Paulson to explain his stand on outsourcing, a perennial issue that concerns them nor on energy pricing and scarcity. Surely, these are issues that would more than fully engage his attention in the weeks and months to come.
Concern on savings
One thing was clear, above all. Not for Mr Paulson the attitude we see in Finance Ministers elsewhere - sock it to the rich and get the tax collector's hands on everyone. The emphasis was more on a fair and tax-payer friendly regime. Also, of concern was the plight of the middle American, contrary to attitudes elsewhere where the middle-class is given lip service but neglected in practice. Mr Paulson was quite sensible on the question of executive compensation. He emphasised that the issue is sensitive and will need to be carefully handled.
There was genuine concern about the savings management. Mr Paulson was not clear about where he stood on the issue of investments of saver funds in equity. But, that is a perennial issue which faces policy-makers from Chile to India and it is foolhardy to think that investment in equity markets is an easy way-out of the savings investment problem.
How one wishes that we also have such confirmation hearings in India as the US. This would save a lot of trouble later. We make do with the party manifestos and Common Minimum Programmes. But, even so, if a Finance Minister-designate is asked to spell out his policies on various issues well ahead of his appointment, the current scenario of controversies could have been considerably mitigated. It is another question whether our MPs would be equal to the task, either in their knowledge of issues or fairness?
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