Thursday, August 03, 2006

Hank Paulson's Speech

Whats not to like?

The new Treasury Secretary of the U.S.A. gave his first speech, chosen to be at the Columbia University School of Business (CBS), on Tuesday. Paulson chose Columbia because that is where the first Treasury Secretary (A. Hamilton) went to school.

Government is a necessary evil... and some believe the US government and its founding document the Constitution is the apex of man's collective action. The only institutions mentioned in the Constitution are the Departments of Treasury, State and War (later, now, Defense). So nothing wrong with Treasury really, a necessary evil.

At the risk of sounding like a partisan hack, I liked 90% of what Paulson had to say. Our point of departure is the administration's buzzword "energy security", eg depending on home-grown energy sources and blaming Americans for our energy uses and asking for alternative energy sources and uses. It is strange (well not really actually) to hear for this type of industrial policy when the administration is preaching "markets" elsewhere - of course it is due to farm policy that alternative fuels are being preached. Paulson did mention that nuclear is part of the future as well.

In summary, Paulson said the US is on a sound economic footing to face "the challenges ahead". The challenges are, 1) reform of entitlements programs (social security and medicaid/medicare), 2) energy security, 3) trade.

Paulson said he is going to let the markets set the price for the US dollar, though he did say he is in favor of a strong dollar (eg he shouldnt say that as talking up or down the dollar is an intervention into itself). Paulson said that the first cut report on the US GDP growth was 2.5% annual growth, which is more sustainable than the last two years' worth of growth.

(Workers would like to see a nice 5% per person growth for our 'post-industrial economy' with a mildly catalystic 3% money supply growth, and a healthy 95% employment rate. To get there: make smaller the size of the government in the economy to free up capital for productive investment instead of government spending. Our inflation and employment figures have been on track but growth is not what it should be due to size of the government in the economy. Decreased G in the economy (increased I) means a more productive economy and therefore better wage growth and therefore better standards of living for those that need them).

Other items of interest viz Paulson is that the USG debt is now 2.3% of GDP which is at the average of the last 40 years, that those with college degrees make almost 2x that of those without, that entitlements will grow from 8% of the economy to 17% of the economy in 50 years unless we reform, and that the US people need to be sold on trade.

Paulson said the tax cuts sold the financial markets on the administration's ability to create reforms for 'investor confidence'. No matter what your political stripe this financial market depth is what allows us our unprecedented standard of living.

The administration would be much better at selling its sound economic program if it would:

1) indeed let markets rule for energy policy,

2) cut back government discretionary spending not just entitlements, and

3) show leadership in trade policy by unilaterally opening borders to goods from abroad.

Otherwise seems like things are on track.