Paulson's Testimony

From the early reports of Hank Paulson’s confirmation hearing to become the next Treasury Secretary, he sounds very much like a supply-sider on fiscal issues. This is a good thing.

He told the Senate Finance Committee that it would be a big mistake to raise taxes to deal with deficits and that he would like to see spending curbed. While he said tax cuts don’t pay for themselves, he does believe that tax cuts change behavior. Paulson emphasized the importance of U.S. business competitiveness and doesn’t want to see any over regulation. Amen to all that.

So far, I haven’t found any comments on the U.S. dollar. This obviously remains a big issue. If Mr. Paulson takes the poor advice given by someone like Fred Bergsten, who wants to depreciate the dollar by 20 to 30 percent, that would be a big mistake. At this stage, such a move would undoubtedly raise inflation and interest rates, posing much danger to the economy.

Working with Ben Bernanke, Paulson should appreciate the dollar to curb inflation, keep rates down, and strengthen economic recovery. I continue to watch closely for any hints on the direction of U.S. currency policy.

Paulson is a free-trader. He boasts very strong ties to China, demonstrated by seventy some odd trips there as the head of Goldman Sachs. During his testimony he said he would push harder to get Beijing to move more quickly to overhaul its currency system. I do not agree with this. China has outsourced its monetary policy to the U.S., and that has served them well. I agree with John Rutledge, Art Laffer, and a handful of others who believe that the Chinese currency should be dollarized. But virtually all of Washington disagrees.

The interesting part of this discussion is that Chinese wages are rising as a result of rapid economic growth. That is a much more effective way of equilibrating trade conditions with the U.S.

When Mr. Paulson’s name was first announced, the stock market fell significantly, as it has today. Could be a coincidence. Then again, maybe not. We will wait and see.