Monday, June 26, 2006

What Paulson Really Ought to Do

Fred Bergsten has an op-ed in the Washington Post today that basically says Hank Paulson’s main mission at the Treasury should be to depreciate the dollar by 20 to 30 percent, in order to correct trade imbalances which pose a huge threat to the American economy.

Fred is an old friend and a very bright guy. But he is totally wrong.

As I recently wrote in the Wall Street Journal, my advice to Mr. Paulson is to appreciate the dollar in coordination with the Fed in order to stop the mild upturn of inflation expectations.

He should also try to lower corporate tax rates, including full-cash expensing for equipment depreciation. And he should work with Rob Portman at OMB for a big bang spending cut program, including Senator Judd Gregg’s SOS budget reform, which includes a line-item veto, and Gramm-Rudman across the board budget cuts.

As for foreign economic growth, Paulson should support supply-side tax cuts and deregulatory policies. (See today’s WSJ op/ed, “Germany Out of the World Cup” by Guido Westerwelle, chairman of the Free Democratic Party.) He has the story exactly right.

My old friend Fred is dead wrong.