Smith Faculty Opinion Article	June 1, 2006
By Dr. Peter Morici, Professor of International Business EMAIL WEB SITE

The Trials of Henry Paulson

Failing to convince voters and financial markets the U.S. economy is sound, Treasury Secretary John Snow is being replaced by Wall Street investment banker Henry M. Paulson, Jr.

President Bush hopes he will bring the kind of clout with financial markets and the general public that Robert Rubin enjoyed during the Clinton years.

Don't hold your breath. The Bush Administration labors under the false assumption that better media spin will fix its flagging fortunes even as systemic ills truly bedevil the American economy.

Under the stewardship of President Bush, the federal budget has swung from a $236 billion surplus to a $423 billion deficit. This is thanks to runaway federal health spending aided by a faulty prescription drug program, ill-fated nation building efforts in Iraq and Afghanistan, tax cuts inconsistent with these initiatives, and general fiscal indifference and dysfunctional partisanship from both political parties in Congress.

The U.S. trade deficit has zoomed from $300 billion to more than $800 billion. This is thanks to federal budget deficits, Chinese currency manipulation and a weak-kneed American response, and a trade policy centered on strengthening U.S. intellectual property rights and opening foreign markets for U.S. service providers, as opposed to forcefully challenging mercantilism in China, India, Korea, and other Asian bastions of protectionism.

To grasp the folly of U.S. trade policy, consider that U.S. royalties earned abroad totaled a whopping $58 billion in 2005, and those just equaled the entire U.S. surplus on trade in services. Does anyone believe tougher patent and copyright enforcement and better market access for Citibank is going to fix the U.S. trade deficit?

Americans owe foreigners about $5 trillion in bonds and other IOUs. Each year, after some hard assets are sold, that figure jumps another $700 billion to finance the trade gap. At that rate, IOUs will exceed U.S. GDP in about another dozen years.

Belying this corruption, GDP growth has been strong but powered by the steroids of spendthrift consumption and borrowing, whose effects virtually every economic forecaster expects to wind down in the months ahead.

The stock market is falling, international investors weary of dollars are turning to gold, and American multinational corporations are voting with their feet.

Icons like General Electric, IBM and General Motors have made clear to stockholders they are betting on China and India instead of California and Indiana. Meanwhile, their smaller suppliers are being forced to relocate to Asia or close down shop altogether.

New York investment bankers are happy tour guides on this journey. Now President Bush has recruited from among them a champion to sell the whole shebang to American voters.

If Mr. Paulson truly wants to make things better, his greatest contribution would be to compel the president, his horsemen and fellow citizens to face the facts.

For example, if Americans want foreign adventures they have to pay for them.

Americans pay 50 percent more for health care than do the Germans and the French, who also enjoy universal health coverage. Either Americans regulate prices and ration health care as the Europeans do, or accept higher taxes to pay for the system they have.

Either Americans place fiscal discipline, exchange rates and Asian mercantilism at the center of economic and trade policies, or Americans must reckon with economic decline.

The day will come when China and the rest of the world will tire of lending Americans what they need to live well. Then Americans will have to pay what they owe, live poorly as repentance, and suffer the status of a debtor people in a world led by the thrifty, prudent and prosperous.

To lure Mr. Paulson to Washington, Mr. Bush assured him that at Treasury he will enjoy the same rank as the Secretaries of Defense and State. The very fact that this was required for the office once occupied by Alexander Hamilton indicates how little weight Mr. Bush places on core economic issues.

In the mantra of the Clinton campaign: Its the economy Mr. Bush!

Peter Morici is an economist and professor at the Robert H. Smith School of Business at the University of Maryland. He is a recognized expert on international economics, industrial policy and macroeconomics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission.