Mr. Paulson Goes to Washington

The Treasury Secretary has unmatched credibility on Wall Street and in D.C. Fortune managing editor Andy Serwer and Washington bureau chief Nina Easton pick his brain about the market, the economy and politics. An exclusive interview.

By Andy Serwer and Nina Easton

December 20, 2006

You recently suggested that you share concerns about the disparities in wealth in this country.

There have been a number of years where our economy was growing and employment growth was strong, but the average worker didn't feel the benefit, largely because of the cost of energy and health care. What you've seen happen this last year—separate and apart from the appreciation of the equity market—is good news on the inflation front, particularly with energy prices. And for the past 12 months you've seen real wage growth, up just a little bit less than 2.5%.

You've said privately you were surprised at the breadth of protectionist sentiment you have encountered on Capitol Hill. What does that mean for the President's fast-track authority on trade agreements, which expires next year?

There has been an interesting paradox in that the lesson over the past 20 years is that those countries that open themselves up to competition—through trade and integration into the global capital markets—have benefited, and the rest have been left behind.

But in virtually each of those countries you can see that there is greater protectionist sentiment. You could see this in the U.S. You could see it in China. You could see it throughout Europe. Shorter-term dislocations—job losses—can be very painful and are visible, and the new jobs aren't as visible. The prosperity and increases in living standards aren't quite as visible.

I've listened very carefully to what some of the Democratic leaders are saying after the election, and some are very encouraging. When I go up and talk to people on the Hill, the sentiments they're expressing are the sentiments of their constituencies. I always knew that I was going to swim against a strong current here, and I still expect that to be the case, but I remain optimistic because with our economy as strong as it is, we approach these discussions from a strong starting point.

Are you going to look at changes on environmental standards, labor standards—all the kinds of concerns that the Democrats are likely to raise in the next few years?

Those are part of the political calculus in any trade agreement, and they're not going to go away.

What's your view on Sarbanes-Oxley, and what sort of reforms do you think are needed in the capital markets?

There are a number of [outside] committees that are studying this, and we'll look carefully at what any committee says. But I've been spending a fair amount of time here at Treasury and with the President's Working Group on Financial Markets—with [Federal Reserve chairman] Ben Bernanke, [SEC chairman] Chris Cox, [Commodity Futures Trading Commission chairman] Reuben Jeffery—thinking through these issues. I will be making some remarks on this topic in New York on the Monday before Thanksgiving.

Care to preview those remarks for us?

What I would say to you is that the capital markets are a cornerstone of our economic success in this country. They play an important role in job creation and prosperity. In terms of [recent] business scandals, you would have to go back a long time—maybe to the Depression—to find a comparable period. We had a great deal of fundamental reform and regulation: Sarbanes-Oxley, the listing rules. Virtually all of it was well intentioned and based upon sound principles, and in totality I think it went a long way toward helping restore confidence in the markets.

I care about making sure we have markets that are strong but that regulation is not overly burdensome. I don't believe we're going to need new legislation. I think that the things we want to accomplish can be accomplished through implementing the existing regulation differently.

And then I think there are some other things, which are much more fundamental and difficult, that we're going to have to think about and deal with over a much longer period of time, but that are very important and don't lend themselves to easy answers.

Mr. Secretary, you've been to China 60, 70 times?

I've stopped counting now but it's well over 60, probably over 70 by now.

Given that rare breadth of experience, can you offer some lessons in negotiating with the Chinese?

The key is to understand that our economic futures are very much interrelated, that for us to have a successful economic relationship it needs to be mutually beneficial. We have to listen as well as talk, and we need to do things that will address the relationship over a much longer period of time. But if we're going to be able to do that, we have to get through the night, as it were, and so we have to deal with short-term issues in order to make sure we keep confidence on both sides.

If we talk about the biggest issues—greater flexibility, greater growth in their imports, their consumption, making the transition from savings of close to 50% to consuming more, protection of intellectual property—we agree on every one of those points in terms of a policy. But there are differences on timing. The case that I will be making is that it is in China's best interest to speed up the pace of their reforms and move ahead more quickly. There's greater risk to China and the rest of the world if they move slowly as opposed to moving faster.

So how do you apply that thinking to the currency issue?

As I talk with the Chinese on currency, I encourage them to move much more quickly with opening up their capital markets to competition, because I don't believe the world is going to give them as much time as they would like. The world is not going to say, "You're just some poor little developing country," because they are a huge part of the economic system. If they're going to take their economy where they need to go and move up the value-added chain—moving from being a manufacturer of low-value-added products to a developing and more complex economy—they're going to need to have a currency that is flexible and reflects economic reality.

When North Korea agreed to come back to the six-party talks, many credited Chinese pressure and some of the financial pressure we've put on the regime. Did you personally have discussions with Chinese officials regarding North Korea's nuclear tests?

This is an area that [Secretary of State] Condi Rice handles. And my role is to coordinate all of the economic discussions within the administration and to work toward having a stronger economic dialogue. I do believe that one of the benefits we get out of a strong economic dialogue with China or any other country in the world is that the more integrated any country is into the global economic system, the higher the cost of any disruption, political tension, military tension, or whatever. So China has a great stake in continued economic growth around the world, and instability is the enemy of that growth.

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