MAY 30, 2006
Howard Gleckman

Paulson to the Rescue?

Treasury nominee Henry Paulson has lots of Street cred -- but little time to work on real issues, like entitlements or the tax code

Will Hank Paulson be George W. Bush's Bob Rubin? At first glance, the similarities between the former Treasury Secretary and the man nominated for the job on May 30 are eerie. When President Bill Clinton chose Robert Rubin to be his second Treasury Secretary, he picked the former co-chairman of the investment banking house Goldman Sachs (GS ). Rubin was a 26-year veteran of the firm who was steeped in the financial markets, and highly respected on Wall Street. But during his tenure in New York, he was a relative unknown in Washington.

President Bush's choice to be his third Treasury Secretary, Henry Paulson, is also chairman of Goldman, where he has worked for 32 years. Like Rubin, he is well regarded among Wall Street colleagues and competitors as a smart, tough executive and a hugely successful investment banker. And, like Rubin, Paulson has largely eschewed Washington policy over his long career.

But Rubin became the single most powerful economic adviser to Clinton because the President showed great deference to Rubin's ideas and his knowledge of the markets. Rubin also had the opportunity to develop a close relationship with Clinton long before taking the Treasury post, first as an informal campaign adviser and fundraiser, and later as a trusted senior White House aide.

NO CHEERLEADER.  Rubin used his Wall Street credibility to build bridges to the GOP. Even though he was a Democrat, Rubin spoke a language that Republicans understood. Paulson also would bring great financial cred to his new job. But using it to sell Bush economics to Hill Democrats won't be easy. "He brings a lot of reputational capital to the job," says Isabel Sawhill, director of economic studies at the Brookings Institution. "The big question is: How will that strength be used by the White House?"

Paulson does not have Rubin's close personal relationship to the President. Bush, indeed, has often distanced himself from Wall Street executives, seeking input from manufacturing and energy companies rather than financial firms.

And in recent years, Bush has increasingly brought economic decision-making inside the White House, leaving his Cabinet secretaries with little to say about the formation of domestic policy. His first Treasury Secretary, Paul O'Neill, found himself on the outs after he aggressively pushed an agenda of his own. Bush's second Treasury boss, John Snow, has had little to do but promote policies made by others and wave the flag for economic growth.

ALUMNI RELATIONS.  Paulson isn't giving up a $38.3 million pay package -- the most lucrative on Wall Street -- to be a mere cheerleader, however. When he was first approached about the job six or seven weeks ago by the White House staff, he declined, according to a former Bush Administration official.

The person who helped convince Paulson to change his mind was Joshua Bolten, a Goldman alumnus whom Bush recently named White House chief of staff. He helped persuade Paulson to meet with Bush on Saturday, May 20. The President told Paulson that he really wanted a "very senior person" from Wall Street in the position, according to a second source familiar with the situation. This source says that Bush said he wanted Paulson to play a broader role in his Administration than previous Treasury secretaries had. He will be Bush's "principal adviser" on economic matters. Paulson felt he couldn't turn down the President's request to serve his country, the source said.

Still, the crucial question is whether any Treasury Secretary, even without potential constraints, can make much difference in two and a half years, the remaining time in Bush's presidency. William Niskanen, chairman of the libertarian Cato Institute and a former economic aide to President Ronald Reagan, says it's not too late to rejuvenate a stagnant economic agenda, although time is growing short.

MYSTERY VIEWS.  Niskanen notes that Reagan won congressional approval of a massive tax-reform bill two years before leaving office, in 1986, and Clinton signed landmark welfare, telecommunications, and agriculture reform legislation in his last two years in office. However, work on all those measures was well along earlier in those administrations. And Bush, says Niskanen, "has given up on his agenda."

If Paulson does get the green light to help develop a new economic platform, his policy views are something of a mystery. Paulson has written in support of free-trade and tax cuts, but these are motherhood-and apple pie issues for a Wall Streeter. His real challenges are the need to reform such long-term entitlements as Medicare and Social Security and the need to rethink the tax code. And on these subjects, he has had little to say -- at least in public.

Bush has talked about doing both, but those ideas have been moribund since last year. To be revived, Bush and his Treasury Secretary will need to convince Democrats that the President is serious about building bipartisan consensus. And at this point in the Bush Presidency, that will be a tough sell.

GREEN CHAMPION.  Paulson's only known policy passion is the environment. He is chairman of the Nature Conservancy, a private nonprofit that acquires environmentally sensitive land and has raised concerns about global warming. That view already has Paulson in hot water with some conservatives, but there are few environmental issues in Treasury's portfolio. "He's way too green for some folks," says the former Bush Administration source. "But he's not going to be running the EPA or the Interior Dept."

Barring the disclosure of some unforeseen scandal, Paulson is likely to win Senate confirmation easily. But can he break the partisan logjam that grips Washington? The answer to that will say much more about George W. Bush than Hank Paulson.
Click here for the slide show


Gleckman is senior correspondent in the Washington bureau of BusinessWeek

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