Without a total overhaul of the American tax system, the United States will not be able to recover from recent economic losses, according to former Treasury Secretary Henry Paulson ’68, who spoke in a crowded Spaulding Auditorium on Wednesday afternoon. Paulson was the eighth speaker of the Summer term lecture series entitled “Leading Voices in Politics and Policy.”
Former U.S. Sen. Judd Gregg, R-N.H. the first speaker in the lecture series moderated the forum, asking the first several questions before opening the discussion to questions from the audience.
The session began with a question from Paulson’s classmate, former U.S. Labor Secretary Robert Reich ’68, who was the seventh speaker in “Leading Voices.” His question concerned the establishment of financial regulations after the bailout package crisis.
“I’m a capitalist,” Paulson said. “I believe that we have the most prosperous country on earth, which it has been for a good while for a lot of reasons, but one of the reasons is we have world class capital markets.”
Paulson expounded on this point, explaining the importance of the strength of American capital markets.
“If we want to stay on top and we want to remain competitive, we need strong capital markets,” he said, adding that strong markets will create jobs, promote economic growth and provide credit for American families.
Large banks “failed us big time” in 2007, he said. While they failed due to abusive, flawed business practices and poor risk management, investment banks are not solely to blame for the financial crisis, he said.
“There’s been much less talk about the flawed government policies that created this problem,” he said. “We as a country save too little and borrow too much.”
He added that the housing bubble was another significant issue that emerged as a result of poor management.
Regarding governmental regulation, Paulson noted that the Troubled Asset Relief Program enacted by former President George W. Bush in 2008 was an effort to put banks back on the right track to fiscal stability.
The goal was to restore confidence to the banks through capital investments, rather than “nationalizing banks as they failed and putting all kinds of restrictions on them,” he said.
Paulson then described the individual failures and crises faced by investment banks including American International Group, Merrill Lynch and Bear Stearns in 2007, and both the national and global actions taken to save financial institutions.
“AIG was taken over,” he said. “It was essentially nationalized.”
Although many Americans including Paulson himself were opposed to the bailout on principle, the former Treasury Secretary stands by the original bailout plan.
“We don’t like bailouts or rescues in our county, in the United States of America,” he said, noting the importance that Americans place on being able to take financial risks. “I did things that were abhorrent to me, but I did it for the American people.”
Gregg who applauded Paulson’s response to the initial economic crisis asked Paulson what the U.S. government must do in order to return to economic stability.
“Our issue is growth,” Paulson said. “We need jobs, and this is an issue for the whole economy.”
Paulson said today’s debt constitutes 110 percent of disposable income a “historical” level and it is necessary for the United States to first eliminate debt before the government can address other problems. He also said, however, that the United States is in a better position than many other “major” countries.
“We are such a rich country and such a big economy,” he said, adding that a significant overhaul of the tax system is crucial to American success.
Although fiscal cuts are an important part of the process, cuts alone will not solve the problems facing the American economy, Paulson said. In addition to tax reform, the government must also address the Medicare system.
“That’s where the huge dollars are,” he said.
In contrast, the issue of whether Bush’s tax cuts should expire is not of particular importance, Paulson said. He continued to stress the significance of an overall reform to the system of taxation.
He added that he had never heard anyone he considered “credible” defend the current tax system.
Gregg followed with a question regarding the advent of the Tea Party and its influence on the present-day political landscape.
“The Tea Party didn’t come onto Capitol Hill with guns and take over by force,” he said. “They were elected. Elections have consequences.”
Although Paulson did not indicate whether or not he agreed with the Tea Party’s political views, he said it was clear that voters wanted to see political change in the government.
“I think we’re going to need another election to get us there,” he said.
Gregg shifted the discussion to ask about Paulson’s focus on China.
“If the U.S. and China aren’t working together, we have almost no chance of solving [the economic crisis],” Paulson said, adding that economic, environmental, foreign policy and national security issues must all be solved collaboratively with China.
In spite of China’s recent ascent to power on the international level, Paulson maintained that the United States will continue to be the world’s wealthiest and most powerful economy.
“We’ve got significant issues, but [other countries] including China have much more daunting issues than we have,” he said.
In response to a student question about the environment, Paulson said environmental concerns are “hugely important” to him.
“My interest, personally, has always been in wild, beautiful places,” he said.
Paulson said both the United States and China have similar interests regarding environmental concerns due to the fact that they are the two largest economies worldwide.
Paulson said that although it is important to continue research on environmental innovation, it is also important to remove tariffs on environmentally beneficial services, a practice that Paulson said is both morally and economically “wrong.”
To conclude, Paulson said that while China plays an important role in the world, long-term American success does not hinge upon Chinese success.
“It’s not going to be determined by China trust me,” Paulson said. “It’s going to be determined by us, the decisions we make, the policies we put in place that’s going to be America.”