Henry Paulson’s nomination as Treasury secretary is good news. It ends uncertainty hanging over the post since it became clear months ago that the Bush administration was greasing the skids under incumbent John Snow. Paulson certainly seems able and experienced. Even so, what he will be able to accomplish in the 32 months left in President Bush’s term is an open question.
Moreover, the changeover at Treasury raises the broad question of just what the Treasury secretary’s job is. Snow reportedly lost the confidence of the Republican White House, but not for any failures in setting policy. Rather, he was deemed insufficiently ardent in convincing the public of the administration’s economic successes.
The idea that the primary function of a Cabinet member is cheerleading seems a bit odd. But it does reflect the reality that most economic policy decisions are initiated by the White House rather than by any Cabinet department. This is not unprecedented. It was true during Democrat Franklin Roosevelt’s era 70 years ago. The question is whether such institutional evolution is good for the nation.
There was a long lag between leaks that Snow was on his way out the door and the announcement of Paulson’s nomination Tuesday. Some observers snidely commented that the administration was encountering difficulty persuading any rat to scramble up the hawser onto a sinking ship. There were repeated leaked references to “a leading Wall Street CEO” becoming the next secretary, but weeks passed without any announcement.
A more plausible explanation for the lag is that Paulson set conditions for accepting the job and it took some time for the administration to agree to those conditions. The new secretary reportedly wants to claw some policy-setting authority back from White House staffers. Time will tell whether this works out in practice. The long-term trend is against Paulson.
Some historians argue that the power and prestige of the Treasury secretary peaked during the term of Alexander Hamilton, the first person to hold the post. Everything has been downhill since then.
The U.S. Constitution said little about the specific structure or functioning of the executive branch. Hamilton, who wrote many of the Federalist Papers on how the new government should be organized, had strong views on the proper economic role of government. Given the benefit of starting with a blank slate, Hamilton established a precedent of broad Treasury responsibility over tax, banking and other economic policies.
The 70 men who followed Hamilton — no woman has ever held the post — were a mixed lot. A few, including Swiss immigrant Albert Gallatin, who served under Thomas Jefferson and James Madison, were vigorous innovators like Hamilton.
Some, like the late Lloyd Bentsen, who served under Bill Clinton, were experienced politicians selected for their skill in managing congressional relations. Fred Vinson, appointed by Harry Truman, and Roger Taney, a confidant of Andrew Jackson, came from the same mold of congressional experience. Interestingly, both went on to become chief justices of the United States. (Taney is best known for authoring the infamous Dred Scott decision affirming that slaves were, indeed, mere property.)
Many other Treasury chiefs came from the world of finance. Robert Rubin, another Clinton appointee, preceded Paulson as head of Goldman Sachs. C. Douglas Dillon, who served presidents John Kennedy and Lyndon Johnson, headed Dillon, Read & Co., another Wall Street investment bank. Andrew Mellon, who served 11 years under Harding, Coolidge and Hoover, was from a family who owned one of the nation’s largest commercial banks.
A few, including Alexander Dallas and William Windom, are remembered only because cities were named after them.
Some Treasury heads served because of their pliability. Henry Morgenthau, who was appointed by FDR in 1934 and served 11 years, understood that he was a figurehead and that all economic decisions would be made in the White House. Indeed, he was frequently humiliated by not being informed of key decisions before they were announced to the public.
The erosion of the power of the Treasury secretary is manifest in growth of the Office of Management and Budget over the last 30 years and the proliferation of policy enclaves like the President’s Council of Economic Advisers and the newer National Economic Council. This bureaucratic metastasis has blurred the lines of authority and responsibility.
If Paulson achieves success in returning some policy functions to the Treasury, it will be good for the nation. But he faces an uphill economic battle. In broad terms — output and employment — the economy is doing fine. Still, ongoing deficits in the federal budget and current account, as well as increasing energy costs, form dark clouds on the horizon. Consumer spending that bolstered economic recovery over the past four years might be waning. Hope for the best.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.