Advice for the New Treasury Secretary

Treasury Secretary John Snow is out and the head of Goldman Sachs, Henry M. Paulson, was confirmed by the Senate and is expected to take over next week.

"I am pleased to be entering the ranks of the unemployed at a time of strong growth made possible by the president's tax cuts,"” said Snow.

Tax cuts that have put our country in danger according to Ben Stein, and his advice to the incoming Treasury Secretary is that it's time to raise taxes.

[...]you have your work cut out for you as Treasury secretary. You are facing what is, in many ways, the most dangerous economic future since the Depression. Danger is coming on many fronts, only dimly seen by the powers that be in Washington, and your insights and eloquence will be urgently necessary.

Just to give you an idea what you are up against, Standard & Poor's issued a warning not long ago. The caution was that if the United States government did not seriously alter fiscal policy, Treasury bonds would be downgraded to BBB, slightly above junk status, by 2020. This is a stunning piece of news for the world's most highly rated security denominated in its primary reserve currency. The S.& P. report said further that if the nation did not make serious changes after that, by 2025 Treasuries would be junk bonds, like the bonds of less successful emerging-markets nations.

These downgrades would occur because the federal budget deficit and the cumulative national debt would be so high relative to the gross domestic product. This debt would presumably come largely from Social Security and Medicare obligations, considered sacred contracts by American taxpayers. (The statement said similar downgrades would also happen to other major countries in the developed world that have large aging populations.)

Just to get an idea of the size of the structural cumulative deficit for Medicare alone, Phil DeMuth, along with others, has calculated that the total Medicare obligations for the balance of this century, if brought down to net present value at the long-term bond rate, would exceed the wealth of the entire nation. This means that if you sold every home, every farm, every factory, every business in America and invested the money in something that returned as much as long-term bonds, there would not be enough to pay for the foreseeable Medicare expenditures of this nation in the 21st century. And that's not counting Social Security or the military or the interest on the debt or the livelihood of 300 million Americans.

Can you imagine, Mr. Paulson, what it will mean to Americans in terms of our currency's value, in terms of the interest we will have to pay to foreign creditors, if our bonds reach junk status? Can you imagine just how crippling a burden this will be on taxpayers?

It gets worse. The annual trade deficit with the rest of the world is approaching $1 trillion. It's not there yet, but we're on our way. This means we have to transfer ownership of roughly $1 trillion of our assets to foreigners every year to cover our excess of international purchases over sales. But the total worth of all the assets in the United States is not greatly more than $50 trillion. To be sure, it rises annually. But even so, we are basically transferring the value of an average of one of our 50 states to foreign investors every year. This trend looks unsustainable to me (unless we are to revert to being a colony - this time, of China).

Again, the downgrades and the deficits in the current account and the federal budget will have major effects on the dollar's value, which will mean major inflationary effects. If experience is any guide, these effects will slow real economic growth.

Right now, inflation is moving out of the Federal Reserve's comfort zone. The Fed chairman, Ben S. Bernanke, is doing the right thing by raising rates and trying to slow the overheated economy, but in a way that does not bring us a recession. To give us a soft landing without recession or stagflation - rising inflation and slow growth, as we had in a good part of the 1970's -— is not an easy or assured task.

To raise rates enough to slow down our economy and thus bring down commodity prices amid skyrocketing demand in developing economies is certainly not easy. To do this correctly, you'd need to be a brain surgeon of monetary policy and a cardiac ace of fiscal policy. In other words, there is a great, great deal to be worried about.

May I respectfully suggest that in this environment, ending the estate tax is not a major sensible priority? May I suggest that having the lowest taxes in 65 years on high-income taxpayers is not really as prudent as it might be if we were not running stupendous deficits, with far worse in the future?

I know you are a Republican, and so am I. Now and then, scornful fellow Republicans ask me what kind of Republican I am, since I'm for higher taxes on the rich. I tell them that I am an Eisenhower Republican, the kind who wants to leave a healthier America to posterity. That includes an economy not headed for the status of a banana republic's economy.

Now, I know that a truly great man, Ronald Wilson Reagan, when asked if he were not worried that his tax cuts would burden posterity with a heavy weight, supposedly asked, "What has posterity ever done for me?" Those of us with teenage children certainly know what he meant. But the problem is no longer quite as funny.

The fiscal house is in severe disorder. ...But someone needs to take a stand, and that person might as well be you.

The ball is in Paulson's corner now. Will our economy end up healthier under his stewardship or will "banana republic" be his - and the Bush administration's - legacy?

[All emphasis added.]