Bolten's White House

This piece originally appeared in the Fall 2006 issue of the International Economy.

The man who will shape President Bush's economic policy in his final two years in the White House--and particularly America's policy toward China--almost didn't join the Administration. Hank Paulson became Treasury Secretary last July only after prolonged negotiations over his role as chief economic policymaker. To lure Paulson to Washington, the President gave him extraordinary authority to manage economic policy on both the domestic and international fronts. Paulson, from the outset of his tenure, matches Secretary of State Condoleezza Rice and Defense Secretary Donald Rumsfeld as a Cabinet member with the discretion to act on his own without White House interference.

Last spring, Paulson, then head of Goldman Sachs, the giant investment banking firm, rejected an offer to become the top finance minister. He declined to meet with Bush, fearing it would be impossible to turn down a personal request by the President. His family was leery of his coming to Washington. And Paulson had doubts that Bush would have enough political clout left in his Administration to promote a significant agenda in 2007 and 2008.

But Josh Bolten, the White House chief of staff who worked for Goldman Sachs before joining the Bush presidential campaign in 1999, kept after Paulson--and changed his mind. Bolten worked out an arrangement that gives Paulson enormous influence, far more than was given to the two previous Treasury Secretaries in the Bush administration, Paul O'Neill and John Snow. The official portfolio for the post "is not really all that large in the modern age," Bolten said. But Paulson's power will extend "well beyond that portfolio."

In fact, Paulson's emergence represents a major shift in economic policymaking from the White House to Treasury. The losers are Vice President Cheney, National Economic Council head Al Hubbard, and the President's Council of Economic Advisers chaired by Ed Lazear. Their clout has been significantly diminished. The only winner at the White House is Bolten, who also was the key figure in the appointment of Ben Bernanke to be chairman of the Federal Reserve.

But while Bolten was the architect of the shift, Paulson is now the master of economic policy. "He didn't want to be hemmed in by a bunch of White House handlers," Bolten said. And he isn't. Paulson was allowed to hire whomever he wanted. He has brought in several Goldman Sachs veterans from around the country as senior advisers, including Bob Steel from New York as Undersecretary for Domestic Finance and Neel Kashkari from San Francisco as counselor.

By bringing a team of personal advisers from Goldman Sachs, Paulson's style is reminiscent of James A. Baker's. Baker was Treasury Secretary in Ronald Reagan's second term. He relied on three aides--Richard Darman, John Rogers, and Margaret Tutwiler--that he'd brought with him from the White House, where Baker had been chief of staff. He insulated himself from Treasury's permanent bureaucracy and leftovers from the staff of the prior secretary. Paulson may be doing the same.

Paulson's portfolio is bulging with issues that once were in the bailiwick of other Bush officials. China, for instance. He's the lead figure in economic talks with China. Both Bush and Rice have given their blessing to that. Paulson, Bolten said, will have "a much more prominent role in overall relations with China." This was underscored by Paulson's three-day trip to China in September in which he established a U.S.-China Strategic Economic Dialogue. Even more important was his unprecedented meeting with Chinese President Hu Jintao. It was the first time a U.S. Treasury Secretary had met with a Chinese President for such a substantive meeting.

Unlike members of Congress, Paulson is more worried about the possibility of an economic stumble in China whose ripple effects would quickly reach the United States than he is about Chinese manipulation of its currency to promote exports and limit imports. During a press conference in Beijing, he expressed patience with China's unwillingness to devalue its currency. "That isn't achievable right away," he said. "I'm looking at something short of the perfect outcome, which is a freely tradable currency. I'm not going to get all concerned about what technique they use to get flexibility. I'm going to know flexibility when I see it." In short, Paulson won't be aggressively pressuring China to devalue for the time being.