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Paulson, Bair raise concerns about fiscal policy

The Honorable Sheila C. Bair

(The Star) – Economics was in the spotlight when former treasury secretary Henry Paulson and Washington College President Sheila Bair met in a symposium, “Our World, Their Future,” to discuss how the environment and the global economy will affect the next generation.

The Sept. 24 symposium, part of Bair’s inauguration as college president, drew a packed house in the college’s Decker Theater. Steve Clemons, Washington editor for The Atlantic, introduced the participants. He gave thumbnail biographies of the two, with a focus on their performance during the economic crisis of 2008, when he said Paulson and Bair, then chairman of the Federal Deposit Insurance Corporation, “kept the economy from going over the brink.”

Clemons then introduced John Harwood, Washington correspondent for CNBC, who moderated the discussion. Harwood addressed the first question to Paulson, quoting Donald Trump to the effect that the economy is in bad shape because “politicians are stupid.” He asked Paulson to comment.

“The United States has policies that used to work and don’t any more,” Paulson said. He said the situation could be traced to before the recession, when the average American’s income had been flat for 10 years. To compensate, people increased their borrowing “to try to live at a level they couldn’t really afford.”

Paulson said income disparity arises from “what’s happening with technology,” with everything that can be reduced to a routine being done by computers or other mechanical devices. The middle-income segment of profession after profession is being carved out, he said, and a “winner take all” philosophy favors the top segment. “We need to change the educational system and skill training,” he said.

Bair agreed, saying current monetary policy is misguided, defaulting to an unsustainable paradigm of getting people to borrow to stimulate growth by making credit cheap. “But even if you get people to borrow, if you don’t have wage real growth to sustain it, you’re going to get yourself into trouble again,” she said. She said the tax code is partly at fault for taxing investment income at a different rate from labor income.

Paulson said the difficulty of changing the tax code arises in that at a high level of abstraction, everyone agrees, “but when you get to change it, they’re all lobbying for their own special preference.” The tax system should be simple, he said, while allowing government to raise the money it needs to work. Why give a deduction for mortgage payments but not to rent payments?

Paulson also made a case for climate change, saying, “I’m a conservationist.” He said the case he makes to doubters is, “When you look at science, and you look at the risks, climate change is a huge economic risk. And you have to be pretty sure that you’re right to not want to take out insurance.” Looked at that way, he said, “there’s a real role for business” to help implement policies to mitigate the effects of climate change.

He also called attention to how population growth drives climate change, with increasing numbers drawing on limited resources.

In response to senior Brad Janocha’s question about college debt for graduates, Bair said, “It’s a high priority for me.” She said Washington College is trying to hold the line on costs and be efficient with its money. She promised to put “a razor-like focus” on philanthropic support for scholarships to help students avoid borrowing for college expenses.

Harwood asked Bair about Sen. Bernie Sanders’ proposal to make public college education free.

Bair said she worries a little bit about accountability if education comes at no cost to the students. She said lack of accountability could lead to a loss of discipline. “We need education to be worth something,” she said.

The two touched on a number of other topics, with a strong emphasis on economics and financial issues. Looking to the future, Paulson said the current 2 percent growth rate of the economy is too slow. He said the country needs a leader to pull people together. “The president needs to go against his party sometimes,” he said.

At the end of the symposium, Bair introduced Larry Culp of the college’s Board of Visitors and Governors, who granted Paulson an honorary degree of Doctor of Laws.

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