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Our Next Treasury Secretary

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The best candidate is probably the last person who wants the job.

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The chatter over who will the next Treasury Secretary has heated up now that the election is behind us. Given that the position will likely be-as things stand right now-central to the nation's next four years, the attention is understandable and warranted.

Much of the talk seems to focus on the traditional discussion about the attributes a Treasury Secretary should typically have. Wall Street or Main Street? Public sector background or private sector background? I think this approach leans us in the wrong direction. Instead, we should focus on what we need now. And today's context is fiscal and political, not financial and technocratic.

The last four years, actually five, were about financial repair. The Treasury Secretary was in triage mode, trying to fix the plumbing of our financial system and trying to support an environment that would allow balance sheets to heal ASAP. You wanted someone with deep financial expertise.

Today, as I see it, our future challenges will be predominately fiscal, not financial. Fiscal issues are profoundly political. And the only path to sound fiscal policy runs straight through Capitol Hill.

We all know, at some level, we need a deep fix of our entitlement commitments. We simply promised too much. I am tempted to repurpose Churchill's famous WWII phrase: "Never was so much owed by so many to so few".

We also have a revenue problem. Revenue as a share of GDP is just too low by historical standards. And, unlike spending to GDP, Rev/GDP, because of the way the math works, will not improve that much as the cycle improves (Revenue is positively correlated to GDP through a cycle, whereas counter-cyclical stabilizers make spending negatively correlated to GDP through the cycle).

Revenue is a difficult issue, not just for fundamental reasons, but also for behavioral ones. Two jump to mind. One, taxes are painful. We perceive immediate pain in exchange for future, often intangible benefits that are hard to perceive. And this often makes taxpayers resentful and, at times, indignant.

The second problem is our resentfulness makes us susceptible to almost any economic theory that allows us to stave off paying more taxes. The phrase "never get in between someone and what they what to believe" comes to mind here.

Lastly, we need structural reform to compete globally. The last 20 years of credit expansion made us flabby. The faux prosperity that came from household leverage and financial engineering papered over declining competitiveness. Many of the relevant issues lay beyond a Treasury Secretary's remit. But many of them, such as corporate tax reform, do not. And these issues too are highly political.

The other large issue area that will continue to be important is international relations. Economic policy long ago stopped being a domestic issue area. The world is getting smaller, our trading partners are getting wealthier, global competition is fiercer than ever, and the world's international economic infrastructure is at the leading edge of an overhaul to reflect these emerging realities. This overhaul matters critically to us, as raw imposition of our will is no longer a viable alternative.

The ideal candidate, therefore, is someone who meets these basic criteria:
  • Has the strong trust and confidence of the President. No freelancers or peacocks need apply.
  • Excellent political skills. Well respected by Congress.
  • Knows where the bodies are buried on Capitol Hill; knows where are the hot buttons are for the key players.
  • Strong international experience and knowledge of the international political landscape, plus diplomatic ability.
It may be controversial to suggest at this point in time that deep financial expertise is not a principal criterion for Treasury Secretary. And the assertion that it doesn't really matter whether a particular candidate has or hasn't met a payroll might not sit well with many. But, if you believe, as I do, that the next four years will be all about fiscal and structural issues, and that our ability to shape international economic relations will only grow more important, than we have to get past the backward-looking temptation to root for a financial wizard or green-eyeshade type. We need a politician, one with international street cred.

Who might that be? Well, it is easier to look at the presumed front runners and say who it is not. But when I look around, the far and away best candidate is one who probably doesn't want the job: Hillary Clinton.
This article originally appeared on Behavioral Macro.

Twitter: @mark_dow

No positions in stocks mentioned.
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