The Economic Outlook

In the summer of 2006, Henry Paulson left the helm of Goldman Sachs to become the third Treasury secretary of the Bush administration. At the end of his first full year in Washington, Paulson sat down with NEWSWEEK Senior Editor Daniel Gross to discuss the price of oil, the housing market and his recent trip to China. Excerpts:

NEWSWEEK: Is it surprising to you that oil has reached $100 per barrel at a time when demand in the United Sates—the world's biggest consumer of oil—is slowing?
Henry Paulson: Oil has been at a level that has seemed high for some time. I think what is noteworthy is that the economy has done as well as it has. We're using oil more efficiently, and it has a smaller overall impact on our growth. A big part of the oil story has to do with global demand and another part is the underinvestment in a number of the countries that have essentially nationalized oil production and are not managing resources efficiently.

Speaking of global growth, you just got back from China. What were you hoping to accomplish, and what did you accomplish? 
These big meetings that take place twice a year are only part of the story, because we have a continuing dialogue. I think the significance of this meeting is that it came at a time when the Chinese leadership is in transition. It took place between the Party Congress and the National People's Congress that takes place in March. A big part of what we're doing is to keep this economic relationship on an economic even keel during a time of tension. My primary focus is to work to persuade the Chinese to move more quickly to open up their economy. It's the fastest-growing market for our exports. The thing that was most noteworthy to me is that our two countries agreed to work between now and our upcoming meeting in June in Washington to develop a 10-year plan whereby we can work together on energy efficiency, energy security and [the] environment, including climate. We're the two biggest emitters of carbon. We're both big importers of oil, and we have some common interests.

As an investment banker, you traveled to China several dozen times. How is it different than going as a private-sector person?
The advantage that I had in coming to this job was I knew a good number of their leaders quite well. I had worked with Ziang Jemin and knew Hu Jintao. I had had a chance to work with Chinese leaders not just on their financial-sector reform but on environmental issues, too. Having said all that, it's just enormously different to represent your country. One of the positive surprises for me has been the sense of pride and satisfaction I feel when I go to any foreign country representing the American people and the United States of America. It's just an absolutely terrific feeling.

Your trip was just before Christmas, when Americans were concerned about the quality and safety of toys from China. Did you discuss that?
The biggest accomplishment at this meeting by far was the progress that was made in import safety. The work that [Health and Human Services Secretary] Mike Leavitt had done with his Chinese counterparts is a good start on a model for what can be adopted around the world. We didn't have a system in place where you could simply scale it up. This is not an issue where you can inspect your way out of it. Quality has got to be built-in. When we set up these strategic economic meetings in the fall of 2006, and we looked at the various trade tensions and the issues that we had before us, no one had foreseen that import safety would be as big an issue. That's very analogous when you want to talk about what's happening in our capital markets and our economy.

That provides a good segue to one of the stories of 2007, the falling value of the dollar. It is very common to hear policymakers in Washington say we have a strong-dollar policy. What does it mean to say that? And what can you as the Treasury secretary do about it?
I'd begin with and say that given my background in the capital markets, it was very easy for me to say a strong dollar is in our nation's interest because I know it is. Our economy, like any other, has its ups and downs. But you know, I believe our economy is going to continue to grow, and its fundamental strength will be reflected in the currency markets. It's my job as Treasury secretary to advocate and fight for policies that are going to keep our economy strong, increase confidence and increase productivity. The [positive news] is the president's pro-growth policies, the fact that the revenues are coming in ahead of forecasts and that our deficit is now down to 1.2 percent of GDP. Fighting economic isolationism and protectionism to keep our country open to foreign investment and trade are all things I'm very committed to--and are reasons why our economy over any period of time has been as vibrant and strong as it has.