Some Misgivings on Geithner

We caught a bit of Treasury Secretary designate Tim Geithner’s testimony to the Senate yesterday. While we were completely neutral on the appointment initially, we now have some misgivings:

• Given his background as a monetary economist, versus the obvious need to revise the federal tax code and address pressing long term fiscal issues, is he the best person for the job of chief tax and fiscal authority?
• Some mild character concerns were raised in yesterday’s hearing related to his past tax problems, and while we don’t find those overly troubling at this point, we are somewhat shocked that Geithner doesn’t mention his experiences with the U.S. tax code as a clear and compelling argument for tax simplification.
• On currency and foreign exchange issues, and specifically on the Chinese Yuan – USD exchange rate, it’s not clear at all where the Obama Administration is headed, and this is a potentially explosive issue for the global economy.

On the first point, when asked whether he thought rising tax burdens in the late 1930s had exacerbated or extended the Great Depression, Geithner professed ignorance of tax policies in that era, and said he had far more knowledge of the role that monetary policy had played. This admission highlighted a question that no one (to our knowledge) has asked yet: Given that Geithner was steeped in monetary policy during his tenure as a central banker, and given that the key focus for a Treasury Secretary is tax and fiscal policy, is he the right person for the job?

On the second point, one or more Republican senators raised a legitimate character issue, based upon the fact that (1) when Geithner originally settled his IRS tax claim, he did not pay any back taxes for which the statute of limitations had expired (as most people would do) and (2) after his appointment, he chose to pay those back taxes several years after he the fact (in other words, he paid the full tax bill only when it became apparent that it could thwart a high profile career opportunity). Of the questions raised, this issue troubled us the least, because the taxes involved are notoriously complex, it’s a legal truism that one pays only those damages that they owe, and there doesn’t appear to have been a longstanding pattern of misconduct. What surprises us is that neither Geithner, nor any of the Senate Finance members, even Republicans (at least while we were watching) pointed out the obvious implications of his tax problems — that tax simplification is critically important and long overdue, and that the problem’s been getting worse in recent years.

On currency and foreign exchange issues, it’s not entirely clear yet where Geithner and the Obama Administration are headed. In his hearing, Geithner subscribed to the prevailing idea that "market forces" should determine exchange rates. But as we like to point out, (1) governments in most mature economies prefer floating exchange rates because they help to obscure the fact that burdensome policies and regulations drive capital, investment, production and jobs abroad; and (2) many export oriented businesses prefer floating rates because when taxes and regulations are costly and inflexible, exchange rates become the only public policy tool that confers a competitive advantage over foreign competitors.

So the Treasury’s direction on exchange rates is worrisome enough, especially when you consider that Senator Obama supported a bill in the last Congress that sought to categorize a fixed exchange rate ("currency manipulation") as a trade violation. But the issue was muddied significantly by Geithner’s written follow ups which were provided to the Senate today, as he called for a "strong dollar", a policy last pursued by Treasury during the Clinton Administration.* The thrust of such a claim is that President Obama and Treasury Secretary Geithner (if approved, which looks very likely) will pursue a stronger dollar and an even stronger yuan. If they are truly committed to this path, then things could get even stranger — perhaps uglier — in the months and years ahead.

To sum up, we now have some concerns about a Geithner Treasury. However, he deserves an opportunity to prove himself, and his experience at the Fed since the financial crisis began should be a strength if and when he assumes the post.

* The sudden reference to a "strong dollar policy" would seem to have the fingerprints of Larry Summers, Clinton’s last Treasury Secretary, all over it. And while a "strong dollar" has a nice ring to it, there is no good economic argument to be made for it, just as there’s no good argument for a "weak" dollar. To clarify, we realize that those arguments, along with plenty of fancy theories used to support them, exist in spades. We just don’t think they’re good arguments. The value of money ought to be stable, and from that perspective, exchange rates should be relatively stable as well.