Tim Geithner has undoubtedly become one of the top advisors in the Obama administration, not just in the Treasury, but in the Obama White House. While he and I disagree on a host of key policy issues, I loved the back-and-forth exchange we had during yesterday’s interview. Incidentally, Mr. Geithner stated that the Obama administration hopes to keep the top tax rate on dividends and capital gains capped at 20 percent. Be thankful for small blessings.
LARRY KUDLOW, host:
We welcome to THE KUDLOW REPORT Treasury Secretary Tim Geithner.
Thank you very much.
Secretary TIM GEITHNER: Good to be here, Larry.
KUDLOW: Let me begin with this. Is there bad blood now between the
administration and business, and was the president’s free trade speech today
designed to calm business with a pro-growth message? I mean, stocks are up
275 points, the speech may have had something to do with it. Were you trying
to speak to your business critics?
Sec. GEITHNER: We have a pro-growth agenda. Part of the agenda is growing
exports. They’re central to our future. What the president today is to say,
that is important to the United States, we’re going to be committed to making
sure we’re that we’re expanding opportunities for American business
everywhere. Now, this president understands deeply that governments don’t
create jobs, businesses create jobs. And our job as government is try to make
sure we’re creating the conditions that allow businesses to prosper so they
can hire people back, get this economy going again.
KUDLOW: All right, I hear you. I hear you, I get what you’re saying to me.
But as you know, you’ve had tremendous criticism from the leaders of the
Business Roundtable, the Business Council, you see this criticism with the
small business surveys. They’re worried about stimulus spending, taxing, cap
and trade, fin reg, health care, the costs of doing business. Some have
characterized it as a bad environment for investment in jobs.
Sec. GEITHNER: Business…(unintelligible)…
KUDLOW: So how do you react to that? And so, you know, changing the rules of
Sec. GEITHNER: Look…(unintelligible)…
KUDLOW: This is overregulation. How do you react?
Sec. GEITHNER: I think businesses are doing now what businesses always do,
which is they want their taxes lower and they’d like to operate with less
regulation, as they always do. Our job, though, is to make sure, again, we’re
creating the conditions that make this economy work better for the country as
a whole. Now, just remember, when the president stepped into this job,
business of America was out of business. People could not borrow.
KUDLOW: All right. All right.
Sec. GEITHNER: They were cutting deeply into the bone of the productive
capacity of this country. They were completely out of commission. It was
almost lights out. And what the president did is to take on the tough things
early to bring stability to an economy that was falling off the cliff. And
businesses across this country are in a much, much stronger position today
because of the actions he was willing to take. Now, people don’t like change,
they don’t like these reforms, but he took on things that are absolutely
critical to our capacity to grow in education, in health care costs and in the
financial system. And by taking those tough choices early, we’re in a much
stronger position now to make sure we can prosper going forward.
KUDLOW: Why is it, then–I mean, you’ve got–first of all, let’s talk about
spending, stimulus spending. It’s like public enemy number one. I mean, you
see it in all the opinion polls, public enemy number one. Now, you
recommended more spending at the G-20, and you’re recommending more spending
here at home on unemployment compensation and so forth.
Sec. GEITHNER: That’s not quite–can I just…(unintelligible)…
KUDLOW: Yes, please.
Sec. GEITHNER: OK.
Sec. GEITHNER: Our basic job now, as I know agree with this, our basic
responsibility right now is to make sure this economy is growing again.
Sec. GEITHNER: We have a recovery led by private demand, private investment,
private recovery. That is the most important thing we can do right now. Now,
as part of that, we want to make sure that governments around the world are
working with us to make sure we’re strengthening growth. In the United
States, what the president does propose a series of very targeted measures to
support business investment, credit for small businesses, help stay–keep
teachers in the classrooms. Those are very sensible–those are good policy
for the country. But of course, we recognize that if we’re going to have
growth in the future we also need to be–make people confident that we’re
going to have the will as a country here in Washington to act to bring those
deficits down over time as growth strengthens, recovers. But our job now is
about growth. Now, all the government can do is to make sure we’re providing
a bridge to the recovery in private demands.
Sec. GEITHNER: As I said earlier, it’s businesses that create jobs,
governments don’t create jobs.
KUDLOW: But–all right, Secretary, I–that–it’s a great–it’s a great point.
But what you hear, for example, let me raise this. Unemployment insurance is
back on the table, whatever, $30 billion. It would make it up to two years.
Some people say that’s a deterrent to working, but I’m not going to debate
that. Why not couple that with something that would help business investment,
again, large and small? For example, Japan and Britain have lowered their
corporate tax rates. We now have the highest in the world, we’re not
competitive. Why not couple the unemployment bill with a lower corporate tax
reform? Why not couple it with full cash expensing for business investment,
which some people like Fred Smith of FedEx say is the absolute best bang for
the buck? In other words, can you lower tax burdens for business even while
you’re trying to prop up the safety net for those who are truly needy?
Sec. GEITHNER: We’re going to have to take a look at comprehensive tax
reform for the corporate sector. I agree with that. I think it’s going to be
important for us going forward. That’s one of the things that this fiscal
commission is going to look at. Now, it’s important to recognize, Larry, that
the effective tax rate that US businesses pay now is about the average of what
companies face around the world. Our priority right now, and this is what the
president is doing, is to make sure that we’re extending tax cuts that go to
benefit more than 95 percent of businesses in America.
KUDLOW: But what about the capital–what about the capital…
Sec. GEITHNER: And as…
KUDLOW: …and the investment tax hike?
Sec. GEITHNER: And–but we’re for that. And as part of that, we want to
make sure that businesses are getting continued incentives to invest. So
there’s a bill right before the Senate, it’s called the small business
package, but it includes some very important, targeted incentives: zero
capital gains rate on investment in small business, extension of expensing,
this bonus depreciation thing. So those are things we think are very good
policy, very good–they’re sensible things.
KUDLOW: But aren’t…(unintelligible)…
Sec. GEITHNER: Those are things you support.
KUDLOW: I–yes, I do. But again, why not universalize them? They’re very
Sec. GEITHNER: No, but…
KUDLOW: They don’t help the majority of companies, both large and small.
We’re running at a competitive disadvantage. I mean, for example, in Asia, as
you know, they really tax capital less than we do. And here’s what I hear all
the time from my interviews, people on the street. We’re going to see the
Bush tax cuts expire, at least for the top end, next year. Tax hikes on
capital gains dividends stay.
Sec. GEITHNER: Just for the top end.
KUDLOW: Personal income…
Sec. GEITHNER: Just for the top end.
KUDLOW: Yeah, but this is a big chunk.
Sec. GEITHNER: Right.
KUDLOW: I mean, those are those most likely to invest and save and take
risks. Why penalize them? Why not reward them? Why not say there’s a
moratorium on tax hikes in an uncertain economy?
Sec. GEITHNER: Well, let me tell you what the president’s going to fight for
and propose. We’re going to make sure that we extend and leave in place tax
cuts that will go to benefit more than 95 percent–not just of individuals in
this country, but of businesses across the country. We think that’s good
policy, good for the country, sensible policy. We’re going to make sure that
we keep at 20 percent the existing rates on dividends and capital gains. We
think that’s good policy, too. But…
KUDLOW: For the–for the–but not for the top end.
Sec. GEITHNER: For dividends. Just for the high end. No, for the high end.
We’re proposing to make sure that…
KUDLOW: For the high end?
Sec. GEITHNER: …that 20–and 20/20 on dividends and capital gains. Now,
that’s the president’s proposal. Now, you’re right, we’re also proposing to
allow the tax cuts that President Bush put in place that go to the top 2 to 3
percent of the most affluent, most fortunate Americans in this country, we’re
proposing to let those expire. But when they expire, Larry, they’re going to
go back to the rates that prevailed in the second half of the ’90s. And as
you know, that was a period where we had the best record of growth in private
investment, in productivity, broad-based gains of income. That was a record
that was the envy of the world in terms of…
Sec. GEITHNER: …innovation and…(unintelligible).
KUDLOW: Touche. I agree, absolutely. I mean, I supported most of Clinton’s
policies, to tell you the truth. Maybe not the tax–certainly the lower
capital gains tax, his free trade policies, his welfare reform. But I want to
ask, you know, going after the top 2 or 3 percent, look, Arthur Brooks, the
head of AEI’s got a book out now. He says there’s a war going on between the
culture of entrepreneurship on the one side and statism and redistributionism,
as he calls it, on the other. When people hear you say we’re going to
penalize the top earners, those who really make the most income and have the
most successful investments, it sounds like social policy, not economic
growth. It sounds like ideology, not economic growth policy.
Sec. GEITHNER: We’re going to be on the side of the entrepreneur, because
there is no plausible strategy for this country to grow that doesn’t recognize
that that growth has to come from private businesses investing and innovating
in this country. That has to be the centerpiece of any successful strategy
for this country. But as you know, we inherited a kind of a big mess…
Sec. GEITHNER: …on the fiscal side. And part of growth in this country,
part of making sure interest rates are low over time so people have their–are
able to invest, is to make sure that people understand that we’re going to
start to dig our way out of that fiscal hole over time. So we think the
responsible thing to do–and we don’t do this with pleasure–is to make sure
we are beginning to take the steps that allow us to dig out of that fiscal
hole. And part of that, we think it’s responsible to allow those tax cuts
that benefited just those 2 to 3 percent of Americans to expire. But again,
it only–they only go back to the level, Larry, that prevailed in a period
where we had terrific outcomes for the American entrepreneur.
KUDLOW: Well, I think one issue is that when people look at this oversized
spending and deficits and borrowing, they don’t believe you’re going to stop
there on tax rates. Now, how do you respond to that? I mean, it’s sort of
like, to tell you the truth, the country is getting a fiscal product from
Washington that it is scared to death about. I mean, that shows up in all the
opinion surveys. You know this as well as I do. So if you’re running 10
percent of GDP deficits, if the debt-to-GDP ratio is on its way from 60 to 80
to maybe 100 percent according to the Congressional Budget Office, then folks
think this is the first of many future tax hikes to come, and it causes them
to freeze. And they worry about the regulatory impact of these huge bills.
What do you–how do you react to that? This is the heart of the business
worry. I think it’s the heart of the mainstream worry.
Sec. GEITHNER: I think if you listen to people across the country today,
businesses and average working Americans, you hear people worried about two
things: growth and jobs, and our long-term fiscal problems. And I think we
should find–we should–I would be optimistic about the broad recognition
you’re seeing in the country today that our deficits are too high and they’re
going to have to come down. Remember, there was a long period of time where a
lot of people in this country believed that deficits didn’t matter and we
could borrow our way forever.
KUDLOW: Yeah. Loose talk.
Sec. GEITHNER: And that…
KUDLOW: Very loose talk.
Sec. GEITHNER: And that was not a responsible strategy for the country.
Sec. GEITHNER: And I would say it’s a good thing people recognize now that
these are going to have to come down over time. And I think that recognition
is the beginning. Now, it’s going to require some difficult choices. Our
challenge is going to be the way to make sure we dig out of that fiscal hole
in a way that is good for growth, good for incentives for investment, but
still regarded as fair to the average American that doesn’t want to have to
bear a larger burden of paying for things governments have to do. That’s
going to be the challenge.
KUDLOW: All right, I hear you.
Sec. GEITHNER: But can I–I want to go back to what you said.
KUDLOW: Of course you–of course you may.
Sec. GEITHNER: The president, again, he took on, right when he took office,
a set of very challenging reforms in education, in health care and in the
financial system. Those things are important to every business operating in
this country. Education because you want to make sure you have a
well-educated work force able to produce the things we need as a country,
provide the ideas we need to grow. Health care because rising costs are
killing American business. And the–and a financial system that was not good
for American business. Now, reg reforms…
KUDLOW: (Unintelligible)…get to fin reg in a minute.
Sec. GEITHNER: Yeah.
KUDLOW: But you know businesses is worried that the Obamacare health plan is
going to layer on more costs and more taxes. It’s not a popular plan,
Sec. GEITHNER: But you have–you have to look at what the independent
analysts say about health care costs, and they say this plan will make a
substantial contribution to slowing the rate of overall growth of health care
costs, and that is very encouraging. Now, it’s a beginning. It won’t solve
all problems. And a very difficult thing to do, particularly at a time when
people have so little faith in government getting things right, but it goes in
the right direction and I think it’s enormously important to the business of
America, not just to our long-term…(unintelligible).
KUDLOW: All right. Now I just got a couple of real fast ones, then I want to
close on bank regulation, financial reg. First of all, what is your economic
outlook right now?
Sec. GEITHNER: I think this economy is healing. We’re repairing the damage
caused by the crisis. We’re growing, and we’ve been growing now for 12 months
now. We’ve had six months of sustained growth in private sector jobs. Coming
out of the last recession, it took us almost two years before we had a
sustained set of month-to-month increase in private sector jobs, so that’s
very encouraging. I think the most likely thing is you’re going to see an
economy that is growing at a moderate pace, hopefully strengthening over time.
And this growth now you’re seeing is being led by business investment, by
exports, by manufacturing. That’s very encouraging, too. And again, if you
look across American industry today, you see the great strength of America.
You see our companies competing in the technologies that the world needs. And
we are exceptionally good as a country at making things that are very
important to growth around the world, and that will serve us well.
KUDLOW: Will the unions allow these free trade agreements to go through? The
president talked about South Korea, Colombia and Panama today. These are very
important, lots of jobs could be created, beneficial to consumers. The unions
have been an obstacle in the Democratic Party and, frankly, in the Republican
Party. Can any of this stuff get through in this session?
Sec. GEITHNER: I think people want to see these agreements will come on
terms that are fair and good for American business and American workers. So
if the president can present–I believe he can–agreements that we think do a
good job of protecting those interests, then I think we’re going to find
support for them.
KUDLOW: All right.
Sec. GEITHNER: It’s very important we do, because we need to be able to be
back in the game…
KUDLOW: No, I agree.
Sec. GEITHNER: …of trade, expanding opportunities, because we will benefit
hugely from them.
KUDLOW: All right, the clock is ticking. We might run over a minute.
Financial regulation. All right, you’ve–this has been one of the hearts of
your whole existence. First of all, the criticism is, as you know, that the
five or 10 largest banks are still too big to fail, and that this bill
therefore fails to remove the moral hazard of excessive risk-taking. Your
response to too big to fail?
Sec. GEITHNER: Disagree with that. What this bill does is very important.
It gives us the authority to constrain risk-taking, limit leverage, force much
more conservative capital requirements, liquidity requirements, on these large
institutions, so they are much less vulnerable to mistakes, much more able to
withstand the shocks that could come from the future, future recessions,
wherever they come from. But what it also does, and this is fundamental, what
it also does is make sure that if they mess up in the future, if they make
mistakes and they can’t survive without the government coming in, then we will
be able to put them out of existence safely, without the taxpayer being
KUDLOW: The biggest. The biggest, top five, top 10?
Sec. GEITHNER: The biggest institutions, exactly. So this–what happens is
if you–like if AIG were to happen in the future, Lehman, AIG, Bear Stearns,
the government would have the ability to come in and dismember it–and only
this, not to preserve them to live another day, but to dismember them safely,
break them up, wind them down without the taxpayer being exposed to loss and
without the fire spreading to a bunch of better managed, solvent institutions.
That’s what this bill does, and it’s very important we do it.
KUDLOW: All right. One way or the other, the banks are going to continue to
trade derivatives. But the corporations, again, Business Roundtable folks are
saying the end users of derivatives who want to hedge, what, currencies or
energy or farm products, they’re going to have to pay a trillion dollars more
because of this bill, and therefore they’re being enormously penalized.
Sec. GEITHNER: No…
KUDLOW: Your reaction?
Sec. GEITHNER: No basis for those estimates or those concerns, in my view.
What this bill does, it preserves the capacity not just for financial
institutions but for American businesses to hedge the risks they face in their
business. It allows them to continue to do that in ways that meet their
specific needs, but to make sure the system as a whole is safer. That stuff
happens in the light of day with transparency and disclosure. That’s why
these reforms are so important in derivatives, so that we don’t face the
situation again where all this stuff operates in the shadows, where firms like
AIG can take on huge risks without the capital to back them up.
KUDLOW: And of course, everyone is up in arms about nothing being done with
Fannie and Freddie. And, you know, it’s a couple of hundred billion dollars
right now. It’s off the budget, it’s actually exacerbating the deficit, as
you well know, running the Treasury. People are throwing up their hands, how
can we exempt Fannie and Freddie? They were a crucial element of the problem.
Sec. GEITHNER: No one is going to feel more strongly about reforming those
institutions, fixing what’s broken, than I am. I’m the one that has to live
with trying to clean up that basic mess we inherited. And we’re going to
propose a sweeping set of reforms that’ll end what was broken in that basic
model, remove the moral hazard from it, fix the basic things that caused that
risk, and we are going to move quickly to do that once we have this financial
reform bill in place and behind us. We’ve had a very thoughtful team of
people looking at alternatives, and we’re going to cast the net very broadly
across the aisle to get the best ideas so we can fix what’s broken. This is
very important we do it. We couldn’t do everything at once, and we decided to
do it–try to fix these other problems first. But we’re going to move very
quickly to reform Fannie and Freddie.
KUDLOW: Personal question, and my final one. And you’ve been terrific today
and I appreciate your time. You had a slow start, but you have become a
crucial player in the Obama team, his economics teams. You’ve come–everyone
says that about you. So my question is, will you continue to serve as
Treasury Secretary beyond the midterm elections?
Sec. GEITHNER: As long as the president wants me to serve, it is my
privilege and honor to help him fix what’s broken and make this country
stronger. I’ll do it as long as he asks me to.
KUDLOW: He backed you, and you’re backing him.
Sec. GEITHNER: Absolutely.
KUDLOW: All right.
Sec. GEITHNER: Absolutely.
KUDLOW: Secretary Tim Geithner, we appreciate it very much.
Sec. GEITHNER: All right. See you.
KUDLOW: Terrific stuff and I thank you.
Sec. GEITHNER: Good to see you, Larry.