Has Henry Paulson Made a Mistake?

Adam Posen thinks Henry Paulson has made a mistake:

The Washington Note: Adam S. Posen: Putting Money on More of the Same from Economic Policy: Just as in foreign policy, economic policy under the Bush Administration has been waiting for adult supervision.... [O]lder wiser moderates, like Pete Peterson, have been pushing for greater fiscal restraint, multilateral approaches to international economic policy, and some regard for the domestic political impact of corporate excess....

Last week's nomination of Henry Paulson to be Treasury Secretary, supposedly due to the increased influence of Chief of Staff Josh Bolten, is supposed to be the sign of the adults finally taking charge of the nation's finances.... [S]ome market chatter has been that this is the turning point, at least on the fiscal issue. The earlier meritocratic appointment of Ben Bernanke as Fed Chairman, as opposed to some Harriet Miers of central banking from the Bush bench of obscure buddies... was also a hopeful sign....

Would that it were so. It could turn out that way.... [But] there remain several reasons for skepticism.... Lots of momentum towards deepening difficulties -- The US fiscal and international economic positions are not irretrievably or even critically bad, but the last five years of mismanagement have done quite a bit of harm.... Lack of credibility from within the tent -- One might think of Paulson as a Colin Powell for economic policy, in which case the limited impact of such an appointment should be self-evident. The claim is made that someone of Paulson's stature would never take the job unless s/he were guaranteed that s/he could speak truth to power and pursue mature policies; otherwise, s/he would resign.... [B]ut as an economist I do know something about incentives and time-consistency. Once a senior official is in the administration, all forces motivate him/her to keep the job.... Josh Bolten oversaw the budget binges at OMB without a squawk or at least any noticeable restraining effect. There is no reason to think Paulson will be immune.

Absence of risks to what the Bush administration values -- There are elected officials who do undertake painful fiscal measures for the sake of a country's economic well-being. George Bush the Elder did so with regard to raising taxes, and Bill Clinton also did so by pursuing 'Rubinomics' rather than the spending programs that his 1992 platform seemed to portend. In both cases, the Presidents and their core advisers believed that the US' best interest was served by an American economy integrated with the world, with sufficient government resources (or credit lines unused) to marshal military force as needed, and (moreso Clinton than Bush) the predominance of financial and technological efficiency over protection of older declining corporate interests. Fiscal rectitude and a strong dollar supported these values. On each of these counts George Bush the Younger, Cheney, and Rove have revealed the opposite priorities....

There are many reasons to hope that the Paulson nomination to Treasury is indicative of a reversal of the Bush Administration of the destructive fiscal policies of the last five years, but far fewer reasons to expect that those hopes will come to fruition.