Paulson Optimistic About Economy Despite Market's Downturn

Treasury Secretary Henry Paulson says the economy is healthy, inflation seems under control and the U.S. should not perceive China as an economic enemy.

After a week in which the Dow Jones industrials posted their worst weekly performance in more than four years, Paulson said in a television interview broadcast Sunday he felt good about the economy and discounted the chance of an economic downtown.

"Markets never move in any one direction forever in a straight line. And so I look at it and put it in perspective and say, over the last year, the Dow's up almost 11%, the S&P's (the Standard & Poor's 500 index) up 9%, and I'll take it," Paulson said.

U.S. stocks dropped 416 points last Tuesday after big declines in China and other countries. Wall Street's tumble rattled investor confidence about the state of the U.S. economy.

The sell-off followed comments a day earlier by former Federal Reserve Chairman Alan Greenspan that the economy might slip into recession by year's end. Just weeks ago, the current chairman, Ben Bernanke, gave Congress a mostly upbeat assessment of the economy's prospects.

No Crystal Ball

"Clearly, no one's got a crystal ball. So there's always a possibility that there will be a downturn, always a possibility," Paulson said. "But I don't see it. I think we have a healthy economy in the U.S.

"You know, a year ago, when the growth rates were much higher, I was concerned. I said, `Is this going to be sustainable? Now I'm looking at it and I'm seeing a situation where it looks like we're successfully making the transition.

"The consumer's strong. Exports have been greater than imports for quarters running, and they're adding to our growth," the secretary said in an interview taped Friday for "This Week" on ABC.

"We've got a very healthy labor market. ... Inflation seems to be contained. And what really makes a difference to me is the average worker is now beginning to feel the benefits. Real income is up 2.1% for the average American worker over the last year. So I'm feeling good about the U.S. economy."

Paulson, who this week makes his third visit to China as treasury secretary, said it is essential that both countries have strong economic ties. The former head of the investment company Goldman Sachs has said China is moving too slowly in overhauling its currency system and cracking down on copyright piracy. U.S. businesses blame these factors for the soaring U.S. trade deficit with China.

"I would say that our relationship with China is multifaceted and it's a very important relationship for the U.S. And I don't believe we need to make China an enemy," Paulson said.

China Relationship

"And if we manage that relationship properly on a long-term basis, and if we manage the relationship--the overall relationship--with China properly, it's going to benefit both of our countries for a long time to come."

The Democrats' takeover of Congress this year was helped by their criticism that the Bush administration was doing too little to protect U.S. workers from unfair foreign trade practices. Paulson says protectionist barriers in this country would hurt U.S. consumers and make the United States less competitive.

Paulson said it is "a top priority to get this long-term economic relationship right between our two countries and to deal with the most pressing short-term issues. ... They need to have more flexibility of their currency in a short term. It needs to appreciate more. And we need to get to the point in the intermediate term when that currency can trade in a competitive marketplace where it's market-determined."

"Their whole economy is developing; their capital markets are not nearly as developed as their manufacturing economy. They're not reflective of the Chinese economy overall. They're largely cut off from the global capital markets," he said.

"But as they reform those capital markets and as they open them up to competition, this will make it possible for them to have a currency that trades in a competitive marketplace. This will help their economy develop in a way which it'll be good for them and good for us, because there will be a bigger market for our exports," Paulson said.

U.S. manufacturers contend that China's currency is undervalued by as much as 40%. That makes Chinese goods cheaper for American consumers and means U.S. products are more expensive in China.

The U.S. trade deficit reached $763.6 billion in 2006, the fifth straight year with a record. The imbalance with China climbed to a record as well--$232.5 billion, the highest trade gap ever recorded with a single country.

Rules on CEO Pay

On other topics, Paulson said:

--He opposes efforts in Congress to rein in executive pay. Last week, the head of the House Financial Services Committee and 21 other Democrats proposed legislation to give shareholders at public companies a formal say in executives' compensation packages.

"What upsets people in this country is pay for failure. And so I think it's very, very important that compensation be tied to performance," Paulson said.

"I really believe U.S. companies, by and large, are the most competitive, the best-managed companies in the world. And we have a system in this country where shareholders elect directors and directors set compensation. And I would let the current system work."

Bush also has said the government should not get involved in the matter.

--His talks with Bush about China usually bring up global warming. "He knows we're not going to get what we want to get unless we get the developing countries involved--India, and particularly China," said Paulson, a former chairman of the Nature Conservancy.

"Almost every time I talk with the president on China, he asks me how we're doing on the environmental issues with China. Because they're building one coal plant every week, and a lot of it is with some of the more less-developed technology, and there's a lot we can be doing to make advances there."