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Larry Kudlow Interviews Secretary of the Treasury Henry Paulson on CNBC's "Kudlow & Company" (Transcript Included)

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DATE: July 23, 2007
NETWORK: CNBC
PROGRAM:"Kudlow & Company"
TIME: 5:00PM

The following is the unofficial transcript of a CNBC interview with Secretary of the Treasury Henry Paulson, on CNBC's "Kudlow & Company" today at 5:00 PM ET. All references must be sourced to CNBC's "Kudlow & Company."

In the exclusive interview, Paulson discusses free trade, the state of the economy, credit markets, corporate tax, capital gains tax, free market capitalism, among other topics.



LARRY: MR. PAULSON WELCOME BACK TO THE PROGRAM. WHAT YOU HEARD JUST A MOMENT AGO BETWEEN STEVE FORBES AND DAVE IS A PERFECT SPLIT. STEVE THE OPTIMIST AROUND THE WORLD AND AT HOME. HE SAYS YEAH, LOOKS OKAY AROUND THE WORLD BUT NOT AT HOME. YOU'D THINK WE WERE IN A RECESSION HERE IN THE UNITED STATES. ENLIGHTEN US PLEASE SIR.

PAULSON: WELL, LET ME BEGIN. I DON'T THINK WE DL'S MUCH ARGUMENT THAT WE ARE IN A VERY STRONG GLOBAL ECONOMY. THAT JAPAN IS ON A SUSTAINED GROWTH COURSE IN EUROPE THEIR GROWTH RATE HAS JUST ABOUT DOUBLED. UNEMPLOYMENT IS STILL HIGH BUT IT'S AT A 15 YEAR LOW. THE DEVELOPING COUNTRIES ARE GROWING TWICE THE RATE THEY GREW IN THE 90S THREE TIMES THE LEVEL OF THE INDUSTRIAL COMPANIES. SO NOW LET'S GET TO WHAT'S GOING ON IN THE U.S.. I HAPPEN TO BELIEVE THAT WE ARE MAKING A SUCCESSFUL TRANSITION TO AN ECONOMY THAT WAS GROWING AT A RATE THAT WASN'T SUSTAINABLE TO ONE THAT IS SUSTAINABLE. THERE HAS BEEN A VERY SIGNIFICANT HOUSING CORRECTION. I THINK WE'RE AT OR NEAR THE BOTTOM THERE. I DON'T DENY THERE'S A PROBLEM WITH SUBPRIME MORTGAGES BUT I REALLY DO BELIEVE THAT'S CONTAINABLE.

LARRY: IS IT GOING TO BUST THE ECONOMY? NOT GOING TO BUST THE ECONOMY THIS IS.

PAULSON: NO, QUITE CONTAINABLE. WE HAVE LARRY A VERY, VERY HEALTHY ECONOMY. WE HAVE VERY STRONG EMPLOYMENT. WE'RE CREATING JOBS HERE AT VERY HIGH LEVELS. NOBODY TALKS ABOUT THAT. NOBODY TALKS ABOUT THAT. NO. THE CONSUMER IS STRONG. WE HAVE WHEN YOU LOOK AT WHAT'S HAPPENED WITH THE EQUITY MARKET AND S&P GONE UP ABOUT 24% OVER THE LAST 12 MONTHS, THERE'S BEEN ABOUT 3 AND A HALF TRILLION DOLLARS OF WEALTH CREATED IN THE MARKETPLACE. THAT DOESN'T HURT THE CONSUMER IN THE U.S. AND AGAIN, THE STRONG GROWTH OUTSIDE OF THE U.S. HELPS THE U.S. ECONOMY. THE FACT THAT OUR TRADING PARTNERS ARE STRONG IS A POSITIVE. SO I BELIEVE WE HAVE A VERY HEALTHY U.S. ECONOMY.

LARRY: WHAT DO YOU SAY NOW, YOU KNOW THE ARGUMENT AS WELL AS I DO. WHAT DO YOU SAY, THE CREDIT MARKETS ARE FREEZING UP. THE LEVERAGE LOAN MARKETS ARE FREEZING UP HERE THERE'S NOT ANY CREDIT AVAILABLE. OF COURSE EVERYONE IS OBSESSED ABOUT SUBPRIME MORTGAGES AND I DO ASK MYSELF SOMETIMES, WHATEVER HAPPENED TO THE PRIVATE EQUITY PART OF THE PRIVATE EQUITY BOOM? IT SEEMS LIKE THOSE GUYS HAVE SCHIFFED OVER TO LEVERAGEED LOANS AND THE MARKET COULD BE GOING THROUGH A MINI CREDIT CRUNCH.

PAULSON: I WOULD JUST SIMPLY SAY THIS WE HAVE HAD NOW BENIGN POSITIVE MARKETS FOR A WHILE AND THERE'S ALWAYS A TEMPTATION TO GIVE WAY TO EXCESSES, TO HAVE LESS DISCIPLINE. SO I BELIEVE THAT SOME OF THE ISSUES WE'VE HAD RECENTLY ARE A WAKEUP CALL AND I DO BELIEVE THAT BORROWERS NEED TO BE VIGILANT. LENDERS NEED TO BE VIGILANT. I'M NOT GOING TO SAY IT'S WITHOUT RISK BUT I'M GOING SAY WE HAVE A HEALTHY FINANCIAL SECTOR IN THIS COUNTRY. RECORD EARNSINGS. NONPERFORMING LOANS ARE AT LOW LEVELS AND AND WE NEED TO BE MINDFUL. WE NEED TO ALWAYS BE VIGILANT.

LARRY: YOU SEE THIS ON DAILY BASIS. YOU MONITOR THIS YOU AND YOUR STAFF. YOU HAVE SUPERVISORY AUTHORITIES OVER A LOT OF THESE BANK. IF YOU'VE SEEN THESE INDEXES THE LEVERAGE LOAN CDO IN ADDITION TO THE SUBPRIME INDEX. THEY HAVE SLUMPED DOWN IN PRICE AND VALUE QUITE A BIT.

PAULSON: RIGHT. WE CLEARLY ARE MONITORING IT AND THE PRESIDENT'S WORKING GROUP WE MONITOR IT. AS I SAID, WE NEED TO BE VIGILANT.

LARRY: WHICH WORKING GROUP IS THIS?

PAULSON: THE PRESIDENT'S WORKING GROUP ON FINANCIAL MARKETS.

LARRY: AND THAT'S THE TREASURY?

PAULSON: THE TREASURY, THE FED, THE SEC THE CFTC. WHEN I CAME TO WASHINGTON ONE THING I KNEW WE NEEDED TO FOCUS ON IS HOW DO WE GET READY FOR A FINANCIAL SHOCK. WE WEREN'T PREDICTING FINANCIAL SHOCK. I'M NOT PREDICTING ONE THAT BUTT THEY'RE NOT PREDICTABLE AND BEEN SINCE 1998 SINCE WE'VE HAD A FINANCIAL SHOCK. SO WE NEED TO BE READY AND THERE HAVE BEEN A LOT OF CHANGES IN THE MARKET SINCE 1998 WE'RE MUCH MORE INTEGRATED INTO THE GLOBAL ECONOMY. PRIVATE POOLS OF CAPITAL ARE PLAYING A MORE IMPORTANT ROLE. EXPANDED USE OF FINANCIAL DERIVATIVES ALL OF WHICH I THINK HAVE MADE THE MARKETS MORE EFFICIENT AND MORE LIQUID. BUT AGAIN, THE NEXT TIME WE HAVE A FINANCIAL SHOCK WE'LL BE SEEING HOW SOME OF THESE THINGS PERFORM. UNDER STRESS FOR THE FIRST TIME BUT AGAIN, I AM, I BELIEVE WE FORTUNATELY HAVE A VERY STRONG GLOBAL ECONOMY AND A VERY STRONG U.S. ECONOMY.

LARRY: SO YOU DON'T SEE AN ECONOMY-WIDE CREDIT CRUNCH.

PAULSON: NO.

LARRY: YOU DON'T SEE LOANS GOING UNFUNDED. STORIES OUT THERE KPBGRKK ANDR AND OTHER BUYOUT FIRMS HAVE 15-20 DEALS AND CAN'T SEEM TO PRICE THEM RIGHT.

PAULSON: LET ME SAY THIS LARRY. YOU'RE ALWAYS GOING TO SEE EXCESSS WHEN THERE ARE GOOD TIMES AND I DON'T DENY THERE ARE EXCESSS AND I DON'T DENY THAT THERE ARE CERTAIN LOANS WHEN YOU LOOK AT THEM FROM AFAR OR EVEN CLOSE. YOU SAY WHY DID THEY MAKE THOSE LOANS. OR I DON'T DENY THAT YOU'RE GOING TO SEE MONEY LOST ON SUBPRIME MORTGAGES. YOU CAN'T GO THROUGH THE KIND OF HOUSING CORRECTION WE'VE GONE THROUGH AND WITHOUT HAVING SOME SIDE-EFFECTS THAT ARE GOING TO GO ON FOR A GOOD WHILE. BUT DO I THINK THESE RISKS ARE CONTAINED? YES, I DO.

LARRY: ALL RIGHT. LET'S STOP RIGHT THERE. GOING TO TAKE A QUICK BREAK. MORE WITH SECRETARY PAULSON IN JUST A MOMENT. PLENTY MORE TO COVER INCLUDING HIS TERRIFIC ARTICLE IN THE "WALL STREET JOURNAL" ABOUT THE NEED TO REFORM THE CORPORATE TAX CODE.

LARRY: ALL RIGHT WELCOME BACK EVERYBODY. WHAT WE'RE WITH TREASURY SECRETARY HENRY PAULSON. MR. PAULSON WE'RE GOING TO GET TO YOUR GREAT PIECE CORPORATE TAX IS BROKEN IN JUST A MOMENT. YOU HAVE A LOT OF PEOPLE IN THE MARKETS NOW WHO SAY THE U.S. DOLLAR IS BROKEN. CAN YOU RESPOND TO THIS CRITICISM?

PAULSON: I WOULD JUST SIMPLY SAY, WE FEEL VERY STRONGLY, DO I THAT STRONG DOLLARS IN OUR NATION'S INTEREST AND THE DOLLAR'S VALUE SHOULD BE DETERMINED IN A COMPETITIVE MARKETPLACE BASED UPON UNDERLYING ECONOMIC FUNDAMENTALS. FEEL THAT WAY ABOUT ALL CURRENCIES AND AGAIN, AS YOU HEARD ME SAY EARLIER, I BELIEVE THIS COUNTRY HAS VERY STRONG UNDERLYING ECONOMIC FUND MENTALS.

LARRY: JUST ONE FOLLOW-UP TO THAT. I KNOW IT'S NOT YOUR FAVORITE PUBLIC DISCUSSION. I APPRECIATE YOUR DEALING WITH IT AT ALL. ARE THERE BREN. MARKS? I MEAN, PEOPLE ARE TALK ABOUT THE WEAK DOLLAR BEING HIGH IN INFLATION THE WEAK DOLLAR IS GOING TO DRIVE UP INTEREST RATES SKY-HIGH. WE DON'T SEE ANY OF THAT IN THE EMPIRICAL EVIDENCE COMING OUT OF THE FINANCIAL MARKETS. DO YOU HAVE ANY BENCHMARKS?

PAULSON: AS I'VE SAID I BELIEVE WE HAVE AS STRONG A GLOBAL ECONOMY AS I'VE SEEN IN MY BUSINESS LIFETIME AND AGAIN, WE ARE MAKING WHAT I BELIEVE TO BE A SUCCESSFUL TRANSITION TO A RATE OF GROWTH IN THIS COUNTRY THAT WASN'T SUSTAINABLE. THE ONE THAT IS AND WE HAVE A HEALTHY ECONOMY IN THE UNITED STATES.

LARRY: ALL RIGHT. YOUR STORY IN THE JOURNAL I GUESS IT WAS LAST WEEK OR SO, THE CORPORATE TAX IS BROKEN. YOU HAVE A BIG CONFERENCE COMING UP I THINK THIS THURSDAY ON THAT SUBJECT. TELL US WHY THE TAX SYSTEM IS BROKEN.

PAULSON: OKAY. AGAIN, THE LENS I'M LOOKING LARRY THROUGH IS GLOBAL COMPETITIVENESS. AND WE WENT IN THE 1980S FROM A NATION WITH A BUSINESS TAX SYSTEM WHICH WAS HIGH RELATIVE TO OTHERS. THE ONE THAT WAS LOW RELATIVE TO OTHERS. AND IT MADE A VERY BIG DIFFERENCE IN OUR COMPETITIVENESS THROUGHOUT THE LATE 80S AND THE 90S AND NOW TODAY ONCE AGAIN WE HAVE BUSINESS TAXES IN THE UNITED STATES THAT ARE HIGH RELATIVE TO OTHERS. AND OTHER NATIONS HAVE LOWERED THEIR RATES HAVE REFORMED THEIR TAX SYSTEMS AND ARE MOVING TO CONTINUE TO DO SO AND BRING RATES DOWN AND WE NEED TO CONTINUALLY LOOK AT OUR SYSTEM AND SAY WHAT TAX SYSTEM IS GOING TO DO THE MOST TO BRING INVESTMENT, TO ADD JOBS AND TO INCREASE WAGES FOR THE AMERICAN WORKER.

LARRY: SOME THINGS I'VE SEEN THE EUROPEAN UNION AVERAGE IS AT 25% CORPORATE TAX RATE. THE UNITED STATES AND JAPAN 39%.

ACTUALLY ASIA PACIFIC OUTSIDE JAPAN 30%. SO WE'RE LIKE WAY OVER THAT. I MEAN, IS THERE SOMETHING YOU'RE GOING TO PROPOSE? DO YOU WANT TO PUT SOME LEGISLATION ON THE BOARD?

PAULSON: I THINK THE FIRST THING WE NEED TO DO. AND THAT'S WHAT WE'RE DOING WITH THIS CONFERENCE WE'RE GOING TO BRING IN SOME REAL EXPERTS OF PUBLIC POLICY. EXPERTS IN TAX. WE NEED TO STEP BACK AND BUILD AWARENESS FIRST OF ALL THE ISSUE. THE COMPETITIVENESSISH SMAOU. THEN WE -- ISSUE. THEN WE NEED TO ASK THE QUESTION. THE WHOLE REASON FOR HAVING TAXS IS TO RAISE REVENUE. FOR ANY GIVEN LEVEL OF REVENUE, WHAT IS THE RIGHT SYSTEM? WHAT SYSTEM WILL PLACE A SMALLER BURDEN ON OUR WORKERS AS POSSIBLE AND DO AS MUCH AS POSSIBLE TO ENCOURAGE GROWTH AND -- IN JOBS AND COMPETITIVENESS.

LARRY: ARE WE LOSING IF I WERES? ARE E WE LOSING GROWTH R WE LOSING CAPITAL BECAUSE OF THIS?

PAULSON: THINK RIGHT NOW YOU'VE GOT TO REMEMBER WE HAD MAJOR TAX RELIEF IN 2001 IN THISCOUNTRY. AND A GOOD NUMBER OF OUR BUSINESSES, SMALL BUSINESSES PAY FLOW THROUGH TAXES THE INDIVIDUAL TAXES. SO THAT THE TOP INDIVIDUAL TAX RATE THE 35% BRACKET MORE THAN HALF OF THE FILEERS THERE ARE SMALL BUSINESSSES. SO WE HAD THE BENEFIT OF THAT AND REMEMBER TWO TOW THREE TAX REFORM CUT THE TAXES ON INVESTMENT. SO WE'VE GOT A STRONG ECONOMY BUT WE NEED TO LOOK FORWARD. WE NEED TO LOOK A FEW YEARS DOWN THE ROAD AND WE NEED TO ASK OURSELVES, ARE WE WELL POSITIONED TO BE COMPETITIVE LOOKING FORWARD WITH A TAX SYSTEM THAT IS AS COMPLEX AS OURS IS AND THE RATES ARE AS HIGH RELATIVE TO OUR COMPETITORS AROUND THE WORLD AND OUR TRAINING PARTNERS AUND THE WORLD.

LARRY: JAMES TESH THE C ERK ORANGE OF LOWE'S HAS BEEN ON THIS PROGRAM A COUPLE OF TIME AND HE'S CAM PAGE HARD TO REDUCE THE CORPORATE CAPITAL GAINS TAX AND SET UP DIFFERENT RENT, BETWEEN CORPORATE INCOME AND CORPORATE CAPITAL GAINS HE SAYS IT WILL PAY FOR IRS ITSELF.= ARE YOU FAMILIAR WITH IT WOULD YOU GO THERE?

PAULSON: LET ME SAY THERE THIS A NUMBER OF DIFFERENT APPROACHES WE'RE GOING TO LOOK AT. DIFFERENT APPROACHES I'M VERY FAMILIAR WITH THAT IDEA. THAT'S A GOOD IDEA. I FOR YEARS HAVE WORKED WITH CORPORATIONS IN MY PREVIOUS JOB WHEN I WAS AN INVESTMENT BANKER WHO WANTED TO DO THING TO MAKE THEIR COMPANY MORE EFFICIENT WHICH WOULD HAVE ADDED TO JOBS AND MADE OUR COUNTRY MORE COMPETITIVE. BUT THEY WERE IMPEDED BY SOME OF THE -- BY THE HIGH LEVELS OF CORPORATE CAPITAL GAINS TACK. SO THAT'S A VERY GOOD IDEA. WE ARE GOING TO LOOK AT A NUMBER OF THINGS WE'RE GOING TO LOOK AT IDEA TO SIMPLY -- SIMPLIFY THE TAX SYSTEM AND LOOK AT, DO THINGS TO BROADEN THE BASE. RIGHT NOW WE HAVE A GOOD NUMBER OF SPECIAL PREFERENCES FOR ONE INDUSTRY OR ANOTHER. MANY OF WHICH MAKE GREAT SENSE IF YOU LOOK AT THEM INDIVIDUALLY BUT IF WE DIDN'T HAVE THEM WE COULD HAVE TAX RATES WHICH ARE 25% LOWER WE'RE GOING TO LOOK AT REDUCING THE TAX ON INVESTMENT OR THINKING ABOUT THE TAX ON INVESTMENT BECAUSE AGAIN, THE WAY I THINK ABOUT IT IS INVESTMENT IS NECESSARY TO CREATE JOBS AND RAISE WAGES AND WHEN YOU ARE -- DEPENDING ON HOW YOU TAX INVESTMENT YOU'RE GOING TO HAVE LESS OF IT. WE'RE GOING TO LOOK AT NUMBER OF IDEAS.

LARRY: WHY DO YOU SUPPOSE ONE OF YOUR PREDECESSORS RUBEN TREASURY MAN DURING THE CLINTON YEARS HE GAVE A TALK A MONTH AGO I DMOECHBLT A CUT IN THE CAPTAIN -- CAPITAL GAINS TAX DIDN'T HELP THE AMERICAN ECONOMY ONE IOTA. THAT WAS HIS PHRASEONE IOTA. I DON'T KNOW HOW TO MEASURE ONE IOTA. WE'LL LEAVE THAT UP TO THE STATISTICIAN. HE CLEARSHY AGAINST CAPITAL GAINS HE WANTS TO RAISE THE TAX ON HEDGE FUNDS AND BUY-OUT FUNDS AND YOU'RE MAKING THE BUSH CASE THE LOWER CAPITAL GAINS TAX HELPED THE ECONOMY. WHERE DO YOU DISAGREE WITH MR. RUBIN ON THIS?

PAULSON: LET ME SAY TO BEGIN WITH LIKE EVERYONE ELSE I HAVE A VERY HIGH REGARD FOR BOB RUBIN SO I'LL START THERE. AGAIN THE WAY WE ARE LOOKING AT IT IS AND I WOULD BE VERY SURPRISED IF BOB RUBIN DOESN'T AGREE WITH THIS, THAT WE ARE IN A WORLD THAT'S CONTINUALLY CHANGING. AND IT'S INCREASINGLY EASY FOR SOMEONE TO START UP A BUSINESS AND OPERATE FROM MANY PARTS OF THE WORLD. SO WE NEED TO CONTINUE TO SAY WHAT TAX SYSTEM IS GOING TO LET US BE COMPETITIVE WITH THE REST OF THE WORLD. WHICH TAX SYSTEM IS GOING TO LET US FOR ANY GIVEN AMOUNT OF REVENUE RAISED ADD MORE JOBS, PAY HIGHER WAGES. NOW, MY OWN VIEW IS INVESTMENT IS KEY TO JOBS. AND IS KEY TO INNOVATION AND IT'S KEY TO R AND D AND PRODUCTIVITY IS KEY TO HIGHER WAGES. AND THE WAY YOU GET GREATER PRODUCTIVITY IS WITH MORE INVESTMENT AND I THINK THE WAY YOU GET MORE INVESTMENT IS TAX IT LESS.

LARRY: YOUR ASSISTANT SECRETARY FOR TAXES MR. ERIC SOLO MAN I BELIEVE HIS NAME IS TESTIFIED BEFORE CONGRESS AGAINST RACING -- RAISING TAXES ON THE BUYOUT FUNDS AND THE HEDGE FUNDS AND THE OTHER PRIVATE PARTNERSHIPS. IS THAT YOUR VIEW SIR?

PAULSON: YEAH, WHAT OUR VIEW IS VERY SIMPLY IS, IT DOESN'T MAKE SENSE TO SINGLE OUT ONE INDUSTRY AND PART OF THE REASON WHY WE HAVE SUCH A COMPLEX TAX SYSTEM IS THERE'S TOO MANY PROVISIONS THAT ARE AIMED AT ONE INDUSTRY REACTING TO THE HEADLINE OF THE MOMENT AND WE NEED TO TAKE A STEP BACK AND LOOK MORE BROADLY AT OUR TAX SYSTEM. NOW, THERE'S A LOT OF THOUGHT IN CONGRESS AND A LOT OF RHETORIC AND THOUGHT BEING GIVEN TO LOOK AT] PARTNERSHIP. THE PARTNERSHIP STRUCTURE AND ALL I WOULD SAY IS WE'VE -- THE PRINCIPLES THAT HAVE GOVERNED PARTNERSHIP TAXATION HAVE EXISTED IN THIS COUNTRY FOR A LONG TIME AND WE TAX PARTNERSHIPS, WE TAX CORPORATIONS AND THE PARTNERSHIP STRUCTURE WHICH IS AVAILABLE FOR REAL ESTATE, FOR ENERGY, FOR INVESTMENT PARTNERSHIPS HAS BEEN VERY, VERY EFFECTIVE AGAIN AT PROMOTING RIS TAKING AND DRIVING EFFICIENCY AND THE ECONOMY. BUT AGAIN, I THINK THE WAY TO LOOK AT IT IS LOOK AT OUR TAX CODE COMPREHENSIVELY AND LOOK AT IT AND SAY, WHAT'S THE RIGHT WAY TO TAX OUR BUSINESSES IN ORDER TO INCREASE THE PROSPERITY OF AMERICAN PEOPLE AND AMERICAN WORKERS.

LARRY: ANOTHER TOUGH SUBJECT VEXING THIS TRADE AND I WANT TO ASK YOU, THE NEWSPAPER IS LOADED WITH STORIES THAT FREE TRADE DEALS WITH PANAMA AND PERU AND COLOMBIA ARE BREAKING DOWN. FIRST THING I WANT TO ASK YOU IS DID THE HOUSE DEMOCRATS CROSS YOU UP? IN EFFECT DID THEY RENEGE ON A PROMISE TO DELIVER A TRADE AGREEMENT WITH PERU, PANAMA AND COLOMBIA?

PAULSON: LARRY WHAT I WOULD SAY IS WE'VE WORKED VERY, VERY HARD WITH THE HOUSE DEMOCRATS TO GET THESE FREE TRADE AGREEMENTS DONE. WE ARE NOT WHERE WE WANT TO BE YET.

LARRY: IS THERE A DOUBLE CROSS YET? I THOUGHT YOU HAD A DEAL.

PAULSON: LET ME SAY I BELIEVE WE GOT -- I BELIEVE WE HAVE A DEAL AND I NEED TO TAKE THE PERSPECTIVE THAT WE ARE GOING TO HAVE A DEAL AND WE'RE GOING TO GET THIS DONE AND I'M NEW TO WORKING IN WASHINGTON. I'M GOING TO GIVE EVERYONE THE BENEFIT OF THE DOUBT AND GIVE PEOPLE IN BOTH PARTIES THE BENEFIT OF THE DOUBT THAT WE'VE GOT TO WORK TOGETHER TO DO WHAT WE SAY WE'RE GOING TO DO AND YOU KNOW, I KNOW HOW MUCH CHARLIE RANGEL IN PARTICULAR WOULD LIKE TO SEE THESE DEALS GET DONE AND WE IN THE ADMINISTRATION ARE GOING TO WORK HARD TO GET THEM DONE. BUT AGAIN I WOULD LIKE TO SEE CONGRESS BEGIN HOLDING HEARINGS AND MOVING FORWARD ON THESE BECAUSE THEY'RE VERY IMPORTANT.

LARRY: IF THEY DO HOLD ADDITIONAL HEARINGS, THERE'S THIS POLL IN THIS MORNING'S FINANCIAL TIMES. BACKLASH AND RICH NATIONS AGAINST GLOBALIZATION. WHAT THEY BASICALLY ARE SAYING HERE IS PEOPLE IN THE LEADING INDUSTRIAL COUNTRIES DON'T LIKE GLOBALIZATION. THEY THINK THERE'S INCOME IN EQUALITY, WAGE INEQUALITY. THEY HATE CEOS AND WANT TO PUT CAPS ON THEIR SALARYS AND THEY WANT TO RAISE TAXES ON RICH PEOPLE. I'M GENERALIZING HERE OVERSIMPLIFYING BUT THAT'S BASICALLY WHAT THIS THING SHOWS. IS THIS THE KIND OF THING YOU HAVE TO FIGHT IS THIS THE HEADWIND YOU HAVE TO FIGHT POLITICALLY.

PAULSON: YEAH THIS IS THE HEAD WIND WE'RE FIGHTING AND FIGHTING IN VIRTUALLY EVERY OTHER DEVELOPED COUNTRY AND MANY DEVELOPING COUNTRIES. AND IN MANY WAYS IT'S A PARADOX BECAUSE THE LESSON OF THE LAST 20 OR 30 YEARS ARE THAT THOSE COUNTRIES THAT HAVE REFORMED OPENED THEMSELVES UP TO COMPETITION, FREE TRADE, FREE CAP FLOWS HAVE BENEFITED THE REST HAVE BEEN LEFT BEHIND AND AS I MADE THE POINT EARLIER, WE REFORMED OUR BUSINESS TAX SYSTEM AND THE RONALD REAGAN TAX REFORM OF '86. THE REST OF THE WORLD WATCHED WHAT HAPPENED HERE. THEY MAR VELD. THEY'VE LEARNED FROM WHAT WE'VE DONE. THEY REDUCED THEIR TAXES. THEY SIMPLIFIED IT BUT I THINK WE'RE GOING TO NEED TO NOW TAKE A VERY, VERY CAREFUL LOOK AT COMPETITIVENESS.

LARRY: AM I ON THE WRONG SIDE OF HISTORY? TO ME FREE MARKET CAPITALISM THE CREED OF THIS SHOW HAS PUT HUNDREDS OF MILLIONS AROUND THE WORLD IN THE MIDDLE-CLASS FROM THE LOW, LOW UNDER CLASS INCLUDING TREMENDOUS JOB CREATION HERE IN THE UNITED STATES WITH PROSPERITY. WHAT IS UP WITH THIS VIEW?

PAULSON: LARRY, YOU'RE RIGHT BUT WE ALL HAVE TO DO A BETTER JOB OF COMMUNICATING BECAUSE WHAT I BELIEVE IS THAT THE, SOME OF THE DOWN SIDES OF GLOBALIZATION AND TRADE, THE OBVIOUS DISLOCATIONS JOB LOSSES ARE VERY VISIBLE. AND THE BENEFITS ARE NOT QUITE AS TRANSPARENT. THEY REFLECT THEMSELVES THROUGH THE OVERALL HEALTH OF AN ECONOMY, THROUGH GREATER PROSPERITY AND WE HAVE AN ECONOMY THAT BENEFITS GREATLY FROM COMPETITION. AND WE DON'T NEED TO BE AFRAID OF COMPETITION BUT WE NEED TO TELL THAT STORY BETTER.

LARRY: ALL RIGHT. TELL IT BETTER. THANK YOU MR. SECRETARY HENRY PAULSON THANK YOU EVER SO MUCH FOR COMING BACK TO "KUDLOW & COMPANY".



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