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Paulson pledges to make entitlement program spending a priority

NEW YORK—Delivering his first address as treasury secretary, former banking titan Henry M. Paulson pledged Tuesday to seek a bipartisan compromise with Congress to shore up federal benefit programs such as Social Security and Medicare, whose runaway costs threaten the nation's long-term financial health.

The odds of success in that quest are quite low. President Bush devoted much of the first year of his second term to seeking to overhaul Social Security, and got nowhere. If Democrats capture either house of Congress in November's elections, they'll be even less likely to compromise with Bush on social policy. Even if Republicans triumph, the president's lame-duck status will make him politically weaker with each passing month.

Still, Paulson vowed to try.

Speaking at Columbia University in New York, he made restructuring federal "entitlement" benefit programs the centerpiece of an address that he penned himself to outline his economic vision for the Bush administration's remaining 29 months and 20 days.

"The biggest economic issue facing our country is the growth in spending on the major entitlement programs," Paulson said, repeatedly stressing the need to rein it in.

Once baby boomers—born between 1946 and 1964—begin retiring in 2008, federal finances for retirement and health care will face progressively worse strains. Absent phased-in changes, lawmakers eventually may be forced to choose among steep tax increases, deep spending cuts or an unpleasant mix of both.

"The entitlement challenge is difficult, but it is fixable," Paulson said. "And given our expanding economy we can approach the issue from a position of strength."

Until recently, Paulson was the powerful chief executive officer of Wall Street behemoth Goldman Sachs & Co. Many colleagues wondered why he'd take a job in Washington for a lame-duck president facing a Congress with no stomach for overhauling Social Security, Medicare or Medicaid.

Paulson alluded to that Tuesday, saying he abides by a philosophy that "when a problem needs fixing you should run toward it, not away from it. That's one of the reasons I came to Washington."

Force of personality is what's expected to distinguish Paulson—known by his nickname, Hank—from his predecessors John Snow and Paul O'Neill. Both were accomplished corporate executives but lacked pull in Wall Street financial circles.

Paulson thinks his Wall Street clout can help push a bitterly divided Congress to tackle issues that, left to fester, could drive foreign and domestic investors to abandon U.S. Treasury bonds, forcing the Treasury to offer higher interest rates that could choke the economy.

The call was welcomed on Wall Street.

"Time is of the essence in dealing with these issues," said Richard Berner, the chief U.S. economist for banking giant Morgan Stanley. "Mr. Paulson clearly has a lot of credibility in financial markets. That's one of the things he brings to the table ... he has the opportunity to use that credibility in getting things done."

An aide to Paulson acknowledged that it's not clear that Bush is prepared to expend political capital again on trying to revamp Social Security.

"We'll see," said the aide, requesting anonymity since the decision rests with the White House.

On other topics, Paulson:

_Vowed to promote a strong dollar and promised to be a tireless promoter of free trade.

_Defended the president's tax cuts of 2001 and 2003, saying they prompted "very real, very tangible" spending by consumers and businesses.

_Identified soaring energy costs as a current and future threat to the U.S. economy.

_Acknowledged that high gasoline prices and rising health-care costs are robbing average Americans of the benefits from the tax reductions and a growing economy.

Paulson started the day with a tour of the New York Stock Exchange, where angry floor traders shoved photographers, shouting in thick New York accents, "We're trying to woik here!"

Later, during his address, Paulson shrugged off the $296 billion federal deficit projected for 2006. He said surprisingly strong tax revenues had reduced the federal deficit to about 2.3 percent of the gross domestic product, a percentage about average for the past 40 years.

He was careful to avoid criticizing China over its exchange-rate policy, despite bipartisan legislation on Capitol Hill that threatens sanctions against China if it doesn't move to let market forces determine the value of its currency.

Declaring that he favors a strong dollar—as virtually every treasury secretary does—Paulson also said currency values should be set by open and competitive markets. Together, those points gave him cover to allow a weaker dollar and nudged China to let its currency strengthen against the dollar.

"It's a very artful formation," said Robert Hormats, vice president-international for Goldman Sachs, appreciating his former boss's nuanced language.

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(c) 2006, McClatchy-Tribune Information Services.

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