The President’s Man

Former Bush economic adviser Greg Mankiw interpreted the indicators for the President. Now he explains the President's policies to CFO.

Turning to the deficit, the Administration’s goal was to cut it in half in five years. Are you still comfortable with that?

You can think about the deficit over three different horizons: short, medium, and longer. In the short run, the President inherited an economy that was heading into recession, and then he had to fight the war on terror. War and recession are two times when running a budget deficit is appropriate. In the medium horizon — sort of a 5-year horizon — I think we can, through spending restraint, reduce the budget deficit. But the big issue is, really, what does the budget look like 10, 20, 30 years from now? That’s where the big problems lie, with the aging of the population and growing costs of entitlements.

The easy thing, as we increase spending, would be to increase taxes. But I believe that very high tax rates are bad for the economy. One difference between the U.S. and Europe is that Europe has much higher tax rates and lower growth, which is in part a reflection of the higher tax rate. It would be very disappointing if the United States, over time, due to the aging population, went in a European direction regarding tax policy.

On the stock-options issue, were you surprised that expensing was delayed again?

I’m of the view that eventually stock options should be expensed. But to me the issue is not should they be expensed, but how should they be evaluated…. I think the high-tech community has done itself a disservice by fighting the wrong battle — over whether they should expense, rather than over the valuation formula.

So you don’t buy the argument that expensing will hurt the Silicon Valley economy?

What they’re basically arguing against is accurate accounting. When a company says accurate accounting will hurt the company, I say, “Well, if it is, it should.”

The other issue CFOs are dealing with is Sarbox compliance. Many argue that the costs exceed the benefits. Do you agree?

A lot of this debate comes down to the role of corporate capital. Corporate capital is in some ways an astonishing institution, built on this idea that shareholders will voluntarily give their money to people they’ve never met and expect those people to protect it and maximize its value and give returns with a profit. What Sarbanes-Oxley tries to do is provide some balance between protecting shareholders and instituting regulations that aren’t so overwhelming that [they deny managers the time to] maximize shareholder value.

I’ve talked to enough CEOs in the past few years to strongly suspect that Sarbanes-Oxley went a bit too far. At some point, [Congress] may want to look back and ask, How do you strike this balance?

A lot of companies are hoping that will happen sooner rather than later.

They should be careful what they wish for. It’s true that Sarbanes-Oxley is far from perfect, but they shouldn’t compare it to what’s ideal; they should compare it to what Congress would do next.


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