Will Bush's Treasury Chief Swing the Budget Ax?

President Bush followed a well-worn path to the Goldman Sachs well when he tapped Hank Paulson, the firm's CEO since 1999, to succeed John Snow as Treasury Secretary. Across Wall Street, they are hoping that Paulson can bring a gravitas to the job that has been missing since the tenures of Larry Summers and another former Goldman executive, Robert Rubin, both of whom served under President Clinton.

Certainly, Paulson commands respect in financial circles. He engineered Goldman's initial public stock offering a few years ago and led the firm to record profits of $5.6 billion last year. Goldman's stock has been on a tear. He's just the kind of big-time name that Bush needs.

But there is no guarantee that Paulson can live up to his reputation as a get-it-done boss. "We'll have to see if he signed a pre-nup," says Ethan Harris, chief economist at Lehman Brothers. That's a pointed reference to the limited role that Snow was allowed to play in shaping economic policy under Bush, who has preferred to keep his own counsel and that of Vice President Cheney and top adviser Karl Rove. Snow was widely seen as a pitchman for policies that others wrote.

Would someone of Paulson's stature take the job with limits? It's possible, says Harris, who adds, "Treasury Secretary is a great way to cap a career under almost any circumstances." For the most part, though, economists agree that Paulson likely will be asked to shape policy, which should give him a stronger voice on all economic issues.

That's no small matter, given that the budget deficit is soaring and the economy appears to be slowing while the critical housing market clearly is weakening. With a new, untested team at the Federal Reserve, Paulson's credentials are more important than ever. He's also well-known in China, which holds massive stores of U.S. housing debt and could get spooked if the housing market takes a sharp turn down.

So what imprint will Paulson try to put on economic policy? He cannot tackle the big issues—Social Security and tax reform. The wind is gone from those sails and the Bush Presidency doesn't have the broad support it would need for any big new initiatives. Yet Paulson will need some kind of win to cement his authority. That likely will come in the area of spending cuts.

"This is still a President who hasn't vetoed a bill," says Gus Faucher, director of macroeconomics at Moody's Economy.com. Bush wants to make his tax cuts permanent, which will be expensive, and the nation is fast approaching the retirement years of the Baby Boom generation, which will be costly as well. Paulson needs to start the nation down the road of deficit reduction—and Bush needs to give him a free hand.

If Paulson can rein in spending enough to turn the deficit around it will be clear that there was no pre-nup, and his words will carry the full weight of the U.S. government the first time he confronts an international or domestic crisis. He needs that, as do we all.