Washington's Oddest Tag Team

How the Treasury Secretary and a powerful Democrat are cutting deals crucial to business

One worked at Goldman Sachs (GS ) for 32 years, rising from an entry- level job in Chicago to chief executive. The other has represented Harlem, N.Y., in the House of Representatives for the past 36 years.

One grew up wealthy, was educated in the Ivy League, and took home $37 million in compensation the year before becoming Treasury Secretary last June. The other, a high school dropout who worked his way up from poverty, eventually earned a full scholarship to St. John's University School of Law after returning home as a decorated Korean War vet. He now pockets a $165,200-a-year congressional salary.

Yet the unlikely duo, Treasury Secretary Henry M. Paulson Jr. and House Ways & Means Committee Chairman Charles B. Rangel (D-N.Y.), have formed a surprisingly strong bond that has brought unexpected progress in a host of critical areas since the Democrats regained control of Congress following November's election. Defying Washington's current culture of polarization, the downtown executive and the uptown pol have met in the middle on issues including trade liberalization, China, and tax breaks for small businesses and the working poor.

Paulson and Rangel weren't particularly close when the Goldman Sachs Group Inc. CEO came to town to rebuild the Administration's economics team. But the gregarious Rangel, an old-school liberal, and the circumspect Paulson, an old-fashioned fiscal conservative, quickly found that despite their many differences they share a trait increasingly rare in Washington: They prefer results to rhetoric. "He's pragmatic and wants to get things done," Paulson says of Rangel.

Moreover, neither has time to waste.Paulson, 61, explained to Rangel that he traded in his lucrative career on Wall Street in hopes of making a difference on national economic policy in the waning years of President George W. Bush's term. Rangel, 77 years old and uncertain how long the Democratic grip on power will last, is likewise a man in a hurry. U.S. Trade Representative Susan Schwab recalls Rangel's rejection of calls last year for a pause in trade negotiations. "I don't have time to pause," Rangel told her. "I don't even buy green bananas."


Paulson, as Goldman Sachs' chief executive, had paid courtesy calls on his local congressman. He quickly renewed acquaintance with Rangel after he was elevated to chair the Ways & Means Committee following the 2006 Democratic sweep, inviting him to a series of lunches in his private conference room at Treasury. That has helped shift the tone, even though Rangel and Paulson remain far apart on many issues. Medicare and Social Security reform are too hot to handle, both men concede. Fixing the Alternative Minimum Tax will be a tough slog. A showdown also looms over Rangel's willingness to back legislation to boost tax rates on private equity firms and hedge funds that go public, a move the Administration is likely to resist.

Still, the two new amigos got off to a fast start in February by winning passage of a package of small-business tax incentives tied to a boost in the minimum wage. Most House Democrats wanted no tax breaks. The White House wanted more. Rangel and Paulson found middle ground.

Forging a compromise on the divisive issue of trade has proven more challenging. The President's "fast-track" negotiating power, which allows him to submit trade pacts to Congress for a vote without opening them up to amendments, runs out at the end of June, and Senate Finance Committee Chairman Max Baucus (D-Mont.) wants to relegate Bush's trade agenda to the back burner.

But Rangel, working with Paulson and Trade Rep Schwab, recently reached an agreement with labor leaders and business groups such as the Business Roundtable and the U.S. Chamber of Commerce to move forward on bilateral pacts with Peru and Panama, while renegotiating deals with Colombia and South Korea. The unions agreed not to oppose the pacts; in exchange, business leaders pledged to retrain workers displaced by global competition and push for more federal assistance. "[Rangel] laid out the challenge to us," says Roundtable President John J. Castellani. "But he's willing to push his own leadership and members as much as he's pushing us."

Even those business concessions may not sway reluctant Democrats, but Administration officials say Rangel has kept the trade legislation afloat. In the short run, White House officials think they could reach a pact on investment services. And despite widespread predictions of doom, Rangel still believes agreement can be reached to give the President limited fast-track trade negotiating authority if progress is made in the troubled Doha global trade talks.

Rangel has also given a behind-the-scenes hand to Paulson's efforts to win economic concessions from China. Facing loud complaints from some U.S. businesses that China is manipulating its currency to gain competitive advantage, Paulson has led an Administration effort to jawbone the Chinese into revaluing the yuan. But he has twice declined to cite Beijing for currency manipulation, even as some lawmakers threaten retaliatory legislation. Rangel, a skilled poker player, is willing to up the ante. When Chinese Vice-Premier Wu Yi met Rangel in Washington recently, the chairman warned her "that the House was elected by the people, and we are not diplomats." The clear implication: If you don't respond to Paulson's polite entreaties, you might end up with anti-China legislation.

In return for Rangel's cooperation on trade, the White House has offered help on a top priority for his low-income constituents: the Earned Income Tax Credit. Rangel complained to Paulson that the instructions for the credit, designed to aid the working poor, are so complicated that millions of eligible taxpayers don't make use of the benefit. Paulson promised to simplify the form's instructions and push for full participation by eligible individuals. If his efforts don't yield verifiable progress this year, the two have agreed to work on legislation that would make the credit more broadly available.

And nobody doubts that the two New Yorkers will keep talking in search of more deals. At Treasury, says one aide, the Secretary has a rule: "When Charlie Rangel calls, Hank Paulson calls him back. Immediately."

By Richard S. Dunham

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