In selecting Jack Lew, the White House chief of staff, to replace Timothy Geithner as Treasury secretary, President Obama has sent some not-so-subtle messages: The Treasury’s autonomy will be curbed; the president doesn’t much fear another financial crisis (otherwise, his nominee might have more financial-market experience); and the president isn’t conciliating his Republican and business critics (otherwise, his nominee would be less partisan).
In many ways, the choice of Lew makes perfect sense. Hard bargaining over the $3.5 trillion federal budget looms, as Congress grapples with raising the debt ceiling and trying to avoid automatic spending cuts (a.k.a. the “sequester”). Few people can match Lew’s grasp of the budget. He headed the Office of Management and Budget (OMB) in both the Clinton and Obama administrations and is said to have an encyclopedic recall of budget numbers and program details. Having worked for Democratic politicians as far back as House Speaker Tip O’Neill, he is also a fierce defender of liberal goals — notably, protecting Social Security benefits.
The job of Treasury secretary has a split and contradictory personality. The secretary is usually the president’s chief economic adviser while representing the views and interests of the business and financial community inside the administration. Lew qualifies for the first job, and Obama doesn’t seem to care much about the second. Lew — a graduate of Harvard (1978) and Georgetown Law School (1983) — had a brief stint as a Citigroup executive from 2006 to 2009, reports the Wall Street Journal. He also was the chief operating officer of New York University (2001-06) and practiced law (1987-91).
“Obama wants somebody close to him who he trusts in these very tough budget negotiations,” says Nariman Behravesh, chief economist of IHS Global Insight, a consulting firm. “I understand the choice, though I’m not sure I agree with it.” By contrast, Geithner enjoys tremendous “credibility” in the financial community because his long government career was spent on financial problems, says Behravesh.
Lew once had a reputation as a technocrat who bridged partisan differences. But this image has faded as he’s risen to positions of greater responsibility. In “The Price of Politics,” his book about the 2011 budget negotiations, journalist Bob Woodward reports that Republicans felt that Lew impeded success. Here’s Woodward’s version of one meeting between Obama and House Speaker John Boehner:
“And Mr. President, the speaker added, please don’t send Jack Lew. The budget director talked too much, was uncompromising, and Boehner’s staff did not believe he could get to yes.
“In an interview a year later, Boehner still had strong feelings about Lew. ‘Jack Lew said no 999,000 times out of a million,’ Boehner said, chuckling. Then he corrected himself, ‘999,999. It was unbelievable. At one point I told the president, keep him out of here. I don’t need somebody who just knows how to say no.’ ”
(Woodward then reports that Lew found Boehner “impatient with details.”)
Broadly, any Treasury secretary now faces three big questions.
First: How, if at all, can the anemic economic recovery be improved? In the first three years of this recovery — which officially began in mid-2009 — the economy has expanded at an average annual rate of 2 percent, less than half the 4.6 percent average for the 10 other recoveries since 1949. Many economists predict more sluggishness. Behravesh forecasts 1.7 percent growth in 2013, with today’s 7.8 unemployment rate dropping to only 7.5 percent by year-end.
Second: How much and how fast should budget deficits be cut? From 2009 to 2012, the federal debt increased by $5 trillion; on the present path, it will continue growing as a share of the economy. Many economists warn that this could someday trigger a financial crisis, as fewer lenders buy U.S. debt. But many of the same economists fear that abrupt deficit declines — from tax increases and spending cuts — would cause a new recession. That’s what the “fiscal cliff” involved.
Third: Can the global economy avoid self-destructive economic nationalism? Economist Adam Posen of the Peterson Institute warns of currency wars, as countries let exchange rates depreciate to gain competitive advantage in export markets. This has already happened; if it gets worse, protectionism could obstruct trade flows.
These are thorny issues; Lew’s possible responses are unclear. One constructive step would be to start cleansing Washington’s poisonous political climate. This corrodes confidence and weakens the economy by undermining the willingness to spend and invest by households and businesses.
The question about Lew is whether he encourages cooperation and bolsters confidence — or becomes an instrument of conflict. Obama’s anti-business attitudes are politically convenient but economically destructive. As Behravesh puts it: “Who do they [administration officials] think creates jobs? It’s puzzling to me that, when they want jobs, they bad-mouth the private sector. It doesn’t compute.”
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