For the past four years, fighting a global economic crisis has been the U.S. Treasury Secretary’s top priority.
Though the U.S. economy seems to be entering a period of recovery, President Obama’s Treasury Secretary nominee, Jacob “Jack” Lew, would still face enormous challenges in office. A battle over raising the debt ceiling and a longer-term debate about America’s debt and deficits are examples. A still-shaky euro zone and China’s continuing economic evolution are likely to add plenty of international issues to the next Treasury ‘s agenda.
Lew served as budget director to both Bill Clinton and Barack Obama and has plenty of experience in fiscal issues and Congressional wrangling. He also worked for several years in a high-ranking role at Citigroup, but many Washington watchers have noted that Lew has less experience in financial markets than his predecessors.
With Lew’s Senate confirmation hearings set to get underway tomorrow, The Financialist asks the questions we’d like answered about what a Treasury Secretary Lew might do in office.
How would you balance the need to reduce America’s budget deficit with the impact significant spending cuts could have on the economy?
Under current laws, by 2015 the U.S. budget deficit is expected to shrink from 5.3 percent of GDP to 2.4 percent, according to the Congressional Budget Office (CBO).
However, deficits are set to hit 4 percent of GDP by 2023. By the end of this fiscal year, U.S. debt will account for 76 percent of GDP, the highest level since 1950.
Many economists believed the so-called fiscal cliff, a package of tax increases and $1.2 trillion in federal spending cuts over the next decade, would have caused another recession if it had gone into effect as planned at the beginning of the year. Even without the cuts, U.S. GDP contracted in the last quarter of 2012, and unemployment remains at 7.9 percent.
Lew presided over budget talks in 2011 that resulted in spending caps set to slash federal outlays by about $900 billion over the next decade. It is important to know his thinking on addressing U.S. debt and deficits during a nascent economic recovery.
What is your stance on entitlement reform?
The Congressional Budget Office forecasts that Medicare, Medicaid and Social Security spending will increase from 10 percent of GDP to 16 percent over the next 25 years.
Lew is said to be a strong advocate of these so-called entitlement programs, which are likely to be a key part of an upcoming battle this year between Republicans and Democrats in Congress over raising the debt ceiling.
President Obama has suggested recently that changing the inflation index for Social Security benefit increases and charging higher Medicare premiums to wealthy recipients might be an acceptable way to curb entitlement spending. What entitlement reforms would Lew support?
How should the United States deal with China on currency valuation issues?
Former Treasury Secretary Henry Paulson and outgoing Secretary Timothy Geithner were both interested in and deeply knowledgeable about China.
Lew has less experience with the country Republican presidential candidate Mitt Romney said he would label a currency manipulator on his first day in office. The Treasury refused such a label last year but said in a November report that the yuan is “significantly undervalued.”
With China set to become the world’s largest economy by purchasing power parity as soon as 2017, according to PricewaterhouseCoopers, it is worth asking how a Treasury Secretary Lew would handle the currency valuation issue.
Tell us your view on the European debt issue — is the European sovereign debt crisis still an issue that could negatively impact the U.S. economy?
The impact of the European debt crisis on the U.S. economy has been an ongoing source of concern for the Obama administration. While in office, Secretary Geithner repeatedly urged bold action to end the crisis. Five years on, the euro zone may have finally turned a corner and given itself the tools to effectively manage the crisis. In the past year, European governments have agreed to better coordinate their economic policies. They’ve also agreed to form a banking union, overseen by the European Central Bank, to regulate the continent’s 6,000 lenders.
These are certainly the sorts of bold actions the Obama administration and Secretary Geithner wanted to see, but what does Lew think the euro zone’s remaining needs and challenges are?
Could the capital requirement outlined in Dodd-Frank act as a brake on the U.S. economy?
The Dodd-Frank Act requires U.S. regulators to implement strict capital requirements that are bound to impact the balance sheets of U.S. banks and U.S. subsidiaries of large foreign banks. These rules are layered on top of strict international standards known as Basel III. Banks argue that having multiple capital buffers limit the amount of money they are able to put to work in the economy. Regulators recently agreed to extend the full implementation of Basel III to 2019, partly to offset concerns that a quick adoption of its capital requirement would tighten lending and hurt the global economy.
An incoming secretary should spell out his views on how to balance financial regulation with the need to maintain lending to businesses and households.
Are Basel III standards strong enough to avert the threat of future bank failures?
Last summer the U.S. Federal Reserve officially came out in favor of the Basel III capital requirement rules. Secretary Geithner is also a strong advocate of Basel III. But over on Capitol Hill, some lawmakers say Basel III rules do not go far enough in offsetting a potential financial crisis.
In a letter last fall to key regulators, including Federal Reserve Chairman Ben Bernanke, Senate Banking Committee members Sherrod Brown, D-Ohio, and David Vitter, R- La., called for tougher capital rules that “properly align incentives for megabanks by lessening government support for the financial sector, and reassure financial markets that the U.S. financial system is healthy.” Which side of this debate does Lew fall on?