The next treasury secretary: Jack be nimble

A successor to Timothy Geithner in the economic hot seat

Jan 12th 2013 | WASHINGTON, DC | from the print edition

[Greg Ip] TREASURY secretaries are best picked to fit the circumstances. Barack Obama chose Timothy Geithner, a central banker and an experienced crisis manager, in late 2008 when the global financial system was in free fall. The crisis and recession are past; Mr Obama’s priority now is dealing with the deficit they left behind. And so, as The Economist went to press, he was expected to name a budget technocrat, Jack Lew, to succeed Mr Geithner.

Mr Lew is currently Mr Obama’s chief of staff and has spent most of his career dealing with budget issues, starting in 1979 as an aide to Tip O’Neill, then-Speaker of the House of Representatives. He ran the Office of Management and Budget for Bill Clinton from 1998 to 2001, and for Mr Obama from 2010 to 2012.

The treasury secretary is one of the most influential members of the cabinet and by default the administration’s economic spokesman. The portfolio spans currency relations with China and collecting taxes. There had been speculation Mr Obama would appoint an outsider, perhaps from Wall Street, to repair relations with business and with Republicans in Congress. Mr Lew, by contrast, is the consummate insider. The fiscal challenge he inherits is almost as daunting as the financial abyss that greeted Mr Geithner four years ago. America’s deficit, expected to be around 6% of GDP this year, should decline for a bit as the economy improves, but then head inexorably higher as the cost of entitlements such as Social Security (pensions), Medicare and Medicaid (health care for the elderly and poor) mount. 

Mr Obama and Republicans in Congress failed several times to strike a bargain that restrained entitlement growth and raised more revenue from an overhaul of the tax code. They settled for a smaller deal earlier this month that freezes taxes for most households, barely touches the deficit, and leaves several unexploded fiscal bombs to defuse.

Automatic spending cuts of nearly $90 billion this year, split between defence and domestic programmes, kick in at the start of March. At the end of March, government operations will shut down unless funding for roughly a third of the budget is renewed. Most serious, the Treasury will run out of legal borrowing authority some time between February 15th and March 1st. Failure to lift the debt ceiling would force the Treasury to stop paying some bills and even risk defaulting on the national debt.

Negotiations with Republicans to remove those bombs were already likely to be contentious. Mr Obama’s selection of Mr Lew may make them more so. Unlike Mr Geithner, Mr Lew comes from the Democratic party’s liberal wing. His relations with Congress are far from warm. During negotiations in 2011 to raise the debt ceiling, Republicans complained that Mr Lew lectured them on what was good for their own party while repeatedly raising obstacles to a deal. At one point the Republicans reportedly sought to exclude him from the process.

Mr Obama may not care. As with Chuck Hagel, his nominee for defence, Mr Obama wants cabinet secretaries who are loyal and share his views of the world, even if they rub Republicans up the wrong way. That said, Mr Lew’s confirmation will surely face less opposition from Republicans than Mr Hagel’s (see next article).

Despite a stint at Citigroup, Mr Lew’s greatest weakness is his inexperience in financial markets (which the treasury secretary now oversees thanks to the Dodd-Frank financial reform law). Mr Obama could address that weakness by naming a deputy with that background, such as David Lipton, currently the number two at the International Monetary Fund; Michael Froman, a White House adviser; or Lael Brainard, currently the undersecretary for international affairs.

Mr Lew has one big advantage Mr Geithner lacked four years ago: a growing economy. In late 2008 and early 2009, employment was plummeting by 600,000 to 800,000 per month. This past December it grew 155,000, or 0.1%, from November, close to its average for the year. Though unemployment remains painfully high at 7.8%, it is remarkable the economy has performed as well as it has given uncertainty over taxes and the threat of government shutdown and default.

Firms and investors have come to trust Mr Obama and Congress to dodge disaster, usually at the very last minute. Whether Mr Lew can fulfill that trust will determine the fate of the economy this year, and with it his own reputation.

The original article is linked here.