Graphic by Marshall Cohen/Medill
WASHINGTON — Jack Lew has accumulated a few gray hairs after four decades in Washington. Now that he’s Treasury secretary, he’s in store to grow a few more.
Lew enjoyed a surprisingly smooth nomination process and the Senate overwhelmingly confirmed him last week to replace Tim Geithner. But clear skies aren’t ahead. Lew faces a handful of major challenges, some immediate and some that will linger until the day he leaves office.
But Lew is no stranger to challenges in life. The soft-spoken 57-year-old is the son of a Polish immigrant father, and a mother who struggled through the Great Depression. He attended public schools in Queens, N.Y., before studying at Harvard University.
“While my parents are only with me in spirit today, I know I am sitting here because they nurtured in me lasting values and an enduring commitment to serve our country,” Lew said at his confirmation hearing last month.
Lew took his first government job in 1973 and his commitment to service endured for the better part of 40 years. He worked as White House budget director during the Clinton and Obama administrations and went on to be President Barack Obama’s chief of staff.
Between Democratic administrations, he worked in the private sector for New York University and Citigroup. A handful of Republicans have criticized this period of his life: a six-figure severance package from NYU, Citigroup investments in the Cayman Islands and a $1 million bonus during the 2008 financial meltdown.
But these challenges proved minor during the confirmation hearing. The road ahead, as Lew takes on the nation’s top economic post, will be harder.
Massive budget cuts threaten a fragile economy
The imminent issue for Lew is sequestration — Washington-speak for the massive package of budget cuts that started kicking in on Friday.
Sequestration entails $1.2 trillion in across-the-board cuts over a decade as a way of dealing with annual budget deficits often exceeding $1 trillion. The cuts are evenly divided between domestic programs and defense spending. About $85 billion goes into effect for the current fiscal year through Sept. 30.
Economic experts agree that the severe cuts could wreak havoc on the nation’s fragile economy and lead to another recession. More than two million jobs could be lost, according to a study commissioned by Second to None, an anti-sequester campaign backed by the aerospace industry, which is hit hard by the cuts.
In the heat of high-stakes negotiations in summer 2011, Lew and President Barack Obama thought automatic cuts would be a good way to prod congressional leaders to agree on a grand bargain on deficit reduction.
Key players in the ongoing dispute — Lew, Obama, House Speaker John Boehner, Vice President Joe Biden and Senate Minority Leader Mitch McConnell — failed to stop sequestration from going into effect. Their task now is to make a deal as soon as possible to prevent future cuts.
With political capital after his reelection, Obama has made it clear that he wants some tax increases as part of any deal to stop sequestration. Congressional Republicans have balked at changing the tax code and some have signed a pledge to never raise taxes.
“Lew will play an important role in deciding what reforms they’ll try to go for and what they’ll try to accept,” said George Perry, top economic advisor during the Kennedy administration. “He has more to do with that discussion than anybody else.”
Another debt ceiling debacle
Another battle is just around the corner: raising the nation’s debt ceiling
The debt ceiling is a statutory borrowing limit that affects how the federal government pays its bills. If the limit were reached, the U.S. could default on its loans.
In a bipartisan deal earlier this year, Congress suspended the debt limit and allowed the Treasury to continue borrowing at a normal pace until May 19. On that day, the $16.4 trillion debt limit will automatically increase to include all recent borrowing. The thinking behind the Republican-crafted legislation was that lawmakers needed time to deal with looming sequestration cuts first.
When the debt-ceiling suspension ends, Treasury will use “extraordinary measures” to keep paying its bills for a few months. So-called extraordinary measures have become routine in recent years, as lawmakers have fought to the eleventh hour over raising the limit.
Lew served as Obama’s point person in summer 2011 during tense debt ceiling negotiations. Although he is generally considered a mild-mannered numbers man, top Republicans walked away from those negotiations with a sour aftertaste.
Esteemed journalist Bob Woodward detailed the months-long negotiations between the White House and House Republicans in his book “The Price of Politics.” Republicans were annoyed by Lew’s negotiation style, according to the book. Boehner found Lew, who was Obama’s budget director at the time, to be “disrespectful and dismissive” and even “obnoxious.”
The voice in the room will be the same, but circumstances are different this time around.
“The White House believes they’ve got the upper hand here on refusing to negotiate over the debt ceiling,” said Sarah Binder, senior Brookings Institution fellow in governance studies. “Republicans understand that Democrats can call their bluff on their willingness to default, and that might not have been as clear back in July 2011. That is not a viable strategy anymore.”
Implementing new financial regulations
Looking past the manufactured crises of the next few months, Lew’s main challenge will be implementing the most sweeping financial reforms since the Great Depression.
Congress passed a package of financial regulations in 2010 as a reaction to the meltdown that brought the U.S. economy to its knees in 2008 and early 2009. The law, called Dodd-Frank after its cosponsors, contains more than 2,300 pages of new regulations. It affects almost every aspect of the financial industry and expands the federal government’s regulatory ability.
The law greatly increase Treasury’s role as a financial regulator and increases its power to oversee Wall Street and coordinate with the Federal Reserve. Many provisions of the law kick in this year, some later.
As Treasury secretary, Lew chairs the Financial Stability Oversight Council, an organization created by Dodd-Frank that monitors excessive risks in the financial system. Lew is also tasked with implementing the Volcker Rule, expected next year, which curbs banks from making speculative investments that do not benefit their customers.
“The most important challenge is to finish the job of financial reform,” said Michael Barr, a former top Treasury official who helped draft the law. “There is a lot of work to implement Dodd-Frank and put in place key measures to make the financial system safer and continue on the path of reform.”
The law faces a court challenge by a handful of states with Republican attorney generals. They claim the law is unconstitutional and violates the separation of powers clause, but Barr called it “not serious” and legal analysts say the case is relatively flimsy.
