Treasury Secretary Jacob J. Lew has been part of Washington’s fiscal battles for three decades, since he served as an aide to then-House Speaker Thomas P. O’Neill. But soon he will be the Obama administration’s point man on an unusual convergence of fronts: extending government funding past the end of the current fiscal year on Sept. 30, dealing with the so-called budget sequester and raising the federal debt limit.
On the morning after he informed Congress by letter that the debt limit must be raised by mid-October, Mr. Lew sat down with John Harwood of The Times and CNBC for an interview at the Treasury Department. What follows is a condensed, edited version of their conversation.
Since you sent your letter to Congress, have you spoken to Speaker John A. Boehner and, if so, how was the conversation?
I have exchanged calls. I haven’t actually spoken with the speaker; I did speak with other leaders yesterday. I think in general the news was taken as it was intended, which was sharing the information that we have. I think it’s helped frame how they are thinking of coming back in the fall.
The speaker says we need dollar for dollar spending cuts in return for a rise in the debt limit. Some conservatives have talked about linking the defunding of the health care law to a rise in the debt limit. Both of those are total nonstarters?
John, the president has been very clear. We are not going to be negotiating over the debt limit. Congress has already authorized funding, committed us to make expenditures. We are now in the place where the only question is, will we pay the bills the United States has incurred? The only way to do that is for Congress to act, for it to act quickly. What we need in our economy is some certainty. We don’t need another self-inflicted wound. We don’t need another crisis at the last minute. Since 1789, every Congress has acted to pay the bills of the United States. This Congress needs to do the same.
But you will negotiate over the budget; government funding runs out at the end of September.
We have been very clear for quite some time on fiscal policy generally: the president thinks the right answer is a balanced approach. We have pressed very hard for the kind of agreements that would do spending reform, entitlement reform and tax reform. We’ve hit a bit of an obstacle with the Congress, because there hasn’t been an openness to doing the balance with the tax reform. The president has tried to reach out in every way that is possible to make it clear. He’s looking for the sensible common middle ground.
That’s very different from, do we take something as fundamental as the full faith and credit of the United States and put it in jeopardy. I think if you look back at 2011, we see what the problem is when you can confuse the two. 2011 was the very first time in â€" certainly my years in Washington, that’s three decades â€" where there was debate about whether or not to default. It used to be the debt limit was treated as a deadline to force action to come together. In 2011, we actually saw the specter of default raised to something that was an affirmative position some were saying was better than the alternative. That was dangerous. It was bad for the economy, and we can’t go back there.
Given the stance the Republicans have taken and the stance that the administration has taken, are you 100 percent confident this will get worked out without any of the negative repercussions we saw two years ago?
As I talk to leaders on both sides, there is an understanding of the seriousness of this issue. I don’t think that the leaders are in a place where anyone wants a repeat of 2011. I don’t yet see that they have a plan to avoid it, which is one of the reasons it’s so important for them to come back in just a couple of weeks and get to work on getting this done and trying to make the debt issue different from other debates that we have.
What if the speaker calls you and says, Jack, I want to help you, I know we have to raise the debt limit, but I’ve got to give something to my members or I can’t get the votes. What do you say?
Look, I think we saw in 2011 the danger of going down the path of having the kind of negotiation over the debt limit that you have over other issues. The debt limit is just different. It’s just different. There cannot be any question. We are a country that pays our bills. It’s not as if we get to go back and undo the commitments we made. These are old bills that have to be paid. It is part of the rock-solid stability of the United States that we always pay our bills. Congress has the job to raise the borrowing authority to make that possible, just as Congress has the authority to authorize the expenditures in the first place.
On funding the government, is there any circumstance under which the administration would accept either a delay in parts of Obamacare or a defunding of parts of Obamacare?
No.
Is the only way the sequester is replaced, in whole or in part, is if Republicans agree to additional tax increases? Or could you see a trade of entitlement cuts, some of which your administration has said are necessary, for the discretionary cuts we have now?
There should be sensible, balanced approaches to medium- and long-term deficit reduction. I don’t want to get into the details of what a package would be, because a small or large package might have different characteristics. The president made clear he was prepared to do tough things on entitlement programs, but those tough actions on entitlement programs require balance in terms of revenue, both for fairness and for economic results.
Chairmen Camp and Baucus are pursuing a tax reform process â€" corporate tax reform as well as individual reform. You have watched Congress for a long time. Is this still possible to do in both realms in this Congress?
The president tried very hard just a couple weeks ago to make clear there is a path to do business tax reform. There was a way to do it so we could simultaneously do some other important things for the economy â€" invest in infrastructure, invest in manufacturing centers or job training.
I think there has been a convergence of views on the business tax reform. On the individual side, it is a bit more complicated, because it is intrinsically connected to the larger fiscal policy conversation. So without additional revenues, I don’t see a path towards comprehensive tax reform.
How concerned are you about the reaction of financial markets to two different events: the possibility of military action in Syria and the tapering of bond buying that the Fed has signaled is likely to happen this fall?
I focus on the core economy here. I think we have to take every step we can as we make policy to try and keep our eye on the ball of, what does the economy need to keep growing in the future? We have foreign policy decisions that are going to need to be made for reasons other than core economics, and obviously we’ll have to manage accordingly.
In terms of Fed tapering, you know, as Treasury secretary, I don’t comment on monetary policy. But I will focus on core economics. Our core economy has been growing in the 2 percent range, and, I think it’s important to note, that’s with substantial headwinds from federal policy â€" some on purpose, some not on purpose.
We withdrew the payroll tax cut because that was a short-term policy that had to be withdrawn as we started to see economic growth. The across-the-board cuts of sequestration are an unintended, self-inflicted wound in the short term. They were meant to be replaced by medium- and long-term savings that would be a better, sensible path for the future. In spite of those drags on the economy, we are seeing 2 percent growth. As we get to the end of the year, we think without the headwinds of additional federal cuts, the economy should pick up a notch again.
Could Larry Summers be an effective Fed chair if he is the president’s choice?
John, I will leave my comments on Fed transition where they belong: in the Oval Office.
