EconoMonitor

U.S. Treasury Secretary Jack Lew Places Blame on Congress

Jack Lew really needs to get better at lying in public. So far, he’s making a hash of it.

A Reuters story reports on Lew telling a series of whoppers:

Dysfunction in Washington is one of the biggest drags on the U.S. economy, undermining confidence and crimping growth, Treasury Secretary Jack Lew said on Tuesday.

“One of the most significant speed bumps for growth is coming straight from Washington, where some political leaders continue to generate one manufactured crisis after the next,” Lew said in remarks prepared for delivery at the City Club of Cleveland.

There’s actually a lot to unpack here. First is the embedded claim that the economy was on a strong trajectory (“speed bumps”). In fact, ERCI in an admittedly contested call pegged the economy as going into a recession in 2012 and has not backed down, insisting that some indicators are consistent with a recession and expects others to confirm it when data is revised. Commenting on ECRI’s view in March, Henry Blodget indicated that regardless of whether you agree with ECRI, we are still in a “crappy economy”. Yes, stock markets keep rising, but that seems to be a function of too much liquidity with nowhere to go, as S&P earnings continue to fall. And as this blog and others have observed, for the last three years, the first quarter has looked strong but then growth has faltered as the year progressed. This pattern suggests that seasonal adjustments that might be appropriate for the old normal are now out of whack.

Put it another way: it’s hard to characterize an economy that isn’t generating enough jobs to absorb the entry of new prospective workers into the economy as in good health. It’s hardly any secret that the reason the headline unemployment numbers aren’t worse is that so many people have given up looking for work or are underemployed.

And why do we have this malaise? Lew conveniently ignores the elephant in the room: the global financial crisis. Of course, since he was getting pay increases while working for then ward-of-the-state Citigroup, it might be a tad awkward to mention that big reckless financial firms got us in this mess. Or that Obama’s failure to seize a historic moment to bring them to heel is a big contributor to continued economic sluggishness.

Then we get to the next layer of obfuscation: it’s the sequester’s fault! Now it is true that the sequester is putting a serious damper on economic activity. But Obama WANTED to cut the deficit. And reducing Federal spending, which is something both parties have said they wanted, is a braking operation. So while it is narrowly accurate to say that the sequester is slowing the economy, Obama has been insistent on pursuing policies that would produce that outcome. Moreover, in late 2012, when serious negotiations were underway, Obama at one juncture put forward a bigger debt-cutting figure than John Boehner had on the table.

So the real issue is in fact not spending cuts, which Obama wanted, but what is being cut. And the “dysfunction” is code for “those big bad intransigent Republicans who won’t agree on some token tax increases to help Obama save face so we can all get to what we really want, which is cutting Social Security and Medicare.”

Lew also underplays his role in bringing about the sequester and Reuters plays along:

The spending reductions were designed in 2011 to be so onerous that they would force the White House and Republicans in Congress to find a less drastic way to trim U.S. budget deficits.

Notice the lack of agency? In fact, the sequester was Lew’s baby. From a 2012 Washington Post article:

As the saying goes, success has a thousand fathers, while failure is an orphan. And if there ever is an orphan in Washington these days, it is that odd duck known as “sequestration.”…Fortunately, there is a detailed and contemporaneous look at the debt ceiling deal that led to the current budget crunch: Bob Woodward’s “The Price of Politics.” The book clearly had the full cooperation of top White House and congressional officials. With the help of our colleague, we took a tour through the relevant sections in order to determine the accuracy of the president’s statement [that Congress "proposed" the sequester].

Woodward’s account indicates Gene Sperling was the brainchild, and that Obama immediately grabbed the idea. Boehner was “nervous” about it.

Two weeks after that conversation:

Page 326 (July 26):

At 2:30 p.m., [White House Budget director Jack] Lew and [White House legislative affairs director Rob] Nabors went to the Senate to meet with [Senator Majority Leader Harry] Reid and his chief of staff, David Krone.

“We have an idea for a trigger,” Lew said.

“What’s the idea,” Reid asked skeptically.

“Sequestration.”

Reid bent down and put his head between his knees, almost as if he was going to throw up or was having a heart attack. He sat back up and looked at the ceiling. “A couple of weeks ago,” he said, “my staff said to me that there is one more possible” enforcement mechanism: sequestration. He said he told them, “Get the hell out of here. That’s insane. The White House surely will come up with a plan that will save the day. And you come to me with sequestration?”

Well, it could work, Lew and Nabors explained.

What would the impact be?

They would design it so that half the threatened cuts would be from the Defense Department….The idea was to make all of the threatened cuts so unthinkable and onerous that the supercommittee [tasked with making additional cuts] would do its work and come up with its own deficit reduction plan.

Lew and Nabors went through a laundry list of programs that would face cuts.
“This is ridiculous,” Reid said.

That’s the beauty of a sequester, they said, it’s so ridiculous that no one ever wants it to happen. It was the bomb that no one wanted to drop. It actually would be an action-forcing event.

“I get it,” Reid said finally.

Short versionOnce tax increases were off the table, the White House staff came up with a sequestration plan that only had spending cuts and sold Harry Reid on the idea.

In fairness, Lew does make a coded acknowledgement that he was a midwife to this scheme:

“I remain optimistic that there will be a resolution to this,” said Lew, who as Obama’s budget director in 2011 participated in discussions that led to the sequester.

“But I will admit I underestimated the change in the political landscape, such as the defense cuts we’re describing are not considered troubling to many Republicans now.”

Conventional wisdom is that the both parties will give variances where the shoe really pinches, such as with air traffic control, which takes the sting out of this scheme. If Obama were serious about inflicting pain to get a deal, he would have talked down a deal on the FAA. But the reality is he’s not willing to make corporate executives suffer but he’ll use other victims, like college aid candidates and children in Head Start, as talking points. Oh, and notice how we are hearing nary a peep about the looming debt ceiling deadline of May 19? Lew isn’t concerned because no one is willing to anger the Bond Gods.

The interesting bit here is that one of Obama’s big reasons for giving Lew the nod was he expected budget fights, and in particular, his hoped-for rollback of key elements of the New Deal, to be major focuses of his second term. If both parties decide they’ll settle for the half-a-loaf of the sequester, Lew may not be so well-suited for his job, particularly if financial regulation heats back up (not in terms of real action, the Administration isn’t keen to see anything happen here, but in fighting rearguard actions by both obstructionist bank stooges and reformers). We’ll see soon enough if he is able to rise to the occasion.

This piece is cross-posted from Naked Capitalism with permission.

Comments are closed.

Most Read | Featured | Popular

Blogger Spotlight

Dan Steinbock

Dr Dan Steinbock is a recognized expert of the multipolar world. He focuses on international business, international relations, investment and risk among the major advanced economies (G7) and large emerging economies (BRICS and beyond). In addition to his advisory activities (www.differencegroup.net), he is affiliated with major US universities as well as international think-tanks, such as India China and America Institute (USA), Shanghai Institutes for International Studies (China) and EU Center (Singapore).

Economics Blog Aggregator

Our favorite economics blogs aggregated.