Treasury Sec’y Lew Makes a Great Point (and a not-so-great one too)

August 27th, 2013 at 8:32 pm

CNBC’s John Harwood interviewed Treasury Sec’y Jack Lew this morning and I thought Lew made an interesting point.  He was giving the White House talking point that “we won’t negotiate over the debt ceiling” and Harwood was like, OK, but you will negotiate over the budget…why is it OK to negotiate over one but not the other?

Lew said, in essence—or at least this is how I read his answer—that the budget is precisely what the different parties should be negotiating over so that when they hit the debt ceiling, they raise it pro-forma in order to meet the spending obligations upon which they’ve agreed.

I recognize that this sounds awfully rational, but it is a potential advantage of Congress having passed a “regular order” budget that they hammer out through negotiation and compromise between conferees from both parties.  I’m not saying that such a budget would necessarily have buy-in from the fringes of the Tea Party—they’d probably still want to threaten default.  But I strongly suspect that it would have more buy-in than our endless series of last-minute budget patches.

Moreover, the key point is that what makes the fight over the debt ceiling so ridiculous is that it’s a fight over paying a bill you’ve already incurred (the budget agreement that’s currently funding the government).  What I read Lew as pointing out is that the time to have that fight is when you’re looking at the menu, deciding on what you’re going to order, not after you’ve eaten the meal.

Then, on the other hand, there was this: in commenting about the fiscal headwinds that are slowing growth right now, Sec’y Lew said, “We withdrew the payroll tax cut because that was a short-term policy that had to be withdrawn as we started to see economic growth.” (my bold, italics)

Yes, such measures are temporary and should be withdrawn, but no, no, no!  Not when we “start” to see growth!  That’s the “green shoots” trap they (“we,” at the time) fell into before, when the administration pivoted to deficit reduction back in 2010 when growth was positive but weak, and households and business were still recovering from the recession.

There’s no science to when you phase out stimulus, but unless there’s obvious pressure from markets or interest rates (which there wasn’t) the smart move is to wait until the private sector is clearly ready to pick up the slack before you remove stimulative measures.  It’s not enough for growth to break zero; you want to see accelerated growth rates that are solidly above trend: GDP numbers with handles like 4 and 5, not 1 and 2.

It’s one of the reasons why next time, we might want to tie the ending of our stimulus measures to measurable numbers in the economy–as in, “we’ll lose the payroll tax break when the unemployment rate is falling consistently and is below 6%,” much like the Federal Reserve is now doing with its interest rate policy.

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3 comments in reply to "Treasury Sec’y Lew Makes a Great Point (and a not-so-great one too)"

  1. urban legend says:

    I still don’t see the problem with the President saying, at the right moment, that he will not be the first President to preside over a default, that he refuses to damage the nation’s international standing and intends to meet the nation’s legal obligation, pay its bills and execute the laws he has been ordered by Congress to execute. So the Republicans will scream bloody murder and attack the President for paying Grandma’s Social Security check and Ms. Afghanistan Hero’s treatment at the VA Hospital.

    Constitutionality? Is the Constitution a suicide pact? The Supreme Court has said no. The President has the right to make a Constitutional interpretation; he certainly has a right to make an interpretation that results in the least possible damage to the country.

    Besides, progressives and the business and financial establishments will for a brief moment share (for somewhat different reasons) the thrill of seeing President throw the absurd monkey of the “debt ceiling” off our backs. So will future Presidents who will have been enabled to do the same thing. Since it is a profoundly stupid law, it would be doing the country a world of good, too.

  2. urban legend says:

    No. 2: Why couldn’t there have been a one-time, stand-alone tax credit — or one declining over two or three years — as a straight out substitute for the reinstatement of the payroll tax? For historical reasons (the social compact built up around Social Security), there never should have been a “payroll tax holiday — a substitute tax benefit with identical fiscal effect would have been better — but once in place the best thing was to go back to normal as quickly as possible. At either stage — when implemented and when removed — why was there not a stated equivalent that was used or, apparently, even put into public discourse by the administration?

  3. Fred Donaldson says:

    Would Mr. Lew, representing the WH, have the same opinion if the payroll tax holiday was on the employer, not the employee, side of the public ledger?