Lew Faces Contradictions as Budget Battles Loom

As Congress returns from recess next month following August's town hall battles over immigration, it will take up the ever-controversial issue of the debt ceiling, plus tax reform. Secretary of the Treasury Jack Lew will be at the center of the debates and negotiations, and will have to face several contradictions in current federal policy, largely of the Obama administration's own making.

On the one hand, Lew and the administration have complained all year about the costs of the budget sequester, warning of its dire consequences. On the other, they are touting gradual improvements in the economy, taking credit for significant reductions in the federal deficit this year, largely due to the sequester's cuts to defense and other domestic spending.

Similarly, Lew and the administration have warned Congress against any threat to vote down a debt ceiling increase, arguing that doing so would mean certain default, with devastating consequences for the economy. At the same time, Lew has indicated that the administration will not negotiate at all over spending cuts--in effect, threatening default unless there are spending increases.

These contradictions can only be resolved--at least theoretically--by the view that further government spending is essential to economic growth, and that while the sequester did not stop economic progress, it prevented the economy from recovering as quickly as it otherwise would have done. That view is questionable, though, given the failure of dramatic spending increases in Obama's first two years in office to generate significant growth or employment.

The Obama administration has proposed corporate tax reforms that would cut the tax rate from 35% to 28% while closing tax loopholes to raise additional revenue--yet it also insists that new revenues generated by these tax reforms be allocated to new spending rather than deficit reduction or debt repayment. It has proposed no new individual tax reforms.

International credit rating agencies are likely to view greater spending with caution, given the Obama administration's string of four consecutive trillion-dollar-plus deficits during the most rapid accumulation of debt in the nation's history. In that time, the White House has taken few steps to reform entitlements, which are mandatory spending in the federal budget, and rising rapidly.

In addition, Lew is considered a poor negotiator by Republicans, who insisted that he be excluded from talks during the debt ceiling negotiations of 2011 due to his unwillingness to compromise.

Lew is set to address the Commonwealth Club in Mountain View, CA on Thursday at the Computer History Museum as part of a visit to the Bay Area to promote the Obama administration's policies and priorities.


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