Jack Lew is as decorated as they come when it comes to US economic leaders from the Democratic side of the aisle having served as President Obama’s treasury secretary, and before that as his director of the office for management of the budget (OMB), a role he also held in the Clinton White House, when he was instrumental in the administration balancing the budget in the late 1990s – the last time that has happened.
As President Trump’s “one big, beautiful bill” makes its way through Congress, Mr Lew expressed dismay at the direction of the US deficit.
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“The simple rule that in good economic times you ought to come as close to paying your bills in the current sense as possible, certainly not running a deficit more than 3% of GDP, is the right rule.”
“Then in a bad time, you don’t worry about nickels and dimes. You don’t worry about a COVID response or a financial crisis response,” Mr Lew said on The Master Investor Podcast with Wilfred Frost.
“What you can’t do is never worry about it because then the hole just gets deeper and deeper and deeper. And that’s why we’re now looking at a deficit that is going to grow to 6% of GDP with this bill. That’s terrible.”
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Dealing with the deficit
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Of course, the deficit, having leapt during COVID-19 at the end of the first Trump administration, did stay elevated through the recent Biden administration, when Lew served as ambassador to Israel, and he said he felt that Biden’s Build Back Better Bill was not a great decision.
“The reality, the political reality at the time when there was a bill that in my own view was too large, it gave cash to people who were already working at a time when there was a concern about inflation,” Mr Lew said.
“The political reality was you couldn’t get Democrats and Republicans to vote for something without that. If you asked me at the time was the risk of the economy not recovering great enough to take that on, I would have said you can’t afford not to come out of COVID strong.
“So I didn’t think it was a great decision, but I don’t think there was an alternative other than doing nothing, and we’ve seen from experience that the US recovered stronger and better than other countries from COVID, and the inflation is running its way through the system.”
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Need for compromise
Giving insights on how to balance the budget, he spoke about the need for political compromise.
“I’ve always been able to convince most of the wisdom and the benefit of the compromise. And I work for presidents who were able and willing to make that case.
“As in everything else in life, relationships matter deeply. Having a counterpart that you know and that you’ve worked with in the past and knows that they can trust you and you can trust them gives you the freedom to explore ideas that might actually work, but if they were prematurely made public, would be potentially very painful to either or both sides. So you have to have a space that you can talk about middle grounds in that isn’t totally off limits or poisoned.”
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Ruefully, he added, “there’s no bipartisan conversations going on”.
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An economy ‘doing ok’
Despite being down beat about the Trump administration’s economic policies he acknowledged that “the US economy is actually doing ok”, and was reassured that despite a 10% fall in the dollar so far this year, which he puts down to “policy chaos in the US”, the bond market appeared calm to him – for now at least.
“The economy is not yet in a place where it’s in distress.”
But, “I think we have to be careful. Right now, I think we’re in a place where there’s no alternative to the dollar, which is why you’re not seeing more departure from the dollar”, he added.
“The renminbi is not in a place where it’s fully convertible and market-controlled. There’s not enough high-rated European debt to meaningfully replace the dollar.
“Japan mostly is a domestic lending and borrowing market. So I have always been of the view that the fact that it’s not there now does not mean we should take for granted that the US dominance will be perpetual.”
