Can Lew think outside the box?

Can Lew think outside the box?

In nominating Jack Lew to be his next secretary of the Treasury, President Obama has chosen a particular type of Washington insider.

It’s the kind who comes to Washington after law school and goes to work on the Hill as an assistant of some sort to a congressperson or senator. He/she becomes the brains for that particular politician and also becomes a skilled political and public relations operative and a loyal party player. At some point, a transition is made and this inside congressional type moves into an administration where by dint of non-stop wonk work, congressional connections and savvy, loyalty, and personal dedication to officials higher in the chain of command and particularly to whomever the president is he/she rises rapidly to a senior level. When the term of the administration is eventually finished, the insider moves out of government to make some money and to obtain private sector credentials, but always there is the possibility and intent of a return to government at a very high level.

This type of insider can be extremely valuable. He/she knows how Washington works, where all the bodies are buried, what’s been tried before and what has worked and what hasn’t worked. He/she is not particularly well known to the public, but is known and trusted by all the people who count in the party and the broader policy and political world.

Jack Lew is a quintessential example of the type. A former congressional aide, he worked as director of the Office of Management and Budget (OMB) in the Clinton administration, then left government to work for Citigroup, and then returned to government in the Obama administration at OMB followed by his present stint as chief of staff to the president.

Obama seems to like this Washington type. In addition to Lew, National Security Adviser Tom Donilon is in this mold, as is National Economic Commission head Gene Sperling. Undoubtedly Obama likes them because they are knowledgeable, hard working, loyal, connected, and without ambitions for elected office.

Especially, in the current environment of ongoing struggle in Washington over debt ceilings and federal spending, Obama is clearly counting on Lew’s encyclopedic knowledge of the budget and of congress to keep the government operating and to make the cuts the president wants to make while maintaining the spending he wants to maintain.

From this perspective, Lew is an ideal candidate for Treasury Secretary. On the other hand, this type of Washington insider does have a weakness. It is the flip side of source of the great strength. It is having been inside the Washington box for most of one’s adult life. Thus, the great question in the case of Jack Lew is whether he can think outside that box.

Assuming he is confirmed, he will be replacing Tim Geithner for whom he is a virtual clone in many respects. Geithner, a protégé of former Treasury Secretaries Robert Rubin and Larry Summers, has been very competent at keeping the old machinery running in pretty much the old way, but he has been much less impressive in introducing change either domestically or internationally. The U.S. banking system remains a catastrophe waiting to happen. As Frank Portnoy and Jesse Eisinger make clear in the current issue of the Atlantic, no one understands the risks being carried by major U.S. banks like Wells Fargo including their own top executives and boards of directors. They continue to guess at the risks and prices involved in extensive trading of complex derivative instruments for which there are no public markets. Will Lew, also a Rubin protégé, be more imaginative and/or forceful in resolving this issue? That is a major question.

Perhaps even more important is the international stage. Over the past four years, Geithner has largely maintained the policies and global machinery that have seen a continuation of massive U.S. trade deficits and the off-shoring of U.S. productive capacity and jobs. This was to some extent compensated for by the introduction of fiscal and monetary stimulus to the domestic U.S. economy. But the situation will become increasingly difficult. On the one hand, most of the world is planning to grow by exporting. The EU has introduced massive austerity and, in effect, the entire EU has become Germanized in that it can only grow by dint of increased exports. Japan’s new government is actively trying to devalue the yen and otherwise to generate growth through greater exports. China and the other BRIC countries are all focused on exports as a major source of new growth. The major market to which they are all planning to export is, of course, the United States.

But Obama needs to create jobs too. Given the budget and spending problems, he won’t be able to use the same stimulus measures as during his first term and the Federal Reserve has already used most of its monetary ammunition. This suggests the need to create jobs by reducing the U.S. trade deficit. Beyond this issue, there is also a crying need to update the global economic and financial machinery to reflect a globalized world in which the United States is less dominant and in which China and other developing countries have become major players

Can Lew think outside the box to grapple with these issues? That is probably going to be the big question.