U.S. Secretary of the Treasury Jacob Lew testifies during a hearing before the Financial Services and General Government Subcommittee of the Senate Appropriations Committee March 8, 2016 on Capitol Hill in Washington, DC. 
U.S. Secretary of the Treasury Jacob Lew testifies during a hearing before the Financial Services and General Government Subcommittee of the Senate Appropriations Committee March 8, 2016 on Capitol Hill in Washington, DC.  - 
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Listen to the uncut audio of our interview with Treasury Secretary Jack Lew above, and find the transcript below. Just want the highlights? Check 'em out here

Kai Ryssdal: You have written here, a manifesto basically, for America as the indispensable economic nation. But, we’re doing it in a changing world, you point out, and it seems to me that what you’re talking about here is us giving up some economic influence so we can get some economic influence.

U.S. Treasury Secretary Jack Lew: Actually, I don’t think it’s about giving up anything. I think that what we’ve done over the last 70 years is worked to build institutions that promote both American values and American interests, and we have to make sure that we maintain that ability going forward. In a world where the size of countries and the relative influence that they have in the global economy has evolved, what I’m saying is we have to make sure that we don’t see countries pulling away from a system that very much promotes American interests. We need to make sure  they stay in it, and that all that changes are changes that we think are in our U.S. interest.

Ryssdal: This is the system of the International Monetary Fund, the World Bank, that came out of World War II. How do you convince countries to stay in it, when, as you point out in the first paragraph of this piece, it took the Congress of the United States five years to agree on reforms to the International Monetary Fund?

Lew: You know, the interesting thing, Kai, is that I think the world wants us to play this role —

Ryssdal: That’s a gutsy statement.

Lew:  Over these last five years — the last three-and-a-half as Secretary — I had to explain over and over again why it was taking so long. The desire was for the U.S. to ratify the IMF reform, and for the IMF to remain the centrally important institution that it is. I actually think that if you look at the structure of the IMF quota reforms it tells a really interesting story.

Ryssdal: Quota reforms are how much voting power each country has —

Lew:  That’s how much voting, what your share in the IMF is, and five years ago there was an agreement where essentially the U.S. went down a tiny, tiny bit, a small fraction, and other countries in the world were really juggling around their shares, their position, to reflect the shift, mostly from Europe to emerging economies. So here you had winners and losers, and the United States that was, compared to the others, staying the same, yet we were having a hard time passing it through Congress. It was profoundly in the U.S. interest to have this take place, for the emerging countries to feel invested in the system, and where the other developed countries were prepared to go along with it. That’s exactly the point of my piece. That’s why we have to be engaged. We have to make sure we do the things that are smart to keep everyone else engaged.

Ryssdal: The United States has been a winner in the global economy, by and large, since World War II. What are we going to do though, what are you going to do, once the United States is not the biggest economy in the world anymore, once we are not the reserve currency with the dollar, then what happens?

Lew: So I don’t think that there’s anyone on the horizon to take the place of the United States, either in terms of our economic position or in terms of the dollar as the reserve currency. Clearly, there are different forces at work in the economy today than there were in 1944, when half the world, most of the world, was coming out of a war where it had no manufacturing capacity, it had no hard currency, and we were the place with both manufacturing capacity and hard currency. I think now we’re in a world where population growth and economic growth is taking place in the countries that we’ve called the emerging economies. We’re making sure that they take seats at the table, adhere to the rules that we adhere to when you have a seat at the table, and that as we make decisions in the future, we have a very strong voice in what all the rules of the road in the future are.That’s the way for the United States to maintain its power.

Ryssdal: You talk about a rules-based global economy in this piece quite a bit, and the Obama Administration’s hope that if we set the way, if we lead the way, others will join in those rules. You talk specifically about China, the President has talked about China, how are you doing so far in getting them to play by the economic rules that you want?

Lew: Look, I think that if you look at what China’s going through right now it is the most dramatic economic transformation one can imagine. Going from a centrally controlled, non-market economy, to an economy where market forces are increasingly going to be driving the way resources are allocated and participation is opened. They’re not all the way there, they’re on a path. What I take encouragement from is when you talk to their economic leaders, they understand they have to make progress on that path to have the China they want in the future. They don’t want a China with ghost cities, and excess capacity that has no market. We have to make sure we don’t let them off the hook in terms of making those changes, and that we don’t just take it as a commitment, but that we take the action seriously. We’ve seen this in the world of currency, where for years there has been a huge focus on was China doing things to gain unfair advantage? They now stand up and say they oppose competitive devaluation, that they will not, they don’t see a need for the depreciation of their currency.  That’s very different from just a few years ago. Does that mean we take our eye away? No. We’re going to watch very carefully. If we don’t see actions consistent with those words we will keep the pressure on them. I think engaging with them has helped move them in the right direction, but it’s a long journey.

Ryssdal: You are making the case for American engagement internationally, at a time when, domestically, income inequality is up, wages have been stuck for decades, and I wonder how you think that’s gonna play back here, at a time when, in this political season, free trade and internationalism are taking a beating on both sides of this election campaign.

Lew: The last few decades have seen an awful lot of pressures coming to bear on middle class families in America, middle class workers in America, and it’s not just trade. It’s more broadly globalization, it’s modern technologies that are changing the shape of what the workplace looks like, what people do at work, and frankly, it’s been economic policies and economic crisis that have taken a toll on a lot of middle class families. I mean, if you came out of the Great Recession having lost your life savings, where it was in the equity in your home, if you graduated from high school and college during the recession and couldn’t find a job right away, or if you were 50 years old and you lost your job, those are deep scars. I’m not surprised. Now we have policy solutions that really do work there, but it’s not cutting America off from the world. The growth in the global economy is growth that ought to provide future jobs for American workers, both in services and in manufacturing. That’s what we need to make sure is the opportunity that’s open.

Ryssdal: It ought to provide it, but if this issue of Foreign Affairs lands on some kitchen table in Ottumwa, Iowa, with some auto worker or some farmer or some machinist who’s been out of a job for years and can’t find work, how do you make the case that this is what’s good for the American economy.

Lew: I think that if you look at the economic growth in the last 50 years, we have seen around the world, lifting people out of poverty, creating conditions for a more peaceful world, for a world where the United States could have enormous markets to sell into, both goods and services. The fact that it has been very hard for that auto worker is something that we have to ask, “‘What do we need to do as a matter of domestic policy?’”. First of all, there has to be fair trade, it cannot be the U.S. auto is competing against an auto that is unfairly subsidized by practices which in a good trade agreement aren’t allowed. Secondly, we have to make sure that we have the kinds of policies here at home where we provide people with the skills they need to get the jobs that are available in the economy, and where we build the infrastructure in our own society so we can have a growing economy in the future. I think the idea of cutting us off from the world would ultimately shrink, not grow the job opportunities.

Ryssdal: I tried this with the President the last time I talked to him and he shot me down, so I’m gonna give you the same opportunity. Why is it so hard for people advocating free trade, fair trade, to say to Americans, you know what, some jobs are gonna disappear, and we just have to get used to that.

Lew: The challenge is to make sure that everybody who is able to work and wants to work has the ability to have the skills they need to get the jobs that are out there. And I don’t think that’s something that we should just be talking about at moments when trade agreements are being negotiated or put through Congress. One of the things I say in the piece is that we have to be thinking about that in the periods between trade agreements. So when the President proposes making community college free for anyone who goes in and does the work, what’s that about, it’s about getting the skills you need. You have several million jobs in this country that are open and several million people in this country looking for jobs, and they’re not matching up, in large part because of a skills gap. So these are not, these are not abstract questions. We don’t make horse and buggies any more, and there’s a lot of things that change over time, so things like technology coming in and changing what people do and how they do it isn’t new. The fact that production moves from one place to another isn’t entirely new. What we cannot tolerate is having a situation where we don’t invest in our own country to make sure that people have the skills they need, and access to the kinds of jobs that will provide for a middle class income.

Ryssdal: You talk a lot about the Trans Pacific Partnership in this piece, the TPP. You hold it up as a beacon of America engaging with the world, which is the premise of this piece.. Congress, though, has said it’s not going to take it up until a lame duck, if at all, and I wonder if you’re underestimating, both on the hill and among the American people, the degree to which free trade is a losing proposition.

Lew: Look, just a few months ago we passed Trade Promotion Authority through the Congress—

Ryssdal: Fast track.

Lew: That’s the fast track that allows the Trans Pacific Partnership Agreement to come up in an expedited way—

Ryssdal: Up or down vote.

Lew: Up or down vote. An easy matter to approve or disapprove—

Ryssdal: (laughs) Sorry I didn’t mean to laugh out loud—

Lew: Procedurally, procedurally.

Ryssdal: But easy is not what this is going to be.

Lew: It’s a hard vote, it’s always a hard vote. It’s nothing new that a trade vote is a hard vote. The fact that less than a year ago we had a majority that was willing to vote for the procedural pathway, that’s harder than voting for the agreement itself. In the agreement itself, what we have is labor protections, what we have is environmental protections, what we have is agreements on how we’re going to work together on currency, so that we don’t have unfair practices. I think we have an awful lot of things in the agreement, that make it easier, not harder. Now, obviously, this is a difficult environment generally, politically, and in terms of sentiment. But when you have something that is a good product, I believe you can sell it, and I think TPP meets the test that a majority will be looking for when they decide how to vote. It’s up to Congress. We’ll have to send it to Congress. But ultimately it will be up to them to decide when to take it up and we will work on a bipartisan basis. It’s always been the case that it required a bipartisan vote to pass trade agreements and you know, typically the arithmetic is there’s more Republicans than Democrats, and I think what we’ve seen over these last you know months and last couple of years is a little bit of chipping away of that kind of solid Republican support. So we’re going to have to make sure on both sides that we maintain the coalition that passed trade promotion authority, when we bring TPP to the floor. I’m optimistic that we’re going to be able to do it, because it’s good for American workers.    

Ryssdal: I want to turn to a couple of real life examples of America in the global economy, how things are changing and what this administration is doing to try to help companies compete.

Ryssdal: Last week a federal judge unsealed her ruling in a case involving MetLife, the very big financial services company, in which she  basically — I’m condensing here for the purposes of the interview — took MetLife out from under the strictures of the government’s requirement  “Too Big, Too Fail.” She said that the Treasury Department and the government’s process was fatally flawed. It was arbitrary and capricious, and she called on you to fully explain what you’re doing; to show your work.

Why is it so hard for the government to decide what is too big to fail and what is not?

Lew:  Well Kai, on that ruling obviously we disagree with it and the government is appealing, but let me take a step back and remind everyone what was at issue - what is at issue - with this decision.

You go back to the financial crisis in 2007, 2008. Nobody expected the companies that failed to fail. They were not sitting at the edge of disaster. AIG, Lehman. It was a surprise. It came out of the blue for most who were watching. Part of Wall Street reform said that should never happen again. You are looking for a process not *if a firm could fail, but you are looking at if it failed could it bring the whole economy to its knees? We went through that process in a very careful way and designated not hundreds, but roughly less than a dozen firms - very big, very interconnected firms. The decisions are hundreds of pages long with detailed analysis. I think it will withstand review, but (it’s a) question that we have to ask if we ever again want to face the possibility of a firm‘s failure putting at risk the whole economy. That’s why it’s so important that we get this right.

Ryssdal: The answer obviously is that we don’t want that. The question, though, is why is it so hard for the government to say “‘This is what Systemically Important Financial Institutions means?”

Lew: You know, I —

Ryssdal: Cause the judge said you didn’t do it.

Lew: I think that well, without getting into all the details, there are certain aspects of the ruling that are just incorrect. Take, for example, the premise “should we have to show if it’s likely that a firm will fail.” No. These are very unlikely events. That’s one of the questions that the judge asked. “Did you show that it’s likely that the firm would fail?” It was not likely that AIG would fail, or Lehman would fail. These are very remote possibilities with highly destructive consequences if it happens. So you’re not really looking for the probability. You’re looking for what are the consequences? That’s what the statute tells you to look for. The question of looking at a cost-benefit analysis, the statute didn’t have that requirement in it. That’s not the measure that’s being looked for. The consequences of a failure are immense, almost infinite in terms of the damage the financial crisis in ‘07, ‘08 caused. One would never be able to predict with any kind of precision the scope of that broad, systemic failure.

So there’s a reason that it wasn’t  put in the statute. I actually think the work was done correctly, I think the work was done well, and we’re going to appeal and it’s going to be up to an appeals court to decide

Ryssdal:  And eventually it will, I guess. But let me circle back to this one more time. If it is so critical that these companies not fail, which we all agree it is, even if the statute doesn’t require it, why not go the extra mile before imposing these regulations and expenses on companies?

Lew: Look, I think that we are very cautious and very circumspect before. That’s why we’ve designated very few firms. It’s not that there are hundreds of firms out there that have even been examined closely. You’re talking about some of the largest financial institutions in the world, and that’s where what we’ve done is gone through the analysis of what would happen if they failed. That’s a circumstance that is really quite a dire circumstance. It’s not something that’s happening in a good strong economy with everything moving in the right direction. It’s where things are going wrong. That’s what happened in ‘07, ‘08, and what happens when one thing leads to another and then you have loss of control of the reaction. I’ll give you an example and it gets into the weeds a bit.

Ryssdal: Sure.

Lew: So, is it the direct holdings that the firm has in terms of its connection to, say, derivatives, or is it what happens when the whole market breaks because you’re so big that your failure causes the whole market to break.

Ryssdal: K. Go ahead, use the word “counterparty risk.” Go ahead. There you go.

Lew:  I’ve just gone through all of the principal elements of what the court, I think, made a mistake on and that’s what will be appealed. So I actually think the answer to your question is that we did a very careful analysis. It took a very long time. It took the better part of two years. It was a 300-plus page analysis. So, I feel that the important question here is will we or won’t we have the ability to keep our sights trained on the firms whose failure could cause the damage to the economy that Wall Street Reform was set up to make sure would never happen again, and we’re determined to continue our work in this area and do it well.

Ryssdal: How concerned are you now that other companies are saying, “Hey look! MetLife did it. We’re going to do it, too. We’re going to get from under this.” General Electric to name just one.

Lew: Well, these decisions are obviously made by firms, but I’m actually looking at what has been said by the companies that have been designated. For the most part, what they’ve said is they’ve been looking at our activities and looking at what we can do to reduce our risk and they’re talking about coming back and saying we’ve sold the riskiest part of our business. Can we, is that the basis for changing the decision? That’s actually the system working. If you end up with them making voluntary decisions for reasons that are business-driven, then you end up with less overall risk. So I’m not sure if this is a broad set of issues, but obviously that is for every firm to decide on their own.

Ryssdal: Tax inversions. Last week you came out with what I believe is your third action on tax inversions — companies buying other companies overseas to change their tax liabilities. I guess it worked the way you wanted it to because Pfizer and Allergan have called off their merger. Both of the CEOs of those companies, though, came out last week and said “we were playing by the rules that Congress made and now here is the Treasury Department coming in and changing them on us midstream.” Isn’t that kind of the antithesis of what your article is about? That we have to be able to adapt and play in a global economy?

Lew: Look I think that anyone who has listened to what I have said over the last two-plus years could not be surprised that we were looking to do anything that we could do administratively to stop the pipeline of inversions. We took actions twice administratively. It had some effect each time we did it, and each time we made clear that we were looking to take additional action. We even said that in the case of earnings stripping. What could we do in the case of that regard?

I think that, you know, the right answer here is legislation. There’s  no doubt. I’ve been saying all along the only way to do it so that really sticks is legislation. I’m sure there are smart tax lawyers and accountants out there looking for loopholes in the guidance we put out last week, but yes the American people are clear that they don’t think it’s fair that a company would get all the benefits of being an American company — research and development in America, the rule of law that we cherish in ,but also invest in, the skilled workforce, the infrastructure — and then change your address to avoid U.S. taxes. They don’t get to do that. This is tax season. American families are sitting down. They are reporting their income. They are paying their taxes. It just doesn’t feel right that you have a system that lets companies behave differently.

Ryssdal: I get all of that, but don’t you think this plays as the U.S. government going after two companies specifically with this administrative action?

Lew: We don’t make policy based on individual companies.

Ryssdal: Oh sir, come on.

Lew: You look at the impact of  this company. It sends a powerful symbol in  the future of what is permitted and what is not permitted. The goal has been all along to stop the pipeline. We don’t do it retrospectively so if you closed a deal, if you completed a deal. I don’t know what other deals are caught up in this, but I hope that we stopped the pipeline for a little while.

Ryssdal: This piece did not come out of the Treasury Department’s speech writing shop. You wrote it yourself. As we sit here under a bust of Alexander Hamilton and with Hamilton all in the news, I wonder if this is Jack Lew’s legacy piece right now.

Lew: You know, I have thought that after three years of fighting the quiet fight on the IMF quota reforms, dozens if not hundreds of conversations with congressional leaders, there’s a real burden to make a public case, so that maybe this will be a little easier next time.

It has to be that there is a broader understanding of what we do to create a space for the US to have the influence that we need for our economic and national security. And I thought that this was an appropriate moment to do it. Obviously, before we completed quota reform, before we got TPA through Congress, before we got the Export-Import bank reauthorized, it would have been more challenging. But the fact that at this moment, say, we have reasserted the U.S. global leadership role in the economy, it was important to take stock of it.

Ryssdal: A little pride of ownership there. I see the smile on your face.

Lew: Well, I’m proud to have been part of it. It’s not all my work.

Ryssdal: Uh, last thing, then I’ll let you go. I need some love on the $10 bill. Hamilton’s staying right?

 

Lew: You know, we’re going to have —

Ryssdal: Come on, come on, come on, come on.

Lew: We’re going to have a really exciting announcement really soon. People have to hear the whole of what I said, so I’m going to take a second and repeat.

Ryssdal: Alright, go ahead.

Lew: But to hear it all together. We started this conversation, I started this conversation last summer. We’ve heard from millions of Americans. That means there’s people from around the country at school lunch tables, in senior centers, at workplaces talking about what   woman should we recognize and how have women contributed to democracy in America. As a student of history, that is just exciting and thrilling that people are actually focused on this.

Lew: We’re doing something bigger than just one face on one bill and we’re going to be looking at a whole series of bills: the $5 bill, the $10 bill, the $20 bill. And we’re looking at how to use the front and the back of the bill to tell stories, and it is going to be a little bigger than people think because they kind of focus on the one piece of it. But stay tuned we’re going to have an interesting announcement.

Ryssdal: Soon? Soon? Can you say?

Lew: Yeah, very soon.

Ryssdal: Mr. Secretary, thank you very much for your time.

Lew: Good to be with you Kai.

Follow Kai Ryssdal at @kairyssdal