Likely Treasury chief Lew faces early budget tests

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WASHINGTON – The to-do list that awaits Jacob Lew, President Barack Obama’s choice to be Treasury secretary, is daunting.

Bridge disputes in Congress on taxes and spending. Shrink budget deficits. Manage tense economic ties with China. Press Europe to reduce debts while fighting a recession. Defend the U.S. financial overhaul law. Prevent a global currency war.

And those are just the obvious challenges.

Lew’s job isn’t quite as perilous as the one that greeted the now-departed Timothy Geithner four years ago. As Treasury secretary, Geithner had to help stabilize a teetering U.S. banking system after the worst financial crisis since the 1930s and help lift the economy out of a deep recession.

The economy and banking system are far healthier now. But if the Senate backs Lew’s nomination after a committee hearing today, he likely will have to marshal all of his strengths as a budget specialist and perhaps overcome inexperience in some areas to achieve significant success.

The federal budget is sure to preoccupy Lew’s early weeks, and it’s also likely to dominate his confirmation hearing before the Senate Finance Committee. Republicans are expected to use the hearing to stress their differences with the administration over deficits and taxes.

Sen. Orrin Hatch of Utah, the panel’s top Republican, said he would press Lew on “what kind of plan the Obama administration has to confront our skyrocketing debt and our broken entitlement programs.”

Lew, 57, likely will be well-prepared to spar over taxes and spending. He has twice served as a White House budget director – once during the Clinton administration and once under Obama before becoming White House chief of staff.

Going back to his days as an aide to House Speaker Tip O’Neill in the early 1980s, Lew has amassed three decades of experience at the top levels of Washington policy-making.

He isn’t expected to have trouble winning Senate confirmation, despite the likely arguments from Republicans that the administration isn’t doing enough to contain “entitlement” programs such as Medicare, Medicaid and Social Security whose costs are straining the federal budget.

After today’s hearing, committee members will have two days to send questions to Lew to answer before they vote. The full Senate could vote on the nomination late this month.

That would give Lew little time before his first budget challenge – the March 1 date when deep spending cuts in defense and domestic programs will kick in unless Congress and the administration agree on some way to avert them.

The second challenge would come March 27, when much of the government would shut down if Congress doesn’t extend a temporary measure authorizing funding. And the nation’s borrowing limit must be raised by May 18 or the government could default on its debts.

Few are optimistic that negotiators will strike a “grand bargain” to simultaneously resolve the budget rifts, avoid slashing spending too much for now and shrink the deficit over the long run.

“You will get little deals along the way but not much else,” said Stanley Collender, a budget expert at Qorvis Communications. “I don’t see them having the time or the inclination to do a grand bargain.”

Collender thinks a temporary government shutdown will occur once the current budget measure runs out March 27. A shutdown could force the two sides into a compromise over spending cuts and the need to fund the government for the rest of the budget year.

Sen. Jeff Sessions of Alabama, the top Republican on the Budget Committee, has said he will oppose Lew’s nomination. Sessions argues that Lew misled Congress as Obama’s budget director when he said the administration’s 2012 budget wouldn’t increase the nation’s debt.

“To elevate him to the premier finance post in the country would be wrong – and it would represent a clear danger to our economy and to the working people of this country,” Sessions said in a statement. “We must have a person who, when speaking of America’s financial condition, will be totally candid.”

House Republican officials who negotiated with Obama’s team over a deal to raise the federal debt ceiling in 2011 have accused Lew of using budget gimmicks to demonstrate phantom cuts in spending.

“Lew is obviously very knowledgeable on budget matters, but he may lack the diplomatic skills to forge a compromise with Congress,” said Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University.

But Collender said he saw the Republican criticism as signaling that Lew was a tough negotiator.

Lew will enjoy at least one major negotiating advantage – his close relationship with Obama. Lew would be the first Treasury secretary to take the job after being a president’s chief of staff since James A. Baker III served as Ronald Reagan’s chief of staff before becoming Treasury secretary in 1985.

“When Jim Baker spoke, you knew he had the total confidence of President Reagan,” Collender said. “Lew will be in a similar position. Lew has been as close as any White House staffer to Obama.”

Beyond the budget, Lew is expected to hew closely to the positions Geithner struck on such issues as Europe’s debt crisis, the U.S. relationship with China and the administration’s defense of the Dodd-Frank financial overhaul law that the banking industry has fought to weaken.

“I don’t see anything creative in terms of dealing with these issues,” said Brian Bethune, an economics professor at Gordon College in Wenham, Mass. “That is the downside when you choose an administration insider who is loyal and will likely toe the party line.”

One potential weakness for Lew: His relative inexperience with financial markets and international economic crises – areas that had played to Geithner’s background.

Lew did serve briefly as chief operating officer for Citigroup’s alternative investments unit starting in January 2008. The unit was later criticized for its use of investment vehicles that hid mortgage risks outside the bank’s balance sheet and for operating risky hedge funds that imploded during the 2008 financial crisis.

Citi was pummeled by the crisis and was rescued with the help of $45 billion in taxpayer aid – money the bank has repaid. Lew’s defenders say that by the time he showed up to take charge of the alternative investment unit, most of the bad decisions had already been made.

Analysts think Lew will keep pressuring Europe to deal aggressively with its budget and debt issues. But they suggested that this will consume less of Lew’s time given that Europe’s debt crisis now poses less of a threat to the global economy.

On trade, Lew is expected to keep prodding China. The U.S. trade gap with the world’s second-largest economy hit another record high last year. No breakthrough is expected, though.

Lew will also need to calm investors who have grown concerned about possible currency wars after Japan’s new government sought to lower the value of the yen as a way to boost exports and its weak economy. A weaker yen makes Japanese goods cheaper overseas and foreign goods costlier in Japan.

Japan’s steps have alarmed officials from Latin America to Asia and Europe about the possibility that more countries will seek to manipulate their currencies to gain trade advantages. The issue is expected to be raised when finance ministers of the Group of 20 major economies meet in Moscow this week.

Lew will also need to defend the Dodd-Frank Act, which overhauled financial regulation after the 2008 crisis. Since the law was passed in 2010, Wall Street has fought to weaken many of its stricter regulations.

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