A Conversation with Jacob J. Lew, Secretary, U.S. Department of the Treasury

Puerto Rico Debt Crisis and Restructuring

• Treasury Secretary Jack Lew characterizes Puerto Rico's debt crisis as an active, unfolding emergency rather than a future threat, citing immediate harm to 3.5 million American citizens.
  • Current consequences include hospital ward closures, school shutdowns, medicine rationing, and the inability of government agencies to fund basic operations.
  • The Government Development Bank recently defaulted on a debt payment, and a larger series of payments is due in early July.
  • Nearly 100,000 residents left the island last year, creating a "brain drain" of professionals (doctors, lawyers, entrepreneurs) that further cripples the local economy.
• Secretary Lew argues that legislative action is urgently required to establish an independent oversight authority for an orderly restructuring process.
  • Without such legislation, the alternative is a "chaotic unwinding" involving decades of litigation, which could bankrupt the territory and harm U.S. municipal bond markets.
  • Lew frames restructuring and bailouts as "polar opposites," asserting that an orderly restructuring is the only alternative to a total bailout or system collapse.
  • The debt burden is unique in magnitude: $70 billion in debt for a population of 3.5 million, with funds historically used for operating expenses rather than productive investment.
• A key concern raised is the potential for "holdout" creditors to derail the process by demanding full payment, similar to the 15-year litigation in Argentina.
  • Lew notes that a restructuring framework prevents a scenario where a few creditors block a solution that benefits the majority and the stability of the community.
  • He emphasizes that the crisis stems from a fundamental mismatch between debt growth and flatlining economic growth, exacerbated by triple-tax-exempt bonds that attracted high-yield investors.

Housing Finance and Government Role

• The Treasury Department maintains that comprehensive legislation is the only viable path to reform the housing finance system and end the conservatorship of government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac.
  • Administrative actions by the FHFA (such as developing a common securitization platform) have limits; they cannot fully allocate risk to private markets without legislative authority.
  • Proposed reforms aim to structure securitization so that loss risks are properly allocated to specific parties rather than backed by the full faith and credit of the government.
  • The administration seeks to cabin any future government backstop to prevent open-ended commitments, a failure that contributed to the pre-2008 financial crisis.

Infrastructure and Productivity

• Secretary Lew links infrastructure investment directly to future productivity growth and U.S. global competitiveness.
  • He acknowledges the passage of a five-year transportation reauthorization bill but notes it failed to provide the necessary investment increase to repair aging ports, airports, and roads.
  • He warns that without increased investment, the U.S. risks falling behind international competitors, specifically regarding deep-draft seaports and roads capable of handling modern, heavy loads.
  • Lew identifies a "lurking risk" where the perception of orderly U.S. governance is essential for global market confidence; disruptions like government shutdowns or debt default threats previously caused high anxiety in financial markets.

Tax Reform and Revenue Neutrality

• The administration views the current U.S. tax code as broken, with high statutory rates but average effective rates due to loopholes, which skew investment decisions and encourage corporate inversions.
  • Secretary Lew identifies a primary political obstacle to business tax reform: conflating it with individual tax reform, and the lobbying influence of specific entities (hedge funds, pipeline companies) disguised as "small business" interests.
  • Lew argues that "revenue neutrality" is an insufficient goal for broad tax reform; he asserts that additional revenue is necessary to address rising costs in Social Security, Medicare, and inflation.
  • The administration proposes closing loopholes like "carried interest" and "stepped-up basis" to generate revenue for social investments, including community college and maternal health programs.
  • While Bill Gates supported equalizing capital gains rates with income tax rates, Lew notes that differential rates encourage non-productive tax planning.

Administrative Actions on Inversions

• The Treasury has implemented three administrative actions to slow down corporate inversions, though Lew asserts these measures are temporary fixes.
  • An inversion is defined as a U.S. company moving its tax domicile abroad to avoid U.S. taxes while continuing to benefit from U.S. infrastructure and markets.
  • Lew states that only legislative tax reform can permanently shut down the pipeline for inversions, as administrative rules are subject to legal loopholes and potential reversal by future administrations.

Currency Redesign and Historical Narrative

• Treasury Secretary Lew announced a comprehensive redesign of U.S. currency to tell a broader story of American history and democracy.
  • Harriet Tubman will appear on the front of the $20 bill; she was an escaped slave, Underground Railroad conductor, Civil War spy, and suffragist leader.
  • The back of the $5 bill will feature the Lincoln Memorial and scenes of the Marian Anderson concert and Martin Luther King Jr.'s "I Have a Dream" speech.
  • The back of the $10 bill will feature figures from the fight for women's voting rights and a rally at the Treasury Department.
  • The redesign process prioritized security considerations, dictating that the new features appear on the back of notes first to maintain currency stability.

Political Discourse and Historical Perspective

• Addressing the current level of political partisanship, Secretary Lew reflects that while the current era feels uniquely fractious, historical review often reveals significant accomplishments during similarly divided periods.
  • He cites the Reagan-O'Neill and Clinton-Newt Gingrich eras as times of hyper-partisanship that eventually yielded major legislation on tax reform, Social Security, and welfare.
  • Lew attributes the perception of increased division to the instantaneous, segmented nature of modern media, which allows leaders to speak only to "true believers."
  • He concludes that it is the responsibility of both elected and appointed leaders to consistently elevate the quality of public debate and find areas for bipartisan cooperation.