Former Treasury Secretary Jack Lew on Trump, Deficits and the Dollar

0:00What you can 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. You know, Wilf, I've had a lot of opportunities to come and go, which gives me a perspective that may be a little bit different than people who just were in one or another world. People tend to get carried away by the trappings, the title, the office, the people surrounding you. it's important to always remember that you walk in and you walk out as the same person. Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of some of the greatest investors, business leaders and politicians in the world, giving you, our listeners, the edge.

0:57It is Tuesday, the 1st of July afternoon time in London, morning here in New York where I am today. US markets closed last night once again at record closing highs, shrugging off many of the macroeconomic challenges of the first half of the year. S &P 500 is up 5 % year to date. The FTSE 100 up 7%. Perhaps the story of the first half of the year though, the dollar down 10 % so far this year, something I definitely want to talk to our guest this week about. I am delighted to say that joining me today is the 76th Treasury Secretary of the United States to President Obama, who also served as his chief of staff for a period.

1:41And before that, as director of the Office for Management of the Budget, the OMB, a role he also held in President Clinton's White House when they managed to balance the budget. Another topic we will certainly get to. Most recently, he was President Biden's ambassador to Israel at an enormously consequential time. It is my delight to introduce today Jack Lew. Mr. Secretary, thank you so much for joining us. It's great to be with you, Wilfred. Long time no speak. And we're both in New York, as it happens. I'm here in the Stock Exchange. And of course, I want to start on what is going on here stateside going through Congress at the moment, the big, beautiful bill.

2:25Your successor, Treasury Secretary Scott Besson, saying early this morning he was confident it would all be done and dusted and passed by July the 4th. I mean, what is your snapshot take on if that is likely? And I guess more importantly, whether you think one way or another, a bill in a similar form to its current form will pass in the coming weeks or months? Well, if I can't tell you how the arm twisting is going to end up, my experience is that after some false starts, it usually works out. So I'm not, since I think it's not a big, beautiful bill, it's a kind of reverse Robin Hood bill, I would be happier if I could say I thought it was not going to pass, but I suspect it will pass.

3:16I think that the size of this bill and the scope of it is really quite enormous. It's the biggest transfer of income from people at the bottom and the middle to the top, in my experience. And it does some real damage to core services in this country, particularly health and nutrition programs. And we can talk more about that. And I think that's why it's challenging to get the votes together. There are Republicans who are very uncomfortable about that. So I think they do have hurdles to get over. But as I said, my experiences aren't twisting, usually results in deals that get it to the finish line.

3:56I want to get into some of those line items in a moment. But I guess the headline question, first of all, is your take on the size and scale of the debt and the deficit today compared to when you were Treasury Secretary. You were only Treasury Secretary quite recently, and yet the debt has soared since then. So, you know, Will, the debt is a big issue. The annual deficit is an issue. And one way to think about it is, you know, how much does it cost each year to service the debt? Right now, our debt service costs are more than we spend on national security. That's an enormous drain on resources.

4:38So as it gets bigger, it puts more and more pressure on defense, on services for vulnerable people, on all the things that government ought to be able to do. You know, the period of time when I was in the Clinton administration, we did run a surplus, and it was hard to say no when you had a surplus, but we thought it was important to build the fiscal conditions to deal with hard times when they came so we could spend without creating a huge overhanging problem. And I'm sorry to say that in recent years, there's been less focus on that. There is a debate in the Congress right now about whether this bill is too big.

5:24You know, my advice is that when you're in a hole, stop digging. It don't make it three to five trillion dollars worse by doing things that are irresponsible. And that means making hard decisions. In my experience, it's been hard decisions have to be made in a bipartisan way. Otherwise, each side can point a finger at the other. There's no bipartisan conversation going on. So much I want to unpack there, including the difficulty to have bipartisan consensus now and your lessons from the Clinton administration balancing the budget. But just quickly, first of all, presumably implicit in that answer then is some criticism for the expansion during the Biden administration as well or not?

6:09So I have to take it kind of piece by piece. Yes, COVID was a crisis, and we spent a lot in the first Trump administration and at the beginning of the Biden administration. 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. 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.

6:58So 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 U.S. recovered stronger and better than other countries from COVID. And the inflation is running its way through the system. So that I think is different. You look at the infrastructure bill, it was paid for. The infrastructure bill did not add to the deficit. So I think that is the right way to do it. I think in general, Well, both Democrats and Republicans only tend to worry about the deficit when the other side is in charge. And that's why I say it takes a bipartisan atmosphere to deal with it.

7:48You have to do it together. That's what we did in 1997 when we balanced the budget. Let's touch on that. What are your key takeaways from that? And are any of those actions you took repeatable today, or are we just living in a different era? I don't know the answer to that, Wilf. If you had asked the question in 1994, could we work together in a bipartisan way, everyone would have said it's impossible. You had Newt Gingrich as speaker. He was shutting down the government, threatening to default on our debt. And, you know, you ended up with a congressional election that changed the balance of power in the Congress, essentially so that nobody could do anything on their own.

8:36You know, with a need to work together to get anything done. You know, you had a Gingrich and a Clinton who came together, you know, through a lot of hard work of rebuilding trust after terrible fights in 1994 and 1995. I was in the middle of those negotiations. Gingrich's conference room had a big dinosaur head in it. I felt like I was a prisoner in the dinosaur room for months. Was it a carnivore or a herbivore? I'd have to ask my grandson. He's more of an expert on dinosaurs than I am. My son could help in that discussion too. Anyway, sorry, continue. you. And, you know, we went from being at total odds with one another to saying, OK, in a world where in order to get something done, we have to figure out what does each side need?

9:29What can each side not tolerate? Is there a pathway in the middle? And we did a balanced agreement that, you know, raised some taxes. It added some benefits for health care and the child health program. And my last two and a half years as OMB director, we were running a surplus. Now, that didn't last for long because you had a big tax cut at the beginning of the Bush administration. And Democrats have gotten a little cynical. You did the hard work and you wouldn't spend the money when you had a surplus. As soon as the table is turned, we can't stop a tax cut. And I think a little bit what you saw in the changing dynamic amongst Democrats is, you know, Republicans spend it on a tax cut.

10:17We need to spend it on the more social policy oriented things. And people stop worrying about the deficit and the debt. I think we all need to worry about it together. The simple rule that in good economic times, you ought to come as close to paying your bills in a current sense as possible, certainly not running a deficit more than 3 % of GDP, is a 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. What you can 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.

11:07That's terrible. I want to talk about the implications of that in just a second. But first, whilst we're on this sort of topic of bipartisanship, as you said, whether you're a Treasury Secretary or OMB Director, you're in the heart of negotiations. and I just wonder if you had tips for how you convince the other side of the advantage of working together you know comes at a time not just with the big beautiful bill going through congress but our prime minister back home in the UK is having a torrid time at the moment trying to get his welfare bill through parliament what tips do you have for how you convince someone on the opposing team to see the light of your argument you know the environment obviously matters Um, not every moment, uh, lends itself, uh, to bipartisanship.

11:57Um, whenever the moment is there, it takes building some trust, having private conversations where you explore what it is, as I said before, you absolutely need to do and what you absolutely can't do. And you try to see if there's a pathway where everyone can agree on some things. and then the things they disagree about, you know, avoid either putting a stick in each other's eye or humiliating each other. Whether it's in budgets or international negotiations, agreements only come when both parties can defend what they did. It can't come with humiliation or, you know, or defeat. And I've never been part of a budget deal where I couldn't go out and defend it.

12:45And I often did. going into the Democratic caucus and the House and the Senate, whether it was in the Clinton or the Obama administration, and explaining why the things that you had to do to get a deal were worth it because of what the deal did. It's hard. And sometimes people are nasty to you. It's not like you're always carried in a sedan chair. On the other hand, I've always been able to convince most of the wisdom and the benefit of the compromise. And I worked 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.

13:49So you have to have a space that you can talk about middle grounds in that isn't totally off limits or poisoned. One of the things that I always counseled when I was at OMB, at Treasury is be careful in your rhetoric not to take the things that are potential common ground someday and making them toxic. Whether it was in Social Security reform in 1983, in the balanced budget agreement in 1997, in the negotiations between President Obama and Speaker Boehner in 2011, you know there are going to be ideas that are hard, that if there's going to be a deal, you cannot have made toxic. And that takes self-control because it's usually easier politics to make everything toxic.

14:46That's fascinating. Absolutely fascinating. Great lessons there for all politicians, I think.

14:56Let's talk about the implications of where we are at the moment. As you said, deficit 6 % or 7 % in the years ahead, continuing where it's been roughly for the last couple of years. It's led a lot of people to focus on the fact that the dollar's down 10 % this year and bonds have sold off at the same time. Many people in the markets are kind of terrified about what that's hinting at. Does it scare you? You know, there's something very unusual going on now. The US economy is actually doing okay. You know, it's kind of been chugging along. Employment is staying high. Inflation hasn't gotten down to 2%, but it's hovering in the mid twos.

15:41And growth is a little slower, but it's certainly not in recession territory. I think it's one of the reasons that the Fed has been holding back on moving on interest rates, because we're still not at the 2 % target. And the economy is not yet in a place where it's in distress. So you have to ask, why is the dollar weakening right now? In my experience, I've never seen this before. It's a result of policy chaos in the United States, from the trade policies to the economic policies. Everything in the policy world has been unsettling, even the things that have ultimately settled down. I mean, you can say the massive tariffs never happened, but it sure sent a shockwave through the world before they were suspended until this next week, pending further negotiations.

16:49Well, that has an effect around the world. And meanwhile, back at home, we're working through a budget debate where the only direction is for the deficit and the debt to go higher. So at a time when the U.S. is unsettling confidence in the United States, it's building a greater need to borrow domestically and internationally just to support the running operations of the government. Now, I will take issue a little bit with the question that you framed. I haven't seen massive selling off of dollars. I mean, I've been watching, not daily like I did when I was Treasury Secretary, but to my observation, there was only one 20-year auction where there was a question about whether or not there was enough depth in demand to support the market.

17:43And that was something that got my attention. You never want to see a lack of demand in any treasury bond auction. The depth and liquidity of the U.S. Treasury is at the core of what makes us the world reserve currency and the definition of safety and soundness. I think we have to be careful. You know, 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. The renminbi is not in a place where it's fully convertible and market controlled. The, you know, there's not enough, you know, high rated European debt to meaningfully replace the dollar.

18:36You know, 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. I do think that it's the case right now that there being no alternative is the reason you're not seeing more diversification. You're seeing a little bit of movement into gold and other metals. But as I look at the kind of treasury activity, you know, it's a pretty small decline so far. That's really interesting. So the key thing you watch on that is not so much the US dollars level, it's the supply and demand dynamics for US bonds.

19:26Look, I think as so many other Treasury secretaries in modern times have said, a strong dollar is good for the United States. I believe that because a strong dollar reflects It's a strong economy, and the strength of the U.S. economy is what powers the engine of the U.S. global economic leadership, both in terms of our dollar and our markets and our example. To the extent that you have policies that are driving towards a weaker dollar, you have to ask, what is the purpose? I understand that there is a lot of pain in the United States because exports have gone down over the years, manufacturing exports in particular, and that we have not done a great job as a matter of domestic policy dealing with the regional impact of both free trade, technology, and the economic flows of the economy.

20:34of global markets. I don't think that it will make the United States better if we end up with a smaller U.S. and global economy because of our economic policies. The problem gets back to domestic policy and politics. We know how to educate people and build technology hubs and have a future that makes people not feel forgotten. I think that what you're seeing in terms of the current administration's policies that tend to lead to a weaker dollar are in part motivated by a desire to increase American exports. I don't think that's likely to be the result. And I think it's going to come back to what I just described, understanding how do you have demographic and place-based policies that deal with disruption in an economy that, frankly, is more disrupted by technology than trade.

21:37What we can do, Wilf, is being indifferent to it. And I think that one of the reasons for the political anger in America is that the inability to put together a bipartisan approach to deal with the problems of people who have borne the burden of disruption leads to a sense that people are not seen. I have never stopped seeing those people, but I will tell you the only time you could get a political conversation into high gear was when you were trying to pass a trade bill. Other than that, there was no bipartisan conversation about what do you do about this? And dealing with it with kind of seesawing policies that don't solve the problem doesn't address the feeling that people are overlooked.

22:28Really, really interesting. I want to pick up on that in a second for the long term future of the Democratic Party. But just one final question as it relates to the dollar. What is your view on President Trump's regular, very pointed commentary towards J-PAL? Look, I think in general, independent central banks are critically important. You know, as Treasury Secretary, one of the things that I would go around the world advising other governments is, if you look at history, independent central banks have served their purpose very effectively and interfering with the independence of a central bank doesn't end well.

23:09So that's a general proposition. I'm not going to get into commenting on the personal dynamics other than to say I have the highest regard for Jay Powell and think that he will be remembered as having managed through multiple crises very effectively. And I watch commentators every day knowing better. But I don't know another central bank governor did a better job with a soft landing from a tough crisis. Well, as you know, I'm heading downstairs to be one of those commentators at 10am on CNBC. So I hope not to get in an area of criticism from you on that. Just on that, you mentioned Jay Powell.

23:52What level of regard do you hold Scott Bessent in? I mean, he's got a tricky job. There's lots of voices in the room. What do you think about the job he's done? I don't know him very well. He does have a very difficult job. It's the job of the Treasury Secretary always to be the sober voice of reason when there are easier arguments to be made, either politically or in terms of just ease of satisfying different constituencies. You know, he has to, on the one hand, represent his president and the policies of his president, but he has to be willing to go in and say when he thinks something would end up very badly.

24:43I don't have enough visibility into the day-to-day conversations to comment on how well he's done. But, you know, I do think that on the trade policy, he's become, you know, the public face of trying to walk back from the policies that would have just done terrible damage to the U.S. and global economy. I don't know where it ends in the pace of developments in this administration. Whatever I know today could change tomorrow. The events over the weekend with Canada were kind of head spinning. We don't know where things will be on July 9th when the different negotiations settle down or what we posted on Truth Social.

25:33So he has a hard job because it's not like you set a course once and stick to it. It's a daily challenge. And I think it's early to know what the results will be. I don't agree with the policies that he's promoting in terms of our fiscal policy on the bill that's going through Congress. But frankly, that is the kind of difference between perspectives that is more normal. I want to touch on the Democratic Party, obviously, fresh off the New York mayoral primary last week. Overall, for the party, is it important now to back someone who's won the primary fair and square overall? Or as you look ahead, particularly to who might be the presidential nominee in a couple of years' time, is the party moving further to the left, the far left, I think you could say?

26:30Is that a mistake? You know, I have never been involved in the political side of politics to comment on things like that. But do you believe socialism would work for America? I think the policies that he's outlined are not policies that are good for New York. He's running for mayor of New York. And I worry deeply, having spent most of my life in New York, about a city that I call home. You know, I see a similarity between the kind of policy solutions to the left and the right that satisfy populist sentiment don't always go through the filter of do they work? I don't think they work. And I think that's a problem.

27:25You know, I'm not going to comment on what democratic leaders should and shouldn't do in terms of who they endorse and support and whether, you know, whether if he's elected, he can grow in the role. One of the things I'll say about New York is that New York is not an entirely independent governing entity. Many of the policies have to be approved by the state, either legislature or governor. So it's a process where you have more centrist political voices that will still be very much in a position to determine whether or not different tax and spending policies can take effect. You know, I think the Democratic Party is well served by building the center out.

28:13And that means appealing to the center left and the center right. I think going to either extreme in either party tends to polarize the country. So that's my own personal view, but I really can't speak to the party politics part of it. A lot of wealthy people have left New York in the last five, six years, whether it's to Florida or other lower tax place. Obviously, the SALT deduction was a big factor there. If he becomes mayor, do you think that would continue or pick up pace? Look, I think it's a trend that's been going on for a very long time. You know, in my private conversations, you know, I've heard many people refer to when their youngest child graduates high school.

28:57You know, so I think people have been thinking about this in terms of their life planning because you can arbitrage tax jurisdictions. You do have to live in the place that you're paying taxes more than half the year. So people are going to have to want to spend half a year in one of the low tax jurisdictions. And New York doesn't let go of you very easily. So they actually check. I don't think it's new. And I don't think it's good for the city. So I hope it doesn't accelerate. One of the things that makes New York work is having a broad population where in tough times people stick together and pull together.

29:45We got out of the financial crisis in the 70s by having the business community and the labor community come together to save the city. That was the learning experience that shaped my view of how municipal politics should be.

30:06Two things as we wrap up, back to business, back to what you've learned in your career, Mr. Secretary. Do you have for our listeners an overriding piece of advice, whether it's people in leadership positions in business or in politics, your number one tip in that area? You know, Wilf, I've had a lot of opportunities to come and go, which gives me a perspective that may be a little bit different than people who just were in one or another world. People tend to get carried away by the trappings, the title, the office, the people surrounding you. It's important to always remember that you walk in and you walk out as the same person.

30:52if you don't um you're not going to make good judgments because you can't do things just to hold on to the office or the trappings you have to do it because you think it's the right thing and when you leave you have to be yourself because the things that are your life uh are better if you do it that way well on that note uh i'm sure you're you're heading off for the fourth of july weekend to to to celebrate the best parts of life and family and uh as you know on this podcast we celebrate the special relationship and it's a transatlantic mix of guests and listeners. And so I'd like to wish you, Mr.

31:28Secretary, and all of our American listeners a very happy 4th of July. Thanks, Wilf. And my grandkids have already made sure that our flag is out. Mr. Secretary, my sincere thanks to you for joining me for this extended conversation today. It was an absolute pleasure. Next week, we will be joined by the legendary British investor and founder of GMO, Jeremy Grantham. Please remember that nothing you've heard in the Master Investor Podcast should be considered direct financial advice. There's more information on that in the show notes. The Master Investor Podcast is produced by Paradine Productions and Master Investor Podcast Limited in association with Birdline Media.