April 17, 2014

Round Two for Jack Lew

Last week President Obama nominated Jacob “Jack” Lew to be the new head of the Office of Management and Budget (OMB), replacing Peter Orszag, who is stepping down at the end of July. OMB is primarily responsible for developing the President’s budget.

If confirmed by the Senate, as expected, Lew will become OMB director for the second time. He served as President Clinton’s director from 1998 through the end of the Clinton administration in 2001.

While Lew is familiar with the job, the budget picture has changed considerably. Lew was OMB director during the only four years of budget surpluses since the late 1960’s. He was also a key negotiator on the bipartisan balanced budget agreement in 1997. Now the budget environment is even more partisan and the country is experiencing the largest deficits since the end of World War II.

The change in OMB leadership provides an opportunity to review the changes that have taken place since Lew’s last stint as budget director and also gives us another chance to review the major decisions looming for the federal budget.

The final budget presented by Lew for the Clinton administration in February of 2000 (FY 2001) projected a 10-year surplus of $2.7 trillion. The President’s proposals in that budget were projected to reduce the 10-year surplus by $472 billion. The major fiscal policy debate was what to do with the surplus. For the most part, the Clinton administration favored debt reduction over tax cuts or new spending initiatives. However, there was also a debate about whether it would be wise to entirely eliminate the publicly-held debt. That is one problem Lew will not need to worry about in his second tour of duty. 

Interestingly, the final year projected in the FY 2001 budget was 2010. It showed a surplus of $395 billion. The current projection, however, is a deficit close to $1.4 trillion. We have also racked up $5.6 trillion in deficits since then. That is over an $8 trillion swing. OMB’s latest projection is expected to be released on July 23.

Of the changes since 2000, CBO estimates nearly 70 percent have been due to legislation enacted by Congress and signed by the President. The rest can be attributed to changes in economic conditions combined with changes in CBO’s technical models.

The largest legislative changes affecting the surplus were the 2001 and 2003 tax cuts ($1.4 trillion) and increases in discretionary spending ($2.4 trillion -- $1.9 from 2001 to 2009 and $510 billion in 2010 alone). For most of the decade, this has reflected increases primarily in security spending, while the change in 2010 is primarily related to stimulus legislation.

So as Lew begins his second OMB stint, the toughest choices he will be facing are likely to be whether to continue the policies that have had the largest negative impact on the favorable budget outlook he helped to create in his first stint. The 2001 and 2003 tax cuts are scheduled to expire in just 5 months, and the level of discretionary spending (including war costs) is one of the main barriers to agreement on budget plans in Congress. 

Beyond the immediate issues looms the Dec. 1 report of the president’s fiscal commission. Incorporating proposals from the commission into the FY 2012 budget proposal, and arguing for them on Capitol Hill, may be Lew’s most important mission in Round Two at OMB.

Update: For a good rundown of how to evaluate a President's budget proposal, especially when it needs to deal with balancing economic recovery, the 2001 and 2003 tax cuts, defense spending and other discretionary spending commitments, and the long-term budget outlook, check out the February 6th hearing at this link. That would be February of 2002, where Concord's Bob Bixby testified with Jack Lew about President Bush's 2003 budget proposal!