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Senate Finance Committee Holds Confirmation Hearing on the Nomination of Jacob J. Lew to be Secretary of the Treasury

BAUCUS:

Hearing will come to order.

Before we begin this morning, I want to recognize six new members to the Senate Finance Committee, Senator Sherrod Brown, Senator Michael Bennet, Senator Pay Toomey, Senator Robert Portman, Senator Johnny Isakson and Senator Bob Casey; welcome, all.

We’re honored to have you. I think you’ll find it to be a tradition of this committee — I mentioned Johnny Isakson, I think — this committee is one that’s very proud. We’ve worked together and I just — very happy that you’re here with us to help move that tradition forward at an even deeper, faster, greater rate. You’re all very talented members of this committee, and we deeply appreciate your attendance.

Less than two miles from where we sit today, at the entrance of the U.S. Treasury building, stands a large bronze statue. One would assumed the figure cloaked in colonial garb is Alexander Hamilton, America’s first Treasury secretary.

Look again. This 12-foot tall statue is of Albert Gallatin, the longest serving U.S. Treasury Secretary. In 1801, Thomas Jefferson asked Gallatin to serve. Gallatin did not shy away from the role’s challenges. But he did recognize the enormity. And he said, quote, “The place of the Secretary of the Treasury is more laborious and responsible than any other,” end quote.

As Treasury secretary, Gallatin laid the policy framework for the rise of the United States as an economic engine. That’s Albert Gallatin. What did he do? He established fiscal discipline. It was necessary to transform a young country into a great world power.

Gallatin also helped orchestrate the Louisiana Purchase, doubling the size of the United States and bringing my home state of Montana into the young nation.

His work is commemorated in Gallatin County, Montana, and the beautiful Gallatin National Forest in Montana’s northern Rockies, as well as the Gallatin River, one of the tributaries of the Missouri.

When Gallatin accepted the position, it was noted at that time that he was placed in a situation of trust. Today, we’re here to consider the nomination of Jack Lew to the nation’s next Secretary of Treasury. We’re here to determine if he’s worthy of this situation of trust.

Jack Lew is a long and distinguished career focused on public service with experience in both academia and on Wall Street. During one of his stints as OMB director, he helped guide our nation through one of the greatest periods of economic growth in America’s history. We’ll learn more about his record from Senator Schumer and Domenici in a moment, but there’s no doubt that he’s experienced.

As Gallatin said, there’s no more laborious or responsible position than Treasury secretary. Mr. Lew will have his work cut out for him.

Our economy today is on the road to recovery, but it is a road with many twists and turns. Last week, the CBO released a report showing the deficit as a percent of GDP from 2012 to 2015 will be cut in half. And the debt-to-GDP ratio will be stable for the next five years.

The Budget Control Act in 2011 in the end-of-the-year fiscal cliff arrangement, both bipartisan, have made a difference. Nearly $2.4 trillion of deficit reduction has been locked in for the next 10 years. But while progress had been made, the job is certainly not over. We have many tough decisions ahead of us.

The first challenge is the sequester, across-the-board cuts to programs starting in just over two weeks. And then we quickly face the threat of a government shutdown.

The sequester will cut critical programs including Medicare, role development and early education. We need to work together, Republicans and Democrats, House and Senate, with the administration to prevent indiscriminate cuts and lasting economic damage.

The state of the economy is still fragile. Unemployment rate rose slightly in January and is projected to remain stubbornly high, 8 percent in 2013, 7.6 percent in 2014.

These numbers are troubling, combined with the more favorable deficit numbers, the unemployment figures show that we cannot take our eye off the ball, that is, the economy and job creation. Mr. Lew, we need to concentrate on three areas to provide greater economic growth and certainty for the nation.

First, focus like a laser on job creation. Do not get distracted. As a leader of the president’s economic team, you must put in place policies that create more jobs and spark economic growth. Unemployment near 8 percent for the next two years is unacceptable. Use your office to develop new ideas to boost job creation and to relieve small businesses of needless regulatory burdens.

Second, you must help return predictability and stability to our nation’s capital. We have to get off this roller coaster of crisis after crisis. These crises are frustrating to the American people and harming the economy. You need to help us achieve stability and fiscal policy as the economy continues to repair itself after the financial meltdown in 2008.

That will help give businesses and families certainty and confidence.

And finally, we must simplify our tax code for individuals, for businesses. We need to make the system fair and help make U.S. businesses more competitive in the global marketplace. As Treasury secretary, you’ll be in a position to help make tax reform a reality. We will not need only your leadership, but your salt (ph) ideas and technical help. We’re serious about this.

We’ll be counting on your deep experience to help us achieve comprehensive tax reform. Over the past two years, this committee has been moving steadily forward on tax reform. America’s tax code has become too complex for both individuals and businesses. And the rules have not kept pace with today’s transactions.

The last tax code overhaul was in 1986. Our world economy has changed drastically in the past three decades. Our tax code has not caught up and is now acting as a drag on America’s economy. This is not some academic exercise. Tax reform is a real opportunity to spark the economy and create more jobs. As secretary, I expect you to be a partner as we tackle tax reform.

Members of this committee are going to probably — Mr. Lew — will ask you some tough questions. That’s our right. That’s our responsibility. That’s our role. In fact, I’ll ask you to address my concerns if the administration’s being distracted from what should be the main focus, that is job creation. We’ll get to that in a minute.

I’m confident that, in the tradition of this committee, the question, of course, be respectful and that these questions will focus how we can best move our country forward, representing the people that we serve.

Mr. Lew, welcome. As you follow in Secretary Gallatin’s footsteps, I encourage you to embrace this challenge as you chart your own path forward at Treasury pending your confirmation.

Recognize the great responsibility you have, ensure our government finances are sound and help us remain a great world power in this competitive economy.

Senator Hatch?
HATCH:

Well, thank you, Mr. Chairman.

Welcome, Mr. Lew and my old colleague, Senator Domenici, we’re so happy to see you here and all the great work that you did here in the whole time you were here, and of course, Senator Schumer, one of our great leaders in the United States Senate.

We also want to welcome the new members of our committee on both sides. I think you’re going to enjoy this committee. It’s a very, very important one and we look forward to working with all of you.

Thank you, Mr. Chairman.

I want to thank Mr. Lew for joining us here today, and I look forward to hearing Mr. Lew’s testimony today and finding out more about his knowledge, his background and qualifications for this important position in the president’s Cabinet.

And I agree with you; it’s an extremely important position. As we all know, the U.S. Treasury Secretary is charged with a variety of responsibilities. Mr. Lew, I know that you’re well versed in budget matters, but those are not the main responsibilities of the Treasury Secretary.

I believe that I already have a good understanding of your budget views, including your opinion that we need higher taxes and much more revenue to address our nation’s fiscal problems.

I also know about the Obama administration’s reluctance, which I assume you share, to engage in structural reforms to our entitlement programs, even though they are main drivers of our debt and deficits, although I was pleased with some of the president’s remarks in this area last evening.

I do not share your views on these — on some of these matters and neither, in my opinion, do the American people.

HATCH:

And as — and as a Social Security and Medicare trustee, the Treasury secretary cannot simply hope these problems will go away. But the Treasury secretary has responsibility so to extend far beyond the budget. These responsibilities include implementation of financial regions, oversight of financial stability, debt management, tax collection, oversight of economic sanctions, defense of the value of the U.S. dollar, disbursement of payments, implementation of certain housing policies, assisting Congress with its oversight responsibilities. And to finish with this one, oversight of entitlement trust funds.

So while I admire your budget prowess and understand your views on fiscal policy, I know far less about your knowledge and experience in many of these other areas. I hope to learn more today.

There remains a large amount of uncertainty in financial markets from the as yet unknown aspects of Dodd-Frank. Hundreds of Dodd-Frank rulemaking requirements are either still in the works, or have not even been proposed yet. Meanwhile, lobbying continues with hundreds of meetings having occurred between banks and their lobbyists on the one hand, and Treasury and other regulators on the other. Whoever becomes the next Treasury secretary ought to have a firm grasp of financial markets and the risks to stability to our financial system.

Dodd-Frank assigns responsibility for assessments of and warnings about threats to financial stability to the recently created and largely non-transparent Financial Stability Oversight Council, or the FSOC, which is chaired by the Treasury secretary.

In addition, the secretary of the Treasury plays a key role in the international financial sphere. This is an area where we have seen a real lack of leadership, in my opinion, from our administration. With no real U.S. economic leadership, the world is left with a policy vacuum. If the United States does not lead, other nations will.

Recent analysis shows that China has now surpassed the United States as the world’s largest trading nation. Furthermore, the risk of international currency wars, at least it appears to me, is rising, which could push the U.S. back into a recession or worse.

Statements by U.S. political leaders at international conferences about currency policy are not enough. Without a clear policy and a coherent strategy to advance that policy, the international monetary system will continue to be adrift.

Our future economic competitiveness depends upon the United States leading efforts to establish a fair, stable, and transparent global financial and currency system based on market principles. Now, I look forward to hearing your views about these important matters before the Treasury, and your plan of action if you are to be confirmed.

In addition, I understand that you worked as managing director and chief operating officer of two units of Citigroup. But it is unclear what your exact roles and responsibilities were there. So far, you have indicated that you coordinated operations, technology, human resources, and maybe legal and financial activities. But we know very little about your knowledge and practices for which you were the chief operating officer.

Some of the units’ activities included proprietary trading along with sales and marketing of risky investments. If you knew about the marketing of sales of these investments, it would be instructive for us to know, or to find out, what you knew. If you did not know much about them, then it would be instructive for us to find out why and to determine exactly what your responsibilities were during your years at Citi when you were well-compensated, including times when Citigroup was being propped up by American taxpayers.

Now, these are important questions, because if you are confirmed as Treasury secretary, you will be responsible for overseeing the implementation of regulations directed at some of the very practices undertaken by the Citi units that you once operated.

For example, as Treasury secretary you would be responsible for coordinating implementation of the so-called Volcker Rule, which is intended to separate proprietary trading from federally insured financial activities. You have stated that you support the Volcker Rule, yet you were the chief operating officer over two units that engaged in the sort of activities the Volcker Rule is meant to prevent. Therefore, if you to be confirmed it could lead to an awkward situation in which your role as chair of the FSOC — as chair of the FSOC, you would effectively be saying to financial firms, “Do as I say, not as I did.”

Now, these are not trivial matters. Indeed, they bear directly on your qualifications to serve as the next Treasury secretary. If the committee was given time to examine your record more thoroughly before today’s hearing, I’m sure many of these questions would have already been answered. As it is, we’ll have to explore some of these matters here today.

Finally, I just want to mention that when we met to discuss your nomination, I told you that I was very dissatisfied with the Treasury Department’s level of responsiveness to our letters here, both the chairman and mine, as well as letters from our colleagues. You pledged to me to, quote, ” … maintain frequent consultation with members of this committee.” unquote. Now, I do appreciate that promise and want you, if confirmed, to be responsive in a timely manner.

Once again, welcome to the committee. Pleased to have you here. I want to thank you for willingness to serve. I want to than you for your past service. There’s no question in my mind you’re a very bright and able person.

And Mr. Chairman, I look forward to what I hope will be an informative hearing.

Thank you.

BAUCUS:

Thank you, Senator. Thank you very much.

Senator Schumer and Senator Domenici have asked to introduce the witness, but before they do, Mr. Lew, I’d like to give you the opportunity to introduce your family.

LEW:

Thank you very much, Mr. Chairman.

I would like to introduce my wife and my daughter, who are with me here today. My wife, Ruth, my daughter, Shosana (ph). My son Danny and his wife, Shahava (ph), and my grandchildren couldn’t be here today, but I’m very happy to have my wife and my daughter with me.

Thank you.

BAUCUS:

So why don’t you stand up so we can all recognize you and show our appreciation, Ruth?

(APPLAUSE)

These jobs are a huge sacrifice. It takes a lot of understanding and tolerance (inaudible) they are so time consuming.

Senator Schumer?

SCHUMER:

Thank you, Mr. Chairman. Thank you and Ranking Member Hatch, members of the committee, for the opportunity to introduce Jack Lew and for moving this nomination in a timely manner.

I am delighted and proud to introduce to this committee my friend and a great New Yorker, Jack Lew. No matter how many years he spends in Washington, Jack, who grew up in Queens, the neighboring borough from which I live, and Ruth, his wife, who grew up in my congressional district, will always have New York in their bones.

And I’m delighted to endorse Jack’s nomination to serve as the next secretary of the Treasury. I do so wholeheartedly, without any reservation. Jack is an accomplished public servant, renowned for his economic acumen, managerial prowess and his commonsense approach to solving tough problems. He is uniquely qualified to take the helm of Treasury in these precarious economic times, as you so well outlined, Mr. Chairman.

Jack’s no stranger to many of us in this room. He and I first met three decades ago when I was a wide-eyed freshman congressman, and Jack was a top aide to House Speaker Tip O’Neill. We became friends. He and his colleague, Ari Weiss, took me and his little group under his wing and taught us a whole lot.

I know that Tip had a tremendous influence on Jack, and it’s clear that Jack shares the late Speaker’s indefatigueable work ethic and sense of duty. He shares another thing with Tip O’Neill, bipartisanship. Speaker O’Neill was renowned for sitting down at 5:00 o’clock with President Reagan and trying to work problems out. And Jack was heavily involved in that, and continues to be a bipartisan person who wants and is successful at working with both parties.

And you mentioned the issue of trust, Mr. Chairman. There is no straighter shooter than Jack Lew. He is one of the most honorable, honest, and decent men in Washington. And when he gives you facts, they are backed up with research. When he gives you numbers, just the same. From the time I knew Jack when he started in Tip O’Neill’s office, he would always outline both sides of the argument and give each without bias. He’d then tell you where he came down, but he always let you make your own judgment.

And that has propelled him to an extremely successful career that so well qualifies him to be Treasury secretary. He joined the Clinton OMB in 1994, distinguished himself not only as a knowledgeable policy wonk adept at navigating the intricacies of the tax code and the federal budget, but also at the same time as an agile leader with a knack for operations.

He rose to become OMB’s chief operating officer, and then in 1998 was named director. When Jack left OMB at the end of the Clinton administration, it was the last time the federal government had a surplus, an unprecedented surplus, of $236 billion. It wouldn’t have happened without Jack Lew’s leadership, knowledge and expertise.

SCHUMER:

In 2009, Jack once again answered the call to public service, returned to D.C. to become deputy secretary of State for management and resources, helping Secretary of State Clinton transform the State Department, and honing his skills in the international arena, skills which I am confident will prove useful as he works to address the myriad global economic challenges he will be confronted with in his new role as Treasury Secretary.

And as we all know, Jack spent the last two years serving the administration in a second stint as Director of OMB and as White House Chief of Staff.

During this tenure in these positions, he has ably guided negotiations on a range of fiscal issues — passage of the bipartisan Budget Control Act, while he ran OMB, brought annual non-security spending to its lowest level as a share of the economy since Dwight Eisenhower sat in the Oval Office, and the recent end-of-year agreement on the fiscal cliff has kept taxes low on the middle class and at the same time decreased our nation’s deficit by more than $700 billion.

Now, there are many, many subjects a Treasury Secretary must cover, and not every — not any Treasury nominee can have expertise immediately in all of them. But Jack has an uncanny ability to delve into a subject, learn it, study it, and master it in a factual and non-ideological way.

So I look forward to working with Jack and the rest of the president’s economic team as we continue to focus on protecting the middle class and combatting our nation’s long-term economic challenges.

Mr. Chairman, in conclusion, I’m confident this nominee possesses the expertise and work ethic necessary to excel as the Secretary of Treasury. He won’t be an ordinary or just workmanlike Treasury Secretary. He’ll be a great one in the mold of Albert Gallatin and of Alexander Hamilton, another New Yorker, one who I never knew, unlike this — hopefully this one.

I fully support this nomination and urge that we move as quickly as possible so that the Senate can confirm this nominee and Jack can get on with the important tasks necessary to continue moving this country forward economically.

Jack, I congratulate you on your nomination.

BAUCUS:

Thanks, Senator.

Senator Domenici.

DOMENICI:

Senator Bennet, you know, you may not think you’re getting old, but clearly I am. I remember that we had a Bennet who was Chief of Staff for the Budget Committee and I was a very young and on the bottom, bottom chair, and guess who that Chief of Staff was? He had the same name you do. He happened to be your father.

What a terrific thing, to come and see you today after that experience. I think it’s great to be with you.

This committee, the senators know full well, has jurisdiction over 50 percent of the federal budget, and if we are to put the country on a sustainable fiscal path for the future, this committee will play a critical role in achieving that goal working with the president and particularly with the Secretary of the Treasury.

So as you confront the fiscal challenges ahead, I cannot think of anyone more qualified or more ready for this job than Jack Lew. He not only understands the challenges our country faces, he has the experience and judgment to confront them.

As many hear know, Jack has been a dedicated service for many years, servant of the people. But what many here may not know is where the dedication that he has originates.

I think it originated from Jack’s father, who was born in Poland and came to America at the end of World War I. His mother — his mother’s family made this journey for — from Europe to America in just a few years later.

You would say that Jack’s parents were among the fortunate ones. They left Europe before it was too late. And with that good luck came a deep love for the United States, a country that was, for them, synonymous with freedom, hope, and opportunity.

The bulk of Jack’s career has been spent in public service, beginning here on Capitol Hill in 1973. I first encountered Jack briefly when he was Speaker O’Neill’s liaison to the Greenspan Commission, which negotiated a bipartisan solution to reform Social Security in 1983.

And anyone that doesn’t think that was a major, major reform, just go back and read it and go back and look at the facts. From that dedication of which he was part of, a giant step took — was taken to make Social Security solvent for 20, 30, 40 years. That’s something real, not something just to talk about.

He’s earned the trust of two presidents. He has overseen the budget of the entire executive branch in two administrations. I know this firsthand. During long and difficult budget negotiations in 1990s, we worked together to reach an honorable compromise and balance the budget.

I can say without equivocation that Jack was always willing to listen, to work with members of both parties, to seek and find common ground. As my friend and colleague in the Bipartisan Policy Center Alice Rivlin has said, and I quote, “Jack is a very fair person.”

Former Secretary of the Treasury Bob Rubin wrote me to say that “Jack has the ability to understand complex matters quickly and well, very good judgment and ability to work effectively with the administration, colleagues, and members of Congress.”

That was told to me by Bob Rubin, qualities all that our next Secretary of the Treasury is going to have to have if we’re going to pull our country out of the fiscal mess we are in.

We talk about job creation. It’s clear to me that we will get real job creation when we get real deficit reduction, but I’m not here for that. I’m here — on a personal note, I found Jack to be a man of integrity. He worked hard and can be tough and as a negotiator, he’s awful tough, but when the time comes to settle, things are settled.

He believes and plays it straight. We have had differences of opinion over policies, but we have always been able to work through them.

DOMENICI:

Again quoting Alice Rivlin, “The press keeps asking me,” this is her saying this, “keeps asking me for funny anecdotes about Jack. Jack, knowing that I had worked with him over the many years,” continues Alice saying this, “the truth is,” she says, “is that Jack isn’t a funny-anecdote guy. He’s just an able, dedicated straight shooter.”

I guess you can’t be both. He definitely is the — of the two, he chose the right one.

Congratulations on being a straight shooter.

From my current position at the Bipartisan Policy Center, we look forward to working with Jack in the months ahead and share views on reigning in the health care costs in a fair way and reforming our tax code to make it a growth-oriented taxation.

Mr. Chairman and members of the committee, I know that Jack is a decent man, a serious policy-maker, who has all the right mixes of qualifications, knowledge and vision to serve as the next Secretary of the Treasury.

And it’s my hope that you will approve his nomination swiftly. It’s a pleasure to be with you all and with him. Congratulations. Thank you.

BAUCUS:

Well, thank you, Senator. Thank you, Senator Schumer, thank you, Senator Domenici, very very much for those glowing statements. We all appreciate it and I’m sure Mr. Lew especially appreciates it. Thank you very very much.

OK, Mr. Lew. As you know, our usual practice here is for statements to be submitted to the record, but a person to summarize — briefly summarize their statements for about five minutes or so. But if you want to speak longer than five minutes, you know, take your time.

This is a very important position. Why don’t you proceed?

LEW:

Thank you very much, Mr. Chairman, Ranking Member Hatch and members of the committee. It’s a real privilege to be considered by this committee, as the president’s nominee, to be Secretary of the Treasury.

I’d like to thank Senator Schumer and Senator Domenici for their very gracious and kind introductions. It’s been my great fortune to work with both of them over many years and I’m honored that they were here this morning.

I am especially thankful to my wife, Ruth, my daughter, Shoshi, my son, Danny, his wife, Zahava, and my grandchildren. As you noted, public life demands much from our families, and I deeply appreciate their support and sacrifice over many years of long days and missed family time.

While my parents are only with me in spirit today, I know I sit here because they nurtured in me lasting values and an enduring commitment to serve our country.

I am grateful to President Obama for asking me to lead the Treasury Department. It has been my honor to serve in his cabinet and as his chief of staff, and I am humbled by his continued faith in me.

Finally, I want to thank the Members of this Committee for meeting with me over the last weeks and for sharing your insights. This committee plays a singular role in defining our tax, trade, health care, and Social Security policies.

And with a long history of cooperation and collaboration, this committee stands is a clear example of how bipartisanship can thrive and produce real results for all Americans. I pledge that if confirmed, I will maintain frequent consultation with you in accordance with that spirit of respect.

Forging bipartisan consensus is not an abstract idea for me. It is the fundamental thread that spans my professional life. Early in my career, when I worked for the great Speaker Thomas P. O’Neill, Jr., I took part in negotiations that led to the historic agreement with President Reagan to save Social Security.

Under President Clinton, I helped negotiate the groundbreaking agreement with Congress to balance the federal budget. And as budget director, I oversaw three budget surpluses in a row.

My experience in leadership positions outside government at New York University, where, I might add, the highest honor the university has is the Gallatin, after Albert Gallatin, who also founded NYU, which is the largest private university in the United States.

And at Citi, it’s proven to me that working collaboratively to solve problems and drive change is a universal challenge.

With my return to public service in this administration, I worked alongside Secretary Clinton to promote our national security and international economic policies around the globe and to reinvigorate America’s leadership abroad.

At the Office of Management and Budget, I pursued sound fiscal policy by working with Democrats and Republicans to pass the Budget Control Act, which has reduced federal discretionary spending to historically low levels.

Finally, as White House Chief of Staff, I adhere to the principle that we best serve the American people when we find common ground to move the country forward.

We saw that principle in action most recently when the administration and Congress acted together to protect the middle class from sweeping tax increases that could have thrown our economy back into a recession.

Because of my experience, I approach the challenges that lie ahead with a clear understanding of their complexity and significance. That’s also given me a profound respect for Secretary Geithner and for the women and men of the Treasury Department whose remarkable record of accomplishment I would like to acknowledge today.

When President Obama came into office, economic conditions were the worst our nation had seen since the Great Depression. The President moved quickly to break the back of the financial crisis, to reignite growth, and because he, along with Congress, responded with great speed and force, our economy is in better shape today.

Over the past four year, the private sector has created more than 6 million new jobs. Taxpayer money that saved the financial system has been mostly repaid. Rules are in place so that the financial system is safer and taxpayers are not responsible if a big firm fails again. The housing market is recovering, and home values are stabilizing.

We have isolated Iran from the global financial system and established toughest sanctions regime in history. We have signed a series of trade agreements to open new markets for American goods and level the playing field for American workers and businesses.

Our auto companies are once again growing, innovating, and creating jobs. And we have made substantial progress reducing our deficit in a balanced way. So we are in a better position today. But as we all know, the work to create a sounder economy and a safer world remains unfinished.

Our top priority is to strengthen the recovery by fostering private sector job creation and economic growth while we make sure our economy remains resilient to the headwinds from beyond our shores.

That means making it easier to sell American-made goods abroad and expand manufacturing in the United States. It means working with our partners around the globe and through the G20 to bolster the international financial system and promote global economic stability.

It means moving forward on financial reform so that the system is less vulnerable to crisis, with greater protections for investors and consumers. And it means reforming the tax system so American businesses can thrive and compete.

At the same time, we must put our nation back on a path of fiscal sustainability. Over the past two years, we have locked in $2.5 trillion in deficit reduction through spending cuts and revenue increases.

And we can do even more to shrink the deficit over the next decade through a balanced mix of spending reductions and tax reforms, and sensible reforms to Medicare that will help the program stay sound in the future.

But even as we move forward with deficit reduction, we need to make certain there’s room for critical investments in education, research, and infrastructure; things that we need for our economy to grow and compete globally.

We also have to avoid doing anything to degrade our national security or derail the economic recovery through abrupt moves in the short term. That’s why we cannot allow the series of harmful automatic spending cuts known as the sequester to go into effect. These cuts would impose self-inflicted wounds to the recovery and would put far too many jobs and businesses at risk.

In closing, I would like to make one final observation. In recent years, some have argued that Washington is broken, that our government cannot tackle the nation’s most serious problems, and that bipartisanship is a thing of the past. I disagree.

I have reached across the aisle to forge honorable compromises my entire professional life. I have been involved in almost every major bipartisan budget agreement over the last 30 years. And I can honestly say that the things that divide Washington right now are not as insurmountable as they might look.

We all share the same goals. We want an economy that’s expanding. We want a private sector that is robust. We want a vibrant job market that gives anybody who works hard the chance to get ahead. We want a financial system that helps families save and channels investment to support innovation and entrepreneurs.

We want a strong housing market. We want a global economy that is prosperous, inclusive, and secure. We want a vigorous manufacturing base and a level playing field for American companies. And we want a government that lives within its means.

It is going to take a lot of hard work to achieve these goals. We have plenty of obstacles, but I have no doubt that we will work together to find solutions to today’s challenges.

Mr. Chairman and members of the committee, I am grateful to you for considering my nomination, and I look forward to answering any questions you may have. Thank you.

BAUCUS:

Thanks, Mr. Lew. I have several questions here that are obligatory questions we ask of all nominees. First, is there anything you’re aware of in your background that might present a conflict of interest with the duties of the office to which you have been nominated?

LEW:

No, Mr. Chairman.

BAUCUS:

Do you know of any reason, personal or otherwise, that would, in any way, prevent you from fully and honorably discharging the responsibilities of the office to which you have been nominated?

LEW:

No, there are not.

BAUCUS:

Do you agree, without reservation, to respond to any reasonable summons to appear and testify before any duly constituted committee of the Congress if you are confirmed?

LEW:

Yes, I do.

BAUCUS:

And, finally, do you commit to provide a prompt response, in writing, to any questions addressed to you by any senator in this committee?

LEW:

Yes, I do.

BAUCUS:

Thank you.

I like your thoughts on tax reform. As I mentioned in my statement, everyone knows the country, the world’s changed dramatically since 1986 and I believe that we must — and this committee is going to engage in substantive, comprehensive tax reform. It’s our duty. It’s our obligation. It’s also our opportunity.

And I’d like your thoughts on provisions we should focus on, actions we should take. And I’d like you also to tell us how you’re going to be working with this committee as we reform the code? What would you focus on first and second, your thoughts on tax reform?

LEW:

Mr. Chairman, I think tax reform is an extremely important priority, and if confirmed I would look forward to working with this committee on a bipartisan basis to help make it happen. I was involved in 1986 tax reform. I know how hard it is. I also know how important it is.

When one leaves Washington, you don’t have to talk to very many people to learn that the American people want tax reform. They want a simpler tax code. They want it to be easier for them to comply with the taxes on an individual basis and know that it’s fair and that everyone is treated in a similar way in a similar position. And as businesses, they want to be able to go about the business of business without having to worry about complicated tax accountant and lawyer consultations.

Now, it’s hard, because the way to do tax reform is to broaden the base and lower the rates. But broadening the base means taking on a lot of very entrenched interests, and lowering rates is of benefit to everyone, but not concentrated with anyone individually. I think we can do it. I think it’s important that we do it. It’s important for competitiveness. It’s important for manufacturing and job creation. It is important in terms of our international competitiveness.

And I think it’s something that there’s a bipartisan consensus that we need to do, but there’s an understanding of how hard it is. And I would pledge to work with this committee to try and get that job done.

BAUCUS:

Could you speak a little more about base-broadening? What areas you think are areas we should focus on? And then, you also mentioned that the base-broadening should be used to lower rates. If you could talk a little bit about that, I’d appreciate that. A little more detail?

LEW:

Senator, I think that on the individual side it’s a very hard thing to do to broaden the base, because it’s taking a look at things that are very much part of the fabric of how people live right now. But, as in 1986, that’s the way you can go about tax reform. It’s a little harder than in 1986, because we haven’t completed the work on the fiscal plan.

We need to have some more revenue as part of the fiscal plan, so tax reform is going to have to be done in an environment where, as we broaden the base, we both contribute to deficit reduction and hopefully are able to lower rates.

On the business side, we have a contradiction in our business tax system. Our statutory rate is very high. Our effective rate is not as high. So when you look at the United States competitively against other countries, statutory rates make it unattractive to look at the United States versus other cases on some occasions. Though for individual firms, their average tax rate is much lower because of all of the complicated provisions, deductions, credits, that are part of the code now.

It will be a challenge to take on those individual deductions and credits, but there’s no other way to bring the rate down, which is something that I think we need to do to maintain our competitiveness abroad.

BAUCUS:

So even though our effective rate might be different than the statutory, you still believe it’s good to proceed, go down the road of corporate reform, reduce a lot of those deduction expenditures in order to get the rate down?

LEW:

I do, Senator. I think that when one looks at a table of international tax rates, it stands out that the U.S. statutory rate is very high. It’s a much more complicated story to tell that the average rate is lower, and it doesn’t affect all businesses equally. And in order to get that lower average rate, one has to take advantage of complicated special tax provisions. We need to have a simpler tax code.

BAUCUS:

We don’t have a lot of time here, but if you could just comment on something that’s been in the Press? And that is, your investment in the Cayman Islands? What was it, how did that happen, why did you choose that investment, and what benefits did you receive?

LEW:

Senator, while I was an employee at Citigroup I had the opportunity to make an investment in a venture capital fund, a private equity fund, that was designed to invest in emerging economies around the world. It was an opportunity that looked to me to be a bit riskier than other investments I had made in the past. I have a very conservative personal investment philosophy. And I thought it was an appropriate risk to take, given the possibility of a higher return.

I invested in the fund as an employee, and I divested from the fund when I was confirmed for a position in the Office of Government Ethics. It was recommended or directed a divestment. My benefit was really very small in the sense that I took a loss when I sold the investment. I always reported all income. I always paid any taxes that were due.

BAUCUS:

Why was the investment in the Cayman Islands?

LEW:

Senator, I actually don’t know why it was organized. I was not involved in setting up the fund.

BAUCUS:

Did you know at the time it was Cayman?

LEW:

You know, at the time I invested I was aware that it was an international fund investing in emerging markets. I knew that much of the personnel for the fund was based in London. I actually didn’t know at the time what the address of the partnership was.

BAUCUS:

OK. And when did you divest?

LEW:

I divested in 2010 when I became OMB director. The fund was disclosed in all of my prior confirmations and on all of my SF- 278s. You know, I’m not aware of any tax benefits that I got from participating in this investment.

BAUCUS:

But where did you pay taxes on that investment?

LEW:

I reported all income related to the investment on my tax forms. I paid all my taxes.

BAUCUS:

But did you pay taxes — is there any taxes on it?

LEW:

I lost money on the investment. So in fact, I lost money, which I didn’t have a great deal of income.

BAUCUS:

OK, thank you.

Senator Hatch?

HATCH:

Well, thank you, Mr. Chairman. I appreciate it.

Following the financial crisis, many lessons were learned. And many financial firms, including Citigroup, have taken actions to improve their performance, operations and responsibilities.

My questions about Citigroup to you, Mr. Lew, relate to the time you were there and not the current Citigroup operations. Frankly, I do not believe that I have a good understanding of your responsibilities as managing director and chief operating officer at Citigroup units.

Now, you have said to our staff, I believe, that you were not involved in investment-level decisions or portfolio management. However, while you may not have selected assets that Citi invested in or managed any portfolio, Citigroup organization charts seem to identify that you were tied to investment research, investment and other such activities like liquid and illiquid operations.

During your time on Wall Street, it was not clear to me whether risky securities that were alleged to be misleadingly marketed and sold to investors, were handled by the units that you oversaw. Now, those securities included a collateralized debt obligation, or CEO, called Class B funding which the SEC has alleged was a product that Citi misrepresented, sold to collect fees and then bet against.

Other risky securities that may have been marketed and sold by a unit that you oversaw include funds called ASTA/MAT and Falcon which some allege to have been misrepresented to have been far safer than they were. Now, Mr. Lew, you have said that you were responsible for operational activities and management with little or no knowledge of investment activities of the very units that you staffed.

Now, I find that somewhat confusing. Some Wall Street participants have, cynically, in my view, labeled your position at Citi as a political trophy position. And I hope we can provide some clarity here to disprove that view.

Now, I have four questions about your Citigroup role at the time you were there. Perhaps you should get your pencil ready, because I’m going to go through all of them and then you can respond.

First one, at Citi did you have any discussions or participate in any email exchanges, including having been cc’d on any email regarding the Class B funding, CDO, or the AST/MAT or Falcon funds?

Second, did you get an understanding of bank risk-taking activities from observing activities in the units that you oversaw, or did you not know about any risky activities in your units?

Third, did you have any oversight role with respect to financial products that were marketed and sold by your units? And if so, did you do anything to curtail risky activities? Or, did you not know about the marketing and sales products in the units that you managed? In which case, I wonder specifically what you did do with regard to them?

HATCH:

And fourth, while managing to provide efficiencies at the units that you oversaw, did you use any services of Citigroup level services which Citi’s website calls, quote,” … one of the largest providers of business process outsourcing services within the banking and financial services sector.” unquote.

Those are the four questions I’d like to have you answer, if you’d take time to do so.

LEW:

Thank you, Senator Hatch.

You know, let me start with maybe answering the part about my role, because everything I think falls within that. I was chief operating officer, first, of the global wealth management business and then — that was for two years, and, then, for about a year, the alternative investment business.

As the chief operating officer, I was responsible for a number of broad-ranging management of the business kinds of activities. I had substantial responsibilities in terms of large, national and international field organization system.

I mentioned to Senator Baucus one of the early trips that I took was to Billings, Montana, to visit our financial advisors because I want around to make sure that our business was working on the ground.

In New York, I was responsible for the budget of running the business, which was a very large, as I say, national and international operation.

I was not in the business of making investment decisions. I was certainly aware of things that were going on. I was working in a financial institution. I learned a great deal about the financial products, but I wasn’t designing them and I wasn’t opining on them.

I take away from that experience a deep understanding that there are risks that we need to be very much on guard against and I would be delighted to discuss those policy considerations as we go forward.

You know, with regard to specific e-mails and phone calls, it’s quite a number of years. I don’t recall specific conversations.

There was a very bad financial situation going on in that year. There were products that were widely understood to be troubled. So, yes, I was aware that there were funds that were in trouble.

I didn’t have responsibility for the funds themselves, but I was aware that those difficulties were going on.

HATCH:

My time is up, Mr. Chairman.

BAUCUS:

Following the early bird rule, next Senator on the list is Senator Schumer. He’s not here.

Senator Grassley, you’re next.

GRASSLEY:

Already?

BAUCUS:

Yes.

After Grassley, it’s Stabenow, Crapo and Cantwell.

GRASSLEY:

Mr. Lew, on January 16, 2009, Citigroup announced losses of $18.7 billion; the same day Citigroup received a $301 billion federal bailout through a loan guarantee on its mortgage assets.

One day later, you received a bonus from Citigroup for over $940 thousand for your work as chief operating officer on the alternative investment unit, which was responsible for much of the loss.

Were you aware that Citigroup was about to receive a multibillion dollar federal guarantee when you accepted your bonus?

LEW:

Senator, I was aware of the condition of Citi and of the TARP program, yes.

GRASSLEY:

OK. Explain why it might be morally acceptable to take close to a million dollars out of a company that was functionally insolvent and about to receive about a billion dollars of taxpayers’ support.

LEW:

Senator, in 2008, I was an employee in the private sector compensated in a manner consistent with other people who did the kind of work that I did in the industry and I was compensated for my work. I’ll leave for others to judge.

GRASSLEY:

Now to something that President Obama has made a big deal. On May 4, 2009, President Obama said about Ugland House, which is where you invested your money overseas, “On the campaign, I used to talk about the outrage of a building in Cayman Islands that had over 12,000 business. And I’ve said before, either this is the largest building in the world or the largest tax scam in the world.”

You invested more money there than the average American makes in an entire year. Do you believe the president was accurate in referring to the building which housed your investment as, “The largest tax scam in the world?”

LEW:

Senator, I’m happy to answer questions about my own investments. I’m also happy to answer questions about tax policy regarding the sheltering of income from taxation.

I reported all income that I earned. I paid all taxes due. I very strongly believe that we should have tax policies that make it difficult, if not impossible, to shelter income from taxation.

GRASSLEY:

Well, there’s a certain hypocrisy in what the president says about other taxpayers and, then, your appointment, but let me move on.

You’ve told finance committee staff that you were unaware of Ugland House and its association with tax scams. That makes me wonder where you have been for the last eight years.

The chairman of this committee as well as a former budget committee chairman, whose chart is behind us, highlighted Ugland House as the nation’s — to the nation several times. And, as I said, President Obama preached about it.

It’s no wonder that maybe you and the president haven’t proposed legislative solutions to what you consider or what the president considers a tax scam.

So my question, how can you be the president’s top tax enforcer if you haven’t heard of this off-shore loophole?

LEW:

Senator, this committee has reviewed by taxes for many years. I think it’s clear that I reported all income that I’ve earned. I’ve paid taxes as appropriate.

I believe very strongly that people should pay taxes on their income. I have very strong views on how the tax code should be constructed to encourage investment in the United States and I am happy to answer any policy questions you have.

GRASSLEY:

Ugland House ought to be shut down?

LEW:

Senator, I’m actually not familiar with Ugland House. I understand that there are a lot of things that happened there …

GRASSLEY:

OK, let me move on then.

LEW:

Yes.

GRASSLEY:

A case filed in the New York State Supreme Court in which NYU, New York University, is the plaintiff, states that at the same time you were executive vice president, New York University invested in the Ariel Fund, a Cayman Islands, open-ended investment company, “created to be used for United States tax exempt investors and foreign investors.”

Nonprofits sometimes seek to avoid paying taxes on unrelated business income through off-shore vehicles like funds in the Cayman Islands.

So, question, while you were the executive vice president, did NYU have investments in the Cayman Islands to avoid taxes on unrelated business expense and if so, how many millions of dollars did NYU have invested in the Caymans?

LEW:

Senator, when I was at NYU, I was not aware of any policy to invest in a manner that you describe. I was in no discussions regarding the (inaudible).

I was involved in discussions about making sure that the endowment was invested to have as good as a return as impossible. And the goal of the investment committee at NYU was to try and have a diverse portfolio that would help the university get income from its endowment.

GRASSLEY:

OK, I’ll close then with this conclusion so you’re unaware of it and I take your word for it, but it’s certainly a poor reflection on your tenure there if you didn’t know about these investments.

You were paid over $800,000 more than the actual president of NYU to know what was going and I’m surprised you didn’t know what was going on.

Thank you, Mr. Chairman.

BAUCUS:

Thank you, Senator.

Next, Senator Stabenow.

STABENOW:

Thank you very much, Mr. Chairman.

And, Mr. Lew, welcome back. I understand this is your sixth confirmation hearing so you are certainly a glutton for punishment, but we welcome you. We thank you very much for your service.

And, Mr. Chairman, I actually am optimistic listening to the concerns about closing off-shore loopholes. I think we may have something here that we could do together to off-set sequestration.

I think it would be wonderful to work together on something that would close loopholes that clearly we’re seeing bipartisan support — concern about today, which I would love to work with members on.

I’d like to talk to you about, no surprise, one of my favorite subjects which is growing the economy with manufacturing. I was very pleased to hear the president’s comments last night. We all know that while we’d love to have things go faster, manufacturing has been leading the recovery in growth.

And when we look at tax reform and what we need to do to be competitive internationally and so on, I’m very interested and concerned to make sure that we continue to make things in America and we innovate in America.

So I wonder if you might speak to how we, in tax reform, encourage making things in America, American manufacturing, and things like the Section 199 manufacturing deduction, how could we make it more effective, as well as the R&D credit.

I mean what would you see in terms of being able to continue to innovate and make things in America and focus on that in tax reform?

LEW:

Thank you, Senator. I think that one of the real reasons for taking on tax reform — I would say the major reason for taking on tax reform is to grow the economy, create jobs and improve the environment for manufacturing in the United States.

LEW:

Right now, we have a tax code that has a lot of provisions that benefit manufacturers of one kind or another, but they’re quite complicated, they’re quite particularistic and, overall, we have a tax code that has a lot of provisions that benefit manufacturers of one kind or another, but they’re quite complicated, they’re quite particularistic and, overall, we have at tax code which, when you look at it, suggests that we have a very high statutory rate for income.

I think that if we approach business tax reform from the point of view that our goal is to try and simplify it, the system, that is immediately going to help businesses because right now businesses have to start by spending money on accountants and lawyers just to get started. We can simplify it to lower the bar.

Secondly, as the president outlined in his proposal last year, we ought to have a preference for manufacturing in the reformed tax code.

And I think that the challenge, as I mentioned in my response to the chairman, is going to be that we all know that a tax code which has a broader base and a lower rate is going to be one that makes it more attractive to invest in manufacturing.

But we also know that it’s hard that each of the individual provisions in the tax code is very important to one or another industry.

It’s going to require bipartisan consensus, it’s going to require working together to do what’s in the greatest good of the economy and the American people even if it does mean taking away some of the particular benefits that go to one or another part of the economy.

In particular, one of the things that we’ve focused on is we should take away the incentives for things that — oil and gas exploration can’t move off-shore. The resources are here.

We need to look at what is it that enters into the business decision when you choose between locating in the United States or overseas and have the tax code be helpful not hurtful in terms of locating in the United States.

One of the things that has been very encouraging in the last few years is that, even with the tax code as it is, more and more businesses have been deciding they want to invest in the United States.

The quality of our workforce, the stability of our system and our economy makes the United States a very attractive place to invest. If we fix our tax code, there’s no limit to how much we can grow.

STABENOW:

I want to just emphasize that. We have about 17 million people that work in this country because of manufacturing, 16 million because of agriculture. If we focus on making things and growing things, that’s really the foundation of the economy.

One final question on foreclosure crisis. I believe there is much more to be done even though things are improving. What would you like to see done?

LEW:

Senator, we have worked very hard over the last four years pursuing multiple paths to help homeowners either refinance or modify their loans.

And one of the things that we’d very much would like to do, which the president addressed last night in the State of the Union, is enable homeowners who are paying their bills, who are underwater through no fault of their own because of the financial crisis, to be able to refinance their loans.

Right now, you’ve got homeowners who are locked into 6, 7, 8 percent mortgages when they should be able to get 3 1/2 or 4 percent mortgages. We ought to be able to do that on a bipartisan basis.

STABENOW:

Thank you very much.

Thank you, Mr. Chairman.

BAUCUS:

Thank you very much, Senator.

Senator Crapo.

CRAPO:

Thank you very much, Mr. Chairman.

And, Mr. Lew, I appreciate having you here with us today. I want to continue to focus on tax reform, as we did in our private discussions.

As I’ve shared with you, in my work with the Bowles-Simpson Commission and in other areas of trying to address putting together a comprehensive package and debt reduction package, I view tax reform, as I’ve heard you say today, to be a key part of that.

Not because of the need to raise revenue, which is where you and I may have some disagreement, but because of the need to generate growth and have a pro-growth element in the recovery effort for our country in dealing with our debt crisis.

And that’s I think the first part of the question I want to ask you and I think you’ve already answered it, but I what to get it very clearly on the record.

To me, in the last few months, the discussion over tax reform has taken, in some cases, a concerning turn. And I’ve heard the term, “tax reform” used all too frequently to be a revenue-generating device.

I understand it can be utilized to generate revenue, but please tell me why — again, why you believe take reform is needed in our economy.

LEW:

Thank you, Senator.

As I think we discussed in the conversation that we had, I considered it a lost opportunity in December and January that we didn’t get to a final agreement on our fiscal challenges so that we’d be able to debate tax reform after resolving the fiscal challenge.

I think that there is still more work to be done in terms of the fiscal path and we need more revenue to be part of it. I think that separate from that, there’s a need to do tax reform.

And in clearing out the tax code and broadening the base, there’s room to raise the revenue that we need. Just a few months ago, there was a lot of discussion as to whether or not we should raise tax rates or raise revenue by broadening the base.

Well, we did the tax rates. We didn’t broaden the base. So there’s room in the conversation for both and I would look forward, on a bipartisan basis, to achieving the goal both of being on a sound fiscal footing.

And, equally importantly, perhaps more importantly in terms of the long-term growth of the economy, having a tax code that makes sense for individuals and businesses so that we have a thriving investment environment.

CRAPO:

I agree with that. I think that we would have been hard- pressed to create a tax code if we tried that was more unfair, more complex, more expensive to comply with and, frankly, more anticompetitive to our own business interests than we have now and we need to correct that. And I look forward to working with you in partnership on that.

I’d like to get into to a little bit more detail. If you look at the corporate side and you’ve discussed the need to lower the statutory rate and I agree, do you have a target rate in mind?

I know a lot of us have talked about 25 percent — at least a level of 25 percent that we need to reach.

LEW:

The challenge, Senator, is how far we’re willing to go on broadening the base. We don’t have the ability to lose revenue as we go through business tax reform. I think it’s challenging to get all the way to 25, but I think the more aggressive we are at broadening the base, the more progress we’ll be able to make at lowering the rate.

CRAPO:

Do you agree on the corporate side that we should be revenue-neutral? My understanding is that, in the past, we’ve focused on at least the corporate rate reforms being revenue-neutral.

LEW:

I think the primary goal in business corporate tax reform is to have the tax code be simplified and to be consistent with a more robust investment environment, particularly as we are in a competitive environment with other countries.

I think it can be done in a revenue-neutral way. I don’t believe we have the ability to raise the revenue that we need to deal with our fiscal problem and have it cost revenue as we go through business tax reform.

CRAPO:

And with regard to business taxation, many have made the argument, and I tend to agree with it, that we need to pay very close attention to the individual code with regard to its impact on business taxation.

Do you think we can do corporate reform without also doing individual tax reform?

LEW:

Senator, I think we could, but I don’t think it would be the best way to do it. I think the best thing for us to do both individual and business tax reform.

You know we do have a combination of different forms of business organization. The closer we get to a place where the corporate tax system is one that is open for more business, the more competitive we’ll be. But we need to keep both in play.

Right now, the challenges are many, but I think once we’re doing tax reform, we should do it right and we should do both.

CRAPO:

I wanted to get into some Dodd-Frank issues, but I see my time’s running out. One last quick question on the corporate reform side, are you open to negotiating a competitive territorial system in the corporate code?

LEW:

Senator, I think that, as we lower our rate, we ought to be looking at having a kind of minimum worldwide tax rate where we’re trying to level the playing field.

We actually have a debate between whether we go one way or the other. And we have a hybrid system now and it’s a question of where we set the dial. I think that there is room to work together on this.

CRAPO:

Thank you.

BAUCUS:

Thank you, Senator.

Senator Cantwell.

CANTWELL:

Thank you, Mr. Chairman.

Congratulations, Mr. Lew, on your nomination. And it’s great to see your family here today. And I definitely have a lot of fiscal, financial question for you.

But, you know, you mentioned in your opening statement about Medicare and getting the delivery system right. The president, last night, mentioned that in his State of the Union Address about focusing on quality as opposed to frequency and tests.

And I was curious, were you involved, as Chief of Staff, in the implementation of the Affordable Care Act?

LEW:

Senator, both in my time at OMB and as Chief of Staff, I did pay attention to the implementation of the Affordable Care Act. Enacting the law was a critical step, but implementing it is necessary in order for it to be in place.

CANTWELL:

Do you think that if there’s a provision of the Affordable Care Act that is supposed to be implemented, it should be implemented in 2014?

LEW:

We have been working very hard to be on schedule, to getting the exchanges set up and having the Affordable Care Act in place in 2014. Many departments have been involved in that in addition to the Department of Treasury, the Department of HHS, the Department of Labor, the Office of Personnel Management and it was not always easy because we had to work mighty hard to get the funding to implement on schedule.

But I feel we’re in a pretty good place.

CANTWELL:

Well, there’s one provision that’s not being implemented, the Basic Health Plan, and I know the president tried to express an opinion to help push things along. But I guess my question is, do you think if the Affordable Care Act specifies that the Basic Health Plan should be implemented in 2014 that it should be implemented in 2014?

And I guess I’m also asking, is there a bias somewhere in the administration against lower-cost managed-care delivery systems that the Act calls for in exchange for the exchange?

Is there a bias over there that somehow the Affordable Care Act means implementing only those pages related to the Exchange and punting everything else even though they have been more cost-effective delivery systems?

LEW:

Senator, I am not aware of any such bias. I do know that there’s been an enormous amount of work to get the exchanges set up and the various parts of the kind of architecture. I’d be happy to follow up and work with you on that specific issue and find out where it is in the — in the kind of queue and follow up on that.

CANTWELL:

I would greatly appreciate that. I think there is a very big concern on my part and several other members that somehow people may be asking states to forego what have been more cost- effective solutions for that population just above the Medicaid level in exchange, and also maybe even making it more expensive and putting those states, pushing that population onto the exchange as some Holy Grail.

And I can tell you that we think it should be implemented and it should be implemented now. So I certainly will take you up on that.

I want to turn to financial issues. You and I have had a chance to talk, and we could talk for hours, but just so everyone understands your philosophy on the regulatory side of things.

Do you believe in the reimplementation of Glass-Steagall?

LEW:

Senator, as we discussed when we had this conversation, you know, Glass-Steagall had been, over the years become something of an anachronism, and much of the activity in the — in the financial world have gotten beyond it.

And I think the problems we had in the — leading up to the financial crisis were evidence that our financial regulatory system did not keep pace with the growing complexity of the financial system.

Now, I think Dodd-Frank was a critically important step to reasserting proper regulatory oversight of an industry that’s critical to the health of our economy. I think as we go forward, we have to ask questions. As we complete the implementation of Dodd-Frank, are there more actions that are needed? And they have to be actions that make sense in 2013.

So I think going back, while I’m a student of history and — and New Deal history in particular is of great history to me, I don’t think it’s just resuscitating a 1930s statute. It’s a question of what do we need to do to manage the financial challenges now.

CANTWELL:

So I’ll take that as a no. And to that point, I mean, I — I don’t see how you contain this issue as we now see the CFTC and the treatment of swaps and futures as different clearing measures. Aren’t you worried that that’s going to provide more systemic risk as well?

LEW:

You know, I — I — I think that if you — if you look at the issues, things like margin requirements for swaps, it’s very important that we get on top of regulating things that create systemic risk.

And I — I didn’t mean to be answering the prior question yes or no. I think it’s just a little bit more complicated. I think that the question of is there a need for any further consideration of — of financial regulation is one that just comes in sequence after implementing Dodd-Frank.

And I come to the issue open-minded, knowing that we can’t let what happened leading up to 2008 happen again. We can’t let a regulatory system become outstripped by the complexity and organization of a financial system which our economic life depends on.

CANTWELL:

Well, I’ll look for more discussion on that point, then.

Two other issues I wanted to bring up. I just don’t understand the administration’s idea of capping the municipal-bond tax deduction at 20, whatever, is it 28 percent?

If we want to encourage more investment, one thing I do believe that the federal government does is provide cheap capital, whichever way, and when all these banks are putting all these monies into derivatives and, you know, you can’t convince me that they’re really interested in the bottom line here.

So to me, a policy on capping the municipal bonds at 28 percent, tax-exempt bonds, I’m curious as to whether you’re going to continue that policy.

And also, on the Foreign Investment in Real Estate Act, whether you’re — whether you think the Treasury Department is going to complete that IRS notice and take action that would help jump-start private investment.

LEW:

Senator, the administration’s proposal which would have limited the value of deductions in the tax — top tax bracket to 28 percent was designed to try and restore some equity in the tax code and to generate revenue that we need for meeting our fiscal targets. It wasn’t specifically directed at municipal bonds or at other specific areas of tax activity.

It was also meant to be a placeholder that we really should have tax reform and we should make specific policies deciding what’s in and what’s out and what the proper tax rates are. But we put it in as a fall-back, saying that if tax reform doesn’t happen, this is something that would help us to get to the revenue targets we need.

I’d be happy to follow up with you on these issues of the individual component parts of tax reform, but I would say as a general proposition that the hard decisions in tax reform will in many cases put us in places where there are things that we, many of us, are sympathetic to where we have to curtail tax benefit if we’re going to broaden the base.

And I think as a general rule, if there were a lot of easy decisions, tax reform would have happened a long time ago, and I think there are going to be hard choices to make.

CANTWELL:

And so on the foreign investment, is that something you’re going to take action on, or are we going to have to act here?

LEW:

My understanding is that those rules are progressing. If confirmed, I would — I would pay attention to them and work on them and work with you to — to — to get them completed.

CANTWELLL:

Thank you, Mr. Chairman.

BAUCUS:

Thank you.

The next two are not here, so, Senator Thune, you’re next.

THUNE:

Thank you, Mr. Chairman.

Mr. Lew, welcome. I want to come back to an area where I think there’s room for Republicans and Democrats to work together, and that the issue of tax reform.

What I have on my right here are the 1300 pages that the last time we did tax reform, the White House and the administration put forward in terms of their recommendations.

In November of 1984, 1985, it was Treasury I, it was Treasury II. We talked about this. I think you’re familiar with these documents.

But the, you know, contrast that with the — the — the paper that — that the White House, the administration put out, which is the — this is 25 pages, basically. It’s a corporate tax reform proposal. It’s 25 pages, if you include the title page and the table of contents.

But I’m — my point very simply is the administration, I think, is going to have to do a better job of leading on the issue of tax reform if we’re actually going to get something done on this issue.

This goes into great detail of the myriad complex issues that we deal with in the tax code. And the president talked about, last night, yet again, tax reform and the need for it, but he doesn’t give us any details.

Now, he said he supports lowering rates for businesses that create jobs in America, and I guess the question I would have for you is, does the president, when he says that, agree that rates need to be lowered across the board for all taxpayers, because as you know, there are lots of small businesses that file on individual tax forms and pay rates or pay at the individual tax rates.

So should tax reform include the lowering of rates on individual taxpayers as well as the corporate rate, which I think you’ve already addressed with regard to Senator Crapo’s question.

LEW:

Senator, I think that to proceed on tax reform, we’re going to have to work together, both the executive branch and the legislative branch, and in a bipartisan basis and, if confirmed, it would be at the very top of my priorities to work with you and this committee to do that.

In terms of the best way for an administration to engage, as we discussed in your office last week, I remember Treasury I and Treasury II. I still have the white books and the blue books and they, at the time, were important.

Tax reform in 1986 did not exactly follow either Treasury I or Treasury II. It was worked out by, you know, the two chairmen with the Secretary of the Treasury in the conversation in the kind of regular order process that I think we’ll need to follow again if we’re going to succeed.

You know, I remember not that long ago when I produced a pile of paper roughly that size and it was the Health Security Act in the Clinton administration, and it did not lead to healthcare reform. When President Obama sent a much shorter document to Congress, it ended up going the full distance in getting it enacted into law.

The goal is, how do we get something done, and the means to the end, I’m very flexible on and would be very open to suggestions of how we could work constructively to both provide ideas and technical support. And I think it’s very important.

On the question of rates, you know, we — we are going to — we’ll have to work very hard to broaden the base, to lower the rates, and meet the revenue targets that we have. But I think it’s possible.

LEW:

I think if we’re — if we roll up our sleeves and we’re willing to do the hard work, we can both get our fiscal house in order and work on the top rate — on — on — on the rate structure. It will all depend on how much we’re willing to do.

THUNE:

Well, and I would just — I would just say, and — and I — I understand the whole issue of the healthcare-reform legislation and — and the concern about too much specificity, but, frankly, I mean, this isn’t going to get done unless there is leadership out of the White House.

This is a big issue. It is going to be very hard. There are lots of constituency groups out there, that are very attached to the current tax code. And I frankly and one who believes that we need to do away with — start by doing away with everything, and go with what Simpson-Bowles suggested, and that is just come up with whatever those three rates are; 8, 14, 23?

And then figure out what we want to add back in, and adjust the rates accordingly. But I think the goal in all of this should be getting the rates down, and promoting economic growth. I hear the president talking about raising revenue through tax reform. To me if you get economic growth, you will get revenue, but you’ll get it the old fashioned way. And — and at the same time, create lots of jobs, and get this economy expanding again. So, that ought to be the goal.

And I was suggesting that there’s got to be, I think more leadership than this relative to this when it comes to this issue. Very quickly, one other question and — and I raised this with you as well when we had our — our meeting last week. But the president once again, I think talks about entitlement reform. And — and we’ve talked about the need to address what is the long term driver of debt and deficits, and that of course is our entitlement programs. But again there’s just not the specificity there. And you — you know the president has talked about $400 billion. If you think about $10 trillion in deficits just in the next 10 years, $400 billion looks like a drop in — in the bucket.

And so I guess my question again is, you know where is the specificity when it comes to addressing, what I believe, and I think what most of us agree, is a spending problem. I mean revenues as a percentage of GDP in 2015 are going to be back up to 19.1 percent, and over the next decade, they’re going to average 18.9 percent, which is almost a full percentage point higher than the four year historical average. We’ve got revenue coming in. We have a spending problem. And there’s just no — no proposal that, in any meaningful way addresses that.

And — and you look at the budget that — submitted the last two years, got voted on, both the House and the Senate, didn’t receive a single vote, Republican or Democrat. They’re not serious. And I guess I’m just asking you I hope that you will engage on this issue of trying to do something about what I think is a very, very huge problem for our country’s future, and that’s this massive debt.

LEW:

Senator, I couldn’t agree more that — that we need to deal with our fiscal challenge. I may disagree that it’s a combination. We have a deficit problem, and we’re going to need to solve it with a combination of spending reduction, and restoring revenue. But that’s the kind of thing where we can have a discussion and figure out what the right balance should be. The president says he thinks it should be 2:1, spending cuts to revenue.

In terms of specific proposals on Medicare, the president’s budget that I worked on, had $300 billion of specific savings proposals. They were a mix of different approaches. Some were on the providers. Some were on beneficiaries. Some were adding burden to those who can afford to pay for their Medicare if they retire, and they can afford to pay for it. There’s — there’s going to be a difficult discussion at some point about what the right mix between those different approaches are. The president, in negotiations in December, offered to increase to $400 billion the savings in — in Medicare. And we are prepared to engage on very specific ways to do that.

And the sooner we put the fiscal frame together, the better to get certainty in the economy, and to be able to move on, and create an economy that’s growing, and creating jobs.

(UNKNOWN)

I see my time has expired, Mr. Chairman. Thanks.

BACUS:

Thank you Senator. Next, according to our early bird rule here, Senator Menendez?

MENENDEZ:

Thank you Mr. Chairman. Mr. Lew, congratulations on your nomination. In the previous confirmation hearing as the OMB director, there were a series of questions raised about deregulation, and — and approximate cause of — of the financial crisis. And — and some of the responses that you gave raised some concerns to your commitment to stronger financial regulations. Clearly there’s a difference between being the OMB director, and being the Treasury Secretary in that regard. The Wall Street reform law has given the Treasury secretary a much stronger role in oversight of financial regulation, and you would play a very significant role in regulating our financial sector. So I would like to give you the opportunity to put some of those concerns to rest.

Do you believe that stronger regulation of our financial sector was, and is necessary? And moving forward, if you were confirmed, do you support the full and robust implementation of the oversight rules of the Dodd-Frank law?

LEW:

Senator, I very much believe that Dodd-Frank was necessary, that we needed to modernize the regulation of the financial services industry. And I think that the — the oversight provisions in Dodd- Frank need to be implemented. If confirmed as chairman of the FSOC, it would be a extraordinarily high priority of mine.

MENENDEZ:

OK. One of the other things that you’ll have in your portfolio as the Treasury secretary is the implementation of sanctions. And as the author of the Iran Sanctions Act, I am obviously very interested in making sure that Treasury pursues the law that the Congress passed, you know unanimously, and that our president signed as our last peaceful diplomacy tool to prevent Iran from achieving nuclear weapons. If you are confirmed, will you ensure the robust enforcement of the sanctions provisions that we have given to the president, and that a large universe of them are within the Treasury Department?

LEW:

Yes, Senator. And if — if I might just elaborate on that a bit, I think that our sanctions are unilateral sanctions. Our — bringing the world community together for multilateral sanctions have put in place the strongest sanctions regime in history. And frankly, it’s the only reason I have some hope that we might be able to resolve the issues that we have with Iran peacefully. Sanctions are doing what they need to do. It’s crushing the Iranian economy. GDP is down, the value of their currency is down. Unemployment is up. Inflation is up.

What we haven’t seen yet, is whether that has changed the mind of the regime so that it’s ready to, in a diplomatic process give up the pursuit of nuclear weapons. That is the goal. The president has made clear, it is unacceptable for Iran to have nuclear weapons. We will exhaust all diplomatic and economic means we can, but that all options are on left on the table. I firmly believe that these economic sanctions are far preferable to war, but we must pursue them vigorously.

MENENDEZ:

All right. Now with reference to the president’s State of the Union speech, a good part of what he talked about was a growing economy that growth is an essential provision of achieving some of the deficit questions, as well as the job opportunity questions. What do you see, I read through your testimony, but what do you see yourself as the role of the Treasurer of the United States in being part of creating that growing economy?

LEW:

Senator, the — the secretary of the Treasury is the senior member of the president’s economic team. I have worked on economic teams from various perspectives. One of the things that I think is most important for a Treasury secretary to do, is to always ask, what can we be doing to get the economy moving? What can we do, to help create an environment where jobs will be created? What can we do to create the possibility that every family that’s willing to work hard, has the chance in this country to get a decent life?

Now, I think there are many things we can do. I am an optimist by nature, but I also believe you have to just keep working at it. You know the president proposed in the American JOBS Act, a number of proposals. Last night he thanked the Congress for adopting a few of them, and he urged the Congress to enact the rest. I believe that in the short run, investments in infrastructure make a lot of sense. I think investments in keeping teachers and firemen from being laid off, make a lot of sense. I think in the longer term, we have to get our fiscal house in order, no doubt. But we can’t short-change the investments that build the economy for the future.

Things like infrastructure. Things like education, skills training. We have the best workforce in the world. We have the most vital economy in the world. In order to be there in the future, we need the R&D, and the people and the infrastructure. And that’s got to be in conjunction with a fiscal policy that we can afford.

MENENDEZ:

Well, I hope — closing Mr. Chairman, that you’ll also put in that universe something the president mentioned in his speech last night, which is mortgage refinancing. Senator…

LEW:

Absolutely.

MENENDEZ:

… Boxer and I have a legislation on that. I can’t understand for the life of me why we wouldn’t let, you know thousands of American families refinance, lower their rates to historically low rates, and unlock not only a universe of solidified homeowners, but also unlock an economic potential for…

LEW:

Senator, I couldn’t agree more. I think the work that you’ve done is very important.

BAUCUS:

Senator Cardin?

CARDIN:

Thank you Mr. Chairman. And Mr. Lew, thank you very much for your willingness to continue in public service.

CARDIN:

We congratulate you on the nomination I thank also your family, because this truly is a family sacrifice, and we very much appreciate that. You come to this hearing with an incredible background of public service. I just want to underscore one I think will be very helpful. And that’s your work in the House under Tip O’Neill where you were part of the efforts to reform our Social Security system and our tax code, both of which require bipartisan cooperation, where the — the White House and Congress were under different parties.

We need that desperately today, and I think you’ll be well suited in that regard to bring together Democrats and Republicans to solve our national fiscal issues.

I want to touch on one or two points in the time that I have. First of all, I’d like to deal with the problems that are — have been brought to our attention about small businesses and access to capital.

We’ve had several initiatives to try to help small businesses gain easier access to capital to expand job opportunity with the concerns of community banks. And we see a lot of community banks being merged into larger banks.

There is a real challenge for a small company to be able to get access to capital to expand our economy. Do you have thoughts as to how you, if confirmed as Treasury secretary, can help ease the burdens that small businesses have in getting access to capital?

LEW:

Senator, in the aftermath of the financial crisis, one of the big challenges has been to get capital flowing again. And we have two problems. One is there are businesses that have a lot of cash on their balance sheet and they’re not investing. And we have financial institutions that are — have been slow to get back into the lending business.

I think we’ve seen some progress on the opening of the spigots in lending. You know, it’s going to be a balance. We have to make sure that financial institutions are sound that particularly larger financial institutions don’t get back into a position where they create risk to our entire system or risk that taxpayers will be left with a burden.

For community banks, you know, I think that many of the new laws and regulations quite rightly were written to treat them differently, that small institutions don’t have the same regulatory burdens, the same reserve requirements that large institutions do.

I would look forward to working with you and others on this committee to make sure that we implement the laws in a way that does help get capital flowing.

CARDIN:

I appreciate it. I think the laws are well intended. I think on the ground they’re not working exactly as we all intended. And I’m not blaming the administration or Congress. I think collectively we need to do a better job to help small businesses get the access to capital that we intended, that in too many communities is not taking place that way.

I want to turn to a second subject dealing with our national savings rates. Senator Portman and I worked in the House on dealing with our national savings issues. And during the best of economic times, savings rates in this country were very low. We — it’s important for our economy to have private savings; it’s also important for individuals for retirement security taking pressure off a lot of the public plans.

One of our concerns is that, as we look at tax reform, there’s efforts being made to diminish the tax incentives for individuals to save and companies to set up retirement plans.

That could be very counterproductive for many reasons, including what you’re doing is talking about the timing of tax revenues and on a long-term basis, we are accelerating tax collections, even make our long-term finances not as — not what it should be.

Will you work with us? And do you have suggestions as to how we can improve opportunities for individuals to save, particularly for their retirement?

LEW:

Senator, I believe that it is very important that we have policies that encourage individuals to save for their retirement. We’ve long viewed our retirement system as being something that depends on a combination of Social Security pensions and savings. We’re in a — in a new world, where pensions are a smaller part for many people, which means that savings are going to have to pick up more of the burden.

We’ve had rules that could have been simplified. We have — there are proposals that the administration has made, for example, for people to have to opt out as opposed to opt in to retirement savings. That’s viewed as something that would actually very much increase the likelihood of people saving for retirement.

I would look forward to working with you and others on a bipartisan basis to think through these ideas.

CARDIN:

Let me just say lastly, Senator Stabenow talked about delivery system reform in the health care system. And it’s been very frustrating, because we know that we’re moving forward to a better, more efficient health care system. The problem is how do we get that scored and how we do it in a way that we know will get the savings that we need.

So I just look forward to working with you, because your experience in OMB, your experience in the White House and as Treasury secretary, puts you in a unique position where we can try to really deliver a more efficient health care system for the American people.

BAUCUS:

Senator Cornyn?

CORNYN:

Thank you, Mr. Chairman.

Mr. Lew, let me — good morning.

LEW:

Good morning to you.

CORNYN:

As you know the Medicare Board of Trustees in which the Treasury secretary serves as the managing trustee, must project whether a general revenue funding will exceed 45 percent of Medicare outlays for the current fiscal year or any of the next six fiscal years. This is sometimes called the Medicare trigger. I think you and I talked about this in our meeting in my office.

These funding warnings have been issued since 2007. President George W. Bush submitted a proposal pursuant to the requirement of the statute, which says that when this funding trigger — funding warning is triggered after two such consecutive determinations, the president’s required to propose legislation within 15 days of submitting a budget to reduce spending below the 45 percent threshold.

President Obama has never submitted a proposal pursuant to that legal requirement, has he?

LEW:

Senator, I’m familiar with the report and I know that the acting OMB director’s written to you on it. The view, as I understand it, in the Bush administration, when the prescription drug bill was signed, was that the report was not one that was constitutionally required of the — of the administration. They voluntarily submitted it.

When the — when the Obama administration came in, actually, the budgets that we’ve submitted have had specific Medicare savings proposals. But before I was at OMB, the decision was made not to voluntarily submit the report.

CORNYN:

So the administration is taking the position it’s unconstitutional?

LEW:

Well, as I understand, there’s a signing statement in the Bush administration that said that it is inconsistent with the recommendations clause of the Constitution.

CORNYN:

But they submitted the report.

The Obama administration has never submitted a report, correct?

LEW:

Well, we have submitted specific Medicare savings proposals which, if enacted, would resolve the issue. And I would also add that in 2013, we’ll be out of that zone. So it — the combination of the trajectory we’re on with the savings from the Affordable Care Act and specific proposals of the administration put forward have addressed the substance of the issue.

CORNYN:

Well, the record will reflect that the administration has never submitted a report pursuant to that statute. I hear you saying they’ve submitted other proposals that you think are satisfactory. But it doesn’t comply with the statute.

As you know, the Congress has passed a no-budget, no-pay bill, which says if Congress doesn’t do its job and pass a budget, it doesn’t get paid. And I would just submit that maybe it would be appropriate to say that the Office of Management and Budget not get paid unless they comply with the statutory mandate under the Medicare trigger.

Last night, the president talked about energy production, which I was actually very gratified to hear about. My state has seen job growth go up 32 percent since 1995, compared to 12 percent for the nation as a whole. And a significant part because of energy production.

But I’d like to ask you, do the planned revenue proposals that the president has in mind include tax increases on American energy producers?

LEW:

Senator, the president has proposed eliminating a number of targeted provisions for the oil and gas industry.

There are provisions that I don’t — the administration does not believe are necessary to continue having the industry go through the process of extracting and using those resources. He has proposed other incentives to develop new sources of energy. And we would look forward to working with the Congress to have, as we call it, an all- of-the-above energy strategy.

CORNYN:

So that would effectively raise the tax burden on American oil and gas producers.

LEW:

Well, it would take away a special provision that now is — encourages activity in that area more favorably than in other areas.

CORNYN:

So they would pay more in taxes?

LEW:

It’s going to be part of tax reform that there will be some special provisions that have to be eliminated so that everyone can get a lower rate.

CORNYN:

Well, Mr. Lew, I’m amazed at your unwillingness to answer a simple question.

But let’s move on.

We talked about the level of federal spending and that — we talked about that in my — in my office. The 40-year norm is the federal government spends roughly 20 percent of our gross domestic product.

CORNYN:

Actually, during the Clinton years, which you served, the average spending level was 19.8 percent; under the Obama administration, it’s been 24.4 percent, while revenue has been at 15 percent. Hence the 9-10 percent deficit, difference between revenue that’s brought in and the amount of money the federal government keeps spending, which is obviously borrowed money.

In our meeting in my office, you declined to identify what you would consider to be an appropriate target for federal spending. Are you prepared to do so today? Do you think the 40-year average norm of 20 percent roughly is appropriate? Or do you think the new normal should be what it currently is under the Obama administration, 24.4 percent?

LEW:

Senator, I don’t think with the current situations a new normal. We’re at the end of a recovery from a very deep recession where we’ve had extremely — extreme reductions in revenue because of economic activity and more spending because of economic conditions.

What I do believe is that as we look ahead, we have to recognize what’s driving costs. What’s driving spending is that there are 30 million more people who are going to be eligible for Medicare and Social Security because the Baby Boom’s retiring.

So we have a reality that even if we make sensible changes, there is going to be more activity in those programs because there’s going to be a larger population of people eligible.

So I think to say with — there’s an exact number, based on a historical norm kind of misses the — the — fact that there’s this large cohort moving through the system that we’re going to have to make some tough choices about. I for one think we ought to pay all the Social Security and Medicare recipients benefits and I think most members and Senators do as well.

But that’s what’s driving the number, we’re at a historically low level of discretionary spending as a percentage of GDP. We’re down to the levels of the Eisenhower…

BAUCUS:

Thank — thank you Senator.

Senator Portman?

PORTMAN:

Thank you, Mr. Chairman.

I would just say to the 24 percent congressional budget office as former OMB Director Jack Lew knows just told us last week that we’re quickly going to 25 and — and then 30 and then 35 and then in the year 2042, 40 percent of GDP. So clearly not sustainable.

And CBO also made the point that you simply can’t cache that level of spending with new taxes at least under the income tax code. So as Treasury Secretary, you’re going to have the opportunity to deploy all those OMB skills and I would agree with Senator Cornyn that we need to establish, you know, what is the right level of government? And then be sure that our budget is balanced over time. CBO tell us that revenue has kind of exceeded it’s historical average as you know in the next few years, by 2015.

But let me back up on a — on a question that I’d like to ask you today regarding corporate tax reform and individual tax reform, last night at the State of the Union, the president said a lot of things, and again, as a former OMB Director, I hope you were at least a little uncomfortable with his laying out, what I counted is ten new federal spending programs. I won’t ask you today how we’re spending — how we’re going to pay for those, the president said not a dime in the deficit, which I guess means higher taxes.

But he did say some things I thought were very promising about reform and that was with regard to tax reform and entitlement reform. And he also said something that I — I appreciated which is it’s not going to be easy. And I think that’s part of his role as president and your role should you become Treasury Secretary is to lay this out for the American people in a way as we just talked about the current spending level is unsustainable. We do have to reform these important vital programs so that they are there for future generations.

With regard to tax reform, as you and I have talked about, I — I believe it’s a huge opportunity to give the economy a shot in the arm.

Senator Hatch talked about it, Senator Baucus talked about it in his comments and questions to you, Senator Crapo, Senator Thune and others, but I’d like to dig a little deeper if I could, because I really think this is an area where we can both see strong economic growth and also frankly, find a consensus here between the administration and the Congress on a nonpartisan basis almost because I think it’s one that we all agree needs to be done.

In ’86, back when you were here on The Hill and Ronald Reagan was working on tax reform, we lowered the corporate rate from 46 percent to 35 percent 27 years ago. And we did that very deliberately to get our corporate rate below the — the average of our competitors.

In the intervening 27 years, every single one of our competitors, all of them, have not just lowered their rates, but reformed their corporate tax code except us and that puts us at a clear competitive disadvantage. We’re sitting on the sidelines while investment and jobs and headquarters are going overseas, we can talk more — more about that.

But here — here’s a quote that I like. It’s — it’s from the Secretary of the Treasury equivalent, the chance for the (inaudible) in the U.K. He says, “The headline rate of corporate tax remains the most visible sign of how competitive our country is.” By 2014, Britain will have a 22 percent rate, headline rate that is not lower than our — all of our competitors, but dramatically lower, 18 percent lower than the U.S.

So this is what’s going on; they’re all lowering their rates and — and they’re all reforming their code to make it more competitive except us.

We talked earlier about our rate being 39.2 as an average, that’s the corporate rate when you include the state and the federal rate which is 14 points above the OECD average. You made the point that, well that’s really not the effective rate, the effective rate is lower. But I will just put on the record today the effective rate is still eight points higher than the OECD average. So I don’t want folks to misinterpret what was said earlier when the point was made that our effective rate is lower because it — you — you could have inferred from that that it’s lower that the average. It’s not, it’s still higher and as you have talked about today and I think Senator Crapo discussed, this is incredibly complicated, there are four (inaudible) we don’t have an efficient allocation of resources, therefore, it’s hurting jobs in this country.

So I would just ask you, given that the president’s job council has come out with a report that cutting the corporate rate in a deficit neutral way would boost economic growth, given that Simpson- Bowles also said that given that the Treasury 2012 white paper advocated cutting the corporate rate because it would I quote, “put the United States in line with other major competitor countries and encourage more investment in American.” Given that the OECD has now concluded that a high corporate tax rate is quote, “most harmful to growth.”

Would you agree that revenue neutral tax reform that reduces our corporate rate is a competitive necessity for our country.

LEW:

Senator, I — I very much agree that business tax reform where we broaden the base and lower the rate would be very important to getting our economy moving again.

PORTMAN:

And do you believe that reducing that corporate rate is good for workers? Let me just give you a little background from some of the studies that I’ve seen on this.

The CBO has said that 70 percent of the corporate tax burden falls on workers in there form of reduced wages, fewer jobs opportunities.

There’s a recent study by a Harvard economist saying that corporate taxes depress both real wages and returns to capital. Most of the burden of corporate taxes being born by labor.

Would you agree that corporate tax system we have right now is bad for the American worker and that a corporate rate cut would be good for jobs and wages?

LEW:

I think reformed tax system with a lower rate that encourages investment in the United States and creation of jobs in the United States and creation of jobs in the United States would be good for American workers who would fill those jobs.

PORTMAN:

Great, thank you Mr. Chairman, I look forward to talking about entitlement reform on the second round.

BAUCUS:

Thank you very much.

Senator Brown?

BROWN:

Thank you Chairman Baucus.

I — welcome, thanks for being here.

One of the most important jobs the Treasury Secretary does is — as this chairman of the financial of — of FSOC. You didn’t mention it in your written testimony. I want to ask a little bit about it.

We know that the six or so largest megabanks in our country benefit from lower interest rates and the capital market, some say 50, 60, 70, 80 basis points. Senator Vitter and I have made a request of — of GAO to study what that differential exactly is.

I mean in — in basically it’s a subsidy to reduce funding costs based upon the market’s belief that these banks are in fact too big to fail.

Do you — don’t you think it’s unfair for these banks $2 trillion banks and at least a couple of cases, these megabanks to receive government subsidized funding advantages of community banks in West Akron or Palmeroy or Sycamore, Ohio don’t get?

LEW:

Senator, the administration has proposed a financial responsibility fee that would fall on those large banks which is something that we think is the right way to assess responsibility for past burdens put on tax payers.

In terms of the — the access to different borrowing windows, I’d be happy to follow up with you on the differences between access and community banks and large money center banks.

In general, our view is that we have to distinguish between the large banks that create risk to the system and smaller institutions that are less likely to. And we’ve tried to put less burdens on the smaller banks. I — I — I’m not familiar with the specific issue you’re raising.

BROWN:

Well, I mean you’re — you’re — you’re familiar with the fact that — that these megabanks do get advantages on the capital markets because they — they — they can borrow money at a less expensive rate and I — I mean I’ve kind of heard this from Treasury before, not your — not your responsibility yet but I’ve heard this before. And one of the jobs of FSOC is to eliminate the market’s expectations that the government will — will serve as a backstop in the event of failure.

And I — I — and my question is — is fundamentally (inaudible). GAO with Senator Vitters and my request if GAO finds these subsidies exist, will you commit to working with Senator Vitter and me to take further steps — steps to eliminate that government subsidy, that government support for these megabanks.

LEW:

I’ll be happy to follow up with you, Senator, and understand the GAO report and work on having a system that appropriately encourages smaller banks to have the opportunities that they should have.

BROWN:

And — and — and you — you have not quite that…

LEW:

I haven’t read the GAO report.

BROWN:

(inaudible) the GAO report’s not — not there, neither have we. But we also know that — that all evidence points to the fact that — that the largest banks in the country on — in the capital markets get — get interest rates lower when they borrow then do medium size and community banks and you acknowledge that.

LEW:

I — I — I acknowledge that the market works the way you described, yes.

BROWN:

OK, OK.

Let me just…

LEW:

Well — well, just to be clear, the reason I’m being a little hesitate is you know, markets unless their creating systemic risk or putting burdens on tax payers are not generally — we don’t intervene in markets on — on — on a regular basis. So I would want to understand the issue, understand what federal policy is behind it and work with you if there’s an issue where federal policy is contributing to some unfair-

BROWN:

I guess I think it’s pretty clear that federal policy has contributed to this. I mean it really is federal policy that subsides these megabanks by the implicit “too big to fail” policy. But we can debate that later.

LEW:

That’s why Senator, I mentioned direct responsibility to you. We think that we, that Dodd-Frank dealt with “too big to fail” and on top of that, we think there should be a fee on large money center banks to approximate the risks they presented in the past.

BROWN:

Okay I’m not in total agreement with you, but that’s fine. Let me shift to China currency for the last minute or so. It’s clear that yuan currency manipulation, that China’s currency manipulation means jobs in my state. There’s no question it’s cost us jobs. I spoke with Randy Zignolick (ph) the other day. He owns a company called City Plating in Cleveland. They’re doing just about everything right, yet they face a competitive disadvantage on their exports and unfair competition on imports because of currency manipulation.

There’s been some movement in the right direction in the value of the yuan, we know that. But it’s been too slow, it’s been too little. Especially when you consider the U.S.-China trade deficit. When trade deficits generally moved in the right direction our trade deficit with China didn’t. It went from 295 to 315. Do you agree that currency manipulation is in fact an export subsidy?

LEW:

Senator, we have over the last four years, pushed back very hard on China in a whole number of areas. We pushed back on our perception that the currency was undervalued. We pushed back on unfair trading practices. We engaged in the strategic and economic dialogues and bilateral discussions over many occasions.

I think we made progress. There’s been a 15 percent improvement in the valuation of China’s currency. It’s still undervalued and more progress needs to be made.

BROWN:

The administration has been pretty good on trade enforcement through Commerce or through ITC. Fallen short when we ask the administration to include currency and their filings. Are you willing to, do you support industries filing petitions to seek relief against companies that, or countries that actually manipulate their currency?

LEW:

Senator, I would put a lot of energy behind developing a relationship where I could push back on practices in China that we think are unfair. We have done that as an administration. We will continue to do that.

BAUCUS:

Thank you very much. Senator Toomey?

TOOMEY:

Thank you Mr. Chairman. Mr. Lew, thanks for coming, good to see you again. I wanted to follow-up a little bit on the conversation we had in my office a week or so ago. As you know, I’m very concerned about the implications, the effects of this huge new series of regulations, most of which emanate from Dodd-Frank. As you know, we’ve seen over 9,000 pages of new rules and regulations already. And they’re not close to being finished.

And when Jamie Diamond famously questioned Chairman Bernanke about the cumulative adverse effect of all of these new regulations on the availability of credit, and on job growth, Chairman Bernanke acknowledged that they don’t really know what the cumulative effect is. And don’t seem to have a way of analyzing and understanding that.

So as Treasury Secretary of course and head of the FSOC, you will be arguably the most powerful financial regular in the world and have a great deal of influence over this. My question for you is, what are your thoughts about how we ought to think about the unintended and adverse consequences of this really massive new wave of regulations?

I’m particularly concerned about small and medium sized banks which are not at all systemically important, but nevertheless are hiring more compliance officers than loan officers because they have to for this.

Shouldn’t we understand the implications that this has and what are your thoughts on that?

LEW:

Thank you Senator, I think we need to be very much attentive to the burdens of really all regulations that we put forward, particularly in an area as important to the economy as the financial services area. I think we also have to be attentive to the cost of failure to regulate appropriately.

We saw in 2008-2009 the enormous loss of economic power in this country because of the financial crisis. The burden it put on individuals and businesses. The burden in put on taxpayers. So as we look at the costs and benefits, we have to look at the systemic risks and what are the consequences of a failure to regulate properly.

I know that each of the agencies that are working on this, are working in their areas, trying to get their hands around that. It is complicated. It is something that if confirmed as Chair of FSOC I would urge all of the regulatory agencies involved in implementing Dodd-Frank to pay close attention to.

TOOMEY:

I would hope so, because as you know, the vast majority of financial institutions in America have no systemic significance, because they’re not big enough to. And yet, they are often caught up in a whole lot of regulations, that impede their ability to extend credit. And that’s one of my concerns.

Second issue…

LEW:

Senator, I would look forward to working with you to making sure that the provisions that were intended to not put those kinds of burdens on those smaller institutions are being implemented as intended.

TOOMEY:

Terrific. On a separate topic, you may be aware of a huge expansion in a relatively new form of tax fraud. We’ve seen this in Pennsylvania, where criminals steal a Social Security number, they submit a tax return to the Treasury seeking a refund and they get it. The unsuspecting victim who’s identify has been stolen, wonders why they never get their refund. That’s because someone else got an unrelated and fraudulent refund.

The IRS I think believes this could be on the scale of tens of billions of dollars a year. They’ve made some progress. I’m glad that they included Pennsylvania in a pilot program to work more closely with local law enforcement authority. But I think a lot more needs to be done. And I think it can be done. I think the technology exists to largely solve this problem.

Are you prepared to commit to making sure we get this under control?

LEW:

Senator I am. My understanding is that the IRS has put a good deal of resources behind this. Has made a great deal of progress. It is a pernicious kind of crime, identity theft. And the president spoke to this issue last night in the more broader context of cyber security. You know we have a whole new level of criminal activity where very clever and creative criminals are trying to get a step ahead of systems that are going to need to get a step ahead of them.

And if confirmed, I would work with the IRS Commissioner, make sure the IRS was doing that. I think we also need cyber security legislation for the broader threat.

TOOMEY:

Last question, understanding as we all do that monetary policy is the realm of the Fed, the Treasury Secretary is nevertheless responsible for managing our nation’s debt. For borrowings, the value of the currency is necessarily very imported and integrally related in that. There’s a number of countries that seem to be inclined to deal with their fiscal problems by devaluing their currency. And some might argue that the behavior of the Fed would be consistent with one that was intended to, in time, devalue our currency.

I’m just asking if you will be a vocal advocate for a strong dollar policy and acknowledge that a strong dollar that maintains its value is a necessary precondition to strong growth.

LEW:

Senator, Treasury has had a long-standing position through administrations of both parties over many years, that a strong dollar is in the best interest of promoting U.S. growth, productivity and competitiveness. If confirmed, I would not change that policy.

TOOMEY:

Okay, thank you very much.

BAUCUS:

Thank you Senator. Senator Bennet?

BENNET:

Thank you and thank you Mr. Chairman for allowing me to join this committee. I’m very pleased to be here. Mr. Lew thank you for your public service. I wanted to ask you a couple questions. The first one is as we’ve lurched from manufactured crisis to manufactured crisis in this land of flickering lights on Capitol Hill, people at home are doing the best they can to try to build their businesses and support their communities, educate their children and get ahead.

And the last 20 years has seen in this country a decline in median family income that’s quite significant over that period of time. While the cost of healthcare has skyrocketed, the cost of higher education has skyrocketed. It’s made it harder and harder and harder for people working hard to get a head. And it also has created massive income inequality we haven’t seen since 1928 in this country.

I know there are a lot of things we can do to address this, education and other kinds of things. And ultimately government can’t solve this problem. But you mentioned that tax reform is hard because of the interests that are fighting to hold on to benefits they gained, sometimes deep in the 20th century.

BENNET:

But maybe if we have an objective that people could rally behind, it will make our work easier. And it would seem to me that an objective that said we would like to recouple wage growth and job growth with economic growth once again, might be a useful way for us to think about this. It’s not just economic growth for economic growth’s sake. It’s economic growth that’s building a middle class again in this country.

And I wonder if you had thoughts about how we might approach the discussions on the committee with that objective in mind? Maybe it’s not the right objective.

LEW:

Senator, I think it is the right objective. I think in the president’s speech last night, he called it the North Star. That we need to always keep before us as we go through each of the component policy areas. And tax reform is one of those. I think we’ve made some progress. The tax bill that was passed in January did go a distance to restoring some equity in the distribution of the tax burden.

I think the distribution of income has been a real problem. It ought to be possible for somebody who works 40 hours a week to earn a decent wage. It ought to be possible for anyone who is willing to work hard to make it into the Middle Class. And we’ve got a lot of work ahead of us, but there’s no substitute for growing the economy. If we grow the economy, that’s going to create jobs.

If we create jobs and we have people with the skills for those jobs, there’s going to be a better future for people to enter and stay in the Middle Class. I think there’s no more important undertaking for a Treasury secretary to keep that in mind every day, because that’s what it’s all about. That’s the goal.

BENNET:

Well, let me ask you this then, because I don’t think there’s anything that’s creating anything that’s creating a greater drag on this economy than our own dysfunction. That’s certainly what I hear from the business people that I talk to, from farmers and ranchers in this state. That’s what is dragging us backward.

On the other hand, there’s huge pent up energy, too. There’s $2 trillion sitting on balance sheets in this country that can’t be invested, because they have no idea what interest rate environment we’re gong to be in because they have no idea how to calculate the political risk in Washington.

You have been here during times when both parties were able to come together and craft long-lasting, not 2 and 3 month deals, but deals that endured over time and helped bring us back from the brink and get us where we need to be. What are some of the conditions that we need to rally around here, so that we can see that kind of work again in the United States Congress, in your view, based on the experience that you’ve had?

LEW:

Senator, I share your concern that the short term crisis deadline-driven practices that we’ve seen over the last couple of years are undermining the economy.

BENNET:

It makes matters worse.

LEW:

It does. It’s the first time in my nearly 30 years in public life that I’ve felt that the actions of government were actually working against the goal of getting the economy moving. Now, I actually take some heart in the fact that there is a solution. There is a solution that we’ve gotten close to a couple of times. And by going through the regular order could get done if we can bring, on a bipartisan basis, parties together to do that. I think that we have an obligation to the American people to get that done.

BENNET:

Well, sign me up for that and I hope we’ll be able to work in that. You know, part of what you’re going to be is chair of the FSOC. And other than things outside of our control like Europe, I can’t actually think of anything that’s creating more systemic risk to this economy than this Congress. And it’s time for us to start working together to solve this problem.

Mr. Chairman, thank you. My time is up.

BAUCUS:

Thank you, Senator.

Senator Casey?

CASEY:

Mr. Chairman, thank you very much. And I join Senator Bennett and others in expressing gratitude. It’s an honor to be on this committee and we’re grateful for the opportunity. And also grateful for the opportunity that the Chairman and others have made to bring folks together on this committee and therefore to bring forth a more bipartisan approach to a whole range of difficult issues, economic and fiscal in nature.

And Jack Lew, I’m grateful to see you back putting yourself forward for yet another position of public service. We’re grateful for that commitment. I won’t read the list of positions you’ve held in the federal government, but every one of them were difficult and many of them required confirmation or at least a total engagement by you and by your family. We’re grateful that your wife and daughter are here to join you today and to make their own statement of solidarity with you to serve the public again. We’re grateful for that.

I’ll begin with just a historical note where the Chairman began this morning. He talked about Albert Gallatin. He happened to be a Pennsylvanian. What is little known or little remembered, I guess, is that before he achieved acclaim as a Treasury secretary he was a candidate for the United States Senate.

He was elected by the legislature of Pennsylvania, the general assembly. He tried to be seated, but because he lived here only 7 years, according to the assertion made against him, he was thrown out of the Senate. So he didn’t have a good experience with the U.S. Senate, but he became a great Treasury secretary.

So for you today my wish is that you have a better experience with the United States Senate, and then go on to a great career in the Treasury, leading the Treasury Department.

I wanted to begin with maybe two areas to explore in the time I have. One is the basic challenge we face as it relates to the impact of global currency policy. And I want to step back, because sometimes we talk about anything global it does seem far away from communities in Pennsylvania and states like it. The reality is such that — and this is my point of view, and I know some disagree with this — but when it comes to just China’s currency policies that has a real impact, a tremendously adverse impact on communities in Pennsylvania. We’ve lost a lot of jobs because China has cheated, and I would argue, continues to cheat on their currency policy.

And in light of the exchange you had with Senator Brown, I hope that you would keep an open mind as Treasury secretary, not simply to having a good engagement with the Chinese, and therefore to have a better policy as it relates to their currency policy. But I hope that you would seek new ways, maybe ways that are consistent with the bill we passed in the Senate, to have real consequences to designate misaligned currencies and to have priority action, as the bill speaks, which have real teeth and real consequence.

But I ask you, not just in the context of China currency and other currency policies, but just generally. When you — if you were to walk into a manufacturing plant in Pennsylvania that has been stressed by a tough economy, stressed by currency policies, stressed by trade policy as well, what would you say to the head of a manufacturing company that you’re going to try to do as Treasury secretary, that the administration is doing, to give them a level playing field, albeit a playing field that has to come about based upon a number of policies?

LEW:

Senator, I think that there are many things we have to do. We have to vigorously insist that the laws and international agreements be honored. And that where they are not, that there be consequences. We’ve done that in the area of trade with China over and over again. We’ve done it in auto parts. We’ve done it in tires. We’ve done it in rate earths.

I think on the currency question, we work through the international bodies, the G7, the G20, to advance the view that it’s not just the United States, but the organized nations of the world that insist on having currency policies which are market-determined. And you know, our bilateral relations, we push back very hard.

I would look forward to working with you and the members of this committee so that we can assure manufacturers in the United States that we’re doing everything we can to make the United States an attractive place to invest and to insist that these kinds of laws and norms be honored.

CASEY:

I’m the newest member on the committee side and haven’t had a chance until today to talk to you, but we’ll get together and talk about some other issues.

Thank you very much.

LEW:

Thank you, Senator.

BAUCUS:

Thank you, Senator.

I think, Senator Roberts, you’re next?

Who is? Oh, Senator Burr, sorry.

Senator Burr, you’re next.

BURR:

Thank you, Mr. Chairman.

Mr. Lew, welcome. Thank you for — and your family — for serving you up in public service so much.

LEW:

If I might, Senator, just apologize. My wife has a class to teach in New York this afternoon, so she had to run to catch a train.

BURR:

That’s quite all right. I want you to know that my family’s differences with Alexander Hamilton do not extend to other secretaries of the Treasury.

LEW:

Well, I appreciate that. And I’m not going to Weehawken.

BURR:

You said in your testimony that we can’t let sequestration take effect. In Bob Woodard’s book, “The Price of Politics,” Woodward credits you with originating the plan for sequestration. Was he right or wrong?

LEW:

Well, Senator, it’s a little more complicated than that and even in his account, it was a little more complicated than that. We were in a negotiation where failure would have meant the default of the government of the United States.

BURR:

And I hate to speed it up. Did you make the suggestion?

LEW:

Well, what I did was said that with all other options closed, we needed to look for an option where we could agree on how to resolve our differences. And we went back to the 1984 plan that Senator Gramm and Senator Rudman worked on, and said that that would be a basis for having a consequence that would be so unacceptable to everyone that we would be able to get action.

BURR:

So is it unfair that the president says the blame is on the House Republicans?

LEW:

Well, I think…

BURR:

That they originated it? That’s what he said.

LEW:

Senator, the demand for an enforcement mechanism was not something that the administration was pushing at that moment. Our preferred outcome would have been to have there be something on taxes and something on spending. It was unacceptable to the other parties for taxes to be part of it, and the only spending — only alternative that anyone could think of that could be agreed to was sequestration, precisely because it’s so objectionable that nobody could imagine it happening.

BURR:

I heard your testimony today that it shouldn’t take effect. On November 21, 2011, let me quote the president: “Already some in Congress are trying to undo these automatic spending cuts. My message is simple: No. I’ll veto any effort to get rid of these automatic spending cuts to domestic and defense spending. There will be no easy off-ramps on this one.”

What’s changed?

LEW:

Well, the rest of what he said was Congress should work on putting in pace policies that make sense to get our fiscal house in order. That is consistent with what he said last night, it’s consistent with what I believe.

This is not an impossible problem to solve. It would be better for the country if we have an agreement on a framework for solving our fiscal problems and not going into sequestration.

BURR:

Do you regret suggesting sequestration?

LEW:

You know, Senator, I look back at a time when a lot of people thought we were going to default. That was not an acceptable option.

And I think that it should not have been the case that the good faith in credit of the United States was at issue, but that was what was at issue, and I think we had a solution that frankly should still work.

Sequestration is so objectionable that we ought to just do our work and solve the problem.

BURR:

Jack, in the Armed Services hearing last week, Secretary Panetta testified that following his and General Dempsey’s 5 o’clock meeting on September the 11th, after the Benghazi attack, they had no further contact with the White House and it was their understanding that you, as chief of staff, was individually briefing the president.

Is that inaccurate?

LEW:

Well, Senator, I did speak with the president that evening. The national security staff was working on the issue on a nonstop basis.

BURR:

But who was — who was actually briefing the president? Were you?

LEW:

I was not — I was in the room when the president was briefed, but I was not briefing the president.

BURR:

OK, because John Brennan testified yesterday that it wasn’t him. Secretary Panetta said it wasn’t him. In hearings, the ODNI Clapper said it wasn’t him. Acting DCI Mike Morrell said it wasn’t him. Ambassador Kennedy said it wasn’t him. And the FBI said it wasn’t them.

Now we’ve eliminated a lot of people who had contacts within the intelligence community that knew firsthand what was going on in Benghazi. Let me ask you again, who briefed the president on actually what was happening throughout this seven-hour period?

LEW:

Well, in the conversations that I was in, the national security staff was present and some of the people…

BURR:

… would John Brennan have been included in that?

LEW:

You’re asking who did a briefing, and that’s different from who was in a conversation. I think if you ask people were they in conversations, there might’ve been a different answer.

BURR:

Who was your primary point of contact in the intelligence community?

LEW:

As chief of staff, I didn’t usually reach out directly to the intelligence community. I worked through the national security staff.

BURR:

Was there anybody from the national intelligence community in that briefing session on a continual basis, to your knowledge?

LEW:

The intelligence community was in close touch with the White House, with the national security team, on a near constant basis.

BURR:

Last question. If the Affordable Care Act is the panacea some suggest it is, why did the executive branch exclude themselves from coverage under the Affordable Care Act?

LEW:

Senator…

(CROSSTALK)

BURR:

… Congress is included. Staff’s included. Members are included. But nobody in the executive branch is included under the Affordable Care Act.

LEW:

Senator, that is actually a provision I was not involved in the creation of, I’d have to go back and check, but I assume…

(CROSSTALK)

BURR:

… do you feel like they should be?

LEW:

Well, I assume it has something to do with the fact that the federal system is something that is going to be accessible, in a sense, through the — if there’s a federal exchange, but I’d go back and check and get back to you. I don’t want…

(CROSSTALK)

BURR:

… in fact, my understanding is every member of Congress and every staff who works for a member of Congress is under the state exchange program. They’re no longer part of FEHBP. My point is simple. If it’s that good, why would we not make all branches?

LEW:

Senator, that’s a detail that I’m just not familiar with. I’d have to go back and check and get back to you.

BURR:

Right. Thank you.

LEW:

Thank you.

BURR:

Thank you, Mr. Chairman.

BAUCUS:

Thank you, Senator.

Mr. Roberts?

ROBERTS:

We’ll get back to you. That’s the song I hear from an awful lot of people in the regulatory business and it’s a pretty tired country western theme, it seems to me.

Mr. Lew, welcome to what some of the press have described as the Grand Cayman Ugland House Rehab and Restoration hearings.

In the Grand Caymans, they are very joyous about this hearing. I’m not going to split the shingle on that, with the exception to say the bottom line is hopefully through tax reform we can lower the corporate tax rate and this wouldn’t be a problem.

And you have indicated repeatedly that you do not know what this situation with regard to these investments, so I’m not going to bother you with that.

Senator Burr is a stickler in regards to the overregulation problem. It gets even more of a problem, or at least a challenge to us, in that, I think the president said last night that if, in fact, his agenda is hindered by Congress or high water, he’s going to have the ability or will take the issue to more executive orders, which means more regulations.

I have a whole series of questions on the four things that you have to achieve in regards to regulations under the president’s own executive order, and all four, according to staff, and we meet with folks from Treasury or from the Department of Health and Human Services or IRS, whoever it is, to try to merge these regulations. We’re not getting any answers.

We talked about this in my office. And you said we do the best job that we can, and I understand that. We’ll get back to you.

But the get back to you stuff is getting a little bit old, more especially on the — in the view of the people who are on the receiving end of regulations. But I want to save that one, too. I’ll submit it for the record. You’ll have a long time to go over those questions.

But over the past four years, sir, this administration has repeatedly brought up the issue of business aviation, general aviation. And the proposal to change the depreciation schedule for jets, agriculture aircraft, OK, piston engine aircraft, from five to seven years.

The estimates I have seen allege this will raise $200 to $300 million a year. But it does not take into account the loss in tax revenue and jobs that will result from this change.

Now if you take into consideration the list of the projections of the federal deficit for this year, which could end up being $1 trillion, $850 billion to $1 trillion, the changes that you have proposed would reduce the fiscal year 2013 deficit by about 2 millionths of 8 percent.

Now based on this calculation, I think you can understand why someone like me gets a little bit hot under the collar, who has seen our general aviation manufacturers in my state already lose 50 percent of their workforce during very difficult times, and why we would object to the seemingly unending attacks this administration continues to direct at the essential aviation industry, i.e., general aviation.

We’re not talking about fat cat corporate jets, which has been used over and over and over again. The general aviation industry has become the (inaudible) in regards to tax reform by this administration. And I am more than a little tired of it.

Now I need a yes or no question (sic), if the administration continues attacking these hardworking, largely unionized American workers, which as we can show has had a direct negative impact of sales, will we even have a U.S. general aviation manufacturing base in the next 10 years, or are we going to be flying Brazil or French?

LEW:

Senator, I know you asked for a yes or no answer. I have to say that the purpose of the policies that we proposed were to try to create a more fair tax code and it was not aimed at trying to do any damage to the general aviation industry.

I think a number of the kinds of aircraft that you’re describing would not be covered by the policy that we proposed, and I would look forward, if confirmed, to working with you to understanding if, in fact, that’s not the case.

ROBERTS:

I appreciate that.

It’s just the adjectives that we use in the political system that a particular industry is designated as being, as I said, a (inaudible) or a target. And I know that’s convenient. But we have a sales force out there that’s already been cut in half, as I’ve indicated. We have good workers. We produce excellent product.

If we make this change, we’re going to be hurt.

LEW:

The objective of the policy was not to hurt the general aviation industry. It was to look at what was an inequity in the tax code that the users of the jets had preferential tax treatment, regardless of whether they bought U.S.- or foreign-made aircraft.

If it has an effect that I’m not aware of that’s disproportionate, I would look forward to working with you on it.

ROBERTS:

Good.

BAUCUS:

Thank you, Senator.

Senator Schumer?

SCHUMER:

Thank you, Mr. Chairman. I apologize to the witness. We had an immigration hearing and Lord knows.

Anyway, first question. As you know, unless Congress acts before March 1st, sequestration will roughly impose $85 billion across the board cuts. Now, rather than seek to replace the sequester with a balance of smart spending cuts and reforming tax loopholes, many of our friends on the other side are settling for letting the job- killing cuts take effect.

Their only idea is preserve the cuts but spread them out differently. This strikes me as a little bit like rearranging the deck chairs on the Titanic rather than steering away from the iceberg.

So, first question, does the administration agree the Republican proposals to merely move spending cuts won’t solve the problem and, second, economist Mark Zandi said sequestration would cause a 0.5 reduction — 0.5 percent reduction in GDP for the entire year.

Do you believe the proposals on the other — the Republican proposals would reduce the hit to GDP caused by the sequester at all or would the reduction in growth be the same?

LEW:

Senator, first thank you, again, for the very kind introduction this morning.

I think that the analyses of the impact of such a dramatic and rapid reduction in federal spending would hurt the economy at a time when the economy doesn’t need a kick. It needs a little help not a kick.

I think that if you look at the question of should the sequester just be redistributed, we’ve — in 2011, we agreed to reduce discretionary spending by $1.2 trillion. That’s already putting a burden on all areas of government, including Defense and all non- defense areas that’s quite significant.

I think it’s the right challenge. We need to tighten our belt. We need to spend less. But I don’t’ believe that the sequester can just be rearranged. We’re already at …

SCHUMER:

It would not change the reduction?

LEW:

No.

SCHUMER:

The estimates of reduction in growth if we just did all cuts.

LEW:

The economic impact would be the same and I think the damage it would do to important investments from defense to education would be wrong. I think what we need is a balanced approach which combines mandatory savings and revenues and finishes the job.

The did $2 1/2 trillion of deficit reduction. We need to do another 1 1/2. We can get this done.

SCHUMER:

Great. Thank you. You make sense. I mean if you’re just going to switch cuts from one place to the other, it’s not going to change the reduction in growth that would occur.

And probably the greatest reason, there are many, to avoid the sequestration or just rearranging is our economy’s finally beginning to recover a little bit. This would snuff that out in a significant way, 0.5 percent GDP is not small number.

LEW:

It’s not a small thing and one could certainly have something more rational than across the board cuts, but it would have the same economic impact and it would do a lot of harm. So it’s not the right policy. It’s was meant to not happen. It wasn’t meant to be rearranged.

SCHUMER:

OK. Here’s another question I have which you will be involved with should you and I believe when you become Treasury Secretary, and that is TRIA, the Terrorism Risk Insurance Act. I worked with your predecessor and President Bush’s Treasury Secretaries on this. It was last extended in 2007, but it’s the nature of insurance.

You can’t wait for the last minute because businesses who need to renew their policies may find the insurance companies either aren’t willing to provide or terrorism coverage if the future of the program is in doubt or raise the price so high that, in effect, they’re not offering coverage and, then, you can’t get new building refinancing and all the things that keep an economy growing.

It’s not just in New York, but in many areas with tall buildings that might be targets of terrorism. When TRIA was last extended, there was some debate about the scope of the program or whether it was still necessary.

The program was reformed, the need for it was reaffirmed and the program was extended for another seven years. If you talk to my constituents, I assure you that you would agree the program remains vital to obtaining insurance — regular insurance to build and even to get financing.

Terrorism is just something that the private sector is not willing to do on reasonable terms. It’s a little like flood insurance, but probably worse because we have less of a record about terrorism. We don’t know when it comes.

And if it does come, it could come in such a horrifying amount, nobody wants to insure against it. What’s your view on extending TRIA for five more years?

LEW:

Senator, I am very familiar with TRIA. I was chief operating officer of NYU on September 11th. I would not have been able to have had a university with insurance during the time I was there without TRIA.

I’m less familiar with where it stands right now in the extension process and would look forward to working with you on exploring options.

SCHUMER:

Could you see the argument that you still need it even though we’re ten years after 9/11?

LEW:

Well, I certainly understand that it was very much needed at the time. I have no reason to believe that it isn’t important, but I’d want to become current in my understanding.

SCHUMER:

Thank you.

Thank you, Mr. Chairman.

BAUCUS:

Thank you, Senator.

Senator Rockefeller.

ROCKEFELLER:

Thank you, Mr. Chairman.

Mr. Lew, I welcome you and your family and I welcome my opportunity to vote for you.

The — I’m the — The chairman of this committee once called me utterly predictable.

(LAUGHTER)

And he is utterly correct.

(LAUGHTER)

I have a focused mission in life and I stick by it and you are one of the people who could help me make progress. I have never really understood why it is that the Republicans are so adamant about raising — against raising revenues because it does make sense.

I don’t know if it’s Grover Norquist. I don’t know if it’s a Wednesday breakfast meeting they have every week to make sure that they — I just don’t understand it because if you want to get things done in this country, you have to have revenue. You just have to have revenue.

So, one, I’d like to know that you are on that side and that you would encourage in the development of budget and tax proposals so that there’d be more revenue.

LEW:

Senator, I very much believe that we need to have a balanced approach to getting out of the fiscal hole we’re in. I think that revenues are part of the solution.

Nobody likes to raise taxes, but the choice is always between being able to pay our bills or not. And if the choices are to cut more deeply into things like education and research or health care, I think that we need the right balance. The president’s ratio of 2:1 seems about right to me.

ROCKEFELLER:

OK. Second question, you and I have talked about this before. We did it in my office. It’s something I care passionately about. It turns out, in fact, that the Earned Income Tax Credit is the greatest anti-poverty program in the United States government and it has an unbelievable effect in my state of West Virginia.

The Earned Income Tax Credit, on one hand, the Child Tax Credit on the other, there are other tax credits which help balance out the inequality and help people, you know, to live. Just frankly, to live.

And I would hope that those are — those are up for reauthorization. I would hope that they would be part of a five-year reauthorization that the administration would support.

LEW:

Senator, I have supported the Earned Income Tax Credit for many years, was proud to be part of the effort this year to extend the — (inaudible) both credits again.

They’ve got a proud, bipartisan history from the Nixon administration until today and they are to encourage work and to make work pay. And I think they do an important job.

ROCKEFELLER:

Great. The next and maybe I’ll make it my final just to please my chairman so he would give me some credit for efficiencies here. No, I guess I won’t.

(LAUGHTER)

Income inequality is a vast problem for this country and there are a variety of ways that that can be attacked. But, you know, what, we rank 31st out of 34 developed countries in income equality. It’s a disgrace.

And I would just hope that the administration would take a very — would be strongly embarrassed by that as indeed I am and that they would take that into account one way or another to effectuate a change in our standing in the globe.

LEW:

Senator, I mentioned earlier and I believe strongly that it was important in the tax bill that was enacted in January that we took a step towards to having the tax system play less of a role in contributing to inequality.

ROCKEFELLER:

Yes.

LEW:

The president made some announcements last night that also contributed to that.

ROCKEFELLER:

Yes.

(CROSSTALK)

LEW:

This is a — this has been …

ROCKEFELLER:

I got two more questions.

LEW:

This has been decades in developing and we need to address the problem.

ROCKEFELLER:

I got two more questions and a hostile chairman here.

(LAUGHTER)

The — you and I have talked about Medicaid and one of the things that I like about you is that you feel very strongly about Medicaid and I think you experienced Medicaid in your own life.

ROCKEFELLER:

Medicaid is — it’s not only sustenance for all of long-term care if you spend yourself down low enough to quality for it, but it’s one of the great funders of child help and it’s also the easiest thing to attack.

And I’m pretty sure that you feel very strongly about Medicaid and would fight for its protection as much as possible.

LEW:

Senator, I do believe strongly in the Medicaid program. We do have to be careful in the Medicaid program to make sure that we’re not overpaying and, over the years, there have been issues on that.

I’ve defended the program strongly, that it needs to be protected, but I’ve also been willing to take our a sharp pencil when there were practices that needed to be addressed, either on the reimbursement side, or in terms of — of the way the state programs were working. I think we — if we care about a program, we have to run it well.

ROCKEFELLER:

I agree with that, and I’ve over run my time, and I apologize Mr. Chairman.

BAUCUS:

Thank you Senator. Senator Isakson?

ISAKSON:

Thank you very much Mr. Chairman. Thank you. Congratulations on your nomination.

LEW:

Thanks.

ISAKSON:

Thank you for your service to the country. You have repeatedly said that we needed to — the administration addressed Too- Big-To-Fail, but we need to expand credit. It is critically important that we complete the implementation of Dodd-Frank. If you are confirmed, very shortly the first problem you may have as the secretary of the Treasury is the implementation of a Dodd-Frank rule known as QRM. Mr. Cordray just issued a QM ruling, which I commend him on. I was scared to death they were going to over-reach, but they didn’t. And they defined QM in such a way so as to avoid predatory lending in housing, but protect traditional housing.

But Dodd-Frank also had a QRM requirement, and the pending rule which has been circulated twice, and pulled by the six member committee, would have required for risk retention exemption, a 20 percent, or greater down payment. If that took place in the conventional mortgage market, you would withdrawal fully 60 percent of the people buying housing from the marketplace, because nobody is going to hold risk retention against loans for that length of time. Will you engage as secretary of Treasury, with HUD, with FDIC, with OCC, and the others on the committee to come up with a reasonable approach for risk retention exemption from Dodd-Frank?

LEW:

Senator I think that — well, if confirmed I would very much as the chairman of FSOC, engage in the issues of rules implementing Dodd-Frank, and in terms of the relationship between the Department of Treasury, and the Department of Housing and Urban Development will continue, as Secretary Geithner did, to work closely on those issues. The QM rule, and the QRM rule were obviously designed to address different issues, and I — I appreciate the comments you’ve made about the QM rule. It was really designed to protect borrowers against institutions that fail to exercise proper due diligence. And so they would hold accountability for their failures.

The QRM rule is really designed to make sure that we don’t get back into a situation where institutions create risk to the system, or create the risk that the taxpayers will have to come in and bail out failed institutions. I would work on these issues going forward to make sure that the goals are achieved with the least burden possible.

ISAKSON:

Well, understand this, Dodd-Frank exempted Freddie Mac, Fannie Mae and FHA. If you end up with a conventional mortgage that can’t sustain the risk retention requirement, you will put the entire burden of financing housing in America on two institutions, Freddie, and Fannie, and FHA. FHA is in difficult solvency position right now, and Freddie and Fannie owe the taxpayers $171 billion. So it’s critically important we get it right. I would hope you would exercise leadership on that.

LEW:

I — I — Senator, I think it’s very important that we get private capital back into housing. Our goal is not to have the heavy presence of either federal programs, or federally backed programs. And I would look forward to working with you on these issues.

ISAKSON:

Well thank you very much. Secondly, Senator Schumer made the statement in his introduction that you had the unique ability to learn about a problem, study for solutions, and implement those solutions. That’s quite a — that’s quite a compliment. We have a serious problem with spending, with budget, with being out a process that’s broken in Washington. On March 6, and February 15, 2000 when you were in the administration of President Clinton, you testified before the House Rules Committee on the bi-annual budget.

There were 40 members of the House and Senate in a bipartisan fashion. Jean Shaheen and myself as the principle sponsors recommended the bi-annual budget process to change the paradigm where we appropriate in odd numbered years, and do oversight in election years, which are even numbered years. You have been very supportive of that, all the way back to 1993. But once again like in the last question, can you really help exercise some leadership to get the administration to come on board? And let’s try to work together to do that.

LEW:

You know Senator, I have supported bi-annual budgeting for a long time, and testified on a number of occasions in support of it. I’ve had my work on this cited by international figures in terms of following policies in their own countries, to implement policies like that. It has not been something that we took a position on, I believe in this administration, though there’s never been any opposition to it. I would look forward to following up with you. It’s fundamentally a matter of congressional decision making, and I understand that there has been resistance to the idea over the years, but I think that the — the record of the last 10 years only strengthens the case.

ISAKSON:

Well I think also our inability to do budgets in and appropriations on the Senate side and some of the difficulty we’ve had demanded of us to change the paradigm and change the structure in which we make these considerations. Last question on behalf of a constituent; Treasury is dictated by March 1 of this year everybody receiving benefits will get them either through direct deposit, or through express cards, is that correct?

LEW:

I believe that’s correct.

ISAKSON:

And I understand 90 percent of people are complying, but there’s 10 percent out there, some of them veterans, some of them people who are in poverty, who don’t have a checking account, who don’t have access to the direct express card?

LEW:

I’d have to ask to follow up on that, Senator, I’m not sure…

ISAKSON:

On behalf of my constituent, please do. Because they want to know how they’re going to get their money after March 1.

LEW:

OK, I — I’ll follow up on that, Senator.

ISACSON:

Thank you Mr. Chairman.

BAUCUS:

Thank you, Senator. Senator Wyden?

WYDEN:

Thank you Mr. Chairman. Mr. Lew, welcome. And I was interested this morning. Staff came in, and said that they had done a count that since 2001, the Congress has passed 137 laws changing the tax code. Now, as you know, almost always these laws have helpful provisions. Nobody disputes that. But with each one of these changes, the tax system gets more incomprehensible, more dysfunction, and more Byzantine. So my question to you is, do you support the idea that it’s now time for the Congress to make a break with this idea of just passing these piecemeal changes?

Actually put a hold on these piecemeal tax changes, and actually move to the kind of long term, bipartisan tax reform that Senator Baucus, and Senator Hatch, and — and Chairman Camp are talking about? Should we put a hold on these piecemeal approaches?

LEW:

Senator, I definitely agree that we should do the big job of tax reform. And I think that…

WYDEN:

The question is, should we put a hold on the piecemeal approaches? Because as long as we keep passing them, I think it’s going to be tough to get the long term reform.

LEW:

The — the — the — I hadn’t actually thought about whether there was an approach like the one you described. I’d be happy to have a discussion with you about it. My — my own predisposition is that we should just get the big job done, and anything that makes it easier to do, is worth considering.

WYDEN:

OK. You’re going to have a large role in determining whether health care coverage is affordable for workers and families because the IRS determines who is eligible for tax credits for health care, and how much they’d be eligible for. Now the IRS has already determined that affordability is going to be based on a worker’s individual coverage, not the cost of family coverage. So we are going to have millions of workers, and spouses, and dependents in a kind of regulatory no-mans-land. Now in the Affordable Care Act, a provision was added that would have allowed an employee to take their employer’s contribution, either the individual, or the family and shop for a policy that best fit their needs, at a price that they could afford.

As we talked about in the office, that provision is no longer there. So we’ve got millions of people, working-class, middle-class people that are pinched. They’re in the middle. They are unable to afford the family coverage offered through their employer, and ineligible for the subsidy that could be used by dependents on the exchange. What do you think ought to be done to help them?

LEW:

Senator I — I’m — I think that getting the Affordable Care Act in place, there are lots of hurdles between now and 2014. Job number one is to get it up and running. I will look forward to working with you and the members of this committee to ask, and answer the questions about, are there gaps that need to be addressed after that. There are many things in the Affordable Care Act that require a lot of work to get in place, and I must say my first focus would be on making sure that we implement the law, but then I’d be delighted to pursue with you looking at solutions to the remaining problems.

WYDEN:

The New York Times and others in the press said that millions of low, and moderate income families are going to be affected by this IRS decision. So this is not an abstract question. I appreciate your saying that you’re going to work with me, and others on it. This is an urgent matter. These are not people that ought to get hammered. They have done nothing wrong. We had a provision that would have made a real difference to those families. That’s not there anymore. I think it has to be a priority.

WYDEN:

Let me ask you about one other area. We talked about it in the office. And that is the electioneering that now takes place by tax exempt social welfare organizations. And this stems from the wake of the Citizens United case. There’s been a proliferation of these entities that are organized under 501(c)4 provisions in the internal revenue code, and they’re really doing politics. They get a tax break as social welfare organization but they’re really ripping off the tax code because they’re not social welfare organizations. They’re doing politics. And I think some of my colleagues had a little bit of a case of how outrageous this has gotten.

Now Senator Murkowski and I are going to be introducing bipartisan legislation to stop this, to take away that tax break when these organizations don’t disclose.

But I was very troubled by the fact that the IRS, what’s called the priority guidance plan, basically doesn’t make cleaning this abuse up a priority. My question to you is when confirmed — I believe you will be; I’m certainly supporting you — will you make it a priority to drain the slop here?

And this is not a partisan issue. This is an abuse, a flagrant abuse of the tax code. These aren’t social welfare organizations. They’re electioneering and they’re doing it with the taxpayers’ dime and they’re not disclosing. Will you make it a priority to fix this?

LEW:

Senator, as a general proposition, I believe that the tax laws should be enforced, enforced fairly. If there’s something wrong here, it should be looked at. You know, there’s an appropriate distance between the Treasury secretary and the IRS on enforcement matters. But on policy matters, I think it’s entirely appropriate to ask that question.

WYDEN:

This is something that’s way wrong.

And my time is up, Mr. Chairman, thank you.

BAUCUS:

Thank you.

Senator Nelson?

NELSON:

Thank you, Mr. Chairman.

Mr. Lew, I just want to make a statement before I ask you a couple of simple little questions.

First of all, when Leon Panetta was nominated to be CIA director, I talked to a number of our CIA personnel or — in various parts of the world. And they were concerned because Leon didn’t have a background in intelligence. And I said — my response was, anybody who has been chief of staff to the President of the United States can handle any job in the United States government.

And, of course, Leon went on to prove that so much so that then for his next position he was confirmed 100 to nothing as Secretary of Defense. And therefore, that’s by way of saying to you obviously I support your nomination. You’ve handled that job of chief of staff very well.

And the other thing I wanted to say was that there was a problem when you were chief of staff with OMB in that OMB was continuing to try to run this country’s space program.

And I went to you and you started to massaging — perhaps is the best way — that the NASA administrators got to administratively run the space program without OMB folks saying you do this, you do that, pursuant to the directives given by the Congress and the NASA Authorization Act, of which Senator Rockefeller chairs the Commerce Committee.

And I want to thank you for that, because what you did, you’ve smoothed it out so that Senator Kay Bailey Hutchison and I could bring unanimity and we got direction for the space program three years ago that otherwise was in turmoil. And that is in no small measure to what you did. I want the folks to know that’s what you did, and I want you to know how much this senator appreciates it.

LEW:

Thank you, sir.

NELSON:

Now I want to — I want to ask you — we’ve got all of this international finance stirring. And a lot of that’s going to run under your bailiwick. Give me your thoughts on it.

LEW:

Well, Senator, the international financial situation is one that we do have to watch very closely. As much as we try to do our own business, we can’t separate ourselves from the world entirely. We can make sure our financial institutions are sound.

We can make sure that we run our policies appropriately. But you know, look at Europe. Europe is our largest export partner. If Europe has an economic or a financial crisis, that’s something we have to worry about.

It’s something that, if confirmed, I would work on. But frankly, I’ve been working on it, even as chief of staff, because in addition to worrying about the U.S. economy, we’ve been worrying about the exposure to the U.S. economy from risks overseas.

We have — there are questions of demand overseas, where that’s directly going to determine the ability of U.S. exporters to have markets. There are issues of the financial interconnection, particularly with sovereign risk. If confirmed, I would work with this committee to give the president the best independent advice I could and to play a leadership role in the world economic community to advance U.S. interests.

NELSON:

Do you think, given the extremes of situations of the economies in countries like Greece, that they can right their ship?

LEW:

You know, I think that Europe has shown a resolve to deal with its problems, both as a union and individually in countries. But these are tough fiscal solutions that have to be put in place to fix the situation in some of these countries, much tougher than the choices we face.

I think that it’s going to take some time. It’s encouraging that there’s been more of a willingness on the part of the broader European community to give some time, provided that there are assurances that progress is being made and risk is not just being shifted.

This is fundamentally a European problem, but it’s one that has such an enormous impact on the United States economy that the president and Secretary Geithner were deeply involved. I was deeply involved as chief of staff.

And it’s something that we can’t take our eye off of, because the risks that are potentially in the future are not just within our borders but they’re external risks that we have to safeguard against.

NELSON:

Thank you, Mr. Chairman.

BAUCUS:

Thank you.

Thank you, Senator.

Mr. Lew, Senator Schumer, in his introduction, mentioned your extraordinary talents and abilities as they’ve been referred to here a couple times. We face extraordinary times. You mentioned yourself, it’s been three years in the making with the American middle classes has deteriorated. We face globalization. It’s a far different world today than it was in ’86.

And the challenges faced in the United States are far greater economically than they’ve been in the past. What can you tell us today that show that you’ve got the courage to step up and tackle this and be a great Treasury secretary?

LEW:

Well, Senator…

(CROSSTALK)

BAUCUS:

I said before to you how, you know, it somewhat is an analogy — not quite the same — our U.S. solicitor general represents the United States government 4th Supreme Court, but the solicitor general plays another role as well as adviser to the court.

And I believe the Treasury secretary has a dual role as well, that is perform the functions the Treasury secretary would ordinarily perform and do well.

But I think there’s another role, is it’s — comes down to stature and a gravitas, courage and stepping up and after you’re pursuing your analytics, (inaudible) skills and solutions, is having the courage to do something about it, publicly as well as (inaudible) within the administration.

So what can you say to us here today to show us that you’re going to be not just an ordinary Treasury secretary, that you’re going to be a great Treasury secretary so that when your term is up, you look back and see that Secretary Lew was terrific?

He was asked to — he got this country back on the right economic track? It includes tax reform; it includes all the (inaudible) — all the globalization issues that we all face.

And world’s changing so much, I think of three major changes, one is demographic, all — most countries are finding that an aging population of huge pressures.

BAUCUS:

Second is globalization, it tends to have downward pressure on wages. One of the main reasons why U.S. jobs are hard to find and probably has some effect on middle class globalization.

And third is increases in productivity, which is inexorable. You can’t turn back technology. We use it forward. But technology is having a cross-current effect on jobs. So what can you tell us today? Show us that you’re going to be a great secretary, that you’re going to take on these issues?

LEW:

Mr. Chairman, I have the highest regard for the roles of Treasury secretary and solicitor general as the kinds of positions in government where, while you work for the president, you have a responsibility to represent some values that may go beyond the administration you’re in and — and to have — have the requirement that you have to be able to go in and give the president your honest view, even if you disagree and you have to be able to build support outside of the administration for difficult decisions.

I think that if you look at my career from an early age, I’ve — I’ve proven that I’m not daunted by the challenge of going in before authority figures and speaking my mind.

When I was in my young 20s working for the Speaker of the House, it wasn’t easy to look Dan Rostenkowski in the eye and tell him I thought he was doing something that he needed to rethink.

You know, he said something to me once that when I agreed with him when he knew I didn’t he lost his temper and he said, don’t waste the air in this room if you tell me you agree with me if you think I’m wrong. And it liberated me at the age like 24, to never again hesitate with — with — was with the Speaker or with the president of the United States or a world leader to speak my mind. I do it respectfully, I try to do it without unnecessarily breaking china, but I don’t believe that I’ve ever withheld my honest view from the president and as Secretary of the Treasury, I will be called upon in more circumstances to sometimes come in with hard messages.

As Chief of Staff, it turns out you don’t get to go the president with a lot of good news. The good news finds its way to the president pretty easily. I, over a year, had to walk into that Oval Office every day and tell the president there were tough choices and here’s what I think, never mincing my words, never not saying what I think.

As Treasury Secretary, I would follow that kind of a path and I would hope to work with this committee on a bipartisan basis, have the kind of relationship where we could talk to each other that way.

BAUCUS:

I appreciate that, but I’m really — I was really getting at something else.

I’m going to ask you — it’s clear that you’d be a great staffer. I’m not talking about being a great, courageous staffer and telling the president what you think and don’t think. I’m talking about something else. I’m talking about the public perception, the public demeanor, representing the United States, around the world, across the country and around the world be able to influence policy in a way that makes sense — most of us tend to agree with. We may differ along the edges, but most everybody in this room agrees needs to be done. That’s what I’m getting at.

What can you tell us about that?

LEW:

Mr. Chairman, I — I — I think that the years I was at the State Department, I met with world leaders one-on-one as White House Chief of Staff. I’ve met with both world leaders and heads of major interests in this country. I think the position that you’re in and the way you carry yourself in that position is where (inaudible) task comes from.

I — I feel like in the business dealings that I’ve had, it’s about building trust, it’s about having credibility, it’s about speaking clearly and saying what you think.

And you know, I’ve done more than my share of public speaking and appearances in — on television. I’m not afraid of taking issues public and expressing complicated ideas in terms that people can understand.

I’m not sure how to put a specific behind — behind the question of gravitas but I think the career path I’ve had, and very few people leave the role of staff and become a member of the Cabinet. I’ve had a career path that’s not the norm and I think that that lends itself to the kind of gravitas that you’re looking for.

BAUCUS:

I wish you well because the challenges are tremendous. Thank you very much.

Mr. Hatch?

HATCH:

Well thank you, Mr. Chairman.

Mr. Lew, do you need a break?

LEW:

I — I’m fine, thank you.

HATCH:

OK, just…

LEW:

Thank you for asking.

HATCH:

… just want to make sure because I, you know, this is unfortunately the — the — this is one of the most important positions in the country and that this is going on — it’ll go on a little bit longer.

BAUCUS:

Do you need a break?

HATCH:

I’ve taken my break. When I need one, I’ll take it.

LEW:

It depends on whether we’re talking about 20 minutes or two hours.

BAUCUS:

Well if you need one, just let us know…

LEW:

Thank you.

HATCH:

… because we understand.

Senator Rockefeller raised the issue of why Republicans have such a tough time raising revenue? Well reasons we have a tough time raising revenue is because we know that the Democrats will just spend it. They won’t use it to pay down the national debt which is astronomical.

And we also know that if we taxed every dime that millionaires make, it — it — on taxable million dollars or more, it’ll raise less than what the national debt is this year and what the debts that will be — excuse me.

And we’ve seen it time after after time but we don’t have any faith that these funds would be used to help get our spending under control and get our government under control. And that’s one of the reasons why I think that Republicans are so loathe to, you know, to — to raise taxes.

We know that fiscal calamity is primarily driven by the exponential growth in entitlement spending. We — we know that’s a problem, you know it’s a problem.

Secondly, there are economic costs to tax increases, tax something, labor capital, entrepreneurship and you’re going to get less of it.

Third, there are practical limits to the politically designed tax increases on whatever the unpopular group is that’s targeted.

So like I say, these are problems that we as Republicans have and they are legitimate concerns and I’m sure you have legitimate concerns about these things as well as we do. Frankly, I think you’ve done really well today. And — and I have a great deal of respect for you. It’s not easy to give a lifetime of service as a staffer and — and then a — a — a Director of (inaudible) and — and a tough staffer in the White House, my gosh, I have nothing but respect for people like you who give yourself to our government. And I really have great respect for your wife and your daughter, your family too.

LEW:

Thank you.

HATCH:

This is tough.

LEW:

That’s something we agree on, Senator.

HATCH:

That’s good. Well I — I think we don’t give our spouses nearly the credit that hey deserve.

But some of these questions we do need to ask just to make sure the record is clear.

Now let me — let me ask one that hopefully will help make the record more clear.

American taxpayers provided over $45 billion to Citi — Citi Group. In late 2008 and early 2009 and taxpayers backed hundreds of billions of dollars of Citi Group assets.

Meanwhile, Mr. Lew, you reportedly received over $945,000 of compensation in early 2009, mostly — mostly comprised of quote, “discretionary,” unquote, compensation for work performed in 2008 and you received that a day before Citi received about $7 billion of taxpayer backing.

On January 29, 2009, President Obama remarked on Wall Street bonuses at the time and said quote, “that is the height of irresponsibility. It is shameful,” unquote. He went on to say that, quote, “there will be a time for them to get bonuses, now is not the time,” unquote. Elsewhere he referred to Wall Street bonuses as quote, “obscene,” unquote.

Now Mr. Lew, you wrote in a 2010 letter to Senator Grassley that, quote, “my compensation was in line with other management executives at the firm and in a similarly complex operations,” unquote.

Now that seems a little bit to me like saying, gee dad, everyone was doing it. Unfortunately that type of reasoning is exactly what I think led to this financial crisis.

Now I have three questions related to your compensation. Let’s me just give them to you and then you can respond to all three.

First, could you explain what you did in 2008 for Citi that warranted payment to you of close to $1 million, most of which was a bonus?

Second, what was it about your performance that merited your bonus from a company that was being propped by taxpayer money and are the any records of your performance assessment? Or are there any assessments of your performance.

Third, your employment agreement included a clause stating that, quote, “you are guaranteed incentive and retention award,” unquote, would not be paid upon exit from Citi Group, but there was an exception that you could receive that compensation, quote, “as a result of your acceptance of a fulltime high-level position with the United States government or regulatory body,” unquote.

Now is this exception consistent with President Obama’s efforts to, quote, “close the…” — quote within a quote, “revolving door,” unquote that carries special interest influence in and out of the government,” unquote. Now I think that’s a question that has to be asked and I’d appreciate hearing — hearing your response.

LEW:

Senator Hatch, you know, the — the work that I did in 2008 was running, as I said earlier, the business of a business at a year when the financial products of that part of the firm were not doing very well. I think I actually performed quite well on managing the business operations, shedding real estate and parts of the operation that were not necessary, reducing the costs in a very considerable way.

I — I’m not familiar with records that were kept, so I — I — I don’t have access to things that I — I — I don’t know about.

You know, the — the — the experience that I had in the private sector has given me perspective that I think enhances my ability to perform, it both — in the role I’m nominated for and in the roles I’ve had. I’ve practiced law, I’ve worked at a university, I’ve worked at a financial institution, I think that if I hadn’t had a set of experiences like that, I wouldn’t be sitting here today speaking with confidence that I could undertake the responsibilities of Secretary of the Treasury.

As far as my 2008 compensation goes, it was for my work in 2008. I do believe that it was comparable to compensation for people in positions like mine in the industry. And it’s a broader discussion on compensation, but I don’t think there’s anything that hasn’t been fully transparent about both what I did and what I earned.

HATCH:

Could you tell us how much money you made in 2008, before you got the bonus?

LEW:

My base salary, I believe was $350,000.

HATCH:

Well thank you sir, it’s a question I felt had to be asked. I appreciate your answer. Mr. Chairman?

BAUCUS:

Thank you Senator. Senator Portman?

PORTMAN:

Thank you Mr. Chairman. I thought the question posed by Senator Baucus earlier was very interesting was very interesting and I’m glad I wasn’t on the other side of the table to answer it. But you know I’ve been before this committee for a Confirmation Hearing and they were much tougher on me, that’s all I can say.

(LAUGHTER)

But that is sort of the ultimate question that Senator Hatch just posed earlier in his reference to Gallatin and what kind of Secretary of the Treasury he was. There are different rules. Having been a staff people in OMB and USTR and I’ve had this same balance that you will be facing. But Treasury’s different. You know I think it is a different job than Chief of Staff or OMB, in the context of both the Ranking Member and the Chairman were talking about.

And it does have to do with taking one of the public positions. It’s not about meeting with foreign leaders or meeting with the president and being frank in the Oval, it’s about being willing to have the courage of your convictions. And to talk about these issues at a time when your country’s in trouble. And I think we are truly in trouble in terms of our debt and deficit record levels. And the weakest recovery we’ve had in our history, in terms of getting out of this, our economic doldrums. And I think it requires, it requires a Secretary of the Treasury, as Gallatin is quoted as saying from Senator Hatch “no more responsible position.” It’s true. I mean, this is it.

We talked about tax reform and entitlement reform earlier. I’ve just got three quick questions for you. All of which maybe the kind of questions where, sometimes you need to break some china to do the right thing.

But on entitlement reform, Senator Hatch just talked about the importance of it. CBO, which is again, the nonpartisan group here in congress that gives us our information on what’s going to happen the future. They have said that over the next 10 years, Social Security, Medicare and Medicaid will double in their costs. So you’ve got about 100 percent increase, about 1.5 trillion to 3 trillion in these programs over the next 10 years. During that time, other entitlements are going to go up 39 percent, discretionary spending only 10 percent.

So it’s very clear where the spending problem is. It’s not only the biggest part of our budget now, it’s the fastest growing part of our budget. It’s these incredibly important programs but they’re not sustainable in their current form. By the way the other thing that’s causing a problem in our deficit and debt is the interest payment. And they’ve told us that in the next 10 years, our interest payment is going to go up 284 percent. The bulk of which of course, relates to the increase of spending on the entitlement side, which requires us to borrow more.

So my question to you is the obvious one which is, you know, are you willing to take this on? And the president has talked about it a lot. He’s even said and I quote “he refuses to pass this problem on to another generation of Americans.” But so far that’s what the administration has done. Because the few changes that you have proposed in your budgets, which as you know have not gotten votes from democrats or republicans, really just are around the edges.

So my question to you is, are you willing to step forward on this and show the type of leadership that Senator Baucus is talking about. And he may be talking about other kinds of leadership. I think, I know he agrees that this is a huge challenge that we face.

If you could answer that question with regard to entitlement reform?

LEW:

Senator Portman I agree that we need to tackle entitlement reform and health programs are a big part of that. I think that if we look at the trajectory and the gap between the revenues that come in in a program like Social Security, and it is not the entirety of the program, but it’s a gap. Social Security is 75 percent funded by the payroll tax forever, but it leaves a gap. We need to deal with that.

PORTMAN:

$99 billion this year.

LEW:

We need to deal with it in a way that protects Social Security in a balanced, fair way. You know I think that if you look at the arc of my career, whether it was in 1997 going and presenting the agreement that Senator Deminichi and I worked through together on the Balanced Budget Agreement going into the Democratic Caucus in the House and the Senate. Presenting it, advocating it, winning support for it. That wasn’t easy. That was the courage of my convictions.

PORTMAN:

Yeah, it’s not easy.

LEW:

It’s not easy. You know, you’ve been OMB Director. I think if you look at the current debate and Senator Baucus knows this, I’ve gone before the Senate Democratic Caucus many times with telling people what I thought needed to be told, even if it wasn’t the popular thing at the time. I believe in a certain set of things, and we may disagree on some policy, but on the things that I believe in, I have never, never withheld my judgment and driven as hard as I can to get the job done.

I would continue to do that. It would be a broader set of issues, a different playing field. That’s clear. But I don’t-

PORTMAN:

Different audience.

LEW:

The thing I would say that’s different about Treasury, it is a job that requires one to transcend politics in many respects. That’s what Senator Baucus was getting at in the comparison to the Solicitor General’s office. I understand that, and I’m looking forward to that.

PORTMAN:

Before the Chairman tells me our time is up, because it just about is, two other ones quickly, TPA. Not to have the ability to negotiate trade agreements makes it difficult to take the president up on his challenge last night for us to have a European-U.S. Free Trade Agreement of some sort, and also to complete the Transpacific Partnership.

Because without the ability to be able to up or down vote here in congress, in my experience, other countries are not willing to put their last and best offer on the table. This is the first administration since FDR of course, not to ask for Trade Promotion Authority. Why, one. And two are you willing to ask you to give you and to work with this committee and the Ways and Means Committee on Trade Promotion Authority so we can indeed make good on the president’s commitments last night?

LEW:

Senator I’ve for 30 years worked to try to advance free trade and fair trade at times when it was extremely unpopular. I worked to make sure that we didn’t have protectionist policies in a Democratic House in the late 1970s, early 1980s. I worked in the Clinton Administration and the Obama Administration. I’m proud of the work I did helping to shape the TPP when I was at the State Department.

I think it was a great announcement that the president made yesterday with Europe. And I would look forward to working with you and the members of this committee to have fair and free trade that expands markets.

PORTMAN:

Will you be requesting Trade Promotion Authority?

LEW:

I would defer to the discussion that still has to take place on that. I would certainly engage on it.

PORTMAN:

I will ask my last question as a written question since I am over time. Thank you Mr. Chairman.

BAUCUS:

If you want to take more time, go ahead.

PORTMAN:

Well the final one is on retirement savings. We had this question posed generally earlier by Senator Cardin and this committee has worked over the years along with the Ways and Means Committee starting in 2001 to expand retirement savings. And the theory has always been that if you can get more businesses, small businesses, to offer a 401(k) and get more people to take up an IRA that you can expand people’s ability to save for their retirement privately, to help take some of the pressure off Social Security.

Some of us are concerned that sometimes the administration seems less committed to that going forward. In 2006 as you know, congress chose to make that part of the 2001 Act permanent. So the expansions that occurred then are in place. Our question for you today would be, are you committed to the private retirement savings approach? And specifically do you think that 401(k)s work and do you think they should be an important part of the three-legged stool really, savings, 401(k), IRA and Social Security for people’s retirement?

LEW:

Senator I think that they work better for people at the higher end of the income scale than people in the low to the middle end of the scale. I think we need to look at ways to get people to participate more in savings plans. It’s obviously harder when you’re spending all your disposable income, to save. No doubt about that. But there are things that we can do to make it easier, more attractive.

And I would look forward to working with you and other members on the committee on that. I do believe we need a three-legged stool.

PORTMAN:

Both these men have been leaders on that. We want to work with you on it. But just one point quickly, unless you provide that incentive to that small business owner to provide a plan, than those workers who we’re both concerned about are not going to have the alternative to be able to save for their private retirement, plus the matching contribution is key as you know. So we would just hope you would work with us on that to expand retirement savings in a way that gets more small businesses, not fewer, involved in providing that great opportunity for piece of mind at retirement. Thank you Mr. Chairman.

LEW:

Thank you Senator.

BAUCUS:

Thank you Senator. Mr. Lew, I appreciate your comments. I think in your opening statement and also in answer to questions, that you want to pursue regular order in pursuing comprehensive tax reform. Which essentially on the business side is base broadening and rate reduction. And individual side, you were a little vague there. But certainly with base broadening and also potentially rate reduction, therein depending on the degree that’s necessary.

I just want to say that this committee is going to act very forthrightly in pursuing tax reform in the regular order; that is, the committee itself with mark up legislation.

And I’m sure I speak for the House Ways and Means Committee as that’s their preference too and I think I can speak for both sides of the aisle, both parties those in the Finance Committee and Ways and Means Committee and many other members of the Congress want to pursue tax reform the same way — in much the same way we did back in ’86.

That was wide open, free-wheeling amendments offered. It is true that to some degree ’86 began with the administration with Treasury one and Treasury 2. It’s also true that both parties got very engaged, very involved and found a solution.

I can remember in this committee, Senator Packwood was then chairman, we reported out the ’86 bill unanimously, all members of the committee supported it, which was not expected earlier on.

So I appreciate your not only willingness, but your enthusiasm working with the Congress, under the regular order when the committees are doing their work to pursue tax reform because I believe that’s a good vehicle as well to address growth and jobs and the other goals that are so important.

LEW:

And, Senator, if I might add, I don’t think there’s any other way to accomplish it. It’s too complicated. It has to be done by the people with expertise and responsibility. And if confirmed, I would look forward to being a partner in that effort.

BAUCUS:

Thank you.

Senator Hatch.

HATCH:

Thank you.

And, Mr. Lew, I agree with the chairman that we need to do tax reform. We’re going to need you to weight in rather heavily. And, hopefully, we can do it in such a way that really does increase growth and pulls us out of the mess that we’re in.

I would just make one other comment. I think you got to weight on TPA. It’s ridiculous that this is the only president that’s — in my memory, who hasn’t asked for that power.

I mean it’s just — it’s a great power for the president so that you don’t have to have a two-thirds vote up here in the United States Senate.

And trade is going to be one of the best ways we can to pull us out of the mess we’re in and to create the manufacturing jobs that the president suggested he would like to do last night.

So I think you’re highly respected in this administration and by many of us. And I believe that if you’ll weight in, that’s something that really has to be done or we get into a massive mess up here that isn’t going to be solved easily.

Anytime you have to have a supermajority vote, it becomes a real (inaudible) United States Senate. And we’d like to avoid that and we’d like to see free trade go much faster and much better than it is.

Other nations throughout the world are entering into these free trade agreements and we’re being left out in the cold at a time when we need the jobs, we need the opportunities, the unions need the jobs, getting more and more jobs give them more and more chances to organize.

So all of that fits together and I just encourage you to weight in because I know the president thinks very highly of you and — or he wouldn’t have put you in this position.

And that would be my counsel to you and I just want to thank you again for appearing, being willing to answer these questions, and, frankly, I think you’ve done really well.

LEW:

Thank you very much, Senator.

HATCH:

You bet.

BAUCUS:

Like he said, I want to just emphasize something that Senator Hatch said. I don’t think this administration has been aggressive in pursuing trade agreements as it should.

To be honest, I had to twist some arms to get this administration to even agree to pursue TPP. They were not in favor of it in the beginning at all.

I thought that was just totally short-sighted. We need TPP to engage in the Pacific.

LEW:

I totally agree with you, Senator.

BAUCUS:

(inaudible) doing it. But, anyway, this administration was dragging its heels at best.

(CROSSTALK)

LEW:

I was on the side of the administration pushing for it so I’m glad you pushed.

BAUCUS:

No, it didn’t come out. I appreciate that very much. Also, recently, when I was in Europe, I was very heartened to see the degree to which European countries want to pursue a trade agreement with the U.S.

I might also add that TPA is a good opportunity to write a kind of trade authority with some provisions in it that move us into the 21st century, you know, move us forward, you know, rather than the old standard, garden variety TPA.

So I — lots of opportunities here and I know you agree and say that I know you’re going to pursue them all, but I just urge also you work mightily to find ways for both ends of Pennsylvania Avenue to work together.

It’s not just Congress. It’s both ends of Pennsylvania Avenue because that’s the way our founding fathers, you know, set this arrangement up and we just got to make it work.

LEW:

I look forward, if confirmed, to doing that with you, sir.

BAUCUS:

Thank you. And I wish you great luck. I mean this is a tough job. I mean Albert Gallatin said it was I agree with him. Good luck.

LEW:

Thank you, sir.

BAUCUS:

Hearing’s adjourned.

 

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