[Senate Hearing 113-166]
[From the U.S. Government Publishing Office]



 
                                                        S. Hrg. 113-166

                       NOMINATION OF JACOB J. LEW
=======================================================================

                                HEARING

                               BEFORE THE

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                 ON THE

                             NOMINATION OF

       JACOB J. LEW, TO BE SECRETARY, DEPARTMENT OF THE TREASURY

                               __________

                           FEBRUARY 13, 2013

                               ___________


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                          COMMITTEE ON FINANCE

                     MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West         ORRIN G. HATCH, Utah
Virginia                             CHUCK GRASSLEY, Iowa
RON WYDEN, Oregon                    MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         PAT ROBERTS, Kansas
DEBBIE STABENOW, Michigan            MICHAEL B. ENZI, Wyoming
MARIA CANTWELL, Washington           JOHN CORNYN, Texas
BILL NELSON, Florida                 JOHN THUNE, South Dakota
ROBERT MENENDEZ, New Jersey          RICHARD BURR, North Carolina
THOMAS R. CARPER, Delaware           JOHNNY ISAKSON, Georgia
BENJAMIN L. CARDIN, Maryland         ROB PORTMAN, Ohio
SHERROD BROWN, Ohio                  PATRICK J. TOOMEY, Pennsylvania
MICHAEL F. BENNET, Colorado
ROBERT P. CASEY, Jr., Pennsylvania

                      Amber Cottle, Staff Director

               Chris Campbell, Republican Staff Director

                                  (ii)


                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Baucus, Hon. Max, a U.S. Senator from Montana, chairman, 
  Committee on Finance...........................................     1
Hatch, Hon. Orrin G., a U.S. Senator from Utah...................     3
Schumer, Hon. Charles E., a U.S. Senator from New York...........     6

                         CONGRESSIONAL WITNESS

Domenici, Hon. Pete, former U.S. Senator from New Mexico.........     8

                         ADMINISTRATION NOMINEE

Lew, Hon. Jacob J., nominated to be Secretary, Department of the 
  Treasury, Washington, DC.......................................    10

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:
    Opening statement............................................     1
    Prepared statement...........................................    63
Domenici, Hon. Pete:
    Testimony....................................................     8
Hatch, Hon. Orrin G.:
    Opening statement............................................     3
    Prepared statement...........................................    66
Lew, Hon. Jacob J.:
    Testimony....................................................    10
    Prepared statement...........................................    69
    Biographical information.....................................    73
    Responses to questions from committee members................    79
Schumer, Hon. Charles E.:
    Opening statement............................................     6

                                 (iii)
      



                      NOMINATION OF JACOB J. LEW,



                            TO BE SECRETARY,



                       DEPARTMENT OF THE TREASURY

                              ----------                              


                      WEDNESDAY, FEBRUARY 13, 2013

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:10 
a.m., in room SD-215, Dirksen Senate Office Building, Hon. Max 
Baucus (chairman of the committee) presiding.
    Present: Senators Rockefeller, Wyden, Schumer, Stabenow, 
Cantwell, Nelson, Menendez, Cardin, Brown, Bennet, Casey, 
Hatch, Grassley, Crapo, Roberts, Enzi, Cornyn, Thune, Burr, 
Isakson, Portman, and Toomey.
    Also present: Democratic Staff: Amber Cottle, Staff 
Director; Lily Batchelder, Chief Tax Counsel; Tiffany Smith, 
Tax Counsel; and Jeff VanderWolk, International Trade Counsel. 
Republican Staff: Chris Campbell, Staff Director; Mark Prater, 
Deputy Chief of Staff and Chief Tax Counsel; Nicholas Wyatt, 
Tax and Nomination Professional Staff Member; and Aaron Taylor, 
Professional Staff Member.

   OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM 
            MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The hearing will come to order.
    Before we begin this morning, I want to recognize 6 new 
members to the Senate Finance Committee: Senator Sherrod Brown; 
Senator Michael Bennet; Senator Pat Toomey; Senator Robert 
Portman; Senator John Isakson; and Senator Bob Casey. Welcome, 
all.
    We are honored to have you. I think you will find the 
tradition of this committee is one that is very proud. We have 
worked together. I am just very happy that you are here with us 
to help move that tradition forward at an even deeper, faster, 
greater rate. You are all very talented members of this 
committee, and we deeply appreciate your attendance.
    Less than 2 miles from where we sit today at the entrance 
of the U.S. Treasury building stands a large bronze statue. One 
would assume 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, ``The place of the 
Secretary of Treasury is more laborious and responsible than 
any other.'' As Treasury Secretary, Gallatin laid the policy 
framework for the rise of the United States as an economic 
engine. That is Albert Gallatin.
    What did he do? He established fiscal discipline that 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, MT 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 the 
time that he was placed in a situation of trust. Today we are 
here to consider the nomination of Jack Lew to be the Nation's 
next Secretary of Treasury. We are here to determine if he is 
worthy of this situation of trust.
    Jack Lew has 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 will learn more about 
his record from Senators Schumer and Domenici in a moment, but 
there is no doubt that he is experienced.
    As Gallatin said, there is 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, CBO 
released a report showing the deficit, as a percent of GDP for 
2012 to 2015, will be cut in half, and the debt-to-GDP ratio 
will be stable for the next 5 years.
    The Budget Control Act of 2011 and 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 has been made, the job is certainly not 
over. We have many tough decisions ahead of us. The first 
challenge is the sequester, the across-the-board cuts to 
programs starting in just over 2 weeks. Then we quickly face 
the threat of a government shutdown.
    The sequester will cut critical programs, including 
Medicare, rural 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. The 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, you 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 2 years is 
unacceptable. Use your office to develop new ideas to produce 
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 the 
American people and harming the economy. You need to help us 
achieve stability in 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.
    Finally, we must simplify our tax code for individuals, for 
businesses. We need to make the system fairer and help make 
U.S. businesses more competitive in the global marketplace. As 
Treasury Secretary, you will be in a position to help make tax 
reform a reality. We will need not only your leadership, but 
your solid ideas and technical help. We are serious about this.
    We will be counting on your deep experience to help us 
achieve comprehensive tax reform. Over the past 2 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 few 
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, 
ask you some tough questions. That is our right, and that is 
our responsibility. That is our role. In fact, I will ask you 
to address my concerns that the administration is being 
distracted from what should be the main focus, that is, job 
creation. We will get to that in a minute.
    I am confident that, in the tradition of this committee, 
the questions of course will be respectful, and these questions 
will focus on how we can best move our country forward, 
representing the people whom 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 to 
ensure our government and finances are sound and help us remain 
the great world power in this competitive economy.
    [The prepared statement of Chairman Baucus appears in the 
appendix.]
    The Chairman. Senator Hatch?

           OPENING STATEMENT OF HON. ORRIN G. HATCH, 
                    A U.S. SENATOR FROM UTAH

    Senator Hatch. Well, thank you, Mr. Chairman. Welcome, Mr. 
Lew, and our old colleague Senator Domenici. We are so happy to 
see you here, and remember all the great work that you did here 
the whole time you were here. And of course, Senator Schumer is 
one of our great leaders in the U.S. Senate.
    I also want to welcome the new members of our committee on 
both sides. I think you are going to enjoy this committee. It 
is 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 his qualifications for this important position 
in the President's Cabinet. I agree with you: it is 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 are 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 debts 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 some of these matters and 
neither, in my opinion, do the American people. And, as a 
Social Security and Medicare trustee, the Treasury Secretary 
cannot simply hope these problems will go away.
    But the Treasury Secretary has responsibilities that extend 
far beyond the budget. These responsibilities include: 
implementation of financial regulations; 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, an 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 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 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 of the 
activities and practices of the units for which you were the 
chief operating officer.
    Some of the units' activities include proprietary trading, 
along with sales and marketing of risky investments. If you 
knew about the marketing and 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 will 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 that the Volcker rule is meant to 
prevent. Therefore, if you were to be confirmed, it could lead 
to an awkward situation in which, in your role as chair of the 
FSOC, you would be effectively 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 am sure many 
of these questions would have already been answered. As it is, 
we will have to explore some of these matters here today.
    Finally, I just wanted 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's and 
mine, as well as letters from my colleagues. You pledged to me 
to ``maintain frequent consultation with members of this 
committee.'' I do appreciate that promise and want you, if 
confirmed, to be responsive in a timely manner.
    Once again, welcome to the committee. We are pleased to 
have you here. I want to thank you for your willingness to 
serve. I want to thank you for your past service. There is no 
question in my mind you are a very bright and able person.
    Mr. Chairman, I look forward to what I hope will be an 
informative hearing. Thank you.
    [The prepared statement of Senator Hatch appears in the 
appendix.]
    The Chairman. 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 would 
like to give you the opportunity to introduce your family.
    Mr. 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 Shoshana. My son Danny and his wife 
Zahava and my grandchildren could not be here today, but I am 
very happy to have my wife and my daughter with me.
    The Chairman. Well, stand up so we can all recognize you 
and show our appreciation. [Applause.]
    These jobs are a huge sacrifice. It takes a lot of 
understanding and tolerance from the whole family, because they 
are so time-
consuming.
    Senator Schumer?

         OPENING STATEMENT OF HON. CHARLES E. SCHUMER, 
                  A U.S. SENATOR FROM NEW YORK

    Senator 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 the one in which I live, and Ruth, his 
wife, who grew up in my congressional district, will always 
have New York in their bones.
    I am delighted to endorse Jack's nomination to serve as the 
next Secretary of Treasury. I do so wholeheartedly and without 
any reservation. Jack is an accomplished public servant, 
renowned for his economic acumen, managerial prowess, and his 
common-sense 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 is no stranger to many of us in this room. He and I 
first met 3 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 our little group under their wings and taught us a whole 
lot.
    I know that Tip had a tremendous influence on Jack, and it 
is clear that Jack shares the late Speaker's indefatigable 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 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 to, and is 
successful at, working with both parties.
    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. 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 would then tell you where he came 
down, but he always let you make your own judgment. 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 and 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 would 
not have happened without Jack Lew's leadership, knowledge, and 
expertise.
    In 2009, Jack once again answered the call to public 
service and returned to DC 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 2 years serving 
the administration in a second stint as Director of OMB and as 
White House Chief of Staff. During his 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. 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 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 combating 
our Nation's long-term economic challenges.
    Mr. Chairman, in conclusion, I am confident this nominee 
possesses the expertise and work ethic necessary to excel as 
the Secretary of Treasury. He will not be an ordinary or just 
workmanlike Treasury Secretary, he will be a great one, in the 
mold of Albert Gallatin and of Alexander Hamilton, another New 
Yorker, one whom I never knew unlike, 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.
    The Chairman. Thank you, Senator.
    Senator Domenici?

               STATEMENT OF HON. PETE DOMENICI, 
              FORMER U.S. SENATOR FROM NEW MEXICO

    Senator Domenici. Thank you very much, Mr. Chairman. I am, 
likewise, very pleased to be here. I think most of you know I 
left the Senate because I was told I should by an eminent 
doctor, and I have outlived the doctor. [Laughter.]
    In any event, it is very nice to be here and to feel good 
enough to come and talk to you. Senator Schumer, it is nice to 
be with you.
    Senator Schumer. Thank you.
    Senator Domenici. And it is also nice that you left me 
enough time to express my views, and I thank you for that.
    In any event, I want you to know that I was sitting up in a 
little restaurant in Santa Fe, NM with some of the members of 
the State House, and I got a telephone call from somebody whom 
I could not understand; there was lots of noise. If he was not 
such a wonderful guy, he probably would have dumped me 
overboard, because I kept insisting, who are you? I can't get 
it. What are you doing?
    And finally, after three or four times and exerting 
himself, he got it out that he was trying to tell me that he 
would like me to come here today and introduce him. When it 
finally came out, I said, why didn't we do this a long time 
ago? I did not understand, I apologized, and he is still my 
friend.
    I want to say to all of you, Senator Hatch: Mr. Chairman, 
first, that was an eloquent statement. I happen to be a fan of 
Hamilton. The next gentleman after him probably did more in the 
broad sense. He probably had problems. The second one that you 
alluded to had problems like the ones our friend Jack is going 
to handle. But I am honored. I am very honored to endorse his 
nomination to serve as the next Secretary at this critical 
moment in our Nation's history.
    Currently, I am a senior fellow at the Bipartisan Policy 
Center, established a few years ago by former Leaders Senators 
Dole, Baker, Mitchell, and Daschle. It is bipartisan, not 
nonpartisan. I am a proud Republican. I am also a former 
chairman of the Senate Budget Committee, which many of you also 
serve on. I completed my career here as chairman of the Senate 
Energy and Natural Resources Committee.
    I will say, moving away from my prepared remarks, and 
saying to Senator Bennet, you may not think you are getting 
old, but clearly I am. I remember that we had a Bennet who was 
Chief of Staff of the Budget Committee, and I was very young 
and on the bottom, bottom chair. 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 here and see you today 
after that experience. It is great to be with you.
    This committee, as Senators know full well, has 
jurisdiction over 50 percent of the Federal budget. 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 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 here know, Jack has been a dedicated servant for many 
years, a 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's family made this journey from 
Europe to America 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. 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. Anyone who does not 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 
was taken to make Social Security solvent for 20, 30, 40 years. 
That is something real, not something just to talk about. He 
has 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 the 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, ``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 the 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 
are going to pull our country out of the fiscal mess we are in. 
We talk about job creation. It is clear to me that we will get 
real job creation when we get real deficit reduction, but I am 
not here for that. I am here on a personal note. I have found 
Jack to be a man of integrity. He works hard and can be tough. 
As a negotiator, he is awfully tough.
    But when the time comes to settle, things are settled. He 
believes in playing it straight. We have had differences of 
opinion over policies, but we have always been able to work 
through them. Again, quoting Alice Rivlin, ``The press keeps 
asking me for funny anecdotes about Jack, knowing that I had 
worked with him over many years.'' Alice continues, saying 
this: ``The truth is,'' she says, ``Jack isn't a funny anecdote 
guy.'' [Laughter.] ``He's just an able, dedicated, straight 
shooter. I guess you can't be both.'' He definitely, of the 
two, 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 policymaker who has all the right 
mixes of qualifications, knowledge, and vision to serve as the 
next Secretary of the Treasury. It is my hope that you will 
approve his nomination swiftly. It is a pleasure to be with you 
all and with him. Congratulations. Thank you.
    The Chairman. Well, thank you, Senator. Thank you, Senator 
Schumer, thank you, Senator Domenici, very, very much for those 
glowing statements. We all appreciate them. I am sure Mr. Lew 
especially appreciates it. Thank you very, very much.
    Mr. Lew, as you know, our usual practice here is for 
statements to be submitted into the record but for persons to 
summarize--briefly summarize--their statements for about 5 
minutes or so. But if you want to speak a little longer than 5 
minutes, take your time. This is a very important position. Why 
don't you proceed?

  STATEMENT OF HON. JACOB J. LEW, NOMINATED TO BE SECRETARY, 
           DEPARTMENT OF THE TREASURY, WASHINGTON, DC

    Mr. Lew. Thank you. Thank you very much, Mr. Chairman, 
Ranking Member Hatch, and members of the committee. It is a 
real privilege to be considered by this committee as the 
President's nominee to be Secretary of Treasury.
    I would like to thank Senator Schumer and Senator Domenici 
for their very gracious and kind introductions. It has been my 
great fortune to work with both of them over many years, and I 
am honored that they were here this morning.
    I am especially thankful to my family: my wife Ruth and my 
daughter Shoshi, who are here today; my son Danny, my daughter-
in-law Zahava, and my grandchildren. As you noted, public life 
demands much from our families, and I deeply appreciate the 
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 me in 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. With a 
long history of collaboration, this committee is a clear 
example that 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. As Budget Director, I oversaw three budget surpluses in 
a row.
    My experience in senior leadership positions outside 
government at New York University--where, I might add, the 
highest honor the university has is the Gallatin Award, after 
Albert Gallatin who also founded NYU, which is the largest 
private university in the United States and its city--has 
proven to me that working collaboratively to solve problems and 
drive change is a universal challenge.
    In 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 the 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 recession.
    Because of my experience, I approach the challenges that 
lie ahead with a clear understanding of their complexity and 
significance. That has 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 4 years, 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 the toughest sanction regime in history. We have 
signed a series of trade agreements to open the 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 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 expanding manufacturing in the United States. It 
means working with our partners around the globe and through 
the G-20 to bolster the international financial system and 
promote global economic stability. It means moving forward on 
financial reforms 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 2 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 is room for critical investments in 
education, research, and infrastructure, things that we need 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 is 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 is expanding; we want a private sector 
that is robust; we want a vibrant job market that gives anyone 
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.
    The Chairman. Thank you, Mr. Lew.
    [The prepared statement of Mr. Lew appears in the 
appendix.]
    The Chairman. I have several questions here that are 
obligatory questions we ask of all nominees. First, is there 
anything that you are aware of in your background that might 
present a conflict of interest with the duties of the office to 
which you have been nominated?
    Mr. Lew. No, Mr. Chairman.
    The Chairman. 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?
    Mr. Lew. No, there are none.
    The Chairman. Do you agree, without reservation, to respond 
to any reasonable summons to appear and testify before any duly 
constituted committee of the Congress, if confirmed?
    Mr. Lew. Yes, I do.
    The Chairman. And finally, do you commit to provide a 
prompt response in writing to any questions addressed to you by 
any Senator of this committee?
    Mr. Lew. Yes, I do.
    The Chairman. Thank you.
    I would like your thoughts on tax reform. As I mentioned in 
my statement, everyone knows the country, the world, has 
changed dramatically since 1986. I believe that we must, and 
this committee is going to, engage in substantive, 
comprehensive tax reform. It is our duty, it is our obligation; 
it is also our opportunity.
    I would like your thoughts on the visions we should focus 
on, actions we should take. I would like you also to tell us 
how you are 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.
    Mr. 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 do not 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 is fair and that everyone is treated in a similar way 
in a similar position. 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 is 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 a benefit to everyone but not concentrated 
with anyone individually.
    I think we can do it. I think it is important that we do 
it. It is important for competitiveness; it is important for 
manufacturing and job creation. It is important in terms of our 
international competitiveness. I think it is something that 
there is a bipartisan consensus that we need to do, but there 
is an understanding of how hard it is. I would pledge to work 
with this committee to try to get that job done.
    The Chairman. Could you speak a little more about base 
broadening? What areas do you think are areas that we should 
focus on? Then you also mentioned that the base broadening 
should be used to lower rates. If you could talk a little about 
that, I would appreciate that--a little more detail.
    Mr. Lew. Senator, I think that, on the individual side, it 
is a very hard thing to do, to broaden the base, because it is 
taking a look at things that are very much part of the fabric 
of how people live right now. But, as in 1986, that is the way 
you can go about tax reform. It is a little harder than in 1986 
because we have not completed the work on the fiscal plan.
    We need to have some more revenue as part of a 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 
places, on some occasions.
    For individuals, individual firms, their average tax rate 
is much lower because of all 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 is no other way to bring the rate down, which is 
something that I think we need to do to maintain our 
competitiveness abroad.
    The Chairman. So, even though our effective rate might be 
different than the statutory, you still believe it is good to 
proceed, go down the road of corporate reform, reduce a lot of 
those tax expenditures in order to get the rate down?
    Mr. 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 is a much more complicated 
story to tell that the average rate is lower. It does not 
affect all businesses equally. In order to get that lower 
average rate, one has to take advantage of complicated special 
tax provisions. We can have a simpler tax code.
    The Chairman. I do not have a lot of time here. But if you 
could just briefly comment on something that has 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? What benefits did you receive?
    Mr. 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 had a very conservative personal 
investment philosophy. 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 and they recommended or directed the 
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.
    The Chairman. Why was the investment in the Cayman Islands?
    Mr. Lew. Senator, I actually do not know how it was 
organized. I was not involved in setting up the fund.
    The Chairman. Did you know at the time it was the Caymans?
    Mr. 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 did not know at the time what the address of 
the partnership was.
    The Chairman. And when did you divest?
    Mr. Lew. I divested in 2010, when I became OMB Director. 
The fund was disclosed in all of my prior confirmations and all 
of my SF 278s. I am not aware of any tax benefits that I got 
from participating in it. It was an investment.
    The Chairman. But did you pay taxes on that investment?
    Mr. Lew. I reported all income related to the investment on 
my tax forms. I have paid all my taxes.
    The Chairman. But did you earn taxes on that?
    Mr. Lew. I lost money on the investment. In fact, I lost 
money, so I did not have a great deal of income.
    The Chairman. All right. Thank you.
    Senator Hatch?
    Senator Hatch. Well, thank you, Mr. Chairman. I appreciate 
it.
    Following the financial crisis, many lessons were learned 
by many financial firms, including Citigroup, that 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 to 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 have been 
misleadingly marketed and sold to investors were handled by the 
units that you oversaw. Those securities include a 
collateralized debt obligation, or CDO, called Class V 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 were 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 am going to go through all of them, and then you can 
respond.
    First of all, at Citi, did you have any discussions or 
participate in any e-mail exchanges, including having been 
cc'd, on any e-mail regarding the Class V funding CDO, or the 
ASTA, 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?
    And fourth, while managing to provide efficiencies at the 
units that you oversaw, did you use any services of Citigroup 
Global Services, which Citi's website calls ``one of the 
largest providers of business process outsourcing services 
within the banking and financial services sector?'' Those are 
the four questions I would like to have you answer, if you 
would take time to do so.
    Mr. Lew. Thank you, Senator Hatch. 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--that was for about 2 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 a 
large national and international field organization system. I 
mentioned to Senator Baucus, one of the early trips that I took 
was to Billings, MT to visit our financial advisors, because I 
went 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 was not 
designing them, and I was not 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.
    With regard to specific e-mails and phone calls, it is 
quite a number of years. I do not 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 did not have responsibility for 
the funds themselves, but I was aware that those difficulties 
were going on.
    Senator Hatch. My time is up, Mr. Chairman.
    The Chairman. Following the early bird rule, the next 
Senator on the list is Senator Schumer. He is not here.
    Senator Grassley, you are next.
    Senator Grassley. Already?
    The Chairman. Yes. After Grassley, it is Stabenow, Crapo, 
and Cantwell.
    Senator Grassley. Mr. Lew, on January 16, 2009, Citigroup 
announced losses of $18.7 billion, the same day Citigroup 
received a $301-billion Federal bail-out through a loan 
guarantee on its mortgage assets. One day later, you received a 
bonus from Citigroup for over $940,000 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 multi-billion dollar Federal guarantee 
when you accepted your bonus?
    Mr. Lew. Senator, I was aware of the condition of Citi and 
of the TARP program, yes.
    Senator Grassley. All right. Explain why it might be 
morally acceptable to take close to $1 million out of a company 
that was functionally insolvent and about to receive $1 billion 
of taxpayer support.
    Mr. Lew. Senator, in 2008 I was an employee in the private 
sector. I was compensated in a manner consistent with other 
people who did the kind of work that I did in the industry. I 
was compensated for my work. I will leave it for others to 
judge.
    Senator Grassley. Now to something that President Obama has 
made a big deal about. 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 the Cayman Islands that had over 12,000 
businesses. I have 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 that the President was 
accurate in referring to the building which housed your 
investment as ``the largest tax scam in the world?''
    Mr. Lew. Senator, I am happy to answer questions about my 
own investments. I am 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.
    Senator Grassley. Well, there is a certain hypocrisy in 
what the President says about other taxpayers and then your 
appointment, but let me move on.
    You have 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 8 years. The 
chairman of this committee, as well as a former Budget 
Committee chairman whose chart is behind us, highlighted Ugland 
House to the Nation several times. As I said, President Obama 
preached about it. It is no wonder that maybe you and the 
President have not proposed legislative solutions to what the 
President considers a tax scam.
    So my question: how can you be the President's top tax 
enforcer if you have not heard of this offshore loophole?
    Mr. Lew. Senator, this committee has reviewed my taxes for 
many years. I think it is clear that I reported all income that 
I have earned. I have 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.
    Senator Grassley. Do you think Ugland House ought to be 
shut down?
    Mr. Lew. Senator, I am actually not familiar with Ugland 
House. I understand there are a lot of things that happen that 
are a problem.
    Senator Grassley. All right. Let me move on then.
    Mr. Lew. Yes.
    Senator 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 offshore 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?
    Mr. 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 Unrelated Business Income Tax. I was 
involved in discussions about making sure that the endowment 
was invested to have as good a return as possible, and the goal 
of the Investment Committee at NYU was to try to have a diverse 
portfolio that would help the university get income from its 
endowment.
    Senator Grassley. Well, I will close then with this 
conclusion since you are unaware of it. I take your word for 
it, but it is certainly a poor reflection on your tenure there 
if you did not know about these investments. You were paid over 
$800,000 more than the actual president of NYU to know what was 
going on, and I am surprised you did not know what was going 
on.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Next, Senator Stabenow.
    Senator Stabenow. Thank you very much, Mr. Chairman.
    Mr. Lew, welcome back. I understand this is your sixth 
confirmation hearing, so you are certainly a glutton for 
punishment. But we welcome you, and we thank you very much for 
your service. Mr. Chairman, I actually am optimistic, listening 
to the concerns about closing offshore loopholes.
    I think we may have something here that we could do 
together to offset sequestration. I think it would be wonderful 
to work together on something that would close loopholes that 
clearly we are seeing bipartisan concern about today, which I 
would love to work with members on.
    I would 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 would love to 
have things go faster, manufacturing has been leading the 
recovery in growth.
    When we look at tax reform and what we need to do to be 
competitive internationally and so on, I am very interested and 
concerned to make sure that we continue to make things in 
America and that 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. 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?
    Mr. 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 help grow the economy, create 
jobs, and improve the environment for manufacturing in the 
United States.
    Right now we have a tax code that has a lot of provisions 
that benefit manufacturers of one kind or another, but they are 
quite complicated, they are quite particularistic, and overall 
we have a 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 to simplify 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. 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 is hard, that each of the 
individual provisions in the tax code is very important to one 
or another industry. It is going to require bipartisan 
consensus; it is going to require working together to do. It is 
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 have focused on 
is, we should take away the incentives for things that--oil and 
gas exploration cannot move offshore. 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 is no 
limit to how much we can grow.
    Senator Stabenow. Just to emphasize that, we have about 17 
million people who work in this country because of 
manufacturing, 16 million because of agriculture. If we focus 
on making things and growing things, that really is the 
foundation of the economy.
    One final question on the foreclosure crisis. I believe 
there is much more to be done, even though things are 
improving. What would you like to see done?
    Mr. Lew. Senator, we have worked very hard over the last 4 
years, pursuing multiple paths to help homeowners either 
refinance or modify their loans. One of the things that we very 
much would like to do, which the President addressed last night 
in the State of the Union address, is to enable homeowners who 
are paying their bills, who are under water through no fault of 
their own because of the financial crisis, to be able to 
refinance their loans.
    Right now, you have homeowners who are locked into 6, 7, 8 
percent mortgages when they should be able to get 3.5 or 4 
percent mortgages. We ought to be able to do that on a 
bipartisan basis.
    Senator Stabenow. Thank you very much.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator.
    Senator Crapo?
    Senator Crapo. Thank you very much, Mr. Chairman.
    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 have shared with you, in my work with the 
Bowles-Simpson Commission and in other areas of trying to 
address putting together a comprehensive deficit reduction 
package and debt reduction package, I view tax reform, as I 
have 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.
    That is, I think, the first part of the question I want to 
ask you. I think you have already answered it, but I want 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.
    I have heard the term ``tax reform'' used all too 
frequently to mean a revenue-generating device. I understand it 
can be utilized to generate revenue, but please tell me why, 
again, you believe tax reform is needed in our economy.
    Mr. Lew. Thank you, Senator. As I think we discussed in the 
conversation we had, I considered it a lost opportunity in 
December and January that we did not get to a final agreement 
on our fiscal challenges so that we would 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 is a need to do tax 
reform. In clearing out the tax code and broadening the base, 
there is 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 did not broaden the base. So 
there is 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.
    Senator 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 anti-competitive to our own business 
interests, than we have now. We need to correct that, and I 
look forward to working with you in partnership on that.
    I would like to get into a little bit more detail. If you 
look at the corporate side--and you have 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.
    Mr. Lew. The challenge, Senator, is how far we are willing 
to go in broadening the base. We do not have the ability to 
lose revenue as we go through business tax reform. I think it 
is challenging to get all the way to 25, but I think the more 
aggressive we are at broadening the base, the more progress we 
will be able to make at lowering the rate.
    Senator Crapo. Do you agree that, on the corporate side, we 
should be revenue-neutral? My understanding is that in the past 
we have focused on at least the corporate rate reform being 
revenue-neutral.
    Mr. 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 
do not 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.
    Senator 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?
    Mr. Lew. Senator, I think we could, but I do not think it 
would be the best way to do it. I think the best thing would be 
for us to do both individual and business tax reform. 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 
will be, but we need to keep both in play. I mean, right now 
the challenges are many, but I think, once we are doing tax 
reform, we should do it right and we should do both.
    Senator Crapo. I wanted to get into some Dodd-Frank issues, 
but I see my time is running out. One last, quick question on 
the corporate reform side. Are you open to negotiating a 
competitive territorial system in the corporate code?
    Mr. Lew. Senator, I think that, as we lower our rate, we 
ought to be looking at having kind of a minimum world-wide tax 
rate where we are trying to level the playing field. We 
actually have a debate between whether we go one way or the 
other. We have a hybrid system now, and it is a question of 
where we set the dial. I think that there is room to work 
together on this.
    Senator Crapo. Thank you.
    The Chairman. Thank you, Senator.
    Senator Cantwell?
    Senator Cantwell. Thank you, Mr. Chairman.
    Congratulations, Mr. Lew, on your nomination. It is great 
to see your family here today. I definitely have a lot of 
fiscal/financial questions for you. But you spoke 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, as well as focusing on quality as 
opposed to frequency in tests. I was curious. Were you involved 
as chief of staff in the discussion of implementation of the 
Affordable Care Act?
    Mr. 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.
    Senator Cantwell. Do you think that if there is a provision 
of the Affordable Care Act that is supposed to be implemented 
in 2014, that it should be implemented in 2014?
    Mr. Lew. We have been working very hard to be on schedule 
with 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, Department of Labor, Office of Personnel 
Management. It was not always easy, because we had to work 
mighty hard to get the funding to implement on schedule, but I 
feel we are in a pretty good place.
    Senator Cantwell. Well, there is one provision that is not 
being implemented, the basic health plan. I know the President 
has 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?
    I guess I am 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 exchanges? Is there 
a bias over there that somehow the Affordable Care Act means 
implementing only those pages related to the exchanges and 
punting everything else, even though they have been more cost-
effective delivery systems?
    Mr. Lew. Senator, I am not aware of any such bias. I do 
know that there has been an enormous amount of work to get the 
exchanges set up and the various parts of the architecture. I 
would be happy to follow up and work with you on that specific 
issue and find out where it is in the queue and follow up on 
that.
    Senator 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 and almost maybe even 
making it more expensive and pushing that population onto the 
exchanges as some Holy Grail. I can tell you that we think it 
should be implemented and 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?
    Mr. Lew. Senator, as we discussed when we had this 
conversation, Glass-Steagall had, over the years, become 
something of an anachronism. Much of the activity in the 
financial world had gotten beyond it. I think the problems we 
had 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. I think Dodd-Frank was a 
critically important step to reasserting proper regulatory 
oversight of an industry that is 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? They have to be actions that make 
sense in 2013. So I think going back--while I am a student of 
history, and New Deal history in particular is of great 
interest to me--I do not think it is just a matter of 
resuscitating a 1930s statute. It is a question of, what do we 
need to do to manage the financial changes now?
    Senator Cantwell. So I will take that as a ``no.'' To that 
point, I do not see how you contain this issue, as we now see 
the CFTC and the treatment of swaps and futures as having 
different clearing measures. Are you not worried that that is 
going to provide more systemic risk as well?
    Mr. Lew. I think that if you look at the issues, things 
like margin requirements for swaps, it is very important that 
we get on top of regulating things that create system risk. I 
did not mean to be answering the prior question ``yes'' or 
``no.'' I think it is just a little bit more complicated.
    I think the question of, is there a need for any further 
consideration of financial regulation is one that just comes in 
sequence after implementing Dodd-Frank. I come to the issue 
open-minded, knowing that we cannot let what happened leading 
up to 2008 happen again. We cannot let a regulatory system 
become outstripped by the complexity and organization of a 
financial system which our economic life depends on.
    Senator Cantwell. Well, I will look for more discussion on 
that point, then.
    There are two other issues I wanted to bring up. I just do 
not understand the administration's idea of capping the 
municipal bond tax deduction at 28 percent if we want to 
encourage more investment. One thing I do believe the Federal 
Government does is provide cheap capital whichever way, and 
when all these banks are putting all these monies into 
derivatives, you cannot convince me that they are really 
interested in the bottom line here. So to me, a policy on 
capping the municipal bonds at 28 percent, tax-exempt bonds--I 
am curious as to whether you are going to continue that policy.
    Also, on the Foreign Investment and Real Estate Act, I am 
curious whether you think the Treasury Department is going to 
complete that IRS notice and take action that would help jump-
start private investment.
    Mr. Lew. Senator, the administration's proposal, which 
would have limited the value of deductions in the top tax 
bracket to 28 percent, was designed to try to restore some 
equity in the tax code and to generate revenue that we need for 
meeting our fiscal targets. It was not specifically directed at 
municipal bonds or at other specific areas of tax activity.
    It was also meant to be a place holder, that we really 
should have tax reform, and we should make specific policies 
deciding what is in and what is out and what the proper tax 
rates are. But we put it in as a fall-back, saying that, if tax 
reform does not happen, this is something that would help us to 
get to the revenue targets we need.
    I would 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 
many of us are sympathetic to where we have to curtail tax 
benefit if we are going to broaden the base. I think as a 
general rule, if there were a lot of easy decisions, tax reform 
would have happened a long time ago. I think there are going to 
be hard choices to make.
    Senator Cantwell. And so, on the foreign investment, is 
that something you are going to take action on? Are we going to 
have to act here?
    Mr. Lew. My understanding is that those rules are 
progressing. If confirmed, I would pay attention to them and 
work on them and work with you to get them completed.
    Senator Cantwell. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    The next two are not here, so, Senator Thune, you are next.
    Senator Thune. Thank you, Mr. Chairman.
    Mr. Lew, welcome. I want to come back to an area where I 
think there is room for Republicans and Democrats to work 
together, and that is the issue of tax reform.
    What I have on my right here are the 1,300 pages that, the 
last time we did tax reform, the White House and the 
administration put forward in terms of their recommendations. 
In November 1984, May of 1985, it was Treasury I, Treasury II. 
We talked about this; I think you are familiar with these 
documents.
    But contrast that with the paper that the White House, the 
administration, put out. This is 25 pages, basically. It is a 
corporate tax reform proposal. It is 25 pages, if you include 
the title page and the table of contents.
    But 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 are 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.
    The President talked about, last night yet again, tax 
reform and the need for it, but he does not give us any 
details. He said he supports lowering rates for businesses that 
create jobs in America. 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 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 have already addressed with regard to Senator Crapo's 
question?
    Mr. Lew. Senator, I think that to proceed on tax reform, we 
are going to have to work together, both the executive branch 
and the legislative branch, and on a bipartisan basis. 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. 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 the two chairmen with the 
Secretary of the Treasury in the conversation, in the kind of 
regular-order process that I think we will need to follow again 
if we are going to succeed.
    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--it did not lead to health care 
reform. When President Obama sent a much shorter document to 
Congress, it ended up going the full distance and getting 
enacted into law.
    The goal is, how do we get something done? The means to the 
end I am very flexible on and would be very open to suggestions 
of how we could work constructively to both provide ideas and 
technical support. I think it is very important.
    On the question of rates, we will 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 is possible. I think if we 
roll up our sleeves and we are willing to do the hard work, we 
can both get our fiscal house in order and work on the rate 
structure. It will all depend on how much we are willing to do.
    Senator Thune. Well, I guess I would just say--and I 
understand the whole issue of the health care reform 
legislation and the concern about too much specificity, but 
frankly this is not going to get done unless there is 
leadership out of the White House. This is a big issue. This is 
going to be very hard. There are lots of constituency groups 
out there that are very attached to the current tax code. I, 
frankly, am one who believes that we need to do away with it.
    Start by doing away with everything and do 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 this should be getting the 
rates down, promoting economic growth. I hear the President 
talking about raising revenue through tax reform. To me, if you 
get economic growth, you will get new revenue, but you will get 
it the old-
fashioned way and at the same time create lots of jobs and get 
this economy expanding again. So, that ought to be the goal. 
But I am suggesting that there has to be, I think, more 
leadership than this relative to this when it comes to this 
issue.
    Very quickly, one other question. I raised this with you as 
well when we had our meeting last week. But the President, once 
again, I think, talks about entitlement reform. We have 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 is just not the specificity there. 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 the bucket.
    So I guess my question again is, 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 are going to average 
18.9 percent, which is almost a full percentage point higher 
than the 40-year historical average.
    We have revenue coming in. We have a spending problem. 
There is just no proposal that, in any meaningful way, 
addresses that. You look at the budgets that were submitted the 
last 2 years that got voted on in both the House and the Senate 
that did not receive a single vote, Republican or Democrat. 
They are not serious.
    I guess I am 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 is 
this massive debt.
    Mr. Lew. Senator, I could not agree more that we need to 
deal with our fiscal challenge. I may disagree that it is a 
combination. We have a deficit problem, and we are going to 
need to solve it with a combination of spending reduction and 
restoring revenue. But that is the kind of thing where we can 
have a discussion and figure out what the right balance should 
be. The President said 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 
a burden to those who can afford to pay for their Medicare if 
they retire, and they can afford to pay for it. There is going 
to be a difficult discussion at some point of what the right 
mix between those different approaches is.
    The President, in negotiations in December, offered to 
increase to $400 billion the savings in Medicare, and we are 
prepared to engage in very specific ways to do that. 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 is growing and creating jobs.
    Senator Thune. I think my time has expired, Mr. Chairman. 
Thanks.
    The Chairman. Thank you, Senator.
    Next, according to our early bird rule here, is Senator 
Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Mr. Lew, congratulations on your nomination. In your 
previous confirmation hearing to be the OMB Director, there 
were a series of questions raised about deregulation and the 
approximate causes of the financial crisis. Some of the 
responses that you gave raised some concerns as to your 
commitment to stronger financial regulations. Clearly, there is 
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? Moving forward, if you were to 
be confirmed, do you support the full and robust implementation 
of the oversight rules of the Dodd-Frank law?
    Mr. Lew. Senator, I very much believe that Dodd-Frank was 
necessary, that we needed to modernize the regulation of the 
financial services industry. I think that the oversight 
provisions in Dodd-Frank need to be implemented. If confirmed 
as Chairman of the FSOC, it would be an extraordinarily high 
priority of mine.
    Senator Menendez. All right.
    One of the other things that you will have in your 
portfolio as the Treasury Secretary is the implementation of 
sanctions. 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 nearly unanimously and that 
the 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, seeing that a large universe of them are within 
the Treasury Department?
    Mr. Lew. Yes, Senator. If I might just elaborate on that a 
bit. I think that our sanctions--our unilateral sanctions that 
are bringing the world community together for multilateral 
sanctions--have put in place the strongest sanctions regime in 
history. Frankly, it is 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: they are crushing 
the Iranian economy. GDP is down, the value of their currency 
is down, unemployment is up, inflation is up. What we have not 
seen yet is whether that has changed the mind of the regime so 
that it is 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 all options are left on the table. I 
firmly believe that these economic sanctions are far preferable 
to war, but we must pursue them vigorously.
    Senator 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--for 
yourself in the role as the Treasurer of the United States, in 
being part of creating that growing economy?
    Mr. Lew. Senator, the Secretary of 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 is 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 just have to keep 
working at it. 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 cannot 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, the people, and the infrastructure. That has 
to be in conjunction with a fiscal policy that we can afford.
    Senator Menendez. Well, I hope, in closing, Mr. Chairman, 
that you will also put in that universe something the President 
mentioned in his speech last night, which is mortgage 
refinancing.
    Mr. Lew. Absolutely.
    Senator Menendez. Senator Boxer and I have legislation on 
that. I cannot understand for the life of me why we would not 
let thousands of American families refinance, lower their rates 
to the historically low rates, and unlock, not only a universe 
of solidified homeowners, but also unlock economic potential 
for----
    Mr. Lew. Senator, I could not agree more.
    The Chairman. Thank you.
    Senator Cardin?
    Mr. Lew. The work, you have done that. It is very 
important.
    The Chairman. Senator Cardin?
    Senator Cardin. Thank you, Mr. Chairman.
    Mr. Lew, thank you very much for your willingness to 
continue in public service. 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 experience that I 
think will be very helpful, and that is your work in the House 
under Tip O'Neill, where you were a part of the efforts to 
reform our Social Security system and our tax code, both of 
which required bipartisan cooperation, where the White House 
and Congress were under different parties. We need that 
desperately today. I think you will 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, I would like to deal with the problems that have 
been brought to our attention about small businesses and access 
to capital. We have had several initiatives to try to help 
small businesses gain easier access to capital to expand job 
opportunities.
    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?
    Mr. Lew. Senator, in the aftermath of the financial crisis, 
one of the big challenges has been to get capital flowing 
again. We have two problems. One is, there are businesses that 
have a lot of cash on their balance sheet that they are not 
investing, and we have financial institutions that have been 
slow to get back into the lending business.
    I think we have seen some progress on the opening of the 
spigots in lending. It is going to be a balance. We have to 
make sure that financial institutions are sound and that, 
particularly, larger financial institutions do not get back 
into a position where they create risk to our entire system or 
risk that the taxpayers will be left with a burden.
    For community banks, I think that many of the new laws and 
regulations, quite rightly, were written to treat them 
differently, that small institutions do not 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.
    Senator Cardin. I appreciate that. I think the laws are 
well-
intended. I think, on the ground, they are not working exactly 
as we all intended. And I am not blaming the administration or 
Congress. I think collectively that 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 the 
national savings rates. Senator Portman and I worked in the 
House on dealing with our national savings issues. During the 
best of economic times, savings rates in this country were very 
low. It is important for our economy to have private savings. 
It is also important for individuals, for retirement security, 
taking pressure off of a lot of the public plans.
    One of our concerns is that, as we look at tax reform, 
there are 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, because 
what you are doing is talking about the timing of tax revenues. 
And, on a long-term basis, we are accelerating tax collections 
and even making our long-term finances counter to what they 
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?
    Mr. Lew. Senator, I believe that it is very important that 
we have policies that encourage individuals to save for their 
retirement. We have long viewed our retirement system as being 
something that depends on a combination of Social Security, 
pensions, and savings. We are 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 have had rules that could have been simplified. 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 is 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.
    Senator Cardin. Let me just say, lastly, Senator Stabenow 
talked about delivery system reform in the health care system. 
It has been very frustrating, because we know that we are 
moving forward to a better, more efficient health care system.
    The problem is, how do we get that scored, and how do we do 
it in a way that we know we will get the savings that we need? 
So, I just look forward to working with you, because your 
experience at OMB, your experience in the White House, and as 
Treasury Secretary, puts you in the unique position where you 
can help as we try to deliver a more efficient health care 
system for the American people.
    The Chairman. Senator Cornyn?
    Senator Cornyn. Thank you, Mr. Chairman.
    Mr. Lew, good morning.
    Mr. Lew. Good morning.
    Senator Cornyn. Good to see you.
    As you know, the Medicare Board of Trustees, on which the 
Treasury Secretary serves as the managing trustee, must project 
whether general revenue funding will exceed 45 percent of 
Medicare outlays for the current fiscal year, or any of the 
next 6 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 
warning is triggered after two such consecutive determinations, 
the President is 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?
    Mr. Lew. Senator, I am familiar with the report, and I know 
that the acting OMB Director has 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 administration. 
They voluntarily submitted it. When the Obama administration 
came in, actually the budgets that we have submitted have had 
specific Medicare savings proposals, but before I was at OMB 
the decision was made not to voluntarily submit the report.
    Senator Cornyn. So the administration is taking the 
position it is unconstitutional?
    Mr. Lew. Well, as I understand it, there was a signing 
statement in the Bush administration that said that it is 
inconsistent with the recommendations clause of the 
Constitution.
    Senator Cornyn. But they submitted the report. The Obama 
administration has never submitted a report, correct?
    Mr. Lew. Well, we have submitted specific Medicare savings 
proposals which, if enacted, would resolve the issue. I would 
also add that, in 2013, we will be out of that zone, so the 
combination of the trajectory we are on with the savings from 
the Affordable Care Act and specific proposals that the 
administration put forward, have addressed the substance of the 
issue.
    Senator Cornyn. Well, the record will reflect that the 
administration has never submitted a report, pursuant to that 
statute. I hear you saying they have submitted other proposals 
that you think are satisfactory, but it does not comply with 
the statute.
    As you know, the Congress has passed a no budget-no pay 
bill which says if Congress does not do its job and pass a 
budget, it does not get paid. 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, in significant part because 
of energy production. But I would like to ask you, do the 
planned revenue proposals that the President has in mind 
include tax increases on American energy producers?
    Mr. Lew. Senator, the President has proposed eliminating a 
number of targeted provisions for the oil and gas industry. 
They are provisions that 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.
    Senator Cornyn. So that would effectively raise the tax 
burden on American oil and gas producers?
    Mr. Lew. Well, it would take away a special provision that 
now encourages activity in that area more favorably than in 
other areas.
    Senator Cornyn. So they would pay more in taxes?
    Mr. Lew. It is going to be part of tax reform. There will 
be some special provisions that have to be eliminated so that 
everyone can get a lower rate.
    Senator Cornyn. Well, Mr. Lew, I am amazed at your 
unwillingness to answer a simple question, but let us move on.
    We talked about the level of Federal spending, and we 
talked about that in my office. The 40-year norm is that the 
Federal Government spends roughly 20 percent of our Gross 
Domestic Product. Actually, during the Clinton years, in which 
you served, the average spending level was 19.8 percent.
    Under the Obama administration, it has been 24.4 percent, 
while revenue has been at 15 percent, hence the 9- to 10-
percent deficit, the difference between revenue that is brought 
in and the amount of money that 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?
    Mr. Lew. Senator, I do not think the current situation is 
the new normal. We are at the end of a recovery from a very 
deep recession, where we have had 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 is driving costs.
    What is 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 is 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 is going to 
be a larger population of people eligible.
    So I think to say that there is an exact number based on a 
historical norm kind of misses the fact that there is this 
large cohort moving through the system that we are going to 
have to make some tough choices about.
    I, for one, think we ought to pay Social Security and 
Medicare recipients' benefits, and I think most members and 
Senators do as well. But that is what is driving the number. We 
are at a historically low level of discretionary spending as a 
percentage of GDP. We are down to the levels of the Eisenhower 
administration.
    The Chairman. Thank you, Senator.
    Senator Portman?
    Senator Portman. Thank you, Mr. Chairman.
    I would just say to the 24 percent, the Congressional 
Budget Office, as former OMB Director Jack Lew knows, just told 
us last week that we are quickly going to 25, and then 30, and 
then 35, and then, in the year 2042, 40 percent of GDP, so 
clearly this is not sustainable. CBO also made the point that 
you simply cannot cache that level of spending with new taxes, 
at least under the income tax code.
    So, as Treasury Secretary, you are going to have the 
opportunity to deploy all of those OMB skills. I would agree 
with Senator Cornyn that we need to establish, what is the 
right level of government, and then be sure that our budget is 
balanced over time. CBO tells us that revenue is going to 
exceed its historic average, as you know, in the next few 
years, by 2015.
    But let me back up on a question that I would like to ask 
you today regarding corporate tax reform and individual tax 
reform. Last night in the State of the Union address, the 
President said a lot of things. Again, as a former OMB 
Director, I hope you were at least a little uncomfortable with 
his laying out what I counted as 10 new Federal spending 
programs.
    I will not ask you today how we are 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. He also said something that I 
appreciated, which is, it is not going to be easy.
    I think that is part of his role as President--and your 
role should you become Treasury Secretary--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 believe it is 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 would 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 is one that we all 
agree needs to be done.
    In 1986, 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 34 percent 27 years ago. We did that very 
deliberately to get our corporate rate below 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. That puts us at a 
clear competitive disadvantage. We are sitting on the sidelines 
while investment in jobs and headquarters is going overseas. We 
can talk more about that.
    But here is a quote that I like. It is from the Secretary 
of the Treasury equivalent, the Chancellor of the Exchequer in 
the UK. 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 all of our competitors but dramatically 
lower, 18 percent lower, than the U.S.'' So this is what is 
going on. They are all lowering their rates, and they are all 
reforming their code to make it more competitive, except us.
    We talked earlier about our rate being 39.2 as an average, 
that is 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, while that is 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 do not want folks to misinterpret what was said 
earlier when the point was made that our effective rate is 
lower, because you could have inferred from that that it is 
lower than the average. It is not. It is still higher. As you 
have talked about today, and I think Senator Crapo discussed, 
this is incredibly complicated. Therefore, we do not have an 
efficient allocation of resources; therefore, it is hurting 
jobs in this country.
    So I would just ask you, given that the President's Jobs 
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 ``put the United States in line with other major 
competitor countries and encourage more investment in 
America,'' given that the OECD has now concluded that a high 
corporate tax rate is ``most harmful to growth,'' would you 
agree that revenue-neutral tax reform that reduces our 
corporate rate is a competitive necessity for our country?
    Mr. Lew. Senator, 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.
    Senator 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 I have seen on this. 
The CBO has said that 70 percent of the corporate tax burden 
falls on workers in the form of reduced wages and fewer job 
opportunities.
    There is 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 borne by labor. 
Would you agree that the 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?
    Mr. Lew. I think a reformed tax system with a lower rate 
that encourages investment in the United States and the 
creation of jobs in the United States would be good for 
American workers who would fill those jobs.
    Senator Portman. Great. Thank you, Mr. Chairman. I look 
forward to talking about entitlement reform on the second 
round.
    Mr. Lew. I look forward to working together.
    The Chairman. Thank you very much, Senator.
    Senator Brown?
    Senator Brown. Thank you, Chairman Baucus.
    Welcome, Mr. Lew. Thanks for being here. One of the most 
important jobs the Treasury Secretary does is serving as 
Chairman of the FSOC. You did not mention it in your written 
testimony, and I am going to ask you a little bit about it.
    We know that the six or so largest mega-banks in our 
country benefit from lower interest rates in the capital 
market, some say 50, 60, 70, 80 basis points. Senator Vitter 
and I have made a request of GAO to study what that 
differential exactly is. Basically it is a subsidy through 
reduced funding costs based upon the market's belief that these 
banks are, in fact, too big to fail.
    Don't you think it is unfair for these banks, $2-trillion 
banks in at least a couple of cases, these mega-banks, to 
receive government-subsidized funding advantages that community 
banks in West Akron, or Palmyra, or Sycamore, OH do not get?
    Mr. 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 taxpayers. In 
terms of the access to different borrowing windows, I would be 
happy to follow up with you on the differences between access 
in community banks and large money center banks.
    But 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. We have tried to 
put less burdens on the smaller banks. I am not familiar with 
the specific issue you are raising.
    Senator Brown. Well, I mean, you are familiar with the fact 
that these mega-banks do get advantages in the capital markets 
because they can borrow money at a less expensive rate. I mean, 
I have kind of heard this from Treasury before--not your 
responsibility yet, but I have heard this before.
    One of the jobs of FSOC is to eliminate the market's 
expectations that the government will serve as a backstop in 
the event of failure. My question is fundamentally this: if 
GAO, with Senator Vitter's and my request, finds these 
subsidies exist, will you commit to working with Senator Vitter 
and me to take further steps to eliminate that government 
subsidy, that government support for these mega-banks?
    Mr. Lew. I will 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.
    Senator Brown. You have not quite said that----
    Mr. Lew. I have not read the GAO report.
    Senator Brown. I mean, the GAO report is not there yet. 
Neither have we. But we also know that all evidence points to 
the fact that the largest banks in the country, in the capital 
markets, get interest rates lower when they borrow than do 
medium-sized and community banks, and you acknowledge that.
    Mr. Lew. I acknowledged that the market works the way you 
have described, yes.
    Senator Brown. All right. All right.
    Now let me shift----
    Mr. Lew. Just to be clear, the reason I am being a little 
hesitant is that markets, unless they are creating systemic 
risk or putting burdens on taxpayers, are not generally--we do 
not intervene in markets 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 is an issue where Federal policy 
is contributing to some unfair----
    Senator Brown. I guess I think it is pretty clear that 
Federal policy has contributed to this. I mean, really, it is 
Federal policy that subsidizes the mega-banks by the implicit 
``too big to fail'' policy, but we can debate that later.
    Mr. Lew. That is why, Senator, I mentioned the 
responsibility fee. We think 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 risk they 
presented in the past.
    Senator Brown. All right. I do not totally agree with you, 
but that is fine.
    Let me shift to China currency for the last minute or so. 
It is clear that China's currency manipulation means jobs in my 
State. There is no question it has cost us jobs. I spoke with 
Randy Solganik the other day, who owns a company called City 
Plating in Cleveland. They are doing just about everything 
right, yet they face a competitive disadvantage on their 
exports and unfair competition on imports because of the 
currency manipulation.
    There has been some movement in the right direction in the 
value of the yuan, we know that, but it has been too slow, it 
has 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 did not. It went 
from 295 to 315.
    Do you agree that currency manipulation is, in fact, an 
export subsidy?
    Mr. Lew. Senator, we have, over the last 4 years, pushed 
back very hard on China in a whole number of areas. We pushed 
back on our perception that the currency was under-valued. We 
pushed back on unfair trading practices.
    We engaged in the strategic and economic dialogues and 
bilateral discussions over many occasions. I think we have made 
progress. There has been a 15-percent improvement in the 
valuation of China's currency. It is still under-valued, and 
more progress needs to be made.
    Senator Brown. The administration has been pretty good on 
trade enforcement through Commerce and through ITC but has 
fallen short when we asked the administration to include 
currency in their filings. Are you willing to--or do you 
support industries filing petitions to seek relief against 
countries that actually manipulate their currency?
    Mr. 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, and we will continue to do that.
    The Chairman. Thank you very much, Senator.
    Senator Brown. Thank you, Mr. Chairman.
    The Chairman. Senator Toomey?
    Senator Toomey. Thank you, Mr. Chairman.
    Mr. Lew, thanks for coming. Good to see you again.
    Mr. Lew. Good to see you.
    Senator Toomey. 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 am 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 have seen over 9,000 pages of new 
rules and regulations already, and they are not close to being 
finished.
    When Jamie Dimon 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 do not really know 
what the cumulative effect is and do not 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 regulator 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 am particularly concerned about small and medium-sized 
banks, which are not at all systemically important, but 
nevertheless are hiring more compliance officers and loan 
officers because they have to afford this. Should we not 
understand the implications that this has? What are your 
thoughts on that?
    Mr. Lew. Thank you, Senator. I think we need to be very 
much attentive to the burdens of 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, and the burden it 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.
    Senator Toomey. I would hope so because, as you know, the 
vast majority of financial institutions in America have no 
systemic significance, because they are not big enough to. Yet, 
they are often caught up in a whole lot of regulations that 
impede their ability to extend credit. That is one of my 
concerns.
    The second issue----
    Mr. Lew. Senator, I would look forward to working with you 
to make sure that the provisions that were intended to not put 
those kinds of burdens on those smaller institutions are being 
implemented as intended.
    Senator Toomey. Good. Terrific.
    On a separate topic, you may be aware of a huge expansion 
in a relatively new form of tax fraud. We have 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 whose identity has been 
stolen wonders why they never get their refund. It is 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 have made some 
progress. I am 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?
    Mr. 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. The President spoke to this issue last night in the 
broader context of cyber-security. 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. If confirmed, I would work with the 
IRS Commissioner to make sure the IRS was doing that. I think 
we also need cyber-security legislation for the broader threat.
    Senator 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 important and integrally related in that.
    But there are a number of countries that seem to be 
inclined to deal with their fiscal problems by devaluing their 
currency. Some might argue that the behavior of the Fed would 
be consistent with one that was intended to, in time, devalue 
our currency. I am 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 of strong 
growth.
    Mr. 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.
    Senator Toomey. Thank you very much.
    The Chairman. Thank you, Senator.
    Senator Bennet?
    Senator Bennet. Thank you. Thank you, Mr. Chairman, for 
allowing me to join this committee. I am very pleased to be 
here.
    Mr. Lew, thank you for your public service. I want to ask 
you a couple of questions. The first one is, as we have 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, support their 
communities, educate their children, and get ahead.
    The last 20 years has seen in this country a decline in 
median family income that is quite significant over that period 
of time, while the cost of health care has skyrocketed. The 
cost of higher education has skyrocketed. It has made it 
harder, harder, and harder for people working hard to get 
ahead. It also has created massive income inequality we have 
not seen since 1928 in this country.
    I know there are a lot of things we can do to address this 
with education and other kinds of things, and ultimately 
government cannot solve this problem. But you mentioned that 
tax reform was hard because of the interests that are fighting 
to hold onto benefits they gained, sometimes deep in the 20th 
century. But maybe, if we have an objective that people could 
rally behind, it will make our work easier.
    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 is not just the economic growth for economic growth's 
sake. It is economic growth that is building a middle class 
again in this country. I wonder if you have thoughts about how 
we might approach the discussions on the committee with that 
objective in mind. Maybe it is not the right objective.
    Mr. 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 have 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. We have 
a lot of work ahead of us, but there is no substitute for 
growing the economy.
    If we grow the economy, that is going to create jobs. If we 
create jobs and we have people with the skills for those jobs, 
there is going to be a better future for people to enter and 
stay in the middle class. I think there is no more important 
undertaking for a Treasury Secretary than to keep that in mind 
every day, because that is what it is about. That is what the 
goal is.
    Senator Bennet. Well, let me ask you this then, because I 
do not think there is anything that is creating a greater drag 
on this economy than our own dysfunction. That is certainly 
what I hear from the business people whom I talk to, from 
farmers and ranchers in the State. That is what is dragging us 
backward.
    On the other hand, there is huge, pent-up energy too. There 
is $2 trillion sitting on balance sheets in this country that 
cannot be invested because they have no idea what interest rate 
environment we are going 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 to 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 U.S. Congress, 
in your view, based on the experience that you have had?
    Mr. Lew. Senator, I share your concern that the short-term 
crisis, deadline-driven practices that we have seen over the 
last couple of years are undermining the economy.
    Senator Bennet. It makes matters worse.
    Mr. Lew. It does. It is the first time in my nearly 30 
years in public life that I have 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 have gotten close to a 
couple of times and we, 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.
    Senator Bennet. Well, sign me up for that. I hope we will 
be able to work on that. Part of what you are going to be is 
chair of FSOC. Other than things outside of our control, like 
Europe, I cannot actually think of anything that is creating 
more systemic risk to this economy than this Congress. It is 
time for us to start working together to solve this problem.
    Mr. Chairman, thank you. My time is up.
    The Chairman. Thank you, Senator.
    Senator Casey?
    Senator Casey. Mr. Chairman, thanks very much. I join 
Senator Bennet and others in expressing gratitude. It is an 
honor to be on this committee, and we are grateful for this 
opportunity. We are also grateful for the effort 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.
    Jack Lew, I am grateful to see you back, putting yourself 
forward for yet another position of public service. We are 
grateful for that commitment. I will not read the list of 
positions you have held in the Federal Government, but every 
one of them was difficult and many of them required 
confirmation, or at least total engagement by you and by your 
family. We are 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 are grateful for that.
    I will begin with just a historical note, where the 
chairman began this morning talking about Albert Gallatin, who 
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 U.S. 
Senate, was elected by the legislature of Pennsylvania, the 
general assembly, 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 did not 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 U.S. 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. I want to step back, 
because sometimes, when we talk about things in global terms, 
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--when it comes to just China's 
currency policies, that has a real impact, a tremendously 
adverse impact, on communities in Pennsylvania. We have lost a 
lot of jobs because China has cheated, and I would argue 
continues to cheat on the currency policy.
    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, 
then to have priority actions, as the bill speaks to, 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, if you had 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 are 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?
    Mr. 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, where they are not, 
that there be consequences. We have done that in the area of 
trade with China over and over again. We have done it in auto 
parts, we have done it in tires, we have done it in rare 
earths.
    I think on the currency question, we work through the 
international bodies, the G-7, the G-20, to advance the view 
that it is not just the United States, but the organized 
nations of the world that insist on having currency policies 
which are market-
determined. In 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 are 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.
    Senator Casey. Well, I am the newest member of the 
committee, so I did not have a chance until today to talk to 
you, but we will get together and talk about some other issues. 
Thank you very much.
    Mr. Lew. Thank you, Senator.
    The Chairman. Thank you, Senator.
    I think, Senator Roberts, you are next. Oh, Senator Burr. 
Sorry. Senator Burr, you are next.
    Senator Burr. Thank you, Mr. Chairman.
    Mr. Lew, welcome. Thank you and your family for serving you 
up in public service so much. [Laughter.]
    Mr. Lew. If I might, Senator, just apologize. My wife has a 
class to teach at New York this afternoon, so she had to run to 
catch a train.
    Senator Burr. That is 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. [Laughter.]
    Mr. Lew. Well, I appreciate that. I am not going to 
Weehawken.
    Senator Burr. You said in your testimony that we cannot let 
sequestration take effect. In Bob Woodward's book, ``The Price 
of Politics,'' Woodward credits you with originating the plan 
for sequestration. Was he right or wrong?
    Mr. Lew. Well, Senator, it is 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.
    Senator Burr. And I hate to speed it up. Did you make the 
suggestion?
    Mr. Lew. Well, what I did was, I said that, with all other 
options closed, we needed to look for an option where we could 
agree on how to resolve our differences. 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.
    Senator Burr. So is it unfair that the President says the 
blame is on House Republicans, that they originated it, is what 
he said?
    Mr. 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. 
The only spending--the only alternative that anyone could think 
of that could be agreed to was sequestration, precisely because 
it is so objectionable that nobody could imagine it----
    Senator Burr. I heard your testimony today that it should 
not 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 will 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 has changed?
    Mr. Lew. Well, the rest of what he said was that Congress 
should work on putting in place policies that make sense to get 
our fiscal house in order. That is consistent with what he said 
last night. It is 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 instead of going into sequestration.
    Senator Burr. Do you regret suggesting sequestration?
    Mr. Lew. Senator, I look back at a time when a lot of 
people thought we were going to default. That was not an 
acceptable option. I think that it should not have been the 
case that the good faith and credit of the United States was at 
issue, but that is what was at issue. 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.
    Senator Burr. Back in the Armed Services hearing last week, 
Secretary Panetta testified that, following his and General 
Dempsey's 5 o'clock meeting on September 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, were the individual briefing the President. Is that 
accurate?
    Mr. Lew. Well, Senator, I did speak with the President that 
evening. The national security staff was working on the issue 
on a nonstop basis.
    Senator Burr. But who was actually briefing the President? 
Were you?
    Mr. Lew. I was not. I was in the room when the President 
was briefed, but I was not briefing the President.
    Senator Burr. All right. Because John Brennan testified 
yesterday that it was not him. Secretary Panetta said it was 
not him. In hearings, the ODNI Clapper said it was not him. 
Acting DCI Mike Morell said it was not him. Ambassador Kennedy 
said it was not him, and the FBI said it was not them. Now, we 
have eliminated a lot of people who had contacts within the 
intelligence community who knew firsthand what was going on in 
Benghazi.
    Let me ask you again: who briefed the President on actually 
what was happening throughout this 7-hour period?
    Mr. Lew. Well, in the conversations that I was in, the 
national security staff was present, and some of the people----
    Senator Burr. Would John Brennan have been included in 
that?
    Mr. Lew. You are asking who did a briefing, and that is 
different from who is in a conversation. I think if you ask 
people, were they in conversations, there might have been a 
different answer.
    Senator Burr. Who was your primary point of contact in the 
intelligence community?
    Mr. Lew. As Chief of Staff, I did not usually reach out 
directly to the intelligence community. I worked through the 
national security staff.
    Senator Burr. Was there anybody from the intelligence 
community in that briefing session on a continual basis, to 
your knowledge?
    Mr. Lew. The intelligence community was in close touch with 
the White House, with the national security team, on a near-
constant basis.
    Senator 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?
    Mr. Lew. Senator----
    Senator Burr. Congress is included, staff is included, 
members are included, but nobody in the executive branch is 
included under the Affordable Care Act.
    Mr. Lew. Senator, that is actually a provision I was not 
involved in the creation of. I would have to go back and check. 
But I----
    Senator Burr. Do you think they should be?
    Mr. 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, if there is a Federal exchange. But I 
would have to go back and check and get back to you. I do not 
want----
    Senator Burr. In fact, my understanding is, every member of 
Congress and every staffer who works for a member of Congress 
is under the State exchange program. They are no longer part of 
FEHBP. My point is simple. If it is that good, why would we not 
include all branches?
    Mr. Lew. Yes. Senator, that is a detail that I am just not 
familiar with. I would have to go back and check and get back 
to you.
    Senator Burr. Great. Thank you.
    Mr. Lew. Thank you.
    Senator Burr. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Roberts?
    Senator Roberts. We will get back to you. That is the song 
I hear from an awful lot of people in the regulatory business, 
and it is a pretty tired country and western theme, it seems to 
me.
    Mr. Lew, welcome to what some in 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 am 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 will not 
be a problem. You have indicated repeatedly that you did not 
know of this situation with regard to these investments, so I 
am not going to bother you with that.
    Senator Burr is a stickler in regards to the over-
regulation problem. It is even more of a problem, or at least a 
challenge to us, in that I think the President last night said 
that, if in fact his agenda is hindered by Congress or high 
water, he is going to have the ability, or will take on the 
issue with 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, when we meet with folks from Treasury or from the 
Department of Health and Human Services or IRS, whomever it is, 
to try to merge these regulations, we are not getting any 
answers.
    Now, we talked about this in my office. You said, we do the 
best job that we can. I understand that: we will get back to 
you. But the ``get back to you'' stuff is getting a little bit 
old, more especially in the view of the people who are on the 
receiving end of regulations. But I am going to save that one 
too. I will submit it for the record. You will have a long time 
to go over those questions.
    [The questions appear in the appendix.]
    Senator Roberts. But over the past 4 years here, 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, piston 
engine aircraft, from 5 to 7 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 two-millionths of a percent.
    Now, based on this calculation, I think you can understand 
why someone like me gets a little bit hot under the collar, 
someone who is seeing 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 are not talking about fat cat corporate jets, which has 
been used over and over and over again. The general aviation 
industry has become the pinata in regards to tax reform by this 
administration. I am more than a little tired of it.
    Now, I have a ``yes'' or ``no'' question. If the 
administration continues attacking these hardworking, largely 
unionized American workers, which we can show has had a direct 
negative impact on sales, will we even have a U.S. general 
aviation manufacturing base in the next 10 years, or are we 
going to be flying Brazilian or French aircraft?
    Mr. 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 was 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 are 
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 is not the case.
    Senator Roberts. I appreciate that. It is just the 
adjectives that we use in the political system here that a 
particular industry is designated as being, as I said, a pinata 
or a target, and I know that is convenient. But we have a sales 
force out there that has already been cut in half, as I have 
indicated. We have good workers, we produce excellent product. 
If we make this change, we are going to be hurt.
    Mr. 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 where 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 am 
not aware of that is disproportionate, I would look forward to 
working with you on it.
    Senator Roberts. Good.
    The Chairman. Thank you, Senator.
    Senator Schumer?
    Senator 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 1, sequestration will roughly impose $85 billion 
of 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 to 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 around will 
not solve the problem? Second, economist Mark Zandi said 
sequestration would cause a 0.5-percent reduction in GDP for 
the entire year.
    Do you believe the Republican proposals would reduce the 
hit to GDP caused by the sequester at all, or would the 
reduction in growth be the same?
    Mr. 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 does 
not 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, in 2011 we agreed to reduce 
discretionary spending by $1.2 trillion. That is already 
putting a burden on all areas of government, including defense 
and all non-defense areas, and it is quite significant. I think 
it is the right challenge. We need to tighten our belt. We need 
to spend less. But I do not believe that the sequester can just 
be rearranged. We are already----
    Senator Schumer. It would not change the reduction and the 
estimates of reduction in growth if we just did all cuts?
    Mr. Lew. The economic impact would be the same. 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. We did $2.5-trillion of deficit reduction. We 
need to do another $1.5 trillion. We can get this done.
    Senator Schumer. Great. Thank you. It makes sense. I mean, 
if you are just going to switch cuts from one place to the 
other, it is not going to change the reduction in growth that 
would occur. Probably the greatest reason--there are many--to 
avoid the sequestration, or just rearranging, is our economy is 
finally beginning to recover a little bit. This would snuff 
that out in a significant way. Zero-point-five-percent GDP is 
no small number.
    Mr. Lew. It is not a small thing. 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 is not the right policy.
    Senator Schumer. Right.
    Mr. Lew. It was meant to not happen. It was not meant to be 
rearranged.
    Senator Schumer. Right.
    Here is another question I have which you will be involved 
with should you, and I believe when you, become Treasury 
Secretary. That is, TRIEA, the Terrorism Risk Insurance 
Extension Act. I worked with your predecessor and President 
Bush's Treasury Secretaries on this. It was last extended in 
2007.
    But it is the nature of insurance that you cannot wait for 
the last minute, because businesses who need to renew their 
policies may find the insurance companies either are not 
willing to provide terrorism coverage if the future of the 
program is in doubt or will raise the price so high that, in 
effect, they are not offering coverage, and then you cannot get 
new building refinancing and all the things that keep an 
economy going.
    It is not just in New York, but in many areas with tall 
buildings that might be targets of terrorism. When TRIEA 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 7 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 is a little like flood 
insurance, but probably worse because we have less of a record 
about terrorism. We do not know when it comes, and, if it does 
come, it could come in such a horrifying amount nobody wants to 
insure against it.
    What is your view on extending TRIEA for 5 more years?
    Mr. Lew. Senator, I am very familiar with TRIEA. 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 TRIEA. I am less familiar with 
where it stands right now in the extension process and would 
look forward to working with you and exploring options.
    Senator Schumer. Could you see the argument that you still 
need it, even though we are 10 years after 9/11?
    Mr. Lew. I certainly understand that it was very much 
needed at the time. I have no reason to believe that it is not 
important, but I would want to become current in my 
understanding.
    Senator Schumer. Thank you. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Rockefeller?
    Senator Rockefeller. Thank you, Mr. Chairman.
    Mr. Lew, I welcome you and your family. I welcome my 
opportunity to vote for you.
    The chairman of this committee once called me ``utterly 
predictable,'' and he is utterly correct. I have a focused 
mission in life, and I stick by it. 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 against raising revenues, because it 
does make sense. I do not know if it is Grover Norquist, I do 
not know if it is a Wednesday breakfast meeting they have every 
week to make sure that they--I just do not 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 would like to know that you are on that side and 
that you would encourage, in the development of the budget and 
tax proposals, that there be more revenue.
    Mr. Lew. Senator, I very much believe that we need to have 
a balanced approach to getting out of the fiscal hole we are 
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. 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.
    Senator Rockefeller. All right.
    Mr. Lew. The President's ratio of 2:1 seems about right to 
me.
    Senator Rockefeller. All right. Second question. You and I 
have talked about this before; we did in my office. It is 
something I care passionately about. It turns out, in fact, 
that the Earned Income Tax Credit is the greatest anti-poverty 
program in the U.S. Government, and it has an unbelievable 
effect in my State of West Virginia.
    The Earned Income Tax Credit on the one hand, and the Child 
Tax Credit on the other--there are other tax credits which help 
balance out the inequality and help people to live, just 
frankly to live. I would hope that, as those are up for 
reauthorization, they would be part of a 5-year reauthorization 
that the administration would support.
    Mr. Lew. Senator, I have supported the Earned Income Tax 
Credit for many years and was proud to be part of the effort 
this year to extend the refundable credits again. They have a 
proud bipartisan history from the Nixon administration until 
today, and they are intended to encourage work and to make work 
pay. I think they do an important job.
    Senator Rockefeller. Great. The next--and maybe I will make 
it my final question just to please my chairman so he will give 
me some credit for efficiencies here. No, I guess I will not. 
[Laughter.]
    Income inequality is a vast problem for this country, and 
there are a variety of ways that that can be attacked. But what 
were we, ranked 31st out of 34 developed countries in income 
equality? It is a disgrace. I would just hope that the 
administration 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.
    Mr. 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 having the tax 
system play less of a role in contributing to inequality. The 
President made some announcements last night that also 
contribute to that. This has been----
    Senator Rockefeller. I have two more questions.
    Mr. Lew. This has been decades in developing, and we need 
to address the problem.
    Senator Rockefeller. I have two more questions and a 
hostile chairman here.
    You and I have talked about Medicaid. One of the things 
that I like about you is that you feel very strongly about 
Medicaid, and I think you have experienced Medicaid in your own 
life.
    Medicaid is not only sustenance for all of long-term care, 
if you can spend yourself down low enough to qualify for it, 
but it is one of the great funders of child help, and it is 
also the easiest thing to attack. I am pretty sure that you 
feel very strongly about Medicaid and would fight for its 
protection as much as possible.
    Mr. Lew. Senator, I do believe strongly in the Medicaid 
program. We do have to be careful in the Medicaid program to 
make sure we are not overpaying. Over the years there have been 
issues on that.
    I have defended the program strongly, that it needs to be 
protected, but I have also been willing to take out a sharp 
pencil when there were practices that needed to be addressed 
either on the reimbursement side or in terms of the way the 
State programs were working. I think if we care about a 
program, we have to run it well.
    Senator Rockefeller. I agree with that. I am over on my 
time, and I apologize, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Isakson?
    Senator Isakson. Thank you very much, Mr. Chairman. Thank 
you.
    Congratulations on your nomination.
    Mr. Lew. Thank you, Senator.
    Senator Isakson. Thank you for your service to the country. 
You have repeatedly said that the administration addressed 
``too big to fail,'' that we needed to expand credit, that 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 Qualified Residential Mortgage 
(QRM). Mr. Cordray just issued a QM ruling which I commend him 
on. I was scared to death they were going to overreach, but 
they did not, and they defined QM in such a way as to avoid 
predatory lending in housing but to protect traditional 
housing.
    But Dodd-Frank also had a QRM requirement, and the pending 
rule, which has been circulated twice and pulled by the 6-
member committee, would have required for risk retention the 
exemption of a 20-percent or greater down payment.
    If that took place from the conventional mortgage market, 
you would withdraw 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 and exemption 
from Dodd-Frank?
    Mr. Lew. Senator, I think that, if confirmed, I would very 
much, as the chairman of FSOC, engage in the issues of rules 
implementing Dodd-Frank. In terms of the relationship between 
the Department of Treasury and the Department of Housing and 
Urban Development, I would 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. I appreciate the comments you have 
made about the QM rule. It is really designed to protect 
borrowers against institutions that fail to exercise proper due 
diligence, so they would hold accountability for their 
failures.
    The QRM rule is really designed to make sure that we do not 
get back into a situation where institutions create risk to the 
system or create the risk that 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.
    Senator Isakson. Well, I understand this: Dodd-Frank 
exempted Freddie Mac, Fannie Mae, and FHA. If you end up with a 
conventional mortgage that cannot sustain the risk retention 
requirement, you will put the entire burden of financing 
housing in America on 2 institutions, Freddie and Fannie, and 
FHA.
    FHA is in a difficult solvency position right now, and 
Freddie and Fannie owe the taxpayers $171 billion. So, it is 
critically important we get it right, and I would hope you 
would exercise leadership on that.
    Mr. Lew. Senator, I think it is 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.
    Senator Isakson. Well, thank you very much.
    Second, Senator Schumer made the statement in his 
introduction that you have the unique ability to learn about a 
problem, study it for solutions, and implement those solutions. 
That is quite a compliment. We have a serious problem with 
spending, with the budget, with being out of process. It is 
broken in Washington.
    On March 6th and February 15th of 2000, when you were in 
the administration of President Clinton, you testified before 
the House Rules Committee on the biennial budget. There were 40 
members of the House and Senate in a bipartisan fashion.
    Jeanne Shaheen and myself as the principal sponsors 
recommended the biennial 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 us try to work together to do that?
    Mr. Lew. Senator, I have supported biennial budgeting for a 
long time and testified on a number of occasions in support of 
it. I have 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 we took a position on, I believe, 
in this administration, though there has never been any 
opposition to it. I would look forward to following up with 
you. It is fundamentally a matter of congressional decision-
making. I understand that there has been resistance to the idea 
over the years, but I think that the record of the last 10 
years only strengthens the case.
    Senator Isakson. Well, I think also our inability to do 
budgets and appropriations on the Senate side and some of the 
difficulties we have 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 has 
dictated, by March 1st of this year, everybody receiving 
benefits will get them either through direct deposit or through 
express cards. Is that correct?
    Mr. Lew. I believe that is correct.
    Senator Isakson. And I understand 90 percent of people have 
complied, but there are 10 percent out there, some of them 
veterans, some of them people who are in poverty, who do not 
have a checking account and do not have access to the direct 
express card.
    Mr. Lew. I would actually have to follow up on that, 
Senator. I am not sure.
    Senator Isakson. On behalf of my constituent, please do, 
because they want to know how they are going to get their money 
after March 1st.
    Mr. Lew. All right. I will follow up on that, Senator.
    Senator Isakson. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Wyden?
    Senator Wyden. Thank you, Mr. Chairman.
    Mr. Lew, welcome. I was interested this morning--staff came 
in and said that they had done a count, and 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 dysfunctional, and more 
byzantine.
    So my question to you is, do you support the idea that it 
is 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, Senator 
Hatch, and Chairman Camp are talking about? Should we put a 
hold on these piecemeal approaches?
    Mr. Lew. Senator, I definitely agree that we should do the 
big job of tax reform, and I think we should do it now.
    Senator Wyden. But the question is, should we put a hold on 
the piecemeal approaches? Because, as long as we keep passing 
them, I think it is going to be tough to get the long-term 
reform.
    Mr. Lew. I had not actually thought about whether there was 
an approach like the one you described. I would be happy to 
have a discussion with you about it. My own predisposition is 
we should just get the big job done, and anything that makes it 
easier to do is worth considering.
    Senator Wyden. All right.
    You are 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 would be eligible for.
    Now, the IRS has already determined that affordability is 
going to be based on the cost of a worker's individual 
coverage, not the cost of family coverage. So we are going to 
have millions of workers, spouses, and dependents in a kind of 
regulatory no-man's 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 have millions of people, these working-
class, middle-class people, who are pinched. They are 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 exchanges. What do you think 
ought to be done to help them?
    Mr. Lew. Senator, I think that, in getting the Affordable 
Care Act in place, there are a lot of hurdles between now and 
2014. Job number one is to get it up and running. I would 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. I must say, my first 
focus would be on making sure that we implement the law, but 
then I would be delighted to pursue with you looking at 
solutions to remaining problems.
    Senator 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 are going 
to work with me and others on it. This is an urgent matter. 
These are not people who ought to get hammered. They have done 
nothing wrong. We had a provision that would have made a real 
difference to those families. It is not there anymore. I think 
it has to be a priority.
    Let me ask you about one other area. We talked about it in 
the office. That is the electioneering that now takes place by 
tax-
exempt social welfare organizations. This stems from the wake 
of the Citizens United case. There has been a proliferation of 
these entities that are organizing under 501(c)(4) provisions 
in the Internal Revenue Code, and they are really doing 
politics.
    They get a tax break as social welfare organizations, but 
they are really ripping off the tax code because they are not 
social welfare organizations, they are doing politics. I think 
some of my colleagues had a little bit of a taste 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 do not disclose. But I was very 
troubled by the fact that the IRS, in what is called the 
priority guidance plan, basically does not make cleaning this 
abuse up a priority.
    My question to you is, when confirmed--I believe you will 
be; I am certainly supporting you--will you make it a priority 
to drain the swamp here? This is not a partisan issue; this is 
an abuse, a flagrant abuse, of the tax code. These are not 
social welfare organizations, they are electioneering, and they 
are doing it with the taxpayers' dime, and they are not 
disclosing. Will you make it a priority to fix this?
    Mr. Lew. Senator, as a general proposition, I believe that 
the tax laws should be enforced and enforced fairly. If there 
is something wrong here, it should be looked at. There is 
appropriate distance between the Treasury Secretary and the IRS 
on enforcement matters, but on policy matters I think it is 
entirely appropriate to ask that question.
    Senator Wyden. This is something that is way wrong.
    My time is up, Mr. Chairman. Thank you.
    The Chairman. Thank you.
    Senator Nelson?
    Senator 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 in various parts of the world, and they 
were concerned because Leon did not have a background in 
intelligence.
    My response was, anybody who has been Chief of Staff to the 
President of the United States can handle any job in the U.S. 
Government. 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. Therefore, that is by way of 
saying to you, obviously, I support your nomination. You have 
handled that job of Chief of Staff very well.
    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. I went 
to you, and you started ``massaging,'' perhaps is the best way 
to say it, 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 
in the NASA Authorization Act by the Commerce Committee, which 
Senator Rockefeller chairs.
    I want to thank you for that, because what you did was, you 
smoothed it out so that Senator Kay Bailey Hutchison and I 
could bring unanimity, and we got direction for the space 
program 3 years ago that otherwise was in turmoil. That is in 
no small measure to what you did. I want the folks to know that 
is what you did, and I want you to know how much this Senator 
appreciates it.
    Mr. Lew. Thank you, Senator.
    Senator Nelson. Now, I want to ask you, we have all of this 
international finance stirring, and a lot of that is going to 
run under your bailiwick. Give me your thoughts on it.
    Mr. 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 cannot separate ourselves 
from the world entirely. We can make sure our financial 
institutions are sound, we can make sure we run our policies 
appropriately. But look at Europe.
    Europe is our largest export partner. If Europe has an 
economic or a financial crisis, that is something we have to 
worry about. It is something that, if confirmed, I would work 
on. But frankly, I have been working on it, even as Chief of 
Staff, because, in addition to worrying about the U.S. economy, 
we have been worrying about the exposure to the U.S. economy 
from risks overseas.
    There are questions of demand overseas where that is 
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.
    Senator Nelson. Do you think, given the extremes of 
situations of the economies in countries like Greece, that they 
can right their ship?
    Mr. Lew. 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 is going to take some time. It is 
encouraging that there has 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 a fundamentally European problem, but it is 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 is something 
that we cannot take our eye off of, because the risks that are 
potentially in the future are not just within our borders, but 
there are external risks that we have to safeguard against.
    Senator Nelson. Thank you, Mr. Chairman.
    The Chairman. Thank you. Thank you, Senator.
    Mr. Lew, Senator Schumer, in his introduction, mentioned 
your extraordinary talents and abilities. They have been 
referred to here a couple of times. We face extraordinary 
times. You mentioned yourself, it has been 3 decades in the 
making, but the American middle class has deteriorated. We face 
globalization. It is a far different world today than it was in 
1986. The challenges facing the United States are far greater 
economically than they have been in the past.
    What can you tell us today to show that you have the 
courage to step up and tackle this and be a great Treasury 
Secretary?
    Mr. Lew. Well, Senator----
    The Chairman. I mentioned before to you how, somewhat as an 
analogy, not quite the same, that the U.S. Solicitor General 
represents the U.S. Government before the Supreme Court, but 
the Solicitor General plays another role as well, as an advisor 
to the court.
    I believe the Treasury Secretary has a dual role as well. 
That is, to perform the functions that the Treasury Secretary 
would ordinarily perform and do well, but I think there is 
another role. It comes down to stature and gravitas, courage, 
and stepping up, after pursuing your analytics, abilities, 
skills, and solutions, and having the courage to do something 
about it publicly, as well as privately within the 
administration.
    So what can you say to us here today to show us that you 
are going to be, not just an ordinary Treasury Secretary, but 
that you are going to be a great Treasury Secretary, so that 
when your term is up you can look back and see that Secretary 
Lew was terrific, he got this country back on the right 
economic track? That includes tax reform, it includes all the 
multi-national issues, the globalization issues, that we all 
face. The world is changing so much.
    I think there are three major changes. One is demographics. 
Most countries are finding an aging population with huge 
pressures. 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 it probably has some effect on middle-class 
globalization. Third is increases in productivity, which are 
inexorable. You cannot turn back technology. You can go 
forward, but technology has a cross-current effect on jobs.
    So what can you tell us today to show us that you are going 
to be a great Secretary, that you are going to take on these 
issues?
    Mr. 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 are in, and to 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 
have proven that I am not daunted by the challenge of going in 
before authority figures and speaking my mind. When I was in my 
20s working for the Speaker of the House, it was not easy to 
look Dan Rostenkowski in the eye and tell him I thought he was 
doing something that he needed to rethink.
    He said something to me once, and I agreed with him when he 
knew I did not. 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.'' It liberated me at the age of, like, 24, to 
never again hesitate, whether it was with a 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 do not believe that I have ever withheld 
my honest view from the President. As Secretary of the 
Treasury, I would be called upon in more circumstances to 
sometimes come in with hard messages. As Chief of Staff, it 
turns out you do not get to go to the President with a lot of 
good news.
    The good news finds its way to the President pretty easily. 
I, for a year, had to walk into that Oval Office every day and 
tell the President there were tough choices and here is what I 
think, never mincing my words, never not saying what I thought. 
As Treasury Secretary, I would follow that kind of a path, and 
I would hope to work with this committee on a bipartisan basis 
to have the kind of relationship where we could talk to each 
other that way.
    The Chairman. I appreciate that, but I was really getting 
at something else. It is clear that you can be a great staffer. 
I am not talking about being a great, courageous staffer and 
telling the President what you think and do not think. I am 
talking about something else.
    I am talking about the public perception, the public 
demeanor, representing the United States around the world--
across the country and around the world--being able to 
influence policy in a way that makes sense that most of us tend 
to agree with. We may differ around the edges, but most 
everybody in this room agrees what needs to be done. That is 
what I am getting at. What can you tell us about that?
    Mr. Lew. Mr. Chairman, in the years I was at the State 
Department, I met with world leaders one-on-one. As White House 
Chief of Staff, I met with both world leaders and heads of 
major interests in this country. I think the position that you 
are in and the way you carry yourself in that position is where 
gravitas comes from.
    I feel like, in the business dealings that I have had, it 
is about building trust, it is about having credibility, it is 
about speaking clearly and saying what you think. I have done 
more than my share of public speaking and appearances on 
television. I am not afraid of taking issues public and 
expressing complicated ideas in terms that people can 
understand.
    I am not sure how to put a specific behind the question of 
gravitas, but I think the career path I have had--very few 
people leave the role of staff and become a member of the 
Cabinet. I have had a career path that is not the norm, and I 
think that that lends itself to the kind of gravitas that you 
are looking for.
    The Chairman. Well, I wish you well, because the challenges 
are tremendous. Thank you very much.
    Senator Hatch?
    Senator Hatch. Well, thank you, Mr. Chairman.
    Mr. Lew, do you need a break?
    Mr. Lew. I am fine, thank you. Thank you for asking.
    Senator Hatch. All right. I just want to make sure, 
because, unfortunately, this is one of the most important 
positions in the country, and this will go on a little bit 
longer, if you do not mind.
    Mr. Lew. Do you need a break?
    Senator Hatch. I have taken my break. When I need one, I 
will take one.
    Mr. Lew. It depends if we are talking about 20 minutes or 2 
hours.
    Senator Hatch. Well, if you need one, just let us know.
    Mr. Lew. Thank you.
    Senator Hatch. Because we understand.
    Senator Rockefeller raised the issue of why Republicans 
have such a tough time raising revenue. Well, the reason we 
have a tough time raising revenue is because we know that the 
Democrats will just spend it. They will not use it to pay down 
the national debt, which is astronomical. We also know that, if 
we taxed every dime that millionaires make, it would raise less 
than what the deficit is this year.
    We have seen that time after time after time. We do not 
have any faith that these funds would be used to help get our 
spending under control and get our government under control. 
That is one of the reasons why I think that the Republicans are 
so loathe to raise taxes.
    We know that fiscal calamity is primarily driven by the 
exponential growth in entitlement spending. We know that is a 
problem. You know it is a problem. Second, there are economic 
costs to tax increases: tax something--labor, capital, 
entrepreneurship--and you are going to get less of it. Third, 
there are practical limits to the politically designed tax 
increases on whatever the unpopular group is that is targeted. 
So like I say, these are problems that we as Republicans have, 
and they are legitimate concerns. I am sure you have legitimate 
concerns about these things as well as we do.
    Frankly, I think you have done really well today. I have a 
great deal of respect for you. It is not easy to give a 
lifetime of service as a staffer and then a Director of OMB, a 
top staffer in the White House. My gosh, I have nothing but 
respect for people like you who give yourself to our 
government. I really have great respect for your wife and your 
daughter, your family, too.
    Mr. Lew. Thank you.
    Senator Hatch. Because it is tough.
    Mr. Lew. That is something we agree on, Senator.
    Senator Hatch. That is good. Well, I think we do not give 
our spouses nearly the credit that they deserve.
    But some of these questions we do need to ask, just to make 
sure the record is clear. Now, let me ask one that hopefully 
will help make the record more clear. American taxpayers 
provided over $45 billion to Citigroup in late 2008 and early 
2009.
    Taxpayers backed hundreds of billions of dollars of 
Citigroup assets. Meanwhile, Mr. Lew, you reportedly received 
over $940,000 of compensation in early 2009, mostly comprised 
of ``discretionary'' 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, ``That is the height of 
irresponsibility. It is shameful.'' He went on to say that, 
``There will be a time for them to get bonuses. Now is not the 
time.'' Elsewhere, he referred to Wall Street bonuses as 
``obscene.''
    Now, Mr. Lew, you wrote in a 2010 letter to Senator 
Grassley that ``my compensation was in line with other 
management executives at the firm and in similarly complex 
operations.'' 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 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 up by taxpayer 
money, and are there any records of your performance 
assessment, or are there any assessments of your performance?
    Third, your employment agreement included a clause stating 
that your ``guaranteed incentive and retention award'' would 
not be paid upon exit from Citigroup, but there was an 
exception, that you would receive that compensation ``as a 
result of your acceptance of a full-time high-level position 
with the U.S. Government or a regulatory body.''
    Now, is this exception consistent with President Obama's 
efforts to ``close the `revolving door' that carries special 
interest influence in and out of the government?'' I think that 
is a question that has to be asked, and I would appreciate 
hearing your response.
    Mr. Lew. Senator Hatch, the work that I did in 2008 was 
running, as I said earlier, the business of the business in a 
year when the financial products of that part of the firm were 
not doing very well. I think I actually performed quite well in 
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 am not familiar with records that were kept, so I do not 
have access to things that I do not know about. The experience 
that I had in the private sector has given me a perspective 
that I think enhances my ability to perform, both in the role 
that I am nominated for and in the roles I have had.
    I have practiced law. I have worked at a university. I have 
worked at a financial institution. I think that if I had not 
had a set of experiences like that I would not 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. As a broader 
discussion on compensation, I do not think there is anything 
that has not been fully transparent about both what I did and 
what I earned.
    Senator Hatch. Could you tell us how much money you made in 
2008 before you got the bonus?
    Mr. Lew. My base salary, I believe, was $350,000.
    Senator Hatch. All right. Well, thank you, sir. That is a 
question I felt had to be asked, and I appreciate your answer. 
Go ahead, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Portman?
    Senator Portman. Thank you, Mr. Chairman. I thought the 
question posed by Senator Baucus earlier was very interesting, 
and I am glad I was not on the other side of the table to have 
to answer it. But I have been before this committee for a 
confirmation hearing, and they were much tougher on me, that is 
all I can say. [Laughter.]
    But that is sort of the ultimate question. Senator Hatch 
has posed it earlier in his reference to Gallatin and what kind 
of Secretary of the Treasury he was. There are different roles. 
Having been a staff person in OMB and USTR--and I have had the 
same balance that you will be facing, but Treasury is 
different.
    I think it is a different job than Chief of Staff or in OMB 
in the context of what both the ranking member and the chairman 
were talking about, and it does have to do with taking public 
positions. It is not about meeting with foreign leaders or 
meeting with the President and being frank in the Oval Office, 
it is about being willing to have the courage of your 
convictions and to talk about these issues at a time when our 
country is in trouble.
    I think we are truly in trouble with our debt and deficit 
at record levels and the weakest recovery we have had in our 
history, in terms of getting out of our economic doldrums. I 
think it requires a Secretary of the Treasury, because I think 
this is--Gallatin is quoted as saying, from Senator Baucus, 
``no more responsible position.'' It is true. I mean, this is 
it.
    We talked about tax reform and entitlement reform earlier. 
I have just three quick questions for you, all of which may be 
the kind of questions where sometimes you need to break some 
china to do the right thing. But on entitlement reform, Senator 
Hatch has talked about the importance of it.
    CBO, which is, again, the nonpartisan group here in 
Congress that gives us our information on what is going to 
happen in the future, they have said that over the next 10 
years Social Security, Medicare, and Medicaid will double in 
their costs.
    So you have about a 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 is 
very clear where the spending problem is. It is not only the 
biggest part of our budget now, it is the fastest-growing part 
of our budget. They are incredibly important programs, but they 
are not sustainable in their current form.
    By the way, another thing that is causing a problem in our 
deficit and debt is the interest payment. They have 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 in spending on the entitlement side, which requires us 
to borrow more.
    So my question to you is the obvious one, which is, are you 
willing to take this on? The President has talked about it a 
lot. He has even said he refuses to pass this problem on to 
another generation of Americans. But so far, that is 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 kind of leadership that Senator Baucus is 
talking about? He may be talking about other kinds of 
leadership. I know he agrees that this is a huge challenge that 
we face. If you could answer that question with regard to 
entitlement reform----
    Mr. Lew. Senator Portman, I agree that we need to tackle 
entitlement reform, and health programs are a big part of that. 
I think that we look at the trajectory and the gap between the 
revenues that come in in a program like Social Security--it is 
not the entirety of the program, but it is a gap. Social 
Security is 75-percent funded by the payroll tax forever, but 
it leaves a gap. We need to deal with that.
    Senator Portman. Like, $9 billion this year.
    Mr. Lew. Yes. We need to deal with it in a way that 
protects Social Security in a balanced, fair way. I think that 
if you look at the arc of my career, whether it was in 1997 
going and presenting the agreement that Senator Domenici and I 
worked through together on the Balanced Budget Act, going into 
the Democratic caucus in the House and the Senate, presenting 
it, advocating it, winning support for it, that was not easy. 
That was the courage of my convictions.
    Senator Portman. Yes. It is not easy.
    Mr. Lew. You know it is not easy. You have been OMB 
Director.
    I think if you look at the current debate, and Senator 
Baucus knows this, I have gone before the Senate Democratic 
caucus many times, telling people what I thought needed to be 
told, even if it was not 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 have always driven as 
hard as I could to get the job done. I would continue to do 
that. It would be a broader set of issues, a different playing 
field, that is clear.
    Senator Portman. A different audience.
    Mr. Lew. But the thing I would say that is different about 
Treasury is, it is a job that requires one to transcend 
politics in many respects. That is what Senator Baucus was 
getting at in the comparison to the Solicitor General's Office. 
I understand that, and I am looking forward to that.
    Senator Portman. Before the chairman tells me my time is 
up, because it just about is, 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 Trans-
Pacific 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 us 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?
    Mr. Lew. Senator, I have, 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 did not have 
protectionist policies in a Democratic House in the late 1970s, 
early 1980s.
    I worked in the Clinton administration and the Obama 
administration. I am 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 about 
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 to----
    Senator Portman. Will you be requesting Trade Promotion 
Authority?
    Mr. Lew. I would defer to the discussion that still has to 
take place on that. I would certainly engage on it.
    Senator Portman. I will ask my last question as a written 
question, since I am over time.
    Thank you, Mr. Chairman.
    The Chairman. If you want to take more time, go ahead.
    Senator Portman. Well, the final one is on retirement 
savings; we had this question posed generally earlier by 
Senator Cardin. This committee has worked over the years, along 
with the Ways and Means Committee starting in 2001, to expand 
retirement savings.
    The theory has always been, if you can get more businesses, 
particularly small businesses, to offer a 401(k) plan 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? Specifically, do you 
think that 401(k)s work, and do you think that they should be 
an important part of the 3-legged stool--savings, 401(k)s and 
IRAs, and Social Security--for people's retirement?
    Mr. 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 is obviously harder, when you are spending all of 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 of the 
committee on that. I do believe we need a 3-legged stool.
    Senator Portman. Both of 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, then those workers who are 
concerned about it 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 just hope the President 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 peace of mind in retirement.
    Thank you, Mr. Chairman.
    Mr. Lew. Thank you, Senator.
    The Chairman. Thank you, Senator.
    Mr. Lew, I appreciated 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, certainly on the business side, is 
base broadening and rate reduction. On the individual side, you 
were a little vague there, but certainly we need base 
broadening and also potentially rate reduction there depending 
upon the degree that it is 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 will mark up legislation. I am sure I 
can speak for the House Ways and Means Committee, and say that 
is their preference too. I think I can speak for both sides of 
the aisle, that both parties, those on the Finance Committee 
and the 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 1986. That was wide open, freewheeling, 
amendments offered.
    It is true that, to some degree, 1986 began with the 
administration with Treasury I and Treasury II, but it is also 
true that both bodies got very engaged and very involved and 
found a solution. I can remember in this committee--Senator 
Packwood was then chairman--we reported out the 1986 bill 
unanimously. All members of the committee supported it, which 
was not expected earlier on.
    So, I appreciate not only your willingness, but your 
enthusiasm in working with the Congress and, under the regular 
order, where the committees are doing their work, to pursue the 
tax reform. I do think that is a good vehicle as well to 
address growth and jobs and the other goals that are just so 
important.
    Mr. Lew. And Senator, if I might add, I do not think there 
is any other way to accomplish it. It is too complicated. It 
has to be done by the people with expertise and responsibility. 
If confirmed, I would look forward to being a partner in that 
effort.
    The Chairman. Thank you very much.
    Senator Hatch?
    Senator Hatch. Well, thank you.
    Mr. Lew, I agree with the chairman that we need to do tax 
reform. We are going to need you to weigh in rather heavily. 
Hopefully we can do it in such a way that really does increase 
growth and pulls us out of the mess that we are in.
    I would just make one other comment. I think you have to 
weigh in on TPA. It is ridiculous that this is the only 
President who, in my memory, has not asked for that power. 
Trade is going to be one of the best ways we have to pull us 
out of the mess we are in and to create the manufacturing jobs 
that the President suggested he would like to last night.
    So, I think you are highly respected in this administration 
and by many of us, and I believe that, if you will weigh in, 
that is something that really has to be done or we could get 
into a massive mess here that is not going to be solved easily.
    We would like to see free trade move much faster and much 
better than it is. Other nations throughout the world are 
entering into these free trade agreements, and we are being 
left out in the cold at a time when we need the jobs, we need 
the opportunities, and the unions need the jobs. Getting more 
and more jobs gives them more and more chances to organize. So, 
all of that fits together.
    I would just encourage you to weigh in, because I know the 
President thinks very highly of you or he would not have put 
you in this position. That would be my counsel to you. I just 
want to thank you again for appearing and being willing to 
answer these questions. Frankly, I think you have done really 
well.
    Mr. Lew. Thank you very much, Senator.
    Senator Hatch. You bet.
    The Chairman. Thank you, Senator.
    I want to just emphasize, Mr. Lew, what Senator Hatch said. 
I do not think this administration has been as aggressive in 
pursuing trade agreements as it should be. To be honest, I had 
to twist some arms to get this administration even to agree to 
pursue TPP. They were not in favor of it at the beginning at 
all. I thought that was just totally short-sighted. We need TPP 
to engage in the Pacific.
    Mr. Lew. I totally agree with you, Senator.
    The Chairman. We are doing it. But anyway, this 
administration was dragging its heels at best.
    Mr. Lew. I was on the side of the administration pushing 
for it, so I am glad you----
    The Chairman. 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 
would move us into the 21st century, move us forward, rather 
than just the old standard, garden-variety TPA. So, there are 
lots of opportunities here. Lots of opportunities here. I know 
you agree.
    I would say that I know you are going to pursue them all, 
but I just urge also that you work mightily to find ways for 
both ends of Pennsylvania Avenue to work together. It is not 
just the Congress, it is both ends of Pennsylvania Avenue, 
because that is the way our Founding Fathers set this 
arrangement up. We just have to make it work.
    Mr. Lew. I look forward, if confirmed, to doing that with 
you, sir.
    The Chairman. Thank you. I wish you great luck. I mean, 
this is a tough job. I mean, Albert Gallatin said it was, and I 
agree with him. Good luck.
    Mr. Lew. Thank you, Senator.
    The Chairman. The hearing is adjourned.
    [Whereupon, at 1:27 p.m., the hearing was adjourned.]
                            A P P E N D I X

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