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Treasury Secretary Lew Makes a Great Point (And a Not-So-Great One Too)

08/28/2013 11:15 am ET | Updated Oct 28, 2013

CNBC's John Harwood interviewed Treasury Secretary Jack Lew this morning and I thought Lew made an interesting point. He was giving the White House talking point that "we won't negotiate over the debt ceiling" and Harwood was like, OK, but you will negotiate over the budget... why is it OK to negotiate over one but not the other?

Lew said, in essence -- or at least this is how I read his answer -- that the budget is precisely what the different parties should be negotiating over so that when they hit the debt ceiling, they raise it pro-forma in order to meet the spending obligations upon which they've agreed.

I recognize that this sounds awfully rational, but it is a potential advantage of Congress having passed a "regular order" budget that they hammer out through negotiation and compromise between conferees from both parties. I'm not saying that such a budget would necessarily have buy-in from the fringes of the Tea Party -- they'd probably still want to threaten default. But I strongly suspect that it would have more buy-in than our endless series of last-minute budget patches.

Moreover, the key point is that what makes the fight over the debt ceiling so ridiculous is that it's a fight over paying a bill you've already incurred (the budget agreement that's currently funding the government). What I read Lew as pointing out is that the time to have that fight is when you're looking at the menu, deciding on what you're going to order, not after you've eaten the meal.

Then, on the other hand, there was this: in commenting about the fiscal headwinds that are slowing growth right now, Secretary Lew said, "We withdrew the payroll tax cut because that was a short-term policy that had to be withdrawn as we started to see economic growth." (my bold, italics)

Yes, such measures are temporary and should be withdrawn, but no, no, no! Not when we "start" to see growth! That's the "green shoots" trap they ("we," at the time) fell into before, when the administration pivoted to deficit reduction back in 2010 when growth was positive but weak, and households and business were still recovering from the recession.

There's no science to when you phase out stimulus, but unless there's obvious pressure from markets or interest rates (which there wasn't) the smart move is to wait until the private sector is clearly ready to pick up the slack before you remove stimulative measures. It's not enough for growth to break zero; you want to see accelerated growth rates that are solidly above trend: GDP numbers with handles like 4 and 5, not 1 and 2.

It's one of the reasons why next time, we might want to tie the ending of our stimulus measures to measurable numbers in the economy-as in, "we'll lose the payroll tax break when the unemployment rate is falling consistently and is below 6 percent," much like the Federal Reserve is now doing with its interest rate policy.

This post originally appeared at Jared Bernstein's On The Economy blog.