Lew Says Obama Is Open to More Spending Cuts (Transcript)

President Barack Obama’s budget chief, Jacob Lew, said during a Bloomberg Breakfast in Washington with reporters yesterday in Washington that he is optimistic lawmakers will reach an agreement to fund the government through the end of the fiscal year and signaled the administration is open to more spending cuts in negotiations with Republicans.

(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)

AL HUNT, BLOOMBERG NEWS: Let me ask you this. You are going to get - it looks like the CR is going to get through OK. There’s a common refrain coming from Republicans now that says Obama refuses to show his hand. Obama refuses to say what he likes and doesn’t like in Simpson-Bowles. And the White House comes back and says in due time. When will due time?

JACOB LEW, DIRECTOR, OFFICE OF THE U.S. OFFICE OF MANAGEMENT AND BUDGET: Well, first of all, I think the White House, the president, we have shown quite a lot. We put a budget out for 2012 that has a complete set of policies which are not non-controversial. They are things that we are actively working to defend and present.

It sets out a goal which were we to achieve it would be dramatically better in terms of our fiscal posture and I think we have to start by kind of reevaluating how does the year work. The year works with the president putting a budget out there. Congress puts something out there. You then engage.

So I think it’s a - I don’t think it’s a correct statement that the president doesn’t have positions out there. On the CR discussion, first of all, the president had a 2011 budget. That was a year ago. He presented it to Congress last February. At the end of the year Congress was not able to agree on a full- year funding bill. We are now working unfortunately on short- term extensions of a CR.

The president’s position was clear. The president has moved considerably and, frankly, it has been discounted. The fact that we are already more than halfway between the president’s budget and where the current bill is is a great deal of movement, plus we have indicated a willingness to work together to find reasonable middle ground to make additional savings.

I think that there have been, as the speaker noted yesterday, numerous conversations since the meeting that the vice president had with the leaders, a number of us were at. And these conversations are going on at various levels, so I think the fact that there is not a public display is not exactly the same as whether or not there is quite a lot of activity out there.

QUESTION: Are those conversations involving the president? How often is he on the phone talking?

LEW: I have done this for a long time. It rarely involves the president. Presidents don’t negotiate appropriation lines in my experience. I wouldn’t recommend it when I had a president who wanted to negotiate appropriation lines. I urged him not to.

It’s - the president is not an appropriator. The president puts together the entire plan for the government of the United States. He has a Cabinet. He has a team that’s engaged.

I think if one says the only way an administration engages with the Congress is at the level of the president, you go back over history, we haven’t had very many engaged presidents because most involvement is at the level where people have responsibility over the technical detail.

I operate with authority that the president has given me. I am going to the room and I know that I am speaking for the president. I have done that for a lot of years. That doesn’t mean the president needs to be in the room.

QUESTION: At some point he has been brought in, right, in some of these things. You had a meeting at the White House.

LEW: I have gone through with him in great detail where the differences between the administration and the Congress lie. I know with a fair amount of precision where his lines are. I told that to the congressional interlocutors that I deal with, so -

HUNT: You are talking just when you say appropriators, you are just talking about this year’s budget. You are not -

LEW: You asked about me the (inaudible)

HUNT: Well, no, but I was talking about the bigger-picture things -

LEW: Yes.

HUNT: - which is Simpson-Bowles and entitlements and some of the longer-range deficit issues as to whether those have been joined and when the president is going to tell us what he thinks about those.

LEW: So you look at Simpson-Bowles. It obviously has many parts. In terms of its broadest goal, which its mandate which was to reduce the deficit to a point which now seems like ancient history, but it was to get the deficit to 3 percent of GDP.

Were we to accomplish that, it would be an enormous accomplishment. I would just point out that in that’s what the president’s budget embraced this year. It achieved that goal.

We both set that goal for the commission and we have achieved it. And I would say that if you look at the debate on the Hill, there is a lot of discussion that would treat that goal as one that is not a very big accomplishment, and I think that’s a mistake.

I think you have to get there on your way towards ultimately having a balanced budget, but you listen to the debate on the Hill and there is a lot of confusion about how you get to your ultimate goal. I have heard an awful lot of people say, “Why don’t you balance the budget this year?” That - anyone who looks at the numbers, who looks at the policy knows whether you are left-wing or right-wing, Democrat or Republican, it’s not going to happen this year, so you have to work in the world of reality.

Simpson-Bowles had a plan. The president had a plan. They are not exactly the same, but I think it’s important to kind of start there, because frankly we haven’t had a broad conversation about is that the right goal. And I think it’s a grave error to take that goal and treat it as if it’s already been accomplished, because we need to accomplish it in order to make further progress after that.

If you look at the other specifics, there is a lot of things in Simpson-Bowles that we have embraced quite directly. And there are things that range from the government reorganization, the federal pay freeze, to - and malpractice reform legislation and a host of other specific issues.

On the issues of revenue and entitlement, revenue - I think the president’s budget does an awful lot more on revenue than the current political system is ready to process. I think Simpson-Bowles does a lot more on revenue than many would embrace.

We have encouraged the discussion of ideas that range from our own budget proposals, which would let the upper-income tax breaks lapse and would put limitation on deductions in the high- income brackets, which is a way of reaching into tax expenditures. We have put that out there as a specific idea.

Simpson-Bowles has a process. We are ready to engage with Congress on that conversation, so I don’t think it’s fair to say that we haven’t put something out there.

On entitlements, and very difficult, I think that the president’s position is clear from the State of the Union and the budget and things he has said in between and since. He wants to deal with entitlements in a bipartisan way. It’s the only way we are going to make real progress.

On Social Security, he put principles out, he has extended a hand. I have watched my own words get distorted on Social Security. You would think that I had said at some point that I didn’t want to do Social Security reform. I am one of the loudest voices saying we need to do Social Security reform soon.

We have a problem in the out years. I think the debate has been confused by many who would want to define it as an immediate crisis causing the current budget problems. And I think that’s a mistake.

I think one has to embrace the fact that we have an obligation to the Social Security trust fund that’s part of our overall budget. It flows to the bottom line. And in the long term, Social Security has a shortfall.

I think were we to embrace the idea of fixing Social Security on the terms that the president outlined, we could make real progress, but I think trying to define it as having caused the problem that we are facing now is just not factually correct. So that’s one issue.

On Medicare, Medicaid, the administration present before I was in the current role I’m in has done more in the last two and a half years to get our hands around health-care spending and long-term growth than any other administration in history. The fact that there are hundreds of billions of dollars of savings in the first 10 years, $1 billion plus in the second 10 years, is not without controversy. It’s not like everyone has embraced the Affordable Care Act and said we are going to stick with it and implement it and get those savings.

The president has also said we need to move beyond that, but he has done quite a lot. And he hasn’t said he’s done, but I just push back pretty hard on the notion that in any of those areas there has been a lack of presidential leadership.

My own experience on things like Social Security reform, I think I said it when I was here the last time, but I’ll repeat it: I have never seen a unilateral proposal on Social Security reform lead to a positive outcome.

QUESTION: Jack, we are on our second or third, I guess now, CR, short-term CR; it’s getting a little silly. For those of us who haven’t worked for the Democratic Study Group, can you talk to us about what how many more you think it’s going to take (inaudible)? What - where are we going to end up with a deal? Where is the deal that can solve this and move on to the current year’s budget?

LEW: I think that the president made clear in his remarks last week that it is just not the right thing to do to fund the government two weeks at a time. No business would run that way. It leads to bad management, wasteful decisions, things that you know you are going to stop that you can’t terminate, things that you need to start that you have to hold back on.

It’s just not - it’s no way to run a railroad. And we need to get to the point where there is an agreement on the full- year. I think it’s a good thing that the House passed a three- week CR yesterday. I think it’s going to take a few weeks to work through.

Part of the problem is you have to create a reasonable period of time to work through to get done with the whole year’s work, or else you get partway through and everyone is distracted working on a short-term extension. I think this three-week extension was designed, as I look in and see it, to provide that space to work through and maybe finish the year’s work.

I don’t want to minimize the extent to which there are still differences. Having moved more than halfway from the president’s budget, we made clear that there is a line beyond which the president is not prepared to go.

He is not prepared to accept the kinds of cuts to things like Pell grants and Head Start that would mortgage the future and not give us the ability to educate the next generation to do the things that both we need to do for our economy and our future and for kids to have the opportunities they deserve. So there are things in there we are not going to do.

I think they have gotten that message. We are engaging now at preliminary levels to kind of explore what that means. I think yesterday’s vote suggests this is just not a bilateral conversation. This is a complicated puzzle where within the House there is a need for them to manage towards a majority that might be challenging, as yesterday’s vote suggested, without some bipartisanship.

In the Senate, we know there is going to need to be some bipartisanship, because you can’t get 60 votes without it. And frankly, for the president and Congress to come together in an era of divided government, it’s going to require working together.

We are ready to do that. We have been ready to do that. Frankly, we have been doing it. I think that there - we’re at a place that is different now than a couple of months ago in terms of knowing how to exchange information and understand what’s going on so that there are not missed cues, but that’s not a substitute for sitting down and working through the detailed issues.

One of the things I just have to point out on the spending bill, and it’s a shame that finishing last year’s work is distracting everyone’s attention from the huge challenges of next year’s and the long-term multiyear work, but that’s where we are so it does require some significant time and attention. There’s a lot besides money at stake in this, on this appropriation in the CR.

You’ve got the better part of 100, if not 100 depending on how you count them, riders, most of which have nothing to do with actual spending of money for budget control purposes. It’s social policy. It’s things that range from eliminating Planned Parenthood funding, federal funding for Planned Parenthood, to shutting down government activities in areas that involve science and environmental health and safety enforcement.

And the president has made clear that that is not acceptable to him. And I think that that’s -

HUNT: Never acceptable?

LEW: Those - things that meet those characteristics are unacceptable to him.

QUESTION: Every one of those that meet those characteristics?

LEW: Yeah. I am not going to make a global statement that Congress can never put a provision that involves language on that would be acceptable, but the things that meet the standard that I have just described are unacceptable. And that’s going to require some hard work.

My experience in the ‘90s was that those issues were often more difficult than the funding issues. People get very attached to amendments that pass, and they are hard to shake loose.

And I think we do - we are going to have to get work on that. The clarity of our position has been made clear directly from the president to the speaker. I have repeated it in every conversation I have had.

QUESTION: Has the president drawn a line that this could be the last short-term measure that you will fund?

LEW: The president has made it very clear that we should finish the work of last year and get on to the work of the future. I don’t think it’s helpful to the process for us to deliver ultimatums.

QUESTION: Because he would sign another?

LEW: I didn’t say that. I didn’t say that. I said they need to finish their work, and there is now a three-week period if this passes to do it, and it would be a disservice to the country not to do that.

I am just not going to - I am not going to say what he would do. I didn’t say he would. I didn’t say he wouldn’t.

QUESTION: Is it your quiet conversations with Republican leaders indicate to you that they are sincere about their plans to take on entitlements? And do you think they are deliberately exaggerating the crisis (inaudible)?

LEW: Look, I think we have got to change the rhetoric of debate. If there is going to be civil discourse, we have to be able to disagree with each other without calling each other frauds and liars every time we disagree.

Somebody who has been the subject - no, no, no, no, no, I am talking about the broader debate, somebody who is from the press. It’s not just from political leaders.

I think that the tone of debate has to change if we are going to take on these challenges. That’s what the president is trying to do by saying let’s work together, let’s get into a space where you can exchange ideas, not attack each other when you start out by disagreeing, understand each other’s views, see if you can options that are on the table as opposed to off of the table.

So we started out with a different bearing. We are not going into this in attack mode. We are going into it, we want to work together.

Now I tend to give people the benefit of the doubt. I have no reason to believe that they are not approaching this in good faith.

I have - I haven’t seen any signs of it in my personal dealings, and - we disagree deeply. There are things that I would oppose that I would advise the president to oppose that we would have to veto. That doesn’t mean that they are approaching it in bad faith.

You look at the challenge that they have. I don’t know how they are going to put together a budget. I look forward to seeing their budget.

I know that if you look at the things that I have seen publicly, it doesn’t add to a lot of deficit reduction. Because we are against extending the tax cuts at the upper end, ‘hey are for extending the tax cuts.

We are against extending the estate tax provisions. We want to go back to the ‘09 provisions. They are for extending the more generous provisions.

We are - we’ve got specific proposals out there on many areas of spending. They are still developing them.

I don’t know what they are saving. They are going to have a big hole to fill to show real deficit reduction, and I think it’s premature for me to judge how they are going to do that.

QUESTION: So I should ask you: What have the House Republican leaders been like to work with?

LEW: Look, most of the dealings so far have been around getting through the 2011 issues, because that’s the first order of business. Sequentially, we have got to finish 2011. There is going to have to be a vote on the debt limit. Then we have got to get on to the 2012 and the multiyear budget issues.

We obviously think those are all discrete and separate. Others have a different view.

I think that if you look at the actions - I am loath to describe private conversations in relationships where we are just beginning to develop trust, but if you look at the public actions, I think that if you look at the decisions that the House has made on the continuing resolution, it’s been to find areas where there could be agreement.

We didn’t sign onto the principle that CRs should cut $2 billion a month. We won’t sign onto that principle. We reject that principle.

On the other hand, we have said, - pardon?

QUESTION: It’s $2 billion a week, isn’t it? Is it -

LEW: $2 billion a week, I’m sorry, $2 billion a week, $2 billion a week. I -

QUESTION: Got you.

LEW: I stand corrected. It just shows you how unreasonable, $2 billion a week as a principle is that I have translated it in my mind. No, $2 billion a week is not an acceptable principle.

On the other hand, we’ve said we want to work together to find common ground. Where we agree, let’s agree.

The things that they have put in these short-term CRs meet a standard of things that we could accept, and I think that that is an indication that they were looking for something that could be signed into law and not to have a crisis. It would have been easy to put together packages of $4 billion and $6 billion that we would have had to veto. It would be easy. And I think that you have to look at that as an indication of kind of a pragmatic approach that there’s two parties here.

Now it’s going to be harder on both the big 2011 bill and when we get to 2012 and beyond. And these are baby steps that are all-consuming until you finish them, but so are baby steps.

QUESTION: (inaudible) That’s the problem -

QUESTION: (inaudible) on 2011? Who are you talking to on the other side?

LEW: Yes. I am really not going to go into the details of conversations. I think that -

QUESTION: (inaudible)

LEW: The vice president met with the leaders. That was a public meeting. We have continued to coordinate with the leaders, and as they have asked us to talk to others, we’ve talked to others.

QUESTION: Do you have any sense of the divisions on their side as you have talked to them? Do they have a single decision on their (inaudible)?

LEW: I - again, I am going to look to what’s been done publicly. I think you don’t have to look beyond yesterday’s vote to see transparently that there are their challenges on their side.

I have said from the very beginning of the year that everyone says, why don’t the administration and the Congress engage? And I don’t say this so much as an observation about this caucus or this year. Every new leadership, very new majority has to take a time to settle in and understand where the balance of its own caucus is and what they can do, what they can’t do. And I think that they’re in that process now.

Ultimately, ultimately I hope we can get to a place where we are doing things in a bipartisan way, where, if we get away from needing to do things on a purely party-line vote, I think it opens up an avenue to reasonable compromise. But I can’t manage the politics within another caucus. That’s just my hope.

QUESTION: Within each average CR booklet it seems like, on both sides, that the parties kind of fracture a little bit more on their (inaudible), what that they consider apparent. Does that make you more or less optimistic for a longer-term deal?

LEW: I think that the - there is no doubt that the longer- term is harder than 2011. The decisions are bigger.

Time has a very different character than it used to have. If you look at the progression of the debate on just domestic discretionary spending from last fall to now, I remember before I was confirmed as OMB director, the conventional wisdom was that the McCaskill-Sessions levels were unachievable, and they are now left in the dust. We are way, way beyond those levels in terms of what everyone is working on.

So I think it’s very hard to look at where we have been and understand how that dynamic will change in the future.

I think if we can develop a relationship of trust, where the parties are able to work together, and there is an agreement that we should be reducing spending, there also needs to be an agreement that we need to reduce deficits. And I think that’s an important distinction because one can reduce spending and do nothing about the deficit. I think that we have to do both.

And if there is an agreement that we are going both reduce spending and reduce deficits, that can lead to a frame of reasonable conversation. If it’s just about reducing spending without regard to the deficit, it’s not going to solve the problem.

QUESTION: But are there Republicans who speak in those terms that you are dealing with?

LEW: Look, I don’t want to exaggerate the - you asked me are we engaged. I said on 2011 we’ve been engaged. I think that there are activities going on looking beyond 2011, but there is a certain inevitable sequence to the process.

Until you get beyond 2011, you are not going to be seriously - that’s one of the reasons we have got to get a full- year resolution, because you need to move beyond the short-term. It doesn’t serve the American people well for us to spend all the energies at senior levels of government on solving two- and three-week problems. We should talk, be talking about the real problems.

I think I look to the conversations going on on the Hill and I take some encouragement from the fact that there are bipartisan conversations going on on the Hill, not necessarily out of the committees that are going to write the legislation, but important conversations are going on. I think that the - you won’t know if there is going to be the ability to come together until we get into a place where sides move off of their opening positions.

If everyone stays with their opening positions, it obviously doesn’t look all that promising, but that’s not how successful negotiations and successful engagements work. There is always some move.

I think if you look to the - where we are on the short-term CRs, which is all that has happened so far, it suggests a pragmatism. I don’t want to project from that what that means about 2012 or the multiyear. I don’t want to over-read. I don’t want to under-read.

QUESTION: So then how do you maximize your chances and we’re not sitting here having this conversation in December of 2012, same concerns about this? How are you going to maximize the chances of getting something other than a 2011 (inaudible)?

LEW: I think that there are - the simple answer is that we don’t ever get to go back and reclaim lost time. We need to make progress. We need to have realistic expectations about how long it’s going to take and how far you can go in each move, but you don’t - you need to start.

And I think as we - if we look at the political environment that has animated the discussion around 2011, there is clearly a lot of focus on the fact that the public is unhappy about not getting our hands around some of these issues sooner. It has been focused more on spending than deficit reduction, but I think that one leads to the other.

I am not sure that most people, when they say that the government should reduce spending, are thinking that there is a difference between spending and deficits. They see - but we have a responsibility collectively to make it clear that it’s not just about spending, it’s about deficits, and we have to do both.

QUESTION: Not just about spending. It’s about deficits. You mean it’s very difficult to move forward unless the Republicans agree to put revenues as part of the conversation?

LEW: Well, I think that first of all, as I think everyone at this table knows, discretionary, domestic discretionary spending is roughly 12 percent of the budget. One cannot solve our deficit problem by simply cutting away at it.

If we end up cutting things that make it impossible for us to compete economically in the next decade, that would be very shortsighted. So the problem cannot be solved in the confines of appropriations bills.

The - there is going to have to be a serious conversation with everything on the table in terms of revenues and mandatory spending, and that’s hard. I think what the president has done is to try and create an environment where we maximize the chance of having the kind of conversation that can lead to real action in a difficult political environment.

I can’t say that there is a guarantee; you never have a guarantee. But I frankly think that if the focus shifted from who is going first to when are they going to talk together and, frankly, even the - all the calls for leadership, some of it is code. It’s code for “You go first, you go farther.” And what we are saying is we need to find a way to work together.

HUNT: Jackie, I know you have a question and I want to follow up on David, but you go ahead.

QUESTION: Well, go ahead and follow up on David.

HUNT: Well, would you - you say you can’t solve the deficit problem through spending through appropriations. Is it equally through the discretionary program? Would you also say you cannot solve the long-term deficit problem without revenues?

LEW: I think the president’s budget speaks for itself.

HUNT: But you guys clearly believe that, so are any Republican - are Republicans that you are talking to on the Hill beginning to acknowledge that yet? Or are they still drawing a firm line on taxes?

LEW: I don’t think there is a monolith of either Republicans or Democrats on the Hill or in Washington.

HUNT: How about the Republican leaders? Do you think that there is an acceptance yet that there is no way, according to you all, to reach a long-term deficit situation without taxes?

LEW: I think if you look at the Bowles-Simpson commission, you look at the Group of 6 in the Senate, that is a bipartisan - those are bipartisan conversations. I think you see - if - what the contribution that I think the Bowles-Simpson commission made that is very important, that we have been trying to have, get people to keep focusing on, is there are different ways of defining taking on revenues.

They defined taking on revenues as cutting expenditures on the tax side. That’s a fine principle. It’s a principle that many of us remember as an old idea and now it’s a new idea and -

HUNT: Of course no House member signed on to that.

LEW: No.

HUNT: The question is, are any of the House Republicans beginning to at least have those conversations?

LEW: I think that it’s - I am not the right one to comment on where the House Republicans are ready to go. I think that I can comment on defining the challenge, and it’s clear that if we are going to make the kind of serious progress we need to, and again I would point to our budget as reflecting our view of it, it’s not tenable to sustain the tax cut at the high end. We just can’t afford it.

The president said that last year as he signed legislation to temporarily extend it, so it’s a not a new position and it’s not a new difference. I am not going to say that we are on the verge of an agreement on that principle. And I understand that that is something that is going to be a very difficult political battle if that - but I think it represents very much our view that you can’t solve this just on the spending side.

QUESTION: This isn’t what I was going to ask about -

LEW: And just add, there’s things in our budget beyond that, whether it’s tax subsidies for the oil and gas industry or other things where we have said that, as we have in past budgets, that the tax code needs to be cleaned up and we need to stop doing some things that cost a lot of money that are not necessary for our economic future.

QUESTION: All those talks about who is going to go first and farthest as you said on entitlements, but on that revenue side, we had late last year not just Bowles-Simpson, but Domenici-Rivlin, the National Science Foundation. There was a number of these packages, all which had in common that you have to have all spending, discretionary and entitlements, and military and domestic, and you had to have revenues.

And you have some of those conservative senators from the Republican or the Republican parties agreeing that that there is very - it’s all about entitlements and it is there’s - how do you get it to a - it seemed late last year that that was the beginning of a discussion where it was - everything was on the table, but it doesn’t seem like the House Republicans are there at all. And I don’t - and the administration doesn’t seem to be at least publicly pushing them in that direction. It’s like a denial, and I think the press is a bit complicit, too, that it’s all about spending. I - really there’s a question in here somewhere, but -

QUESTION: We were looking for it, Jackie.

QUESTION: But how - why aren’t revenues a bigger (inaudible)? It seems as if the whole Republican leadership is the only people and the players that are in denial about this, but nobody is - why aren’t you forcing them to publicly stop that denial?

LEW: I’m trying to figure out what question I’m answering, but I’ll -

QUESTION: She gave you a lot of choices.

LEW: I think that the -

QUESTION: You repeat the questions and you can tell us.

LEW: I think that the -

QUESTION: Can you repeat the question?

LEW: I don’t think there is a question of starting out by forcing each other to do one thing or another. The question is, can we define some objectives that we can agree on, and then can you get to work on them?

We are not in disagreement that there is a need for spending reduction. The president’s budget established that before we got into any kind of negotiation on the CR.

The president’s budget was dramatically clear in saying that we have to reduce spending, but it also said that we have to address other parts of the equation as well. We haven’t stopped saying that.

It - we can’t compel other parties to accept that principle. It’s not - so I am not sure what one would do to compel a party, but we need to make a case. We need to - if we accept the principle that deficit reduction is the goal, and if we can work together towards deficit reduction as well as spending reduction, I think that we will see where there is room for compromise and progress.

I just don’t think - I don’t think that you - you look at the actions taken to date by the House, they don’t even, with the spending reductions if they all happen, reduce the deficit. The repeal of the Affordable Care Act costs money, the - not going to become law, but you look at the actions of the House.

The waiver of, or amendment of, the pay-go rules so that you don’t need to have offsets for tax cuts ultimately opens the door towards increasing the deficit. So I think you have to start with this very basic principle that we have got to reduce spending, but we also have to reduce the deficit. I think if we can agree to a principle about deficit reduction, that would be important.

HUNT: Then we cannot take up entitlements then without taking up taxes? You have to take them both up. You can’t do entitlements and say (inaudible).

LEW: I in general avoid making global statements about things. We have dealt with taxes on their own and entitlements on their own.

HUNT: That’s not global. That’s very basic, isn’t it?

LEW: No. For the 30 years that I am familiar with you have seen them come up either separately or together, so -

HUNT: But if you are talking deficit reduction long-term, don’t you have to say you have to do them both?

LEW: I think that if you look at past deficit reduction efforts that have been successful, that have been balanced and they have represented the different things that caused the problem, so that certainly has historically been the case. I think that if you look ahead, that’s what we have proposed as a way to go forward. And I am just going to avoid making kinds of global statements.

QUESTION: (inaudible) I am not aware of anything the House Republicans have said or done that indicates they are willing to move from this - this it’s all about spending paradigm and no talk about revenue and the president has to go first on entitlements. That - what gives you optimism in anything they have said or done that they are going to move?

LEW: The simple answer is with the choice between optimism and pessimism, I always choose optimism.

QUESTION: (inaudible) There often is a point.

LEW: Look, I cannot - I can’t speak for House Republicans. I obviously disagree with many of the policies that they have put forward.

I can say that if we are going to make progress, it’s going to require flexibility on both sides. I think that if there is not flexibility on both sides, it’s going to be hard to make progress.

And so, to some extent, my optimism is conditional. In a divided government the - you can have deadlock or you can have progress. It’s hard to force one or the other to do what they don’t want to do.

So my optimism is that I think I know where the president’s compass is, and I am comfortable that in the negotiation we are in now in 2011, there is a clear line that he is not going to cross. And in a multiyear budget conversation, he has got principles that matter deeply to him. That gives me comfort engaging that the worst outcome of just kind of having bad things happen, you have a safeguard against.

The optimist in me looks at projections of the - of - I testified before most of the committees of jurisdiction. They seem to think it’s a problem that, with projections, that the debt is going to exceed 100 percent of GDP. Well, the only way for that to be avoided is to reduce the deficit.

And if you are going to reduce the deficit you have to be realistic about approaching it. And I believe the facts actually ultimately affect the way people look at things, and you just keep going at it. I can’t -

QUESTION: Now that’s optimistic.

LEW: I can’t say that there has been a great opening publicly. You haven’t seen it, and I haven’t seen it. But I do know what the facts are. The facts are you are not going to turn the tide on the growth of the debt as a percentage of GDP, which is a threat if it’s not turned, without dealing with all of the things that actually contribute to the deficit going up.

And that fact is just a fact. And I certainly wouldn’t be working as hard as I am working if I thought it was impossible.

QUESTION: Can I ask a question on -

HUNT: David, David.

QUESTION: Oh no, it’s something.

QUESTION: What is the debt ceiling, both an opportunity to put some framework in place, (inaudible)?

LEW: Look, obviously our view is that the debt limit vote should be done clean. It should not be attached to the broader set of issues. The debt limit does not cause the problem. The debt limit is merely the manifestation of decisions already made, and a great nation has to honor its obligations. So I don’t want to in any way suggest that we have changed our view on that.

There obviously are other views abroad that would suggest that there should be conversations around that. I think it’s a little bit early. Frankly, the intense focus on finishing 2011 business, just in the sequence of the work that is being taking up, have pushed that out a little bit, and it’s coming closer each week.

So you look at the likely expiration of the short-term CR April 8, the space from then to the serious engagement on the debt limit is a blink of an eye. So it’s something that we will start to develop I think right after we can clear out the old business of 2011, and the sooner the better.

QUESTION: I want to ask about the government reorganization principle stuff. A presidential memorandum was issued last week. Where are you in the process, and what are we likely to see come out of the recommendations? And the president sort of targeted the Commerce Department in the State of the Union. Are we likely to see something on a really large scale, a small scale?

LEW: I think it’s premature to speak to the outcomes. Jeff Zients, who is deputy director of OMB for management, chief performance officer, is the head of this project. He is doing a great job reaching out to all the stakeholders, trying to have it be driven by as much fact as we can quickly develop.

A lot of people have thought about these subjects before, so you are not starting totally from scratch. And there is a lot of benefits that could come from rationalizing how we do it. We are not looking at taking on everything all at once everywhere, so it’s going to be sequential going -

QUESTION: Trade first?

LEW: The president focused on export enhancement. That’s going to be an organizing principle at the beginning, but in the course of gathering information, there is also a broader look being taken. So it’s a little bit early to suggest where it’s going. It’s not an effort that’s designed to kind of find the maximum number of things that we can kind of turn over or combine. It’s an effort that’s being designed to answer the question, how can we do the things we do better more effectively and more efficiently?

HUNT: Let me bring you back to the CR. Let me see if my understanding is correct.

LEW: So much for the long-term.

HUNT: No, but you - I think what you said was even for an optimist, you are optimistic about getting a resolution on this, the current fiscal year, with some lines drawn in the sand which they seem to be aware of, and that the biggest impediment may well be the riders. Is that accurate?

LEW: Well, I don’t want to be overly optimistic. We don’t yet have the agreement on the money, and I think it’s going to be a hard move. The president has said he would veto the package of $100 billion. There are points below that, that between where things are now and $100 billion, that we could live with. I hope we can work our way towards that. I think that the - if you look at the evolution of the $100 billion, you can see various points that their own position has evolved, which give you ideas of where there may be different points of potential, kind of, stability.

On the riders, it’s - and again this may just be based too much on my own history, they are more emotional sometimes than the individual funding levels, and that’s why we were so clear right at the start that it was not acceptable to put extraneous social policy and broad policy directive in a must-fund continuing resolution. It’s just not - it’s not going to be acceptable to us, and we are going to have to work our way through that. I don’t - I certainly hope that we will be able to work through it in this three-week period, because that would be the right thing to do.

QUESTION: Oh, I’m sorry if I could pick up the torch of conditional optimism? You’re the top. You said that in these big -

LEW: My optimism is increasingly challenged these days as I read the newspaper, but -

QUESTION: Toward the top you said that in your baby-step conversations with I think Republican leaders was (inaudible), that you sense some pragmatism. I wonder if you could just elaborate on that.

LEW: To be clear, I referred to actions, not our conversations. I said if you look at the actions taken, the actions taken reflect pragmatism.

QUESTION: OK.

LEW: I was careful not to characterize the conversations.

QUESTION: So could you elaborate on -?

LEW: No. I am not going to talk about the conversations. I am, yes -

QUESTION: What makes you think that their actions suggest pragmatism?

LEW: Look, I think if you look at the bill that passed the House yesterday and you look at the things that are in there, the $6 billion of savings, the composition of it is - reflects something that they had a very high degree of confidence would be acceptable. That’s pragmatic.

One could have put a $6 billion package together that was $5 billion of things that were acceptable and $1 billion of things that were daring us to veto it. They didn’t do that. I applaud them for that. That’s responsible. That’s the way you put things together when you want both sides to agree.

And it wasn’t done completely in the dark, so there was some knowledge of what boundaries were. And that gives me the sense that it was designed to reach a constructive conclusion. Not that a three-week CR is such a great accomplishment, I am not saying that it’s something that will go in any of our memoirs as the thing we are most proud of, but it beats a government shutdown by a long shot. And -

HUNT: The greatest 21 days. We have time for one more question. Jackie Calmes, Jackie’s going to make a comeback. Everybody -

QUESTION: Remember, that other question wasn’t what I was going to ask, now I got to make this one.

QUESTION: And transcribe that.

QUESTION: We have seen in the Middle East - we are seeing in the Middle East to Japan just how quickly external events can change things, can threaten the global economy and perhaps - what is the thinking within the new administration economic team about what the tipping point is? You have - so many people talk about this as key. This is setting the table for, say, 2013 to get something broad and comprehensive done, but what is your thinking within as to how much time there actually is before the markets see signs that the U.S.’s political system is just incapable of doing what needs to be done to (inaudible)?

HUNT: Japan probably changed that dynamic anyway.

LEW: So I, look, I think that those are separate, very separate issues. Obviously there is a lot of things going on in the world that we don’t have total control over. No one controlled the weather in Japan and the horrible consequences.

QUESTION: Well, I only raise those who suggest that it can shape (inaudible) -

LEW: Yes. I think that we just have to all be humble about the fact that we work in an environment where there are things we control and things we don’t control, and we should take responsibility for the things we control and do the very best we can and then respond as well as we can when the things that are unpredictable happen.

We have experts going to Japan to help, but we have to have, again, a certain amount of humility. We - no one expected an earthquake and a tsunami of that scale there or anywhere else.

If you look at the political developments in the Middle East, the - we have to make our policies domestically,. assuming that there will be surprises. And it just underscores the need for us to be responsible and focused in doing our business.

I don’t think we should turn on a dime every time there is a crisis around the world. If we have a plan for how to manage the U.S .economy well, we just stick to it. There are things we need to do as we respond, but I do think we need to keep them separate.

And we have tried to, and we look at the energy situation very closely. What we do or don’t do to respond to the current energy prices and issues relating out of the Middle East, I think it’s totally separate from what we do in terms of managing our fiscal policy.

The thing we know for sure - that the stronger we are in terms of managing our fiscal affairs to send a signal both domestically and to the world that we are taking responsible actions, the stronger we are. That’s why Mike Mullen, when he described the kind of long-term debt as a national security challenge, perhaps the biggest national security challenge, I think hit it on the nose.

That should underscore why we need to get beyond partisanship. We need to work on defining the problem that we can get our hands around. And we need to get to the work of finding the reasonable middle ground, not defining the differences.

And that’s what the president is about. That’s what we are about, and if I think we stay focused on it, the optimist in me says we will make progress.

And I think no one should expect that there is an instant solution. There is not an instant solution. And I frankly don’t think that the American people, or the world or the markets expect an instant solution. They expect us to be doing things that make progress, not denying the problem, and having a vision and a path.

And I think our budget reflects our first shot at that. It’s an invitation now to engage when we see what an opposing view is, and then coming out of it with some resolution.

HUNT: Ken is giving us the hook. I assume therefore Japan has not changed any of your calculations yet.

LEW: Look, obviously Japan is an enormous human tragedy. If you look at it in macroeconomic terms, I don’t think it has the - any reason that we would immediately to make any kinds of changes.

Obviously, it raises all kinds of issues that are policy, important policy and humanitarian issues, but I don’t think it fundamentally changes the direction of the U.S. economy.

HUNT: If your optimism doesn’t pay off, you can come back and (inaudible) 21-day saga.

***END OF TRANSCRIPT***

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#<372076.7439435.2.1.77.31389.96># -0- Mar/17/2011 23:39 GMT

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