Desperately Needed: A Strong Treasury Department

Alexander Hamilton, the first Secretary of the Treasury, set the bar very high. The Senate is about to begin debate over President Obama’s nomination of Jack Lew to be Treasury Secretary. Lately, confirmation hearings have often focused on either the personal foibles of candidates or relatively evanescent policy disputes that are soon forgotten. But at a time when fiscal policy is so critical to the nation’s well-being, the Senate should not forget the critical role Treasury has played in forging that agenda.

The key question for the Senate: will Treasury continue to play that powerful role under Lew’s stewardship?

While Hamilton could be mercurial and even buffoonish in his monarchial tendencies and late military ambitions, he was extraordinarily visionary in molding institutions and organizations to meet the fiscal needs of the new nation. Whether writing Federalist Papers or engaging in the nation’s first Grand Bargain on the budget—to pay off Revolutionary War debt in exchange for the establishment of the capital in the District of Columbia—his prescient gaze stretched far into the future, finding limitless possibility for this great nation.

Perhaps nowhere is his legacy more embodied than in the Treasury Department that he helped create and nurture to handle the nation’s debt obligations, taxes, and its budget. That legacy has been threatened by a modern department weakened by the usurpation of its functions.

Remember that the president is the only elected official our founders explicitly tasked to represent the nation as a whole. We expect partisanship among members of Congress because they represent different constituencies, though today the influence of special interests transcends congressional boundaries. The Chamber of Commerce, AARP, National Rifle Association, and AFL-CIO each understand the levers of power, even to the point of knowing how to scare an entire legislature to inaction with a few million dollars of campaign contributions or “scare” leaflets to their membership. I’m not saying that these groups don’t have views worthy of consideration, but they do not—I repeat, do not—represent the “general welfare” that our Constitution explicitly mentions in its preamble and its taxing and spending clause.

The executive branch is no longer organized along a few simple lines such as treasury, state, defense (or war), and justice—departments dedicated to what might be considered general welfare functions. The branch is now dominated by departments dedicated to special constituencies or tasks that generate special interest pleading such as agriculture, commerce, labor, housing, health and human services, and education. In turn, the White House is full of individuals whose jobs revolve around placating these constituencies, as well as pollsters and political advisors whose jobs center more on sound bites than sound policy.

Interestingly, one of the earliest fights between our political parties was over whether the federal government should get involved in arenas like agriculture or education. While Hamilton, was on the side of those favoring those efforts, both sides agreed that if such spending took place, it should still favor the general interest and not favor any specific section of the country over another. Today, particular constituencies are the dominant beneficiaries of many of our spending and tax subsidy programs. Does anyone really think that subsidies for sugar growers or early retirees or owners of oil companies and expensive vacation homes serve the general welfare?

When it comes to spending, taxing, and budgeting in the modern era—especially when the government has made too many promises to too many people—the Treasury Department remains the only agency that can restore order by offering broad reform packages centered on the general welfare.

Other arms of government simply lack the tools to deal with today’s unique fiscal challenges. If we set aside those mainly focused on special constituencies or tasks, the options are limited. The White House can and should help the president agree to propose what should be built, but it doesn’t have the personnel to figure out its plumbing and engineering. The only two budget competitors might be the Congressional Budget Office (CBO) and the Office of Management and Budget (OMB). CBO serves the Congress and not the President, and it abstains from proposing policy, partly to protect its now-ascendant role as neutral scorekeeper. Neither CBO nor OMB puts together cross-cutting packages the way that Treasury has done, when allowed. They do provide laundry lists of options, but that tends to foreclose, say, adopting an efficiency improvement in one area and offsetting its potentially regressive effects in another. OMB, in turn, has few economists on staff and has little tradition in issuing reports.

Treasury also sits in the unique position of having to worry about the ways and means of paying for things. It alone must deal with what I call the “take-away” side of the budget ledger. Constantly confronting how to administer taxes or float bonds, it’s in its very blood to balance potential benefits with costs and reduce politicians’ incentive to operate on the “give-away” side of the budget by enacting tax cuts and spending increases for which future generations will have to pay.

One other part to solving our fiscal puzzle involves understanding the role of committees or assemblies of politicians. The role of these groups is to approve, not design, policy, and delegating that latter function to them neglects the role of the executive in both business and government. There was a reason fiscal policy shifted to a strong Treasury and away from the committees operating under the weak Articles of Confederation.

In assuming the executive role of Treasury Secretary, will Jack Lew follow Hamilton’s example by leaving a stronger Treasury as a legacy? Will he help move us down a viable path for getting out of our current fiscal mess? I suggest he is unlikely to succeed at one without accomplishing the other.

2 Comments on “Desperately Needed: A Strong Treasury Department”

  1. It depends on whom he puts in the Office of Tax Policy, as you very well know. Will he staff it with experts with no agenda, or will he allow some sort of plan to come out that combines the best of analysis and originality? I don’t expect anything as radical as my plan be proposed, however it would be nice if they would give it a look (or if TPC would do the same thing).

  2. Bartlett said much the same thing in his book.

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