Why U.S. Economic Leadership Matters

Jacob J. Lew discusses America’s leadership in the global economy. Lew outlines how U.S. leadership of the global economic system has produced economic successes over the past 70-plus years, and why sustaining that economic leadership and adapting it to the challenges of our time are critical to future U.S. and global stability and prosperity.

The C. Peter McColough Series on International Economics brings the world's foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

MALLABY: Thank you all for being here this morning. My name is Sebastian Mallaby. I work here at the Council.

So I want to welcome you all to today’s CFR meeting. This is part of the Peter McColough Series on International Economics. I want to welcome also CFR members around the nation and the world participating in this meeting through livestream. I think you know this is going to be on the record.

There is an introduction and description of Mr.—of Secretary Lew’s bio, I think, in your packs. But just to say that he was sworn in as the 76^th treasury secretary in 2013. Before that, he ran the OMB. And one thing I remember as being kind of relevant to what he’s going to be discussing today is, before that, in the early Obama administration when he was deputy secretary of state and running the first-ever sort of deep look at all the tools of development assistance across the U.S. government, the Quadrennial Development Review, shows that his involvement in these questions of the interaction between economics and statecraft is rather extensive.

So I’m going to welcome Secretary Lew up to the podium. And he’s going to speak for a bit, and then we’re going to have a conversation. Thank you.

LEW: Thanks very much, Sebastian, for that introduction, and for your leadership at the Council. This is a remarkable institution with a long history of intellectual influence on America’s foreign policy. And, as always, it’s an honor to be here today.

America’s leadership in the global economy is something we all care deeply about. And I want to thank Gideon and his Foreign Affairs team for publishing my essay on this topic.

The piece opens with a story about the difficulty of getting IMF quota reform through Congress. And it asks, why was it so hard? Why was it so hard, and did it take five years to win approval at the end of last year? After all, the IMF has been a symbol of U.S. leadership since its birth at the end of World War II. And, along with the World Bank and the World Trade Organization, it’s provided the underlying architecture of a global economic system that’s helped produce remarkable gains over the past 70-plus years.

American leadership was essential to the creation of that system and the progress that it’s yielded. Yet, even though it’s supported the well-being of our citizens and has helped the United States advance our values and our foreign policy objectives, America’s global economic leadership has not always been popular here at home. In the case of IMF quota reform, it took five years to convince Congress, to act, a delay that led many in the international community to question America’s leadership position in the global economy.

The ultimate passage of IMF reform was pivotal, but it was just one of many important steps needed to sustain our economic leadership and adapt it to the challenges of our time. We know that the global landscape of the next century will be very different than that of the postwar era. And if we want it to work for the American people, we need to embrace new players on the global economic stage and make sure that they meet the standards of the system we created, and that we have a strong say in any new standards. The worst possible outcome would be to step away from our leadership role and let others fill in behind us.

Making the case for global engagement is a responsibility we all share. And we must make the choices necessary to ensure both the future of the international architecture we built and America’s position in it.

Over the last year, the Obama administration has made significant progress advancing U.S. leadership in the global economy. We worked with Congress to secure IMF reform, Trade Promotion Authority, and the reauthorization of the Export-Import Bank. We reached agreement with our international partners on the Trans-Pacific Partnership, a landmark climate agreement, the Iran nuclear deal, and a stepped-up strategy to confront terrorist financing. But to ensure the benefits of our global role, that those benefits remain available in future generations, we have more work ahead of us.

Since its establishment in 1944, the Bretton Woods system of cooperation has evolved and endured by providing a foundation for mutual economic gain that could not be achieved by individual countries alone. Since 1950, real per-capita income worldwide has quadrupled, raising living standards for billions of people, extending life expectancies, and expanding access to education. Clear rules for global economic relations create opportunities and incentives to innovate, invest, and work—the critical drivers of economic progress. But a system of mutual responsibility does not automatically enforce itself. It requires responsible American leadership. It also requires constant improvement to raise standards and create better mechanisms to ensure that countries keep their commitments, refrain from unfair competitive behavior, and cooperate to confront new challenges.

The rules-based system was a major reason that the global financial crisis never turned into a second Great Depression. The United States and other nations were able to coordinate efforts through the G-20 and the IMF to avoid the downward spiral of protectionism and predatory macroeconomic policies that characterized previous eras. The world’s major economies—the United States, the eurozone, Japan, and China—launched simultaneous economic stimulus programs and mobilized financial assistance to vulnerable parts of the global system. We’ve build on that cooperation in recent years to advance important U.S. goals, including the IMF’s response to fiscal stress caused by the Ebola epidemic in 2014 and its support for Ukraine following Russia’s aggression in Crimea.

The scale and speed of assistance in both instances would not have been possible if the United States had to act alone or to stitch together donor contributions. The simple fact is that international financial institutions amplify U.S. influence on the global stage.

We have also worked closely with partners to implement financial sanctions that show how this same global financial architecture can be used to persuade malign actors to abandon behavior that threatens peace and security. The Iran agreement is a direct result of the financial pressure imposed by an unprecedented global coalition. And we have and continue to work closely with our allies to impose costs on Russia for its actions in Ukraine, and on entities that are abetting North Korea’s nuclear violations.

But the benefits of international coordination and our international standing cannot be taken for granted, and we must take the necessary steps to preserve and strengthen our position. Responsible and sustainable U.S. leadership in the global economic system begins at home. And we have to lead by example, as we did by bouncing back from the financial crisis that threatened America’s place in the global economy.

The U.S. economy has now produced the longest streak of uninterrupted private-sector job growth in American history. Between 2009 and 2015, the budget deficit has declined from nearly 10 percent of GDP to 2 ½ percent. And improved financial regulation has helped to address the causes of the crisis, producing a better-capitalized and more stable financial system.

Yet, along the way, political brinksmanship led some to question America’s capacity to meet this moment of leadership. The threat of government shutdowns and default heightened global anxieties. And Washington’s inability to reach a consensus on domestic priorities such as rebuilding aging infrastructure and reforming the broken business tax code—priorities with bipartisan support—creates unnecessary risks to America’s future economic strength.

Recent advances—including multiyear budget targets, the passage of Trade Promotion Authority, and the reauthorization of the Export-Import Bank—have demonstrated that we have the capacity to work together to make important progress. But much more work remains.

Beyond our borders, the world’s economic challenges will not end with the current administration, nor will the ongoing agenda for U.S. leadership. And there are a number of priorities that we must continue to press.

First, we must work with our partners to further modernize the IMF, allowing it to intensify its scrutiny of critical issues like exchange rates, current account imbalances, and shortfalls in global aggregate demand. Because more information means better policy cooperation and more efficient financial markets, the IMF should continue to promote greater transparency among its members when it comes to economic data, especially as it relates to foreign reserves.

Second, we must work with our partners to make the World Bank and the regional development banks more efficient and effective. These institutions need to have the resources and policy expertise to help countries promote sustainable development and address challenges like state fragility, forced migration, natural disasters, and disease epidemics. They must also be able to mobilize resources that cut carbon emissions and build societies resilient to climate change.

Third, we must help modernize the global trading system by pushing for innovative features in new trade agreements. TPP, for example, includes strengthened labor and environmental provisions, robust protections for trade in services, and controls on the behavior of state-owned enterprises to ensure fair competition. Under the agreement, members have also pledged to avoid manipulating exchange rates. These high standards need to be the model for future agreements.

Fourth, to prevent a repeat of the financial crisis, we must continue to lead efforts to reform the international financial regulatory system. U.S. leadership in this area has already resulted in more rigorous capital standards for banks, greater transparency in the derivatives market, and stronger tools for managing the failure of financial institutions. With many of the critical standard-setting reforms in place, the focus must shift to comprehensive and consistent implementation and close attention to emerging threats.

Fifth, we must continue to combat terrorist financing, corruption, money laundering, and other financial crimes. The Treasury is strengthening its anti-money-laundering and counterterrorist financing rules at home, working through the Financial Action Task Force to improve enforcement globally and partnering with countries to combat terrorist financing specifically against ISIL. Because we must keep up with innovation in the private sector and by our adversaries, regulators must update their regimes while ensuring regulations do not impede legitimate provision of financial services, especially to the underserved.

Finally, we’re committed to building on the progress that we’ve made in cooperating with emerging-market partners, including Brazil, Argentina, India, and Mexico on key priorities, such as facilitating investment, improving the implementation of tax policies, promoting financial inclusion, and combating money laundering and terrorist financing.

As the two largest economies, the United States and China also have a unique responsibility to work together to advance shared prosperity, maintain a constructive global economic order, and make progress on critical challenges like climate change. This year we’ll hold the seventh U.S.-China Strategic and Economic Dialogue, which is a platform that has strengthened relations between our two countries and provided a forum for discussing important priorities, like China’s shift toward consumption-led growth and greater transparency and predictability in its policymaking.

While the progress of the last year has helped to advance this important agenda, we cannot take our global role for granted, and we must always think about how our choices will affect our leadership in the future. With vision and foresight, previous generations of Americans have provided a foundation on which to advance our values and build a prosperous future for the United States and other countries.

Our task now is to strengthen that architecture and adapt it to new challenges. If we come together and accomplish this, we’ll not only support today’s prosperity. We’ll also ensure that the next generation of Americans inherits an even stronger platform for navigating tomorrow’s economic landscape.

Thank you very much. (Applause.)

MALLABY: Great. So we have a bit more than 45 minutes. And we’re going to divide that between a conversation up here, and then we’re going to go to the members. There’s a lot of talent I can see in the room, so I do want to hear from people.

But I thought I’d start by just, you know, in a slightly cheeky way, questioning the premise. You lay out this view that the Bretton Woods institutions embed U.S. values, expand Western influence. And I think this is the Council, and most people are going to agree with that for the most part. But you could also observe that the central feature of the Bretton Woods architecture, when it was adopted in 1944, was actually fixed exchange-rate regime. And that was probably the most important single part of it. And it was dumped by Richard Nixon unceremoniously in 1971.

And then the world moved on and we found that actually floating exchange rates for large parts of the global economy were good. And so I want to ask you to look forward and ask a question about the sort of central theme of your essay, which is to say maybe there are bits of the international financial architecture that we shouldn’t necessarily support, that might be dispensable, that might not be around in 10 years.

Can you think of any that you do not think of as indispensable?

LEW: Sebastian, I think that the key is to think of the international architecture as an evolving, adapting set of institutions. The world, at the end of World War II, looked so different than it does today. The role of the United States was so different than it is today. And it wasn’t good. It wasn’t good that the rest of the world had lost its manufacturing capacity, that there was no other hard currency that had any promise of being an alternative to the dollar.

And the system that evolved provided a foundation between the 1940s and the 1970s to see a period of growth that has led to not just economic growth but geopolitical stability. Some of the political developments in the ’70s, ’80s, and ’90s show that when you move towards a more market-oriented system, when you’re sharing a set of values, political reforms tend to follow.

I think as we go forward, the thing that we have to keep in mind is that the world isn’t going to look, in 10, 20, or 30 years, exactly the way it looks today. The thing that we need to make sure, from a U.S. perspective, is a constant is that we have a role in those institutions to help govern how they change as they go along. We can’t look at it as being completely frozen in time, or others will just decide that they’re going to group together in a different set of organizations where they make different rules.

I think the thing about the IMF, the World Bank, are that they’re institutions that are very inclusive. There’s a very strong U.S. role that we have earned. And going forward, I think these institutions have to be looking at the challenges of the future.

You asked about the IMF, but let me kind of shift and give an answer perhaps a little bit more about the World Bank. You know, we have, over the last year, since the World Bank play a very important role in the discussions on climate change, we’ve seen the development of lending facilities that are designed to deal with challenges of the future, which is governmental and public-private partnerships to invest in the kinds of things that will lead to a cleaner environment.

At the IMF, you know, if you look at the period between 2008 and now, it has played an enormously significant role, both in stabilizing the post-financial-crisis environment and also in responding to the crisis. I mentioned two in my remarks, Ebola and Ukraine. We don’t know what those challenges in the future will be. I don’t think anyone predicted Ebola, you know, even a month before it became an international crisis. What we know is we need to have flexible international bodies to go to Congress to get funding. To deal with something in short term like Ebola is a challenge.

MALLABY: Let me ask—let’s take both of those, the World Bank and the IMF, since you’ve raised both of them, as the key institutions of the order created in 1944. So in terms of the World Bank, I think it’s certainly true that the governance system on the board has neither the disadvantages of the U.N. Security Council, which is way too narrow for a world in which other powers have risen, nor the disadvantage of the U.N. General Assembly, which is way too democratic, frankly.

So that strikes me as an incontestable point. But the tools of the World Bank’s lending feel to me as if this evolution that you’re mentioning might be accelerated somewhat. So, for example, the IBRD, the main lending window, which lends at, you know, interest rates that cover the World Bank’s costs so they’re sub-market, but they’re not a giveaway. You know, the premise was a world in which the clients did not have access to global capital markets. That premise is out of the window. They all do have access to commercial private capital.

So what’s the residual rationale? The classic answer would be there are some things, like global public goods—climate being a good example—where you want more lending than the market would deliver for those things, because they’re global public goods, and single countries don’t have an interest in creating enough of them.

But as I understand it, the IBRD’s lending interest rates do not differentiate. They don’t give you a break, a cheaper interest rate, if you’re borrowing to create a (political ?) or public good. Shouldn’t that—isn’t that a clear case where—

LEW: I think if you look at the discussions that we had just last year at Addis Ababa, at the Funding for Development conference, it kind of illustrates your point of being kind of in between the Security Council and General Assembly. There were very significant debates about how much a World Bank resource should be put into climate. You know, there was a debate about whether it was competing with more traditional forms of lending or whether it should be all additive. And I think it was resolved in a way that was really quite construction, where the World Bank became a major partner in making resources available to deal with what is one of the most pressing public goods of our generation dealing with investing in a—in a more energy-efficient, less carbon-intensive future.

MALLABY: But just to press you, right now there is a surge just reported in IBRD lending, which is driven by the budget gaps in countries like Nigeria, which have had resource crashes and where the private markets are being less accommodative in lending for general budget expenditures. So a large portion of what the bank does is kind of substituting, complementing, competing—however you want to see it—with private capital markets. It’s not creating global public good.

LEW: I think it’s a mistake to think of any of these institutions as dealing with one challenge. Dealing with maintaining basic financial stability in a country is certainly core to what the IMF is, even though the IMF does many things beyond that. The World Bank has traditionally helped to shore up systems which meet the standards that are set by entities like the IMF to be on a sustainable path.

I think having multiple points of access, to make sure that you avoid the destabilizing consequences of having either cyclical or price-shock effects that lead to economic and political destabilization, is very important. It’s not that you choose between doing climate change or the other. The question is, how do you strike the right balance?

I think that one of the things that the World Bank has done over the last few years is looked at how to manage its resources creatively to gain a bit of reach through better management of its financial capabilities to be in more places. That’s a good thing.

If you look at the countries that are on the cusp of kind of shifting from developing to developed countries, they tend to still be places where you find a lot of poverty. So it’s not as if, once your overall economy reaches the next level, the benefits of that are necessarily as broadly shared as needs to be. And—

MALLABY: But if the government of a middle-income country wants to reduce poverty—you know, let’s take China or India—it can borrow commercially to do projects which are focused on poverty reduction. Having the Bank there, the World Bank there, to be an additional source of—I mean, either the government wants to do these projects or it doesn’t.

LEW: I think that there is a period in that transition when the government wanting to do it and the ability to do it are not totally matched up. And that’s where I think having international financial institutions—this is not concessional financing. I mean, I think that we have to maintain the principle that below-market-rate lending is restricted to the poorest countries. And that is something that comes under pressure on a regular basis.

MALLABY: Let me switch a little bit from development—

LEW: If I can switch—

MALLABY: Yeah, sure.

LEW: —I think it’s also important to develop new instruments. We’re seeing now, in refugee crises, that there are geopolitical situations that create surges of need. And there aren’t necessarily the tools in place to deal with where those needs show up in a timely way. And one of the discussions that’s under way now is how to make sure that you have a facility that can step in, in a case like a refugee crisis, where, in one sense, it’s a global problem, but in another sense it has a very local dimension because people end up in a concentrated place or set of places.

I think that’s an important conversation for the 21^st century. We’re seeing right now the challenge of dealing with that. And that’s something that institutions like the World Bank are set up to think through. We’re doing it now in a way that’s adapting old tools for a new challenge. And that’s why this idea of adaptation is so key. You have to be nimble enough to deal with the problems that you face today and that you’re likely to face in the future, not always looking backwards.

MALLABY: So on the subject of financial-crisis management, your essay and your remarks both draw attention to the IMF’s role after 2008. But I think it probably is fair to argue that bilateral swaps between the Federal Reserve and other economies that were in desperate need of dollars were bigger in aggregate and more decisive. And that is a trend that ain’t going away, because the sheer volume of cross-border claims has grown so much that even an expanded IMF with more resources is going to have trouble being big enough to deal with what happens to South Korea when suddenly there’s a massive flight to safety in the U.S. and dollars flow back into the U.S. And then you have to have the Fed recycling them.

So as you think about that, in the next big financial crisis globally, I mean, the IMF will be there to deal with medium-size things like Ukraine. But in a bigger sense, big crises, isn’t it really a case of central banks dealing with each other?

LEW: Well, I’ll leave the question of Fed swap lines to the Fed, which has the authority to make those decisions. But I think if you look at the financial crisis and the response to it, the IMF played a critical role. It was part of country plans in a number of critical instances where, if you had not stabilized those economies, we would have seen a new bottom that was far worse than the bottom we ended up hitting.

There was a sense that there was somewhere to go, which psychologically had a very important effect. And I think if you look at the role of the United States, I don’t think it is a defensible notion that the United States is going to respond to every global crisis on its own unilaterally.

While the Ukraine example may be a medium-size country, look at the numbers that were involved; I mean, a $17 billion IMF program. You know, we’ve done three $1 billion loan guarantees, you know, which in credit budget scoring terms are less than a billion dollars of budget exposure. The leverage that we got by being part of a larger effort, you know, is just the difference between making a difference and not. Ukraine’s economy turned, you know, from negative to neutral to maybe positive faster than anyone thought. And our loan guarantees alone wouldn’t have been enough to accomplish that.

I think one of the things that’s happened since the financial crisis is that the IMF has developed some new tools. The flexible credit lines are being used in a different way and more effectively. With quota reform, we have recapitalized the IMF, taken the money and put it in the main fund itself.

So I think right now the IMF has considerable resources. We do have to ask the question always, what would be the consequence of the next crisis? You don’t have the luxury of knowing the precise contours of a crisis until it’s upon you, which is why you have to have the tools in place, but also the adaptability.

Look what happened after the financial crisis. A new arrangement to borrow was funded rather quickly to put in the IMF the facility that could deal with that crisis. If you had to create an IMF out of whole cloth, you couldn’t have put that in place so quickly. And I don’t believe that any one country, not even the United States, could have had that amount of firepower.

MALLABY: So you make in your essay a case, and a persuasive one, that, notwithstanding the governance advantage that the Fund and the Bank begin with, quota reform has been constructive because you’re allowing emerging nations to have a larger voice and stake in the international system.

So I’m wondering if you would apply the same logic to the question of global reserve currencies. So right now you have the dollar very dominant. You have the Chinese explicitly saying that they don’t like that and they would prefer to internationalize the Renminbi and make it a rival or at least another reserve currency. You have various others expressing frustration with the dominance of the dollar. Some of it’s ill-informed, but it’s a sentiment that’s definitely out there.

Would it be in the U.S. national interest if more global funding, including by the private sector, took place in the form of issuing Renminbi debt instead of dollar debt?

LEW: Obviously it’s the marketplace that decides these questions fundamentally. And I think it is a fair statement that at the moment there is really no likely competitor to take the place of the United States and the dollar.

The reason I raised the question in the essay is that we can’t just think about the next year or two. We have to think in decades—10 years, 20 years, 30 years. And anyone sitting—you know, (added to ?) North Korea sanctions, you know, that’s a challenge. We always have to maintain the ability of the U.S. to act unilaterally in our own national interest, but we have to do it in a way that’s mindful of the fact that we have something that gives us power and leverage and economic strength. And that’s something we need to also keep an eye on protecting.

You know, I think if you look at the current kind of global economic situation, and you know, probably you’d have to say today it will be a longer period of time that we have than you would have said maybe five years ago, because the United States has recovered from the Great Recession in a way that really demonstrates the resilience of the U.S. economy, and notwithstanding the noise of our political process, the ability of our political system to respond in a timely manner.

I think when you look at a currency like the RMB, the challenge is going to be for China to make the kinds of changes that it needs to make—to have its currency be truly convertible, to have its markets be truly open to foreign investment, and to services and goods from abroad—I think that they’ve made progress. It’s clear that they’ve made progress, but they’re not all the way there. They still have work to do. And, you know, the reason that’s an area where we engage at a considerable amount of detail is it’s an area where China’s economic leadership knows they have to make these kinds of changes for China’s economy to be where it needs to be in 10, 20, 30 years. So it’s an area of common interest, potentially, but potentially also of conflict.

MALLABY: Let me just pursue this, because your answer is provoking. And I want to ask one more question, then I’m going to come to the—to the members in the audience.

So your essay does a good job of highlighting the dilemma that, because of the position of the U.S. dollar in the global system, it gives one the opportunity to exercise sanctions power, and that this is a tool of statecraft that future presidents will be glad to have because it’s short of war and it avoids doing nothing. So that is all stipulated and a point well-taken. There’s also this balance between use of sanctions, not overuse, because if you use it too much you will incentivize people to move outside the dollar system.

But I’m thinking about a different dilemma, which is—the Triffin dilemma, namely that whoever is the reserve—the issue of the reserve currency is issuing safe assets that will protect value during a crisis, so people around the world are going to want that safe asset as insurance. They’re going to come and buy lots of U.S. dollar debt because it’s safe. And because it becomes easy to issue U.S. dollar debt, the U.S. will almost by definition issue too much dollar debt. And, as a result, there will be these cycles where the indebtedness of the U.S. becomes a problem that threatens the very stability that the U.S. had been creating for most of the time. And the way out—one consequence of that position is a constant inflow of capital into the U.S., which makes the dollar stronger, which creates the current account deficit, which creates these global imbalances, you know, which then you would like the IMF to go police, right? So some of the things that trouble us in the international order—you know, excess U.S. indebtedness, global imbalances, and so forth—do have their origins in an extreme reliance on the dollar globally.

Hence, my question: Would it be better to, you know, encourage—you can do—you can imagine policies that would encourage private actors to use other capital markets more. You could make it more restrictive, harder for corporates from Asia to come issue U.S. dollar bonds.

LEW: You know, I think that the U.S. financial markets have the leadership role they have in the world because of all of the things that make the United States the United States. It’s our political stability. It’s our resilience. It’s our—it’s the depth and liquidity of our markets, particularly our Treasury markets. Those are all good things, and I don’t want to change that. Actually, I want to protect that. That’s really one of the main points that I’m—that I’m making.

I think, when it comes to fiscal policy, we ought not to take our ability to borrow infinitely as license to borrow infinitely. And, you know, I’ve had two tours at the Office of Management and Budget. During one of them, we ran a balanced budget and a surplus. During the second, we dug our way out of a very deep hole that we got into in the intervening years. We need to look on the horizon. We’ve made great progress in this administration: reducing the deficit by three-quarters as a percentage of GDP, stabilizing the debt as a percentage of GDP, and creating a window where we now have time to deal with the longer-term fiscal challenges on a stable foundation. You know, that’s something that’s going to be a challenge that has to be undertaken anew, but I don’t think our ability to borrow infinitely ought to be viewed as a justification for ignoring that, over the long term, maintaining stable fiscal policy is very important to our national strength.

We’ve achieved a great deal in this administration to repair the damage that was done both by policies and by recession. But, going forward, it’s going to be a responsibility for a new team to take a stable economy and look at the period beyond the horizon.

MALLABY: The indebtedness problem is not just government debt, but it’s the private.

LEW: No, I understand. It’s the private and, you know, we—you know, we saw a period where, frankly, we were seeing inadequate access to debt in this country. It’s only in the last few years that we’ve seen businesses and individuals have the kind of better access to credit that they should have. I mean, I think that families have improved their balance sheets. Businesses are sitting on a great deal of capital right now. So I think the current practices, if anything, are on the recovering part of the curve. Where it goes beyond is a question. But we’re a long way away from the kind of easy borrowing that we saw in the decade before the financial crisis.

I mean, I think the challenge we have is, how do you make sure that you don’t lend to individuals and firms that are not creditworthy just because they want to borrow? On the other hand, how do we make sure that individuals and firms that are creditworthy have access to the credit they need, both for their family needs and to invest, particularly in small medium-sized enterprises? We’re not seeing as much investment as I would like to see in some of these areas. I wish that the—we’ve tried, actually, to ease the credit box because we think that, for mortgage lending purposes, if you have a very solid credit history, you ought to have access to a mortgage. That’s different than a subprime loan. Same thing with a small business or an entrepreneur who wants to expand their business. And the two aren’t completely de-linked, because one of the ways that entrepreneurs typically had access to credit was through mortgage products.

So we still have work to do, but that’s moving in the right direction. I think we’re a ways away from having to worry about kind of an overhang of loose credit in that way.

MALLABY: OK. So, yes, let’s go right to—in the—

Q: Thank you very much. I’m Barbara Slavin from the Atlantic Council, where I run a program from Iran. And I’m going to read this question, because I’m not a banker, but I spoke to one who is.

We’ve seen a lot of problems with sanctions relief for Iran. And is part of the difficulty because they have dollar assets now, in banks in China and India and so on, that they are having trouble accessing and using, moving? Or is it because banks find it difficult to do transactions without some reference to the dollar? And don’t you need to reinstitute at least a limited U-turn so that Iran can avail itself of its own money which is sitting in primarily Asian banks?

LEW: You know, we have been very clear that the nuclear sanctions on Iran that limited access to Iran’s reserves and to financial institutions were lifted when Iran complied with its nuclear-related obligations under the Joint Comprehensive Plan of Action. We have been clear in going around the world making that point, both government-to-government and to financial institutions.

Iran has many challenges in doing business. Some of them have to do with Iran’s own business practices. Some of them have to do with Iran’s other activities outside of the nuclear arena, where they continue to engage in supporting terrorism, regional destabilization, missile testing that is violating norms, and human rights problems that they have in their own country. So there are still sanctions on Iran in those areas while the nuclear sanctions have been lifted.

I think that we have to be clear. Iran, complied with the nuclear agreement. Therefore, the nuclear sanctions are lifted. I think that that is a process that is becoming more and more clear. And we’ll keep our part of the bargain there. But the U.S. financial system is not open to Iran and that is not something that is going to change. So the challenge is going to be how to work through an international financial system that is complicated, where there are—is a lot of attention paid to what U.S. law requires. And I think our obligation is to be clear, which I’ve tried very hard to do and our team has tried very hard to do.

You know, if you look at what makes a sanctions regime work, a sanctions regime works if in order to get relief from the sanctions a government changes it policy. So the government of Iran changed its policy, that’s why we lifted the sanctions that were nuclear sanctions. The government of Iran has not changed its behavior in all of those other areas. And there still are other sanctions in place. And navigating through that is going to be a challenge, but it’s one where I think clarity will help. We’re not proposing that the U-turn be changed.

MALLABY: Stephen Myrow. Stephen, just there, behind you.

Q: Thank you, Sebastian. Steve Myrow, Beacon Policy Advisors.

Mr. Secretary, given the premise that global leadership begins here at home, I’d like to ask for a second about the Puerto Rican debt crisis. I know that your Treasury Department has been working closely with the House Natural Resources Committee on legislation. It sounds like we might get a new bill as early as today. What we’re hearing is that Republicans in Congress to get on board will probably push for a weaker restructuring authority where they have collective action clauses, plus the litigation stay. And if you combine that with the debt moratorium that the island itself has been preparing, is that something that Treasury can get behind?

LEW: There’s still an ongoing process. People were working through the weekend on it and I don’t believe it’s completed yet. What we’ve been very clear about is that the only way for Puerto Rico to resolve the situation it faces is for there to be a comprehensive restructuring of the debt. And that along with that, there needs to be a very strong oversight board to make sure that Puerto Rico continues on a path—gets on a path and stays on a path that can be sustained.

There are a lot of details, but when you get down to the bottom line, the question to us is does that restructuring authority work? It has to work or it’s not going to be acceptable. It won’t—it can’t be something that you put a label on but in the marketplace doesn’t work. There’s still some open issues. We’ve had a very good working relationship on a bipartisan basis, working through many, many technical issues. But there are still a number of very difficult issues that are open that, if resolved in the right way, will lead to bipartisan support just won’t work. And we’re not going to support something that doesn’t work.

MALLABY: Another Steve here. Microphone back there.

Q: I do have a question, but if it’s OK with you, I would yield to Dr. Rivlin.

MALLABY: OK. Sorry, I didn’t—OK, fine.

Q: (Laughs.) Mr. Secretary, you’ve been very clear about the connection between U.S. economic leadership and trade and international organizations. But U.S. economic leadership is a very abstract concept. And it’s pretty clear to people in this room. It’s not clear to the general public. And indeed, it seems to conflict with the people who are cheering let’s make America great again. (Laughter.) So my basic question is, how do you establish the connection between U.S. economic leadership in the world and a strong U.S. economy, which is clearly what everybody wants?

LEW: Look, it’s obviously a very important question. And we know that jobs that are supported by trade pay better than jobs that are not supported by trade. We know that a world where markets are closed to the United States is going to lead to a less-wealth performing U.S. economy. That’s not necessarily broadly embraced now. I think, frankly, one of the things we have to do is be more clear about what are the standards that are going to be in place in countries like the TPP countries that sign on.

What does it mean to extend higher labor standards in a country like Vietnam? These are somewhat abstract questions, but if you have high labor standards in the United States and low labor standards in other countries, it means the other countries are always going to have lower costs and be able to out-compete you. As the other countries raise their standards and meet our kinds of labor concerns, and our kinds of environmental concerns, and our kinds of business practice concerns, the playing field becomes more level for the U.S. to complete better.

I actually think one of the challenges we have is how to make sure that things like trade adjustment assistance don’t just get public attention at the moment when there’s an effort to pass a trade promotion authority bill or a trade agreement. There has to be tension on those issues in the intervening years. We tend to have challenges getting our system to focus on these things except at the moments when we’re trying to get approval for trade legislation. I think the fact that we could get a majority of Congress to support trade promotion authority just a few months ago is quite significant.

I think all of us who believe that the benefits of U.S. economic leadership are profound, both in economic and geopolitical terms, have more work to do to make the case to people who have legitimate worries about an economy that has, for decades now, not necessarily provided the kind of opportunity to middle-class workers and their families that they want to have and they have a right to expect. That’s not all because of trade. I think trade has become one of the things that’s easy to point to. But between globalization and technological change and income concentration, we’ve seen an awful lot of change in our country in the last 25 years.

And I think if we address those root issues by having better education, more skills for the economy of the future, infrastructure that will make it easier to the jobs you need—if you don’t live near the jobs that are available, the burden of getting a job is hard. If you can’t travel there because there’s no mass transit or the roads take two hours instead of 35, 40 minutes, it becomes a real hurdle to your own personal mobility. So I think we have a lot of domestic things we could do to concentrate on building our economy in a way that gives people real confidence in their own economic future.

And I actually think most of the kinds of things I just described are the kinds of things which you can have bipartisan consensus on, if it was in the context of an overall, you know, fiscal approach where you had resources to address problems that have bipartisan support to address. The challenge on infrastructure now isn’t that people don’t want better roads and better ports and better airports. It’s now to pay for it. So it really comes back, as you and I both know, to where’s the money come from. And hopefully the work of the last several years has moved us back towards a more mainstream conversation of those issues. We saw it at the end of last year, and I certainly hope that continues.

MALLABY: And what strikes me about Alice Rivlin’s question is that she’s plainly correct that parts of the primary debate are surfacing fairly powerful skepticism about globalization and international engagement. It’s also true in Europe that animosity towards supranational economic institutions is at an all-time high. I mean, the very cohesion of the European Union is in doubt.

But actually, the interesting thing is that we’re having this conversation, in the sense that I can remember some of your predecessors who would be making a speech essentially saying that the Bretton Woods institutions have allowed themselves to become irrelevant, bordering on archaic, and really they need to be either scrapped or radically changed. And I would be asking the questions, but isn’t there some value in it? And you’ve taken the opposition position, wholeheartedly supporting them, and supporting the international system. And I’m therefore in the position of prodding you to defend that position. So I think there is an interesting flip in some sense—

LEW: But I can point to just two things in this last year that kind of partially answer Alice’s question, but address yours. We’ve made enormous progress in the G-20 this year on base erosion and profit shifting, and that’s closing the tax loopholes that allow, you know, the legal shifting of money to low- or no-tax environments. We’ve seen just in this last week the outrage of people around the world because those kinds of opportunities exist. You know, we in the United States have taken a leadership role in doing things to try and make it more transparent who the real owners are, putting in place tax information-sharing agreements that make it easier for tax authorities to cooperate. But getting the G-20 to agree in this area, we’ve make more progress in the last year than in the last 20 years on that issue.

On things like the financial action taskforce, working on a global basis to try and put real barriers in the way of anyone trying to use the international financial system for illicit or malign purposes. We have a lot more work to do, but we had a meeting at the U.N. Security Council in December where there was a unanimous resolution on the subject. And it was the United States and Russia jointly sponsoring it, you know? So we have work to do. It’s not that we’ve achieved everything we need to, nor that anyone sitting here in my role will ever be able to say we’ve achieved everything, but you have to adapt to the challenges of the future. If we could address this, you know, issue of taxes becoming stateless income—you have income that never gets taxed—I think it would help address some of the international sentiment that the system doesn’t seem fair. So I think the fact that we’ve worked on that is very important. We have to demonstrate it by making real progress.

MALLABY: Yeah, let’s go right here.

Q: Hi. Rachel Oswald with Congressional Quarterly. A follow-on to Barbara’s question earlier.

There have been a couple of bills filed in Congress to address the U-turn concern, to make it illegal. What are your thoughts on those measures, given that you have just said there are no plans to allow limited U-turns at this point?

LEW: So what we have said—what the president said about 10 days ago—is that we will work on an international basis to make sure that financial institutions in other governments understand what the lifting of the nuclear sanctions mean, and to provide the guidance that’s necessary for Iran to get access to resources and to transactions that it has a right to with the nuclear sanctions being lifted. And that’s what we’re doing. I’m not going to address hypotheticals in terms of any other actions.

MALLABY: Let’s go—yes, right here. On the—in front of you there. Good, yeah, sorry.

Q: Hi. David Apgar, Inter-American Development Bank Group. Thank you very much.

Let me ask a question that broadens Sebastian’s earlier question and lets you expand a little bit on development. Those of us in the business focus on our hard-won successes, but outside of Washington the view that development is broken has probably never been more widespread, and not without reason. You know, now we look back in history and see wave after wave of competing approaches to development have not provably had an effect. And what has had more effect than anything in recent experience were the efforts of the Chinese party—the Communist Party in China to lift hundreds of millions of people out of poverty.

So this pessimism isn’t all bad. It’s encouraged the private sector to step up with a whole movement of impact investment. But what I’m wondering is, give your understanding of bilateral aid from your previous position at the State Department, and your understanding of multilateral efforts given where you sit now, are there any deep changes that might break the cycle of development ineffectiveness, that you see?

LEW: Well, first, I wouldn’t accept the premise that our experience of development has been ineffective. It has not been perfect, and certainly some things have worked better than others, but the countries where you’ve seen the biggest rise out of poverty have been very much the countries that have been beneficiaries of lending from institutions like the World Bank and, in many cases, recipients of bilateral aid.

I think that the—you know, when I was at the State Department what I saw when I looked around the world was a big challenge of coordinating different streams of development assistance that in a host country it wasn’t always clear what the goals were and who was working with whom. You know, working even within the United States, we tried very hard to coordinate the bilateral and the multilateral efforts that we have underway, so that we have maximum advantage. It’s something that we looked at when I was at the State Department from the perspective of having responsibility for the bilateral development assistance, and where I sit now largely responsibility for the multilateral development assistance.

But look at something like climate change. Look at the conference I mentioned in Addis Ababa, Funding for Development. I don’t think you could have imagined 10 years ago that you would have had a gathering like the Funding for Development Conference, where three principles came out of it as being equally critical. One was that there’s a need for ongoing official development assistance. Secondly, that there’s a need for host government investment in the same priorities. And third, that there has to be public-private partnership in order to get the full leverage necessary to achieve the goals. I think that is very important foundational element to the COP21 agreements in Paris. And it’s an important concept as we go forward.

You can’t look at any of these things in isolation. The question is, when you put them together, do they give you the results that you’re looking for? But I think it’s a mistake to think that everything has been a great success. But it’s certainly a big mistake to think that everything’s been a big failure. We have to adapt and learn how to take the best of what we’ve accomplished and build on that for the future.

MALLABY: I’ll go back to Steve. Generosity should be rewarded. (Laughter.)

Q: Thanks. Steve Charnovitz, George Washington University.

In your essay and your remarks, you’ve highlighted the work of the World Bank on climate change. The question I wanted to ask you was about the World Bank role in human rights. Recently the U.N. special rapporteur on extreme poverty and human rights criticized the World Bank for being a human rights-free zone. So I wanted to ask you your reaction to that criticism, and what you think the proper role for human rights in World Bank lending is.

LEW: Well, one of the U.S. interests in the World Bank in recent years has been to make sure that there is a proper focus on the conditions in the countries, both in terms of human rights but also in terms of the impact on the community of the investments that are being made. That is something that we have been pushing with a great deal of support from Congress. And I think it’s something that helps guide the World Bank as it moves forward. It is a challenge in many countries to get along the path of progress on an economic, political, human rights field all at the same time. But that’s not an excuse for not pushing in the right direction, and for having standards of what is acceptable progress. So it’s an area where we will continue to press.

I don’t think that’s a fair characterization of the World Bank. But again, I don’t think it’s fair to say that in all of the countries where the World Bank lends the practices are yet where they need to get. These are countries that are developing countries in every regard, in many cases. And in our bilateral programs, you know, we tie aid to progress. And we press for those kinds of standards in international setting as well.

MALLABY: Last question, we’ll go to the lady in the green shirt here.

Q: Porter McConnell from the Financial Transparency Coalition. Thank you, Secretary Lew, for coming to speak with us.

A question you sort of alluded to in the OECD’s base origin and profit shifting scheme—I guess I’d like to push you on is that there’s a sense—you know, when I think of America’s economic leadership, I think of rule of law, I think of transparency, I think of respect for small and medium enterprise. When I talk to my colleagues abroad they have a pretty different picture right now. They see a great place to hide illicit cash, with no questions asked. The big scandal around the Panama Papers was less that you could do this in Panama, but that so many Americans didn’t need to do it in Panama because they could do it in Delaware or Nevada. So I guess I’d love to hear from you what you would say to those critics about the credibility gap there.

LEW: I think that we have a tax system that is amongst the best in the world and is a standard that others aspire to in terms of its independence and its reach. You know, we have put in place, you know, the ability to see what people’s different income streams are. If it’s not subject to tax, that’s a policy issue, not a transparency issue. You know, we are working globally to make sure that there’s a sharing of tax information. You know, the word FATCA is now an international word because the United States adopted the policy of making it obligatory on all countries to share tax information so that you can’t hide income. We’re not all the way there. The base erosion work we did was critically important, but—I seem to keep coming back to the meetings in Addis Ababa, but another thing that came up at those meetings that was critically important was how weak the systems are internationally in so many countries, and how much technical assistance countries need to build the kinds of tax authorities so that you can work with them to make sure those gaps don’t develop.

You know, we’ve pledged to double our Office of Technical Assistance support. We work closely with the IMF and other bilateral partners. But we’re making real progress there. We have more work to do.

I think that the idea that there’s different rules depending on kind of where you are in the—in the hierarchy is unacceptable. Everyone has to follow the law. And if the laws permit the movement of income to, you know, countries or places where they are inadequately taxed, then that’s a tax policy question that we have to address. Which is one of the reasons that we have proposed business tax reform, so that the U.S. broken tax system could be fixed, and we would tax all U.S. income wherever it is in the world at a reasonable level, and close the loopholes that make our system as broken as it is. We, right now, have a tax system that forces companies to look for ways to avoid a statutory tax rate that’s the highest in the developed world, even though our effective tax rate is about average, because of the impact of the system of deductions and credits, which—some were worthy when they were put in place; many are—have outlived their usefulness. Some weren’t necessarily useful when they were put in place. (Laughter.) So we’ve got a lot of work to do.

But I think our economic leadership in this area is still profoundly important. And in the base erosion and profit-shifting debate, you know, we’ve been right at the heart of it globally. So the world has more work to do here. We collectively have more work to do here. But I think, you know, we’ve made progress and we will continue to make progress.

MALLABY: Well, Mr. Secretary, you’ve taken us from Bretton Woods to the Panama Papers, with many stops in Addis Ababa on the way. (Laughter.) Thank you very much. It was a pleasure to have you here.

LEW: Great to be with you, Sebastian. Thanks. (Applause.)

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