In 1981, after working as a lawyer in the Philadelphia firm Schnader LLP, Libby accepted the invitation of his former Yale University political science professor and mentor Paul Wolfowitz to join the U.S. State Department's policy planning staff. From 1982 to 1985, Libby served as director of special projects in the Bureau of East Asian and Pacific Affairs. In 1985 he received the Foreign Affairs Award for Public Service from the United States Department of Defense, and he resigned from government to enter private legal practice at Dickstein, Shapiro, and Morin. In 1989, he went to work at the Pentagon, again under Wolfowitz, as principal deputy under-secretary for strategy and resources at the U.S. Defense Department.
