James Pethokoukis

An NY Times op-ed by just-departed WH budget chief Peter Orszag is getting lots of play because he advocates temporarily extending all the Bush tax cuts. After that, though, he wants all of them to expire. This is the part that really got my attention:

More troubling, middle-class and lower-class families would be saddled with higher taxes. That’s a legitimate concern, but also a largely unavoidable one if we are to tackle the medium-term fiscal problem.

Me: Again,  Orszag accepts that Americans are undertaxed, which is left-center dogma.  Of course, the real problem is not that tax revenues will be dramatically lower long term, it is that spending will be dramatically higher.

Peter Orszag never really seemed to want the job as President Barack Obama’s budget chief. His successor should be just as reluctant, having to deal with the fiscal aftermath of the stimulus and healthcare plans.

But there is little doubt Orszag will depart as the most consequential Office of Management and Budget director since the notorious David Stockman nearly torpedoed Reaganomics in the early 1980s by calling supply-side economics a sham. In hindsight, of course, Reaganomics looks pretty good, including 17 million net new jobs and a collapse in inflation.

But Orszag was no whistle-blower of some perceived fiscal sleight-of-hand. Instead, it was just the opposite. He was a facilitator and enabler, providing the intellectual firepower and energy behind Obama’s drive for healthcare reform. Orszag made the case to the president that reducing healthcare costs was an important element to slashing the long-term budget deficit. More importantly, he persuaded Obama the U.S. healthcare system was so inefficient, overall spending could be restrained while also providing near-universal health insurance coverage. In effect, “bending the curve” was a free lunch. Or at least close enough for government work.

It was an audacious claim, mostly based on a single controversial academic study. Republicans never bought into the theory, and neither did Orszag’s successor at the Congressional Budget Office, Uncle Sam’s fiscal scorekeeper. In the end, Obama was forced to cut future Medicare spending and raise taxes to make the numbers balance out — at least on paper. Few Washington observers think those cuts will happen, meaning that the budget deficit could explode if Orszag’s novel theories don’t pan out. And even if the cuts occur, many budget hawks were counting on them to make Medicare sustainable over the long-term, not create a new entitlement.

Too bad Orszag didn’t use his considerable political skills – Larry Summers was supposedly warned to be careful of the guy “wearing the cowboy boots and bad toupee” – to make the case for entitlement reform first. In that regard, Orszag’s legacy is uncertain at best.

The next head of OMB will need 24-carat credibility and authority. The president’s confidence won’t be enough. A potentially more Republican Congress will be needed to pass any fiscal austerity reforms recommended by Obama’s deficit panel. And voters will need to understand those painful fixes, while U.S. bond and currency investors will need to believe they’ll really happen.

One option would be a disciple of Bill Clinton, the last president to balance the budget. A bolder choice would be David Walker, the government’s former chief auditor. He now runs a foundation created by Blackstone Group co-founder Peter Peterson devoted to fiscal sustainability issues. Walker is a fire-and-brimstone preacher on the deficit, albeit one with a penchant for folksy aphorisms. He could both crunch the numbers and communicate them. But given the magnitude of the challenge, getting him might take some convincing.

White House budget chief Peter Orszag thinks his old colleagues at the Congressional Budget Office are being too pessimistic over the potential budget savings of healthcare reform (via The Hill):

“I think if anything, the deficit impact may well turn out to be larger than what was projected by the Congressional Budget Office for two reasons,” Orszag said at an event sponsored by the Economic Club of Washington. ”One, if you look at the history of projections on major pieces of legislation, they’ve tended to be too conservative rather than too optimistic,” he said. “And second, the scoring largely does not take into account this evolution toward paying for quality, which I think in this decade will begin to pay off.”

Me: Interesting, the International Monetary Fund thinks Orszag’s Office of Management and Budget might be too optimistic about its overall fiscal forecasts. This from the folks at e21:

The IMF working paper makes a compelling case that the Office of Management and Budget (OMB) uses unrealistically low interest rates in its forecasts of future debt and deficit levels, assumes too rapid a recovery, and overstates the speed at which countercyclical entitlement expenditures will fall in response to economic growth. As the IMF explains (page 14), “aging and health related spending are not the key drivers of this debt build-up.” Indeed, policy choices are.

Optimism is nothing new. As the IMF explains, “the past record of budget projections shows a strong tendency for ‘optimistic’ budget forecasts.” With the exception of 1993 to 1997, OMB projections have underestimated the growth of deficits and debt. What’s different about the Obama team’s projections is the magnitude of their optimism. The IMF estimates that to stabilize debt below 70% of GDP would require a fiscal adjustment of about 3.5% of GDP. In nominal terms, that would require some combination of spending cuts and tax increases equal to roughly $600 billion in 2014 alone.

OMB director Orszag didn’t much like a WSJ editorial about the lack of  fiscal prudence of ObamaCare. And he said so on his blog. I think Orszag makes a few reasonable points, like not counting on cost savings from the pilot programs.  But he side-stepped that fact that America will be spending more on healthcare, even if paid for. Then there is this:

For an economist, the irony is rich.  The editorial board that did more to bring supply-side economics – or in George H.W. Bush’s immortal words, “voodoo economics” – to Washington is raising the specter of a fiscally irresponsible health reform bill in which efforts to rein in health care cost growth are an “illusion.”  But the ironies run richer, since an editorial that hurls accusations of overselling cost containment itself displays more impressive rhetoric than substantive content. The Journal makes three fundamental claims. The first is that health reform represents a huge risk to the federal budget, and will end up exploding the deficit, because it relies on an array of speculative policies to control costs. What the Journal misses is the crucial difference between this health reform effort and the flawed supply-side economics that drove the country into the deep deficits of the 1980s.

Me:   1) The 1980s tax cuts saved the US from complete economic collapse, yet Orszag sees them only as an accounting issue. Also, the worst deficit-to-GDP year of the 1980s was like 6 percent. The US may well average that number over the next decade.

Here is OMB Director Peter Orszag at NYU yesterday:

Our fiscal future is so dominated by health care that if we can slow the rate of cost growth by just 15 basis points per year (that is, 0.15 percentage points per year), the savings on Medicare and Medicaid would equal the impact from eliminating Social Security’s entire 75-year shortfall.

Right now, we are further along toward our goal of fiscally responsible health reform than ever before. I believe that in the weeks to come, the President will sign a bill that gives those with health insurance stability and expands coverage, and does so while boosting quality and reducing long-term deficits.

But there is mounting evidence that ObamaCare won’t do enough to reduce deficits. The Peterson Foundation just released a study on the Baucus bill that it commissioned from the Lewin Group. The findings:

1) The impact on the Federal budget deficit is positive only if the reductions to reimbursement levels are maintained. More than half of the $404 billion in savings over the 2010 through 2019 period is attributed to reductions in the rate of growth in payments to providers for health services, plus reductions in hospital DSH payments.

2)  Without providing new measures to control the growth in costs, the study estimates that total health spending would rise from about 17 percent of gross domestic product (GDP) in 2010 to 25 percent in 2029.

3) The federal government’s health spending would increase by almost $400 billion over the next 10 years and $1.6 trillion over the 20-year period.

Me: The context here, of course, is that Congress just tried an end-around to make sure doctor reimbursements aren’t cut. Actually, if the cuts were actually made, you would save enough that you would not have to raise taxes to pay for reform — though the goal is to make sure reform actually results in less red ink.