Orszag: Deficit Can Help But Slows Recovery The director of the White House Office of Management and Budget says the skyrocketing deficit can actually be helpful during an economic crisis. But, Peter Orszag says, it can put a drag on early stages of recovery. He says reducing that debt while not cutting back too soon on stimulus programs is a tricky situation.

Orszag: Deficit Can Help But Slows Recovery

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This is MORNING EDITION from NPR News. Good morning. Im Renee Montagne.


And Im Steve Inskeep.

We stepped into a cavernous office near the White House yesterday here in Washington. It had a view of the Jefferson Memorial, though when we came in, the occupant didnt have much time to look. Peter Orszag was shooting off phone calls and emails. He is the presidents budget director, and he was surrounded by thick, white briefing books relating to the current fiscal year, in which the government is now running up a deficit estimated at $1.4 trillion. Part of that borrowing was made necessary by the recession. Part of it was designed to shorten the recession. Now Orszags job is to think about how to reduce the sea of debt in future years before it triggers a disaster.

Weve come to ask just how he intends to do that.

Mr. PETER ORSZAG (Director, White House Office of Management and Budget): We have to realize the appropriate deficit for this year or next year is much different than what the appropriate deficit is out in 2016 or 2017. We are living in exceptional times, the difficulty is that by providing tax relief and additional spending, deficits help to spur economic growth, but then when the situation returns to a more normal environment, the effect flips and becomes adverse. We need to transition from one to the other, and thats a very difficult line to walk.

INSKEEP: I want to grant the argument youve just made, that the administration is arguing that deficit spending right now is good or essential to keep the economy going. But give me an idea of a deficit you can live with for the next fiscal year, which is what you are planning now. Youre looking ahead months and months, but its what you have to do.

Mr. ORSZAG: Well, I think as move into the 2011 and 2012, even 2013 horizon, thats where were going to start to need some transition from the extraordinary assistance that the federal government has been providing to try to jumpstart the economy. Were working through, and we havent made final decisions on the best path to walk down from where we are now to where we need to get. And again, no final decisions have been made.

INSKEEP: Granting that no final decisions have been made, ballpark: Is it likely to be another trillion dollars or more?

Mr. ORSZAG: Thank you for the invitation to get into hypotheticals, but Im not going to do that. What we need to do is, clearly, we want to get to something around 3 percent of the economy. The deficits now running at about 10 percent of the economy, and we need to be on a glide path from one to the other, done in a way that avoids the risk of repeating the mistakes of 1937, where you pulled fiscal support away from the economy too quickly and threw the economy back into a recession.

INSKEEP: Right now, were in the middle of a fiscal year where theres a deficit of $1.4 trillion, give or take, most likely about 10 percent of the economy. You want to cut that by two-thirds, which means that even after years of effort, you will still be in a situation where there are deficits of hundreds of billions of dollars per year.

Mr. ORSZAG: Well, youve got to - you have to remember the situation we inherited. We are currently projecting a 10-year deficit of $9 trillion. That $9 trillion reflects three things: The fact that we did not pay for policies in the past, including the Medicare prescription drug benefit in the 2001 and 2003 tax legislation, the effect of the severe downturn that were experiencing because revenue goes down and spending on things like unemployment benefits and food stamps goes up, and then somewhat under a 10th of that projected 10-year deficit comes from the Recovery Act, which was intended to help mitigate the economic downturn.

So, the point being we inherited a big hole. After that, would it be great to move towards a balanced budget? Sure. But at least we would then be on a stable fiscal trajectory.

INSKEEP: Is this situation in anyway a nightmare for you?

Mr. ORSZAG: I would say its extraordinarily challenging, because you have these dual risks. On the one hand, the GDP gap - the gap between how much the economy is producing and how much it could produce - and on the other hand, these deficits. If we only faced one or the other, the way forward would be clear. But balancing between the two keeps me up at night.

INSKEEP: Keeps you up at night.

Mr. ORSZAG: We face challenges that we, as a nation, have not faced in 50 years in terms of the difficulty of the economic decision making and environment that we find ourselves in.

INSKEEP: Your job, we should clarify for people, is to come up with a budget that you sent over to Congress

Mr. ORSZAG: Thats right.

INSKEEP: and then they do their own thing.

Mr. ORSZAG: Yeah, we do not have a parliamentary system here in the United States.

INSKEEP: You know the Congressional system very well, having worked on Capitol Hill, and youve been through a year as director of the budget here. I would like to know if you think, when it comes to restraining or cutting spending, is the political system broken?

Mr. ORSZAG: Well, I think there are some things the political system deals very well with. It tends to deal better with crises than with gradual long-term problems. And thats true in the political system, just like its sometimes true in our own lives. The question is how can you refocus attention on those important, but not yet crisis issues?

INSKEEP: The House, of course, recently passed a health care bill. One of your hopes for health care, as youve discussed before, is to reduce the share of the federal budget that goes to health care, as well as the share of the economy, if you can - to bend the curve, as youve said. This is a bill that does, according to the Congressional Budget Office, reduce the deficit, but not by very much, given the huge amount that is spent on health care. Is this a missed opportunity?

Mr. ORSZAG: No. I think both the House and the Senate have captured important opportunities. Given the need to actually enact legislation, we are doing about as much as could be done. Now, I acknowledge it was a lot easier when I was sitting at the Brookings Institution to dream up the ideal health care cost containment package. But in the real world of actually passing legislation, its about as good as youre going to do in a real piece of legislation.

INSKEEP: I want to come back to the deficit. Is there a political risk in going year after year, maybe several years with trillion-dollar deficits, all the while saying, were being fiscally responsible, were concerned about this, were working on it and were running up another trillion dollars?

Mr. ORSZAG: Well, again, the short-term deficits are directly responsive to and actually turn out to be beneficial to addressing this severe economic weakness that weve been experiencing. And I do think its important to step back. If you know, were now in early November 2009. If in November 2008, someone told you that credit spreads would be back to normal levels and the economy would be growing by three-and-a-half percent, you probably would have looked at them like they were a little bit crazy. So a lot has been done.

INSKEEP: Is the deficit not a political problem?

Mr. ORSZAG: I think it is, but you have to I think the thing about the politics of the deficit is that the deficit is unpopular, but so are many specific steps to reduce it. There are some who will decry the deficit, but are unwilling to embrace anything that will actually bring it down, and we need to avoid that, too.

INSKEEP: Peter Orszag, thanks very much.

Mr. ORSZAG: Thank you for having me.

INSKEEP: Hes director of the White House Office of Management and Budget.

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