Peter Orszag Interview (with Jeff Madrick at Hamptons Institute, East Hampton, NY), 04/16/11

Notes taken by SA,, at interview on subject, “America’s Fiscal Fitness: Where do we go from here?”

This interview was to have been conducted by Steve Kroft, who was replaced by Jeff Madrick.  The interview lasted about 40 minutes and was then opened to questions from the audience.  The questioning began with regard to the pending issue of the debt ceiling.

Following were Mr. Orszag’s major comments.

Not binding the debt ceiling would be “catastrophic,” and, therefore, he expects it to happen.  However, there is no chance that there will be an agreement until emergency measures are pressured by the financial markets.  Explaining his point, he emphasized it was “unfortunate that we didn’t go over a cliff on the budget agreement”; he expects that the deadline for the budget ceiling will not be met, and that by July a temporary disturbance can be expected in financial markets.  There is a real risk that a shift in the financial markets could come quickly, but it will take a crisis for Congress to act.

He gave a back-handed compliment to the Ryan plan, in that it is bold and offers some details, but he labeled it  a “huge” political gift to the Democrats.  Repeating CBO’s commentary earlier in the week, the heart of Ryan’s deductions affects Medicare, changing it to a consumer directed plan and raising costs to beneficiaries in 2030 by more than $6,000.  He affirmed that CBO is not a biased arm of government.

The Obama plan presents a stark difference from the Ryan plan, which difference he cited as a “manifestation of polarization.”  The Ryan plan, he says, lacks a basic theory on how to constrain healthcare costs, and the cuts hit the poor.  Cost containment of healthcare benefits must deal with the highest cost cases, which come disproportionately from the end of life years.  “To call the Ryan plan ‘radical’ is not an overstatement.”  Ryan’s plan moves Medicaid to block grants to the states without indexing, and will put a strain on the states.

Fundamentally, we do not have the tolerance for the tax increases needed to pay for the benefits we expect.  Ryan would make the tax code significantly less progressive.

With our bad fiscal situation we should cancel the Bush tax cuts for the middle-class as well as for the top income earners.

Referencing the increasing political polarization of the country, he noted a recent demographic study showing that our population is shifting to Republican or Democrat leaning neighborhoods, not mixed.

Regarding economic outlook, he is of the camp that believes we need more stimulus now and a plan for deficit reduction in two to three years when the fragile economy stabilizes.  He predicts that the spending reductions just passed will result in the cost of 1/4-1/2% GDP.  Our revenue base is inadequate, causing an infrastructure deficit.  We face a permanent unemployment risk, he said, from the loss of skills among the unemployed.

The deficit for 2015 is projected at 5% of GDP, but the margin of error is 5%, so that means it could be in the 0-10% range. Growth, of course, would be important, but dismissing tax cuts as the answer, he said that there is no empirical evidence for the Laffer curve. Bowles-Simpson is laying the groundwork for general construct in deficit reduction.

While the situation is anxious, there are still no other plausible safe havens besides the U.S., which is keeping turbulence at bay.  He expects that a “sharp” depreciation of the dollar is more likely than Fed action to increase interest rates.  He said we are taking a risk with investor confidence without having developed a fiscal path.

Answering questions on healthcare costs, he said that patients should not be able to sue physicians if doctors are following best-practice protocols.  Asked (by SA, VATinfo) why the OMB did not support Dr. Ezekiel Emanuel’s plan − for universal healthcare with a dedicated VAT paying for insurance vouchers to be used in an exchange, he said that a VAT was not politically viable.  But, he acknowledged that the Emanuel plan, like the Ryan plan, was consumer driven and might therefore help to curtail costs.

As to Social Security, he said the fix was not hard, and taking this step would show our ability to deal with a problem, which would be a confidence builder.  He opined that it is not politically plausible that the Ryan plan’s private Social Security accounts could happen. Raising the Social Security tax base by increasing the wage cap has more Congressional support than any other fix.

Mr. Orszag also noted that Social Security is becoming less progressive, as there is a disparity in longevity based upon wealth, and there is a correlation between longevity and medical costs.  But, he is confident that the Obama healthcare bill will deliver efficiencies from learning best practices.  Expressing concern about the growing cost of prescription drugs, he noted that pharmaceutical spending has decreased in Medicare due to the greater use of generic drugs.

Catching up to Mr. Orszag after the interview to ask him about Gov. Daniels’ sweeping tax overhaul vision, SA queried if OMB has vetted the concept, and he responded “no.”