The Difficulty Balance Between the Short-Term Need to Stimulate the Economy and the Long-Term Need to Reduce Deficits & Debt

In the November 11, 2009 National Public Radio (NPR) article "Orszag: Deficit Can Help But Slows Recovery," Peter Orszag, the Director of the Office of Management and Budget, explains that budget deficits are appropriate fiscal policy for fighting recessions, but in the long run there is a need to reduce deficits and the public debt to avoid its burdensome impact on future economic growth.

White House budget director Peter Orszag has his hands full these days trying to wrangle down a deficit that has ballooned to an estimated $1.4 trillion. Part of that borrowing was necessitated by the recession, while part of it was designed to shorten the economic crisis.

Orszag says the federal deficit needs to be cut to about 3 percent of economic growth in the coming years to reduce the sea of debt. At the same time, the U.S. has to guard against sending the economy into a tailspin by pulling back too soon on stimulus programs.

Striking a balance is "extraordinarily challenging," Orszag tells NPR's Steve Inskeep.

But he says it's important to note that the economy has made significant progress in the past year.

"On the one hand, [you have] 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," he says.

"If we only faced one or the other, the way forward would be clearer. But balancing between the two keeps me up at night."

Sometime around 2011 to 2013, "that's where we're going to start to need some transition from the extraordinary assistance that the federal government has been providing to try to jump-start the economy," he says. "We're working through [this], and we haven't made final decisions on the best path to walk down from where we are now to where we need to get."

He says the deficits needed to be wound down from their current 10 percent of the economy to "something around 3 percent" but that it should be "done in a way that avoids the risks of 1937 — where you pulled fiscal support away from the economy too quickly and threw the economy back into a recession."

The current era of high deficits is "exceptional times," notes Orszag, an economist who led the Congressional Budget Office before being tapped to head the Office of Management and Budget. In fact, he says, the national economic situation is more precarious than at any time in the past 50 years.

Orszag makes no apologies for not projecting a balanced budget anytime in the near-term: "You have to remember the situation that we inherited."

The Medicare Prescription Drug Benefit and the 2001 and 2003 tax cuts weren't paid for, he points out. That was compounded by the reduction in tax revenue from the economic downturn, the cost of the economic stimulus and the need for increased spending on unemployment benefits and food stamps.

"So, the point being, we inherited a big hole," Orszag says.

But he says the economy has been pulled back from the brink, and the past year has seen an amazing turnaround.

"I do think it's important to step back," he says. "If in November 2008, someone told you that credit spreads would be back to normal levels and the economy would be growing by 3.5 percent, you probably would have looked at them like they were a little bit crazy."

Orszag, who studied health care policy at the Washington-based Brookings Institution, says he thought the House and Senate health care legislation had "captured important opportunities."

"Given the need to actually enact legislation, we are doing about as much as could be done," he says.

But the budget chief is circumspect about the difficulty of getting budget priorities through Congress.

"The thing about the politics of the deficit is that the deficit is unpopular, but so are many specific steps to reduce it," Orszag says. "There are some that will decry the deficit but are unwilling to embrace anything that will actually bring it down."