What Orszag’s Resignation Really Signifies

In a significant development that mostly flew under the media radar yesterday, Peter Orszag officially stepped down as the director of the Office of Management and Budget (OMB).  Orszag had announced his intention to do so this past June, citing exhaustion after serving four years in two high-profile government positions, first as director of the Congressional Budget Office (CBO) and then as Obama’s OMB director starting in January, 2009.  Orszag also cited his desire to focus on his upcoming wedding.  It was the first significant resignation from Obama’s inner staff – one that in my view highlights an important policy debate taking place within his presidency – one that Orszag lost, at least in this round.

Note that I don’t doubt that personal reasons factored into Orszag’s decision.  But I think  the single biggest contributing factor to his resignation is likely to be policy differences between Orszag and other key administration officials, including National Economic Council director Larry Summers, regarding how to deal with the unprecedented budget deficit that has developed on Obama’s watch. Last fiscal year the deficit was $1.4 trillion.  By the end of the current fiscal year on Sept. 30, it is projected to be closer to $1.5 trillion- a record in the post-World War II era.   At nearly 10 percent of the gross domestic product, it is a deficit level (as measured by the percentage of the economy) that has not been seen since World War Two, and which most economists say is unsustainable in the long run.

The crux of the debate centers on how to balance the short-term need to stimulate the economy in the midst of a deep recession versus the long-term goal of reducing this budget deficit. Those, like Summers, who emphasize jobs creation pushed for increased deficit spending, as reflected in the initial $787 billion stimulus bill passed by Congress early in Obama’s presidency.  Orszag, by most accounts, while supporting short-term deficit spending, wanted the Obama administration to begin looking to bring down the budget deficit in the out years, a step which will send a positive signal to the bond markets and capital traders regarding the long-term stability of the American economy.

The complicating factor here is Obama’s campaign pledge not to raise taxes on any households earning less than $250,000 a year – a category that covers more than 98 per cent of Americans.   Unless this pledge is broken, however, deep and lasting deficit reduction is unlikely to occur since the remaining options are to raise the marginal tax rates on high-income earners to very high and probably political untenable levels, or draconian spending cuts – also politically unrealistic.

Orszag, if media sources are to be believed, pushed for Obama to break the pledge and include higher taxes on some portion of middle-class Americans as part of an overall strategy to reduce the deficit.  Note that, traditionally, the OMB’s primary role has always been to hold down government spending with an eye toward minimizing budget deficits.  Indeed, Congress created the Bureau of the Budget (now OMB) in 1921 to serve a budgetary clearance role in order to maintain a balanced budget. To do so, the BoB/OMB is responsible for aggregating the individual budget requests from the various government department and agencies into one presidential budget, which it then submits on the president’s behalf to Congress.  This green eyeshade-mentality has largely dominated the OMB’s institutional perspective, regardless of director, for most of its history.  Orszag’s concern to reduce the deficit, then, partly reflects his institutional vantage point.

Obama’s political advisers, however, are resisting breaking the no-tax pledge and that resistance, I’m guessing, contributed to Orszag’s decision to quietly resign.  Note that this debate is not new – it took place under both George H.W. Bush and Bill Clinton.  In both instances the president broke his campaign promise and embraced tax increases in the name of budget deficit reduction.  Both paid a huge political price, with the Bush tax hike likely costing him reelection in 1992 and the Clinton tax increase contributing to the Republican takeover of Congress in 1994.  On the other hand, economists cite those decisions as key factors, along with sustained economic growth, that led to the end of structural budget deficits by the last two years of Clinton’s presidency – deficits that had existed from the first years of the Reagan presidency.

Obama faces a reprise of that decision, but under economic conditions that are far more severe than either Bush I or Clinton faced.  The economic downturn is deeper, and the budget deficit far bigger.  Hence Orszag’s belief that some type of middle-class tax hike is necessary if deficit reduction is to take place.  Under similar situations, both Bush and Clinton bit the political bullet, and chose budget reduction over upholding the campaign pledge. So far, it appears that Obama – perhaps prodded by Chief of Staff Rahm Emanuel, who was working for Clinton when he opted to break his middle class no tax pledge – is resisting efforts to get him to reverse his campaign pledge, although he did  embrace a three-year government spending freeze.  Without commenting on the merits of this position against raising taxes on some portion of the middle-class (I’m not  an economist, and don’t even play one in the movies) I can’t say that I’m surprised that Obama is pursuing the politically pragmatic position (note that he also appears to be resisting pressure from some on the Left to embrace a second round of stimulus spending as well, citing a lack of political support).  This is entirely consistent with his political persona and leadership style to date.  This may well be the best strategy – politically and substantively – to take.  The worry, however – one I’ve voiced before – is that by failing to choose, Obama risks having his options defined by others, and by larger economic forces.

Orszag, to his credit, did what public servants are supposed to do when their boss pursues a policy with which they cannot agree: he resigned, without a fuss.  Interestingly, the NY Times Matt Bai framed Orszag’s resignation in terms of a perceived attempt by Orszag, with Obama’s blessing, to seize policymaking control from Congress.  As evidence, Bai cites Obama’s decision to create a bipartisan debt commission and to incorporate an outside commission of 15 appointees (the Independent Payment Advisory Board) who will, beginning in 2014, be charged with identifying cuts to Medicare if the plan exceeds a preset rate for growth. Those cuts must still be approved by Congress, or legislators must propose alternative ways of reducing costs.  The creation of these commissions, Bai concludes, is a signal “that an administration populated from the top down by Capitol Hill alumni is intent on altering the balance of power between the branches of government.”

Really?  The idea that members of Congress would prefer to incur the political costs involved in balancing the budget or cutting Medicare themselves rather than farming these decisions out to an independent commission is, in my view, dubious.  (Not surprisingly, Bai doesn’t actually quote a single member of Congress lamenting the creation of the debt commission or payment advisory board!)  Indeed, rather than a power grab, the creation of independent commissions or boards to tackle tough issues is a time-honored method by both Congress and presidents to avoid having to tackle those issues themselves. Bai, in my view, gets this story completely wrong.  The commissions are created because of the political risks likely to accrue to any elected officials who make the hard choices associated with bringing down the deficit.

It was the failure to make those choices, I argue, that prompted Orszag’s resignation. It remains to be seen whether his successor, Jacob Lew, will reprise the traditional role of the OMB director as deficit hawk and protector of the purse and, if so, how much influence he will have on Obama.