Peter Orszag became famous for making health care cost control sexy. His replacement will have an even harder task: Doing the same for deficit reduction.
Reducing the deficit is the Washington equivalent of eating one's vegetables. It's preached mainly by stern fogies, who don't make it sound very appetizing. Whoever replaces Orszag as director of the Office of Management and Budget—the top names floated so far are Clinton administration vets Laura Tyson and Gene Sperling—will have to change that.
It's not that deficit reduction hasn't been on the administration's to-do list. It just hasn't been a priority. President Obama first had to tackle the financial crisis, which required a deficit-ballooning stimulus package. We'll get to deficit reduction, the thinking went. Let's just fix this crisis thing first. Health care reform included elements of deficit reduction—nearly every presidential speech mentioned "bending the cost curve"—but balancing the budget wasn't its main goal.
The recession is by no means over. But every step toward recovery brings the tough choices of budget balancing that much closer. Even if Orszag's successor doesn't preside over gigantic federal cutbacks, he'll at least have to formulate a game plan. "There's no question that the single biggest issue on the plate of the OMB director is going to be addressing the long-term deficit situation," says Michael Ettlinger, an economic policy expert at the Center for American Progress.
The numbers are getting uglier by the month. The annual deficit currently hovers at $1.6 trillion. The overall federal debt, meanwhile, stands at $13 trillion. Projections over the next 10 years show the total debt growing by another $9 trillion.
The good news is that the hardest part is over—maybe. Entitlements make up the biggest part of the projected budget gap, and Medicare is the biggest entitlement. The Patient Protection and Affordable Care Act includes all kinds of cost-cutting measures, from the independent commission that would trim Medicare expenses to savings resulting from competition in the exchanges to comparative effectiveness research. The problem is, we don't know whether these measures will work, and we won't know for sure for several years. (The recent CBO announcement that health care reform will cost $115 billion more than originally projected wasn't encouraging.)
There are plenty of other ways to cut the deficit, but none of them is pretty. Most economists agree that Social Security will be insolvent by 2037. One way to boost revenue would be to raise the retirement age. Less drastic would be to simply slow the growth in benefits. That doesn't mean cutting benefits from where they are now, says Isabel Sawhill, a budget expert at the Brookings Institution. It just means reducing the amount that future retirees receive, which is linked to rising wages.
Another option is cutting discretionary, or nonentitlement, spending, which made up 35 percent of the 2010 budget. The Obama administration recently called for federal agencies to cut their budgets by 5 percent. It's a drop in the ocean of overall spending—but the ocean is made of drops. If there's going to be significant discretionary spending cut, it's going to be on the military side. Military dollars are sacrosanct in Washington. But there is fat to be trimmed: A panel convened by Rep. Barney Frank recently recommended nearly $1 trillion in defense cuts.
Then there's everyone's favorite: Raising taxes. Allowing the top-bracket Bush tax cuts to expire is just the first step. After that, most economists agree that there's no balancing the budget without raising taxes on the middle class. Obama has boxed himself in by promising not to raise taxes on American families that make less than $250,000 a year. To eliminate deficits, he would probably need to break his promise—which means we might not see changes in his tax policy until after 2012.
Obama is already laying the groundwork for deficit reduction. But the political obstacles are formidable. The leaders of his much touted bipartisan deficit commission say that all options are on the table. But a testy exchange between co-chair Alan Simpson and a liberal activist last week showed how difficult it will be to find common ground. It doesn't help that the only long-term solutions—cutting entitlements and raising taxes—are considered political hara-kiri. "It's not like we don't know what to do," says Sawhill. "The problem is we're not willing to do it."
In the absence of a real crisis, it's hard to persuade Americans to swallow policies they don't like. The job of the next OMB director will therefore be to convince Americans that the long-term deficit is a crisis. Polls suggest it's not a tough sell. One recent survey found that half of Americans consider the current federal deficit a "crisis," while another 43 percent think it's "a major problem." The challenge is getting them to accept the painful remedies necessary to fix it.