Peter Orszag on Building a New Foundation for Growth
White House Office of Management and Budget Director Peter Orszag addressed the Council on Foreign Relations today, outlining the Administration’s response to the economic crisis, and how the Administration is working to build a new foundation for economic growth and broadly shared prosperity.
Orszag reminded the audience that when President Obama was elected in November, the economy was in a freefall. The administration had to work to restore confidence. This is why the administration has been looking to the future, and laying the groundwork for a stable foundation, so that we will be prepared for future shocks. The Capital Assistance Program, the Homeowner Affordability and Stability Plan, and the Recovery Act were all part of this approach. From his prepared remarks:
In designing the Recovery Act, we also recognized that the economic situation we inherited was so severe that we needed to assure producers and consumers that aggregate demand would be boosted not just for a few months, but for a sustained period. That is why we envisioned a Recovery Act that would ramp up rapidly in 2009, have its peak impact in 2010, and lay the groundwork for further growth thereafter.
Now, the Recovery Act has encountered some criticism in recent days – from all sides. And a piece of legislation of this size and import should be scrutinized. In conducting this debate, however, we need to understand what the Act was designed to do.
Remember that the Recovery Act was designed to take effect over a two-year period with about 70 percent of all funds going out in the first 18 months.
As a result, and since job growth typically lags behind economic activity, both Administration and independent forecasts have predicted that only a very small part of the total job creation expected from the Recovery Act would take place by the end of the second quarter. Therefore evaluating how well the Recovery Act is working based on recent movement in employment numbers is misleading.
Implementation of the Recovery Act is on schedule, and the $220 billion in relief has already had a direct impact. Orszag explained how the Recovery Act is helping our economy rebound:
Goldman Sachs, for one, projects that the Recovery Act will add about 3 percentage points on an annualized basis to GDP in the second quarter and have a similar effect in the third quarter. To be sure, other analysts may reach slightly different quantitative conclusions than Goldman Sachs – and in any case we have a way to go before anyone should become satisfied with our economic performance. Nonetheless, it is becoming increasingly clear that the economy is no longer on the brink of disaster.
The equity markets have rebounded, and credit markets have thawed. The TED spread—an indicator of stress in private credit markets—was typically below 50 basis points before the crisis. In October of last year, it peaked at over five times that, at 460 basis points. It has now settled back under 50 basis points. And the consensus among private forecasters is that the economy will return to positive growth this year.
But even as progress is made, this year will continue to be difficult for American workers, as the unemployment rate typically lags behind other parts of the economy. He argued that recovery is not just about rescue, but about rebuilding our economy so that we can have long-term, sustainable growth -- and that health care reform is an essential element to building this new foundation:
The evidence is clear that the biggest threat to our fiscal future is rising health care costs. If health care costs grow at the same rate over the next four decades as they did over the previous four, Medicare and Medicaid spending will go from about 5 percent of GDP to about 20 percent by 2050. That was about the size of the entire federal government last year.
Our fiscal future is so dominated by healthcare that if we can slow the rate of cost growth by just 15 basis points a year, the savings for Medicare and Medicaid would equal the impact from eliminating Social Security’s entire 75-year shortfall.
The fiscal importance of health care reform is indisputable. Yet in the current debate, there’s been a lot of controversy surrounding whether the bills that are emerging from Congress accomplish our fiscal goals or not. So let me be clear: the President will not sign a health care reform bill unless it is deficit neutral with hard, scoreable savings over the next decade and on a stable trajectory as the decade ends.
In addition to reforming health care in a deficit-neutral way, the President has also insisted that we take additional steps to transforming our system to one that delivers better care, rather than more care.
Because if we fail to do more to move towards a high-value, low-cost healthcare system, we will be on an unsustainable fiscal path no matter what else we do. As it stands now, the health care system does the opposite of what it should -- creating incentives for doctors and hospitals to provide more care, not the best care.