CONFERENCE CALL WITH PETER ORSZAG, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET SUBJECT: LATEST FISCAL FORECASTS FROM THE CONGRESSIONAL BUDGET OFFICE MODERATOR: KEN BAER, OFFICE OF MANAGEMENT AND BUDGET SPOKESPERSON LOCATION: THE WHITE HOUSE, WASHINGTON, D.C. TIME: 1:47 P.M. EDT DATE: FRIDAY, MARCH 20, 2009
OPERATOR: Welcome. Thank you for joining today's conference call. Later, there will be an opportunity for questions, and you may queue up at any time by pressing "star" then "1" on your touch-tone phone. If you require assistance from an operator, please press "star" then "0." And as a reminder, this conference is being recorded.
I'll now turn the conference over to Ken Baer.
Please go ahead, sir.
MR. BAER: Hi. Thanks, everyone, for getting on this call. We're here with Peter Orszag, director of the Office of Management and Budget, to talk about these recent CBO numbers. He'll speak for a few minutes about the numbers, and then we'll go right to questions. And we have about a half-hour total time.
Peter, it's all you.
MR. ORSZAG: Thanks, Ken.
As expected, CBO released its re-estimate of the president's budget today. And, as expected, it reflected a worsening of both the economic outlook and the fiscal picture since CBO's January report.
Let me comment a bit about the projections first. I think one thing that needs to be -- that is often underappreciated is how sensitive the budget projections are to small changes in assumptions in how uncertain they are.
So for example, if you look at the CBO's analysis itself, the confidence interval for the budget projection -- the deficit projection for 2014 is plus-or-minus $900 billion, that is to say, plus-or-minus 5 percent of GDP. There's a huge amount of uncertainty surrounding the budget-deficit projections. And the reason that that's the case is that the deficit is the difference between two large numbers, spending and revenue.
And just as a quick example, if spending is $1050 and revenue is $1000, then the deficit is $50. If revenue then declines by just 10 percent, the deficit skyrockets from 50 (dollars) to $150. In other words, a 10 percent reduction in revenue generates a tripling of the budget deficit. And that basic construct, or that basic insight, is why the deficit number is particularly sensitive to even small changes in assumptions, both technical and economic.
Second point is, if you look at that -- the central estimates, the central projections, especially in the back five years, they are very sensitive to the rate of economic growth. CBO's projected growth rate for the economy declines to 2.2 percent per year in the long term. The blue chip is at 2.6 percent. The Federal Reserve's central tendency is between 2.5 and 2.7, and we are at 2.6. So one of the significant reasons for the out-year deficits being different is that CBO's growth projection is below ours. But it's also below the blue chip and the Federal Reserve's central tendency also.
Despite those -- but nonetheless -- and although there are some, you know, technical differences, and these always arise when two sets of budget projections are put forward, we recognize that the budget resolution will be written off of the CBO numbers.
And I will just close by saying that we remain confident that the four key principles that the president put forward for the budget -- in particular, that it must invest in health care, that it must invest in education, that it must invest in clean energy and that it must cut the deficit in half by the end of his first term -- will all be accomplished as the resolutions move through committee next week.
And I think with that we can go ahead and open it up to questions.
OPERATOR: Thank you. And ladies and gentlemen, if you'd like to ask a question, please press star then 1 on your touchtone phone. You'll hear a tone indicating you've been placed in queue and you may remove yourself from the queue at any time by pressing the pound key. If you're using a speakerphone, please pick up your handset before dialing.
And first we have Andrew Taylor with the Associated Press. Please go ahead.
Q Thank you, Peter. Regardless of the uncertainty over the projections, do you believe that structural deficits in the range of 4 (percent) or 5 percent of GDP are sustainable?
MR. ORSZAG: I think that what you're going to see, again, under our assumptions, our policies lead to lower deficits than that. The budget committees are going to be, you know, working their way, as they always do. No one ever had an expectation that they would just take our budget, Xerox it and vote on it. And I am confident that what will come out of the budget committees is also -- will also lead to a fiscally sustainable task.
So I don't want to get into a game of mixing and matching, you know, our projections and our policies. That's one set of -- that's sort of one set of things. And the second set of things will be what the budget resolution reflects, using CBO numbers. What I'm confident about is that both of them -- I know ours and I'm confident that the budget resolution using CBO's numbers will reflect a fiscally sustainable path.
Q But what about the question itself, which is are deficits of 4 (percent) or 5 percents of GDP sustainable?
MR. ORSZAG: Deficits in the let's say 5 percent of GDP range would lead to rising debt-to-GDP ratios in a manner that would ultimately not be sustainable.
Q Thank you.
OPERATOR: Thank you.
We will go next to John McKinnon with The Wall Street Journal.
Q Hi, Peter.
Can you just talk a little bit more about some of those technical factors that you mentioned that -- the technical differences that produce these somewhat -- (audio break)?
MR. ORSZAG: Technical differences that produce beeps, sure.
Well, one of -- again the one that I mentioned was the rate of economic growth. And again I just -- I'm not going to belabor the point. But you do need to remember that even small -- 2.6 versus 2.2 may not sound that big.
But if you cumulate it, over time, and then you also remember that the point about the deficit being the residual, between two big numbers, and then also take into account the impact of net interest on, as you're cumulating over time, it's not only that the size of the economy will wind up being -- reflecting that difference in growth rate.
But also you know, if in year three, the deficit is somewhat larger under a slower growth rate, then if you roll forward to years seven, eight and nine, you also have more debt service costs. And so that magnifies the impact from even small differences in assumptions.
The growth rate is one of the most prominent. But there are numerous -- you know, there are numerous projection differences on a technical basis ranging from, I don't know, the share of compensation that's taxable that's, you know, taken in the form of health care costs, versus pensions, versus wages, the ratio of capital gains realizations to economic activity, the distribution of income, which will affect the revenue projection, for any given level of national income, and so on and so forth.
There are huge numbers of technical assumptions that go into these overall calculations that for, you know, for technical reasons can and historically have varied between different organizations.
OPERATOR: Thank you.
And just a reminder. We're limiting everyone to one question. You may then requeue. And additional questions will be taken as time permits.
Next we have Jane -- (inaudible) -- with the Chicago Jewish News.
Please go ahead.
Q Hi. Thank you. I actually did have a two-part question. I wanted to know how these numbers will affect the president's proposals for health-care reform and other programs that he's proposed; as well as, how do these numbers affect your job?
MR. ORSZAG: (Laughs.) Well, first, let me say with regard to my job, this is part of the normal legislative process. For the -- some of the reasons -- I gave you only a very partial list of technical differences that always arise between CBO and OMB, and so this is just part of what normally happens in a year as CBO and OMB evaluate the economic and fiscal conditions that we face.
With regard to health care, I don't think that there's any direct impact of these technical differences on either the desire for or ability to get health-care reform done this year. Remember, our approach here is a deficit-neutral one to health reform. And so we have put forward a set of proposals that serve as a down payment for health reform. But we have also said that the health-reform package has to be deficit-neutral over the next five to 10 years and help to bend the curve on long-term health-care-cost growth.
So the fact that there's some difference in the rate of -- at which OMB and CBO are projecting economic growth or overall fiscal- deficit numbers does not affect those core principles or, I think, the desire to get health-care reform done this year, where I do think there's already significant amounts of progress being made, both in Congress and among interested parties outside of the direct policy- making world.
OPERATOR: Thank you. Next we have Lori Montgomery with The Washington Post.
Q Hi, Peter. Thank --
MR. ORSZAG: Hi, Lori.
Q Thanks for doing the conference call.
Senator Conrad, at least, has suggested that adjustments will have to be made to the budget resolution because of these numbers. Do you have any sense of what's coming from the budget committees in that regard?
MR. ORSZAG: Well, I -- we got to remember, even if there weren't any differences in the economic and technical projections -- I'm going to just come back: I think I said earlier, it's not like -- it's not like the process (we'd ?) -- normally just have them take the budget, Xerox it and vote on it.
It's always going to be, you know, some -- there's -- it's a normal part of the legislative process to take the core principles and the core things that the president wants to get done -- and I already delineated those four earlier on -- and work within those boundaries. And that's what I'm confident will happen here, is that the budget resolution will invest in health care, will invest in education, will invest in clean energy and will cut the deficit in half.
And beyond that, you know, developments are ongoing and you'll see chairmen's marks sometime in the middle of next week.
OPERATOR: Thank you. We'll go to Eduardo Segal (sp) with the Health News Review.
Q Hi. My sources tell me that the agencies of NIH are getting ready to spend the billions of dollars given to them on projects that were previously approved, consistent with the goals of the previous administration. Would it make more sense to allocate a few of those billions to implement Obama's and your own ideas in behavior modifications such as -- (inaudible) -- and research in behavior modification, markers of prevention, behavior changes and similarly for other agencies, like, for example, setting up large centers to measure chemicals in food instead of just doing more of the same?
MR. ORSZAG: Sure. Let me answer that in two different ways.
First, I think the president's budget reflects a significant focus on behavioral economics and how people actually -- how people actually respond to incentives rather than a simple Econ 101 approach to the world in which we're all hyper-rational supercomputers costlessly processing information. So for example, the budget includes an automatic IRA proposal. It includes simplification to the educational -- the forms that one uses to apply for financial assistance for higher education, because the evidence suggests that complexity is a major impediment to applications and so on and so forth.
With regard to NIH, I think what you may be hearing about is that the recovery act included an historic investment in NIH funding, and they are beginning to sift through the proposals for how that money can be spent quickly and wisely. And part of that process involves taking preexisting proposals and evaluating them for how appropriate they are for recovery act purposes.
OPERATOR: Okay. We'll go to Jonathan Nicholson with BNA.
MR. ORSZAG: Hi, Jonathan.
Q Hey, Peter. Hope you're doing well. I've got --
MR. ORSZAG: Putting one foot in front of the other.
Q (Chuckles.) One and a half questions, if I could.
One is that there's a lot of talk on the Hill about doing a five- year versus a 10-year resolution. And you guys have been saying part of the transparency of this budget is that it has a 10-year time window. So what's your reaction to that?
And also, on the reconciliation question, what evidence do you guys have that the GOP is willing to come to the table on either health care or cap and trade without reconciliation at this point?
MR. ORSZAG: Well, let me -- on the first point, we put forward a 10-year budget. The budget committees, as I said before, have historically, you know, taken the president's budget and tweaked it in various different ways. And I've read the press reports that you've read about the length -- the duration being one of the things that may be under consideration. But beyond that, again, I'm just going to defer and wait until the chairmen's marks are publicly available, sometime early to mid-next week.
With regard to reconciliation, I will again say, not where we want to start, but we are not -- we think it's premature to be taking it off the table. And beyond that, again, I'm going to just say that we will need to wait and see what emerges from both the House and the Senate next week.
OPERATOR: Thank you. We'll go to Brian Friel with the National Journal.
Q Director Orszag, do you anticipate changing any of your own spending or revenue proposals, to reflect any of the assumptions that have changed with the CBO report? Or do you expect what you've already proposed to sort of stand as is?
MR. ORSZAG: What I'd say is that, you know, independent of the CBO re-estimate, that there would always have been, and it's a natural and normal part of the process, for some adjustments to be made, by the Budget Committees, to the president's budget. That's part of the process.
And I'm just going to come back again and say, we are making clear, and the president has made clear, that the budget resolutions that emerge should meet the four criteria that we've put forward. And all the information that I'm getting, from both Budget Committee chairs, suggests that both the House and Senate resolutions will do so.
OPERATOR: Next we have David Dixon with The Washington Times.
Q Good afternoon, Peter.
MR. ORSZAG: Good afternoon.
Q If you're racing in the marathon this weekend, good luck.
MR. ORSZAG: No, I'm not. My training has suffered a little bit, I have to admit.
Q (Laughter.) Understandably.
On the growth figures, I'm looking at CBO's projections. And they come in at 2.5 percent on average the last five years. And that's following 4 percent in the preceding four years.
And yet when they aggregate the cumulative deficits, for the 10- year period, they're at 9.3 trillion on your budget, which came in at 7 trillion. So they are 33 percent higher than your budget.
MR. ORSZAG: Yeah. But again take my example, in which in one case, the revenue number was 10 percent lower, and the deficit would then triple. So you know, one needs to be very careful. The deficit is the residual between two significant numbers. And therefore you can have disproportionate effects on the deficit.
And again let me just -- you know, you can come up with other numerical examples. But the one that I think is simple is, start with spending at $1,050, revenue at $1,000, so that the deficit is 50. And then let's say that revenue is cut by 10 percent, for example, because the growth rate is, you know, 1 percent lower per year, and you're looking at the 10th year, just as an example.
The deficit then goes from $50 to 1,050 minus 900, which is $150. In other words, the deficit is triple, so getting a difference in the deficit that's dramatically different from what one would expect, from even modest differences in underlying assumptions. And I think that's the key thing we need to remember.
Another way of putting it is, look at the CBO's own numbers. So in 2013 or 2014, their central estimate of the deficit, and I think, you know, you can call up Doug Elmendorf, and I think he'd say the same thing.
The central estimate of the deficit is around 700 or $750 billion. But the confidence band around that is plus-or-minus $900 billion. In other words, CBO is saying it can't rule out a small surplus that year. Again I think that just underscores the sensitivity to even modest changes in underlying assumptions.
OPERATOR: Thank you. Next we have Alexis Simendinger with the National Journal.
Q Peter, let me just follow on what you were just saying about the lack of confidence. Basically, you're saying that CBO doesn't have the ability to be confident about its projections, but in talking --
MR. ORSZAG: Wait -- no, wait -- hold on -- time out -- (chuckles). Confidence interval is a technical statistical term.
Q What? But what you're saying is that there's wide variation.
MR. ORSZAG: Yes.
Q They could be right or wrong.
MR. ORSZAG: That's -- I would prefer a lot of -- I think the right -- the semantics are that there's significant uncertainty and there's a lot of variation.
Q Okay. Significant uncertainty and a lot of variation. But you're facing a Congress that has as much or more uncertainty, so what is the argument that you would make to them that things are getting better, will get better, that the picture for them to legislate in this environment will improve to the extent that they should be more confident than CBO?
MR. ORSZAG: I'm not sure I understand the point. All I was saying is that I think it's easy to exaggerate fluctuations in the deficit projections, which are driven by small changes in underlying assumptions, and that I also recognize that, despite that, the CBO numbers are going to be the basis for the budget resolution. And even with the CBO numbers, the four key principles that the president has put forward will be met.
OPERATOR: Thank you. Next we have Joshua Zumbrun with Forbes.
Q Peter, I was wondering if you could comment on whether or not you stand by the 8.1 percent average unemployment for 2009, especially given that, since when that figure was released, the BLS said that's the figure for January, which would suggest a very unlikely unemployment scenario leading to that being also the average unemployment for 2009.
MR. ORSZAG: Well, I think when the projections were locked down, our projections were in line with, at least on an apples-to-apples basis on -- (inaudible) -- the impact of the Recovery Act -- in line with those of CBO, for example. Since that time, you're correctly noting that the incoming data have -- have been somewhat more negative than anyone -- you know, than either CBO or OMB projected at the time.
I'd also note, I mean, that while we're on the topic of projections -- and I think it is fair to say I happen to know the former CBO director quite well, but I think it's fair to say that CBO is widely seen as being a disinterested and impartial body -- that there was a lot of discussion about the, for example, 2010 number. I believe -- I don't have the table right in front of me; I'm doing this from memory -- but I believe CBO's now projecting a 4.1 percent growth rate for 2010.
And I would just say that if -- you know, if that number were originating anywhere but from CBO, you all would probably be quite skeptical. I think that just underscores again we're going through a very -- an economic downturn that is more severe than any that we have faced since the Great Depression.
And one of the things -- I think what that number reflects, by the way, one of the things that happens is, as you emerge from a recession -- and eventually, there's some debate obviously about when, but eventually we will emerge from the recession -- as you emerge from the recession, economic growth rates can temporarily be quite high, because you're starting from such a low base.
OPERATOR: Thank you. And we'll go --
MR. BAER: One more question.
OPERATOR: Thank you. That will come from Josh Gerstein with Politico.
Q Hi. Peter, I just wanted to go back to ask about your projection. You said that the -- just a moment ago there that the incoming data have been somewhat more negative since January. I believe you probably had to lock in your numbers for the budget book in mid if not early February. Are you going to look at all at your projections or estimates for deficits, for revenues, for economic growth again in light of what has transpired in the last eight weeks or so? Or are you just comfortable with those numbers?
MR. ORSZAG: No, of course we're -- you know, we're constantly receiving reports and reexamining economic conditions.
I also, though, think -- I would also say there is a -- this -- what came out today from CBO is a normal part of the budget process. There is a normal schedule of events that occur. And I do think it's not -- I don't think it's constructive for us to be constantly chasing our tail and updating our assumptions for every new piece of information.
We will, as is regular during the budget cycle, come out with a mid-session review. And at that point we will certainly be updating our economic projections. And by the way, we'll have a lot more information by then than we do now. But to be constantly, on a daily basis, updating our economic projections is both -- inconsistent with the way the budget cycle works, and I'm not sure it would be constructive in any case.
MR. BAER: (Okay ?), well, thank you very much, everybody, and -- for hopping on -- or coming on. And if you need anything else, you know how to reach us. Thank you.
OPERATOR: Thank you, ladies and gentlemen. That does conclude our conference for today; thank you for your participation.
