Orszag Replacement Jack Lew Faces Budget Storm

With fighting over the Bush tax cuts reaching a fever pitch and Larry Summers’ exit leaving the Obama economic team in flux, Jack Lew, the president’s pick to head the Office of Management and Budget, is in a brutal spot. But his predecessor, Peter Orszag, tells The Daily Beast’s Benjamin Sarlin that Lew is a “fabulous” choice for the job.

Senators exhibited some rare bipartisan warmth and fuzziness at a confirmation hearing this week as they took turns praising Jacob Lew, President Obama’s pick to head the Office of Management and Budget, before offering their unanimous approval.

“The nation is fortunate to have you assume this position during this time,” the Senate Budget Committee’s ranking Republican, Judd Gregg, said to Lew, who was OMB director under President Clinton.

Underneath the praise was another message: Glad it’s not me.

“The fact he’s willing to come back again may question his thought process,” quipped Gregg.

“You’re in this atmosphere where extreme views are more prevalent, making the scope for a budget deal in particular harder to see,” Orszag said.

Indeed, Lew’s predecessor at OMB, Peter Orszag, described to The Daily Beast a stormy budget process ahead that will require political savvy, bipartisanship, and a whole lot of luck to conquer—none of which has been in great supply for the White House in recent months. Lew takes over for OMB with the administration’s economic team in flux, having just lost National Economic Council head Larry Summers, the jobs situation bleak, the national debt exploding, and the Democrats’ governing majority limping through a debate over the Bush tax cuts in what may be its final weeks of existence.

And after two years of nonstop legislative battles over stimulus, health care, and financial reform, all of which cut a path directly through OMB, employees are exhausted. There are signs that the workload has taken a serious toll on its staff: A survey of employees last year showed a major decline in morale, dropping it 22 spots to 25th place in the Partnership for Public Services’ list of best places to work.

According to Orszag, at least some of the drop can be chalked up to sheer exhaustion or, as he puts it, using one of his many wonky phrases, problems with “work-life balance.”

“That came across in basically all the surveys,” he said with a dark laugh. For the person in charge, the task is particularly difficult, as the director functions simultaneously as agency manager and White House adviser, with both roles competing constantly for time and attention.

“I have full confidence [Lew will] do that well, but there is that tension,” he said, “It’s almost like two jobs wrapped into one.”

Orszag said he believes that conditions at the agency are improving, but some observers suggested Lew’s leadership skills might help.

“[Orszag] always had a sort of arrogant style where he knows so much—and the reality is he does know so much—but it comes off as a sort of arrogance, and my guess is the staff resent that,” said Gary Bass, executive director of the nonprofit OMB Watch.

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But just because gridlock makes major legislation unlikely in the near future doesn’t mean the office can slack. The health-care and financial-reform bills that passed this year still contain myriad provisions where rules and regulations have yet to be written, a task where OMB plays a crucial, if less well-known, role.

“OMB has enormous unseen powers,” said Bass. “When it comes to [health care and finance], all those rules will be going to [OMB’s] Office of Information and Regulatory Affairs and they will have enormous influence.”

Making the process of putting the landmark health care legislation into place more difficult are Republican efforts to sabotage the law before it gets off the ground, including pledges from lawmakers to repeal or defund it. While the former strikes Orszag as "fanciful" given Democrats' ability to block a repeal even in the minority, he considers the latter a genuine threat.

"The defunding strategy is a little more challenging because it probably wont involve no funding, but just inadequate funding," he said. "That could mean that we're in a very bad situation because the next five years are crucially important to a lot of new institutions that are being created—the exchanges, the Medicare commission, the innovation center—and if there's not proper funding you can really screw things up."

Former colleagues describe Lew as a strong leader who inspires tremendous loyalty among his staff and gets along well with both parties. “He’s about as good as this president could find,” said Pete Domenici, the Republican chairman of the Budget Committee under Clinton. But Domenici is no longer in office, and moderate Republicans like Gregg and George Voinovich are on the way out. A number of Tea Party candidates devoted to unconventional, sometimes even absurd Randian notions of fiscal policy may be on the way in. The prospects for a serious bipartisan effort on reining in the record trillion-plus deficits projected ahead are looking bleaker by the minute.

Orszag made it clear he isn’t expecting an outbreak of good-faith negotiations on the budget breaking out any time soon. Ever the academic, he offered a three-part research-based explanation for why relations in Congress have broken down that includes “technological change leading to increased polarization and filtering of views,” “unintended consequences of gerrymandering,” and “unintended consequences of airline deregulation, meaning members don’t hang out with each over the weekend.”

“You’re in this atmosphere where extreme views are more prevalent, making the scope for a budget deal in particular harder to see,” he said.

Whatever the cause, the result is budget discussions that have become a farce, with numerous Republicans touting the idea that tax cuts pay for themselves, a widely discredited notion among economists, while promising vague spending reductions that never seem to materialize into specific long-term proposals. Working off this bleak view of bipartisanship, Orszag crafted his much-discussed proposal to briefly extend the Bush tax cuts in their entirety before letting the whole package expire after two years largely because he thought it would be the last chance, however slim, for Congress to make any kind of dent in the deficit before an incoming wave of anti-tax Republicans filibusters any attempts to raise revenue.

“That may have a degree of difficulty level 9,” he said of his plan, “but everything else has a degree of difficulty level of 10.”

To Orszag, the decision by the White House and Democrats to extend the cuts to at least the middle class, a $3 trillion move over the next 10 years, would become critically dangerous to the nation’s fiscal health if the economy unexpectedly tanked again at some point. For a nation that has experienced its share of black swans in the financial world, it’s an ominous warning.

“You could get lucky,” he said. “There’s huge amounts of uncertainty over all these numbers. The example I like to use is the deficit in 2015 is projected to be about 5 percent of GDP, but the 90 percent confidence interval is plus or minus 5 percent of GDP, so it’s really somewhere between 0 percent and 10 percent. So it’s possible the world is going to turn out a lot better than projected and the medium-term fiscal problem kind of fades, but I certainly wouldn’t want to be betting on that, and it could turn out much worse.”

In the meantime, the reaction to Orszag’s call is a predictable demonstration of the partisan trends he highlighted. On Wednesday, Republican House members held a press conference to demand a permanent extension of all the Bush tax cuts, and a number of them cited Orszag’s call for a temporary stay as evidence of bipartisan support. They conveniently left out the part of his plan where the entire cuts disappear a couple of years later.

Orszag stressed that the left isn’t immune to irrational ideas that could undermine the White House’s deficit-reduction efforts, noting that some proponents of more stimulus spending “were dancing right to the edge” of arguing that the resulting economic activity and tax revenue would make up the impact on the deficit. He also criticized progressives for reflexively blocking discussion of Social Security reform, a topic that could heat up if the president’s deficit commission offers recommendations on the topic.

“If you’re a progressive, better to reform the program while you have time to phase things in gradually and in an environment in which you’re more likely to get a balanced approach and not have, for example, individual accounts,” he said. “But that’s not the view of most progressives.”

Orszag nonetheless has high hopes for Lew, whom he described as a “fabulous” choice to run the agency.

“He’s almost rabbinic in both demeanor and character,” Orszag said. “I’ve never heard him scream, I’ve never heard him speak crossly to someone.”

Benjamin Sarlin is the Washington correspondent for The Daily Beast and edits the site's politics blog, Beltway Beast. He previously covered New York City politics for The New York Sun and has worked for talkingpointsmemo.com.