Friday, February 5, 2010

Orszag Explains TARP Plan

By Alexis Simendinger and Brian Friel  

Peter Orszag

Office of Management and Budget director

Sen. Judd Gregg, R-N.H., took Office of Management and Budget Director Peter Orszag to task at a February 2 Senate Budget Committee hearing on President Obama's fiscal 2011 budget proposal, arguing that the Obama administration was seeking to illegally use $30 billion from the $700 billion Troubled Asset Relief Program for a small business lending effort, instead of for deficit reduction. In a February 2 interview with National Journal following the hearing, Orszag sought to clarify the administration's plans, and also talked about the administration's job creation efforts. Edited excerpts follow after the jump.

Subscribers can also read further excerpts from National Journal's interview with Orszag in this week's issue.

NJ: The Congressional Budget Office has questioned the proposed use of TARP as a way to pay for new spending programs. Senator Judd Gregg has been outspoken in opposition to the use of unspent bailout funds for anything other than reducing the nation's accumulated debt. Can you clarify what the president is asking Congress to approve?

Orszag: If you take $30 billion contained within TARP and pass a new law to move it out [of the bailout fund], then the net budget impact depends on what you do with that $30 billion. If you use it to inject capital into banks [and then] the repayments [to the Treasury] are equal to what you put in, then there are no net budgetary costs.

The second point is that we are projecting a net cost from [the initial $700 billion] TARP [authority] overall of $117 billion. We've put forward a financial services fee to try to offset that over time, as required by the [TARP] law. [The fee would recoup] $90 billion over [the next 10 years], and then it would continue until the TARP is repaid in full.

NJ: As an economist who had a ringside seat to witness budget balance under the last Democratic president, can you describe how painful it has been for you personally to have helped President Obama craft basically the bleakest, most red-ink drenched budget document since World War II?

Orszag: You mean the budget proposal that has the largest deficit reduction of any budget that's been put forward by an administration in more than a decade? That one?

Well, obviously, things are easier when you have surplus funds to spend than when you're facing fiscal constraints. And it's particularly difficult when you're facing out-year fiscal constraints and such a severe economic downturn.

If we just faced a massive jobs deficit, or we just faced a massive fiscal deficit, it would be a lot easier, but we have to address both of them in the same budget document, and that involves finding a smooth glide path from additional support for the economy in the near term, to deficit reduction in the medium term, and that makes things particularly challenging.

NJ: The number that stands out to most members of Congress is the unemployment rate, now projected to be 9.8 percent at the end of this year -- for politicians, not a rate they want to see. With unemployment expected to remain that high as candidates face the voters, how can you persuade lawmakers to adopt higher spending, which would appear to aggravate deficit worries?

Orszag: I guess the point would be that it would be even worse without additional measures. I think the key challenge we face in the labor market right now is that what normally happens during a recovery -- and we are experiencing a recovery -- in GDP is that the labor market lags behind. As GDP picks up, the first thing you see is rapid productivity growth, and then the next stage you see is additional hiring of temporary workers and increases in hours worked among existing employees. And then only finally do you see an expansion of hiring.

In a sense, what we're trying to do is shorten the lags involved in those stages, and thereby have job growth follow more directly and immediately from economic growth. And that's in a sense one of the purposes behind the jobs and wages tax credit [proposed by some lawmakers and the president].

NJ: Does the 9.8 percent unemployment projection for the fourth quarter of 2010 reflect the impact of the jobs credit?

Orszag: We don't have a specific, quantitative estimate of the individual items contained within our jobs package, in part because parts of the jobs package have been specified and parts are a placeholder [in the budget]. But as [Council of Economic Advisers chair] Christie Romer said yesterday, the economic assumptions do reflect a generic jobs bill of roughly the magnitude of what we are putting forward.

NJ: How many jobs would be created or saved with an additional $100 billion investment this year in jobs legislation, and beyond that, what are the ingredients for long-term job creation that you hope Congress will embrace this year?

Orszag: We have not put forward a specific employment or jobs goal for the jobs bill at this point. With regard to the longer-term job growth, that's really driven by economic growth, and economic growth is really driven by the kinds of things we're trying to invest the additional resources in -- education, innovation, clean energy.

NJ: To clarify, you do not think of the additional $100 billion as a long-term jobs driver?

Orszag: No, that's to sort of jumpstart the jobs market in the short run, given this lag that normally occurs between when the economy picks up and when the labor market picks up. We'd like to try to shorten that to try to avoid unnecessary suffering.

NJ: And you are thinking of that in combination with the stimulus money that would be paid out in 2010?

Orszag: Yes, and the budget also includes a list of extenders that are not included in the jobs bill, but will also help stabilize the economy and promote job growth during 2010.

NJ: A lot of people may not realize that most of the stimulus money is expected to be spent out this year. What is the long-term impact of the Recovery Act spending?

Orszag: Ironically, the numbers that I have in my head currently are the CBO figures from the Economic and Budget Outlook they just released, which suggests that roughly $200 billion of the Recovery Act money went out the door in fiscal year '09, and another $400 billion would go out in fiscal year 2010, so that by the end of this fiscal year a total of $600 billion would be out the door -- all income tax cuts, state fiscal relief, discretionary spending, etc.

NJ: Is there any magic to that total, or is $600 billion in 2010 about what's politically doable?

Orszag: That's roughly in line with spend-out rates that were projected initially, so no great surprises in terms of aggregate spend-out rates from the Recovery Act.