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| Speaker: | Peter R. Orszag, Director, Office Of Management And Budget |
|---|---|
| Presider: | Glenn Hubbard, Dean Of Graduate School of Business, Columbia Business School |
July 22, 2009, New York
Council on Foreign Relations
GLENN HUBBARD: Good afternoon. Welcome to today's Council on Foreign Relations meeting. And this meeting is entitled, "A New Foundation for Growth: Assessing the Economic Recovery and Future," surely a critical topic for today, and for always. This is part of the McCullough series on international economics at the council. The next meeting of the series will be September 9th with Charles Evans, who's the president of the Chicago Fed.
I'd like to take this moment to remind you of a little bit of housekeeping -- turn off your cell phones, BlackBerrys, any other such devices -- and to remind everyone and our speaker that the meeting is on the record. Council members around the nation and the world are also participating in this meeting via Web conference.
It's a real treat today to have Peter Orszag, who, of course, is the OMB director. In a very brainy administration, he still stands out as among the smartest people in Washington. He has a very distinguished career as an economist: Prior to coming to OMB, was the director of the CBO; had been at the Brookings Institution, at the Hamilton project, the National Economic Council and the Council of Economic Advisers. A Princeton University grad and a Ph.D. in economics from the London School of Economics.
Peter, the floor is yours.
PETER ORSZAG: (Applause.) Thank you, Glenn. And thank you to Richard Haass for inviting me to speak with you today. And thank you all for being here.
Over the years, the Council on Foreign Relations has made substantial contributions to the intellectual life of this city and our country, creating the space for academics and strategists, public servants and diplomats to think through the most important policy issues of the day.
Now that I'm back in government, let me say that your work is invaluable to those of us who are entrusted with making and implementing public policy. Your work on the global economic crisis is a case in point, and that is my focus with you this afternoon. I want to describe the administration's response to the most severe economic and financial crisis of my lifetime, along with our approach to laying a foundation for sustained economic growth and broadly shared prosperity.
I do not need to, nor will I, review for this audience what brought us to this point, what precipitated the extraordinary economic and financial crisis that hit us last fall. But it is worth noting that weeks before he took the oath of office, the president was already focused on that very topic -- so focused, in fact, that I spent my entire birthday in mid-December in a conference room in Chicago meeting about this very topic. The only break was a cake brought in by the president-elect himself.
Now, once a birthday has come and gone, for most of us, we don't want to turn the clock back. But not for me, at least not this year. And that's because in reviewing where we were at the end of 2008 and the discussion during that December meeting, it is no exaggeration to say that the economy was in the midst of a severe collapse.
In the fourth quarter of last year, real GDP was declining at a rate of more than 6 percent on an annualized basis. In that quarter alone, household net worth fell by almost $5 trillion, declining at an annualized rate of more than 30 percent.
And, in terms of employment, the fourth quarter saw a loss of 1.7 million jobs, the largest quarterly decline since the end of World War II and exceeded only by the number in the first quarter of this year of 2.1 million jobs lost.
This slowdown in economic activity created a pair of trillion-dollar deficits. One was the budget deficit, which had ballooned to $1.3 trillion even before President Obama walked into the Oval Office. The other was the deficit between what the economy was producing and what it could produce. This so-called output gap amounts to about 7 percent of the economy, or roughly a trillion dollars a year.
Facing this "GDP deficit," the consensus from economists across the spectrum was that government needed to bolster macroeconomic demand, jump-starting economic activity and breaking a potentially vicious recessionary cycle.
Simply, and to a degree that had not been experienced in more than half a century, we needed to bring the economy back from the brink. It was, in a sense, the return of Keynes. After falling somewhat out of favor in recent decades, the great British economist was popular once again. Time Magazine even wrote a long article about him called, what else, "The Comeback Keynes." And the lesson most taken to heart from Keynes's writings was that at periods like that, we needed massive government activity to plug the gap in economic performance.
But there was another task for government, one that was equally important and one that was also noted by Keynes, and that involved restoring confidence. The amount of real economic activity today is influenced not only by what is happening today, but also by expectations of the future. As Keynes noted, our behavior is governed by current conditions, quote, "modified only to the extent that we have more or less definite reasons for expecting a change."
In the fall of last year, the American people and market actors throughout the world unfortunately had little expectation that anything would get better. Their expectations were unsettled, and the results spoke for themselves. With that in mind, the administration recognized that it was not enough to react to crises as they developed. We needed to demonstrate that we were looking to the future, preparing for possible and not-unlikely shocks, and laying the groundwork for a new, stable foundation for economic growth. That was the only way to change expectations and restore confidence.
We pursued this strategy in a number of areas; for example, Secretary Geithner's Capital Assistance Program and the Homeowner Affordability and Stability Plan. But what I want to speak with you about this afternoon is the Recovery Act.
Most academic economists had grown to believe that fiscal policy could help stabilize macroeconomic demand only through the automatic stabilizers built into the federal budget. When economic activity slows, tax revenue naturally declines, and spending on various types of government programs, like uninsurance -- employment benefits and food stamps naturally increase. The combination expands the budget deficit, but it also helps to cushion the blow from the downturn in macroeconomic demand and help put the economy back on a path to growth.
As for discretionary fiscal policy above and beyond automatic stabilizers, the considered judgment of most academic economists was that such fiscal stimulus was unlikely to help the economy and may, in fact, hinder its long-term performance. The reason given in paper after paper after paper was that policymakers never acted quickly enough. As one of my mentors, Alan Blinder of Princeton, once put it, quote, "long political lags may be the most cogent argument against discretionary fiscal policy," end quote.
So there we were in mid-December, and our estimates suggested that the automatic stabilizers would amount to about $300 billion this year.
In a normal downturn, perhaps that would have been enough. But this was clearly no ordinary downturn. So we acted and acted quickly, enacting the Recovery Act 28 days after taking office.
In designing the Recovery Act though, 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 bolstered, not just for weeks or months but for a sustained period.
And that is why we envisioned a Recovery Act that would build up over time, peak towards the end of this year and into 2010 and lay the groundwork for further growth thereafter.
Now, the Recovery Act has been criticized from various quarters and in various ways over recent weeks and months. A piece of legislation of this size and import should be scrutinized. But in conducting this debate, I think, it's important to remember what the Recovery Act was intended to do. Remember, it was designed to take effect over time and have roughly 70 percent of its total funds spend 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, roughly where we find ourselves today. Therefore evaluating how well the Recovery Act is working, based on recent movements in the unemployment rate, is misleading.
So what has been happening with the Recovery Act? After five months, and despite what you might have heard in the media, implementation of the Recovery Act is on schedule. Indeed if anything, according to the Government Accountability Office, it's slightly ahead of schedule.
Roughly $220 billion in relief has already been obligated, more than a quarter of the total size of the Recovery Act, including $43 billion in tax cuts, to working families and first-time homebuyers, and $180 billion across areas such as aid to state and local governments, expansions in food stamps and unemployment insurance benefits and new investments in education, housing and transportation projects.
The pace will ramp up considerably over the summer and continue next year, as planned, and will continue to have an economic impact. So what is that economic impact?
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 be 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 so-called TED spread -- an indicator of stress in private credit markets -- was typically below 50 basis points before the crisis.
Last fall, it reached nearly five times that level, peaking at roughly 460 basis points in October. It has now returned to more normal levels of under 50 basis points. And the consensus among private forecasters is that economic growth will return at some point later this year.
To economists, these statistics may provide some measure of comfort. But let's be clear. These numbers are cold comfort to the millions of Americans who are looking for work.
And as the president has said, this year will continue to be a difficult one for the American economy and particularly and unfortunately for American workers.
Part of this is because, to reduce the unemployment rate, the economy must grow at approximately 2.5 percent per year. In addition, as an economic recovery takes hold, firms are initially reluctant to hire additional workers and instead tend to expand the number of hours worked by those who are already employed.
These factors help to explain why unemployment lags behind a general recovery. Indeed in the last two recoveries, the peak unemployment rate occurred a year and a half after the recovery had begun. In addition to this traditional relationship, there are two other labor market phenomena, possibly unique to this crisis, that should be monitored.
The first is that with the shift away from defined benefit pensions and towards 401(k)s and other types of defined contribution pensions, workers are now increasingly exposed to the financial risks associated with their own retirement. The declining financial markets could therefore be leading some workers to forestall retirement, when they would not otherwise have done so in past downturns.
Indeed labor-force participation rates provide some support for that concern. Since the end of 2007, labor-force participation rates have increased by 1 percent among older men while declining by about 1 percent among younger men. Whether this is simply a continuation of past trends towards later retirement, or a reflection in the structure of retirement system is something worthy of further study.
Second, an important factor that tends to hold down unemployment during normal times is geographic mobility, workers moving to where the jobs are available. Given the difficulties in the housing market, that mobility may be temporarily constrained, thereby raising the unemployment rate. Again, it's unclear to what extent these particular factors have contributed to the apparent change in the relationship between unemployment and economic activity over recent months -- what economists referred to as Okun's Law. Nonetheless, that connection does seem to be much different than traditional relationships suggest. Indeed, unemployment rates are now 1 to 1.5 percentage points higher than one would have predicted given economic activity and the traditional relationship between that activity and unemployment.
These are all interesting analytical questions, but the bottom line is that we expect the unemployment rate to remain stubbornly high over the next few quarters, even if economic activity itself picks up steam. So we will have to be patient. We will have to be vigilant in looking for opportunities to help, and we will have to make sure that we not just bring back the economy of the past, but rebuild a new economy of the future. In other words, rescue alone is not enough. We must also build a new foundation for economic growth.
Earlier this year, the president laid out the five pillars of this new foundation: new rules of the road for our financial markets, investments in education, building a clean-energy economy, reforming health care, and restoring fiscal discipline. With the time remaining, I want to spend -- say a few words about health care. In case you haven't noticed, health care has been in the news a little bit recently.
The evidence is clear that the biggest threat to our economic future and our fiscal future is the rate at which health care costs grow. If health care costs grow at the same rate over the next four decades as they did over the past four, Medicare and Medicaid spending go from about 5 percent of the economy today to roughly 20 percent of the economy by 2050. That's the entire size of the federal government last year.
Our fiscal future is so dominated by health care that if we succeed in reducing the growth rate of health-care cost by merely 15 basis points -- 0.15 percentage points per year -- the impact on our long-term fiscal gap is as large as eliminating the entire actuarial deficit in Social Security.
The fiscal importance of health-care reform is indisputable. Yet in the current debate, there's been a lot of controversy surrounding whether the legislation moving through the House and Senate accomplishes our fiscal goals or not. So let me be very clear: The president will not sign a health-care reform bill that is not deficit-neutral, with hard, scoreable savings over the next decade and achieves a stable trajectory as the decade ends.
In addition to reforming health care in this deficit-neutral way, the president has also insisted that we take additional steps to transforming our health-care system towards one that delivers better care, rather than more care. Right now, we have the opposite. The system is geared towards more care, rather than higher-quality care.
Let's take NYU Medical Center, for example, one of this city's, and the nation's, best hospitals. The average Medicare patient there spends 31 days in the hospital during the last six months of life, compared to 28 days at Beth Israel, and 23 days at Columbia-Presbyterian; or, moving outside of New York, compared to 17 days at Mass General, and 12 days at Stanford. These are all top medical centers. The doctors and nurses there are world-class, and any one of us would love to be treated there. And yet -- and I'd also note these statistics control for the differences in the patients who show up at those hospitals. So why are people hospitalized for more days on the East Coast versus the West Coast; on the east side versus the west side, and across different regions of the United States? Who's right? Who's providing the best care?
The answer is: Right now, we don't know. There is a distinct lack of information about what works and what doesn't. And the available evidence, if anything, suggests that the higher-cost hospitals and the higher-cost regions deliver lower-quality care, not higher-quality care. And therein lies the opportunity. By replicating the best practices in the high-quality, low-cost regions and hospitals, we can boost quality and constrain costs over the long term. But this is going to be difficult work.
To bring about this transformation to a digitized, rapidly learning health system, the administration has put forward initiatives such as health information technology, research into what works and what doesn't, and changes in provider incentives. And it's why the administration particularly supports, and Congress is currently considering, changes to the process of policymaking so that policy can keep pace with a dynamic health-care market.
For example, we have proposed what we're referring to as an IMAC, the Independent Medicare Advisory Council, which would be comprised of doctors and health experts, and would set Medicare reimbursement rates and other aspects of Medicare policy. IMAC would issue recommendations that would either improve the quality of medical care provided to Medicare beneficiaries or improve the efficiency of the program.
After being approved as a package by the president -- not item by item, but as a package -- the recommendations would take effect, unless explicitly voted down by the Congress, within 30 days -- again, as a package.
This kind of reform is imperative for two reasons. First, it would help to insulate Medicare policy decisions from undue political interference, while at the same time preserving a say for our democratically elected representatives.
Second, it would help us keep up with the ever-evolving health-care market and continually reorient it toward higher quality and more efficient care.
The truth is that we don't know today all of the steps that are necessary to move to that high-quality, lower-cost health-care system today. But moving more decisions into the hands of medical professionals and out of the political process will enable us to continually update the system as more information becomes available and will make sure that health-care reform is not just a one-shot deal but rather the continual effort that is necessary to contain costs over the long term.
Taken together, and especially including the IMAC proposal, these reforms will begin the difficult process of transforming the health-care system. I would say that, again, taken together, they represent the best chance we have of creating a health-care system that is digitized, that is more evidence-based, that adjusts policy to new information more adeptly, and that rewards quality rather than volume.
I have been at this a long time; I have sat through innumerable Institute of Medicine and Congressional Budget Office and other briefings; and I understand and respect some of the concerns that are being raised about whether this legislation will lead to that new health-care system.
And what I would say is, for those who are critical, I would like to see specifically what alternatives we have not embraced, because it is easy to critique proposals. It's much harder to come up with what will actually work.
We have been actively seeking input, and after years of examining the question, I believe that we are being as aggressive as possible in moving to this new health-care system. And to the extent that others have interesting and innovative ideas, we are all ears.
To be sure, although health care is at the core of the nation's long-term fiscal problem, our fiscal situation will demand more action once the economy is into a recovery. The president is keenly aware of this and has said that, after we address health-care reform, we also must tackle other parts of our fiscal problem, including Social Security.
That is to say, the road ahead of us is long. The economy is no longer on the brink, but it is not yet the robust economy we deserve. Job losses may not be as severe, but job growth will not return for some time. And more tough choices will have to be made in order to put our nation on a sustainable fiscal course.
Yet our nation is coming together to do the hard work of rebuilding. Health-care reform, for all the ups and downs that you read about in the newspaper and hear about on television, is further along than it's been in decades, with an array of allies that was once unthinkable.
We are making serious investments in education and clean energy. And we are rebuilding a new foundation for long-term and widely shared economic growth.
This may all be setting the bar high, but that's where I believe the bar should be sat. And I do firmly believe, with hard work and cooperation, we can clear it.
Thank you, and I'd be happy to take your questions. (Applause.)
HUBBARD: Thanks very much, Peter, for those remarks. You are the first OMB director in the era where the B-word used to be the bad one. Now it's the T-word to get anybody's attention -- T for trillion, of course.
And I wanted to start the discussion where you left off in thinking about health care. And I have a hunch, based on prior experience, that you're a country-western music fan, and so I want to frame --
ORSZAG: There was a country-western music event at the White House last night --
HUBBARD: Oh, okay. Well, good to know. (Laughter.) There are two ways --
ORSZAG: Just saying. (Laughs.)
HUBBARD: There are two ways of thinking about where we are now. One would be something like, you know, "I'm just a lump of coal, but I'll be a diamond soon." So we'll think about that a description of the health-care bill. Another description might be "There ain't no right way to do the wrong thing."
Now, in thinking about the health-care bill -- (laughter) -- the work --
ORSZAG: That's Toby Keith, for those of you who don't know it.
HUBBARD: I'm so impressed with his --
ORSZAG: (Laughs.)
HUBBARD: My brother is a country-western singer. So I used outside expert advice to get ready.
The academic literature on the proposition that simply covering more people will lower costs isn't kind to that comment. And so given, though, what you said about the president only accepting a deficit-neutral bill, where will the cost containment come from? And to the extent that it doesn't materialize, what's the president's appetite, the administration's appetite, for the sort of tax increases that would be required to keep that promise?
ORSZAG: Okay, first, let me just say expanding coverage does raise costs, at least temporarily. So there's no distance between the academic literature and other studies, what the administration believes. As you expand coverage, the folks who were previously uninsured do receive additional care, and that costs money -- first point.
Second point, the administration has made it very clear that in addition to meeting that moral imperative -- and by the way, I do think there are some benefits to having everyone in the system, because it helps to mitigate the game of hot potato which dominates the health-market today. But in meeting those costs, we have to do so in a deficit-neutral way using scoring from the Congressional Budget Office.
So the package must be deficit-neutral and must be on a sustainable basis through hard, scorable offsets. We are including revenue as part of those offsets. But we have also put forward more than $500 billion in Medicare and Medicaid savings.
The -- so the bulk of the funding is coming from things like reductions in payment rates for Medicare Advantage plans, changes in charges for readmission rates at hospitals, productivity adjustments built into Medicare reimbursement policies and a variety of other steps which total north of $500 billion.
At worst, therefore, this expansion will be deficit-neutral and will meet the moral imperative in some of the efficiency benefits of covering more people. But we are not willing to just stop there. That would be -- that would be one way of looking at it: We're going to expand the system and we're going to pay for it.
We are saying, in addition to that, and despite the fact that many of the things that we are asking for are difficult to quantify and may not pay off for some period of time, so they don't, quote, "score," we are saying we have to go beyond that and do a variety of game-changers that will help to transform the health-care system over time and that directionally can only help, we believe and the vast majority of analysts believe.
So in other words, at worst we're deficit-neutral. And then we have these other things that are difficult to quantify but that are moving us in the right direction and therefore will be better than that over time.
The difficulty is, I haven't seen -- in that second category, there is no -- even if -- even if you or I were benevolent dictator for a day, we don't have enough knowledge today to transform the payment system from fee-for-service to fee-for-value. We don't know exactly how to do that. And so what we need to be doing is doing a lot more aggressive pilot projects, demonstration projects, and then make it a lot -- and putting in place a digitized health system so that we have the information, and then making it a lot easier to implement that -- implement the -- implement the policy suggestions that come out of that over time.
That's exactly why we've put money into health IT, into comparative-effectiveness research, and why we think this IMAC proposal is so important, so that the policy system is more adept over time at incorporating what is learned.
HUBBARD: Let me follow up on that just a second, though. If it's deficit-neutral and $500 billion in cost containment, that would add up to around $500 billion of tax increases --
ORSZAG: Well, it depends on the size of the -- of the -- I think the Senate Finance Committee is considering something that's significantly smaller than a trillion dollars, but the -- you know, the difference over the next 10 years would come from revenue. We have put some revenue ideas on the table. There are other revenue ideas floating around. But yes, there will be a gap in order to meet the deficit-neutrality pledge. As long as you're going to get something close to universal coverage, there will be a revenue piece involved.
HUBBARD: Okay. Let me take you to the longer term before opening up, because that's where you've done so much work. And there's a recent paper by your former colleague Bill Gale that he wrote with Alan Auerbach that very helpfully reminds us of the bad budget situation we're in, and it's worth thinking about in the context of your talk, because really bad economic outcomes generally require a financial crisis. We just went through one, and the prospect of a looming fiscal crisis is certainly a concern.
Auerbach and Gale opine that, even under the administration's budget, the deficit-to-GDP ratio after 10 years will be about 5/12 percent -- bad, but something we all know. But what's truly alarming in their paper would be the notion that if you looked over the long horizon -- so-called infinite horizon -- the fiscal gap is on the order of 9 percent of GDP, by which I mean you would have to cut spending today and permanently by 9 percent, or raise taxes by 9 percent. Given the shares of federal taxes and federal spending in GDP today, those would be big swings, whichever we go.
Does the administration have a view on whether that is or isn't the problem? And if so, what would be the response? Is it a spending cut or a tax increase?
ORSZAG: Well, first, let me say another interesting part of that paper is that roughly half of the long-term fiscal gap comes from policies that were adopted within the past, say, eight years -- (laughter) -- that were not -- just to take a random period -- that were not offset.
So one of the key things, again, that we're demanding is that this new policy initiative have hard, scorable offsets. If that had been done with regard to the policies that were put in place over the previous eight years, the size of the long-term fiscal gap would be half of what it is. So a key principle is, don't make it worse. And I think that is a big difference relative to, for example, the Medicare prescription-drug benefit.
The second point is, again, coming back to health reform, one of the reasons we're starting there is that is the key driver of this long-term fiscal gap -- again, as the paper notes. So the calculation I gave you of Medicare and Medicaid spending, if you slow it even by 15 basis points a year -- .15 percentage points -- that's as large as eliminating the actuarial deficit in Social Security.
Unless we move -- unless we are -- put the system -- the health-care system on a path where it is plausible that over time you'll have intelligent cost-containment measures put in place, nothing else we do will matter. We are on a path with regard to health-care spending that we can take all of the traditional policy steps we want to, and unless we get that problem under control it won't really make that big of a -- it won't -- we will still be on a(n) utterly unsustainable course.
So that's why we wanted to start with putting in place structural changes that -- again, it's not a one-off thing, but that over time lead to some hope that you could contain health-care costs over time. And then, it is true, there would still be an underlying problem that we would need to deal with, and part of that will involve Social Security reform, and part of that will involve more traditional fiscal measures. So I would say the administration is concerned, but I guess we're -- the theory of the case is, we're tackling the big thing first and trying to get that structure right, and then turning to the -- to other pieces.
And throughout it all -- and, by the way, the House of Representatives on the floor today is considering statutory PAYGO legislation, a core principle of "don't do new things that you don't pay for, and at least don't make it worse." We would have been in a much better position today if we had followed that rule in the past.
HUBBARD: Okay. Why don't we open up for questions. Wait for the microphone and please identify yourself.
Sir.
QUESTIONER: Thank you, Mr. Director. It was a very good presentation. My name is Roland Paul. I'm a lawyer. You mentioned in your remarks that -- on the economic stimulus program that it's supposed to peak at about the end of this year. And you also said that unemployment -- that the employment always lags behind other factors. What is your target number on whatever measurements you care to use, such as GNP, employment, stock-market prices, that you're looking for at the end of this year that you and objective economists would say the economic stimulus worked?
ORSZAG: Well, again, I think a variety of -- first I should say, Paul Volcker once said, "Pick a number or a date, but never both." (Laughter.) And --
HUBBARD (?): Sound advice.
ORSZAG: (Laughs.) There always -- there -- I don't want to give a -- we're forced to do this. You have to base budget projections and other projections on a set of assumptions. But I do want to emphasize that we are still in a period of significant uncertainty, and sort of caveat that up front.
Second point is, private-sector forecasters, if you look at the blue-chip forecast, for example, are suggesting, along with the Federal Reserve and others, some return to positive economic growth by the end of this year, point one. Point two is, if you look at the analysis that's being done of the money being injected by the recovery act, again, private-sector analysts are suggesting that it's having a significant effect already in terms of economic activity, as opposed to employment.
Indeed, I think the best private-sector forecast now for the second-quarter GDP numbers that are likely to -- that -- not are likely to come out -- that will come out at the end of this month suggests something like minus 1 or minus 2 percent, kind of in that range -- significantly down from the minus 6 percent that was occurring at the end of last year and early this year.
If you combine that with the analysis that's suggesting the recovery act is having a 3 percent of GDP impact, a significant portion of the stepping back from the brink, going from minus 6 to something much smaller than that, is being attributed, in a sense, to the recovery act.
So there are a variety of indicators that one can look at. I did -- you did, though, I think, get the main message, which is that unemployment is going to be something that will remain elevated, unfortunately, for some significant period of time, even after economic activity takes hold.
HUBBARD: Sir?
QUESTIONER: (Off mike) --
HUBBARD: Please wait for the --
QUESTIONER: I'm sure you've considered history. FDR had a different approach: first, employment growth, through the WPA, which itself created the demand. So did you consider that approach, immediately increasing employment through government-sponsored employment projects?
ORSZAG: I think -- well, first, there is -- with regard to the infrastructure spending, although it involves a different mix of public- and private-sector employees than perhaps was the case in the 1930s, there is part of the recovery act that reflects the notion of let's get, you know, shovels into the ground and employment boosted that way.
Look, the fact of the matter is, the political -- the environment is significantly different than it was during the 1930s and the appetite for dramatic expansions in public-sector employment, I think, is significantly lower than it was at that time. I mean, that's the short answer.
HUBBARD: Sir? In the -- please, yeah.
ORSZAG: Yeah.
QUESTIONER: (Off mike) -- would point out, is hard to measure. Did any of the bills that have been passed by any of the committees offer significant savings for either businesses or people with insurance or the government?
ORSZAG: So let me again separate this into a couple different categories. Let's take people with insurance or people who are currently employed. Significant benefits in terms of security. So if you switch jobs, you'll be assured that preexisting conditions -- you'll be assured you'll continue to have coverage and what have you. So there are important set of consumer protections built in, which will matter a lot.
Second, with regard to insurance premiums for those currently insured, I guess there are a couple categories of effects. One is, to the extent that the transformation that we're discussing takes hold over time, that is the -- the biggest driver of premiums over time is the rate at which health-care costs are growing. And so it sort of collapses to the same question.
But there is a more immediate set of impact -- effects that are likely to affect those with current -- currently with insurance. First, by reducing uncompensated care -- that is, by reducing the number of people who are uninsured, whose costs are shifted onto those who are insured -- you will help to hold down or perhaps even reduce premiums for those who are currently insured.
Second, there are a variety of administration -- administrative simplifications, (forms ?) and what have you, that are associated with the overall health-care reform effort that will help to take administrative costs out of the system and thereby also help those currently insured.
And then finally, actually -- and something that hasn't got as much attention as it deserves -- there are a growing number of local insurance markets that are excessively concentrated -- in other words, that are not fully competitive, and if you adopt the typical antitrust measure of 1,600 on the Herfindahl index, the share of local insurance markets -- anyone who got that in the room -- anyway -- (laughter) -- the share of local insurance markets that are concentrated by that standard has increased dramatically over the past couple decades. By introducing the exchange and/or a public option, you are expanding competition in those markets, and that should help to reduce premiums.
For businesses, I think the key driver are not only those things but frankly, again, what's happened to the rate of growth of health-care costs, over time. That is the key thing that is -- that we need to keep our eye on after 10 or 20 or 30 years.
And I'm going to come back again and say something that I mentioned. We -- this is -- it is extraordinarily difficult to imagine bending the curve on health-care costs without a change in the structure of health care -- digitized, using information more intelligently, changes in financial incentives, and a change in the policy-making process through which we affect those things.
So I think it's easy to say, "Well, this won't work, that won't work, this won't work, that won't work." But unless we're trying all of those thing and then have a process through which we are learning and adapting, it's hopeless.
And so a huge change here, not only the stuff that was already done as part of the recovery act, the $19 billion for health information technology, but changes, again, in the process through which we set health-care policy, I think, is absolutely essential to businesses, and frankly the same answer for government. I would note it's not just the federal government but state governments that are struggling with health-care costs. Medicaid costs are assuming a larger and larger share of state budgets, and that's causing problems elsewhere, like in higher education.
HUBBARD: Let me ask a question from one of the national members, Peter, Katherine Ward, from San Diego, who wants you to channel empires. So think about your inner Crassus; not Pompey for you, since you just killed the F-22.
But one of the popular schools of thought is that history has shown that the powers of empires of the past was heavily dependent on their continued economic strength. The deterioration of their economies foretold the decline of their international political power as well. Not to say that the U.S. is an empire, but what do you think of that argument? If it makes sense to you, how are you finding that set of concerns is influencing the way you construct and present to the public your efforts on the budget?
ORSZAG: Well, I think there's no doubt that economic performance has a variety of effects in foreign policy and national security, in the role of a nation in the world. And so I suppose a motivation for sustained economic growth beyond just the well-being of -- you know, the direct economic effect is that it facilitates a variety of other effects, including the role of the United States in the global economy and in the world.
I guess my point would be, we have gone through a variety of cycles in which a consumer-led economy went through a boom and a bust and a boom and a bust. We do need to move towards an economy in which we instead lead with saving and investment. There's no good outcome that comes from the world's leading economic power on a sustained basis saving 1 percent of its national income, which was what was happening for the past decade or so. That needs to change over time and we need to move towards a higher-saving, investment-led economy, because that's the only sustainable future.
HUBBARD: Okay. Sir?
QUESTIONER: Vijay Vaitheeswaran from The Economist. Thank you for your comments.
A question about health costs towards the end of life. A significant share of health spending does come in the month before the end of life. Some have observed that the U.S. makes a disproportionate share of spending through technological interventions, heroic interventions, arguably, over-invests in this area, and that we can't come to grips with health inflation until we change the social compact on that front.
Others argue that in fact this gets great outcomes on over-65 or over-80 measures, unlike many other health metrics the U.S. does better than most rich countries, and this is very popular. Everyone wants to save granny with the last possible penny when it's perceived to be someone else's penny that's being spent.
I wonder how you think about this problem. Do we over-invest? And how do we come to grips with this large part of the puzzle?
ORSZAG: Well, as you noted, a very significant share of spending does occur near the end of life. And frankly, a lot of the variation that I was discussing -- in fact, the examples I gave were for the number of days in hospital in the last six months of life. So by definition, that was speaking to the type of care provided towards the end of one's life. And it's not just days in hospital. Remember NYU Medical had 31 days, and Stanford Medical had 12. And that's a very dramatic difference.
I think the question we really need to be asking is, especially in those settings, what is actually in the patient's best interest in terms of the quality of care delivered? I, frankly, think a lot of the world's best medical centers -- Stanford, Mayo Clinic, Cleveland Clinic -- are doing a better job at delivering effective, high-quality care without excessively high costs.
So another way of putting it is, it's not just the -- I don't want to be put in this sort of green eye-shade, we have to save money towards the end of life; but rather, who would want to spend 31 days in the hospital if you could be treated just as effectively, if not more, with 12 days in the hospital? Who would want lots of unnecessary tests, which pose risk, if they're not actually helping you?
And so we need to be much more aggressive at figuring out why those practice norms vary and what's driving them. And I think in a lot of cases it's because we don't actually know what works and what doesn't, and we have a payment system that accommodates doing more even if it doesn't do anything.
And it's stunning how part of that involves moving towards a digitized health economy. I'll give a little vignette which I just find quite striking. If you have -- if you go to a hospital and say you have lower back pain, it's possible that there's a problem with your nerves or with the bone. And up at Mass General, they hadn't really digitized the treatment patterns. They finally did and started comparing what happened.
It was almost random whether you went into the neuro or the musculoskeletal part of the hospital. It turns out the rate of spinal MRI ordering was dramatically different depending on what modality you entered the hospital through. Didn't make any sense. They finally sat the radiologists and others down and said, let's develop a protocol, narrowed the variation, and reduced costs.
That's a little vignette. That has to happen time after time after time again. And we won't get there unless we have more universal health IT, a system for doing those kinds of evaluations, and, frankly, a payment system that doesn't just reward more spinal MRIs; because again, if you don't need a spinal MRI, you don't want to get one.
HUBBARD: Memo to New Yorkers: Columbia Presbyterian is kinder and gentler --
ORSZAG: Yes. You guys did all right. (Laughter.)
HUBBARD: (Inaudible.)
ORSZAG: I'll take that back. You did all right.
HUBBARD: (Inaudible) -- the Budget Committee.
Yes?
QUESTIONER: Can I do something little unconventional? I'd like to ask a question to everybody in the room, most of whom have health insurance or, as employers, pay for the health insurance of others. And I'd like to see a show of hands on those who feel like the pending proposals will benefit them, either as insureds or as employers.
QUESTIONER: (Off mike.)
QUESTIONER: When? Any time in the next five years, let's say. And a show of hands who think that the costs are going to outweigh the benefits of the proposals on the table? And a lot of "don't knows." Okay.
HUBBARD: Now you're not voting on the inefficiency of a plan. You're letting me know you want to ask a question. Yes, ma'am?
QUESTIONER: Esther Dyson. On this same topic, it seems to me the real problem is not the cost of care is bad, but the real issue is the need for care in the first place. I have a couple of impractical proposals. Maybe you could come up with something better.
One is to train unemployed workers as gym teachers. Another is to start taxing high fructose corn syrup and other things like that. Can you come up with something better that addresses not the crisis, but the cause of the crisis, which is the unhealthiness and the chronic, self-imposed diseases?
ORSZAG: Well, let me say two things, or several things. First, you're absolutely right that the vast majority of the determinant of your health is not the health-care system, but rather a little bit your what you inherited, and a lot your behavior -- your diet, exercise, attitude toward stress and what have you. And the question becomes how we can be moving towards encouraging healthier living -- which, by the way, most of us say we want to be doing, and yet in practice it can often be difficult.
And I think there are significant steps we can be taking. First, the recovery act included a more than billion-dollar prevention and wellness fund, which will start helping to some degree.
Second -- and I guess I'll just back up. There are a lot of things that companies can do, that households can do, to boost healthy living. For example, one study suggested the best way to get middle-aged men to eat fruit is to put it on the same shelf as beer. (Laughter.)
In retirement saving, we have learned -- in retirement saving, we have learned that the best way of getting people to save is not the traditional Econ-101 approach of creating tax incentives and matches for them, but rather to make saving automatic, simple and easy, and then allow you to default out of it.
And I think that insight -- I like to say I feel like I was mis-trained as an economist, because the Econ-101 approach to life, where everyone is a super-rational -- you know, a supercomputer, walking around constantly processing information and optimizing their lifetime path, doesn't -- you know, is useful for some purposes, but not really. And we need more psychology and sociology, just from a practical purpose -- perspective, because it works better. So retirement saving is the great example. The Econ-101 approach of offering a match or a tax incentive has much less bang for the buck than having workers automatically in a 401(k) plan unless they opt out.
Similarly, in health, there are lots of things that we can be doing in the -- and the evidence is overwhelming. I use the fruit example. It's a little bit cliched, but it is true that putting fruit at the beginning of a cafeteria line, instead of at the end -- which is not a government policy decision; it's someone deciding where the fruit is -- dramatically boosts fruit consumption. Making it easier to exercise and creating incentives to exercise encourages exercise. There's lots that we can be doing to encourage healthier living, not all of which -- in fact, frankly, probably most of which -- is not public policy.
And then, finally, I would say, regardless of what we do there, we still need to address the dramatic variation that we have in the health-care system, that once you, quote, "enter it," you're treated in dramatically different ways depending on, you know, what hospital, doctor, or region you're in.
And what I find fascinating about this is, this is not a theoretical discussion. We have examples in the United States of high-quality, low-cost providers and systems. And the question is how we make the rest of the United States look like those places, not make the United States look like some other country. If we could simply make the entire health-care system look like the best practices that already exist, we would have gone a very far way.
HUBBARD: Sir? In the back.
QUESTIONER: Nick Platt, Asia Society. Can I change the subject? Clean energy is one of your five pillars.
ORSZAG: Yes.
QUESTIONER: And I'd like to know what kind of statistics and figures and growth projections you are using in discussing this fifth pillar.
ORSZAG: Well, first, the recovery act included a variety of key steps that will be necessary to move to that clean-energy future. So for example, we have a lot of wind energy in the Dakotas that you can't move to the population centers of, you know, the Midwest because there's no high-voltage transmission lines that will move the wind energy to where people -- well, there are people who live in the Dakotas, but where more people live, in Chicago and what-have-you. The recovery act included significant funding to move towards building those transmission lines; putting in place smart meters in houses, so that we can have a more intelligent electrical grid, which is part of the solution.
It's also the case that you have legislation that's already moved through the House of Representatives that would address part of the clean-energy future, which involves carbon dioxide emissions and in particular would create a cap-and-trade system.
I think many -- many academics and many people, you know, associated with places like the Council on Foreign Relations, have recognized the crucial importance of steps like that in moving towards a clean-energy future.
HUBBARD: I think we have time for one last, quick question for Peter.
David Malpass, right here.
QUESTIONER: Hi, David Malpass, with Encima. Thank you for that presentation. Right now, the tax deduction goes to the corporation. That divorces the decision from the individual. Shouldn't the tax deduction go to the individual? And is there any plan to have any transition out of this separation that we have right now?
ORSZAG: Well, I mean, with regard to health insurance, the key thing is there's a deduction for employers -- that's the case with wages, too -- but there's also no taxation at the individual level. So it's not that it's -- the issue isn't really the deduction at the corporate level. It's that that form of compensation is treated differently at the individual level than other forms of compensation. That's, I guess, one aspect of things.
Relatedly, there's the question of whether the employer-based system -- there's an academic debate over the merits and demerits of the employer-based system. I guess what I would say is, I think it's clear if we're -- I'm just going to impose a little political economy here. Most people are very satisfied with the coverage that they have. The coverage that they have is employer-based, and so the employer-based system is going to remain the mainstay of our health-insurance system. Period.
HUBBARD: Peter, thanks for helping us be healthy, wealthy and wise.
ORSZAG: (Laughs.)
HUBBARD: Give him a big hand. (Applause.)
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