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Peter R. Orszag's Confirmation Hearing Statement

Speaker: Peter R. Orszag, Adjunct Senior Fellow
Published January 13, 2009

The U.S. Senate Committee on Budget held the confirmation hearing for Director of the Office of Management and Budget nominee Peter Orszag on January 13, 2009. Orszag's testimony follows below. For a webcast of the hearing, click here.


Mr. Chairman, Ranking Member Gregg, members of the Committee, I am honored by the
opportunity to come before you as President-elect Obama’s nominee for Director of the
Office of Management and Budget. I am also particularly pleased that the President-elect
has announced his selection of Rob Nabors as Deputy Director of OMB. If confirmed,
we will be working closely together, and I look forward to that.

Thank you to Chairman Spratt and Congressman Ryan for introducing me at this hearing.
For the past two years, I have had the privilege of serving as Director of the
Congressional Budget Office. In that capacity, I worked closely with members of both
parties, including Mr. Spratt and Mr. Ryan. I hope to continue that spirit of
bipartisanship if I am confirmed as OMB Director, since we will need to work together to
tackle both the short-term and long-term challenges we face.

I am also delighted this morning to be joined by my daughter, Leila, and my son, Joshua.
My children have already informed me that they find much of what I spend my days
doing to be terribly boring. So if they depart early, please know it is only an indication of
their views regarding their father’s occupation.

Mr. Chairman, this hearing is being held at a momentous time. In the short run, the most
pressing challenge is to jump-start the economy out of the worst economic crisis since the
Great Depression. Over the longer run, a key challenge is putting the budget on a more
sustainable course. If the Senate confirms me as OMB Director, I look forward to
working with each of you in the months and years ahead to address the twin challenges of
economic recovery and fiscal responsibility. To meet both challenges, we need to make
government work better and smarter than it has in the past.

Short-Term Challenges

The short-term economic outlook we are inheriting at the beginning of 2009 is bleak, and
dramatic action is necessary to address it. The economy lost more than 2.5 million jobs
in 2008, and, without policy interventions to bolster aggregate demand, it could lose
another three to four million jobs over the coming year. The President-elect’s economic
advisers expect that, unless we take action, unemployment will rise to over nine percent
and will return only very gradually to its normal pre-recession level. As Figure 1 shows,
the unemployment rate in the final quarter of 2010, though still elevated, would be much
lower if we act than if we fail to do so. (Figure 1 is taken from a recent analysis by
Christina Romer and Jared Bernstein, available at www.change.gov.) In the absence of
action, the gap between how much the economy could produce each year and how much
is actually being produced amounts to roughly $1 trillion a year – which amounts to an
average of about $12,000 a year for a family of four.

The economic downturn originated in the bursting of the housing bubble, but it has now
spread much more widely than the housing market. Financial markets remain under
stress, confidence has eroded, and economic activity in the rest of the world is slowing.
We need to act. In particular, during periods like the current one, the key impediment to
growth is aggregate demand: with existing capacity, the economy could produce
substantially more goods and services if there were more demand for them. (By contrast,
over the medium to long term, the key factor driving economic growth is the capacity of
the economy to produce goods and services rather than the demand for them.) Presidentelect
Obama’s economic recovery plan is aimed at promoting economic activity by
helping to fill the gap between aggregate demand and existing capacity, and doing so in a
way that will also help to expand capacity in the future.

As we act to address the economic crisis, we must be also responsible stewards of the
public fisc. As the President-elect has already discussed, the plan should include
significant transparency, accountability, and oversight. The goal is to set a new standard
for how we spend taxpayer dollars.

Such heightened transparency and oversight is particularly important given that we are
inheriting a daunting fiscal position. Even without steps to mitigate the economic
downturn, the deficit we are inheriting for the current fiscal year, which began last
October, is likely to exceed $1 trillion – more than eight percent of Gross Domestic
Product (GDP), and the largest in our history with the exception of the Civil War and the
two World Wars. Even with the prospect of such large deficits, however, nearly every
leading economist agrees we have no choice but to act aggressively to expand aggregate
demand and address the macroeconomic crisis. That will necessarily imply even larger
deficits in the near term.

Longer-Term Challenges

The combination of the economic recovery package, interventions to stabilize the
financial and housing markets, and the normal dynamic of the economy over the business
cycle should help to bring back a period of economic growth. And once the economy
recovers sufficiently, we must shift our attention to our medium- and long-term fiscal
challenges. The simple fact is that, over the long term, the federal budget is on an
unsustainable path. Even after the economy recovers from the current downturn and
under current policies, the nation faces the prospect of budget deficits that, we believe,
will measure about five percent of GDP over the next five to 10 years. Over the longer
term, the situation is expected to grow even worse as health care costs continue to rise
and the baby boomers retire. Today we enjoy significant maneuvering room in
responding to crises because our debt is viewed as the safest investment in the world.
Unless we change policy, however, over the long term that perception could shift – which
could not only trigger a fiscal crisis, but also severely limit our ability to respond flexibly
to any future economic difficulties.

The principal driver of our long-term deficits is rising health care costs. If confirmed, I
look forward to working closely with Tom Daschle, the President-elect’s nominee to
serve as Secretary of Health and Human Services and to run the new White House Office
of Health Reform. I share his passion for getting more value from our health care system.
Let me provide just one telling fact: If costs per enrollee in our two main federal health
care programs, Medicare and Medicaid, grow at the same rate as they have for the past 40
years, those two programs will increase from about five percent of GDP to 20 percent by
2050. That’s roughly the entire size of the federal government today. (As the
Congressional Budget Office and others have noted, there are reasons to expect cost
growth to slow in the future relative to the past even in the absence of policy changes.
But the point remains that slowing health care cost growth is key to our fiscal future.)
Rising costs for Medicare and Medicaid, in turn, reflect rising health care costs across the
public and private sectors. Therefore, we need to be thinking about ways to slow overall
health care cost growth, rather than just reducing the rate of growth in Medicare and
Medicaid. Indeed, were we to try to slow Medicare and Medicaid spending alone without
slowing the rate of growth in health care costs system-wide, we would simply create
massive access problems for Medicare and Medicaid beneficiaries, since providers would
be increasingly unwilling to serve those populations relative to others. Medicare and
Medicaid policy changes can help to lead the way. But those changes will not be
sustainable over time unless they also help to drive down cost growth in the rest of the
system.

Improving the efficiency of the health system, however, has benefits that extend well
beyond the budget. Health care costs are already imposing severe burdens on state
governments – on average, health care absorbs about a third of state budgets, even more
than is taken up by education. Moreover, health care costs are reducing workers’ takehome
pay to a degree that is both unnecessarily large and perhaps under-appreciated.
There is a ray of hope. We appear to have massive opportunities to reduce health care
costs without harming health outcomes. Significant evidence suggests that higher cost
does not always mean higher-quality care. As I have noted before, perhaps the most
compelling evidence of this fact is that per-capita health care spending varies widely
across the United States, but the very substantial variation in cost per beneficiary is not
correlated with overall health outcomes. Thus, embedded in the country’s fiscal
challenge and the current burdens on state governments and workers are opportunities to
reduce costs without impairing health outcomes overall.

Some of the many steps that would help to improve the efficiency of the health system
include the following:
– expanding the use of health information technology (IT) and electronic medical
records, which is a necessary, but not sufficient, measure to improving the quality and
efficiency of the health care system;
– expanding research on “comparative effectiveness” of different options for
treating a given medical condition, which could provide information on both medical
benefits as well as costs;
– providing financial incentives for better care rather than more care (currently,
financial incentives for providers and patients encourage or facilitate expensive treatment
and procedures, even when there is little evidence that they are more effective than
existing therapies); and
– providing incentives for prevention (such as immunizations and screening tests)
and healthy living (such as avoiding obesity and smoking) so that people have fewer
health care problems throughout their lives.

If I am confirmed, I look forward to working with Senator Daschle and with all of you to
make these ideas a reality.

Better Performance

President-elect Obama has vowed to improve the performance of the federal government.
We plan to build a government that not only performs better, but also provides a historic
level of transparency to both Congress and the public about the information it holds. I
would like to take a moment to provide some of our initial thinking about priorities.

First, as you know, President-elect Obama has chosen Nancy Killefer to serve as Chief
Performance Officer and Deputy Director for Management at OMB. Under her
leadership, we will create a set of performance metrics that are outcome-oriented and in
line with public expectations, as well as a central repository of performance data that will
be available to departments and agencies, Congress, and the general public. We view
these data as an important source of information for improving performance across the
federal government. We also plan to build a team of management experts within OMB
who will work with individual agencies to improve the skills of their workforce. We will
launch pilot programs with individual agencies to serve as demonstration projects
through which we can test our approaches to improve program effectiveness and
efficiency, share best practices, and further improve performance.

Second, we will strengthen the federal government’s use of information technology. That
will not only help us deliver services more effectively, it will enable us to gain
efficiencies in federal contracting and acquisition. The OMB officials with responsibility
for information technology will work closely with the President-elect’s choice for Chief
Technology Officer, so that we can better use technology to deliver services.

Third, in the area of human capital, we will work to restore the prestige and build the
capability of the federal workforce and improve the management of federal contractors,
who are our partners in the private sector. With half of the federal workforce expected to
retire over the next 10 years, our government will lose unprecedented amounts of
experience and expertise. We want to broaden the appeal of public service, and we
believe we can do so. In his campaign, President-elect Obama inspired millions of
Americans of all ages. We want to do our part to make government a career of choice for
more Americans.

Finally, we need to re-examine how we can best protect public health, the environment,
and public safety. We need a fundamental transformation of national regulation, one that
rejects old-style remedies in favor of flexible, creative, user-friendly responses that
increase benefits, reduce costs, and are suitable to the distinctive challenges of the
modern era. I am pleased that the President-elect has announced his intention to
nominate Cass Sunstein, one of the nation’s leading law professors and a specialist on
regulation, to run the office within OMB responsible for coordinating regulatory policy.

Conclusion

Mr. Chairman and members of the Committee, that concludes my prepared remarks. I
want to reiterate my commitment to working across party lines to address both the
immediate and long-term challenges we face. I would be pleased to address any
questions you may have.

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