>> charlie: welcome to the program. a conversation tonight about the economy with the former director of the office of management and budget peter orszag. >> the fundamental problem is the economy is growing slowly and also we just went through a traumatic period. i mean total private sector borrowing went from plus-0% of the economy in 2007 to minus 15% of the economy in 2009. it is impossible to go through that kind of trauma and not have emotions that are raw and, you know, heightened emotions. >> charlie: peter orszag for the hour next.

captioning sponsored by rose communications from our studios in new york city, this is charlie rose. >> charlie: peter orszag is here. he is as you know the former director of the office of management and budget. earlier this summer it... he became the first member of president obama's cabinet to announce his resignation.

he played a key role in the stimulus bill and health care reform. he saw the budget deficit levels grow to its highest level since the second world war. he is a guest columnist for the "new york times". i am pleased to have him here to look back and to look forward. so welcome. >> good to be here. >> charlie: one of the big questions for the policy arena today is what to do about the bush tax cuts. >> yes. >> charlie: you step forward and say, here's what i think would be the wise thing to do: extend both of the tax cuts for two years and then eliminate both of them. >> 2015, 2016, 2017, in that range, we face a very large projected deficit. much larger than can be addressed just on the spending side of the budget especially because changes to social security, for example, will always be gradually phased in. so the traction you get on the spending side of the budget by, say, 2015 or 2016 is smaller

than you'd think. there will have to be a significant revenue piece. observation one. observation two. very unlikely you're ever going to get 60 votes in the united states senate for a revenue increase. so the question is, is there a 34-vote option in the senate for a revenue increase? the answer is yes. you don't make the tax cuts permanent. if you don't make the tax cuts permanent, we'll come back to that piece in a moment, legislation that made them permanent would then require... it would have to be passed. if the president wanted to veto that legislation, that's the key piece. if the president vetoed that legislation, you then only need 34 votes to block the senate from overriding the veto. the difference between 60 votes and 34 votes could be the key to whether we get additional revenue that we need. that 26-vote delta is huge. and so my view is we can't afford to make the tax cuts permanent. we need to preserve that 34-vote

option. we should do that. that means not making the tax cuts even for the middle class permanent. if the price of that is that we extend everything for two years, that's an acceptable price to pay. what's even better in my opinion if we condition... extended only to the middle class for two years. >> charlie: which is what the president might do. >> maybe. i think the more important issue is not making the tax cuts permanent now because we are then locked in to a path off of which the only option is to get lucky or we're in a fiscal crisis. >> charlie: including the middle class tax cuts. >> correct. >> charlie: that's where you may differ with the president in terms of making the middle class tax cuts permanent. >> the administration policy is that we should. >> charlie: you differ with the president. >> that would be a fair description. >> charlie: that's what i just said. here is what is interesting about you from knowing what you know about budgeting and having been there right in bowls of the beast so to speak

that we cannot live with a deficit as long as we have the level of middle class tax cuts. the middle class has to pay more taxes than they're paying now. otherwise we will not be able to deal with the deficit. that's the bottom line. >> that is the bottom line. >> charlie: from the director of management and budget. >> i wish that were not the case but that is the case. >> charlie: is it also the case that that won't be enough? >> that's not enough. >> charlie: therefore we're going to have to reach out and do other kinds of taxation. >> i would say that does get you for 2015 or 2016 if you take the correct projections that does most of what is necessary. now the problem is the problem gets worse after that. so more will be necessary but it would largely address, it would stabilize debt as a share of the economy out five.... >> charlie: what is that, 3%? you can get it under 3%. >> yes by doing that and then nipping and tucking.

>> charlie: ideal is 1% or so? >> the ideal is, you know, over the cycle actually a balanced budget over the business cycle. but an alternative objective is to make sure debt is not expanding as a share. that would require something like 3% of g.d.p.. >> charlie: you talked about earlier political reality. will there be a political reality in which america will hear from a gifted politician the argument and an acceptance of the argument that unless we have more taxes, we cannot deal with a structural component of our economy which will do bad things to us over the long run? >> well, look, i hope so. the reason is that without that, we're off to a fiscal crisis. and that's a situation we never want to find ourselves in. now the other benefit that we didn't discuss is if you need additional revenue simply canceling the existing tax

cuts after some period of time after? >> after two years. the key thing is that there's a definitive ending period in that there's a commitment very clear up front including a veto threat that you not extend it thereafter. the other benefit of that is all that would do is return the tax code to the form that.... >> charlie: in the clinton years. >> in the 1990s. you can't argue that that will cause economic ka catastrophe. in the highly politicized debate over what happens when revenue changes take effect it's beneficial to be able to point back and say all we're doing is return to go the 1990s. >> charlie: returning means the following. if you today eliminated the tax cuts for people who made more than $250,000, you would gain how much revenue? >> about $250,000? about $35 billion in the first year. $700 billion. >> charlie: over ten years.

if you did it for today, if you eliminate the middle class tax cuts that the bush administration and the congress gave us, you would enhance revenue by how much? >> a little north of $2 trillion. >> charlie: $2 trillion. >> over ten years. >> charlie: let me go to the stimulus in terms of where is the economy today and what does it need to avoid a double dip and what does it need, you know, to reach some kind of growth level that puts us on the right track? >> i think the biggest risk we face is not a double dip, an outright double dip but rather a period of very slow growth which unfortunately has been the historical norm following economic downturns that were caused by crises. if you look back at the historical experience that downturns caused by problems in the financial sector as opposed to monetary policy changes, the federal reserve actually engineering a downturn, they tend to be

somewhat longer lasting and have more sluggish growth the way out. >> charlie: over a five, six, ten-year period? >> this is what the international experience suggests. >> charlie: in japan and places like that. >> not only there but that is perhaps the most prominent example. we're now at a stage where we are enjoying positive economic growth so that's a good thing. the economy is no longer declining. the jobs market is weaker than it would be desirable. and there are some head winds. so the recovery act, which by the way the evidence suggests has been beneficial and we can come back to that is.... >> charlie: the recovery act. >> the stimulus. that's coming off line. it will no longer be an impetus tore growth. state and local budgets face significant deficits that will need to be closed. that will impede growth. we've had kick or benefit from the inventory cycle as firms

restocked their inventories. that's now fading. those three things are embed i ams to growth. >> charlie: the stimulus.... >> largely passed and state and local deficits. those are three over the next 12 months or so forces that will head winds against the economy. >> charlie: what are you say something. >> in addition to the structural. >> charlie: what can the president do? >> well, i mean there are.... >> charlie: or what can the congress do? or what can the private sector do? >> i think there are some limited steps that the federal government can take but that one of the things that has to happen at this point is we just need to get into a different equilibrium or a different set of expectations. we're stuck in this slow growth phenomenon. firms are investing very substantially, for example, in computers so equipment and software investment is booming. >> charlie: they're not building new plants. >> but they're not building new plants or hiring workers.

the question is how do you address that longer-term risk aversion? i personally think, even though you don't see it in bond rates right now, i personally think that addressing our medium-term fiscal problem would help a bit because it resolves some of the uncertainty facing the economy. there are also the psychological and sort of easier fixes. the complaint that corporate america has about relationships with the administration could be made better. i mean that's a fixable problem. and regardless of whether it's legitimate or not it does seem to be affecting.... >> charlie: define what the problem is. and define how you can fix it. >> i think the fundamental problem-- again i want to say i think this is a secondary issue. but the fundamental problem is that the economy is growing slowly. also we just went through a traumatic period. total private sector borrowing went from plus 30% of the economy in 2007 to minus 15%

of the economy in 2009. it is impossible to go through that kind of trauma and not have emotions that are raw and, you know, heightened emotions. that having been said, the question is are there specific things that corporate america is complaining about that are fixable? so the complaints that one hears... and i should say when i was in the administration i recognized and we all recognized that this was a problem. since i've left and have had a variety of opportunities the talk to outsiders i'd say it's worse than i thought. >> charlie: i hear that everywhere. >> i thought it was an eight and it's really a ten. >> charlie: i hear it on main street too not big corporate places. >> some of the complaints are there's no one in the administration who had been a ceo or... again, i think the key thing is whether regardless of whether they're legitimate complaints they are affecting corporate behavior.

>> charlie: the perception is there's no one like us there so therefore you don't understand. >> you don't get us, right. so therefore we're nervous and therefore we're not going to hire or make investments. >> charlie: also you add to that the sense of i'm not sure what the regulatory climate is going to look like. >> right. >> charlie: as these regulations come down from health care and other places. >> right. again, i think this is a... it's presented as "the" most important issue affecting hiring. i don't think its is the most important issue. >> charlie: what do you think the most important issue is? >> that demand is growing so slowly that firms are holding off on hiring. that having been said, this other problem may be easier to fix than that... primary issue. presumably there are things that can be done not only on the regulatory front but frankly, you know, let me put it this way. if corporate america believes that having a former ceo in

the administration would significantly spur hiring it's in the administration's interest to make that happen. >> charlie: of course they would do it obviously. they know the political repercussions of not enhancing hiring. do they not? >> yeah. >> charlie: 10% cannot... 10% unemployment and an attractive political future do not exist together. >> the unemployment rate because i think it speaks to this tension. normally one would think at a 9.5% unemployment rate there would be substantial zdeno feeb i can't and a lot of complaints about the trade deficit and international competitiveness. instead it's all directed to wall street and ceos. and so one of the things that we're living through is the downturn that has a different political dynamic to it than ones in the past, and that too adds to this tension because the administration says look at what we're protecting you against. look, we're stepping in the middle of this very explosive

situation. corporate america sees it a different way and says you're exacerbating. what have you. the point is given that the drama over popular anger hat wall street and ceos, that relationship was always going to be a bit frosty. >> charlie: i don't understand. are you saying or do you believe that the reason the administration and the president did not hire some ceo and sit him outside the oval office-- or her-- is because they didn't believe the country wanted to see them cozy up to either wall street or.... >> look, i don't know. >> charlie: why haven't they done it? >> i think one of the issues is during the midst of a very intense situation and making personnel changes is often difficult in that kind of setting. there may well be an opportunity given, you know, the normal turnover in staff

to make this kind of decision should the administration choose to. >> charlie: you know how it operates. pull back for a moment. >> sure. >> charlie: you had been in government before. >> yes. >> charlie: you had been in the congressional budget office so you knew how government operated. what was different this time? i mean, did... having the role that you did, the access that you did, what did you see and learn about the way government functions? >> i think for some underlying structural reasons the policy making environment is more difficult than it's ever been. technological change leading to polarization where people get their news from, unintended consequences. >> charlie: the media. >> and 24-cycle. polarization and tempo. unintended consequences of gerrymandering leading to even more extreme polarization in

the house, for example, than among the population at large. and then unintended consequences of airline deregulation and improvements in technology meaning that members of congress no longer spend as much time in d.c. and that change in the community bears that. at the congressional budget office, it was bipartisan by nature. so my role was much different and i could form relationships with both republicans and democrats. much harder to do in the atmosphere that surrounds the current politics. >> charlie: what might you have done if the political environment had not been the way it was? >> i don't think it's a question of what i would have done but whether.... >> charlie: what the administration might have done in terms of its initiatives? >> you know, arguably without... i know there's been a lot of discussion about the stimulus, the recovery act arguably. were it not for congressional constraints, that could have.... >> charlie: it would have been

much larger. they said it should be $1.3 billion trillion. didn't christine roamer recommend that? >> there were a variety of suggestions floating around for a larger. >> charlie: i hope you wouldn't (both talking at the same time). >> i'll be candid about this. i don't think you could have gotten.... >> charlie: did roamer recommend a $1.3 trillion. >> it was widely reported that she did favor a larger stimulus. i don't want to get into the internal dynamics. >> charlie: why not? >> because i respect the confidentiality of the discussions. >> charlie: we're not asking you to say.... >> if she wants to say.... >> charlie: there was a policy debate. you'll go with me this far. >> fine. >> charlie: there was a policy debate within the council that you were operating with. >> yes. >> charlie: having to do with economic advisor, having to do with secretary of the treasury and having to do with larry summers, the president and christine roamer about the size of the stimulus. >> correct. >> charlie: you made the

decision to go with $800 billion rather than $1.3 trillion because of what you thought was politically possible to get through the congress? >> i think the judgment that the recovery act could not have been much larger than it was is absolutely right. >> charlie: it was right? >> because i was in the room when senator reed was negotiating with the moderate republicans that were needed to pass the bill. i do not think you could have gotten a dollar more. >> charlie: you're talking about the senate. it wasn't the house. it was the senate. >> the senate. ha