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. >> charlie: right. in other words, there was nobody stepping forward to say let's do what's right for the country. you believe we needed $1.3 trillion. >> don't forget also. just even weeks earlier the discussion had been about a $300 billion. the numbers were moving very rapidly. what is astonish ing is that the recovery act was enacted so quickly. the normal complaint about these kinds of fiscal policy moves is that it takes congress forever to get them enacted. not only do i not think it was possible to go much larger but the attempt to do so would have strung the thing out. >> charlie: beyond the politics suppose it was politically feasible. a $1.3 trillion stimulus program. what we... what would we be looking at today in termsate

economy. >> it would have helped. put the politics aside, analytically to the size of the recovery act because the amount of money you can get out the door quickly that will boost the economy immediately is quite limited. maybe $200, $300, $400 billion. >> charlie: immediately means? >> within a year. the issue then becomes you start layering on tax cuts part of which are saved rather than spent so they have lower bang for the buck. you start layering on things that spend out more slowly like infrastructure spending. when it does get out it's great but it takes a while to get out the door. as you get bigger and bigger your bang for the buck up front goes down. that would be the trade off. >> charlie: here's conventional wisdom. >> for what it's worth. >> charlie: for what it's worth. i think i may have talked to you about this before. but stimulus program was written by powerful committee chairmen and the speaker of

the house. and that they poured every spending proposal that they've been in love with for their entire career in congress. and it did not have, therefore, the business come... the weiss come of a stimulus that would do what was intended for the economy and create jobs which would have put this president in a much more attractive political place. >> well i think the conventional wisdom on that is somewhat off. let me parse that into two pieces. >> charlie: do you think it's the conventional wisdom? >> i think it's a big part of the threat in the conventional wisdom story. two parts of that. first the evidence on what the recovery or the stimulus actually has done. if you look at the congressional budget office analysis of the recovery act, it suggests that somewhere between 1.5 and 4.5 percentage point impact on economic growth in the second quarter of this year. very large effects.

similarly that the spendout rates that were initially aimed at that you'd get 70% of the money out by then, this fiscal year largely on track. very positive impact on employment too in the millions of additional jobs added but for the recovery act. the problem is the situation in late 2008 was much more worse than anyone know or not anyone there were some critics out there who correctly analyzed it. but back to the conventional wisdom. the situation in late 2008 was much worse than the conventional wisdom at the time suggested. while the recovery act has helped we were in a much deeper hole than, for example, the blue chip economic forecasters suggested. on actual design. >> charlie: this is the end of 2008? >> so the... i remember it quite well. september 16, 2008 i remember quite well the discussion at that point was based on a set of economic assumptions and projections which were in line with the blue chip at the time that is the consensus of

private sector forecasts which were all much more optimistic than the economy was actually performing. at that time. >> charlie: which raises this important question. you have to make evaluations about budgetary proposals based on information that you are given and that you create yourself. did you as a policy maker have confidence in the information and that you... the information that you were given. >> confidence in the information that i was given in terms of it being accurately presented, yes. confidence.... >> charlie: not that they were trying to mislead you. we're going to pull one over him. it's not like the c.i.a. and weapons of mass destruction and stuff. >> i don't think i was dlibltly misled. >> charlie: in other words, nobody knew. >> i don't want to say nobody because whenever you say nobody then the people say i got it right. but the vast majority of forecasters and of economists were too optimistic at that

point. this raises a broader question which is, i mean it's easy to look back and kind of say we should have done this or that. you're making decisions in an environment in which there are political constraints lots of other things going on and huge amounts of uncertainty about not only what the world will look like but frankly what it already is looking like. >> charlie: i'm open to this idea because i just interviewed tony blair in london. i said what's the most surprising thing? he said how complexity was to make the right decisions. we're not talking about the war. a whole range of things. you're saying the same thing. >> absolutely. >> charlie: you're dealing in a land which you don't really know how bad it is. you don't really know what will work. you're having to make choices but you're not convinced they're going to produce what result you want. >> everything is focused on these like single estimates of, you know, the deficit will be $1.37 trillion when there are huge bands of uncertainty around them. everyone focuses on the

central estimate and that specific number as opposed to trying to take into account the fact that those numbers are really moving around a lot. the question then becomes how should you adjust your thinking if someone comes in and says the deficit next year will be $1.5 trillion? you know that means it would be between 1.2 and 1.8. how should you implement or what should you change in the way you approach policy decisions given that. >> charlie: how do you make your decisions based on a range of results? >> as an example. we were talking earlier about the projected deficit out in 2015, 2016. the projected deficit is 5%. economy. the 90% confidence, which is to say with 90% confidence i can say it's plus or minus 5 percent of g.d.p. so what i really should have said instead of saying the deficit is 5% of the economy, it's somewhere between 0 and 10. that gives you a sense of how wide the potentially range is and how much uncertainty there

is just five years ago. >> charlie: i had people from the administration say we wrote it. what they gave us is what we wanted. >> the divergence between what was enacted and what was, you know.... >> charlie: dired desired by the administration. >> look, in any piece of legislation there's always going to be some give and take and some things that were done that were actually... by and large it was in line with what the administration itself had come up with. >> charlie: therefore all those people who want to say the failure of this administration is they let the congress write a stimulus program they didn't like is not true. not true. you've got the stimulus program essentially you wanted. >> yes now the caveat. >> charlie: large because of the political realities. >> the caveat is even in internal workings to come up with the desired proposals, there was some recognition of what was feasible legislatively. in other words, so it wasn't just let's just come up with the perfect ideal optimal thing. it was here is a proposal we could live with that we think could pass. >> charlie: you haven't had a

lot of time to think about this i don't think, i doubt. but if you could rewrite the stimulus program today-- today-- and that's... would you have the same components in it? >> there would be some adjustments. >> charlie: what? >> well, i mean as an example i think we probably put too much into title 1 and education funding. we could have better spent it even within the education sphere in other components of education spending. you can go town the list. this would be-- and the reason i use the word adjustment is these would be tweaks and not >> charlie: tweaks. so if the president had come to you and said, mr. director of omb, i want to create the maximum number of jobs immediately or as soon as possible. the maximum number of jobs. that's why i'm stimulating the

economy. would you say to him today that's exactly what i gave you? or not. with some small tweak? was there something you guys did not do that would have created jobs at a more significant level? >> the one thing that i any many... the one thing i think many economists would say it would have been beneficial to have a larger share of the total would be assistance to state and local governments so they don't lay off workers. that has an immediate impact and it also helps to save jobs. now the problem is it's less salient. you don't see the road being built directly. >> charlie: rite rite right. >> in an ideal world that would have been a larger share of the total. >> charlie: you never believe the idea that if you have to go pay people to dig a hole and then fill it back up that's not smart. >> well prublably we can have a two-for where we're getting the people benefiting from

that and something useful. >> charlie: your operative idea was it would have longer- range benefit in energy, environment and energy, education and health care, correct? >> and those things will... i mean, for example. >> charlie: but not today and not tomorrow. that's why you're in trouble. >> although... look, that was a small share of the total package. it reflects the tension that we discussed earlier which is the stuff that gets out the door fast and has high bang for the buck, let's call it just for the sake of argument $400 billion or $500 billion. then you start layering on other things that will have some spendout in 2010, 2011, but it's not the... again, 70% was money will be out the door by the end of this fiscal year. >> charlie: right. how much? >> 7-0. >> charlie: the next 30 will take how long? >> it's spread out over 2012, 2013. the debate would be over that 30%. >> charlie: could you have

created a stimulus program that created a lot of jobs and you would say all the money will be out the door in two years? >> challenging but perhaps possible. it would require more focus on things like state and local aid. >> charlie: do you think the president wishes he would have done that now. >> another question is how much help would it have been in even in that situation let's say you're accelerating an additional $2 billion in 2010 to 2011 so $100 billion a year. that's, you know, roughly a little north of a half percent of g.d.p. in additional support. it's not the difference between a 9.5 mrs unemployment rate and an 6% unemployment rate. that was never going to happen. >> charlie: what happened in terms of your misprediction in unemployment? >> i think that comes back to the point that was made earlier about the economy being much worse in late 2008 than, for example, kristie roamer and the c.e.a.or frankly the vast majority of

the economists thought at the time. they were basing their projections off one level and it turns out it was much worse than that. >> when you're doing this, whether making decisions about a budget or about war and peace or afghanistan or whatever it is or whether making decisions about what is thought to be the nature of the health care reform package or the financial reform package, are you getting at people who walk in and say and are you listening to people from your staff or elsewhere who say no don't do it that way. do it this way. >> there's plenty of healthy debate. >> charlie: is there? >> yeah. there is plenty of healthy debate. now i think one of the... just returning to some of the discussion we had earlier one of the questions is were there enough different perspectives in that debate so there was plenty of healthy debate. whether the spectrum.... >> charlie: was wide snuff? well, was it wide enough? probably not. the fact that you would entertain the idea means it wasn't wide enough. >> i think that would be a

reasonable interpretation. >> charlie: here is the other thing that fascinates me about being at the level of government that you were at. do you have time to do some of the things that would have real long-range benefit? in other words, are you too much on a treadmill focusing on the emergency of the moment that you don't think about the kinds of pauses we might be thinking here that would change the fundamental issues that will bedevil us in the future? this is actually an area in which the congressional budget office job is dramatically different than the office of management and budget. at cbo there was enough time to look forward and try to think a bit more in the long term. at omb much less though. the director of omb spends two thirds of his or her time in the west wing effectively as a presidential advisor. in that situation, you don't

really have time to look out meeting the long term. so it depends on the government job. but the inner parts of the white house operation in particular your time is very constrained. >> charlie: did you change your mind having been where you were about some... the balance between private and public and how government policy can influence private sector contribution to the economy? >> i don't think that i changed my mind. >> charlie: did you learn something. >> i learned lots of things but i don't know that there was a mega story there. i learned lots of microstories not a deep philosophical shift. >> charlie: what was the most frustrating about it? >> i think what's most frustrating is the political environment in the sense that there is a lot of incentive on

both sides to take things and kind of go to the cheap shot and, you know, probably it's not the best way for us to be engaging in policy making. >> charlie: it seemed to me that this administration and david axelrod in particular pays a lot of attention to that noise. >> i don't know how to judge a lot versus a little. >> charlie: how about too much? >> when you're in washington, i think everyone in washington pays attention to that noise because the noise is really loud. our constantly bombarded. >> charlie: how would it affect you? >> i don't know that it directly affected me but it was one of the things that was affecting the environment in which we operated. >> charlie: meaning it included influenced the decisions you had to make or how you thought it would play out? >> it creates a reality that i don't think is just within the white house but that is across

the policy spectrum. that's probably not as healthy as it could be. frankly you then face this very ex-krurb yeahing choice which is you either engage in it because you can't just yield all that territory to noise makers. if you start to do that, it takes up a lot of your time. >> charlie: is the government dysfunctional? >> our political system is dysfunctional. >> charlie: meaning? >> meaning i think we have unfortunately gone to a system in which it's easy to go to the bumper sticker and we're not as... we probably never have been that great but we're not very good at dealing with gradual long-term problems. the challenge we face is many of them are the most serious problems we face whether our fiscal problem, climate change and so on and so forth are in the nature of a gradual long- term problem until they become

a crisis. we don't want that to happen. >> reporter: you can't change the emissions that go into the air overnight but you need a program and a standard and a goal. >> very hard to motivate change when the benefits are up and.... >> charlie: the pain is now and the benefits later. >> that's not a good political calculus. >> charlie: health care. >> yes. >> charlie: was it a mistake as some argue now? lots of them including david brooks on this program. to go for health care? >> look, at some point the health care system needed to change. >> charlie: did it need to be changed at a time of economic kris swris there's never a convenient time. i'm not going to argue whether... the other point that i think is worth making here is folks say you should have just focused on jobs. what in particular? >> charlie: the question is what should you have done that you didn't do? >> what specifically, you know, especially the irony, that

complaint is often coming from folks who are worried that the administration was already too active in other dimensions anyway. it's mostly a question of what could congress have been doing and that comes back to the fact i think you had max out what congress was willing to do with regard to stimulus. what else did you want them doing in that time. >> charlie: david brooks argues this. i'll give credit where credit is due. he felt there was a perception in the country that the administration did so much that there was some unease and it enhanced the unease about where the country was going. that somehow sort of too much to soon was not the right way to go. on the other hand, you had the chief of staff saying, you know, you can't fail to take advantage of a crisis. >> yeah but then the argument isn't you should have been doing more on specific policies to encourage jobs but rather the cost was almost a psychological one, that you... we're talking about x.

>> charlie: politics and economy have psychological dimensions. >> huge. in fact that's by the way a big, i think a huge problem in many endeavors is this desire for pure science, the pure it... one of the biggest problems in academics economics right now. the desire for pure mathematics when human beings are involved always leads you astray. that's true in medicine. it's true in economics. it's true in finance. >> charlie: there is no... it is not a mathematical question. >> it is not pure physics. >> charlie: emotional. >> psychologist and sociology. >> charlie: relationship, everything. >> they have really big effects, yeah. >> charlie: do you still believe that health care reform as passed by the congress will reduce the deficit? >> ultimately if it's executed well, if it's implemented well. it's worth pausing on the three basic options here.

you can ration care. not going to happen. you can have consumer-directed health care like representative ryan has proposed. the problem with that so the idea is add more consumers in the game. the problem with that is the vast majority of health care costs are high cost cases. the top 25% of medicare beneficiaries ranked by cost. 85% of the total cost. >> charlie: 25% of medicare beneficiaries where the money is spent for the top 25% is.... >> 85% of overall cost. the other 75% of the people or 15% of the cost. that's where you're concentrating the consumer cost sharing because you're never going to say, oh, you're going into the hospital and you're in the emergency room and i'm sorry you have 50% cost sharing. the whole purpose of hoorns is to protect against the high cost cases. >> charlie: we have found out that's ripe with capacity of political rhetoric. to take advantage of it. >> there's only limited traction much less so than the

idea initially seems from that approach. and then you're left with the third bucket which is how do you get at that 85% of cost. it is my very firm belief that what you need to do is to be affecting what doctors recommend because in most of those cases the health care you get is what your doctor recommends for those high cost cases. that involves better information so better evidence- based medicine and computer systems that have decision support software on them and it involves a change in incentive facing those.... >> charlie: do the doctors agree with you on this? >> i think the vast majority of doctors recognize that we need to move toward a fee-for-value system rather than.... >> charlie: why do you think so many people-- not everybody, clearly-- but believe that you missed the boat in terms of cost containment here. that, yes, you delivered more access but no you failed to get your hands around cost contain snment. >> two explanations. the first is that that third bucket of trying to get at

provider incentives is messy. there's not like a simple here's exactly how you do fee-for-value. here's exactly how you do pay-for-performance. it's evolutionary. it's harder to explain. in fact on that point i would just say for those who say there should be more cost containment. my question is what else would you have done specifically? what specifically what you have done? and typically you don't get very much in terms of specific responses to that. the second explanation is more of a political economy one which is that you always have this tension in health care between access and cost/quality. different parts of the policy process lean one way or the other. the house leans more towards coverage. the leans more towards cost and quality. i think not a small part of the explanation here is during that summer of 2009, the senate was delayed because of its internal negotiations from the finance committee. the only bill out there was the house bill. and the perceptions were

formed based on that house bill and legitimately that leaned way more towards coverage. it didn't have the excise tax in it. he didn't have the medicare commission in it. a lot of the things that the senate then added and that were part of the final bill weren't there and so legitimately people thought it kind of tilted in one direction and those first impressions are hard to correct. >> charlie: also the idea that the administration seemed to believe at the time was by the time the midterm elections some of the benefits would kick in and therefore you would have a better perception. i don't think that's happened. >> that does not seem to be what's happening. >> charlie: it seems two things have happened. one is that there is a political reaction against health care reform. why do you think that is? >> i think there are a few things. one is that on the stimulus recovery act, there is always going to be some degree of frustration because unless you got the unemployment rate down

immediately which was never going to happen the thought that you're out there saying this is helping when it hasn't helped sufficiently to get to where you wanted to be is a complicated factor. it also got mixed up with tarp. so in much of the polling that i had seen at least people would combine the stimulus with tarp and somehow combine the two even though they were significantly different things. >> charlie: one of the interesting things about this whole thing-- correct me if i'm wrong-- there was a public response, a public reaction against helping the banks. >> yes. >> charlie: there was... on the other hand the tarp money has been mostly paid back. >> that's the irony. >> charlie: that's the great irony. why did you leave? >> i had been at cbo for two years and i had been in the administration for a year-and-a-half. i thought that was almost four

years of public service was enough. >> charlie: really? >> yeah. >> charlie: do you see public service as where most of your life will be devoted or do you see it will be now mostly in the private. >> i think for the next, you know, ten years i'm going to be a private citizen for a substantial period of time i'm going to be a private citizen. beyond that we'll see what happens. >> charlie: what will you do? >> well right now i'm at the council on foreign relations. i'm sorting out exactly what i'm going to do. >> charlie: is is there a book thaw want to write about your experience? >> no. i have the "new york times" column. i will occasionally write other things. i think will be sufficient. >> charlie: did you have trepidation in writing the "new york times" column. in the first column you suggested that unless we have tax, more tax after two years then we'll be in deep trouble about deal ing with the deficit. for so many people in the country raising taxes is not a way to contribute to growth. >> i am glad i wrote that column because i think this is probably the... the first

column. i think this is one of the most important fiscal issues that we face. i don't see a way to... a plausible way to, a reasonable fiscal outcome in the medium term 2015, 2016 if we make the tax cuts permanent. that was the key point. we can't afford to make the tax cuts permanent unfortunately. and we shouldn't end them all now because that would cause especially the middle class ones would cause economic harm. >> charlie: would you have been unhappy if the lead of your lum had said, ladies and gentlemen, i'm the former director of the office of management and budget and i have to report to you that having seen the numbers that i have seen unless we raise taxes soon on everybody but the poor, we are going to be in an economic mess like we've never seen before. >> the only modification is i

would change june to over the next few years. i don't think that if you would like to help me on the next column. >> charlie: that's exactly what you want people to get. >> yeah. >> charlie: you want to open the debate on that. if there's one contribution you could make to the debate you're saying unless we have this debate.... >> that's the truth. so we should have that debate. >> charlie: n it's no longer a question of supply side economics and what john kennedy did when he was president that somehow if you lower taxes you generate more revenue and in the end you'll contribute more to growth. that was true though wasn't it as an economic.... >> it was never true. that's always exaggerated. >> charlie: doing what kennedy did. not as practiced by reagan. >> let me try to clarify this. it is true that when the economy is in a downturn cutting taxes, reducing marginal tax rates can help spur growth. it is not true that the additional revenue you get from that additional growth is sufficient to offset the tax cut to start with. it's a partial offset not a

full one. which means when you intend to cut taxes, that's what you do. >> charlie: so if i wanted to.... >> said another one. when you tend to raise taxes the result is increased revenue. >> charlie: going back to where you were but it's important basic fundamental principles. you are saying that if you think you can deal the level of deficits most governments have by cutting spending no matter how deep the austerity it will never happen. >> yes i agree. let's go through it. social security, even if we reform social security which would be difficult politically, you always want to.... >> charlie: essential? >> essential. you want to protect current beneficiaries in those nearing retime. most plans say no changes for those 55 and above. so that means that for seven years until you hit the age of 52, it takes seven years to phase in to even have any impact. then it gradually builds after that which means your impact in 2015 is effectively no. medicare and medicaid most of the politically viable changes were already enacted as part

of the health reform act. they were probably maxed out as part of the health reform act. right there you have half the budget taken off the table. defense spending is already projected to decline as the war on terrorism is assumed to phase down a bit. most people say what about.... >> charlie: the war. >> the war. most people say what about weapons system and fancy gizmos? and it's true there can be some savings there but proceed kurment and r&d is only a third of the defense budget. >> charlie: and gates is on that case. >> he's on that case. you might be able to get a few tenths of g.d.p. there. you're left with this other blob of non-defense discretionary spending which is the typical target. >> charlie: 15% of the total budget. >> that's roughly 15% or so, a little bit north of that of the total budget. it's about 4% of the economy. let's say magically you can take 10% of it which you'll never be able to do politically. that's .4% of g.d.p..

you add that piece together and maybe you can get a half percent or .6% of g.d.p. on the spending side. you face a gap in the deficit north of 2% between where you're lightly to be and where you should be, the bulk is going to have to come from additional revenue. >> charlie: there you are. >> that's the unfortunate math. fiscal math. >> charlie: will the american economy change so that we will never have a significant manufacturing base. >> american manufacturing is likely to remain 10 or 15% of g.d.p. for... it's not going to exceed those levels. i guess the question is.... >> charlie: go ahead. >> i think the question is whether it matters. the definition between what's manufacturing and what is a service can be quite complicated because you have manufacturing firms that are providing services. service companies that are also pargally manufacturing and so-and-so forth. myself as an economist i don't think that there's anything unique or special about

manufacturing as opposed to the rest of what the economy produces. the key question we should be asking ourselves is, are we investing sufficiently in education? are we investing significantly in infratruck stur? are we investing sufficiently in computers and software. >> charlie: and can we.... >> regardless of whether it's manufacturing services. >> charlie: that's the question about that. are we investing in all those things. >> that's what we need to be focused on. >> charlie: you may this question to be a false choice or not. will we be able to invest in those things which we desperately need for our future when we have this deficit that is hanging over our head the way it is? >> that is the ultimate question. that is why i think progressives, most of all, who are often most interested in expanded educational opportunities and r&d and in infrastructure need to recognize that you need that revenue base in order to provide those key investments or else, you know, we're starving ourselves. >> reporter: beyond all the

things we've been talking about which is sort of the nature of the budgeting process, what... for us to be a competitive economic force going into a new paradigm having to do with the rest of the world, what do we need? >> i think we need to retain the traditional ethic of work and success. i think we need to invest significantly in education. >> charlie: and rflt and d. >> and r&d. education there has been a lot of progress made towards moving towards incentives for teachers to be better performing in primary and secondary school. one of the big issues i think we need to recognize is ironically rising health care costs have been causing problems for our public universities because rising health care costs have been causing medicaid costs increase in state budgets, causing them to cut back on their support for our leading

public universities. that's a significant issue. so if you look at assistant professor salaries, for example, at public universities versus private, they've plummeted in comparison. over the past two decades or so. >> charlie: people keep talking about innovation. what does that mean to you? >> innovation is the process of new technology and new invengs and in particular not just academic discovery but their propagation throughout usable economic.... >> charlie: more productive ways of to go things that will lead to more productive decision-making and therefore >> new ways of doing things that are either valuable to consumers or that are valuable to firm in terms of getting more out of what we have. >> charlie: we have owned that space. >> we have been terrific in that space. >> charlie: will we continue to be? >> if we do the right things, yes. >> charlie: on budgetary yeses? >> that's just one of many issues that we face. this is all within our power.

we get our fiscal house in order. we continue to invest significantly in education. we have the world's leading universities and dynamism around the innovation that comes out of those universities. we need to be investing in that. >> charlie: you need the confidence of the people that you make the choices. you need the confidence of the people that you know what you're doing and you're making the right choices. >> absolutely. >> charlie: will deliver a country that is better for your children than it is for you. >> absolutely. >> charlie: and gaining ground rather than losing ground. >> in a much more complicated world and one in which there's increased competition especially for the middle and upper middle class professions from other countries than existed historically. >> charlie: a lot of smart people are nonger staying here. they're going back to work in india and china. >> another way of putting it is a lot of the skilled work that was highly valued in the united states for a college graduate, for example, now has

substitutes elsewhere. >> charlie: do you think, for example, within this administration and within the public at large and on television programs and everywhere else in media we're asking the right questions of our future? >> i think are asked but the questions are drowned out by the latest tabloid this or that. or political development. instead of... this comes back to the question of whether we are, whether the political system is equipped to deal with our structural long-term problems. i think there's a legitimate question about whether it is. >> charlie: thank you very much. it's a pleasure to have you here. i hope you can come back and we can talk about these issues. i imagine you will be spending more time in new york. >> thank you very much. >> charlie: thank you for joining us. see you next time. tavis: good evening.

from los angeles, i am tavis smiley. tonight, our conversation with soul legend bettye lavette. her latest cd is