The Future of the American Economy

Peter R. Orszag, Vice Chairman, Corporate and Investment Banking, Citigroup, Inc. Introduced by Bruce Heyman.

Summary by Richard C. Longworth 

The recession is ending “if we don’t shoot ourselves in the foot,” but both the fiscal crisis and more long-term economic trends have left scars that may be permanent, Peter R. Orszag told a Chicago Council audience Tuesday evening.

Orszag is vice chairman for corporate and investment banking for Citigroup, Inc., and a columnist for Bloomberg View. Before that, he was President Obama’s director of the Office of Management and Budget, and he brought both a Beltway and a Wall Street perspective to the Council stage.

Orszag’s talk ranged across the economic and political scene, from the anti-recession stimulus at the start of the Obama administration, through the recession’s echoes into Obama’s second term, ending in permanent changes to the U.S. economy and politics. He closed with some upbeat notes, but much of what he said was blunt, if not grim.

The stimulus did work, he said, noting that states that got it fared better than those that didn’t. But it was flawed, in that “it got Reinhart-Rogoff wrong.” He was referring to economists Carmen Reinhart and Kenneth Rogoff, whose book, This Time Is Different, argued that major financial crises, unlike normal recessions, take many years to unwind. The stimulus, Orszag said, was too front-loaded, with too much impact in 2009, while we’ve found that we still need the boost now.

Despite this, “we do seems to be de-leveraging,” he said. Household debt as a percentage of income is falling, he said, as are the number of vacant homes. Both figures soared during the bubble years of 2003-08, but are heading back now toward their saner levels of 2002-03.

But scars remain and may be permanent, Orszag said. Some are from wounds that have festered for 30 years, long before the recession began. From his statistics and power points, Orszag drew a picture of human pain that will haunt the country when the overall economy revives.

For instance, labor’s share of the economy is down 5 percent from its 1980 level. This means $750 billion in earnings that would have gone to workers if the share had remains constant “has been vaporized. There is no way of getting that back.”

“Most people sense that this is happening,” he said. “But they also sense that there is no policy from Washington that is going to fix this.”

A second scar hides inside the unemployment figures. Disability benefits are up 30 percent, he said, much of them going to unemployed workers.

“People on disability don’t come off,” he said. “A 50-year-old on disability won’t work again.” As unemployment stays high, “over time, we are losing workers permanently,” he said.

A third scar is inflicted by the growing inequality in earnings and wealth. This problem is well-known, but Orszag cited a lesser-known result, which is the growing gap in life expectancy. Wealthier people live longer, he said, and this difference is growing, from a one-year gap 30 years ago to five years now. Part of this is due to more smoking and less health care among lower earners. But much of it, he said, is caused by the simple stress of being poor.

Yet another scar is growing polarization. This political split will be even worse in the new Congress than in the old, Orszag said. But he stressed that this political trend “increasingly is being driven by the increase in the polarization of people. We’re doing it to ourselves.”

In 1976, one-fourth of all Americans lived in what author Bill Bishop called “landslide counties” – counties that voted Democratic or Republican by more than 20 percentage points. Since then, Bishop wrote in his book, “The Big Sort,” Americans have literally been moving to be closer to people who agree with them, segregating themselves economically and politically. Orszag said the recent election showed that, for the first time, more than half of all Americans live in a landslide county.

But there are bright spots, he said. Booming shale oil and gas production is reshaping America’s energy sector. The country is “in the early stage of technological gains” that, among other things, will drive down health costs. These health costs already are falling, he added – partly because of technology, partly because of Obamacare.

Orszag discussed possible outcomes of the so-called “fiscal cliff” – a small tax increase, or a decision to delay a decision, or a breakdown, with a sudden end to the Bush tax cuts, coupled with $400 billion in budget reductions. His bet: “the probability of going over the cliff is higher than I’d like.” He indicated this might not be so bad if it led to a real agreement later but said that “the risk is that we don‘t know how to put the genie back in the bottle.”

Asked by a Council member if “we can solve the deficit problem without significant pain for Americans,” Orszag gave a one-word answer –“No.” 

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