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Replacing Peter Orszag

When it comes to resignations, the big news last week was of course General Stanley McChrystal, chief of U.S. forces in Afghanistan, who resigned after some unguarded comments appeared in Rolling Stone. But there was another high-profile quit last week, by White House budget director Peter Orszag, apparently over differences with the President Obama over how quickly the U.S. should close its federal budget deficit. Orszag has gotten all sorts of attention as an unlikely sex symbol, but more important is that he is a very capable economist and political operator, and the White House will have a tough time filling his shoes.

The Office of Management and Budget oversees the federal budget and sets priorities for funding federal programs -- the boss gets a seat on the President's cabinet. It's always an important job, but these days more than ever: the leading economic powers are now trying to balance the stimulus applied during the recent downturn, and these decisions will determine national and world economic growth and financial health over the next 10 or 20 years. Despite the desire by President Obama to keep the stimulus going -- considered today by my Moneywatch colleague Linda Stern -- as a group the developed economies will be cutting their deficits by half in just three years.

Although we haven't heard from him directly, OMB director Peter Orszag apparently disagrees with the president, and believes that we should pull our stimulus in order to stay credible with the world bond markets. He feels strongly enough to quit, as reported in all the usual places -- here's coverage by the NY Times.

Since 1921 there have been 37 federal budget chiefs, some of whom you may recognize: Percival F. Brundage ('56-'58; I've not heard his name before, but what a fine name it is); Maurice H. Stans ('58-'61, who later was part of the Watergate scandal); Casper W. Weinberger ('72-'73); David A. Stockman ('81-'85); and Leon E. Panetta ('93-'94; currently director of the C.I.A.). It's a high turnover position, with tenure averaging just 2.4 years, and some of its occupants go on to much bigger jobs.

The one director we know best, at least from his work in the job, is David Stockman. He was one of Ronald Reagan's budget directors, from 1981 to 1985, and we know him for denouncing the ideas behind Reaganomics, in an article about him in the December 1981 Atlantic Monthly, "The Education of David Stockman." (For background, President Reagan's "supply-side" doctrine held that economic growth could be stimulated by tax cuts, giving incentives to business people to make more money. It did work, in that situation, due to the high tax rates in force at the time.)

Here is Wikipedia's account:

Stockman was quoted as referring to the Reagan Revolution's legacy tax act as: "I mean, Kemp-Roth [Reagan's 1981 tax cut] was always a Trojan horse to bring down the top rate.... It's kind of hard to sell 'trickle down.' So the supply-side formula was the only way to get a tax policy that was really 'trickle down.' Supply-side is 'trickle-down' theory." Of the budget process in his first year on the job, Mr. Stockman is quoted as saying: "None of us really understands what's going on with all these numbers," which was used as the subtitle of the article.
Somehow, Stockman stayed on the job:
After Stockman's first year at OMB and on the heels of 'being taken to the woodshed by the president' over his candor with Atlantic's William Greider, Stockman became disillusioned with the projected trend of increasingly large federal deficits and the rapidly expanding national debt, which he blamed on the Reagan tax cut.
Stockman later moved to the private financial sector, stopping at investment bank Salomon Brothers and private equity managers Blackstone Group. He left Blackstone in 1999 to start his own private equity fund, Heartland Industrial Partners, L.P., and was head of auto parts manufacturer Collins & Aikman for a few years until its 2005 bankruptcy. These days he lives in Greenwich, CT, and among other activities, blogs for Minyanville.

But back to Peter Orszag. When he leaves the job, who should take over?

The Washington Post has seven suggestions, all Washington insiders. I recognize two names, but that may mean they are overqualified and overconnected.

But as I said, this may be the most important time for the right OMB head in many years.

In a post on the Economix blog of the NY Times, economist Simon Johnson nominates Paul Krugman, winner of the Nobel prize for economics:

Appointing Mr. Krugman would completely take the wind out of the Republicans' sails on fiscal deficits. Mr. Krugman has consistently scolded them, in real time and to great effect, with regard to ruining the budget.
...
--Vice President Cheney is famously associated with the phrase "deficits don't matter." Yet "cut budget spending now" and "President Obama is fiscally irresponsible" are the slogans that come increasingly from Mr. Cheney's part of the political spectrum. It would be a great move to give Mr. Krugman the Office of Management and Budget podium from which to respond. Even the confirmation hearing would be fiery and memorable - and would get the right points across.
...
--Mr. Krugman embodies exactly the balance of messages required to be an effective budget director. He fully understands the need for budget consolidation eventually - after all, he wrote the original definitive work on balance-of-payments crises and how these are fueled by money creation (and implicitly by budget deficits).
Paul Krugman is a smart guy -- no doubt about that. Surely the smartest guy in the room at most times. And there is also no doubt that he could deliver a few zingers, if obscure and pedantic, to the Republican inquisitors during his confirmation hearing, on how poorly Reagan, and Cheney and they understand economics.

But I don't believe Krugman has any political experience, which would be at least half of this job requirement. Closing the U.S. federal budget deficit will be one of the more visible efforts of our government during the next five or 10 years, and to get it going will require someone knowledgeable, articulate and political who can put forward a strong case to the international community. I'd go with Laura Tyson.

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