Memo To The Next OMB Director

TO: The Next Director of the Office of Management and Budget

First, congratulations.

Second, you are and will continue to be in the hot seat.  Because of that, you will have to be one of the most visible OMB directors in U.S. history.  Many of the decisions you will have to make will require a great deal of support and very high public credibility.  Therefore, building that credibility must be one of your personal highest priorities.  If you wait for a crisis to occur before establishing that confidence, you will end up being defined by that crisis and will lose your ability to convince others in the administration, Congress, the media, and the public that they should listen to what you say.

Third, we don't know about the what the economy will look like on Inauguation Day.  As they have been doing for quite some time, the current economic problems likely will have morphed at least once into something else by then.  But the one thing we do know is that the federal budget situation will be far worse than perhaps any incoming president and Congress have ever faced.

So here is what you as the next OMB director need to start thinking about immediately:

• No one should be arguing about deficits, even deficits of the extraordinary magnitude that are now projected, when the primary concern is our economic and market doldrums.  They, and not the budget, are the higher priority.  So expect that, even if the budget situation gets worse than it already is, you will need to support whatever initiatives are developed.

• But the fact that a dramatically increased deficit is appropriate in the short-term doesn't mean that it will be appropriate every year and in every situation forever. In fact, just the opposite is true.  At some point the economy and financial markets will turn around and the deficit and national debt will need to be and absolutely should be addressed.  You need to be prepared because when that occurs the opportunity to rally public opinion to that will fall directly and immediately in your lap.

• The fact that a previously unimaginably large deficit may be appropriate this year doesn't mean that every cockamamie tax cut and spending increase is also appropriate.  With no procedural or perceived political limits, OMB's vigilance against unnecessary and ineffective proposals will be more important than ever. This is another reason why establishing your personal credibility from day one will be so important.

• There already has been a great deal of talk about a $1 trillion or more deficit this year and perhaps next, but I can tell you from personal experience that this number is not well known or understood outside a small circle of people (like those who regularly read the blog Capital Gains and Games).  Because of that you should  assume that it will be reason for over-the-top demagoguery by many who will express absolute shock about it the first time you talk about.  If you're not careful, you will be blamed for it even though you had nothing to do with it.  Get this bad news out quickly so that teh shock value is less when others use it.

• The truth is that we really don't know what the deficit outlook will be.  The $700 billion bailout is a one-time event that will be mostly spent by the end of this fiscal year.  At some point thereafter the government presumably will start to sell the assets it bought with this $700 billion and that wil increase revenues and reduce the deficit temporarily.  Activities in Iraq and Afghanistan will wind down some day and that should provide some permanent budget savings.  But the extent of those savings may be far less than anyone has yet admitted.  In other words, one of your earliest responsibilities will be getting the numbers out there for all to see.

• Don't be cute or sly with these numbers.  That's what got David Stockman, Dick Darman, and Mitch Daniels in trouble from the start of their tenure.  Within a few months of their taking the helm at OMB, their pronouncements were treated with scorn than esteem.

• Finally, OMB directors typically focus their attention inside the U.S.  But unlike your predecessors, one of the most important audiences for you will be overseas.  Whatever you do on the budget will have to be financed in large part by foreign purchases of U.S. debt.  These are the people who most will need to believe you, and not just the Treasury secretary, when you talk about the deficit and the need for government borrowing.  That could make the difference between rising or stable interest rates.  If you pull that off, and get crediot for it, you'll be a hero.