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By Mike Dorning Dec. 1 (Bloomberg) — When Senate leaders gathered around a polished wooden table off the chamber’s floor in October to begin health-care negotiations, Peter Orszag was in a familiar place: at the elbow of White House Chief of Staff Rahm Emanuel , helping determine the fate of a critical piece of President Barack Obama’s agenda. As questions about costs and financing cropped up, Senate Majority Leader Harry Reid repeatedly turned to the man he called Mr. Princeton. The senator bestowed the nickname to highlight not only Orszag’s Ivy League pedigree but also his skill in untangling the economic complexity of health care and the federal budget. “I know he is not a longtime person involved in politics, but he is a natural,” Reid said on the Senate floor on Feb. 13 after working with Orszag into the wee hours to win enough Republican votes to pass Obama’s $787 billion stimulus. “He is a brilliant man.” Orszag, 40, who became Obama’s budget chief in January 2009, is working overtime to help steer the nation’s economic course — a role last defined in such high profile by David Stockman , Ronald Reagan’s budget czar. ‘He’s a Nerd’ Stockman, who like Orszag served during an era of increasing deficits, was quoted in 1981 as saying, “None of us really understands what’s going on with all these numbers.” Orszag, in contrast, is at home in the quantitative world. He’s the son of Yale University applied mathematics professor Steven Orszag, who peppered his three sons with math puzzles and four-digit multiplication problems when they were young. Orszag served as a senior economist on the Clinton White House’s Council of Economic Advisers in 1995 and 1996, got his Ph.D. at the London School of Economics and Political Science in 1997 and headed the Congressional Budget Office from January 2007 to November 2008 before moving to the Office of Management and Budget. “He’s a nerd,” says Representative Jim Cooper , a Tennessee Democrat who agitated to keep Obama’s health-care plan from increasing the deficit. “But nerds come in handy when you’re in a crisis. There’s a certain comfort there because he knows the numbers.” Now Orszag, the youngest Obama cabinet member, is tackling Washington’s trillion-dollar question: how to pay for everything the president wants to do while trimming the $1.4 trillion deficit that piled up in Obama’s first year. Deficit Battle Even if the economy grew steadily, the OMB projects the deficit in 2019 would amount to 4 percent of gross domestic product. In 2006, when Orszag sounded an alarm at the Brookings Institution policy research organization, the deficit was 1.9 percent of GDP. In 2009, an increase in the deficit of one-tenth of a percentage point of GDP equaled $14.3 billion, about twice the Federal Bureau of Investigation’s $7.7 billion budget. The Obama administration says it inherited most of the deficit from policies enacted under George W. Bush and the effects of the recession. “We’re running large — enormous — short-term deficits for reasons that people understand,” says Douglas Holtz-Eakin , Orszag’s predecessor at the CBO and the top economic adviser to Republican John McCain’s presidential campaign. “What I don’t think the markets will tolerate is if we run large long-term deficits — and that’s the direction we’re heading.” Bill Clinton was the last president to end his term without a deficit. He left office with a surplus that equaled 2.4 percent of GDP in 2000. ‘A Threat’ Bush pursued deficit-financed wars in Iraq and Afghanistan, cut individual income tax rates by as much as 5 percentage points and expanded Medicare to cover prescription drugs. Bush approved a $700 billion bank bailout in the waning months of his presidency, and Obama backed the stimulus package in the first months of his, leaving $1.4 trillion in red ink. “It’s a threat to the ability of the economy to grow at its potential rate,” Ward McCarthy , chief financial economist at Jefferies & Co. says of long-term deficit spending. “It bodes for a lower standard of living in the future.” Orszag came to the budget office convinced that medical costs were the largest long-term driver of the deficit. He’d focused so intensely on health care at the CBO that he called the organization the Congressional Health Office. Total U.S. spending on health care in 2009 was expected to be about $2.5 trillion. ‘The Architect’ Orszag proposed ways to save money, which Obama incorporated into his plan and the House and Senate have debated in their overhaul proposals. He suggested an independent Medicare Commission to set reimbursement rates. He pressed for medical providers to work in tandem to keep patients healthy and share any resulting savings. And he favored penalties for hospitals with high rates of avoidable readmissions, such as heart-surgery patients who return because of fluid in their lungs. “In terms of the fiscal undergirding of the health plan, he was the architect,” David Axelrod , a senior Obama adviser, says of Orszag. “His guidance was central to all the decision making.” Orszag infuses his recommendations with insights from behavioral economics, which suggests an organization can nudge people to action by changing the way it presents choices. ‘Econ 101’ At Brookings, he promoted research that showed companies can boost employees’ retirement savings more effectively by automatically enrolling them in 401(k) funds than by offering financial incentives to do so. He walked around Capitol Hill hawking the findings. “It leads to a richer set of policy discussions than what I call Econ 101 approaches,” he says. Orszag extended behavioral economics to Americans’ health. In a 2008 speech, he talked about seating children at smaller lunch tables to reduce obesity, citing research that shows people eat less in little groups. He says computer databases could prompt doctors to consider treatments that are more cost-effective than what they may have otherwise investigated. “Up pops a screen that says you might want to check for X,” Orszag says about what a doctor might see on a PC in his office. “That is a behavioral economics type of intervention, helping the physician guide decisions.” ‘Peter’s Imprint’ Orszag put behavioral economics to work at the OMB. In October, he dipped into his own bank account to buy pedometers, betting that measuring steps could improve physical fitness on the cheap. The almost 300 staffers who took the challenge walked 26,000 miles during the inaugural month. Orszag has expanded his OMB role from gatekeeper for federal agencies’ funding requests to frequent visitor to Obama’s office. He sees the president virtually every workday as part of the group that delivers Obama’s economic briefing. Orszag has discussed the fiscal 2011 budget, which the White House will deliver to Congress in February. “He’s made presentations to the president already on options,” says a White House aide, declining to reveal details. “The president will mull these options over, but the plan will have Peter’s imprint on it.” Orszag has set a goal of reducing the deficit to 3 percent of GDP from 2015 through 2017, a time when the red ink will amount to 4 percent of the economy, according to current OMB predictions . ‘Credibility on the Line’ “My credibility is on the line in the document that we put out,” Orszag told business leaders in November, referring to the 2011 budget. In public, Orszag offers assurances — but no specifics — that Obama will honor a Feb. 23 pledge to halve the fiscal 2009 deficit by 2012. Unlike his boss, Orszag is on record with a reform proposal for Social Security. In 2004, he co-authored a plan with Massachusetts Institute of Technology economics professor Peter Diamond that called for increases in taxes and cuts in benefits, tilting the burden toward better-paid workers. The administration faces the delicate task of trying to cut the deficit without squelching an economic recovery, Orszag says. “Unfortunately they’re in some tension with each other,” he says. The median forecast for economic growth in 2010 is 2.6 percent, Bloomberg’s November survey of 63 economists found. ‘Key Balancing Act’ For now, the growth is coming almost exclusively from Obama’s stimulus and a temporary boost in orders as stores restock, Orszag told Bloomberg News reporters and editors in September. “Managing that transition from where we are now to where we need to be in 2014 or 2016 with the deficit is very tricky given the competing needs of short-term macro and medium-term fiscal discipline,” he said. “That’s going to be the key balancing act.” In a city enthralled with status, Orszag enjoys a rising profile. GQ magazine placed him ahead of every administration member except Obama, Vice President Joe Biden , Emanuel and Defense Secretary Robert Gates among Washington’s power elite. The Washington Post dubbed him one of the capital city’s most eligible bachelors. Edamame and Diet Coke Rail thin and 6-foot-2 (188 centimeters), Orszag, a marathon runner, is as disciplined in fitness as he is at work. His assistant often brings him broiled chicken breast, steamed vegetables and edamame for his lunch in the Eisenhower Executive Office Building. He prefers to do his runs on the way home to Northwest Washington — 5.5 miles (8.85 kilometers) from the office — so he can go uphill. The only vice friends note is his consumption of Diet Coke — a daily minimum of at least a six-pack. He decided to maintain the habit after taking a test to make sure he didn’t carry a gene associated with caffeine-related ailments, an aide says. Orszag’s 1997 marriage to Cameron Hamill, a Stanford University graduate who worked in the Treasury Department during the Clinton years, ended in divorce. He’s now in what a close associate says is a serious relationship with ABC News financial correspondent Bianna Golodryga. Orszag has joint custody of two school-age children. He says he likes 8 a.m. weekend soccer games so he can watch his son before heading to work. Orszag hangs out with Washington’s A-list. His catered dinners bring together members of Congress, administration officials, Supreme Court justices, scholars and journalists. At one, the conversation turned to a uniquely Washingtonian topic: members of Congress’s remembrances of their maiden floor speeches. Math Whizzes Orszag’s father set a tone of intellectual achievement at home in Lexington, Massachusetts. The regular math drills built the children’s ability to solve complex problems quickly. For fun, Michael, Jonathan and Peter, the middle child, played the battle game Empire on a wall-size PDP-11 computer against students from MIT, where their father taught at the time. All three went to Phillips Exeter Academy in Exeter, New Hampshire; college at Princeton University; and graduate school in Britain. Peter and Jonathan graduated from college summa cum laude and won Marshall Scholarships for graduate study in Britain. “Don’t ask who had the higher GPA,” says Jonathan Orszag , 36, senior managing director at economic consulting firm Compass Lexecon. “It’s a state secret. No one tells. But we each have our own arguments.” Clinton White House Orszag proved his affinity for details at Clinton’s Council of Economic Advisers. Chairman Joseph Stiglitz , now an economics professor at Columbia University, sought his help in blocking privatization of U.S. Enrichment Corp., which makes enriched uranium for nuclear plants. Stiglitz said a for-profit company would have less incentive to encourage the import of competing fuel made by the decommissioning of Soviet nuclear warheads. He wound up disagreeing with the Central Intelligence Agency, the Department of Energy and the Pentagon. Stiglitz staved off privatization, though it was completed after he left. “In government, quite often the experts in the various departments tend to dominate because no one can challenge them,” he says. “With Peter there, we could develop the expertise to challenge anybody.” ‘Respect on the Hill’ Orszag established himself as a voice for fiscal discipline at a Brookings group called the Hamilton Project, founded by former Treasury Secretary Robert Rubin . “The adverse consequences of sustained large budget deficits may well be far larger and occur more suddenly than conventional analysis suggests,” Orszag said in Senate testimony in 2006. Once Obama settles on a budget, Orszag will become a chief salesman before Congress. He may fall back on a reservoir of goodwill built up while at the CBO. “He has unusual respect on the Hill among those who do fiscal policy,” says Senator Judd Gregg of New Hampshire, the Budget Committee’s top-ranking Republican. Orszag proved his numbers were credible at the CBO, says Representative Paul Ryan , the ranking Republican on the House Budget Committee. Orszag also showed his independence there, Ryan says, citing Orszag’s decision to treat carbon-emission caps as a tax on business rather than revenue-neutral regulation. “There was pressure from his party to do otherwise,” Ryan says. Taming the nation’s looming budget deficits is proving a consummate test for Orszag and the problem-solving skills instilled by his mathematician father. “I am not underestimating how difficult it will be,” Orszag says. “But it’s crucial.” To contact the reporter on this story: Mike Dorning in Washington at mdorning@bloomberg.net .