Peter Peterson

After the Fall

VTR Date: October 25, 1987

Guest: Peterson, Peter


Host: Richard D. Heffner
Guest: Peter Peterson
Title: “After the Fall”
VTR: 10/25/87

Heffner: I’m Richard Heffner, your host on THE OPEN MIND. Time is so much of the essence in today’s volatile economy (my guest has spoken and written so eloquently of the absolute necessity, right now, for America to see its biggest binge ever of borrowing and spending precisely for what it so destructively has been), and with a stock market that can so unnervingly move up and down hundreds of points in a day, these days, it’s probably best to note that we record this OPEN MIND at the end of a thoroughly unnerving October 1987. For, who knows where the wages of consuming more than we produce will take us next week. Now “The Morning After”, that’s the title of my guest’s compelling and prophetically frightening Atlantic Magazine essay on the painful new economic reality Americans now must wake up to. A major figure in American business, financial and government circles for many years, Pete Peterson was President and CEO of Bell and Howell, served as Secretary of Commerce under President Nixon, was Chairman and CEO of Lehman Brothers, now leads a New York investment banking firm…and is Chairman of the prestigious Council of Foreign Relations. Mr. Peterson also calls the shots as he sees them…says about the end of this nation’s spending binge: “…there is going to be pain, sacrifice of some sort, and part of that sacrifice is going to be changing our unsustainable patterns of consuming more than we produce”. And though I heard him say on television just the other night that the time is past for finger-pointing, I would ask my guest today precisely who it is he’s talking about when it comes to pain and sacrifice. Who’s going to do this, Mr. Peterson?

Peterson: I think, Dick, there’s only one group left. You know, as Pogo used to say, “I have met the enemy and he is us”. It’s Dick Heffner and Pete Peterson and the millions of middle class and upper class who have permitted a fantasy to be perpetrated that somehow everybody in this country could get welfare in one form or another. And, you know, we have in this country this wonderful notion that justifies almost anything. For example, we have these huge programs that now take about forty percent of the budget. They’re growing at ten percent a year. They’re going to explode. They are the universal entitlement programs. The politicians won’t touch them because they are utterly toxic politically. The President in his recent message said, “Everything’s on the table but Social Security” and so forth. And yet if you examine the logic of the concept you realize how really absurd it is, arithmetically. The idea that you and I and all Americans can end up getting three to five times as much as we put into these programs and that all of us could get that somehow, reminds me of an argument I made once in a New York Review of Books in which I suggested that it was essential that the middle and upper classed finally understand that their welfare and their consumption binge has to be the main target. And the response from someone that, I guess, is less conservative than I, said “How can you do that? We’re going to lose political support for these programs”. So I said, “In other words, we have to bribe the well-off to help the poor. But if that’s the case, if everybody’s on the wagon, who’s going to pull it?” So the real question now is “Who is going to pull the wagon?” if we all insist in adding a load to our economy. So the long-winded answer is the middle and upper classes are going to have to observe this reduction in our welfare and consumption.

Heffner: And those below that level?

Peterson: As far as the poor is concerned it’s an odd thing, Dick. This program, when it was announced by the President in ’81, was supposed to be a safety net, do you remember, for the truly needy. A group that I was associated with did an analysis of where the budget cuts were. The budget cuts for the means tested programs, that is those programs that go to the poor, were three times as much as the programs for the non-means tested programs. Beyond that, I don’t know of a liberal, humane society when the economy isn’t going well, so the poor seem to get it both ways. They get it as part of budget cuts because they don’t have a vocal, strong political constituency. And then if the economy doesn’t go well, they don’t do very well then anyway.

Heffner: Then put on your hat as a prophet. If there is no strong constituency there, for the poor, and the articulate people, the voting people are the upper and middle classes, where do we get off?

Peterson: Who is the “we” you are talking about?

Heffner: Where does this nation get off this merry-go-round?

Peterson: Alright. We’re now switching the discussion not to the poor, but to the economy as a whole, which I think we ought to do. If you examine what’s been happening for about twenty-five years, Dick, it was about twenty-five years ago that I argue this country began a long and quite spectacular fall from grace. We really didn’t know it at the time. We were spinning, you know, in violence of various sorts after the Viet Nam War and our Civil Rights problems and so forth. And out of this came a sense of grievance, you know each one was quote/unquote “entitled”, you know, to get whatever he could. And as a result, you recall in the Viet Nam War it was guns and butter and then from then on we added, everybody added programs as though the sum of the special interests somehow added up to the general interest. And as time went on we consumed more and more in this country. We began going more into deficits. The rest of the world, on the other hand, was not like we are, consuming too much. They were saving and they were investing. So wherever you look, across any definition of investment…and it’s after all, out of investment that comes productivity. Let’s take business investment. The Japanese are spending three times as much as of their GNP in net terms on business productivity. They have a lot more robots as a small country than we do…a lot more. They have over half the robots in the world. Where did that money come from? It came from saving. So could public infrastructure. The Japanese spent ten times as much as we did of their GNP, five percent versus point five in this country on mass transit and all kinds of public infrastructure. Let’s take the ultimate investment in a competitive technological society…investment in our children, investment in our education. They’re spending over three times as much, not spending, investing, over three times as much as we are in science education and so forth. So what’s been going on now for some time and Reaganomics, I argue in this article, simply aggravated this notion that we could have it all.

Heffner: Well, your phrase “Fall from Grace” leads me to ask you whether we can climb back up.

Peterson: I think…

Heffner: No, not whether we can, let me not ask you that because you’d have to say “Yes, we could”. The question really is, “Will we”?

Peterson: Well, it’s very interesting…you might ask where did the Japanese and the Germans find the so-called political will to be concerned about the future rather than just the present. I mean how did this happen to come about? I suspect their national consensus on economics, which I argue we don’t have in this country, was born of national crisis. I was on a commission with Willy Brandt called the Brandt Commission, you may recall, on the Third World…I also worked with Helmut Schmidt and by the hour I used to listen and at breakfast an dinner talk about their days as children. And how they were brought up where their savings in this hyperflation of the twenties and Adolph Hitler, you know, gave them a sense that investment is terribly important, that productivity is important…we can’t have inflation…and that’s bipartisan. In Japan, the national economic consensus was probably born partly out of their culture, but also, you know, after the Second World War when their capital stock was devastated. I think, Dick, the most serious question in this country, most serious problem, is not do we have an economic consensus…and incidentally, I don’t mean a rhetorical one…I mean, have you ever met a political leader who was against savings or against capital formation or against investing in our children, or against investing in tools for our workers? We’re all for it rhetorically, but America’s used to making wink-win choices, not win-lose choices. We’re not used to denial, we’re used to having it all. So what they mean is, if we can have all the consumption and pleasure we want, and incidentally, since we can have it all, there’ll be plenty left over for investment, then I’m for capital formation. I’m not talking about that kind of a consensus. I’m talking about consensus where we’re willing to make choices that involve costs, that is, not instant gratification which we’ve become used to, but deferred gratification. Not instant pleasure, but some denial from time to time, so that our future will be more assured. Now what’s it going to take in the United Sates to get that kind of an economic consensus? I…there are only two approaches that I’m aware of. As you can see by looking at me I’ve always had problems being an eager eater and my wife, whom you know well, finally said, “You’re going to have to do something about this”. So I went to a diet doctor. And he said, “Pete, you’ve probably been on a lot of diets in your life” and I said, “Yeah and they’ve all been unsuccessful, I might add”. He said, “I’ve studied this. You might be interested in why”. He said, “I’ve decided that, according to Hegel and others, most of us cannot sustain anything based on a negative or a denial concept. We need a positive vision of some sort, that we have arrived at”. I said, “Really? What would that be?” So he spent twenty minutes talking about why I wanted to lose weight. I got around to I really wanted to look better, you know, I didn’t like the way I looked in my clothes and all this sort of thing. So we went over to a mirror and he said, “What do you want to weigh?” I said, “Well I know what I ought to weigh”…I was weighing about two hundred and fifteen pounds and I hated to tell him. “One hundred and seventy-five”. So he had a wonderful mirror that he had somehow figured out how to take the distortion out of. So he dials this mirror and dials this device, whatever it was, at one hundred and seventy-five pounds and I stand in front of this thing. And he said I want you to look at that for ten minutes. I look at it. Here’s this lean, you know, Pete Peterson…I’d never looked like that in my life. Well, he said, “It’s that vision I want in your head, that you’ve arrived at” and only then do I think you’re willing to sustain whether…any unpleasantness that may come from it. The other way we arrive at consensus is the way the Japanese and Germans did…out of a terminal threat…

Heffner: Out of a terminal threat and you’re not recommending that?

Peterson: No.

Heffner: What kind of mirror can we look in?

Peterson: Well, let’s say a tumor of some sort that frightens us, a coronary. And in the sense, Dick, there is a value to fear, I suppose. And wise men learn from frightening experiences. In the same sense that if you or I had a serious coronary, I hope, you know, we’d be a fool if we didn’t change our regimen and so forth. I hate to be Pollyannaish about this, but history may record if we grab it, that this terrible economic, financial coronary we had on Monday on the stock market may have been that…I mixed my metaphors…that fiscal tumor or aneurysm or whatever you want to call it, that scares us into doing something.

Heffner: Is there any sign that that will be it?

Peterson: I think there is. I was on a television program, forgive me, this morning, and Bob Dole and Lawton Chiles were on it from…a Republican and a Democrat. I’ve talked to perhaps five, six Senators in the last week since the crash, if that’s what it is…and I guess that’s what it is. I think real fear has been struck in the hearts of many of our leaders. And the timing isn’t bad, Dick, because we’ve got an election next year. And I think they’re now…you see, up to now, the scenario of our political leaders went something like the following: “Let’s not admit that the deficits are a problem, because if we admit that they’re a problem, we’ll have to have a solution. And since the solution involves unpleasantness of one sort or another, let’s not talk about it”. So they were all hoping that none of these fiscal tumors would happen prior to the election. Then I think on February of ’89 the new President would look up one morning and say, “My God, I discovered this bipartisan secret. I did not realize that this deficit was so serious and we borrowed so much money from foreigners and we’ve lost control of our destiny. We must do something”. And he’d call in his friends from then Hill and they also would be shocked that this thing emerged overnight. Nobody had mentioned it during the campaign. The Democrats, in turn, have been frightened to get into it because they’ve been frightened really of the President’s charisma and his luck. You know, they have this joke they tell, you m ay have heard it, that I referred to in the article.

Heffner: Did indeed.

Peterson: I asked a Democratic leader, I said, “Tell me why you fellows haven’t stepped up to the plate and told the American people the truth”. They said we have a joke that goes as follows: It’s Inauguration Day in ’89 and President Reagan is flying across, swears in the new President or observes it and when he’s halfway across the country in Air Force One that stock market crashes, the bond market crashes, the Third World debt bomb explodes an a few other things of that sort, lands in Santa Barbara and the reporters say, “Well, Mr. President, what are your comments?”, and the President allegedly says, “I told you the Democrats would screw up the economy”. So, I think in a way, this terrifying experience might turn out to be historic in its importance.

Heffner: You call it a terrifying experience…for many people it was…and yet, as recently as this morning, while you were doing your television bit, I was reading the Times an discovering that there people already saying, “Let’s not attribute this in any major fashion to the deficit”, so…you talked before about rhetoric and you said, “There are some people now who have recognized…” but are you so sure that it’s not more rhetoric? Some recognition of the basic truths that you have in the Atlantic article but no action.

Peterson: Dick, I don’t know how many people you’ve known who have had a coronary. Ah, I don’t think life is ever quite the same again for them. And if this were just a minor quite/unquote “correction” I believe was the euphemism, I’ve talked to friends on Wall Street, I’ve even talked to some of them from in 1929. I don’t think this is an experience they’re going to forget for a long time. I don’t agree with those who say that life is going to go on business as usual. I don’t think the world is quite the same again. And in a curious sense, it might be a good thing.

Heffner: Why do you say that? Because it will mobilize us?

Peterson: Because I think it frightens people enough to mobilize them.

Heffner: But do you think that’s enough to change a nation of spenders into a nation of savers, which is really what you’re asking for? You’re asking us to stop the profligacy of spend-spend-spend, and save before we spend.

Peterson: It will take fright, to be sure, fear as I think this crisis indicates. I think it will take a certain type of leader and we can only pray or hope or whatever one does, that some leader emerges that can somehow convey to us this sense of the platoon that we’ve lost…you know, this sense of the good of the country or whatever it used to be called. And somehow energize us to think about our children. In my case I just had my first grandchild no long ago and I was thinking about exactly what we are doing to her. You know, Dick, we have ten trillion dollars of liabilities in all of these transfer payments and programs that aren’t paid for. And they’re hidden inflation and they’re hidden taxes. Now look at this little girl. She’s a delightful one year old, and I said, “What am I doing to this child?” She is the one that’s going to have to pay these taxes. We talked earlier about compassion for those that are less fortunate. I can’t believe a lot of Americans, you know you and I walk in Manhattan and we see these poor souls on the streets…I can’t believe that a great leader might not be able to energize us. We’re a highly competitive people. I think in our bones we’ve got to know that there has been a fall from grace. We see it in the streets, we see in our living rooms, we see it in people’s attitudes about our products. So it’s going to take some combination of a crisis and a great doctor, if you will, or a great leader and let’s hope that in this ’88 election someone emerges who, who instead of avoiding the truth and avoiding the pain somehow paints a vision of what this country can do. We’ve got great technical resources, we’ve got great energy, we’ve got a big, wonderful workforce, we’ve got great universities. There isn’t any reason why this country can’t gird up its loins and get going again.

Heffner: Do we have the resources to achieve what had been called in earlier years in this century, “social justice” and still make the machinery work the way you want it to work?

Peterson: I think you’re now on the critical question that our political system doesn’t want to face. As I indicated in this article, the easy and popular question is “where to invest?” And any politician can tell you it would be nice to invest in our kids and science and be nice to fix up the mass transit and it would be nice, you know, to do a lot of things. The big question is where do we find the resources? And that’s where I’ve decided to focus. I think there’s several places we’re going to have to look. We’re going to have to look at these entitlement programs that with an aging society and one hundred percent coda of indexing and, you know, medical costs are just going to explode out of sight. If we aren’t willing to face those programs, then we’re not going to find the resources. We’re going to have to have tax increases. But I want them tied to much larger…I am a real fiscal conservative, I think, and what’s been going on for the last six years doesn’t meet my definition of being conservative. We need a tax that helps us shift away from consumption and towards saving. Ironic thing…the Japanese and Germans are consuming too little, they’re importing too little, they’re investing a lot and they’re saving really too much and we’re just the reverse of that. And we’re going to have to change tax systems, in effect. We’ve got to have a gasoline tax, we have to do other taxes of that sort on consumption. The other big place to look for resources, Dick, and that’s why I think diplomacy in the 90s is going to be put to some of the most creative tests imaginable. We’re not used to operating in this country multi-laterally. We’re used to being unilateralists. We’re basically populists of sorts. We’re not used to being restrained by resources. So I think the top agenda items in the 1990s are going to be some of the following: burden sharing with our allies. If you want to look for real resources, Dick, a very significant part of our budget goes for NATO. And yet if you examine the proposition, of course we have a deep interest in the Europeans, but why should we, with these horrendous, grotesque deficits and debts, be taking so much of the burden? Why don’t they take more of that burden? Gorbachev, as you know, we were lucky enough at the Council to spend a week over there. We spent an afternoon with Gorbachev, most of an afternoon. I think he realizes his economy is ossifying and it’s antiquated and he’s asking the same question, “Were do I find the resources?” I think we can make a very large arms control deal with the Soviet Union that includes conventional forces. Our Japanese friends…we’ve been railing them for at least fifteen years, since I was in government, on their free ride on defense. And where has it gotten us? It’s gotten us from point nine percent of the GNP for defense to one percent of GNP. Why? A – Their neighbors would be terrified if they became a military superpower. B – Their culture, their constitution makes it very difficult. Why then don’t we look at the new burdens that are coming? The Third World burdens are enormous. This Third World debt bomb could go off, if we don’t get some resources there. I think what our diplomacy should do with the Japanese is say, “Look fellas, you have enjoyed a peaceful open-world economy more than anyone and you’ve profited from it. Let’s talk about a new division of labor. Our comparative advantage is providing this nuclear defense shield. Why don’t you become the senior partner on economic security? Why shouldn’t you become the world leader in foreign aid, not tied to exports, in the world bank, in huge capital flows to the Third World”? Because, Dick, if we don’t do something about the Third World, just imagine what’s going to happen.

Heffner: But, Pete, we have twice in the two most recent Presidential elections, selected a man who would just devastate that platform, who would just tear it to pieces. Who did, indeed, when it came to the matter of tax increases, when it came to the matter of recognizing the necessity, economically, of negotiating something more than the standstill between ourselves and the Soviets. How do you expect then, that a nation that has twice so well, so heavily supported someone who spoke very differently from the way you speak that we’re going to make that transformation? Is that because of the kick in the head that we got the other week? Maybe more that you anticipate coming up?

Peterson: I may be Pollyannaish, I don’t know. Oddly enough, one of the reasons I took the time to write this is I’ve been a Republican all my life and I’m very dismayed by what’s happened in the last six or seven years. Conservatives, allegedly, were supposed to conserve resources. The whole platform of supply-side reminds me of what we used to say on Wall Street when somebody would come out with a new offering and it was going to grow terrifically and it didn’t need much capital and it was going to dominate the market and make tremendous profits. We used to say, “You know, if it sounds too good to be true, it probably is”. I’m appalled that we believed that you could have the biggest tax cut in history, have the biggest defense increase, have a balanced budget, leave the entitlements alone and, my God, do you realize we were going to have a trade surplus? We were going to outcompete with the world. Why did we believe that, is the interesting question.

Heffner: Then I have another question. Pete, is it true that what I hear is “a switch in time”? You say you’ve been a Republican all your life. It doesn’t sound that way now.

Peterson: Well, I think Republicans are fiscal conservatives. In fact, I think most Republicans are fiscal conservatives. Most Republicans I talk to are appalled by these deficits. They’re appalled by the idea that this country is going to have a trillion dollars of foreign debt. They’re appalled by the idea that we’re going to lose control of our own destiny, that what happens in Germany on interest rates suddenly puts tremors throughout our whole economy. This is what Great Britain was about, you remember, Dick, stop and go and so forth.

Heffner: In ’88 do you suspect you’ll be voting as you voted in the past, or there may be a shift in parties for you?

Peterson: No, I’m supporting a Republican, I intend to support a Republican. It’s possible that would change, but I doubt it very much.

Heffner: Is he or she a person you see as providing the leadership we need now?

Peterson: Well, I don’t know that there’s ever been a candidate that ahead of time seemed perfect, but the candidate I lean toward, I think, has a very realistic understanding of this problem.

Heffner: Will you share that with us?

Peterson: Probably get in trouble for doing it…

Heffner: So you get in trouble.

Peterson: But I would support Bob Dole, I think would be the person I would be most likely to support. One reason is that a very tough deal is going to have to be cut with Congress. And it’s going to have to be cut among people that I think have some element of rapport and trust and it’s going to have to be cut in such a way that it’s what I indicated this morning, was kind of like the immaculate conception. You remember the Greenspan Commission deal?

Heffner: I do.

Peterson: One never quite knew who was responsible. Ronald Reagan and Tip O’Neill walked out of the door at the same time. No one could quite be like the turkey at the turkey shoot that pops its head and gets shot off. I think the next candidate is going to have to know how to cut a very tough deal with Congress, very early, without leaving blood all over the floor.

Heffner: Without the blood, we have about forty-five seconds left. Will that, in your estimation, affect Social Security payments as anticipated now?

Peterson: Oh, I don’t think there’s any question that Social Security as we now know it, before the century is over, will have to change because the aging are exploding, Dick, COLAS, you know, one hundred percent COLAS are exploding. But we can change Social Security in such a way that we do protect the poor and that the burden tends to fall on the well-off. Why should you and I be getting tax free welfare on Social Security? Where we get three to five times as much as we’ve put in, tax free? Why should you and I be getting a four point two percent rise in COLA? Do you need that at age 65? I’m not saying you are 65, but if you were. There’s a lot we can do that would trim the welfare out of the middle and upper classes. And I think we will change it.

Heffner: Pete, I’m glad that that’s the note you end on. Thanks so much for joining me today, Pete Peterson.

Peterson: Thank you.

Heffner: And thanks, too, to you in the audience. I hope you’ll join us again next time. And if you care to share your thoughts about today’s program, please write to THE OPEN MIND, P.O. Box 7977, FDR Station, New York, NY 10150. For transcripts send $2.00 in check or money order. Meanwhile, as an old friend used to say, “Good night and good luck”.

Continuing production of this series has generously been made possible by grants from: The Rosalind P. Walter Foundation; The M. Weiner Foundation of New Jersey; The Mediators and Richard and Gloria Manney; The Richard Lounsbery Foundation; Mr. Lawrence A. Wien; and The New York Times Company Foundation.