Peter Peterson

Running on Empty … On the Road to Bankruptcy

VTR Date: September 8, 2004

Republican Peter G. Peterson discusses fiscal conservatism.


GUEST: Peter G. Peterson
VTR: 09/08/2004

I’m Richard Heffner, your host on The Open Mind. And I heartily second John McCain’s insistence that my guest’s new Farrar, Straus and Giroux book, “Running On Empty … How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It”, and that it provides a clear, concise, and unvarnished look at America’s political and fiscal deterioration.

“This book”, wrote Senator McCain, “should be required reading for everyone involved in public policy and anyone who cares about America’s future.”
Secretary of Commerce under Richard Nixon, formerly Chairman of the Bell and Howell Corporation, of Lehman Brothers and Lehman Brothers, Kuhn Loeb, now Chairman of The Blackstone Group and of the Council of Foreign Relations (among many other pro-bono organizations and commissions), there’s no question that life-long Republican Pete Peterson has been consistently “on message” in his decades-long plaint that both major parties are “bankrupting our future” … and America is “Running On Empty”.
Indeed, Mr. Peterson prefaces his book with a reminder of Ronald Reagan’s galvanizing 1980 campaign words: “I want to ask every American: Are you better off now than you were four years ago?” But, because his concern is mostly the fiscal burdens we are imposing upon our grandchildren — and theirs — my guest adds, “Perhaps we are ready for a candidate who rephrases that line: “I want to ask every American, young people especially: Is your future better off now than it was four years ago…?”

Now, of course, that we have such huge unfunded liabilities … again massive national deficits and debts … and the vastly higher taxes that must eventually accompany them.

Well when Pete Peterson was here last, it was late October, 1987 — the stock market had just fallen dramatically — and with a medical model in mind, perhaps he thought the market crash just might be the warning coronary that would scare Americans into becoming fiscally more prudent.

It wasn’t. It didn’t. But what in the world, then, I would ask my guest, will? Something worse than the Great Depression? What will do it, Pete?

PETERSON: You are asking the profound question that every Democratic industrial society had better ask. Namely … can we react in a timely basis to a silent, long-term, slow motion crisis? Or do we need a palpable crisis before we can act?

I once asked Lady Thatcher, Prime Minister of Great Britain, who is the only developed country leader that has taken action on the boomer senior benefit problem. I said, “Lady Thatcher, when you go to these G-7 meetings with all the leaders, are they aware of this ticking fiscal time bomb? And if so, why don’t they do something about it?

And she said, “Oh my, yes, Mr. Peterson, they’re very aware of it, all of them. But their theory is it’s going to hit on somebody else’s watch. And why should I take the pain for somebody else’s gain?”

Well this time, it’s a bit different, the 77 million Baby Boomers begin retiring in five years. The unfounded liabilities and the taxes as you indicated are just beyond people’s ability to comprehend. And the question is, I guess, will the next President say to himself, quite apart from enlightened long-term interest, “Hey, this might hit on my watch.” And I see two scenarios; one that I pray will take place and one that might well take place.

The benign scenario, the best scenario is the following. There’s a massive dose of truth telling because the politicians have anesthetized the American public with all kinds of phony terms … a Social Security trust fund that shouldn’t be trusted and it’s not, you know, funded. We’re not going to pass on our problems to the next generation. Well, who in the hell are we passing them on to? Or, “it’s your money, you ought to, you know, get it back”. Well, who does the debt belong to? Or it’s a social contract. When I went to business school, a social contract requires a meeting of the minds of the parties.

So to make this point kind of dramatically, I had a book party recently and I invited my wonderful seven year old granddaughter there … I’ve got nine of them and I think a lot about them. And I said, “Chloe, darling, have you come to a meeting of the minds on accepting 45 trillion dollars of unfunded liabilities; more than the net worth of the whole country? Have you come to terms with the idea that your payroll taxes are going to have to double to take care of Social Security and Medicare?”

And this adorable little girl says, “Poppa, is a trillion more than a billion?”

HEFFNER: [Laughter]

PETERSON: I said it’s a thousand times more and she said, “Oh my, I’m going to have to sell a lot more lemonade. And also Poppa, you’re going to have to increase my allowance.” So I guess my hope is that the truth gets out. How would the truth get out?

I propose that the next President, upon being elected, should immediately set up a twin deficit commission and hopefully, we can talk about the other “twin”, not just the budget deficit, but the unprecedented 600 billion dollars a year we’re trying to borrow from foreigners, which I think is utterly reckless.

And part of the 9/11 Commission, not of the usual special interest devotees and suspects, but people of the quality of Hamilton and Tom Kean, I’m talking about Paul Volker, I’m talking about Bob Rubin, I’m talking about Sam Nunn, I’m talking about Warren Rudman, I’m talking about Bob Carey. I’m talking about citizens of this country who can think in transcendent terms about the national interests. And that they should report immediately on what should be done about these.

If you stop and think about the 9/11 Commission … until they told the dreary story of what had gone wrong and why, this country wasn’t ready to do anything about the intelligence reform and now they are.

The next step is for the next President to take bold leadership, to educate the country, to take the lead on what ought to be done about it, and frankly, Dick, he ought to do this on a global basis.

HEFFNER: What do you mean, “a global basis”?

PETERSON: Well, if, if there was ever a global problem, this is it. What most Americans don’t understand is we’re aware of 77 million Boomers. But we’re unaware of the fact that this Boomer problem is going to hit them much sooner, much harder, much faster, with much more impact.

Keep in mind these programs are “pay as you go” programs and the young tax payers pay for the old retirees. Well, the birthrates in Europe for reasons we only dimly understand and Japan have fallen through the roof … they’re down in Italy and Spain to 1.2 babies per woman and have been for some time. It takes 2.1 to stabilize the population. Japan has a birth rate now of 1.3. They’re going to lose 25% of their young tax paying workers in the next ten years. Their benefits are higher, Dick; their taxes are already enormous. In Europe they’re at a 35% payroll tax.

The labor unions are much more powerful, you know. In, in France, only 7% of the people in Europe have any kind of a pension. So they’re going to need their money, not to finance our deficits and our trade deficit. But for their own purposes, and that’s what makes for a reckless situation.

HEFFNER: What’s going to happen when they do?

PETERSON: Well, that’s the question that I asked people that are smarter than I am, who know more than I do about capital markets. I went to 12 leading experts who really know capital markets … Paul Volker, Bob Rubin … people of that quality. And I said, “Lay out a scenario, what do you think the risks are?”

About half of the 12, Dick, predict that we’re taking a very significant risk of what they call “the hard landing”, which is a euphemism for a crash landing.

What happens in a crash landing? Largely because foreigner lose confidence or have … you know, better use of their money than lending us $2 billion dollars every work day to finance our deficit …

HEFFNER: That is really the figure, isn’t it?

PETERSON: Well, it’s enormous, every workday. Just for the deficit. Not for investment. We import another $2 billion because our savings rate is so lousy. Ah, the scenario is … the dreaded scenario is that there’s a hard landing, the dollar falls very suddenly, interest rates go way up with tremendous implications for human beings all over … but big impact on financial markets and the economy.

The softer landing which half of them thought we had a good chance of getting, still has the same things happen … the dollar has to fall and interest rates go up and we have to consume less, and we have to import less and we have to save more, you know. And so these are very big changes for a country like us, who is just obsessed with consumption and you know … as you know.

Both of them are landings, they’re not take-offs. But the longer we delay, the bigger the risk this great country is taking that we, we could well have a hard landing. So the next thing that has to happen is that this problem has to be approached on a bi-partisan basis. I was brought up in Nebraska and we used to have a pheasant shoot and a turkey shoot, you know, and the poor turkey that stuck his head up, got shot off immediately.

Well the poor turkey in a partisan setting that says, “I want to reform Social Security and I’m going to increase the retirement age, or I’m going to have an affluence test so fat cats like you and me don’t, you know, get all the benefits, or something of that sort.” They shoot him and say, “Oh, what a terrible idea. It’s not necessary.”

HEFFNER: You’re bulletproof, I presume.

PETERSON: Well, I don’t know, I’m old and rich and I’m too damn independent maybe, so I kind of say what I think.

But the … that’s the benign scenario … that we get at it right away and the malign scenario is the hard landing scenario, kind of the Pearl Harbor scenario. Now the trouble with that is that it would wreak tremendous costs, you know, on our economy and on our people.

So those are the two scenarios right now and some very hard headed characters I’ve talked to says it may well take a crisis and I sure hope not.

HEFFNER: You a betting man?

PETERSON: I don’t know whether the odds are as high as fifty/fifty. I would like to think they’re at least fifty/fifty. I would do everything I could, personally, as a citizen to persuade the next President to “get at it” and be a Lady Thatcher about this. Because do you want your legacy to be one … you know these Presidents tend to think of eight years. Boomers start in five years, Dick, there’s almost not experts I talked to that believe that we can continue borrowing this much money abroad for more than five years. So it’s going to hit on their watch potentially and what a legacy that would be.

HEFFNER: If you had to make a bet, and you do in November … which President is more likely to respond to the facts as you present them.

PETERSON: Well, you’re sure not going to find out in an election, are you? Because what …

HEFFNER: Not before that day in November.

PETERSON: Now, now that is for damn sure. The President, for example, at least put the subjects on the table and said something about Social Security and Medicare. But let’s briefly review what he proposed. He proposed that we take 10% of the payroll tax and put it individual funds. I’m a great booster of funding these benefits.

But then you ask the question: “where are those funds … what’s going to happen to the 10% you’re losing on Social Security?” The obvious answer is the deficit’s going to get bigger and the debts are going to get bigger.

Then he’s got a health savings plan that he talked about at some length. Well, the health savings plan is a perfectly sensible idea, it gives a lot of young people and poorer people some opportunity at least to have some insurance, high deductibles and co-payments, which I think are a fine idea and so forth. But again those incentives are going to cost something.

What are you going to do about the real problem, which is the costs of Medicare are unsustainable. Now John Kerry says he’s going to provide health insurance, you know, for everybody. Neither of them talk about the fact that we have the most grossly expensive health care system in the world. We spend twice as much money as any country in the world on, on health care as a percentage of the GDP and our health isn’t any better because we’re engaged in all kinds of inefficient, wasteful practices that are going to require some very tough decisions.

Now a lot of people say to me, “Well …”, particularly the Democrats … “you get rid of those damn Bush tax cuts and that would take care of everything.” Well, in the first place there’s no one I know that’s proposing getting rid of all of them, even John Kerry, is just getting rid of the, you know, the top …

HEFFNER: Would you?


HEFFNER: Would you?

PETERSON: Oh, I, I was not for these tax cuts in this form in the first place. Paul, Paul Volker, Rubin and Sam Nunn and others and I got together … we said the tax cuts to stimulate the economy in 2001 should be temporary, they should be fast, they should go to people that spend it, and they should not worsen the long term situation. So my enthusiasm for making these tax cuts permanent is very, very restrained.

So both candidates are talking about what they’re going to add to the package. Neither of them are talking about the brute fact that even if you got rid of all of Bush’s tax cuts, it’s only 10% of the increased costs. So the melancholy reality, Dick, is we’re going to have to reduce the benefits and the, you know the aching question before our political system, is how do we reduce those benefits and do it in a way that’s fair and humane and, and so forth. Or are we going to wait, you know, the “starve the beasters”, who they are in the …


PETERSON: … Republican Party. They are totally different than the Republican “supply siders”. Their theory is, those damn fools are wrong, you cut taxes, of course revenues are going to go down. And that’s what we want. Because then we can cut off these damn government benefit programs.”

And I say to them, “Beasters, you better be careful of what you wish for. We’ve got 77 million Boomers. If current trends continue, a third or more of them will have no savings at all. Of the poor in this country, the elderly, they depend … on 91% of what they get on, you know, on Social Security and government programs. And you’re telling me that some sunny day you’re going to say to them, ‘sorry folks, it’s all over.” And they’re going to say, ‘I needed that, I deserve that, I shouldn’t have been so profligate.’

And you think we’re not going to have a big social, political, moral thing, and by the way, when in a crisis, did the government ever get smaller? Which is what you guys say you’re for?” So we’re living in a kind of a Disneyland surreal world right now, Dick, that worries me a lot. We’ve got these huge risks we’re taking and yet, we’re pretending as though we can spend like money, you know, grows all over. We’re pretending as though the major sacrifice we’re going to ask from people is that they make a tax cut permanent, you know. And nobody is talking about what the pain is that one’s going to have to suffer in order to solve this problem.

HEFFNER: Measure that pain for me in your … terms of your realities. Where do you think we’ll have to feel it?

PETERSON: Well, I … my proposals on Social Security I don’t think are terribly painful and I think they can be done if we get at it. What the public does know about Social Security is that they are indexed to inflation and therefore in after inflation dollars, the benefits are protected.

What most Americans I’ve talked to, Dick, do not know is they’re also indexed to average wages. And therefore the costs go up because, as wages go up you have to pay out more. So one of the reasons you can’t “grow” out of Social Security problem very easily is that as productivity and so forth grows, the costs go up.


PETERSON: So, I propose doing what Lady Thatcher did twenty years ago, and Great Britain’s the only developed country in the world that really has a solution to this problem. She got rid of the wage indexing. Now I think that’s a perfectly fair proposition because I have five kids and nine grandkids … I try to imagine all of them sitting around the table with their parents and grandparents and I don’t believe the parents know they’re slipping this huge check to their kids. But they’ve been …


PETERSON: Bills … they have been “baloney-ed” really by trust funds and “we’re not going to pass the problems on” and hiding all these unfunded liabilities, which would send a corporate CEO to jail if he withheld that kind of information.

But once they discover what the truth is, I think it’s possible to have a reasonable discussion. And imagine the discussion, the kids are there, and the parents and grandparents are there and so forth. None of them want to slip the bill to the kids, they, they understand that’s fundamentally an immoral proposition. At the same time they know there are a lot of people who depend on these benefits. My proposal is you get rid of the wage indexing totally and then the kids and the parents would get the same benefit after inflation, thereby providing that safety net we all talk about. So that’s one of the reforms.

HEFFNER: And how would that impact upon …

PETERSON: Oh, it, it would eliminate the unfunded liability …

HEFFNER: Understood.

PETERSON: It would …

HEFFNER: How much …

PETERSON: It would eliminate …

HEFFNER: … does it mean …

PETERSON: … all of the unfunded liabilities …

HEFFNER: No, no I understand that. How much would it mean in terms of average Social Security benefit to the beneficiaries?

PETERSON: Well if wages go up two or three percent a year, you know, whatever the number is …

HEFFNER: That would be cut out.

PETERSON: That would be cut out. But frankly huge percentages of the kids don’t think they’re going to get the benefits anyway.

HEFFNER: I understand that.

PETERSON: And this way you could say to them, “you’ll not only get something that you didn’t think you were going to get, but you avoid big increases in payroll taxes. You know, where the Lord giveth and taketh away. I mean if you’re going to give somebody a benefit and then say, “But your taxes are going to go way up”, you aren’t getting anything out of that. So that is one of the reforms.

Another big reform, Dick, and it’s very tough … is, we have to save more as a country, fundamentally. And you can save more as a country in two ways … you can get rid of these damned deficits … which are negative savings … you know, they’re dis-savings. And you can save more.

Now I was asked by … in the previous Administration and the Congress to chair a Committee on Capital Formation, which is another fancy word for “savings”. And I got together the best group of savings economists I could … Left, Right and Center.

And I said, “Tell me, how effective are all these tax incentives for savings?” Because we all agree we have to save more. And they said, “Pete, the truth of the matter is they have some limited effect, but it’s kind of ambiguous, because a lot of people would have saved anyway, you know, and it’s one of those kind of calculations.” But I said, “We’ve got to save more, what are we going to do?”

They said, “Pete, we are in a consumption obsessed society. We have gone from the biggest savers in the world, to the biggest consumers. And you can’t consume and save the same dollars. If you want to save more in this country, you’re going to have to make it mandatory.” And that is what Singapore has done, it’s what Australia is now doing, it’s what Chile has done with great success.

So, under my proposal, all workers would have to save two to three percent more, it would not be in the hands of the government because politicians have demonstrated that they took all the Social Security surpluses and they spent them. And you can’t spend the same money twice. I’d put them in what we call indexed funds, global indexed funds, fixed income and stock. The people would own this money, but they would be managed by a public/private board outside of the government and that would increase savings and it would provide our young people with a better retirement than they would otherwise have. And those are two of the kinds of proposals I would make.

HEFFNER: And retirement … would you make it come later?

PETERSON: Well, that’s … I used to advocate increased retirement ages … what I called an affluence test because I thought a “means” test sounded kind of mean.

HEFFNER: Right. You and I can’t pass the affluence test. Okay.

PETERSON: We can’t. I was going to cut the benefits for people like me. In other words you have progressive taxes, why don’t you have progressive benefit reduction. What I find, Dick, in that proposal, what you might call a series of proposals is the opponents line up and you have an aggregation of negatives.

I was on Bill Clinton’s Commission for Entitlement Reform. But we had a fine gentleman there from the Coal Miners’ Union … oh, you can’t reduce … you can’t increase retirement age because you know a lot of our workers are handicapped. And I said, “Oh, come on, we can provide for handicapped workers, that’s only a tiny, tiny percentage.”

“Oh you can’t increase retirement age.” You say to other people, “Let’s have an affluence test … oh, you can’t do that because programs for the poor are poorer programs. You say to them, “What is it you’re talking about? That you have to bribe the rich to help the poor? And if we’re all on the wagon, who’s going to pull it?

So, what, what happens here when you make a series of proposals they kind of get shot down one at a time and … well, I’ve been for those and if, if we could get agreement on them that would be very helpful. I’ve tried to come up with something a little simpler and perhaps more saleable politically.

HEFFNER: We have one and a half minutes left … just as you seem to feel we have …


HEFFNER: … a very short time left before …

PETERSON: [Laughter] that’s a good metaphor …

HEFFNER: … before the explosion comes. What do you want to see happen right now?

PETERSON: I want this next President, and let’s not kid ourselves, Dick, you’re not going to get a serious discussion of this problem during election because the turkey shot phenomenon will …


PETERSON: … be in effect. The minute they’re elected, I want them to set up a Twin Deficit Commission. Tell the American people the truth. Put the best Americans we can think of on that Commission. Give them a fairly tight deadline because the, the problem is obvious. I don’t know of a single person who studies these programs that thinks they’re sustainable. And as Herb Stein said, you remember the Nixon humorist …


PETERSON: … if you can stand that oxymoron … if something’s unsustainable, it tends to stop, he said. If your horse dies, you’d better dismount … so the question is, are you going to dismount gracefully or are you going to get thrown off the horse? So I’d give them a tight deadline, I say, “I want you to speak the truth, I’m going to support you” and let this group report to the country. Because without some truth telling when we tell the American people the trust fund is going to take care of everything for decades, you can’t blame them for saying, “Jesus, there’s no problem here.”

HEFFNER: Pete Peterson, I didn’t think you’d come here and make me laugh and smile …

PETERSON: [Laughter]

HEFFNER: … but this doggone book is obviously saying something that the American people respond to, because “Running on Empty” … pretty dire title, and your subtitle, “How the Democratic and Republican Parties Are Bankrupting Our Future”, that’s pretty, pretty strong stuff, and yet it’s a best–selling book.

PETERSON: It’s a best selling book and I haven’t exactly done worse sellers, but this is my first best seller and I’m pleasantly shocked.

HEFFNER: Pete Peterson thanks so much for joining me today.

PETERSON: Thank you, Dick.

HEFFNER: And thanks, too, to you in the audience. I hope you join us again next time, and if you would like a transcript of today’s program, please send $4.00 in check or money order to The Open Mind, P. O. Box 7977, FDR Station, New York, New York 10150.

Meanwhile, as another old friend used to say, “Good night and good luck.”

N.B. Every effort has been made to ensure the accuracy of this transcript. It may not, however, be a verbatim copy of the program.