The Wealth of Nations

GUEST: Peter G. Peterson
VTR: 06/11/2008

I’m Richard Heffner, your host on The Open Mind for over a half century now.

And I remember when almost as many years ago a particularly knowledgeable and well-connected American icon wondered aloud in my presence whether a law had ever been passed mandating that John J. McCloy – often referred to as head of The American Establishment – must serve on and usually chair the Boards of Directors or Trustees of quite so many major American institutions…civic, financial, cultural, philanthropic, educational and governmental.

Well, I mention the late John McCloy because the same might be said of my guest today … Peter G. Peterson, Senior Chair and Co-Founder of The Blackstone Group … Chairman Emeritus of the Council on Foreign Relations…Founding President of The Concord Coalition…Chairman of the Federal Reserve Bank of New York…Chairman and CEO first of Bell and Howell, then of Lehman Brothers and later of Lehman Brothers Kuhn, Loeb … Assistant to President Nixon for International Economic Affairs and then his Secretary of Commerce.

And I could go on and on listing the other corporate Boards my guest has served…as well as the cultural institutions to which he has devoted time and resources … for example, the Japan Society and the Museum of Modern Art.

Of course, my guest’s best known books are Running On Empty: How The Democratic and Republican Parties Are Bankrupting Our Future, and Facing Up: How to Rescue the Economy from Crushing Debt and Restore the American Dream.

Also, when Pete Peterson first joined me here on The Open Mind in the 1980’s and again earlier in this century, he was merely a millionaire … now he’s a billionaire. And, in the interest of full disclosure, I would point out how generous my guest and Joan Ganz Cooney have been in making possible The Open Mind’s online historical archive.

But for all the huge sums he’s made, and paid in taxes, and contributed to worthy causes — most recently a billion dollars to establish the Peter G. Peterson Foundation — it seems to me that my guest must regret enormously that he hasn’t made the kinds of inroads he so much wanted to make upon what he first deplored at this table 21 years ago … and deplores today … what he considers Americans’ unsustainable pattern of consuming more than we produce, of spending and committing more dollars than we have or likely will have, of saving little — if anything at all — and of passing along the bill for all of these profligate ways to our children and grandchildren.

Indeed, I want to ask Pete Peterson … IF, as the title of his book went, we are really “running on empty”, when and where does this great American enterprise of ours just stop in its very tracks? And what will his new foundation do to help keep it going instead? Pete, that’s a mouthful, but what’s the answer?

PETERSON: Well, the Foundation I’m setting up is going to focus on some challenges that are long term, that I call undeniable, unsustainable and yet, untouchable, politically.

The world “unsustainable” … just elaborate on that. Herb Stein a Nixon humorist in the White House in which I served … a Nixon humorist maybe is an oxymoron to some of you, I don’t know. But he was a very funny man.

He once said if something’s unsustainable, it tends to stop. Or he said, if you don’t like that one, if your horse dies, we suggest you dismount.

So we are clearly on an unsustainable path. The question is, what are the circumstances under which we will get off of this horse that we’re on. Will it take a crisis? And a very costly crisis it would be.

Or can we somehow get the American public sufficiently educated, sufficiently motivated, sufficiently activated to do something about it. Because make no mistake about it, at bottom these long term challenges that my foundation is going to focus on are truly undeniable by anybody that looks at them.

So the issue then is, can we educate and motivate and activate the American public, or enough of the American public to do something about it?

Now what do I mean “do something about it?” When I say these problems are politically untouchable what I mean by that is there’s such pressure on our political friends to continue and expand these programs because the special interests representing them are very, very large.

For example, the American Association of Retired Persons has nearly 40 million dues paying members. They vote much more, the write much more, they call much more, they email much more.

And the politicians who these days view their jobs not as the way our Founders envisioned these jobs … you know that they’d be a temporary period of services … but as a job … as a career. And they want to hold on to those jobs and they conclude that if they were to take action on these problems, that privately, sitting the way you are, but not on television … they would say, “I agree with you, Pete, these are unsustainable”, they’d be thrown out of office.

And until this dynamic changes, the political dynamic changes so they hear from a lot of Americans that “I want you to confront these issues” not much is going to happen. And I just hope to God it isn’t a crisis that gets this to happen.

HEFFNER: You’re betting a billion dollars that you can do something. What are the odds?

PETERSON: Well, I was presumably educated in the University of Chicago, graduate school. We had a brilliant Nobel Prize winner … professor named George Stigler. And George used to say if you have no alternative, you have no problem. And I’ve taken that through life and I found it very useful.

I’ve said to myself when I had this windfall of over a billion dollars that I never had before, “What is my alternative?”, to sit around and conclude that it’s going to be very, very difficult and very, very daunting and in effect do nothing. And then, I have nine grandchildren now … confront the future their generation is going to face … I find it intolerable beyond anything I could imagine … and simply say, “Well, I could have tried, but I decided not to do it.” And I … that would … I would think that would be a horrible feeling to have.

Now which the other obvious fact is, I don’t need the money. I’m 82 years old, I have nice housing and you know, all the amenities anybody would need.

And I’m reminded of what my father said to me many, many years ago, he was a Greek immigrant …I’m the obvious lucky product of the American dream. And I used to whine to him, you know, about how, “God I wish we’d get a new car, we’ve had this one for 10 years. Or why don’t I get a new bike?”

And he used to say, “My son, it is important to know what enough means. And we have enough.”

And fifty years later I was told a story about Kurt Vonnegut and Joe Heller out in the Hamptons as some wealthy hedge fund guy’s home. And Joe came up to … I mean Kurt came up to Joe Heller and said, “Joe, doesn’t it bother you that this guy makes more money in a day than you made selling Catch 22 [one of the great novels]?”

And Joe apparently said to him, “Kurt, I have something this fellow doesn’t have.” And Vonnegut looked at him and said, “What in God’s earth that you have that he doesn’t have?” And he said, “I know the mean of enough”.

And the more I thought about it. The more I thought of my father, the more I thought about this story, the more I thought about George Stigler. I have more than enough.

And I think the alternative of doing nothing is just intolerable to me.

HEFFNER: What will the foundation do to make the unsustainable … not sustainable … but to rid us of the, of the ideas, of the patterns of behavior, of so many things that make us about ready to run out of gas?

PETERSON: Sure. I’ve concluded that … well, there are some cultural issues going on here, beyond the political, where we seem to have lost a bit of our sense of the future … the idea that you save now for a better future, as expressed in our very, very low savings rate.

As a result of a culture that, kinda … I want it all, I want it now, I don’t want to give up anything, I don’t want to pay anything, I’m entitled to it … and all that, that mentality.

There is an additional problem that our political friends have mis-informed, dis-informed, whatever you want to say, the American public. And have tended to anesthetize them (laugh).

It isn’t that parents and young people, I think, are totally unconcerned about their future or what’s going to happen to kids. It’s that they don’t know the magnitude of these problems.

And the politicians, I guess from the political standpoint, understandably enough, don’t want to lay out the magnitude of the problems because the first question they’re going to be asked is, “And what do you intend to do about it?”

And there are now no solutions to these problems that don’t involve our giving up something. Giving up some benefits, raising our taxes or whatever. So that’s not only considered politically incorrect, it’s considered politically terminal.

So we’re going to spend some money, not so much on solutions, or reforms, because they’re pretty well known in most of the areas we’re going to be working … except for health care costs, which I consider the biggest and toughest problem of them all.

But it, it is that they don’t understand. For example, our political friends tell the American public, the Social Security trust fund will take care of Social Security for forty, fifty years. Now, if that were true, and that’s what the American people are told … well, I can understand why they’d say, “Well, that’s off forty, fifty years.”

But in truth the trust fund is an oxymoron. It shouldn’t be trusted, it’s not funded. They’ve already spent that money, that was supposed to be saved and set aside. There’s nothing in the trust fund now but a bunch of liabilities.

Now I think if the young people and their parents really understood what’s going to happen to their payroll taxes, what’s going happen to their income taxes if we don’t something, I think they would be much more likely to be motivated. So part of our job is to speak the plain truth, be awfully sure we non-ideological and non-partisan. Rely always on data and facts that are official, so that we’re not accused of loading them. And trying to get the American people to understand the magnitude of what we’re talking about.

So, we’re going to do a wide variety of things. In August we’re going to announce a film called, “I.O.USA” that we’re working on that I hope to see a final cut of today.

It lays out these problems in fairly clear terms. We’re going to have a big kick-off with my Nebraska friend, Warren Buffet in Omaha. And 400 theaters across the country are going to show that.

We’re exploring how to motivate the young and how to educate the young. And I’m a bad guy to do that and that’s why we’ve got a great CEO, named Dave Walker, who was Controller General of the United States and feels … is not only very expert, but he feels great passion about these subjects.

And we’re going to try to figure out how do you, how do you reach the young? And since I don’t even do email, I’m the worst guy in the world to be laying this out. But we’re getting experts on Face Book, and My Space (laugh) and the Internet generally and I think Barack Obama has demonstrated that there are new possibilities here.

So we’re going to have a major effort on reaching the young and laying this out.

HEFFNER: Can you avoid, as you suggest, you’re going to avoid being partisan, can you in this Presidential election year avoid that?

PETERSON: Well, I may be naïve for taking this on, and I’m sure some of my friends are convinced I am, but I’ve told you why, why I’m doing it.

I’m not naïve enough to expect our political friends to talk in any specificity during a campaign. You will notice in all of the debates that you’ve heard, and all of the speeches, virtually nothing is said about entitlement costs that are just totally unsustainable, or savings rates that force us to be recklessly, dangerously dependent on foreign capital. Or health care costs that are just metastizing beyond belief and threaten the very competitiveness, you know, of the US economy.

And the reasons are pretty clear. As I said earlier somebody’s going to say, “Well, God, I had no idea this was this big a problem. What are you going to do about it?”

So most of the campaign talk is about tax cuts, is about spending increases, its about a kind of an entitlement mentality that “we want it all, we want it now, we’re all entitled to it and we don’t want to pay for it.”

So, what we’re going to try to do is lay out a kind of a predicate beginning in a few months, where we’re going to try to really educate the American people on what we’re talking about.

Now another group that I’m embarrassed to say … Tom Friedman said, we were missing in action, MIAs … are the business community. There were times in the past, you know, where the business community took a major role on certain long term problems.

You know the Marshall Plan and the UN and they were … and other such programs and they were terribly unpopular at the time. But there enough executives out there who understood enlightened self interest. And who understood if the world weren’t peaceful and prosperous it would effect them, too.

HEFFNER: Why are they MIA?

PETERSON: Well I’ve written in articles about that, speculating. Part of it, I think, is their term of office is much shorter than it used to be (laugh). And, ah, I think the typical period is about four and a half years, or something.

HEFFNER: For a CEO?

PETERSON: For a CEO, yeah. Part of it is that we’ve got a media world that’s kind of … I call it, we’re in the “gotcha” mode. You know they love to embarrass major figures.

Part of it, I think, is the globalized economy is far, far more demanding than it used to be when I ran a company. And they’re working hard and traveling and their first priority is that. Part of it probably is stock options that have rather short, you know, vesting periods.

You’d have to be a sociologist and a historian to understand why several segments of the American economy, the political economy are unrepresented. And my thesis is that the future is more or less unrepresented. And our children are more or less un … you know, unrepresented.

But as a society we have an aggravated case of short-term-istis. And in your business I think the media is another world we have explore. I think at the present time long term challenges, you know, are considered pretty boring.

And they don’t get the audiences. So what can we do to somehow make this future reality, real enough and stark enough that television networks and so forth would be more likely to focus time on these problems.

HEFFNER: Pete, I’m not one of those people who seeks to embarrass or put people on spots, but I can’t help but wonder … I, I’m aware of the fact that in the early eighties … you and I are old men now, but in the …

PETERSON: Yeah.

HEFFNER: … eighties you came to this program and you delivered the same message. You saw what was happening and what the future would bring. You spoke then about the one grandchild you didn’t want to be burdened …

PETERSON: Yeah.

HEFFNER: with this. Now there are so many more. Can anything short of the catastrophic give us that sense of reality … fear, if you will …

PETERSON: Sure.

HEFFNER: A film? Well, Al Gore’s film on the environment certainly …

PETERSON: Made a difference at the margin …

HEFFNER: It did make a difference. Is that what you’re thinking of with your film.

PETERSON: Well, there has never been a major educational effort. A billion dollars is a lot of money. And with a billion dollars you can do things in the media that wouldn’t be thinkable (laugh) if you had a very small budget.

I want to see if there’s some way that the young people, in particular, can get themselves organized, you know. Would it be possible to have a young people’s organization? Because I think if the kids understood what was going on, they could go to their parents and grandparents and say, “What are you doing here?”

So that they start expressing themselves in Washington. At the present time, you know the old gag about ignorance and apathy in which the professor asks some kids which is worse … ignorance or apathy … and some kid from the back of the class says sleepily “I don’t know and I don’t care.” Well at the present time the young people don’t know about these problems.

But again I don’t think I have an alternative. I just … I don’t think I could stand the prospect, and I probably won’t be around in 10 or 20 years to have my grandchildren say, “Poppa, you know, where were you? Why didn’t you do something about this?”

HEFFNER: Running on empty … always come back to that title. Ah, you’ve got to stop somewhere. I don’t mean you ought to, I’m not talking about a moral imperative … as you’re presenting us with a moral imperative. Just physically … where do we stop? If we are running on empty when does this nation stop?

PETERSON: Well, one of the more likely places that a crisis would come about and incidentally it’s a melancholy reality that they, they might not say so on television, but some of the most respected public policy people I know … when you say to them, “Do you think we can avert the crisis or will it take a crisis to get it?”

Most of them think it will take, you know, a crisis to get us to finally do something about these problems.

What would the crisis look like? Well at the present time, with our mammoth trade and what are called “current account debts” … it’s … we’re borrowing not just unprecedented, but unthinkable amounts of money from foreigners.

In the Reagan years the so called “current account deficit”, the foreign deficit reached about a little over 3% of the GDP. It’s now been running 6% to 7%. And I’ve been involved with the Peterson Institute for International Economics whose whole world are these international economic issues.

And I’ve told them to do some projections. Well, not far off, by 2015, we have a debt level way above what the IMF says is safe. And you begin looking, frankly, a bit like a developing country.

Now if those foreigners, particularly given since we have no personal savings now in this country and we have these huge deficits that are negative savings, you know, they devour what savings we have. If these foreigners were to decide at some point, “I’ve had enough. I’ve got too much money in dollars. I’m going to diversify”. And they could do it for economic reasons and a thought not many people are spending much time on, they could do it for geopolitical reasons.

I remind you that many years ago, France and England were thinking of taking some … particularly England … some aggressive action at Egypt, when they were talking about taking over the Suez Cannel. And America thought that was a bad idea. Well, at that point we had an awful lot of British pounds and as I read history, a top official of the administration called their British friends and said, “Look, if you go ahead with this, we’re going to have no alternative, but to dump the British pound.” And within 10 days they had changed their mind.

Well, as powerful as we are and think we are, nothing would prevent some of these foreigners from using this extraordinary amount of borrowing for geopolitical reasons, for political reasons.

So this has led to a huge argument in the international economics business. Of the hard landing advocates and the soft landing advocates. Both are landings, believe me, they’re no take-off. The soft landing is the dollar falls but it falls steadily and relentlessly, interest rates go up some, inflation goes up some, gross slows down a bit. But its handled with a lot of trauma.

The other scenario is the hard landing. The crisis landing. Paul Volker, my very good and highly respected friend thinks there’s a 75% chance of a dollar crisis in five years. That would be where we reach a point where very leaning foreign owners of capital say, “I’ve had enough” and they lose confidence. And then you have the hard landing, which is the dollar falls percipitiously and suddenly, interest rates go up very dramatically, you have the awful combination of inflation plus recessions.

And no one’s smart enough to tell you when others are going to lose confidence in us. That’s a psychological issue, it’s a political issue. But that’s the hard landing that people worry about.

HEFFNER: Pete, we’ve reached the end of program. I hope that it isn’t the end of the line for a political economy.

PETERSON: Well, we’ve done it before. The “Greatest Generation” … fought and paid for a costly war … far more costly than this one … in every sense of that word.

They fought and paid for the G.I. Bill. They paid for the highway system. And they did a lot of things.

We’ve done it before and we can do it again. But in those cases the threat was explicit, it was obvious, you know. The threat I’m talking about is a silent, slow motion kind of crisis that we aren’t very good at.

HEFFNER: Except that what the Pete Peterson Foundation does now may make that a much more …

PETERSON: Well, I hope so.

HEFFNER: … obvious and …

PETERSON: I hope so.

HEFFNER: … understood thing.

PETERSON: I hope so.

HEFFNER: Thanks so much for joining me today, Pete.

PETERSON: You bet. You bet. Thank you.

HEFFNER: And thanks, too, to you in the audience. I hope you join us again next time. 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 an 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.