Air Date: July 18, 2015
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I’m Alexander Heffner your host on The Open Mind. Today’s guest and I share a proud intergenerational bond and those of you who have watched this program know I succeeded in the moderator’s chair my grandfather who enjoyed his intellectual exchanges on the open mine with the father of my guest Michael A. Peterson whom we’re delighted to welcome today carries forward his family’s vision for a sound American fiscal future.
President and Chief Executive Officer of the Peter G. Peterson Foundation. Michael directs its strategy, initiatives, partnerships, and long-term objectives all to increase public awareness of the nature and urgency of key fiscal challenges threatening America’s future and also to accelerate action on them.
Despite the Obama administration’s efforts to pare down the national debt, the fiscal confidence index fell to below 50 percent this year according to the latest poll released by the foundation.
“The millennial generation has the most at stake in building a vibrant thriving economy of the future,” Peterson said recently when announcing in collaboration with the Clinton Global Initiative My Two Cents Day – a first of its kind nationwide mobilization to increase our fiscal literacy.
The questions first to Michael Peterson – I want to ask him if we’ve yet to experience the severe repercussions of the debt crisis, that ticking time bomb he identifies and if inaction continues, when does he anticipate the bomb will go off. And welcome, thanks so much for being here Michael.
PETERSON: Well thank you for having me. Well I think the goal is to not… not have the bomb go off at all so I don’t really want to predict Doomsday or what day that will arrive. I think the simple fact is we have a very fundamental fiscal challenge with the federal budget and it’s based primarily on very predictable drivers of the debt and at its most basic terms we have baby boom generation that’s beginning to retire. There are 76 million of them. And as you know a significant portion the federal budget is dedicated towards taking care of our retirees and Social Security and Medicare and other very important programs. So we’ve got this huge influx of retirees that we’ve known about for quite some time. Secondly, they’re all living much longer. And that’s great news. However, it doesn’t mean we have more years in retirement. So you’ve got a bigger population who’s spending more years in retirement.
When we first started the Social Security system, the retirement age was 65 and life expectancy was about 64, so it led to a pretty sustainable system.
Now the retirement age is up to about 67, I guess on average but life expectancy at birth today is closer to 80 years old. So, we have a much bigger generation of people who are all living much longer.
And the third major driver of the long-term debt is our health care system. So, America has the most inefficient health care system in the world. We spend about 18 percent of our economy on health care. Most other advanced … advanced countries spend about 9 and a half percent. So we spend a huge amount more of our economy either as a share of the economy or per capita and we have health outcomes that really are no better than these other countries. So there’s a lot of waste in the system, a lot of inefficiency. And as you know retirees in their later years typically consume more health care dollars, as they should. But you put those three things together – a bigger generation of people living much longer operating in a health care industry here and health care sector that’s highly inefficient and you have a very predictable gap between the revenues the government’s going to be taking in over the coming decades and the level of spending that’s projected. So that’s … that’s the overall fiscal challenge… There’s a lot of confusion about it because deficits have come down in recent years so … … it is a complex subject matter to get across so some people…obviously it when we had the financial crisis in 2008 has a huge impact on the budget is that in fact impacts both revenue and spending. So the slowdown in the economy reduces incomes people lose their jobs. Less spending going on so revenues come down dramatically but also spending goes up because of other things we have to do – unemployment and so forth so it kind of has a double whammy effect on the budget, so we had trillion dollar deficits immediately after the financial crisis – those are down considerably which is great news. However this is really short-term stuff. You know, just because the deficit’s less than it was doesn’t mean we don’t have a long-term problem. So that’s … that’s the general issue we’re trying to bring greater attention to so that we can deal with these challenges. So my answer is, let’s hope Doomsday does another happen and the good news about this is that there’s a lot of things we can do as long as we get at it sooner rather than later.
HEFFNER: So your goal now in terms of the public awareness is to demystify the issue, and has been. Let’s start with the first of those three areas you identified. Can deficit reform and your approach, can that co-exist with what we would like to preserve as a safety net for those older citizens… can those two things co-exist.
PETERSON: Absolutely. I mean the… I would argue that if you don’t deal with this your safety net is in jeopardy. We all know that in a fiscal crisis things can happen to the budget. We can be in a situation where we have to make immediate cuts that are unintelligent, and I would argue that if we have a sound fiscal footing and we don’t need to do that it wouldn’t do that. It’s when you have they have a debt crisis and you may have an economic crisis that’s caused in part by the debt crisis that you might have to do unfortunate things and therefore the safety net in jeopardy and I would say one example is the sequestration that occurred. This was all self-inflicted because we were dealing with brinksmanship in Washington and so forth and they put in place … remember the so-called Super Committee and all these measures and no one expected sequestration to happen but sequestration did happen and they slashed across the board and cut a lot of programs but I don’t think anybody really would have cut it quite that way if we had had control of the budget in the …you know …in a more strategic sense. So I would argue that’s one example of where you have fiscal … fiscal uncertainty causing cuts in programs that don’t make sense. So, I would argue anyone who cares about the safety net should be very focused on preserving it and making sure that we have a sound fiscal footing for the …for the future.
HEFFNER: And so you want legislators to be judicious and methodical and thoughtful in the way they are approaching this problem. So, my question to you is, how do we pave the path towards a bipartisan understanding? Not even action, just understanding that these things can be framed and we’re all living on the same planet.
PETERSON: Well that’s this is what we struggle with every day I mean …it’s … there’s a lot of misunderstanding and misinformation and a lot of politics around this … this is of course our budget so it’s our it’s …basically a discussion of our entire federal government. What we try to do is first of all we’re very much nonpartisan. There’s obviously a lot of political polarization in Washington today that’s quite destructive and … and a real challenge for the government to operate. So we decided to, you know, at the… at the outset of our foundation to be nonpartisan because there’s very few organizations like ours who are operating on that basis. So we work with think tanks from across the political spectrum – we work with Democrats and Republicans and so forth. Secondly, we try to come with a lot of information and data so we have a set of a … you know … a few hundred charts of different ways to look at the budget and so forth, so we try to you know the numbers speak for themselves. There’s really no denying this problem there’s a lot of ways to look at it and a lot of considerations to consider …you know …to think through as you’re thinking about how to implement solutions, but …the numbers speak for themselves. So bringing up …bringing forth information is one of our key roles. And then lastly we do a lot of work with policy institutions to try to come up with solutions. One of our signature initiatives at the Peterson Foundation is something we called the Solutions Initiative. And in that … initiative um… um… we gave grants to 6 different think tanks, again from across the political spectrum, and we said, do whatever you want to the federal budget and we’ll measure you …will measure debt as a share of G.D.P. in 10 years and 25 years. And, on our current path according to the Congressional Budget Office – debt is skyrocketing to quote you know over the coming decades gets close to 200 percent of G.D.P.
And most economists suggest keeping it below 60, so this is way out of line with whatever anyone would call a reasonable and sustainable level of debt. So that’s our baseline.
And we gave these grants and they spent months working out their own versions of the budget doing whatever they want. We had no restrictions whatsoever and every single one of them solved the problem. They of course had differences in terms of the policy mix and some different outcomes but they were all within a very successful band where the debt was stable and or coming down.
I think the highest was in the 70 percent of G.D.P. The lowest was about 40 percent of G.D.P. So I think we proved there …A – we do have a problem. B- They all agreed it was unsustainable and not the right way to run a budget and C- most importantly there are there are a lot of ways to solve the problem.
HEFFNER: So, from that experience, what did what did you find was the most potentially successful way to do this. In this environment … we have the Bowles Simpson effort. What is the … the greatest promise now for a bipartisan undertaking to tackle this issue.
PETERSON: There’s a range of solutions we just need to choose some combination of them that do the job.
HEFFNER: Why did Bowles Simpson’s fail.
PETERSON: Well, I would argue it didn’t fail entirely. I think they did … for a commission doing what they were trying to do with a bipartisan group I think they had tremendous success. They had a super majority that did that did a vote in favor of it. They got people together like Tom Coburn on the right and Dick Durbin on the left and they both agreed to vote in favor of it… They needed a bigger majority to put it to Congress by virtue of how it was organized but I think it was a huge success in certain ways because they showed again they had another example of how we can solve the problem, it was a bipartisan solution, so it showed how two parties, two sides can come together … and I think it was a real benchmark on our issue because had that never happened, I think, you know the idea that there was a solution or comparison … you know it was a very useful comparison for all other plans and …and so forth …why did it fail. Well listen, it’s …this is a hard thing to do politically. I mean you know there’s no … if you do it in a bipartisan fashion there’s no doubt about the fact that it has to include some revenue and some spending cuts.
And if you’re doing that by … by definition you know you’re threatening the exact political priorities of each party and in our opinion it makes a lot of sense to do it because otherwise we have more taxes and less spending overall anyway because we haven’t dealt with the problem. I mean, let’s not forget that every year we pile on more and more debt and debt brings with it interest expense. So interest expense means more taxes over time and interest expense probably means less spending over time as it crowds out these other priorities. So, some of these changes to the budget are going to be forced upon us. I think our argument is, let’s deal with it earlier so that we can do it more gradually and more thoughtfully… And let’s … let’s get at it.
HEFFNER: So, to the extent that there was a failure was political will in the final analysis for a plan to achieve the support that would be signed by the president.
PETERSON: Well listen… it’s …it’s… I don’t get too specific about what happened because you know it’s hard for anyone to know exactly why it failed. You know obviously the parties didn’t come together and agree on it…Okay. Again I think that the commission itself did a great job putting forth the issue itself. What you’re asking about is one of the hardest things for any … any Congress and presidential administration to come together to do, and I think the political polarization that we all see every day in Washington has made almost every issue difficult, from gun control to immigration to the budget.
And what’s really needed is a significant leadership on both sides – to come together and for them to join hands and work together on solving these problems but that’s been a challenge for almost every policy issue over the last you know 8 or 10 years.
HEFFNER: What is runaway spending.
PETERSON: How I would define runaway spending is heading towards insolvency.
If you pick up any social security trustee report or Medicare trustee report they will show that it has long term insolvency and over the coming decades we’re facing an inability to pay the obligations, so to me to make a bunch of promises and have no plans for how to pay for it… is … is the definition of insolvency and you could call that runaway spending if you wish…If you look at what’s causing the problem as I said earlier – it’s …it’s the entitlement growth is one hundred percent of the growth in the spending over the long-term other than interest so that’s …that’s the cause of this.
However the solutions can involve any number of things. We can we can actually lower the discretionary defense spending to help pay the bills so it doesn’t have to be entirely taken out of those programs and of course there’s a revenue opportunity too –so if the entire country wanted all that spending they … we could raise the revenue to do that. I think if you look at a consensus of Americans there’s probably …a vast majority that would like to do some combination of both. So …
HEFFNER: You mentioned defense. What’s the foundation’s position on defense spending, the current status quo.
PETERSON: Well, listen I think our view is that everything needs to be on the table. Okay, the best solutions look comprehensively at the budget at all aspects from revenue… all the sides of the revenue issue and on the spending issue. And at the Peterson Foundation, honestly, our strategy has been from the beginning not to have a Peterson plan.
As I said earlier we sponsor work of other organizations to come up with plans – we are fostering greater and more solutions, so we’re all about solutions, but we felt that in order to serve in that role it’s probably better for us to not to have a …a plan that has our name on it and in our view it’s not all added to the discussion and it puts us in a slightly different role.
We’d like to be the convener and they gather every year we have a fiscal summit in Washington we’ll have our sixth one this year and we will bring together these different think tanks and speakers from all sides, so we think we see ourselves as a facilitator, a convener, and a funder, so we don’t have a Peterson defense number that I don’t …you know that we put out there. But on defense we do… we did another two different projects in the defense area, one …was we gathered former defense officials. And again had them look at the defense budget and come up with a new strategy. I think one of the issues here is that we haven’t had a revised strategy for the 21st Century. So look, comprehensively even not just within the whole budget but within defense look at it look at things like cyber and look at the current threats. A lot of the money in the Defense Department is based on threats from the last century. So we’re all struggling with how to deal with new threats. I think the defense budget is not well aligned with that and so they came out with some recommendations. So again, it was a Peterson funded effort and were very interested in funding policy solutions but we don’t have a specific number that we put out there.
HEFFNER: And in terms of revenue, what’s the most palatable argument to the American public that you’re finding through the grants that you give and the studies that you convene. Is there a way in which Americans would be responsive to the necessity as part of this grand bargain, this great compromise of 2015 and beyond, to raise taxes.
PETERSON: Well, listen; as I said earlier, I think any bipartisan solution to this overall problem that is a viable one is going to involve some combination of spending and revenues. I think if you have a baby boom generation retiring and living longer, you could say, okay, we just need to cut the spending and they get less but we do have obligations that we put forth and I think most people feel Social Security and Medicare are a vital program for the country. So they’d say there’s not going to be a penny more revenue even though we have a much bigger population coming through I think a lot of people disagree with that. So. For those bipartisan solutions or those solutions from the left that have revenue there’s a huge… there is a great number of opportunities on the revenue side I think we all would agree our tax code is not perfect. It’s got many, many thousands of pages …it’s incredibly complex. It’s quite unfair. There’s loopholes and so forth. I think the most prevalent sort of macro solution to the… to the tax issue involves broadening the base and lowering the rates.
So right now we collect a lot of taxes but we have a lot of tax deductions and loopholes and other things you can do to reduce your tax burden. Those are called tax expenditures and actually we have about 1.4 trillion of tax expenditures every year.
So that’s like spending in the tax code – so you’re basically saying if you do this type of business or mortgage deduction or a charitable deduction other than other things you lower your tax burden. Some …most … many of the solutions involve eliminating some of them eliminate all of them, some eliminate some of them but reducing those substantially, Okay, which increases the revenue base a lot and then using some of that revenue to do two things – one lower rates so you can lower the tax rate as long as you have fewer deductions and taking a portion of that and applying it towards reducing the debt and deficit over the long haul. So, I think that’s … that’s where we’re headed. Is it does involve a comprehensive change to the tax code, the last time we did that was in the eighty’s and again we had leadership. You had Ronald Reagan and Tip O’Neill and Dan Rostenkowski and you had real leaders in there pushing, and it was even very hard in that type of environment where they were working, I would say better together than we are today. But those are some of the solutions on the revenue side.
HEFFNER: In a climate in which the tax code, according the American public, is rigged and like the way you’re describing unfairly in a in a post Citizens United climate that really doesn’t give politicians the incentive to reform, either on the left or right because they’re pocketing funds from certain sources that want the tax code to remain the same especially businesses …especially businesses that are exempt from the penalties and taxation and responsibilities that citizens have. So, how do you motivate the politicians because a great deal of your work is geared around that.
PETERSON: Well, again it comes back to …to raising awareness about the challenge, I mean, we don’t have a solution that doesn’t involve any sacrifice or any pain because that’s fantasy land and so I can’t tell you …you can do that – but I think there’s less pain in solving it than there will be a never solving it … and so you’re really asking a question about political will. I mean this is … we have a … I would say we have two challenges – one we have a fiscal challenge … this relates to how our budget is organized our tax code is organized how are entitlements are organized, … but over that is a political challenge which is how do we get anything done in Washington when there’s so much polarization. We have these districts that are aligned in such a way that people are less incented to work together. I’ve seen these charts of …of the most liberal Republican and the most conservative Democrat and you know even just a decade or two ago there were a couple hundred members kind of in the middle, now it’s now we’re down to like a dozen members based on how they … how they judge that.
So, we have a polarized Congress and that makes anything hard. So, I think again it’s about raising more awareness about it – driving more leadership -having more conversations – putting out more policy solutions and we’re just going to keep at it and we have another election coming up obviously in 2016. And our goal is to make it a big issue in that campaign so that 2017 becomes another opportunity.
HEFFNER: From the outset we were describing an Armageddon situation, which we quickly diverted course from, and I don’t want to present such a gloomy picture. But the way that I drew an analogy about this is and it’s the same way that I know that you do. And advocates for action. It’s an unsustainable model if you look at just the base of …of a family. A family can’t survive… I don’t think folks necessarily recognize the magnitude of the fiscal crisis — … of the financial 07-08 situation… bread lines would have been possible had it not been for bailouts of the banks. And I remember being at University of Nebraska saying this to students, and eyes lit up. There was …they couldn’t even fathom that that was a possibility. Is that the …strongest pitch … bring it back to the local level of fiscal insecurity because then people feel the shock that the entire nation might suffer as a result of inaction.
PETERSON: Well, listen, … this… we’re always looking for ways to explain this issue in terms that people can understand and so I think you’re right there are a lot of household analogies. No household can run itself on a deficit for the foreseeable future and no business can do that either. So whether you use a credit card analogy or a business underwater analogy if you or I or one of our companies were involved in was facing something like this we’d deal with it immediately. When you’re dealing with government and politics and policy, listen, you have more time it’s you can say let’s do it tomorrow and the next day and so forth and you can divert these things and that’s really the danger of this …this is a long term problem and you know unfortunately a lot of short term issues come to fore and they deal with a long term problem later. So, we’re always looking for ways to explain it. We try to be realistic about the Doomsday.
So we do talk about what’s dangerous about the debt. When you have a debt like this, there’s interest expense is one of the key dangers so over the next ten years we’re going to spend about 6 trillion dollars on interest alone. You know, many of us feel we need to invest more in our economy and growth and education and other key priorities. But every dollar we spend on interest is an investment in the past.
HEFFNER: Is that a threat foreign or domestic or both.
PETERSON: Well, it’s an economic threat to have so much of your budget going toward interest because it increases the tax burden and it decreases the amount of reserve… resources available for other more important priorities. So that’s its economic challenge. But, you bring up a question about …about foreigners. I think it becomes a national security challenge. As Admiral Mullen once said, the famous quote, “The biggest threat to our national security is our debt.” Today foreigners own close to half our debt, and to me that that … that becomes a national security question if it continues to run out of control and, if we’re trying to be a global leader in the free world bring together adversaries and so forth. You know our power is diminished if we owe all these people trillions of dollars, or all these governments trillions of dollars so, I think I think the fact that foreigners are owning more and more of our debt does put us in a in a more precarious position in the international community. So it … that does become an international issue.
HEFFNER: Do you draw any analogy, or see the parallel especially when you’re catering now with this new initiative to millennials … climate change.
PETERSON: I think there are similarities… The climate change issue is a classic long-term challenge: what do I do about today, oh you know, I can’t make a difference and we’ll worry about it later and so, you know, it’s a kind of thing you can put off. We’re not going to have destruction the planet next week.
…So it’s a similar challenge in that it’s long-term and a little abstract and people don’t quite understand it and they want to get on with their daily lives. So, I think that community has probably some similar challenges trying to raise awareness and accelerate action.
HEFFNER: So financial literacy becomes a hugely significant issue.
PETERSON: Yes. So one, as you said, one of the things we’re …we’re working hard on is trying to get millennials more involved in this issue. Okay … so it’s …it’s their future we’re talking about.
This is … this could affect us in the short term but more than likely it’s a bigger problem the further you go out, so if you’re …the 20 something today thinking about the peak and important moments in your career that’s when a lot of this stuff will really come to affect the economy even more than it may already be doing.
So, we’ve worked a lot on ways to get young people … in terms of financial literacy we’ve developed a high school curriculum on fiscal… we worked with Columbia Teachers College to develop a high school curriculum which is being rolled out nationally today.
And then we’ve done something really … fun and interesting the last few years, which is something we call Up to Us. And this is our third year running it, and it’s a college competition …a competition on college campuses to run fiscal awareness campaigns. So this year we have close to 50 colleges participating, and these kids get very active and we hold about a month long competition and they can … we give them a budget and they can run different events on campus, from something this year called Dance to the Dead and Debt Bingo and they invite congressional leaders to campus to have a real policy discussion so there’s a wide range of very creative, fun, interesting, a lot of use of social media, as you can imagine. We had something called “My Two Cents Day” where they had a huge amount of activity on social media – and the goal of that is to bring millennials into the conversation and help them realize that this is an issue that affects them. I would argue affects it them today because this huge threat lowers confidence and investment in today’s economy, but it certainly affects them on our current path you know as they as they progress through their lives.
And so bringing them into the conversation is critically important that they have a lot to say they have a big, big stake in the solution here and the positive outcome that we can hopefully achieve and if we don’t, they’re the ones who are going to have to bear most of the burden of it. So …
HEFFNER: Let’s hope
PETERSON: … for us to bring them in.
HEFFNER: And let’s hope they don’t have to and they awaken and are responsive to your message. Michael Peterson thanks so much for being here today.
PETERSON: Thank you for having me.
HEFFNER: And thanks to you in the audience. I hope you join us again next time…for a thoughtful excursion into the world of ideas. Until then, keep an open mind.
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