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Peter G. Peterson

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Peter G. Peterson, a fi scal conservative with 60 years of experience in top government and industry positions, co - founded the Concord Coalition with the late Sen. Paul Tsongas (D - MA) and former Sen.

Warren Rudman (R - NH) in 1992. More recently, the former secretary of commerce founded the Peter G. Peterson Foundation and endowed it with $ 1 billion to tackle some of the critical challenges threatening the nation ’ s well - being. Among them: large and growing budget defi cits, dismal national and personal savings rates, and a ballooning national debt that endangers the viability of Social Security, Medicare, and our economy itself.

Q:
Tell me about these things that people in Washington refer to as
the
trust funds.
What are they, and are they appropriately named?

Peter Peterson:
Social Security trust funds are a misnomer, and in fact they ’ re an oxymoron. They shouldn ’ t be trusted and they ’ re not funded. They were intended originally for the surpluses that were building up as the boomers were working, to be set aside and saved for Social Security. Instead, they were spent for other purposes. As a result, all we have in there is a bunch of liabilities.

Q:
Those surpluses have been running now for 20 or 25 years.

What does the future look like for those surpluses?

Peter Peterson:
For the next seven or eight or nine years, they ’ ll continue to approach a trillion dollars in total, but in 2017 the boomers will retire in force and at that point the defi cits grow at an extraordinary rate. In other words, we ’ ve got to learn to think in terms of the cash in, cash out, pay - as - you - go system, not a trust fund at all. And when we ’ re told by the politicians that the Social Security trust fund will be solvent for another 40 years, that is totally disingenuous and not true.

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Interviews

Q:
Why aren ’ t we fi xing it? Why don ’ t people like to talk about
this in Washington? Nobody disagrees with what you ’ re saying.

Peter Peterson:
I call these long - term challenges undeniable and unsustainable but politically untouchable. When I speak privately to our senators and congressmen, they all agree these long - term challenges are unsustainable, and no one is denying them. They ’ re just saying that politically we have gotten so used to getting it all, to all of us being entitled, to never giving up anything or paying for anything, that it ’ s become politically incorrect to ask the American people to make any sacrifi ce. In fact, many of our politicians believe it would be politically terminal if they were to do that.

Q:
What would you say to somebody who may not know this
story as well as you do, but characterizes fi xing entitlements
or reforming entitlements as something that the right wants,
but that the left side can fi gure out just through tax reform?

Does that make sense? Is there any truth to that?

Peter Peterson:
Well, let me give you an idea of the magnitude of the problem. If you look at the projected spending for Social Security and Medicare, it ’ s stunning. Just the increase is 9 percent of the GDP, but roughly three times what we spend on defense.

Now the left is inclined to say, “ Well, let ’ s just get rid of the Bush tax cuts, ” even though most Democrats are only talking about getting rid of the tax cuts on fat cats like myself. If we were to do that, we would increase revenues by 1 percent of the GDP, so it ’ s only one - ninth of the total increase in spending. If you tried to solve this problem with tax increases, you would end up having to more than double our income taxes and double our payroll taxes.

The payroll taxes are already the biggest tax, which 80 percent of people pay, and it falls on the middle class, whom everybody says deserves a tax cut, not a tax increase. Now I ’ m the fi rst to say that the solution to this problem will undoubtedly involve some increase in taxes, particularly on us fat cats, but there is no way you can solve this problem just through tax increases. It ’ s going to require benefi t reforms, and if we start early enough we can do c10.indd 140

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these in a way that is fair and protects the safety net for the truly needy. But if we wait, it ’ s going to be more and more diffi cult to solve this problem.

Q:
Who was Wilbur Mills and what was his great idea?

Peter Peterson:
I ’ m a little chagrined to tell you, because I was on the Nixon White House, fi rst as an economic adviser to President Nixon and then as secretary of commerce. Wilbur Mills was a Democratic Arkansas congressman who decided one day that he wanted to be president of the United States. And his opening bid was that we were going to 100 percent index Social Security benefi ts to infl ation, something that is very rarely done in the corporate sector. Not only that, but we ’ d increase the benefi ts by 20 percent. Now obviously the Democrats before us, LBJ, had been criticized for big spending. You ’ ll recall guns and butter.

But what I ’ m chagrined about is that we were supposed to be the fi scal conservatives, and we lost our fi scal mooring. The next administration caved in to Wilbur Mills and, without doing a serious systematic study of the long - term costs, which will have amounted to hundreds and hundreds of billions of dollars, they caved in and went along with it. These benefi ts have been going up ever since, up and up, in only one direction.

Q: How would you characterize or grade the fi scal record of the
current administration?

Peter Peterson:
I guess you ’ d call me a moderate Republican, maybe a Rockefeller Republican. I have a feeling that if that ’ s the case, there are only two of us left, David Rockefeller and myself.

I am a moderate on social issues but a true fi scal conservative. I would be the fi rst to say that I applauded what happened in the 1990s when, between the Congress, Bill Clinton, and Bob Rubin, Treasury secretary, they put in spending caps, they put in pay - as - you - go rules, and you know what happened. We had budget surpluses. Alas, for reasons I do not fully understand, in a Republican administration we ’ ve ended up with not just guns and butter but guns, butter, and big tax cuts, and we ’ ve gone from having a budget surplus to having very, very large defi cits. Now the c10.indd 141

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142 The

Interviews

president could have vetoed some of these spending bills, but until very, very recently he didn ’ t veto any of them. So we have this phenomenon that not only have defense expenditures gone up, not only have we had big tax cuts, but so - called discretionary spending has gone up at record levels. And don ’ t ask me to explain what has happened here, because this administration and Congress has truly lost its conservative moorings.

Q:
As a moderate Republican, do you feel that the party has left
you, or something along those lines?

Peter Peterson:
I do think the party has left its basic conservative principles. The reasons are not clear. We even have books being written by Secretary of the Treasury O ’ Neill in which very senior offi cers of the administration are saying defi cits don ’ t matter. So there is no question that we ’ ve lost our moorings and we ’ ve got to regain them.

Q:
You had a front - row seat to what happened in the ‘ 60s and the

‘ 70s. Can you explain what the many key factors were that made
infl ation go like this and pave the road for the work that Paul
Volcker had to do?

Mr. Peterson:
Remember, we had the oil embargo in 1973, and oil prices suddenly went up several times. We had big increases in food costs. This was a period when there were big wage increases, big increases in benefi ts. Remember, the ’ 60s saw the launching of Medicare, which is a problem today that is fi ve times bigger than Social Security. So the money supply, I ’ m sorry to say, went up very dramatically during that period of time. Paul Volcker absorbed what you might call a triple or a quadruple whammy, and in my view, handled it brilliantly and courageously.

Q:
Did the Federal Reserve at that time do anything to make the
situation better or did they do anything, possibly, to make the
situation worse?

Peter Peterson:
I think history will record that the Federal Reserve was part of the problem. They let money supply get out of control.

When Paul Volcker took over, he realized the need for tough action, but it ’ s hard for many people to believe that interest rates c10.indd 142

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were, as I recall, at the extraordinary level of 15 to 20 percent annually. He had to take truly courageous action, and he did.

Q:
When infl ation does rear its ugly head, is it true to say that
infl ation affects some people in our society differently than
others, and if so, how is that?