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Interview: Peter G. Peterson of the Council on Foreign Relations

Published by The Straits Times, Singapore on 2004-11-13

AS Chairman of the Council on Foreign Relations, Mr Peter G. Peterson is widely considered the de facto head of the American Establishment. Formerly the Secretary of Commerce in the Nixon Administration, Mr Peterson is Chairman and Co-Founder of The Blackstone Group, one of the leading investment banks in the US. He was Chairman of the New York Federal Reserve until a few weeks ago.

Mr Peterson founded The Concord Coalition in 1992 to increase awareness of fiscal responsibility. Prior to founding Blackstone, he was Chairman and CEO of Lehman Brothers, and later of Lehman Brother, Kuhn, Loeb Inc. He was also Chairman and CEO of the Bell and Howell Corporation from 1963 to 1971.

Prior to founding Blackstone, Mr. Peterson was Chairman and CEO of Lehman Brothers (1973-1977) and later Chairman and CEO of Lehman Brothers, Kuhn, Loeb Inc. (1977-1984). He was Chairman and CEO of Bell and Howell Corporation from 1963 to 1971. His latest book, "Running On Empty: How the Democratic and Republican Parties are Bankrupting Our Future and What Americans Can Do About It," is currently on best-seller lists in the US and Europe.

Following are excerpts from an interview Mr Peterson gave to The Straits Times:

In your new book, you say that both Republicans and Democrats have bankrupted America. How so?
I refer to the theologies of both political parties. I use the word theologies deliberately, because a lot of their policies seem to me, faith directed: they are relatively untouched by analysis, history or evidence. And they are delivered with a kind of moral certitude. Let me talk first about my party--the Republican Party. We have developed a tax cut theology, which has morphed into "any tax cut, any time." To continue the theological metaphor, the tax cutters, in the Republican Party, have formed an unholy alliance with the big spending, big government Republicans: Alas, we have a new oxymoron, the big government Republicans. This is not just Pete Peterson, the aging curmudgeon, saying this. So, let me quote from some conservative Republicans: The Cato Institute refers to the "Spending Explosion." Dick Armey, the very conservative former Republican House majority leader said, "We can't pin this on the Democrats--we are in control of everything." And Senator John McCain calls this spending binge the worst in his 22 years in Congress. He said, and I quote: "It is like any other evil. First, you condemn it. Then you condone it. And, finally, you embrace it."

You often refer to the "Starve-the-Beasters." What's that?
These Republicans are joined by their fellow "Starve the Beasters." Paradoxically, their argument is in sharp contrast to their supply-side Republicans friends who might argue that the increased revenues from tax cuts would grow us out of any problem. The Beasters say, "Oh no, they're not right. You cut the taxes and, of course, revenues will fall. Then, we can get rid of those awful benefit programs. I have debated the "Starve the Beasters" and I say to them, you characters had better be careful what you wish for. Have you considered certain realities? Do you realize that one-third of the people at age 65 in America have no net financial savings at all? Do you also realize that the 20 percent of the retirees - the lower income retirees - depend on these government benefits for 90 percent of their total income?

How concerned are you about the large cohort of baby boomers who will soon enter their retirement years in the US?
Picture the scene: 77 million boomers, twice the number of elderly as we have now, tens of millions of whom would have saved nothing. And yet, these "Starve the Beasters" are seriously suggesting saying: "Sorry folks, you will now get a big cut in benefits." I ask them, do you think there are going to be no social or political effects? Do you think these highly organized 25 or 30 million Americans are going to say, "Thanks, I needed that. I deserve that for my profligacy." And, by the way, Beasters, when in a crisis, did government get smaller? It might also not be unfair to ask the President, "By the way, sir, in the face of this spending explosion, how is it that you are the first full term president since John Quincy Adams not to veto a single bill?" So, to sum up, my party has done President Lyndon Baines Johnson one better--we have guns, butter and tax cuts.

What do you say about the Democrats?
If my party has not seen a tax cut it did not like, many of my Democrats friends have hardly seen a universal entitlement program they did not either want to create or expand. In so doing, they conveniently ignore the awkward question: If we are all on the wagon, who will pull it? Viewed historically, I believe it is fair to say that Democrats, with a little help from some of my Republican friends, have been the primary movers of the following rather startling trend: In the last 40 years, federal benefits to individuals after inflation has multiplied six times! And, as to Social Security reform, I kid my democratic friend, former Senator Bob Kerrey. "Bob, where is the Democratic plan for Social Security reform?" He says, "You hadn't seen our plan?" I said, "No I haven't, what is it?" He said, "We call it the 'Do Nothing Plan'." Indeed.

Are Medicare's costs sustainable?
Viewed currently in the Medicare prescription drug debate, I don't know any serious analysts who believe Medicare's current costs are sustainable. Yet, the Democrats, with hardly a single word about controlling the costs of the current program, have one main complaint; the Medicare bill does not go nearly far enough. So, it seems to me that what has happened in this country is that both parties have adopted what you might call a pragmatic theology--win elections at any cost--especially including costs to our own children. One might well ask: In this "all gain and no pain," "all get and no give" political world, has it become too politically incorrect or suicidal to ever suggest there are times when some of us might be asked to give up something for the general good?

How should the re-elected Bush administration tackle both the fiscal and current-account deficits?
In truth, no one knows when or how America's unprecedented current account deficits will be made lower and sustainable. No one disagrees they must be. These deficits present risks, economic and national security, no great power should be taking. We have talked and thought far too little, in my view, about what I consider to be a reckless kind of outsourcing--the outsourcing of savings. Redressing this very pronounced global imbalance will require some profound and perhaps even traumatic structural and, indeed, cultural changes of our own, and other countries' political economies. The U.S. must consume less and import relatively less, export and save relatively more. The rest of the world will need to do the opposite. Remember, we are a society addicted to consumption. But the counterpart of our addiction to consumption is the rest of the world's dysfunctional dependence on export growth to the US as a way of growing their economies. Both of those habits have to change.

So what does the US need to do now?
This country must increase net national savings; we cannot continue to be this dependent on the rest of the world for savings. There are only two basic ways to do this. First, we must reduce the huge dis-savings or negative savings of the budget deficits. Without fundamental reform of the entitlements, this is a fool's mission. Second, we have to increase personal savings. I don't know if you know how much personal savings have plummeted in America. In the late 1980s, these savings were at 8 percent of the GDP; they are now 0.2 percent - the lowest in American history, barring the1930s, when they were negative. I trust you don't take comfort from that comparison!

What about consumer debt?
As to consumer debt, as you might imagine, it's at unprecedented levels. Twenty or so years ago, consumer debt was a bit over 45 percent of the GDP, now it's a stunning record 85 percent of the GDP.

And the question of reforming entitlements?
As to reforming entitlements, both Social Security and Medicare need reform. However, most people do not understand that the Medicare problem is a far bigger fiscal problem. Medicare accounts for over 80 percent of the unfunded entitlements. Some people say, just drop the Bush tax cuts and that will take care of everything. Even if we were to drop all the tax cuts, and nobody is proposing that, just those on the wealthy, but even if we were, we only cover about 10 percent of the increase in the cost of these programs. So, the brute fact is that reductions in benefits are going to have the primary role in reforming these programs.

What do you have to say about the growing concern about Social Security benefits?
In times past, I have proposed a series of reforms including a gradual increase in the retirement age, an affluence test, a diet COLA, and so forth. I have decided that this multi-micro approach tended to aggregate a consensus of potential negatives. Now I believe a simpler, macro approach has much to say for it. It is quite widely known that Social Security benefits are indexed to 100 percent of cost of living allowances. What I think many do not know, is that Social Security benefits are also indexed to average wages. This is why it is extremely difficult to grow out of a Social Security problem; because as productivity goes up, wages also go up, and so do the costs. If we were to eliminate wage indexing and just have the cost of living indexing that would essentially eliminate the unfunded liabilities of Social Security. My second proposal, which may shock you, is a program of mandatory savings in personal retirement accounts of workers of 2 percent to 3 percent of pay, with some subsidy for the poor. A public/private board would manage these savings.

Why mandatory?
Some years back, I was asked by the White House and Congress to chair a Committee on Capital Formation (i.e. savings) I recruited the smartest savings experts in the country, left, right and center. I said to them, "Please review the record of the effect of savings tax incentives on increasing net savings, net that is, after the cost." They were unanimous. The effects are relatively limited and ambiguous, one reason being that many of the people who take advantage of these incentives would be saving anyway and this adds to the cost of these programs. So I said to these savings experts, "You say we have to increase savings. How do we do it?" They said, "Pete, if you are really serious, in our consumption obsessed society, you are going to have to make savings mandatory; you are going to have to do what Singapore, Chile and Australia are now doing."

And where do you propose that this money should be put?
I would propose that this money be put into global index funds - both equity and fixed income. Why indexed funds? First, they greatly reduce administrative costs. Remember, many of these accounts will be small and administrative costs could significantly reduce net returns. Indexing also eliminates political issues as to which industries are or are not politically correct.

Why a public/private board outside of the government?
Because it is clear to me that the politicians will spend any surplus that is around. Remember the lock-box? It got unlocked very quickly. Therefore, it is important that the money gets out of the government's hands and invested into the private sector. Singapore, with its Provident Fund, knows better than anyone the importance of investing these retirement funds in the private sector.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

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