A Conversation with Pete Peterson
In this candid and informal video series, Foundation Chairman Pete Peterson discusses the economy, our nation’s fiscal challenges, and the personal experiences that underlie his dedication to preserving the American Dream.
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Why did you start the Peter G. Peterson Foundation?
I think of my life as one of those great, only-in-America stories. And I want to do all I can to make sure that my own grandchildren and future generations of Americans benefit from a growing economy that provides abundant opportunities for success. This will require investments in areas such as education, research and development, and infrastructure that give rise to innovation and new jobs. We also need to maintain a strong social safety net for those who need it, including Social Security and Medicare. But rising debt and the resulting interest payments will make it nearly impossible to make these much-needed investments in the future. Unless we get a handle on our skyrocketing deficits, policymakers will be forced to make painful cuts to the social safety net or raise taxes to unconscionably high levels. These options are unthinkable. That’s why I’m so concerned with ensuring that we don’t slip a bill of massive, unmanageable debt and taxes to future generations.
What does a billionaire know about fiscal sustainability?
I wasn’t always a billionaire, you know. I grew up during the height of the Great Depression and began working in my family’s Greek diner in Kearney, Nebraska, at the age of eight. I worked my way up from there, going on to become CEO of Bell & Howell Corporation, U.S. Commerce Secretary, and co-founder of Blackstone, a major financial firm. When I came into a windfall at the age of 81 from the initial public offering of Blackstone, I thought deeply about what I could do with this newfound wealth. To paraphrase the author Joseph Heller, I realized that I knew the meaning of “enough” – in fact, I had more than enough and wanted to do my small part to help the country that had given me so much. So I decided to devote nearly all of my personal resources to starting a foundation that would engage the American people and our leaders in confronting what I consider to be the greatest challenge before us as a nation: our unsustainable long-term national debt.
What would you say to people who think that warnings about a future fiscal crisis and unsustainable deficits are overblown?
I wish they were right, but the facts say otherwise. Economists generally believe that a debt level of 60% of gross domestic product (GDP) is sustainable, while debt that remains above 90% of GDP is potentially dangerous to future economic growth. We currently have a staggering $10 trillion national debt—that’s about 65% of our GDP and more than $31,000 for every man, woman and child in the nation! (The gross debt—which also includes debt issued to Social Security and other trust funds—exceeds $14 trillion.) If we don’t change our current policies, this debt is projected to double in the 2020s and triple in the 2030s, threatening the nation’s long-term economic prosperity and saddling future generations with an unthinkable burden.
I see two potential crises in the future: a near-term financial crisis rooted in declining investor confidence that leads to sharp rises in interest rates and forces sudden, draconian changes in the federal budget; and a longer-term economic crisis that would result from diverting more and more of our national resources to servicing debt instead of investing in areas that are essential to long-term growth. These crises are made all the more likely by the fact that growing debts aren’t just an American problem. Projections show that, by 2035, the world’s advanced economies could face debts approaching 200% of their GDP. With countries competing for scarce capital, interest rates are almost sure to rise steeply.
The non-partisan Congressional Budget Office regularly warns that our nation’s fiscal situation is unsustainable. Recently, our Foundation commissioned public opinion research among senior economic officials from the last eight presidential administrations and congressional leaders from the past 30 years. One hundred percent of participants “strongly agreed” that our nation is on an unsustainable long-term fiscal path. I used to work in market research, and I have never before seen such a consensus. Our fiscal challenges are undeniable.
What is your political affiliation? What kinds of reform are you calling for?
Although I served in a Republican presidential administration, my views do not fall neatly in line with either political party. I believe that the magnitude of our fiscal challenges is so great that we shouldn’t focus on rigid party ideologies, but rather on solutions. Those solutions must be comprehensive and keep all options on the table, including spending reductions and tax increases. We need to spend appropriately on programs that are important to Americans – including maintaining a strong social safety net for those who need it, ensuring that defense spending matches today’s threats and challenges, and investing for the future in areas such as education, research and development, and infrastructure, which pave the way for long-term economic growth.
To pay for necessary spending and investments, we must have a tax code that collects revenue efficiently, doesn’t include unnecessary exemptions, and advances a basic sense of fairness that is central to American values. Putting our country on a fiscally sustainable path will require some shared sacrifice, and it is imperative that those who are better off financially, like me, carry a full and fair share of the burden.
So my beliefs don’t make me a strict Republican or a Democrat. I just believe that we can’t ignore these tough issues.
Can we afford to implement fiscal reforms now?
Even though the economy is recovering from the financial crisis and recession, too many Americans are still struggling to make ends meet. So it is critical for lawmakers to prioritize economic recovery in the short term. But we also need to be thinking about the future, because we will only reassure markets and achieve long-term economic growth and prosperity if we tackle the structural problems that threaten to leave us with an unsustainable debt. Our elected leaders should develop solutions to our long-term fiscal challenges that can take effect once the economy recovers. The important thing is to agree upon a plan now, set clear goals, and stick to them.
Do you believe that we should reform entitlement programs?
One of our Foundation’s goals is to ensure that the federal government is able to meet the needs of future generations—particularly the most vulnerable Americans. I believe that our nation’s fiscal challenges must be addressed in a compassionate way that maintains a strong safety net. This means that we can’t ignore the need for changes: Because of rapidly rising health care costs, increased longevity and the aging of the “Baby Boom” generation, the two largest health care programs, Medicare and Medicaid, are projected to grow faster than the resources dedicated to support them. Social Security is already running a cash deficit, which will require the federal government to borrow $4 trillion (in 2011 dollars) to pay benefits between now and 2035, when the so-called Social Security Trust Fund is exhausted. In fact, over the next 40 years, all the growth in federal spending will come from entitlements plus interest costs.
As we shore up these programs, we should focus on the people who most need them. I have long favored reducing benefits for those of us who are well off. I believe just as strongly that we must maintain Social Security benefits for Americans who depend on them for a large portion of their incomes. Progressive changes like these can ensure that this vital program is sustainable over the long term for those who need it the most.
Do you believe we should reform the federal revenue system?
We need a comprehensive plan of fiscal reforms—and all options need to be on the table. While spending cuts must be part of the equation, revenue increases will also be necessary, given the sheer magnitude of our imbalances. We should also create a simpler, fairer tax system by eliminating special tax provisions and other features—known as tax expenditures—that make the tax code very complex to administer and hard to enforce fairly. Tax expenditures cost an estimated $1.3 trillion each year and provide greater benefits to those whose incomes are highest, while those with less income receive little, if any, relief. As the bipartisan National Commission on Fiscal Responsibility and Reform recommended, substantially reducing tax expenditures would allow us to simplify the tax system, raise revenues to reduce future deficits, and lower tax rates for individuals and corporations, which would make the United States more competitive in the global marketplace. Addressing our fiscal challenges without revenue increases and reforms could devastate the essential programs that our nation’s seniors, children and low-income families rely upon, and severely hinder efforts to invest for the future.
How do you improve the long-term fiscal outlook without overburdening the middle class?
More fortunate individuals—and I include myself—have a moral duty to contribute our full share to ensure that we solve our fiscal challenges. It doesn’t seem right that the affluent should benefit from spending programs and tax cuts while passing the bill—plus interest—on to our children and grandchildren. At the same time, our fiscal problems are so large that all Americans are going to have to contribute something, and all will benefit from a stronger and healthier economy.
What are your thoughts on defense spending?
As a former chairman of the Council on Foreign Relations, I certainly believe that we need to protect our nation. But the fact that we currently spend more on defense than the next 17 countries combined troubles me. This is simply unprecedented in world history, and we can’t afford it. As the Chairman of the Joint Chiefs of Staff, Admiral Mike Mullen, has said “the single greatest threat to our national security is our debt.” He also said “the [Pentagon] budget has basically doubled in the last decade, and in doubling, we have lost the ability to prioritize, to make hard decisions, to do tough analysis, to make trades.”
I believe it is past time to undertake a fundamental review of the defense budget, conducted by highly respected and informed Americans: a credible and bipartisan group that asks tough questions about America’s national security needs, including whether our current force structure, basing, and weapons systems are best suited to the threats of the 21st century, and whether we should continue to engage in wars like those we’ve fought over the past decade. Our Foundation will make this a major project.
Answering these questions and many more will help to keep the United States secure, while releasing resources we desperately need to rebuild our economic strength–which is, after all, the ultimate source of our military and diplomatic power.
What are your thoughts on health care spending?
While the United States spends twice as much on health care as other advanced economies, many of our health outcomes are no better. Furthermore, health care costs throughout our economy have been growing at twice the overall rate of inflation. That’s simply unsustainable–for individuals, businesses, and state and federal governments. Health care is a matter of both quality and cost, and we should be sure we’re getting the highest quality in the most cost-effective way. Currently, however, our fee-for-service payment system maximizes volume and doesn’t provide incentives to spend health care dollars wisely. And too little is being done to address large, inexplicable variations in health costs across the country.
The federal government currently pays for about 36 percent of all health expenditures in the United States, so finding ways to deliver high-quality care more cost effectively will have enormous benefits for our long-term fiscal outlook. There are a variety of steps we can take to improve the way health care is delivered and paid for, including promoting healthier lifestyles and prevention measures, better coordinating care among doctors and other health care providers, and planning ahead for end-of-life care.
Because it has access to extraordinarily detailed data on the cost and amount of care patients receive, Medicare is in a very good position to develop approaches to reward good performance and penalize bad performance. At the Peterson Foundation, we feel so strongly about the need to use resources more effectively throughout the health care system that we are supporting research into a broad range of ideas to maximize smart health care spending.
What are the responsibilities of the financial industry when it comes to addressing our federal deficit?
The businesses and individuals involved in the financial industry, like all of us, have a responsibility to be good corporate citizens and to contribute to restoring our nation’s fiscal health. This includes paying their fair share of taxes. One of the reforms I have called for is taxing carried interest at ordinary tax rates. Currently it is taxed at the lesser rate of capital gains, despite the fact that financial firms do not make initial investments of cash. This is wrong, and I can’t justify it because our nation sorely needs the revenue. Furthermore, any changes to the capital gains tax structure or the treatment of carried interest should apply to all industries—not just private equity and hedge funds.
Were you involved in the financial crisis through your work at Blackstone?
No. Blackstone did not create any of the instruments that underwrote the residential real estate market. We did not hold sub-prime loans, broker mortgage-backed securities, or sell Collateralized Debt Obligations.
What are the responsibilities of the wealthy?
I believe that the well-off like me can afford to shoulder higher taxes and reduced benefits. We have a duty to give back to the country that helped us achieve the American Dream, by passing on a healthy economy which ensures that all Americans have the resources and opportunities to pursue their own success.
About the Peter G. Peterson Foundation
The Peter G. Peterson Foundation is a non-profit, non-partisan organization established by Pete Peterson – businessman, philanthropist, and former U.S. Secretary of Commerce. The Foundation is dedicated to increasing public awareness of the nature and urgency of key long-term fiscal challenges threatening America's future and to accelerating action on them. To address these challenges successfully, we work to bring Americans together to find and implement sensible, long-term solutions that transcend age, party lines and ideological divides in order to achieve real results.