Running
on Empty
by Peter G Peterson
Farrar, Straus and
Giroux
©2004
ISBN 10: 0-374-25287.4
www.fsgbooks.com
Preface: Why this book
now?
Because
Americans import far more goods and services than they export, and because the
federal government borrows so much and Americans save so little, the American
economy is increasingly owned by, or indebted to, foreigners.
This
twin deficit-- the
Why
this book now? Because
the hour is getting late. Because, while our problems are not yet intractable, both political
parties are increasingly incorrigible.
They are not facing our problems; they are running from them. Americans cannot tax themselves out of these
deficits . . . And need I remind you that these payroll taxes fall heavily on
the middle class and low income workers?
Nor can
As
during the era leading up to the Civil War, the American people don't see
statesmen working together and don't hear voices of moderation or common
sense. Instead, they are accosted by
ideologues and operators who play on fears and resentments, making big problems
out of small ones and small ones out of big ones.
But
what did at last begin to shake my faith in the GOP was Ronald Reagan's supply
side gospel. The supply side Reagan budget was indeed, as his
own vice president had once said, based on 'voodoo economics."
Those
numbers (federal debt in Reagan's term) would look even worse if they included
all the additional borrowing that went on "off the books" and that is
only now coming due {unfunded liability on Social Security}.
Social
Security . . . has been used to pay the growth in Medicare and the rest of the
budget, so that when baby boomers finally do go to collect their benefits, they
will find their Social Security "trust funds' stuffed only with IOUs.
Although
President Ronald Reagan made many positive, even historic contributions to
American history, the tripling of the national debt that occurred during his
White House tenure is certainly not among them.
Remarkably, President George W Bush and those around him seem to be
unaware of this. At the 2002 policy
strategy meeting, Vice President Dick Cheney reportedly announced that
"Reagan prove deficits don't matter."
(George
W Bush) asked what I meant about Social Security and other entitlements being a
moral issue. I took him through the
official numbers on the huge payroll taxes and the huge debt he would be
passing on to our children. I told him
if looking out for our children's future was a definitive test of our morality,
then long term tax cuts , particularly for us fat cats (Pete Peterson included
himself) in the room, should wait until reforms had been completed. He visibly stiffened, as though hit in the
gut. "I don't think tax cuts are
immoral,' he said. "Governor,"
I said, "I didn't say they were immoral.
I said they were immoral until we had taken care of our long term
obligations to our children."
But
George W Bush's commitment to Social Security reform has resembled Bill
Clinton's to entitlement reform -- sincere, but not really a priority.
Former
chairman of the Council of Economic Advisors, Charles Shultz once characterized
Former
hose Republican leader Dick Armey recently declared, "I am upset about the
spending. There is no way we can pin
that on the Democrats."
Michael
Kinsley, the editor of "The New Republic," wrote that the Democratic vision of a Great
Society had yielded to a "Grandfather Clause Society" in which leader
doted on those who were already well protected while leaving the young to fend
for themselves. Then and now, leading
Democrats regularly reaffirm their commitment to a "social insurance"
scheme under which government puts the cost of supporting affluent retirees
disproportionately on the backs of low income workers while telling these low
income workers that if they expect to collect in their turn, there own children
will have to pay even higher taxes.
.
. . Both political parties have formed and unholy alliance -- and an undeclared
war on the future, an undeclared war that is on our children.
But
as do you, I want the American Dream to be there for my children and
grandchildren.
Perhaps
we are ready for a candidate who rephrases that line (from President
Reagan): I want to ask every American, young people
especially: "Is your future better
off now than it was four years ago -- now that you and your generation are
saddled with these large new unfunded liabilities and higher taxes that must
eventually accompany them?"
Bankrupt Parties Bankrupt Nation
The
Democrats and the Republicans with their lopsided and mutually irreconcilable
world views, have found only one
important way to compromise, and that is, for both parties to take what they
want (low taxes and high spending) and sending the bill to our kids.
Keep
in mind that these young people according to official Social Security Trustee's
numbers are already expected to pay the equivalent of 25% to 40% of their
payroll into Social Security and Medicare before they retire just to keep these
programs solvent.
David
Walker -- General Accounting Office: "Deficits do matter, especially if
they are large, structural and recurring in nature. In addition, our projected budget deficits
are not manageable without significant changes in status quo programs. We cannot simply grow our way outfox this
problem."
Many
partisan republicans will admit, in private at least, that the supply side
argument is a charade. But they support
tax cuts anyway because they believe that
Or why just talk about Democrats? Casual deficits have encouraged Republicans
to become more reckless with outlays -- "to spend like drunken
sailors." to borrow a phrase from one or more conservative groups
expressing growing discomfort with the president's fiscal policy.
A
nation cannot mortgage its long-term future to purchase any 'greatness"
worthy of the name.
.
. . Dysfunctional. . Like two partners in a troubled marriage,
these two parties mirror react to, and ultimately thrive off each other's
pathology. It is said that two type-A
personalities can sometimes become successful couple because, in a kind of
interlocking neurosis, the rocks in one head fill the holes in the others. Unfortunately, that never seems to happen in
politics.
I
have suggested to them that maybe we ought to introduce an
"affluence" test that reduces Social Security for fat cats like me.
Put
differently, if everyone in on the wagon, who is going to pull it?
{As
I was taking these notes on the book, I was listening to the news: 8.9 trillion Debt Limit increase
Why Deficits Matter to
You and Your Future.
If
Congress had required itself to follow the same accounting rules it requires of
a private sector corporation (as spelled out in the Employment Retirement
Income Securities Act or ERISA), it would have shown a jaw- dropping deficit of
well over one trillion dollars. Keeping
crooked books, under Sarbanes-Oxley, is a felony offense. Thus if congress had to abide by its own
rules, it would have to throw itself in jail for fraudulent accounting. Accrual accounting is the only way to keep
track of long-term liabilities. ERISA
should apply to the federal government.
That
unfunded liability, calculated each year by the Treasury Department, amounted
to $27 trillion as of January1, 2003.
Congress doesn't actually have a penny of this money in the bank. That's why the liability is called
"unfunded."
Any
time a federal program like Social Security runs a surplus for the year, the US
Treasury spends the surplus immediately on other items. All the program gets back are IOUs from the
treasury for the money taken. The
program then puts these IOUs into the "trust fund." Nothing has
really been saved , since if the program wants to redeem its IOUs, the Treasury
will then have to cut spending, hike taxes or borrow from the public (that is,
run a bigger deficit) to raise the cash.
The
term Social Security "Trust Fund" is therefore a fiscal oxymoron
since it isn't funded and it can't be trusted.
In
March of 2004, the Social Security and Medicare trustees estimated their
unfunded benefit liabilities, using and infinite time horizon, at $74
trillion. {Is that like quarter of a
million dollars per person? Do the math
for yourself.}
All
five numbers {various estimates} exceed the total net worth of the
In
the year 2023, for example, the publicly held debt under the Government
Accounting Office projection passes 100% of Gross Domestic Product.
The
problem is not a lack of knowledge. It
is a lack of will by elected politicians to act on this knowledge -- and yes,
if you like, the complicity of voters who allow them to look the other way.
I've
had several conversations about deficits with Bill Clinton, who by all accounts
(including my own), is a superbly informed policy maestro as well as a
consummate politician. I asked him,
"Mr. President, you're not buying this 'trust fund' story on Social
Security, are you?" Without
hesitation, he answered: "Oh my, no Pete.
You and I both know that this is a pure cash-in cash-out program and
that it will be draining revenue from the Treasury decades before the formal
bankruptcy date. We have to act
soon."
Shortly
thereafter . . . I switched on CNN to watch him praise the audience for wanting
to become better educated on this daunting policy issue -- and lo and behold
saw him hold up a chart showing how our "trust fund" would
"totally safeguard" Social Security until 2037.
Why Structural Deficits
Matter
Economically,
the problem with deficits is that they absorb national savings and crowd out
productive investment. They do so by raising
interest rates.
Andrew
Mankiw: "When the government reduces the
national savings by running a deficit, the interest rate rises and investment
falls. Because investment is important
for long-run economic growth, government budget deficits reduce the economy's
growth rate."
Keeping Pumped Up: An
Economy on Steroids
A
century ago, Americans net national savings rate was the highest in the
developed world. Fifty years ago, it was
somewhere in the middle. Today, it is
the lowest. By 2002 the net national
savings rate has sunk all the way to 1.7 percent.
A
more important reason is the steady, decades-long decline in savings by
households, spurred on by the so called democratization of debt. Every year, it seems, access to credit gets
easier -- with no money down mortgages, daily credit card solicitations (the
average household now has 6.5 credit cards with and average balance of $8,000),
and the erosion of any stigma attached to personal bankruptcy (which now occurs
at a record rate).
Most
working age Americans expect to receive a wide variety of government benefits
during their retirements. To the extent
people believe that these future benefits are both generous and certain, they
are relieved of the need to save as much on their own. (Many believe their "contributions"
are equivalent to savings, but of course they are not.)
Here's
another way to look at it. What is an
unfunded liability to the government is an unfunded asset to families. And if families view the unfunded assets as
cash in the bank, they will probably feel less need to accumulate
"genuine" assets of their own.
This is precisely where the platitudes of politicians about "trust
funds" do real harm to people's lives.
Thirty
or Forty years ago, in the imagination of youth, government spending was all
about monorails and spaceships -- the future.
Today, it's all about benefit checks to retirees -- the past. Back then, we read announcements of brand new
waterways and cyclotrons. Today, we hear
mere proposals, like a trillion-dollar Mars mission that everyone knows are
unaffordable unless we send the whole bill to our kids. Or we read dreary reports of crumbling
bridges, rat infested federal warehouses and (according to a recent GAO
release) "many federal assets are in and alarming state of
deterioration," with repair needs estimated" to be in the tens of
billions of dollars." We all know
that you only get what you pay for. So
long as we avoid paying for a better future, we have no right to be surprised
at the logical consequences.
President
Bush closed his 2004 Sate of the Union address with a plea to our nation's
athletes to stop using steroids when playing sports. A better plea might have been to get our
nation's leaders to stop using steroids when managing the economy. If boomers insist on clinging to every
benefit and tax promise extended to today's elderly, they might find a way to
succeed -- but only at a terrible cost to their own children and grandchildren.
But
here's the paradox: although boomers seen to have some abstract understanding
of what lies ahead and what's at stake, most are unable or unwilling to take
concrete steps to prepare for the future.
They certainly are doing little to organize politically and to change
public policy. Nor are they doing much
to prepare their lives and to boost their household finances. The widespread negligence could itself have
major political consequences.
One
researcher sums up the overall situation as follows: the top third boomers
don't have to worry, the middle third had better start worrying and the bottom
third should be seriously rethink their life expectations -- starting with
their retirement age.
The
raw numbers are sobering enough. As of
2000, according to the Census Bureau data, only 50% of all workers ( 60% of fulltime workers ) aged 25 to 65 participate in any kind of retirement plan other than Social Security, and most of
these are voluntarily defined contributions accounts that are liable to be
cashed out well before retirement.
Incredibly, a survey by Hewitt Associates show that over 40% of workers
who change jobs cash out their plans rather than roll them over into new
accounts. . . . Half of all households
age 45 to 54 possess total financial assets (everything from bank accounts to
insurance policies to 401Ks) of less than $46,000.
The
mismatch is painful to behold. And it
gets worse. Even the $46,000 figure is
in some ways an overestimate. It does
not include the 7% of households with no financial assets of any type. And it is not netted against the extensive
personal debt of today's mid life households (remember all those credit cards).
One
out of three families has earned the right to some sort of defined benefit
company plan, whose assets are not fully reported to households. But this brightens the picture only slightly,
since most of these families already reside in the top half of the Fed's
distribution. Also, the reliability of
these defined benefit plans has recently been called
into question. {United Airlines, Ford
and GM 2006} Many boomer workers are
seeing their expected company payouts shaved to "cash balance"
formulae (which penalize today's older workers who have spent their careers
with one company). Under funding is
another problem -- with promises now exceeding assets of company plans by $400
billion.
Pension
plans covering 17 million state and local government workers are in even deeper
trouble. An estimated 4 in 5 are now
under funded; many have already engaged in desperate borrowing ploys. States in chronic fiscal distress have no
choice but to cut benefits across the board to pay their bills.
Yet
another unpleasant surprise that may rough up the affluent edge of this
generation is the impact of raw demographics on financial markets. When they reach retirement age and the time
comes to sell off their mutual funds, where will all of these boomers find
enough willing buyers? Some financial
analysts go so far as to predict a great depreciation in financial assets is
likely to accompany the boomer retirement.
When
President Bush recently remarked that our deficits are "just numbers on
paper," he missed a great chance to explain to Americans what's at stake.
The Aging of
For
nearly all of human history, until the industrial revolution, people aged 65
and over never amounted to more than 2-3% of the population. In
As
recently as1960, there were 5.1 taxpaying workers for every Social Security
beneficiary. This ration, now 3.3, is
officially projected to fall to 2.2 by 2030.
If
the official projections miss the mark, it will almost surely be because they
have underestimated -- not overestimated -- the magnitude of the challenge.
Printing
money has been the last recourse of governments thorough out history. In the end, deliberate inflation would act
like a perverse chemotherapy regime that ravages the body while leaving the
tumor untouched.
{Society
has} ended up with an entirely nonsensical notion: If we are all victims, the unspoken reasoning
went; we all deserved to be on welfare. But, if everyone was on the band wagon, who would be left to pull
it.