Running On Empty

Peter G. Peterson, “Running On Empty: How the Democratic and Republican Parties are bankrupting our Future” Farrar, Straus & Giroux, 2004, 239 pp

Shortly before George W. Bush was sworn into office, an aide to the incoming president called up Peter G. Peterson, the author of this book, and a former secretary of commerce under Richard Nixon, to discuss the nation's finances. "You people have a God-sent opportunity," Peterson, one of the Republican Party's fiercest deficit hawks, told the Bush official. At the time, the federal government was awash in cash; after eight years of Bill Clinton's stewardship, the 10-year budget surplus stood at $5.6 trillion. Peterson went on to state that Bush could now solve the Social Security and Medicare looming funding problems that would devastate the country when the 70 million baby boomers began to retire. Shortly after this official approached Bush with the advice, he got back to Peterson with the message: "Tax cuts come first." His advice to Democrats has also been ignored.

As Peterson sees it, the politician who's behaved worst of all is Bush, for whom Peterson once had high hopes. In addition to advising his aides during the campaign, Peterson also met Bush a couple of times before he became president, and he implored the candidate to make fiscal reform the mission of his presidency. Reform is a "moral issue," Peterson told Bush during one of their meetings. After guiding the candidate through the official projections of the huge payroll taxes and debt that tomorrow's generation would inherit from today's, Peterson writes, "I told him that 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 in the room, should wait until entitlement reform had been completed." This was apparently not something that Bush wanted to hear. Bush "visibly stiffened, as though hit in the gut," Peterson writes. "I don't think tax cuts are immoral," Bush replied, ending the conversation. "It was there and then that I realized that to George W. Bush, tax cuts were an obligation driven by faith, not a policy guided by evidence," Peterson writes.

The author is equally critical of Democrats, many of whom have not yet accepted the idea that entitlements for seniors will need to be radically reformed in order to stave off disaster. While Democrats have recently tried to paint themselves as the more fiscally responsible party, Peterson can't see much responsibility in their record. Worse than that, "Democrats regularly short-circuit any prudent examination of the single biggest spending issue, the future of senior entitlements, by castigating all reformers as heartless Scrooges," Peterson writes. "No national candidate who says the affordability of these entitlements is a problem ... has a prayer of winning a primary."

The ideas that Peterson proposes to fix this situation are complex. He suggests a mix of tactical measures (such as re-indexing Social Security benefits to the price level rather than to wages, or "affluence-testing" benefits, so that the wealthy receive less money than the poor) and broader, strategic changes to government. He wants to reform the way we write budgets, the way we draw up congressional districts, the way we fund campaigns. Not everyone will agree with all of his proposals, and some people -- especially liberals -- might disagree with all of them. Though he is comfortable with criticizing conservatives, Peterson is at heart a Republican, and his solutions are firmly planted in Republicanism; he is fond of market-based mechanisms, and he is not a fan of trial lawyers.

My Notes:
Pg. xx: Milton Friedman believed that tax cut are a fine idea as long as we remember that they are not tax cuts at all unless accompanied by permanent spending cuts. Otherwise, they are simply a shift in taxes to future taxpayers.

Pg. xxi: Federal debt rose from 26 to 43 percent of GDP during Regan’s term.

Pg. 57: For nearly all of human history, until the industrial revolution, people aged sixty-five and over never amounted to more than 2 or 3 percent of the population. In America today, they amount to 12 percent of the population. By the year 2040 they will be reaching 20 percent and may be closing in on 25 percent. As recently as 1960 there were 5.1 taxpaying workers for every Social Security beneficiary. This ratio, now 3.3, is officially projected to fall to 2.2 by 2030.

Pg. 60: Because of stunning progress in public health and medical technology—everything from chlorinated water to miracle vaccines to hear bypass surgery—life expectancy in America has risen to age seventy-seven from around age forty-five in 1900. This is a greater gain in the last one hundred years than civilization had achieved over the previous ten thousand.

Pg. 73: There’s no doubt that America’s technology-intensive style of medicine—thee are more MRI units in Greater Atlanta than in all of Canada—is the single most important reason we spend so much more on health care than other nations do. However, we are also expanding the definition of health itself to include psychiatric counseling to home care for the frail elderly.

Pg. 100: America fertility has stabilized at just under 2.1 births per woman (which roughly translates to a stationary population), it has continued to fall much further in the other countries—all the way to 1.5 in western Europe overall, to 1.4 in Japan, and to 1.2 in certain southern European nations like Spain and Italy.

Pg. 115: When President Johnson signed the Medicare act in 1965, he reassured voters by saying that “an extra $500 million” of new spending would pose no problem. Today, thirty-nine years later, Medicare spends $294 billion per year, more than five hundred times the original estimate.

Pg. 132: Reagan accomplishments: he put an end to double-digit inflation by giving unwavering support to Fed chairman Paul Volcker and by facing down the air traffic controllers union. He brought the Cold War to a peaceful conclusion. And he persuaded the nation to abandon the worst vices of regulation in industries like airlines, banking, and energy.

Pg. 159: Once Medicare is added to Social Security, an unlimited time horizon will add an extra $24 trillion to the actuarial deficit, for a grand total of roughly $45 trillion in 2003 (present value). This amounts to $158,000 for every man, woman, and child living in the U.S. It even exceeds our nation’s total net worth ($42 trillion, which includes all property owned by U.S. residents—real, personal, and financial).
Pg 166: Supply siders maintain that a tax increase always adversely impacts production and savings. The facts indicate that it can go either way. In 1993 President Clinton signed a deficit reduction package that included a hike in the top marginal federal income tax rate, from 31 to 39.6 percent. Supply-siders predicted doom. What followed was an accelerating seven-year boom in jobs, hours, savings, investment, and productivity—a chapter in economic history that never appears in the supply-siders’ texts.

Pg. 172: America’s founding statesmen felt that pubic debts and political parties ought to be banished altogether—they actually felt the two dangers were connected. (Note: some states like Nebraska have unicameral legislatures and work quite well). They associated honest and prudent public accounting with principled leadership, a virtuous citizenry, and a prospering economy. Chronic deficits spelled corrupt leadership, political decadence, and economic ruin.

Pg. 178: If you look back at the federal budget from George Washington through Dwight Eisenhower and exclude only years of declared war or catastrophic depression, the record is remarkable: 127 years of budget surpluses and 44 years of deficits. Even these deficits, on average, were less than 0.5 percent of GDP. Since 1960, the scorecard changes dramatically: just 5 years of surplus and 39 years of deficits, with these post-1960 deficits averaging over 2.5 percent of GDP. And these figures do not include the much larger liabilities racked up in recent decades, off the books, through unfunded benefit promises.

Pg. 198: Under Social Security’s benefit formula, your pension is calculated as a percentage of your lifetime earnings; but these earnings are indexed to the average earnings or wages of all workers in the year you reach age sixty-two. Since wages over time tend to grow faster than inflation, each generation receives pensions that have more and more purchasing power.

Pg. 208: The cure for the Medicare problem is to move toward the health care system provided to federal employees, including members of Congress. Beneficiaries get to choose from among a wide range of competing plans offered by private insurers. These range from traditional, high-cost “fee-for-service” plans, in which patients get to see any doctor or specialist they like, to low-cost HMOs. All these plans must compete for customers on both price and quality, which is their biggest advantage over Medicare’s monopoly position. The government bears 75 percent of the premium cost for low-cost plans, and a somewhat lower share for high-cost plans, meaning that if you want expensive fee-for-service medicine, you have to pay more out of your own pocket.