Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do about It
by Peter G. Peterson
A review by Farhad Manjoo
Shortly before George W. Bush was sworn into office, an aide to the incoming president
called up Peter G. Peterson, a former secretary of commerce under Richard Nixon,
to chat about 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,
and Bush's legislative challenge looked similar to the problem faced by Richard
Pryor's character in Brewster's Millions -- finding ways to spend all that
Despite the happy short-term outlook, though, Peterson reminded the Bush aide
that the United States faced a frightening long-term balance sheet. This is
the same doomsday scenario you've heard a thousand times before, and by now
you're probably weary of it: As more than 70 million baby boomers begin retiring
later in the decade, the Social Security and Medicare programs are destined
to sink into multitrillion-dollar deficits, causing enormous hardships for younger
Americans. Bush had a chance to avert disaster, Peterson told his aide. By using
the immediate surpluses to fix the looming crisis, the new president could possibly
solve "one of the largest fiscal challenges in our history."
But when the Bush official went to more senior aides with Peterson's advice,
the answer came back as you'd expect: There would be no immediate effort to
fix Social Security and Medicare during George W. Bush's presidency. "Sorry,
Pete," the official told Peterson. "Tax cuts come first."
This is the story of Peter Peterson's life. Politicians and their assistants
are always soliciting his advice, constantly appointing him to blue-ribbon panels
and influential committees, forever congratulating him on his prudence and pragmatism.
And yet they're always ignoring him, too. Everybody listens to Peterson, but
nobody does what he counsels. As he describes in his brilliant new book, Running
on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future
and What Americans Can Do About It, he has offered the same practical advice
for decades -- Reform long-term entitlements! -- to presidents and lawmakers
of both parties. His words have gone almost universally unheeded.
The Democrats he encounters either refuse to believe that there's a problem
with Social Security and Medicare, or they insist that it's a problem we can
solve with a few small, painless tax increases and other legislative tweaks.
Republicans concede there might be a problem, but they're not too concerned
about it; for them, the government's inability to fund two massive social programs
fits well with a small-government, libertarian ethos.
During the past 50 years, both sides have not only ignored the challenges ahead
but have exacerbated them by more or less simultaneously approving giant tax
cuts and spending increases. Thanks to their actions, we are all in profound
trouble. As Peterson methodically lays out, when the tab comes due over the
coming decades, Americans will face a grim choice: To pay for the retirement
and skyrocketing healthcare costs of the baby boomers, taxes on future working
Americans -- that is, on today's young people -- will need to be hiked substantially
or benefits to the elderly will have to be drastically reduced. If no policy
changes are made, in about 20 years or so "the whole dynamic spins out
of control," Peterson says -- eventually, spending on Social Security and
Medicare will consume such a huge percentage of national income that the nation's
economy could "simply shatter." But we could be in trouble even before
then: In a scenario that people like Robert
Rubin, Warren Buffett, Paul Volcker and economists at the International
Monetary Fund have recently been fretting about, our mountain of debt might
soon lead foreigners to suddenly sour on the United States, causing the dollar
to plunge, interest rates to spike, and global recession to follow. Volcker,
the longtime chief of the Federal Reserve during the 1980s, tells Peterson that
he sees a 75 percent chance of such a crisis occurring within five years.
None of this is news. The problems we face are the combined product of decades-old
policies and long-foreseen realities -- rising healthcare costs, increasing
life spans, falling birthrates, a falling savings rate, a tendency to import
more than we export. Despite years of warning, we have, amazingly, done nothing
to avoid disaster. The really frightening thing is that even during this election
year, Americans -- the candidates as well as the voters -- remain largely indifferent
to the crisis. Running on Empty is a tour de force; even if you disagree
with Peterson's proposed solutions, the book makes it almost impossible to deny
that we do have problems. But will anyone listen to Peter Peterson this time?
Though he remains an investment banker by day, for the past dozen years Peterson
has mainly been occupied as the nation's unofficial fiscal Cassandra, a man
who considers it his duty to puncture any temporary good feeling with warnings
of the winter ahead. In 1992, he co-founded the Concord Coalition, a bipartisan
group calling for "fiscal responsibility" in Washington. Since then,
he has written several books outlining the coming entitlement disaster, each
one carrying a more urgent title than the last: On
Borrowed Time was followed by Facing
Up and then the more plaintive Will
America Grow Up Before It Grows Old? In 1999, in Gray
Dawn: How the Coming Age Wave Will Transform America -- and the World, Peterson
seemed to put his foot down: "It's time to steer clear of feel-good policies
we know are wrong," he lectured. "It's time to quit serving up a delicious
assortment of free lunches -- and calling it reform. It's time to engage the
real challenges of an aging society."
Of course, nobody in power did anything to engage such challenges, and in the
face of the overwhelming legislative apathy, Peterson could do only what he's
done before -- write another book. In Running on Empty, he is more anxious
than ever -- sometimes, it should be noted, to the point of irritation. Peterson
can come off as a know-it-all grandfather, an eat-your-spinach type whose prudence
and rationality and nostalgia for a time when American politicians acted a lot
more maturely bring the reader to the brink of wondering, Will this guy ever
let loose? Can't he abide any of the pleasures of big government, or the thrill
of a smaller tax bill? Some liberals will no doubt think him unfeeling, seeing
as he regularly rails against the excesses of federal entitlements. Conservatives
will call him untrue, a traitor to the cause of tax cuts, a RINO, or "Republican
in name only," the label that tax cutters have come to apply with devastating
effectiveness to any Republican who questions the prudence of gutting the government.
But Peterson's harsh tone is easy to forgive. Indeed, it is a delight: Somebody
needs to teach our leaders a bit of responsibility, and Peterson, who is both
well-schooled in the facts of his case as well as a gifted and relentless rhetorician,
is exactly the sort of lecturer we need. He sounds like a grown-up, and if he's
sometimes a bit too exasperated, it is only because the kids have behaved so
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. In this belief, Bush is representative of just about every member of
the modern Republican Party (the exceptions are John McCain, who adoringly blurbs
Peterson's book, and a few other blue-state Republicans in the Senate). To Peterson's
chagrin, the post-Reagan GOP has wholly abandoned the party's age-old obsession
with "fiscal responsibility" in favor of what Peterson calls "an
indulgent fiscal philosophy" that cuts taxes without any care for the consequences.
"For 'supply-side' Republicans, the pursuit of lower taxes has evolved
into a religion, indeed a theology that discards any objective evidence that
violates the faith."
Supply-siders believe that when a government cuts taxes on citizens, people
see an increased incentive to work, save and invest, thereby leading to faster
economic growth. Sometimes they're right: When John F. Kennedy lowered the top
tax rate from 91 percent to 70 percent in 1963, or when Ronald Reagan lowered
the 70 percent rate to 50 percent in 1981, revenue from the wealthiest Americans
did increase. But "there's plenty of empirical evidence that when marginal
tax rates are not high, the efficiencies you gain by cutting them may be modest
and the impact on economic activity may be ambiguous," Peterson points
out. If your tax goes down from 39 percent to 35 percent, you could possibly
decide to work more -- but you might also not change your behavior, or you could
work a bit less. We saw this on a national scale in 1993, when Bill Clinton
increased the top marginal federal income tax rate from 31 percent to 39.6 percent.
Supply-side theory would have predicted a decline in economic activity in response
to such a tax hike, but of course what we saw instead was a boom in "jobs,
hours, savings, investment, and productivity -- a chapter in economic history
that never appears in supply-siders' texts."
But even if Bush's supply-side ideas prove true, and lowering tax rates do
somehow lead to a permanently faster-growing economy (a highly, highly dubious
proposal), the resulting gains will not set us free from our liabilities in
Social Security and Medicare. Social Security benefits are directly indexed
to wages, Peterson points out. If the economy turns red hot as a result of Bush's
tax cuts, current workers will receive higher wages, and consequently, they'll
pay more in taxes, thereby helping the government support current retirees.
But when today's workers retire, the government will award them benefits according
to how much money they earned while they were working -- and since they're earning
more today, they'll receive larger checks tomorrow. Republicans often argue
that affording the long-term liabilities will be simple -- we can just "grow
the economy" through supply-side tax cuts. But because Social Security
(as well as, more indirectly, Medicare) benefits are linked to economic growth,
"higher productivity growth cannot possibly save today's pay-as-you-go
retirement systems," Peterson concludes.
Many supply-siders won't be too upset if, instead of making it easier for us
to cope with the coming wave of retiring seniors, tax cuts only bury the nation
in red ink. That's because some of them like the red ink. According to Peterson,
some in the Republican Party are fond of privately espousing the Reagan-era
"starve the beast" theory of governance; they see the deficits caused
by tax cuts as a way to shrink the size of government or force a reform of entitlement
programs. That theory would be easier to swallow if Republicans themselves had
shown any restraint during the past few years of ballooning budget deficits,
but they have not. Bush, Peterson notes, isn't starving the beast -- he's fattening
it. Under Bush and the Republican Congress, spending has gone through the roof.
Domestic discretionary outlays (excluding the tab for "homeland security")
have increased by 7 percent annually during Bush's presidency, and the practice
of earmarking bills for special projects in lawmakers' home districts -- delivering
"pork" -- has reached record levels. Yet Bush has done nothing to
rein in the spending; he is on track to become the first president since John
Quincy Adams to serve a full term without vetoing a single bill.
While there is much in Peterson's book to keep Bush bashers smiling -- "This
administration and the Republican Congress have presided over the biggest, most
reckless deterioration of America's finances in history" could make a nice
T-shirt -- 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. The party's leading lights offer few solid
plans to bring the budget back into balance -- indeed, the majority of the budget
proposals floated by this year's slate of Democratic presidential contenders
would have deepened the deficit, Peterson notes.
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." As proof, Peterson points to Howard
Dean, who learned the hard way that to his party, entitlements for seniors constitute
a sacred cow. In the mid-1990s, when Dean headed the National Governors Association,
he supported a plan to reduce the annual growth rate of Medicare -- an effort
he has defended as a way to keep the program solvent. For his troubles, John
Kerry and Dick Gephardt attacked him for weeks during the Iowa caucus contest,
accusing Dean of siding with Newt Gingrich and against poor defenseless seniors.
"I'm not going to use Medicare as a means to balance the budget ... on
the back of seniors," Kerry began saying on the stump.
How does Kerry plan to tackle the projected deficits in Social Security and
Medicare? One is hard-pressed to determine his policies on these programs. Neither
is mentioned on the "Issues" page of his Web site, and digging a little
further reveals few details (Kerry's "Four-Step Plan to Restore Medicare"
consists of such bromides as "Kerry will strengthen drug coverage for those
who have it -- not make it worse.") During his years in the Senate, and
in the campaign, Kerry has repeatedly pledged to "secure" Social Security
and Medicare, though he's offered few ideas about what his plan would look like.
He has made clear, however, that he sees little need to overhaul the nation's
entitlements -- like many other Democrats, Kerry seems to believe that future
crises can be avoided by instituting a few modest changes.
In January in a primary debate held in Iowa, Kerry declared: "We did protect
Social Security in the United States Senate, and Social Security is safe and
sound well into the next two decades or more. With very minor changes, with
a strong economy, the next generation will have Social Security. I will never
privatize Social Security. I will never try to extend the retirement age for
Social Security. And I will not cut any benefits for Social Security."
The idea that Social Security is "safe and sound" for the next couple
of decades and is in pretty good shape for even "the next generation"
is a central pillar of Democratic establishment thought. There is a kernel of
truth to it. According to the latest data from the trustees who oversee the
Social Security trust fund, the 75-year "actuarial" deficit in Social
Security is $3.7 trillion, meaning that the program can be put into balance
if the government begins taxing workers an extra 1.9 percent. (A recent report
from the Congressional Budget Office puts the required tax increase at just
1 percent). Raising taxes by an extra 1 or 2 percent might be painful, but we
can handle that, Democrats argue, especially if the payoff will be a sound Social
But looking at Social Security in a vacuum is, Peterson argues, not especially
helpful when considering the long-term balance sheet of the nation. For one
thing, seniors require more than just retirement income. They also need medical
care, a whole lot of medical care. And due to generally rising health industry
costs, the Medicare program is in much worse shape than Social Security, with
a 75-year actuarial deficit of more than $15 trillion, the funding of which
would require significant payroll tax increases.
Then, to make things really bleak, try considering time periods beyond 75 years
(because our children's children will also be entitled to the entitlements).
Over what accountants call an "infinite time horizon," the United
States faces $45 trillion in "unfunded liabilities," according to
a projection by economists at the American Enterprise Institute. The International
Monetary Fund puts that number at $47 trillion. The Brookings Institution has
it at $60 trillion. The trustees for Social Security have it at more than $72
trillion. Needless to say, it is highly unlikely that these spectacular shortfalls
can be fixed by the sort of minor changes John Kerry favors. "Closing this
gap would require massive adjustments in either tax or spending programs,"
the IMF has said. The agency added: "The longer-term fiscal deficit is
also associated with a severe intergenerational balance" -- meaning, as
Peterson translates it, "This approaching train wreck is a clear and present
danger to our kids."
Last December, President Bush signed the Medicare Prescription Drug, Improvement
and Modernization Act, which provides, according to the lawmakers who support
it, much-needed prescription drug benefits to needy seniors who rely on the
government for healthcare. Seniors had long been pressing for such an expansion
in Medicare, and the legislation had been a main policy goal of Democrats; in
persuading (just barely) members of his own party to go along with a drug plan,
Bush was widely considered to have scored a major political victory, possibly
winning over many seniors to the Republican Party in November. The bill was,
Peterson notes, a huge shift for the GOP, which has traditionally resisted expanding
entitlement programs. This was the compassionate side of Bush's conservatism
-- yes, he was a Republican, but he was nevertheless willing to call for what
Peterson deems "the largest legislated entitlement expansion since the
heyday of the Great Society."
The drug bill is fantastically expensive. Shortly after the law was enacted,
the White House put the 10-year price tag of the plan at $535 billion (substantially
more than the $400 billion it had allowed Congress to believe the bill would
cost). But because drug prices are rising sharply, and because Americans are
retiring at an increasing rate, the program is projected to become more and
more expensive as time goes by. In its second 10-year period, the plan will
cost "well over $2 trillion," Peterson notes. According to the trustees
who manage Medicare, by the year 2078, the program's spending on prescription
drugs will grow to 3.4 percent of the economy -- close to what we currently
spend on defense. Because the plan includes large gaps in coverage that Congress
is expected to fill later, the figure could rise even more than that.
Most Democrats in Congress voted against the White House's prescription drug
plan. (John Kerry missed the vote while campaigning, though he opposed the bill.)
Among other things, they noted, quite reasonably, that because the federal government
was signing up to pay for large quantities of prescription drugs, it should
have forced drug makers to lower the cost of medication, something the president's
bill expressly forbids. Purchasing drugs at a discount would have allowed better
coverage for seniors at a better price for the government. It is not clear,
though, how much more cost-effective a Democratic plan would have been -- plainly,
when you're talking about offering a huge number of senior citizens prescription
drug coverage, you're talking about a lot of money, whatever discounts you manage
Should the nation really be providing all senior citizens -- even wealthy ones
-- with access to prescription drugs? How much of senior citizens' healthcare
should the federal government be responsible for? Given the long-term problems
we face, can lawmakers really justify adding another open-ended entitlement
to the books, one projected to steadily eat up more and more of federal spending?
And if we're spending money, isn't it better to pay for the healthcare of children
rather than seniors? These are, to be sure, indelicate questions; in America,
senior citizens are sacrosanct, and suggesting that caring for all of their
needs -- especially their health needs -- might simply be too expensive is,
politically, way beyond the pale.
This is, however, a discussion we've got to have, Peterson says. The industrialized
world is in the midst of a profound demographic shift, with seniors steadily
increasing as a share of the population and younger people steadily declining.
"Been to Florida lately?" Peterson asks. "You may not have realized
it, but as you gazed upon the vast concentration of seniors there -- nearly
18 percent of the Sunshine State's population -- you were looking at our future.
By the mid-2020s at the latest, the United States as a whole will have an age
structure as old as that of Florida today." As this occurs, it seems only
reasonable that we discuss, frankly and openly, how we should spend our resources.
Currently, most federal benefits are awarded to seniors; the average older
person, Peterson says, "receives seven times as much in benefits as the
average child (and this includes all child-related outlays, even nonbenefits
like education)." As seniors begin to make up an increasing share of the
population -- as the nation begins, in other words, to look like Florida --
this imbalance should start to worry us: We will be spending an increasing share
of our money on what Peterson calls the past -- on people who've already lived
their lives -- rather than on the future. Is this the America we want?
The ideas that Peterson proposes to fix this situation are complex, as you'd
expect when dealing with such a mammoth problem. 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.
But Peterson's specific solutions aren't as important as the problems he diagnoses.
The fiscal outlook is untenable. We are in trouble. Something must be done.
"It will take a rare combination of bold presidential leadership and enlightened
bipartisanship to forge a reform program equal to the challenge," he says.
The trouble is, that leadership is nowhere to be found.