Financial Leaders Worry About Future, Do Nothing

Peter Peterson, who founded Blackstone and is on all the billionaire lists, started his own charity, The Peter G Peterson Foundation. Much of the work that the organization does involves getting opinions from the people in the highest levels of business and government. It does this through surveys or retreats. The surveys are easier to publish, which makes them more useful to the press. That is, if the research results are actually useful.

Peterson recently got Global Strategy Group to poll the top economic leaders of the last eight administrations and former members of Congress. People currently in the Administration or the House or Senate were not polled, which is odd because they actually run the country.

The survey results were entirely predictable. The US has a deficit which is too high. Combined with an economy which is no longer growing quickly, the national debt is rising to unsustainable levels.  The conclusions, the authors of the report wrote “shows broad agreement that failure to address the country’s long-term structural deficit challenges would lead to another economic crisis within the next ten years. There is also consensus around the solution to the deficit problem: it must include both spending cuts and tax increases, according to a group of more than fifty former top economic officials.”

Everyone surveyed believed that the government cannot stay on its current financial path. The group was more concerned with long-term deficits than short-term ones. That ignores the fact that short-term deficits usually make longer term ones more likely, unless the government has the will to sharply cut spending or raise taxes.

The spectrum of views about how to solve the coming crisis is narrow as it must be. There are only a few ways to solve annual deficits that are at record levels and unprecedented increases in the national debt. And those surveyed did not disappoint. “Two-thirds of Republicans (68%) and more than eight in ten (88%) Democrats believe that solving the country’s long terms structural deficits will include both spending cuts and tax increases.”

The idea that the expenses should be cut leaves aside which of the tens of thousands of  federal programs will be affected and how many Congressmen have a stake in any of these. The same holds true for the Administration, the current one or any that serves in the future.

At the risk of stating the obvious, taxes in the US,  can be raised significantly. The extent to which it will be regressive is only a guess. No one will know the level of regression until well after the taxes are raised. By that time, a heavy tax burden will have taken its toll on the economy, which will slow as a result. To remedy that, the only realistic option may be to cut taxes. The economist of Art Laffer,  whose work has been obscure since the late 1980s, will be reborn. “A decrease in tax rates could result in an increase in tax revenues,”  he said. People who are taxed at a low rate have an incentive to make more money because they keep more of the money that they make. But that depends on whether the economy is growing quickly and the age of the population that is doing the earning. That make the Laffer rule useless in a vacuum

On the cost cutting side of the ledger, anyone who looks at the federal budget knows that without cuts in Social Security, Medicare, Medicaid, and defense spending, real national spending austerity is impossible. The number of people over 60 who have paid into “entitlement” programs for years will be told they need to take out less than the generation before them did. Any politician who runs on that platform is unlikely to get elected at all. Congress will remain stacked with members who will not mention entitlement cuts because it is political suicide.

Defense cuts are more palatable among many citizens. America has the most powerful military in the world. An effort to make it stronger is counterproductive. It encourages the country to fight wars that it cannot afford because it has the tools of war to fight them effectively. As Afghanistan and Iraq show, even the best tools do not always work, but they are expensive.

Peterson’s foundation is bound to keep up its role as a collector of the opinions of people in high places. It is a shame that they are opinions that no one is willing to do anything about.

Douglas A. McIntyre