The Next Four Years
By John Heilemann

(Business 2.0) – On a postcard summer afternoon before the GOP rolled into New York for its national convention, Pete Peterson was in his Park Avenue office, wearing a pin-striped suit and a perfect Hamptons tan, and pondering a question whose answer should have been obvious for a Republican plutocrat like him. "I haven't decided yet whom I'm going to vote for," the chairman of the Blackstone Group and the Council on Foreign Relations said with a wearysigh. "I've been a Republican all my life, and I'm still a Republican. But my enthusiasm for this administration is, shall we say, restrained."

Having just finished reading the man's new book, Running on Empty, I wasn't exactly surprised. For almost 20 years, Peterson has waged a loud and lonely crusade on behalf of a cause that was once central to the Republican Party: fiscal restraint—in particular, balancing the federal budget and reforming entitlement programs such as Social Security and Medicare. In the course of this crusade, he has published several books on the topic, in which he sternly curses both parties for their profligate ways. But while Running takes plenty of shots at the Democrats, Peterson assails the GOP in language so blistering it could have come from To wit: "This administration and the Republican Congress have presided over the biggest, most reckless deterioration of America's finances in history."

If Peterson is right about that—and he indisputably is—he has raised an issue that should be at the heart of the 2004 election. When it comes to the economy, presidents do many things—some obviously important (such as promoting free trade), some trivial to the point of irrelevance. Yet none is more significant than keeping the nation's fiscal house in order. The task is never easy, but in the years ahead—as the baby boomers start to retire, sending health-care and pension costs rocketing into orbit—the challenge will become immeasurably more difficult. At stake will be nothing less than the future of American prosperity.

An issue this important raises some urgent questions as Election Day draws near—questions the media has uniformly done a terrible job of posing. Given the damage President Bush has inflicted on America's balance sheet, is there any reason to think he'd do better in a second term? And if not, would John Kerry be an improvement? Or might he do even worse?

In searching for answers, there's no better guide than Peterson. On the subject of budgets and entitlements, he's peerless—a fiscal-policy éminence grise. At 78, he has stood at the nexus of business and government since the early 1970s, when he served as secretary of commerce under President Nixon after working as CEO of Bell & Howell. He went on to run Lehman Bros., then started up the Blackstone Group, an A-list boutique investment bank. In 1992 he co-founded the Concord Coalition, a bipartisan advocacy group that quickly became a leading voice for deficit reduction.

After watching Reaganomics push the deficit into the danger zone, Peterson was pleased by what happened in the 1990s. Under the influence of Robert Rubin and pressure from a Republican Congress, President Clinton became a reluctant convert to the religion of fiscal discipline. As defense spending fell after the end of the Cold War and tax receipts exploded because of the boom, the federal budget moved into surplus for the first time since 1968. Yet Peterson still saw trouble on the horizon, in the form of 77 million aging boomers rapidly approaching retirement. Unless the costs of Social Security and Medicare were brought to heel, he argued, America would face a future of crushing debt, exorbitant tax rates, or both.

Peterson says he was "hopeful" when Bush took office in 2001. But hope soon gave way to disgust. It wasn't just that Bush pushed through three vast, unaffordable tax cuts or that he did nothing about entitlements. It was that the administration went on a spending spree: gorging on pork, signing an energy bill that Senator John McCain famously dubbed the Leave No Lobbyist Behind Act, and adopting a prescription drug benefit that will eventually cost $2 trillion a decade—the largest entitlement expansion since the Great Society. "Today," Peterson writes, "so-called conservatives are outpandering LBJ. They must have it all: guns, butter, and tax cuts."

The effects of Bush's fiscal indiscipline are, as Peterson says, "simply breathtaking." At the start of 2001, the Congressional Budget Office projected a cumulative 10-year budget surplus of $5.6 trillion. Just three years later, its forecast had radically darkened, to a deficit of $2.3 trillion. But even that, Peterson notes, isn't the whole story. If Bush is reelected, he intends to make permanent all his tax cuts (which were supposed to be gradually phased out). If that happens, and if discretionary spending grows as fast as the economy (a safe assumption), the 10-year deficit is slated to soar to $6 trillion, bringing the total negative fiscal swing during Bush's first term to more than $10 trillion.

Virtually every credible economist believes that annual deficits averaging $600 billion, or 5 percent of GDP, would be a massive drag on the economy. When deficits are large and persistent, interest rates rise and investment falls—a combination that reduces economic growth, the key to national wealth. (If you don't believe me, take a look at the macroeconomics textbook authored by N. Gregory Mankiw, chairman of Bush's Council of Economic Advisers, which says exactly this.)

And that's if we're lucky. Largely because of the deficit, America's national savings rate is the lowest in the developed world; to finance our debt, we're increasingly reliant on foreign capital. Peterson says Americans now borrow roughly $2 billion from abroad every working day. This influx of foreign money has advantages, but it also makes the United States vulnerable. According to an array of panjandrums from Robert Rubin to former Federal Reserve chairman Paul Volcker, if the country continues on its current path, it runs a serious risk of provoking a collapse in confidence among foreign creditors and investors—a panic that could trigger a Third World-style financial meltdown. Indeed, Peterson reports that Volcker believes there's a 75 percent chance of such a crisis occurring in the next five years.

None of these scenarios, to put it mildly, would be any good for business—not for the stalwarts of the old economy or the champions of the new. Which brings us back to the question: Who's the best candidate to get us out of this mess?

Despite Bush's reckless stewardship, he retains the support of a solid majority of corporate America's chieftains. Even in Silicon Valley, which trended Democratic in 1996 and 2000, the president has formidable backers: John Chambers, Terry Semel, Meg Whitman, and many more. But given Bush's record and its implications, you can't help but wonder what these CEOs are thinking.

The easiest explanation is that they're voting their pocketbooks: Being wealthy themselves, they like a president who cuts taxes for the rich. Another is that they're driven by parochial concerns; Bush favors policies that help their respective industries. Visit the Bush campaign's website, for example, and you'll find a video of Chambers singing the praises of the candidate's "aggressive" approach to broadband.

Bush's people, unsurprisingly, would point to the president's second-term agenda—tax reform, medical savings accounts, tort reform, and so on. But though Bush often talks about paring back the deficit he unleashed, he hasn't offered a coherent or specific plan for how he'd go about it. When it comes to entitlements, his only suggestion—the partial privatization of Social Security—would, according to many experts, actually add at least another $1 trillion to the 10-year mountain of debt.

In truth, many Republican executives have misgivings about Bush's fiscal policies. They simply believe that Kerry's approach would be even worse.

Naturally, Kerry has gone to great lengths to dispel that worry. At every opportunity, he's wrapped himself in the mantle of the sainted Robert Rubin, that paragon of Wall Street prudence who persuaded Clinton to tackle the deficit and pay heed to the bond market. His economic team is composed of ex-Clintonistas, who say their first priority is to mop up Bush's red ink. These moves have garnered Kerry 200 CEO endorsements—more business support than Clinton had in 1992.

Yet for all Kerry's attacks on Bush's fiscal improvidence, there's ample reason to be skeptical about the Democrat's own rectitude. As Peterson points out, although the Kerry team has pledged to repeal a big portion of Bush's tax cuts—the portion aimed at fat cats—the campaign has also put forward a welter of new proposals: a $650 billion health-insurance plan and $200 billion for education, plus increased spending on veterans, defense, job-creation tax credits, and so on.

Not that all these proposals are unworthy; some make damn good sense. And Kerry's folks promise to adopt "pay-as-you-go" rules that will keep a lid on the budget. Still, once his proposals are added up, they too would increase the deficit—just less than Bush's would. Kerry also refuses to discuss entitlement reform. "The closer you look," Peterson says, "the harder it is to tell where he is."

So Peterson isn't offering an endorsement of either Kerry or Bush. What he offers instead are substantive suggestions. By all means, repeal the Bush tax cuts, he advises, and implement the pay-as-you-go rules that Kerry's people favor. But all of that is small beer compared with the task of curbing entitlements.

On Social Security, Peterson used to plump for raising the retirement age and for "affluence-testing" benefits. He's since abandoned those solutions as politically unpalatable. His new pet reform is borrowed from Britain: Rather than indexing benefits to wages, as they are today, index them to inflation (since the latter typically rises less quickly than the former). He also wants to impose a mandatory savings regime that would require workers to put a portion of their wages into global index funds. (Bush's plan for personal savings accounts, by contrast, would be funded out of payroll taxes and therefore worsen the deficit.)

Medicare is a bigger and tougher nut to crack, for it involves wading into the swamp that is America's health-care system. Peterson argues that managed competition is the place to start. He advocates cost sharing (through deductibles and co-payments), limits on the tax-deductibility of employer health plans, medical malpractice reform, and global caps on spending.

Most of Peterson's ideas are controversial. Some I like, some I don't, but that's beside the point. The point is that all his proposals share a compelling virtue: They are serious, plausible, grown-up responses to a set of fiscal dilemmas that have finally become unduckable. As Peterson says, "The baby boomers' retirement is no longer a far-off abstraction. It's a fairly short-term, and extremely urgent, economic reality."

The onset of that reality will be a moment of truth for both Republicans and Democrats. For decades Democrats had an insatiable craving for free lunches. Now the GOP has gone further, demanding lunch, dinner, dessert, and bottles of single-malt scotch. The question is whether and how the two parties will cope with the hard choices ahead—and whether the grown-ups in each party will reassert their influence. In Running on Empty, Peterson describes a conversation he once had with Bush, in which the banker wondered aloud "whether a modern, media-driven democracy ... can respond effectively to a different kind of threat—a silent, slow-motion, long-term crisis like entitlements."

So far the answer has been a resounding no. Whoever winds up in the White House come January, here's hoping, for the sake of the American economy, a different reply will be forthcoming.