Twelve and a half trillion dollars. That’s how much our federal government owes to others as the U.S. rings in 2014. Add to that our hidden debt: the additional trillions not yet on the books but promised to millions of people to pay for their retirement and health care in the future. How is our nation going to pay these mushrooming bills?
That’s the question that Pete Peterson would like to see answered, and as soon as possible. The 87-year-old billionaire created the Peter G. Peterson Foundation with an aim very different from the usual charitable aspiration: to advocate for the budget balancing he believes the nation so desperately needs. To nudge the U.S. in more fiscally cautious directions (even at the price of tax increases that many of his natural allies think would create their own economic problems), his foundation has poured tens of millions of dollars into everything from video games on responsible finance to annual budget conclaves on the dangers of a large national debt.
Education and ire
The Peterson Foundation’s first task is education. It expends a lot of money and effort making people aware that there is a serious problem in our federal treasury. If you hear someone talking about entitlements or debt today, chances are they have had their thinking informed by a Peterson report or event. The foundation’s annual Fiscal Summit is rapidly becoming a Who’s Who of serious thinkers on this topic—and the ones who aren’t on the podium are often in the audience, furiously taking notes.
The foundation’s educational outreach extends not just to experts but to the general public, particularly college students—who after all will be stuck with the check. It has sponsored the production of an array of multimedia, from the 2008 documentary film I.O.U.S.A., which premiered at the Sundance Festival, to an array of perky if grim digital leaflets.
One program that’s having an impact in Washington is the Solutions Initiative, which in 2011 gave six think tanks $200,000 apiece to come up with plans to get America’s fiscal house in order. The participants were asked to look out 25 years into the future, and to use the same basic economic projections to allow easy comparison of their options. Spanning a broad ideological range, from the Heritage Foundation and American Enterprise Institute on the right to the Roosevelt Institute and Center for American Progress on the left, the program produced a portfolio of ideas. Roosevelt suggested rolling back defense spending. The Heritage plan radically simplified the tax code and reduced federal spending to 18.5 percent of GDP. A second Solutions Initiative was held immediately after the 2012 election. The goal in all of this is to show that runaway debt is not inevitable, that solutions are available, and to get policy experts of all stripes talking about how to begin making progress.
As philanthropic efforts go, attacking the nation’s budget deficit may seem curiously unrewarding. Donors to colleges and art museums get prominent buildings named for them. Donors to African poverty get their pictures in glossy magazines along with Bono. Donors promoting debt reduction get fan mail from accountants and small businessmen.
Deepening national thinking about deficits, though, is important. Indeed, it is one of the most important national issues of our age. A budget crisis, after all, has the power to override every other policy priority.
Yet it’s also a thankless cause. In today’s fiscal environment—with the economy drifting, tax revenues lackluster, and all those entitlement promises coming due—budget sanity means taking things away from people. Spending will have to be cut, taxes may have to be raised. Confronting austerity tends to spark a lot of ire.
And much ire has been poured onto the courtly figure of Pete Peterson. Liberal economist Dean Baker has called him one of “the granny bashers, intent on privatizing Social Security.” Peterson can be a lightning rod, particularly for left-wing groups that revile the idea of reforming entitlements.
So why is Peterson doing this? What makes him want to dedicate his golden years, and a considerable chunk of his personal fortune, to being the somber voice of warning instead of the sunny voice of assurance?
Economy and opportunity
Pete Peterson looks like what he is: a nice Greek boy from the Midwest. His autobiography, The Education of an American Dreamer, traces a personal and national evolution from immigrant ancestors to farm towns in America’s rural heartland, through midcentury manufacturing to global financial triumph in the new millennium.
In 1926 Peterson was born in Kearney, Nebraska, to Greek immigrants who owned and operated a 24-hour café (they didn’t even have a key to the front door of the never-closed business). From an early age he worked in the restaurant, which struggled as the Great Depression scoured the Great Plains. Peterson got his first sales experience before the age of ten, trying to cajole the cash-strapped clientele into renewing their prepaid meal tickets.
“Here my parents are, immigrants with a third-grade education. So my father took a job on the railroad cooking. No one else would do it because it was steaming hot.” Yet that difficult job ultimately led to business ownership.
That lesson gave Peterson a long-term focus. The other thing he learned from his childhood in the café was a relentless drive to save money. Encouragements to thrift—“economia!”—were everywhere, even in the restaurant’s bathrooms, where a homemade sign exhorted customers to use fewer paper towels. In American Dreamer Peterson writes that even today he finds it impossible to leave a room without turning off the lights.
Peterson lived through a tug of war between the worlds of his parents and his peers. “I wanted to be 100 percent American while my parents clung to their Greek customs,” he writes. “They pulled furiously one way, I the other. All children struggle to escape their parents so they can define themselves, but mine had roots deep in another world.”
Eventually Peterson ended up at MIT, where he worked as an 18-year-old clerk at the radiation laboratory, tracking down parts for what he later learned was the Manhattan Project. After the war ended, he transferred to Northwestern University, where he completed his bachelor’s degree. From there, Peterson went on to earn one of the first MBAs from the University of Chicago, becoming, in turn, a market researcher, an ad executive, a professor at Chicago’s business school, the CEO of manufacturer Bell and Howell, Nixon’s secretary of commerce, the chairman and CEO of Lehman Brothers, and eventually, the co-founder of private equity firm the Blackstone Group. The Blackstone Group’s 2007 IPO supplied the windfall that he is now dedicating to straightening out the cricks and crooks in the federal budget.
In his ramble through advertising, academe, manufacturing, politics, then finance, Peterson showed an uncanny knack for being in the right place at the right time. “I’m a great believer in dumb luck,” he told me, but both in person and in his biography, the picture that emerges is of someone who is always open to opportunity, and willing to pursue it with inexorable resolve whenever he stumbled across it. Just as his father took the worst job on the railroad and turned it into a small business capable of supporting a family and multiple employees, Pete Peterson turned accidents into successes.
It probably helped that he was a bit of an outsider, someone with a different perspective on things (starting with the times his mother made him go to school in a frilly Greek blouse, which will make any boy a fighter). There are many points in Peterson’s long career that contributed to his current crusade against deficits: his father’s thrift, his long career in finance, his various episodes of public service. But the first time the world got to see Pete Peterson in action as an outsider who quietly steps in and finds a way to help a broken system heal itself was when John D. Rockefeller III called.
The Peterson Commission
In the 1960s, charitable foundations were in trouble. As tax rates steadily mounted throughout the middle of the century, wealthy people with a variety of motivations, not all of them charitable, sought out tax-free foundations as places to protect their funds. Politicians went after that money in a variety of ways; one bill floating around Congress would have imposed a nearly 50 percent tax on foundation income.
To police themselves and head off more hostile legislation, philanthropists organized a commission to recommend reforms of foundation rules. John Rockefeller’s grandson and namesake, who was socially acquainted with Peterson, invited him to his home in the Hudson River Valley, where he suggested that Peterson head up the commission, with Rockefeller providing the funds and staff. They didn’t want someone from the eastern establishment of inherited wealth. Peterson, a self-made man from the Nebraska plains, had the outside perspective they needed.
After a visit to Washington, he concluded that the commission wouldn’t have the necessary credibility if foundations were providing the money and the staff. Populist politicians were enraged, and ready to go to war against what they characterized as mere tax shelters for the rich. Given the “deep resentment” Washington felt towards foundations, “I saw foundations being legislated out of existence unless they changed,” Peterson writes in his autobiography.
The commission had to raise its own money, hire its own staff, and have members from outside the foundation world, Peterson insisted. He got his way. The Peterson Commission, as it came to be called, became what some might call a strongly moderate voice for reform.
On the one hand, Peterson proposed strong new safeguards against self-dealing by donors creating foundations. He called for new rules requiring foundations to pay out a percentage of their assets every year. These provisions became law in the 1970s and are still with us today.
On the other hand, Peterson was determined to save foundations as an independent part of American civil society. He is credited with fending off more extreme proposals from the likes of Senator Al Gore, the future vice president’s father. It’s clear that this episode also shaped the way Peterson would approach his own giving when he later became wealthy enough to create his own foundation. Asked how the experience shaped his thinking on philanthropy, he paused for a moment, then smiled shyly. “I thought it was important for foundations to be innovative and do things in areas where no one else is going.”
A cool head in a crisis
Peterson had the funds to put that belief into practice once his Blackstone investment firm went public. And by then, he’d developed a cause that didn’t already have its own telethon: restoring America to sane budgeting. A solid Midwestern Republican, Peterson was shocked by the accumulating budget deficits of our current generation—from a slight surplus in 1960, to a deficit of 2.1 percent of GDP in 1971, 2.7 percent in 1980, 5.0 percent in 1986, 10.1 percent in 2009, and 7.0 percent in 2012. This offended his deep-rooted drive for “economia!,” and since 2008 he has committed $1 billion to his deficit-fighting foundation.
For Peterson, ringing a fire bell on this topic feels like his philanthropic calling. “I would find it difficult to spend all of my time and energy on kind of reacting to standard requests,” he recently told the Bridgespan Group in a video interview. “It just wouldn’t be exciting and challenging…. I need challenges.”
Even with $1 billion and an army of advocates on the job, though, can the man with a passion make the necessary impression in Washington, where challenges often turn out to be mystifyingly complicated, and common sense isn’t all that common? Can he overcome today’s special interests and reservoirs of political inertia?
Peterson has navigated himself, and his companies, through some tight spots before. That’s why Lehman made him CEO just a few weeks after joining the firm, when losses in its government-bond department caused an internal crisis. Perhaps someone with a passion for budget balancing is just what Washington needs.
One of the most interesting things about the Peterson Foundation’s efforts is that it hasn’t pushed a specific agenda on the public, or funded ideological forces to do so at arm’s length. Its politically broad investments have encouraged scholars of all perspectives to take ownership of the problem. It has made brainstorming and raising of awareness its work.
Yet if no one takes action, all of this will eventually be for naught. Peterson would rather that the U.S. fix the situation now. Budget problems are easiest to control when tackled early, for the same reason that retirement experts urge people not to wait until they’re 50 to start funding their 401(k)s. But Washington’s short-term thinking has, if anything, gotten worse in recent years. Observers used to lament that policymaking was dominated by the two-year House of Representatives election cycle; now lawmakers lurch from crisis to crisis with political cycles measured in months or weeks.
At some point, Washington is going to have to make some adjustments. Either voters will get anxious enough about our debt to force politicians to act in time, or insolvency is going to make all the terrible choices for the nation. Plans made when things are falling apart can be clumsy ones, and all the mathematical momentum is against you at that point.
The U.S. will be better equipped to make good policy if it has already made the hard calculations and had the necessary discussions about economic realities and tradeoffs long before the time of financial reckoning. Those are the undertakings that the Peterson Foundation is trying to encourage right now, well before an economic emergency unfolds.
The Greeks have recently illustrated many of the bad things that can happen when national spending exceeds resources over an extended period. Greece offers a vivid example of a fate that no one wants. Luckily, Greece has also provided America with a man willing to use his money to help our country find a more responsible way to proceed.
Megan McArdle is a columnist for Bloomberg. Her book The Up Side of Down will be published in February.
(Infographics courtesy of the Peter G. Peterson Foundation)