Get the Rich Off the Dole

A staunch Republican who served as Richard Nixon's Secretary of Commerce, Peterson, 62, has been a consistent and vociferous critic of the Reagan Administration's economic policies. In 1982, while chairman of the investment banking firm Lehman Bros. Kuhn Loeb, he co-founded a bipartisan group that warned of the mounting U.S. budget deficit. Still one of the most powerful men on Wall Street, Peterson now heads the Blackstone Group, a smaller investment house specializing in corporate takeovers and leveraged buyouts. His new book, On Borrowed Time: How the Growth in Entitlement Spending Threatens America's Future, written with Neil Howe, continues his assault on the economic policies of his own party. senior editor Walter Isaacson and senior correspondent Frederick Ungeheuer interviewed Peterson last week in his office on New York City's Park Avenue.

Q. You say that entitlements, or government outlays for people qualified by law for financial assistance, today absorb 11% of the gross national product. Which do you consider the most egregious of them?

A. The most egregious concept in the entire entitlement package, to me, is the idea that people like Peter Peterson, to take a specific example, should be getting three to five times what I've put into Social Security, plus interest, plus my company contribution, plus interest, and that I should be receiving a lot of it tax free.

The argument that is used to support this system is that you need to bribe the well-off so that they will support the poor. Translated, what that's saying is everybody better get on the wagon getting subsidies from the Federal Government. But the awkward question that leaves is if everybody is on the wagon, then who pulls it? So I think the single most egregious thing is the idea that in a time of profound fiscal stress in this country, we've got billions and billions of dollars going to well-off people under the guise of universal entitlements.

Q. But if a couple has a retirement income of more than $32,000, half of its Social Security income is taxed now.

A. We should have a firm principle that the relatively well-off should receive zero subsidies, not what's left after you pay taxes, but zero. I say that when a person hits somewhere between $40,000 and $100,000 dollars a year in retirement, if he's got back his contributions plus interest, I'd tax it 100% because the relatively well-off should get no subsidies or welfare at a time like this.

My father told me that part of the American dream was that kids should do better than their parents. We now have a situation where our young workers have had a decline in real income after taxes, where a child is six times more likely to be in poverty than the elderly.

Q. Isn't it very difficult to argue against entitlements in the U.S. when we still suffer in comparison with Canada and every other industrial country, especially the Scandinavians, in terms of what we have as a social safety net today?

A. I suppose we ought to differentiate between what we pay and what we get. This country spends 11% of its gross national product on health care. The industrial world on average spends 3 1/2% of its GNP. And I've looked at every measure of health I can look at, and there's little evidence that our health is any better. The Japanese spend even less than that as a percentage of GNP, and their health would appear to be better than ours.

We'd better be very careful about differentiating between what we spend and what people get. Now one of the reasons these countries may need less of a public safety net -- and why we need more of a private safety net -- is that we need the savings for our economy. And the reason I'm an admirer of Japan and West Germany is that those two countries have a very deep, real, long-term economic consensus on capital formation that isn't just rhetoric.

Q. What you're really trying to say is that we should shift our entitlement system from the old to the young.

A. Well, what I said is that let's go from age-based entitlements to need- based entitlements. We have some urgent priorities in this country. We know we have an uncompetitive educational system, and we need to invest more in education. We know we have an uncompetitive work force, with a third functionally illiterate and unable to work in the society.

The brute question that nobody wants to answer in an era of $200 billion deficits is, Who provides the resources? And we ought to look at where the largest pools of subsidized consumption are. And I believe the idea of spending hundreds of billions of dollars on entitlements in which we're giving money to people who really don't need it, when we could take a much smaller amount and really help the poor and the children, is really an unforgivable way of allocating resources at a time like this.

Q. Let's go to politics for a moment. George Bush has been against everything you say. He's against touching entitlements. He's against any taxing. What have you to say to him?

A. What I would say to Bush, if he were to ask me, is that the implication of what he, and for that matter Governor Dukakis, is more or less saying is that we're not going to take any of the painful steps to reduce our deficits and reduce our debt, and that you cannot continue to rely on Panglossian projections, as we've been doing now since 1980.

Q. Well, does it offend you when you watch Bush or Dukakis give these answers in debates?

A. Offend is a strong word. I'm bothered by the fact that the American people can't be told the simple truth -- the simple truth being that if we're going to get back our competitiveness, we have to decide what we're going to give up to get it back.

Q. But wouldn't your suggestion to cut the benefits for the aged lead to a kind of triage in that a certain number of them will be allowed to die because they will not be eligible for life-prolonging care?

A. If we're going to find the resources to reinvigorate this country, we're going to have to make some real choices that are not costless choices. First of all, Medicare is a program that when L.B.J. announced it, he thought was going to cost $500 million, and it's heading rapidly toward $100 billion. Thirty percent of that money, which is a mammoth sum, goes to the last year of life.

We are spending two to three times more per capita on elderly health care than the rest of the industrialized countries. And we're spending far less on our children. We have virtually the highest infant mortality and the longest longevity at 80. It is an immensely moral, ethical, difficult issue. But other countries have made a choice.

Q. In your book you even talk about not paying for dialysis treatment for people who are over 55.

A. I fully appreciate that it sounds harsh and cruel, but the nature of making tough decisions . . . I can throw it right back at you and say, how do you feel about the idea that 96% of the people in this country now are not elderly, and the idea that children are six times more likely to be poor than the elderly, and then if I say to you, well where are you going to get the resources to invest in these children and their education? So the brute question is, What do you give up in order to get something else?

Q. Well, if I may say so, you're talking about tough choices, but in some ways < you're really copping out, because things you suggest are things that are not even being discussed politically. The notion of really lopping off Social Security is just a taboo subject in American politics.

A. Let's talk about a few basic principles of reform. No. 1 is make them humane. By which I mean, let's talk about being fair to those that are less fortunate, making them gradual so that people don't have to disrupt their lives, making it fair to our children, which is something we're not much talking about here.

According to the estimates we've made, our kids are going to have to pay 25% to 40% payroll tax. Has anybody told our children that? So I am suggesting we have to be fair to our children.

Now let's talk about how draconian these reforms are that I'm proposing. Cost of living adjustment on Social Security, for instance. It's now 100%. There isn't another sector in America that I'm aware of that gets 100% indexing. Certainly, nobody in the private sector. I proposed leaving it at 100% for those who are poor and then having a diet COLA, as I call it, for the rest of us that are well off. That isn't a huge cost. It's $2 or $3 a week that most of these people can afford. But it would save us something approaching $100 billion dollars in the year 2000. Let's talk a gradual increase in retirement age. If you take longevity, which has gone up dramatically in America, what's wrong with increasing retirement age?

Q. Like Governor Dukakis, you're the son of a Greek immigrant, and in a very moving passage in your book, you describe how your father and mother toiled in a 24-hour restaurant 365 days a year in Kearney, Neb., where you grew up. A similar experience turned Dukakis into a liberal Democrat, whereas you became a conservative Republican. How did the same experience turn you into such different political men?

A. Well, three events converged to get me to spend three years on this book. The first was the death of my father, which after all, reminds all of us of our own horizon; my 60th birthday, which kind of says, you know, it ain't no dress rehearsal anymore; and third was the birth of a granddaughter which focused me a bit on posterity. Dietrich Bonhoeffer ((a German martyr of the Nazi regime)) said once that the test of the morality of a society is what it does for its children. Now that kind of crystallized my view that we ought to be concerned about the future and say the future matters and let's look at the future.

My father, I think, in addition to telling me what the American dream was all about -- and he certainly lived it -- was what I would call a compassionate conservative. He hated to borrow and he rarely borrowed. But he was immensely generous to the poor. There was hardly ever a person that came to that restaurant at the back door that ever went away hungry.

Q. Are you therefore opposed to the whole concept of entitlements, because entitlements mean that you have a right to something, whereas you would prefer to have people come to the back door for handouts?

A. No, no. I'm not talking about a handout. What I'm saying is that if you have a commitment to the young and the poor, then you have an equivalent commitment to identify the sources to fund it. You're not unaware of the fact, certainly, that we have something called a safety net for the truly needy, and as in some work I did on the budget, when I looked at the numbers, I discovered that the means-tested programs that went to the poor were cut three times as much as the non-means tested.

Only $4 billion more would do an awful lot to lift virtually all above the poverty level. Now instead of that, we're spending hundreds of billions of money that isn't going to the poor at all.

Q. Do you think that what you do now, having got out of politics, and in some ways not having been involved in this struggle except from the sidelines with these proposals, and instead having become an investment banker, is the best way you could be helping the economy?

A. Well, the hardest subject today, I guess, is the foreign buying up of America. I'd like to turn that question around. What I am for is reducing our deficits and increasing our net national savings so we don't have to rely on foreign capital. I think that relying on this much foreign capital is very dangerous to our economic and our political health.

Q. But as an investment banker helping foreign companies invest here, aren't you profiting from the very thing you're criticizing?

A. I don't understand what's wrong with profiting. It's a lot better than losing. That's what the system is all about. Presumably, if we're not performing a service, people won't pay us for it.

Q. Do you think we're heading for a major political conflict between the old and the young in this country?

A. Just take your children today. How do you think your kids would feel about $ paying a third of their pay, a third of their pay going to Social Security? My answer is, at some point, even my daughter -- who finds my discussions utterly eye-glazing, aggressively boring, because she's preoccupied with her career -- now she's paying about 15% of pay, let's say. When all of a sudden it's doubled and tripled, I think even she will decide it's intolerable.

I think in a lot of American life now, there's the big wink. They say we're fiscal conservatives, and yet we've got the biggest debts and deficits in the world. You can take almost every aspect of American life and we're all kind of winking at each other. The reason this problem is so intractable is because the American public deals with the here and now, and they're interested only in the present and not very much about the future, the way our competitors are.

In the current political campaign, don't you find it interesting that about the only issues we're discussing are all costless? The flag doesn't cost anything. Abortion is not an issue that involves resources. What else? Oh, the furlough program. The death penalty. All of these, interestingly enough, are costless. Whereas the real trade-offs that have to be made to assure our economic and political future all involve costs.

I don't know whether it's two years from now or five years from now or ten years from now, but we're going to learn what the real meaning of impossibility is in this country.