Red Ink (15 page)

Unlike the deficit-
über-alles
crowd, Ryan said he wanted to cut taxes, too. Although he didn’t offer details—budget resolutions generally don’t—he called for lower tax rates for both households and corporations. Backed by economists at the conservative Heritage Foundation (and without the endorsement of the CBO), Ryan predicted a resulting surge in economic growth that would produce enough revenues to reduce future deficits and bring down the debt.

“
You shouldn’t put yourself in a position of trying to feed ever-higher spending with higher revenues, because you’ll
never catch up,” he argued. His framework rejected what he called the “shared scarcity mentality” of “ever-higher taxes and bureaucratically rationed health care.”

Krugman described Ryan’s plan as “
a strange combination of cruelty and insanely wishful thinking.” House Republicans voted for it, but many were uneasy, believing that the far-reaching changes to Medicare (which were altered in the 2012 iteration of the Ryan plan) made them an easy mark for Democrats on the campaign trail.

But Ryan was looking beyond the next election: “
I believe the way to make change is to shift the political center of gravity as best you can, by putting ideas out there, solutions out there, and surviving the gauntlet of demagoguery you’ll inevitably receive,” he said.

If there’s a chart or PowerPoint slide that shows a volcano-like explosion of spending or deficits in the future, chances are it was made by, paid for, or inspired by Pete Peterson, age eighty-six, the modern incarnation of an Old Testament prophet roaming the country and the airwaves to lament the profligacy of his times. “
My daughter jokes that when I do pass on, it will be at my desk with my head huddled over a speech explaining why the Social Security trust fund is an insolvent oxymoron,” he
wrote in his memoir. “I hope she’s right and that it has lots of PowerPoint charts.”

His mission: to generate enough alarm about deficits so politicians cut spending and raise taxes—and soon. Peterson is “
the godfather of this whole effort of trying to bring sanity to our nation’s finances,” said Erskine Bowles, who chaired a deficit-reduction commission that Obama appointed.

Pete Peterson is the son of a Greek immigrant who ran a café in Kearney, Nebraska, that was, Peterson allows, known less for its food than for being open 24/7 for twenty-five uninterrupted years. He hopscotched through corporate America, getting rich along the way. Between stints as chief executive of Bell & Howell and of Lehman Brothers, he served as Nixon’s secretary of commerce. In 1985, Peterson cofounded Blackstone Group, a private equity firm, a venture that made him and his partner, Steve Schwarzman,
really
rich.

As Peterson tells it from his office on the forty-eighth floor of a Manhattan office tower with a spectacular view of the New York skyline, his intense focus on the dangers of deficits dates to the early 1980s. He and his wife, his third, were trying to buy a house in East Hampton on Long Island from a friend who was playing hard to get. To win her favor, Peterson agreed to speak at the inaugural forum of a group she was forming, the Women’s Economic Round Table. She accepted on the condition that he talk about Ronald Reagan’s budget. Peterson had voted for Reagan, assuming him to be both a social and
a fiscal conservative, but the homework he did for the speech convinced him otherwise. In March 1981, just two months after Reagan took office, Peterson stunned the White House and Reagan’s many fans on Wall Street by condemning his tax cuts as “
too much of an all-or-nothing gamble, too much of a high-wire act.” The problem, he told the women’s roundtable in 1981, was “
a growing systemic inability to control mandated [benefit] spending programs.” He has been making the same point in speeches, magazine essays, and books for the past thirty years. (And he got the house.)

When Blackstone sold shares to the public in 2007, Peterson cashed out to the tune of $1.85 billion. “I did not want to finish life as the retired CEO
playing golf five times a week,” he said. He had financed antideficit campaigns before. In 2008, he went big time, creating the Peter G. Peterson Foundation to “
engage the American people and our leaders in confronting what I consider to be the greatest challenge before us as a nation: our unsustainable long-term national debt” and endowing it with
$1 billion.

Peterson’s foundation has bankrolled what might be called the deficit-industrial complex, a set of overlapping organizations with a shared goal of rallying the public—and especially the business and political elite—to reduce the deficit before financial Armageddon arrives. In 2011, the foundation gave $3.1 million to an outfit formed by a passionate deficit warrior, David Walker, a former head of the Government Accountability
Office and also an ex–chief executive of the Peterson Foundation; $1.5 million to the Concord Coalition, a group Peterson helped form in the 1990s that, among other things, runs a roving “fiscal wake‑up tour” to get the public alarmed; more than $500,000 to the Committee for a Responsible Federal Budget, a nonpartisan Washington group that presses the case for deficit reduction; and $200,000 each to six think tanks of differing political persuasions to craft deficit-reduction plans of their own. The foundation has financed an eighty-five-minute documentary on the dangers of debt, called
I.O.U.S.A.
It has run a national advertising campaign around a fictional presidential candidate named “Hugh Jidette.” (Say it quickly three times.) Because Pete Peterson likes them, the foundation also produces a steady stream of scary and colorful charts.

The message is simple and consistent: the United States must slay the deficit dragon before it kills the United States. The actual belt-tightening should be delayed until the economy has recovered, but it must be done if the nation is to make the investments needed to restore the American dream of rising living standards.

“
On our current course, we are headed toward an unthinkable situation in which the federal government spends more than four times as much on interest as it spends on education, R&D, and infrastructure, combined,” Pete Peterson has said. “This effectively would mean spending much more on our past than we do on our future … robbing future generations
of the opportunities we have enjoyed.” And in contrast to Paul Ryan—and current Republican orthodoxy—Peterson has long argued that tax increases are essential, inevitable,
and
wise. “
Unlike some of my Wall Street colleagues,” Peterson wrote in the
Atlantic
back in October 1993 and has repeated frequently ever since, “I see absolutely nothing wrong with imposing higher tax burdens on the wealthiest in our society.”

Inside the White House, the banner for doing more, much more, to help the economy than Obama and Congress did was carried by Christina Romer, the Berkeley economist and chair of the Council of Economic Advisers. The CEA is an unusual cog in the economic-policy-making apparatus. Created by Congress in 1946, the three-member council of economists, usually drawn from academia, controls nothing. Its sole task is to give the president “
objective economic advice and analysis.” Its influence varies from administration to administration, and its fiscal advice over the years is a history of the evolution of economists’ thinking about budgets.

Romer is a numbers-crunching bleeding heart. “
The first recession I really remember was that in 1981–82,” she once said. “That recession was personal.” In 1983, her father lost his engineering job at a chemical company. “I vividly remember the phone call where he told me that he had ‘been sacked.’ He was
careful to say that I shouldn’t worry about my wedding, which was scheduled for that summer. There was money put aside for that.” Her father later found a lower-paying, though stable, job overseeing subway car rehabilitation in Philadelphia.

Romer drew unwelcome notoriety early in the administration when she and a colleague predicted in January 2009 that, without any stimulus, the unemployment rate would reach 9 percent but an $800 billion dose of fiscal adrenaline would keep it from rising above 8 percent. As later revisions to government data revealed, the economy was in much worse shape at that moment than the Obama team realized. Still, unemployment peaked at 10 percent in October 2009, and Republicans have never let her forget the flawed prediction.

Romer shared Krugman’s frustration that the government wasn’t doing more to bring down unemployment—and still does. “
The evidence is stronger than it has ever been that fiscal policy matters—that fiscal stimulus helps the economy add jobs and that reducing the budget deficit lowers growth, at least in the near term,” she said after leaving the White House. In the early days of the Obama administration, she saw a case for a much bigger fiscal stimulus (as much as $1.8 trillion) than the new president eventually proposed. She believes the economy would be better today if Obama had secured another big dose of stimulus in late 2009.

But she doesn’t share Krugman’s conviction that the deficit can be safely ignored for now, especially in the wake of the tumult in Europe over governments that can’t pay their
debts. In fact, the
only
way, in her view, to get more stimulus now is to package it with a credible set of deficit-reducing measures that would take effect later when the economy was stronger. “
We don’t have to reduce the deficit immediately. In fact, we can increase it temporarily, as we need to, to help create jobs,” she has said. “But to reassure financial markets (and ourselves) that we will be solvent over the long haul, we need to pass a plan as soon as possible for reducing the deficit gradually over time.”

Although less emphatic in public, Fed chairman Bernanke takes a similar view. He is wary about prescribing fiscal policy to members of Congress, who like to remind him that decisions on taxes and spending are their turf, not his. But when pressed at a February 2012 hearing in the House, he endorsed what he called “
a two-handed plan”—one that coupled increased spending on infrastructure or education or tax cuts while simultaneously addressing “the long-term necessity of making fiscal policy sustainable.… You need to think about those two things together.”

Alas, thinking about “two things together” is not Congress’s strength. In their rhetoric for much of the past couple of years, both Congress and the president have rushed to one side (extend the Bush income tax cuts, continue payroll tax holidays, cut corporate tax rates) and then to the other (raise taxes on the rich, close tax loopholes, cap annually appropriated spending, slow the growth in Medicare spending). Obama’s latest budget has elements of both: a proposal, for instance,
for a new tax break to encourage employers to hire (would increase the deficit by $14 billion in the first year) and a proposal to limit the tax deductions for upper-income taxpayers (would reduce the deficit by $27 billion in the first year). Republicans promptly chastised him for seeking to raise taxes and cut spending on Medicare, and then complained he wasn’t doing anything about the deficit.

Romer and Ryan, Krugman and Peterson are full-throated advocates with clear and loudly stated views on what the government should and shouldn’t do differently. In contrast, Doug Elmendorf, director of the CBO, is more of a national truth teller, trying to make the public and the politicians understand choices they cannot evade while at the same time not hurting his—and the CBO’s—credibility by taking sides. The
Washington Examiner
once dubbed him “
a geek with guts.” At a time when almost every fact about the federal budget is the subject of fierce debate, Elmendorf’s measured voice can be hard to hear, but some people do listen. When he called a press briefing on the agency’s annual economic and budget outlook in January 2012, he drew ten television cameras to record his carefully calibrated words.

Slim and bespectacled, Elmendorf could play a college professor on TV. “
A quiet man who thinks carefully about
everything,” the
New York Times
once said of him. Indeed, he deliberately chose a baseball game for one of his first dates with his future wife. “
You want to be sure there’s something going on to fill the lull in the conversation but not like a movie where you can’t talk,” he explained.

Elmendorf’s academic pedigree is impeccable: Princeton, 1983; Harvard Ph.D., 1989. The advisers for his dissertation—“Fiscal Policy and Financial Markets”—were Martin Feldstein and Greg Mankiw, top economic advisers, respectively, to Reagan and George W. Bush, and Larry Summers, top economic adviser to Clinton and Obama. After five years helping to teach the big introductory economics course at Harvard, Elmendorf came to Washington in the mid-1990s to work at the CBO. “Starting about then,” he said, “I thought being CBO director would be a very good job.” But first he went to work on the staff of the Federal Reserve Board, with a couple of breaks to work on the staffs of the White House Council of Economic Advisers and the Clinton Treasury. Elmendorf left government in 2007 for the Brookings Institution think tank but came back in 2009 when the congressional leadership—then all Democrats—picked him to run the CBO, succeeding Peter Orszag, who went to the White House to be Obama’s budget director.

At congressional hearings, Elmendorf is like the referee in a food fight. With calm dispassionate words and charts, he tries to give his bosses in Congress a reality check. Members of Congress cross-examine Elmendorf as if he were an expert
witness in a murder trial, laboring to get him to support the questioner’s point of view. (Senator Kent Conrad, a Democrat from North Dakota, at a February 2012 hearing: “
Why wouldn’t one conclude from what you’ve said here that the best policy in the short term would be to extend tax cuts, at least some significant part of the tax cuts, and defer some of the spending cuts … several years, but right now agree to a plan that will raise revenue and cut spending so that at the end of the 10 years we’ve dramatically reduced deficits and reduced the growth of debt?”)

Elmendorf tries just as hard to be sure Congress understands the daunting dimensions of the deficit and the alternative ways to reduce it while avoiding taking sides in the partisan debate, particularly over taxes. (“
I don’t want to speak to a specific combination of policies that the Congress might choose to extend or let expire,” he told Conrad. “But on your general point, I think agreement about how the country’s budget will be put on a sustainable path would be a good thing for the economy in the short run because it would give people some confidence that they knew where policies were headed, which is very hard to have in the current environment.”)