L.G.: The religion of Arthur Laffer persists.

P.P.: I've known Arthur since he was in the Nixon administration. I didn't believe it then, I don't believe it now. But McCain...

L.G.: Yeah, why is he better than the two smart people?

P.P.: He talked about these unsustainable challenges. Take entitlements. The present value in current dollars of the unfunded liabilities—all we talk to American people about is the public (or funded) debt of $9 trillion; we don't tell them about the unfunded debt, which would be unthinkable to a private citizen or a business—is over $40 trillion, being kept at the two major entitlement programs [Social Security and Medicare]. That's over three times the size of the entire economy.

L.G.: Over what period of time is that?

P.P.: That's the present value over the next 75 years. But those are the promises we made. If you wanted to do this by payroll taxes, which fall heavily on the middle class, as you well know—and everybody wants tax cuts for the middle class—you'd have to double the level of payroll taxes. And that's just to me, unthinkable economically, politically, and morally, because we're slipping this hidden check to our own kids. In the case of the second challenge, which is the so-called current account deficit that leads to foreign debt: Because we're such lousy savers, we've got a negative savings rate. Because we're such gifted consumers, spending more than we earn, we're confronting these massive current account deficits, led largely by the trade deficits, and we're borrowing unthinkable numbers from the rest of the world. We're currently borrowing about 7 percent of the G.D.P., and the previous record, in the Reagan administration, was less than half of that, about 3.25 percent. The dollar fell, there were all kinds of stock market tribulations, and so forth. We're now at twice that level of current account deficits.

L.G.: Does it bother you that the countries we're borrowing from, like China, are economic competitors, and that they're doing a lot of things around the world that we don't like?

P.P.: Why would a great country ever want to be hostage to another country, particularly a country that isn't an ally or a partner? I don't know whether or not you remember—and you bring up a very good point, that these kinds of foreign debts have political implications-I'm not much of a historian, but at the time of the Suez Canal issue, the Brits were getting very militaristic and aggressive about moving in, and we were very opposed to that policy. We were huge holders of British pound securities, and the U.S. quietly got the word to the top British officials that if they continue with this policy, we would feel under pressure to sell these securities. And all of a sudden, the British policy changed.

L.G.: China could do that to us.

P.P.: China could do that to us, and the Middle East too. You know, the petrodollar deficits are hundreds of billions of dollars a year, which is one of the reasons I'm so concerned about the energy gluttony.... I asked the top foreign-debt guy and foreign-trade fellow [at the Washington-based Peter G. Peterson Institute for International Economics think tank] to do a picture for me in the year 2015 and the year 2025-what we would look like as a country. And I must tell you, we would have debt levels that would easily rival or even surpass the developing countries. And somebody has to tell the American people this is dangerous: It's unsustainable, we're saving much too little, we now have a negative savings rate, and we're going to have to save more. But the question is, How do you persuade them to save more, and how and why do they save more? That's the second issue. The third issue on our foundation’s agenda is health-care costs....

Since the year 2000, and I find this hard to believe, Medicare benefits and capital, even before the boomer crop is retiring, are up over 50 percent in that short period. Our health-care costs are over twice per capita the rest of the developed world, and yet there's no particular difference in health outcomes or longevity. So, to me, the metastasis of health-care costs is a huge issue, and how we're going to reduce health-care costs or get them under control. Because David Walker makes me look like an optimist. David believes that the health-care system could bankrupt this country.

L.G.: If you could just simply tell me, Why is John McCain—a man who has said that he doesn't know a great deal about economics, he knows about national security—why is he better than these two smart people running as Democrats? I just want to get the Pete Peterson view on that.

P.P.: I think he's the best one to confront some of these issues. People talk voluminously about the Bush tax cuts. Nearly everyone wants to preserve all of those except those going to the upper income groups. Let's assume for a moment that you got rid of all the Bush tax cuts-that amounts to 1 percent of the G.D.P. Do you know what the increase in entitlements is going to be over the next 30 to 40 years? Nine percent of the G.D.P. So if anybody thinks you're going to solve these problems just through tax increases, he doesn't understand the magnitude. Secondly, what would the impact be of that kind of tax increase? [To solve these problems,] I think it's going to take benefit reductions and efforts to increase savings. For example, it's going to take a leader who is credible on shared sacrifice; it's going to take a person who at bottom is a fiscal conservative. John McCain has a track record that impresses me. Just look at the Medicare prescription bill, his position on the tax cuts that he took. I also think he's a very good symbol of someone who sacrificed a lot. But no president can do this alone, until the public understands the problem.

L.G.: How long have you known McCain?

P.P.: I don't know, probably 20 years.

L.G.: Do you have an extra level of bonding with him now that both of you have been attacked by the New York Times? [A February 15 article portrayed Peterson as a finger-wagging plutocrat who preaches fiscal discipline while benefiting from having his investment income taxed at 15 percent.]

P.P.: Oh God [laughs], I knew this was going to come up.... I'm allegedly the fat cat that doesn't pay much taxes or some such thing. I made it clear to the New York Times that I pay substantial taxes,but they chose not to print it. Warren Buffett was brought up. He says his assistants pay more taxes than he does. I'm a great supporter of Warren Buffett. As a matter of fact, one of our projects was working with him and Sam Nunn on nuclear proliferation, and Warren and I are going to be fifty-fifty partners. But I went back and looked at what I paid in taxes. I think my taxes last year were 38.7 percent and my two assistants' were 21 percent.

L.G.: Just to put a number on that. You were paid, according to what I read, something like $200 million, so you paid 38 percent, something like $70 million?

P.P.: Thirty-eight-point-seven percent, okay? So I pay a lot of taxes. Secondly, with regard to this charge of insensitivity that a lot of us fat cats are supposed to have to the inequalities in income, keep in mind what my background is. I'm the son of poor Greek immigrants, with a father who-

L.G.: -worked hard at a diner, I know.