Pete Peterson And Deficit Education

SAINT PETER Pete Peterson, photographed in his New York City office on September 24.

Image: Michael Lewis

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Forty-eight stories above Manhattan, looking down on a verdant Central Park, Pete Peterson is sucking on a mint and sipping iced tea in the headquarters of the aptly named Peter G. Peterson Foundation, his new cause.

Soft-spoken and immaculately dressed as always, resplendent with pocket square, he’s the picture of calm on this clear autumn morning. But all around us, invisible to the eye, is the devastation of financial collapse. Wall Street’s investment banks have disappeared. The markets are tanking. The federal government is scrambling to head off catastrophe. “You notice they never say they’re working to make the economy healthy,” says Peterson. “It’s just about preventing a bottom.”

The market debacle and Washington’s efforts to control the damage threaten to derail a cause that has absorbed Peterson, a former Lehman Brothers C.E.O. and a former chairman of the New York Federal Reserve, for more than two decades: cutting government spending. He wants all Americans to save more. He’s worried about the federal budget deficit, the difference between what the government spends and what it takes in, which is now approaching a record $500 billion. He’s even more worried about the national debt—the cumulative total we owe from financing years of overspending—which stands at $10.3 trillion. And he’s positively terrified by the money we’ve promised the baby boomers through Social Security and Medicare. In total, the government has pledged a stunning $53 trillion that it doesn’t have.

Earlier this year, Peterson promised to put up $1 billion of his personal fortune to start his foundation, the main purpose of which is to get the American public to realize just how scary and corrosive deficit spending is. And now things have gotten a whole lot worse.

The current economic crisis makes the country’s fiscal outlook bleaker in two big ways and could turn Peterson’s effort into a billion-dollar folly. First, the slowing economy means less tax revenue. Second, the government is spending wildly to fix the problem. Peterson supports the $700 billion rescue package, the $85 billion to prop up A.I.G., and other measures as sad-but-necessary moves to stop the economy from going over a cliff. But as a result, the deficit could swell to $1 trillion in 2009. Worse, the short-term focus on the health of the economy, Peterson admits, makes deficit reduction a nonstarter in Washington. His goal—always quixotic—is now, he says, a true “long shot.” Bob Kerrey, the former Nebraska senator and a close friend of Peterson’s, puts it this way: “It’s like coming up with a really good welfare-reform plan for New Orleans, and then Katrina hits.”

Still, at 82, Peterson says he will make a full-bore attempt with his campaign, and he believes it is more important than ever. If we don’t do something to restore long-term fiscal discipline, he warns, we could turn into a “banana republic.” We won’t be able to afford such things as the Federal Bureau of Investigation or Yellowstone National Park, which we look to the government to support. We’ll be at the mercy of the foreigners who buy all those T-bills. We’ll be an economic basket case. Peterson will retire at year’s end from the Blackstone Group, the private equity giant he co-founded with Stephen Schwarzman. When he steps down, he’ll devote himself to the foundation. “This is about starting a movement,” he says.

Peterson believes that the public is only dimly aware of the deficit threat because politicians have been afraid to broach the subject of painful spending cuts after seeing colleagues who tried and got whacked. “It’s like a turkey shoot,” he says, recalling his native Nebraska. “The first one that pops up gets his head shot off.”

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