I.O.U.S.A - Addison Wiggin [69]
I am a moderate on social issues but a true fi scal conservative. I would be the fi rst to say that I applauded what happened in the 1990s when, between the Congress, Bill Clinton, and Bob Rubin, Treasury secretary, they put in spending caps, they put in pay - as - you - go rules, and you know what happened. We had budget surpluses. Alas, for reasons I do not fully understand, in a Republican administration we ’ ve ended up with not just guns and butter but guns, butter, and big tax cuts, and we ’ ve gone from having a budget surplus to having very, very large defi cits. Now the c10.indd 141
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142 The
Interviews
president could have vetoed some of these spending bills, but until very, very recently he didn ’ t veto any of them. So we have this phenomenon that not only have defense expenditures gone up, not only have we had big tax cuts, but so - called discretionary spending has gone up at record levels. And don ’ t ask me to explain what has happened here, because this administration and Congress has truly lost its conservative moorings.
Q: As a moderate Republican, do you feel that the party has left you, or something along those lines?
Peter Peterson: I do think the party has left its basic conservative principles. The reasons are not clear. We even have books being written by Secretary of the Treasury O ’ Neill in which very senior offi cers of the administration are saying defi cits don ’ t matter. So there is no question that we ’ ve lost our moorings and we ’ ve got to regain them.
Q: You had a front - row seat to what happened in the ‘ 60s and the
‘ 70s. Can you explain what the many key factors were that made infl ation go like this and pave the road for the work that Paul Volcker had to do?
Mr. Peterson: Remember, we had the oil embargo in 1973, and oil prices suddenly went up several times. We had big increases in food costs. This was a period when there were big wage increases, big increases in benefi ts. Remember, the ’ 60s saw the launching of Medicare, which is a problem today that is fi ve times bigger than Social Security. So the money supply, I ’ m sorry to say, went up very dramatically during that period of time. Paul Volcker absorbed what you might call a triple or a quadruple whammy, and in my view, handled it brilliantly and courageously.
Q: Did the Federal Reserve at that time do anything to make the situation better or did they do anything, possibly, to make the situation worse?
Peter Peterson: I think history will record that the Federal Reserve was part of the problem. They let money supply get out of control.
When Paul Volcker took over, he realized the need for tough action, but it ’ s hard for many people to believe that interest rates c10.indd 142
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were, as I recall, at the extraordinary level of 15 to 20 percent annually. He had to take truly courageous action, and he did.
Q: When infl ation does rear its ugly head, is it true to say that infl ation affects some people in our society differently than others, and if so, how is that?
Peter Peterson: In a curious way, having 100 percent infl ation indexing protects the elderly on their Social Security benefi ts, but very, very few other people have infl ation protection on their pension plans. So we have the anomalous situation where those in the private sector don ’ t get the advantage of infl ation indexing and the government retirees do, so that ’ s one of the differences.
Q: What about someone who is in a minimum wage job or someone who has lived very far down on the income ladder?
Is it diffi cult for people like that when prices start to run away from them?
Peter Peterson: Things become very diffi cult for them for other reasons besides infl ation. What accompanies infl ation often is a rapid rise in interest rates and a slowdown in the economy and a recession. When we have a recession, the people that tend to be hurt the most are those at the bottom end or the poor end of the scale, so it affects them doubly. Not only do