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The days are getting late, the bucks short

Running on Empty How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It Peter G. Peterson Farrar, Straus & Giroux: 242 pp., $24

August 08, 2004|Howard Marks | Howard Marks is chairman of Oaktree Capital Management in Los Angeles.

Consider Sam. He's always been regarded as the brightest guy in town, and maybe the handsomest. He has the best job and lives in the best house. He spends aggressively -- detractors would say hedonistically -- to support a lifestyle that many others envy, but he shows good character by providing generously for his sick and elderly relatives.

There are, however, a few problems. In recent years, he's been spending more than he makes, and his expenditures appear likely to grow faster than his income. He covers each year's shortfall by borrowing from other members of the community. (They've always been glad to lend him money because of his good standing in town.) But this adds increasingly to his debt, and thus to the next year's interest (and shortfall). In other words, he seems to follow Winston Churchill's dictum: "It saves a lot of trouble if, instead of having to earn money and save it, you can just go and borrow it."

Finally, with the number of family members Sam cares for increasing, with him promising each of them an increasing stipend, and with his relatives -- even the sick ones -- living longer, it seems clear that in the future, the cost of supporting them will grow considerably faster than his income.

An annual deficit. Attachment to a lavish lifestyle. Growing indebtedness and related increases in interest costs. Dependence on others to finance the shortfall and the risk that those lenders will withdraw their loans or charge higher interest rates. A commitment to pay for the welfare of others that threatens to grow out of control.

In "Running on Empty," Peter G. Peterson argues forcefully that all of these things describe Uncle Sam today and that they promise to have grave consequences in the future if not dealt with soon. This subject doesn't lend itself to the writing of a page-turner, and Peterson's book certainly can't be described as one. But his writing is compact, unusually clear and accessible, logically consistent and highly convincing. The procession of statistics sometimes seems mind-numbing and impossible to digest, but unlike many books, this one seems no longer than necessary.

Peterson, who wrote "Gray Dawn: How the Coming Age Wave Will Transform America -- and the World," says there are a few more things that complicate our predicament. First, each of the two dominant political parties seems hell-bent on implementing a philosophy that will add to the economic problems. It's a rare pleasure to see both political parties chastised equally. Peterson does this so much that if he hadn't said so in the interest of full disclosure, most readers wouldn't guess that he is a lifelong Republican who has served in several Republican administrations, including as secretary of Commerce under President Nixon. His approach as an equal-opportunity castigator recalls Will Rogers' pronouncement: "The more you observe politics, the more you've got to admit that each party is worse than the other."

According to Peterson, Democrats are dedicated to expanding entitlements, but without any serious examination of our ability to pay for them, and certainly without disclosing the cost to taxpayers: "The revered theologians and ragtag mullahs of the Democratic Party have never met an entitlement program they didn't want to expand." All, of course, out of the highest of motivations.

Republicans, he writes, have an equal dedication to tax cuts -- perhaps to stimulate the economy and perhaps to "starve the beast" of government in order to right-size it. Their attitude seems to be "any cut, anytime." (In fact, a recent newspaper headline noted: "House Approves $140 Billion in Tax Breaks," despite this being a high-deficit year.)

Clearly, enacting new spending programs without new income sources and passing permanent tax cuts without corresponding spending cuts have the same effect: They both contribute to budget deficits. But there is no consensus about the consequences of our burgeoning deficits and national debt. The subject is unclear to the public, for whom economics remains "the dismal science." Even economists (and certainly politicians) differ widely in their views. And none of us has lived through a long period of rising deficits and national debt at high percentages of the gross domestic product.

Yet there's more to deficits than "just numbers on paper," as Peterson quotes President Bush calling them. They increase borrowing, escalate future debt service requirements and -- the point Peterson hits perhaps hardest -- transfer to future generations the burden of expenditures mandated, and possibly benefits enjoyed, today. Even N. Gregory Mankiw, chairman of Bush's Council of Economic Advisers, acknowledges that when "the government reduces national savings by running a budget deficit, the interest rate rises and investment falls. Because investment is important for long-run economic growth, government budget deficits reduce the economy's growth rate."

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