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RUNNING ON EMPTY: How The Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It
by Peter G. Peterson
Farrar Straus and Girou, 272 pp, $24.00

In 1992, Bill Clinton's campaign theme song was Fleetwood Mac's hit, "Don't Stop Thinking About Tomorrow." And as president, Clinton didn't stop thinking about our fiscal tomorrow: He cut the growth of federal spending and paid down the national debt.

But in 2004, George W. Bush's theme song may as well be the old Grass Roots tune "Let's Live for Today," because, as two new books make clear, the impending baby boom retirement threatens our fiscal future -- and Bush's tax cuts, coupled with his creation of a new prescription drug entitlement, have made matters far worse.

Given the importance of securing our nation's fiscal future, it's surprising how much misunderstanding exists about it, both among the commentariat and the general public. Philip Longman's book, The Empty Cradle (Basic Books, 2004), is emblematic of such confusion. Longman's counterintuitive thesis is relatively simple: As birth rates decline, U.S. and global populations will fall and lead to a host of problems, including a shortage of workers. There's only one hitch in that analysis: Both the U.S. and world populations are expected to increase over the next half-century. According to the United Nations, global population is projected to grow from 6 billion now to 8.9 billion by 2050. Even if population were to decline by onehalf of 1 percent per year after 2050, it would not return to 2000 levels until 2114.

But, despite compelling evidence to the contrary, Longman tells us we need more people. To bribe people to have more kids, he proposes reducing or eliminating Social Security taxes for parents with kids under the age of 18, while increasing benefits for many retirees with children. This would not only have little impact on fertility rates, it would make our fiscal crisis much worse.

Pete Peterson's Running on Empty (Farrar, Straus and Giroux, 2004) is more compelling. A secretary of commerce in the Nixon administration and co-founder of the bipartisan Concord Coalition, Peterson is one of that dying breed that America so desperately needs now: a pragmatic Republican.

Peterson begins by explaining just how bad our nation's fiscal situation is. With the retirement of the baby boom generation looming, he describes what amounts to a triple whammy: trillions of dollars in national debt, plus many more trillions in trade and current account debts (that's money we owe to foreign creditors), plus many tens of trillions in projected Medicare and Social Security shortfalls. Unless we act now, all of that will have to be paid for by people who are now too young to vote.

While Peterson blames both parties for doing too little, he reserves special criticism for Republicans and, in particular, their addiction to tax cuts. President Bush, "Supply-side theory has mutated into a kind of 'any cut, anytime' attitude. ... This tax cut ideology is not fact-driven. It is faith-driven." What Peterson finds especially galling is that Bush tax cuts amount to "a tax cut for us, but a tax increase on our children."

As a Republican fiscal hawk, Peterson would be happier if the tax cuts were at least accompanied by spending cuts. But, as he points out, spending has skyrocketed under Republican leadership. Peterson quips, "So-called conservatives are outpandering LBJ. They must have it all: guns, butter, and tax cuts." Perhaps the best way to understand the Bush administration is that it wants the tax structure of the McKinley era and the spending structure of the Johnson era.

Peterson doesn't spare Democrats, particularly liberal Democrats who fight entitlement reform. Yet, his book would be stronger if he gave credit to the Clinton administration for its progress on debt reduction and to Democrats in Congress for their attempts to reinstate the Budget Enforcement Act, over Bush administration opposition.

Peterson rightly argues that we need to rein in future entitlement growth in both Social Security and Medicare. Because Social Security benefits for future retirees are tied to the wages they make before they retire, as real wages go up (due to productivity growth), so do benefits. Peterson rightly proposes indexing future benefits not to wage growth, but to the rate of inflation. If we did this, future retirees would be no worse off than today's, and the future Social Security shortfall would be all but wiped out. Because Medicare shortfalls are projected to be much greater, Peterson rightly proposes several steps to restrain Medicare cost growth.

While he is right about the need for entitlement reform, Peterson gives short shrift to the critical steps of paying down the debt and boosting productivity. Paying off the national debt is the single most important thing we can do now to prepare for the baby boom retirement. Here's why: In 2003, the federal government owed $3.9 trillion to bond holders and paid them $153 billion in interest. Interest (7 percent) and Social Security payments (22 percent) together account for 29 percent of the budget.

By 2030, Social Security alone is projected to account for 34 percent of outlays. If the debt were paid off before that, the combined share of interest payments, which would no longer be necessary, and Social Security payments (34 percent) in 2030 would only be 5 percentage points higher than today.

Given the importance of debt reduction, Peterson's lukewarm support for rolling back the Bush tax cuts is a bit troubling. He admits that the Bush tax cuts were a "bad idea," but suggests that repealing them wouldn't make much difference. In fact, according to the Center on Budget and Policy Priorities, the long-term costs of the Bush tax cuts (assuming they are permanent) amount to more than the long-term shortfall in Social Security.

Peterson also wrongly dismisses efforts to promote economic growth. As a result, we need a new national commitment to boosting productivity, even if particular interest groups are hurt by it.

Not all of Peterson's ideas make sense. After calling for a freeze on future Social Security benefits, he proposes that workers be required to put 2 percent to 3 percent of their wages into retirement savings accounts. "Individuals will gain enough in returns to fully make up for their decline in Social Security benefits," he writes. But that idea contradicts his proposal to freeze benefits.

Yet, he opposes raising the Social Security tax the 1.9 percent that experts say would be enough to cover the future shortfall. He takes this position despite the fact there is no significant difference between raising Social Security taxes and requiring mandatory additional savings -- both cost workers the same amount and provide the same benefits in the future. But at least Peterson has the courage of his convictions to propose paying for these accounts through new "taxes." Bush, meanwhile, proposes to fund personal retirement accounts by cutting Social Security taxes, thereby doing nothing to fix the system -- and massively raising the national debt.

Paraphrasing Ronald Reagan in 1980, Peterson wants candidates to ask, "Is your future better off now than it was four years ago?" Given the explosion in spending, entitlements, and tax cuts in the Bush administration, the answer is clearly no. Peterson's book should serve as a wakeup call for both parties to take this issue seriously before it is too late.

Robert D. Atkinson is vice president of the Progressive Policy Institute and director of its Technology and New Economy Project.