People imagine an idiot savant to be someone like Raymond in Rain Man: a guy who can memorize the location of every card in a deck or tell you how many toothpicks have fallen on the ground. But I think of idiot savants much more broadly. For example, many excellent film directors exhibit an astonishing ignorance about many aspects of the film making process. (Or actors, most of whom seem like they’ve never even visited a film set.) But most telling, businessmen tend to show a shocking lack of understand of anything other than how to make money the way that they make money. Example: a man who is good at real estate investing will likely be very bad at bringing a high tech device to market.
This is important because in our society we assume that a rich man must be smart, especially when he pontificates about economics and finance. If such a man were simply as ignorant as the rest of us, there would be no problem. But he has lots of money to get out his usually ignorant policy ideas. Add on top of this the media’s gullibility about everything a rich man has to say, and well, you have a major problem.
Pete Peterson is perhaps the best example of such a man. David Weigel wrote an article earlier this week, The Failure of Peterson-ism. It is subtitled, “Why Peter Peterson and 20 years of anti-deficit campaigns have barely moved the needle.” I like Weigel a lot, but the article itself doesn’t really deliver. As best as I can tell, he thinks Peterson’s project has failed because it is comprised almost exclusively of a bunch of wealthy businessmen trying to convince the middle class that they don’t like what in fact they like a whole bunch. This is certainly part of the problem.
Matt Yglesias followed up this article with, Pete Peterson’s 1993 Forecast of Japanese Domination. It gets much closer to my thinking on the matter. He notes that Peterson wasn’t just claiming that debt was going to ruin America, but also that by 2003, Europe and especially Japan were going to have greater and rising per person GDP. That didn’t happen. Peterson was wrong about this for the same reason he was wrong about the debt: he believed that government borrowing would crowd out private investment in the economy.
Let me explain this. There is basically one reason that the government shouldn’t borrow too much money: it can take so much money out of available credit sources that private businesses won’t be able to borrow for their own needs. This can happen when the economy is booming. This is why Keynes said that governments should go into debt during recessions but pay down the debt during booms—just as we did in the late 1990s. But even if we did not have this general rule, we would know there is no crowding out going on today because private businesses are sitting on record levels of cash.
What’s more, if there was truly a shortage of cash on loan, interest rates would go up. Interest rates are instead at near record lows. In fact, even though the amount that the government is now borrowing is large, the amount we are paying in interest is also at near record lows. Earlier this week, Matt Yglesias tweeted out the following graph which shows how much we have had to pay in interest on our debt over the years. This is kind of like the “minimum amount due” on your credit card:
Notice anything interesting about this graph? We are paying half as much money to service the debt as we were 20 years ago when Pete Peterson was telling us that we were going bankrupt.
There are any number of reasons why Peterson has failed to change perceptions about the debt. But the main reason is that Peterson doesn’t care about the debt. He cares about “reforming” entitlement programs. But by “reform” he means “cut.” This isn’t about the budget at all—at least not in a real sense. Peterson just knows that all our problems stem from entitlements and so he wants to cut them.
Over at the Peter G. Peterson Foundation, they write, “Instead of allowing our economy to go over the Fiscal Cliff, or once again avoiding action on our nation’s long-term debt and deficits, leaders should seize this opportunity to pass a comprehensive, bipartisan plan to deal with our long-term structural debt and put America on the path to a stronger economic future.” But going over the Fiscal Cliff would be good for our budget deficit. It would be a huge tax increase. Why isn’t Peterson for it? Because this isn’t about the budget, it is about destroying Social Security and Medicare.
The problem here is not that Peterson’s entitlement monomania is pathological and that it shows a shocking lack of understanding of accounting. The problem is that he is rich, and so people think he knows what he’s talking about. But he doesn’t. He knows a lot about investment banking, but that’s all. He is an idiot savant. Would you take policy advice from Raymond?
Another big reason people are disinclined to listen to the supposed deficit hawks is that we balanced the budget before and all we got for it was a huge upper income tax cut, two wars, and billions in corporate welfare for the pharmaceutical industry.