Targeting the Middle Class

During the 1992 election campaign, at least one person agreed with Peter G. Peterson: Governor Bill Clinton. Candidate Clinton said that, as president, he would focus on America's economic problems. Reducing the federal budget deficit, he emphasized, was the key to America's future, both at home and abroad. If the present deficits continued there would be too little savings to finance the investments needed to increase American productivity; both our domestic prosperity and our external influence would decline.

That is the theme of the book. But what no presidential candidate could say, Peterson, a prominent investment banker, does: cutting middle-class entitlements is the most important step needed to close that deficit, and assembling a political coalition to do this and the other tasks required to eliminate the deficit should be our main business.

Peterson believes that President Clinton is headed in the right direction. But he also believes that in proposing his first budget the president could have found public and political support for an economic package that would have much more drastically reduced the federal deficit--through a combination of massive spending cuts and new taxes that would have hurt the middle class in the short run but helped it over the long term. Instead, he contends, the president spared the middle class and left a deficit still large enough to threaten America's future.

RED INK BLUES

This summary does not do justice to the detailed and comprehensive probing of Peterson's book. It does not, for example, include the book's passing conclusion that Marine Corps forces should be dependent on Navy support aviation, which will astonish anyone whose wartime service brought him or her close to those two forces. But the book's main thesis is as stated above, and it deserves our attention.

Why should readers of Foreign Affairs tackle a book explaining this thesis? Shouldn't we stick to reading about Haiti, Bosnia and Somalia? This question, as natural as it is misguided, prevents a lot of intelligent people from doing what must be done if a stable and peaceful world is to be preserved. That world could still exist if Somalia and Haiti were run by dictators, and even if Bosnia's borders were settled by a local war instead of by negotiation. But it cannot exist if the U.S. economy, which is still by far the most powerful in the world, continues to go downhill.

The Critics

That happened once before. In the 1920s U.S. exports of capital and imports of goods helped keep both Japan and Europe going. Then came the Depression--brought on by the unregulated U.S. stock market's excesses and compounded by protectionist trade measures, as well as by the lack of an international bank of last resort, which Charlie Kindleberger's work has done so much to underline. This Depression brought about changes in the world that few had foreseen: the overthrow of peaceful parliamentary regimes in both Japan and Germany, leading to a war that destroyed about 20 million people.

There is one big difference, however, between this earlier period and now. The current threat is not that we will have a sudden depression and crisis. It is rather that there will be a gradual decline in U.S. economic well-being and power. Peterson suggests that this gradual decline may be slowed for a while by large U.S. borrowing abroad--to replace the domestic savings that we need but cannot mobilize. But, as he explains, this will be but a temporary device: Germany and Japan need an increasing amount of savings to meet their own needs at home--to restore eastern Germany and to finance rising Japanese consumption.

Peterson's argument is that U.S. economic weakness will, over the longer term, pose a growing national security threat. This is partly the case because it will engender growing protectionism, which will in turn generate increasing frictions among the three main industrial regions, and partly because it will weaken the United States both at home and in its leadership abroad.

THE CRITICS

It is only fair to point out that Peterson's diagnosis and prescription are not accepted by all economists. A number of Nobel Prize winners recently signed a statement suggesting that what the economy needs most is short-term stimulus to reduce unemployment--not taxes and expenditure cuts to increase it. Peterson agrees that there is a problem of timing; in view of the current state of the economy, he wants to phase in his program gradually. But he would not abandon it, arguing with some cogency that unless we face our long-term problem now, we will drift toward an ever-more troubled economy as a result of ever-lower levels of private savings and private investment.

Peterson's critics argue also that there is no necessary advantage in having private, rather than public, investment. Why not, they argue, concentrate on the latter, even if it does increase the deficit? In reply, Peterson focuses on the heavy burden that this growing deficit will impose on future generations. This argument, which recurs throughout the book, is central to his goal: a balanced budget by the year 2000.