In This Review

Facing Up: How to Rescue the Economy from Crushing Debt and Restore the American Dream
Facing Up: How to Rescue the Economy from Crushing Debt and Restore the American Dream
By Peter G. Peterson
Simon and Schuster, 1993, 316 pp.

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.


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.


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.

He believes that selective public investment, to meet needs that are not likely to be covered by private investment, can be reconciled with this goal--as can measures to help the poor and to protect them from the effects of the expenditure cuts and tax increases that he proposes for the middle class. The fact that he wants to accomplish all this and still eliminate the budget deficit in seven years gives you some idea as to how drastic his program is. We could drown in arguments about the details of that program. But the book's central thesis rings true: that only if the budget deficit is drastically reduced can our country mobilize the savings needed to mount the investment that will spur future growth and thus offer jobs to those who need them most--those at the bottom of the economic pyramid.


Washington's persistent failure to close its budget deficits has had an effect on Peterson similar to the effect that the French Assembly's 1955 defeat of the European Army proposal had on Jean Monnet. In both cases, these two proponents of change decided that they had to build a pro-change constituency outside of government. Monnet created the Action Committee for a United States of Europe; Peterson, who is chairman of the Council on Foreign Relations, persuaded ex-Senators Paul Tsongas of Massachusetts and Warren Rudman of New Hampshire to join him in creating the Concord Coalition, to lobby for the drastic budget-reduction package outlined in some detail in the final chapter of his book.

It is a long shot to expect the coalition to have this effect. But the United States has at times achieved the consensus needed for drastic action, even when the conventional wisdom was that such action was politically impossible. Peterson points out that "when [President Truman] launched the Marshall Plan, only 14 percent of Americans supported him," and yet he "ultimately persuaded the public to pay for it--to devote nearly a sixth of an enlarged but balanced federal budget to aiding countries emerging from the wreckage of war."

The Marshall Plan was a proposal addressed to international needs. It reflected the fact that the postwar economy was, indeed, a world economy.

Perhaps a realistic U.S. fiscal policy would be more likely to come about if it were adopted in an international context. An interesting precedent: in 1978 President Carter wanted to decontrol oil prices but the Congress passed the Dole resolution, warning him not to do so; both Republicans and Democrats agreed that it was too unpopular. Then Carter made an international deal at the Bonn economic summit: the other G-7 countries agreed to negotiate large cuts in certain trade barriers, and Germany and Japan agreed to stimulate their economies in return for a U.S. pledge to decontrol oil prices. When U.S. oil price controls expired and the president did not renew them, the Congress did nothing to force their extension. Perhaps enough of its members recognized that Carter's policy was part of a useful international bargain that had helped the United States. Our allies, in turn, thought that the U.S. action had done much to overcome the world oil shortage, so that the bargain had served their interests too.

Suppose today that a presidential program to balance the U.S. budget by the year 2000 was part of an international bargain? Suppose that the seven main industrial countries agreed, at their economic summit next summer, to set up system for bringing greater order into the making of fiscal and monetary policy--accepting a formula that limited each of their budget deficits to a given percentage of their GDP and of their total budget, taking account of their varying savings rates. (Countries with high savings rates would be allowed to run higher budget deficits than those with low savings rates.) Suppose that the International Monetary Fund (IMF) were charged with monitoring this agreement--offering sharp public judgments urbi et orbi as to whether each of the G-7 was observing or violating its terms.

Most of the G-7 heads of government want to limit their budget deficits but are having political trouble doing so. They might welcome the leverage that such an international agreement could provide. Japan has a different problem: it needs a larger deficit, but it also has a high savings rate, so that it can more readily finance that deficit. The formula proposed above would take account of these divergences, and it might help the leaders of each of the G-7 countries to develop realistic fiscal policies. The fact that the United States had exercised leadership in bringing about this agreement might make it easier for us to help carry it out. Peterson's program might thus be brought closer to fulfillment.

Whether or not this international strategy is carried out, Peterson's book describes our problems perceptively: our high budget deficits, our low savings rate, and their consequences. He offers drastic and useful remedies and describes the coalition that he hopes will create political support for them. If there is any new book that every American should be urged to read it, this is it.

Even if Peterson's program were adopted, we would still face many economic problems--partly because of other structural problems that slow growth in the United States and even more in Europe and Japan, and partly because of declining support for the global economic institutions (GATT, IMF, World Bank) that have done so much to create a better world since World War II--a decline that another private grass-roots organization, the Bretton Woods Committee, is working hard to reverse. Peterson's program is a giant first step toward strengthening the world economy. In the United States it is the heart of the matter.

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  • Henry Owen was Ambassador-at-Large in charge of preparations for the Group of Seven economic summits, 1977-1981, and is now a consultant Salomon Brothers, Inc.
  • More By Henry Owen