Peter G. Peterson, Senior Chairman and Co-Founder, The Blackstone Group

Peter G. Peterson, Senior Chairman and Co-Founder,The Blackstone Group

February 6&8, 2007

Economic Speech

Washington Speeches

PSERSThe Blackstone Group®2

The QUAD-DEFICITS

1. Long Term Budget Deficits 10 years and beyond

2. Current Account Deficits

3. Savings Deficits

4. Political or Leadership Deficit

These four deficits are inter-related and should be resolved together



The Concord Coalition: Using reasonable projections, entitlement and interest alone are expected to consume all federal revenues in under 20 years



Indeed, if the federal government had to observe Sarbanes-Oxley and ERISA and amortize its unfunded pension benefit liabilities over a maximum of 30 years the same way public corporations are required to do, it would add a minimum of $1.5 trillion annually to the federal budget deficit!


% of GDP

9.0%

1.0%0%

5%

10%

15%

Bush Tax Cuts Growth in EntitlementSpending from 2000 to 2040


Alternative 1: Social Security Reform: Borrow the Money

How much would we have to borrow? Between 2018 and 2042, how big are cumulative cash flow deficits? $5.4 trillion in inflation adjusted dollars!


[Section Title]


What about increased payroll taxes?

The cost of Social Security alone is due to rise from 11.2% of workers’ pay in 2006 to 17.5% in 2040. Hiking payroll taxes to cover the growing cost would put a heavy burden on the middle class – and that doesn’t include a much larger tax increase to cover projected costs of Medicare

11.2%

17.5%

0%

5%

10%

15%

20%

Cost in 2006 Cost in 2040

Perc

ent o

f Tax

able

Pay

roll

Alternative 2: Social Security Reform: Increase Taxes


The Concord Coalition: Using reasonable projections, entitlements and interest are expected to consume all federal revenues in under 20 years


2. Beyond benefit reductions, we should also seize this opportunity to increase personal savings, which are at historic low levels

I have come to conclude that America is so consumption and borrowing obsessed that one must seriously consider a program of mandatory savings much as Singapore, Chile, and recently Australia has instituted



Healthcare Costs: Pre- and Post-Medicare(U.S. vs. Other G-7 Countries)

Health Care Costs as a % of GDP

4.8%9.2%

5.6%

15.2%

0%

5%

10%

15%

20%

1965 2003US Other G-7 Countries


Healthcare Costs: Pre- and Post-Medicare(U.S. vs. Other G-7 Countries)

In per capita dollars, the U.S. spends more than twice the developed country average – $5,711 vs. $2,681 in 2003

And there is very little evidence that our health outcomes are anywhere close to being twice as good as other developed countries


We Also Spend Much More on Last Months of Life


We Also Spend Much More on High-tech, High-cost Medicine

High cost surgical procedures High cost equipment


Deficit #2: Current Account Deficits:

Previous Record in the 1980’s: 3.45% of GDP

Today: Nearly 7% of GDP (and widening by every account)

Import over $6 billion of foreign capital every work day

$2.9 billion to finance current account deficits

$3.2 billion to finance investments. These foreign borrowings finance about ¾ of our critically needed investments



The “hard landing”, “soft landing” debate, given that virtually no one believes that the present level of current account deficits is sustainable



11.1%8.7%6.2%4.5%1.9%0%5%10%15%1960's1970's1980's1990's2006

Net National Saving: The Ultimate Bottom Line

% of GNP

11.1%

8.7%

6.2%

4.5%

1.9%

0%

5%

10%

15%

1960's 1970's 1980's 1990's 2006


Personal Savings as a % of Disposable Income

-1.2%

7.9%

1992 3Q: 2006


Household Debt Service is 14.5% of Disposable Income as of Q3:06, a higher level than at any time in the last twenty-five years.


By some accounts, more than 60% of the country is considered in a housing “bubble” versus 40% a year ago(1)

1. Home price/income ratio more than 3 standard deviations above average.Source: Merrill Lynch


Ask All of Us A Rude Question:

Given that households are highly leveraged, that energy costs remain at high levels, that there are long term inflation fears and the potential for a decline in the dollar and a related increase in interest rates, what might be the effect of a significant rise in interest rates and a significant decline in housing values on consumer spending and the US economy?








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Peter G. Peterson, Senior Chairman and Co-Founder, The Blackstone Group