Banking

How one dead billionaire’s influence machine stops Democrats’ spending plans in their tracks and shackles our economy

  • Democrats’ big-spending agenda is threatened by moderates in their own party deficit-hawk dogma.
  • The big money behind the most prominent austerian think-tanks comes from the estate of Pete Peterson, the late co-founder of private equity giant the Blackstone Group.
  • Deficit myths persist thanks to Peterson’s influence operation, despite clear contradiction by reality.
  • Alex Yablon is a Contrbuting Opinion Writer for Insider.
  • This is an opinion column. The thoughts expressed are those of the author.

A group of hardcore ideological extremists in Congress are threatening to blow up any chance the US has to reshape its economy and tackle the biggest challenges of our era.

This renegade clique follows a discredited ideology spread in large part by a dead billionaire. Its patron forced his worldview into public life by funding think tanks, buying access to elected officials, and coordinating the reactionary efforts of the country’s plutocrats.

No, I don’t mean the Tea Party or Freedom Caucus and David Koch. I’m talking about the moderate Democrats following the tune of Pete Peterson. 

Peterson, a master of the DC—Wall Street axis who died in 2018, did more than anyone to force all conversations about government spending and debt to take place in an atmosphere of unfounded deficit paranoia. When you hear a politician compare the government’s budget to a household’s, or assert as fact that the nation’s fiscal path is “unsustainable,” you can bet that they are getting their talking points from the Peterson influence machine, even if they don’t know it.

But Peterson’s ideas — foisted on the rest of the country — are based on a profound misunderstanding of the relationship between the government and the economy, and have a ruinous record in practice. Thankfully, after decades of Peterson’s ideology hurting our economy, activists and some elected Democrats are waking up to the fact that these discredited ideas deserve to be trashed. 

A lifetime of missing the point

According to his memoir, Peterson’s worldview was shaped by his parents’ story of coming to America, the crucible of the Great Depression, the postwar economic boom, and its waning during the 1970s.

He was born to two Greek immigrants in a small Nebraska railroad town. According to Peterson, his father never took a break from running the restaurant he owned and his mother made the children’s clothes by hand. The Depression taught him the most important lesson of his life “with a harsh hand, the lesson of never, even in the bad times, spending more than you earned. And in the good times, you saved and saved.” 

Peterson went to MIT right as America entered World War II, working in a lab. Eventually he transferred to Northwestern where he switched from engineering to business. He then earned an MBA at the University of Chicago where he took classes from arch-libertarian Milton Friedman, which he described as one of the most formative experiences of his entire life. He got a job at the consumer audio-visual firm Bell & Howell, where the company thrived thanks to his insights into the then-cutting edge field of market research. 

His corporate success led to a position in the Nixon administration, eventually becoming Secretary of Commerce and ingratiating himself into DC circles. In 1973 he joined Lehman Brothers, and in 1985 he co-founded the private equity giant the Blackstone Group. When Blackstone went public in 2007, he became a billionaire.

Peterson paints this capitalist bildungsroman as a story of individual achievement and personal thrift — a rebuke of John Maynard Keynes, the influential economist whose ideas about government’s enormous power to direct the economy shaped policy during the middle of the 20th Century. But Peterson conveniently ignores just how important borrowing and policies rooted in Keynes’ thinking were to his story. 

Railroads like the one that provided the foundation of his hometown’s prosperity only existed because of free-flowing credit and the help of the federal government. And Peterson seems not to grasp the implications of the fact that his hometown only emerged from its economic quagmire when the federal government created tons of good jobs at a nearby air base

Even Peterson’s college job during his stint at MIT was the product of the government’s fiscal might — unbeknownst to him at the time, he was procuring equipment for the Manhattan Project. And later in life, he found business success catering to the consumer tastes of the new suburban middle class, which was in itself a creation of Keynseian federal economic policy. 

And for all his anti-debt scaremongering, he made his billions in private equity, a field of finance that lets investors acquire companies using borrowed money and then stick the buy-out targets with the bill.

How Pete Peterson’s influence harmed the country

Peterson achieved enormous influence over centrist Democrats from the 1990s through the 2010s, building especially close ties to the Clinton family and continuing to hold sway during the Obama administration. When he died, Nancy Pelosi eulogized him in a speech from the House floor.

Peterson’s stamp was all over the economic programs of the two Democrats. First in Clinton’s crowning achievements like the famed late 1990s federal budget surpluses (which actually sapped economic growth) and then in Obama’s undersized economic rescue package and eventual pivot toward austerity  after the 2008 crash.

Though austerians like Peterson claim deficit reduction and austerity is the necessary foundation for long-term sustainable economic growth, the results have been the opposite: as the doctrine was deployed over the past four decades inequality worsened, wages stagnated, and economic growth was mostly anemic. Worse, the nagging insistence by Peterson acolytes that all federal policy bow at the altar of the deficit has kneecapped America’s ability to address profound global challenges like climate change.

The economic track record for Peterson’s deficit scolding is a mess, but it clings to American politics in part because of easy to remember catch phrases that have become a constant of American political discourse.

You’ve probably heard the same nonsensical cliches for decades. The most famous is the “household metaphor” which holds that, like households, the government should only spend what it “makes” in tax revenues. As Obama said in his 2010 State of the Union, “families across the country are tightening their belts and making tough decisions. The federal government should do the same.”

But the metaphor doesn’t hold up on its own terms: few households can invest in a home, car, or higher education without borrowing. Debt in the immediate term is often necessary to build wealth in the long term. 

The idea makes even less sense when applied to the federal government, which after all issues the same currency in which it borrows, so it can never “go broke” like a household. Further, the US government regulates the global financial system, which ultimately depends on the

Federal Reserve
for a supply of US dollars in times of crisis. Households do not print money, regulate financial systems, or lend to banks during financial or economic panics.

That’s not the only canard. There’s also the idea that the government’s debts are “unsustainable,” potentially imperiling its credit rating and driving up borrowing costs. Now, borrowers like households, firms or countries that need foreign currency to buy essentials like food or fuel can indeed run up tabs they can’t pay, which leads lenders to charge them higher interest. But the US government isn’t like that. Even a deficit scold like former Federal Reserve chairman Alan Greenspan said “The United States can pay any debt it has because we can always print money to do that. There is zero probability of default.” Indeed, as the US took on more debt relative to GDP in the past 18 months than at any time since World War II, its long term interest rates remained negative when adjusted for inflation

The biggest stinker of all is the idea that the Peterson policy package is “responsible.” As America has found over the past several decades, deficit reduction shortchanges workers, the public sector, and future generations by forgoing necessary investments. Ample research demonstrates that cohorts who graduate into recessions or suffer job losses without government help bear the economic scars for life. At its most extreme, austerity shatters the trust that makes social, economic, and political life possible in the first place. What exactly is responsible about this approach? 

Spreading influence

Even though Peterson’s ideas hold little water and have proven to be an economic disaster, his influence network has managed to saddle these aphorisms on politicians for decades.

The Peter G. Peterson Foundation, created in 2010 through a billion-dollar gift from his personal fortune (which was also a way for Peterson to fulfill the “giving pledge,” Warren Buffett’s dubious push for the ultra-rich to donate their assets to charity), has seeded a series of think tanks dedicated to its goal of increasing “awareness of the nature and urgency of key fiscal challenges threatening America’s future.”

Most notable is the Committee For a Responsible Federal Budget, or CRFB, which for years has pushed politicians to forgo transformational projects and shaped the media narrative around the debt. The CRFB’s executives get quoted prominently in almost every mainstream media story about federal spending. The CRFB got approximately $4 million of its $5.9 million budget for 2019 from Peterson’s Foundation.

In addition to the CRFB, Peterson’s personal foundation spends most of its money on a personal fiefdom that includes the anti-deficit Concord Coalition and the Peterson Institute for International Economics

But many other influential groups have also been the beneficiaries of Peterson’s funding, from left-leaning groups like the Center for American Progress, the New America Foundation, and the Economic Policy Institute to right-wing organizations like the American Enterprise Institute and the Manhattan Institute.

As a result, the mainstream media, policy advocates, and lawmakers in both parties all feel the need to at least address Peterson’s pet concerns. Every time a fiscal policy gets proposed, questions about how to “pay for” it take center stage and almost everyone talks about the deficit like a menace. 

And now, as the country attempts to recover from a devastating pandemic and faces down the existential threat of climate change, Peterson’s lasting influence once again threatens our economic future. 

Moderate Democratic Sen. Joe Manchin has held up Democrats’ ambitious and needed climate and infrastructure plans by fighting to “paid for” every idea with new revenue rather than by adding to the deficit, comparing the government to a household. Last month, five Democratic House members sent a letter to Speaker Nancy Pelosi saying they would only vote for an infrastructure bill if it was preceded by a deficit-reduction effort, since the country “was on an unsustainable fiscal trajectory even before the onset of the COVID-19 pandemic.” The threat is worrisome since Pelosi can only withstand four Democratic defections to pass legislation along party lines.

Prying loose the Peterson grip

But there is hope that Peterson’s hold on the national consciousness may be easing. 

After both the financial crisis and pandemic, more economists and politicians are coming around to the common sense that when times are tough, the government absolutely must spend more than it gets in tax revenue to keep the economy from sinking deeper into

recession
. More politicians have come around to admitting that the challenges America’s economy faces —  a hollowed out public sector, dysfunctional healthcare system, inequality, and climate change — were fueled by debt scolding and the government’s unwillingness to take on big challenges.

You can see that change in remarks on CSPAN by House Budget Committee Chair John Yarmuth, who argued for the Biden spending packages by dismissing the tired old household budget myths out of hand and instead cited the work of leading Modern Monetary Theory economist Stephanie Kelton. 

And activists are waging a counter-offensive against the Peterson machine. In May, a coalition of left-wing advocacy groups launched the “Stop Deficit Squawks” campaign, which seeks to educate Americans on the “artificial crisis” created by Petersonian deficit hawkery.

“Our goal is to decrease the influence of these groups and the CRFB in particular because it has this outsize voice,” said Maura Quint of the Tax March, one of the coalition’s member groups. “The CRFB gets called bipartisan. It gets called neutral. It’s just not true — they are very clearly coming from a conservative economic perspective, and they need to be classified as such.”

Peterson’s influence machine may still have billions at its disposal, and the public may be conditioned to its decades of messaging. But figures like Yarmuth, Quint, and Kelton have economic reality on their side. The fiscal doves also have the ear of Federal Reserve Chair Jerome Powell, Democratic Congressional leadership, and major figures in the Biden White House

The anti-Petersonians will have to use all the leverage they can get, both political and financial, if America is to have a fighting chance of rebuilding its economy, reinvigorating the public sector, or meeting the climate crisis. 


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