I love it when billionaires feel misunderstood. It sounds something like this: “I’ve fleeced you or just piled up gobs of money at your expense but, gee, that really wasn’t personal, I’m really a good guy with all the right motives, if you could just see it my way because, well, my way is the right way because, well, how do you think I made all that money if I wasn’t so smart?” Uh huh.
That’s sort of what Pete Peterson’s gripe is with me, apparently. I’m misrepresenting him. I don’t understand him. Or so he, via his press secretary, whines. Crawl down the rabbit hole with me because, putting aside the tiff we have going here, there is a bigger lesson: how conventional wisdom ruins our society and why it’s important to bang back at the conventional wisdom, which is often dead wrong.
Pete Peterson is a billionaire who has spent a chunk of his fortune—made mostly when his buy-out firm Blackstone went public—fanning the flames of the entirely phony debt and deficit “crisis”. In 2010, I wrote an e-book entitled, “It’s Not Raining, We’re Getting Peed On: the Scam of the Deficit Crisis”, as a modest way to actually lay out the facts about the phony “crisis”.
Pete Peterson figures prominently in the book (more on that in a moment). I took the opportunity to write a very short article for Playboy magazine, which is in the current issue (subscription required even for the words!).
The short article contains this paragraph:
How did we get to a point where the whole political establishment has become obsessed with a phony crisis? The short answer is it’s the result of a well-funded campaign financed by billionaires like Peter Peterson (who made his fortune by the debt-financed buying, slicing and selling of companies), longtime opposition to programs such as Medicare and Social Security, elected politicians who aren’t curious enough to ask the tough questions and traditional media outlets whose reporters don’t understand basic economics.
Which bring us to the current chapter of our little saga. A letter arrives via email:
Dear Mr. Tasini,
I’m writing in response to your recent article in Playboy, "A Fake Crisis," in which we feel you mischaracterize the views and agenda of Pete Peterson and the cause he supports.
You state that recent public concern over rising debt is based on "phony evidence." You further imply that people, like Pete, who favor fiscal responsibility are fundamentally opposed to Medicare and Social Security, and want to cut spending on these and other government programs immediately.
On the contrary, Pete agrees that in the short-term, slow growth and high unemployment make it unwise to cut the deficit immediately and risk plunging the economy back into recession. The real focus of Pete’s efforts is not the current deficit, but the widely predicted, and widely accepted, long-term structural debt problem that presents a major threat to our economy in future decades.
The truth is that Pete believes the safety net, including Medicare, Medicaid and Social Security, is an important lifeline for millions of Americans and must be preserved and protected. He advocates their gradual reform because he is very concerned that future debt levels might cause these programs to be cut suddenly and unfairly in a fiscal crisis. He is also concerned that if debt increases unchecked, interest payments will crowd out funding available for investments critical to future growth, such as education, infrastructure, and R&D.
It appears that there has been a great deal of misunderstanding about where Pete stands on certain issues, and I hope this letter offers some clarity. Please feel free to get in touch if you have any questions.
Peter G. Peterson Foundation
712 Fifth Avenue, 48th Floor
New York, NY 10019
Here is my response:
Dear Ms. Watt:
Thank you for your communication. Let me start with one thing that we entirely agree upon—you write that what I call a "fake crisis" is, in your words, the focus of Pete Peterson’s work because it is, "…the widely predicted, and widely accepted, long-term structural debt problem that presents a major threat to our economy in future decades."
You are correct. It is "widely accepted".
That does not mean the facts support this view. If everything that has been "widely accepted" was true, housing prices would still be going up, the Dow would be at 30,000 and, to the great satisfaction of the conventional wisdom that was widely accepted, at the cost of tens of thousands of lives and trillions of dollars, a national parade would have been held showcasing Saddam Hussein’s weapons of mass destructions. Oooopppsss…
The point is: Pete Peterson has been spreading a falsehood, in contradiction to the facts. That he is treated with respect, and not mocked, is more a function of the incompetence of our media and the unwillingness of our elected officials to bite the hands that feed them (read: extremely rich donors).
Your letter is also grossly misleading. Let me just point out two facts. Far from waiting for the economic crisis to pass—a process that could take a generation or more, given the growing divide between rich and poor, the mal-distribution of wealth and the inability of one in five Americans to find full-time, decent-paying work—Pete Peterson was a loud endorser of the Bowles-Simpson "Bi-Partisan" Commission on the debt and deficit. That Commission has called for immediate, deep cuts that would have kicked in this year, while the country—at least most of the Americans Pete Peterson will never rub shoulders with—is still in deep economic crisis.
Second, while the reference to Medicare and Social Security in the article was not referring to Peter Peterson specifically, since you raise the point: if Pete Peterson, and many others, had been successful at ramming through the idiotic idea to privatize Social Security, millions of seniors would have been hit even harder by the collapse of the housing bubble. Everyone with a modicum of integrity knows that "reform" of Medicare and Social Security is a code word for cuts.
Lastly, to your complaint that there has been a "great deal of misunderstanding about where Pete stands", I respectfully beg to differ. As far as I can tell, Pete Peterson has gotten a free ride from the compliant, ignorant press and members of Congress who either do not care to look at the facts or prefer to be passive consumers of utter nonsense.
I’d end with a challenge: I challenge Pete Peterson to have a real public debate in a forum that isn’t controlled by his handlers or confined to the mostly docile members in Congress. I’ll bring two people to the debate—Dean Baker and Jamie Galbraith, two brilliant economists who have not bought the "widely accepted" view about the phony crisis. Mr. Peterson can bring any two people he selects (say, Erskine Bowles and Alan Simpson). After the debate, we’ll have an open Internet vote on who made a more persuasive case. If our side is seen as having had the better argument, Mr. Peterson will immediately divert the money he is wasting on the phony debate on the debt, disband the Pete Peterson Foundation and, instead, write 10 checks for $10 million each to non-profit organizations of our choosing.
Deal? I doubt it. To take part in such a debate would require a level of courage and intellectual rigor that no amount of money can buy.
Those of you who get the picture can stop here. But, if you are really a glutton and want to climb further down the rabbit hole, there is a lot more to say about Pete Peterson. Here is the excerpt from
As an example, I want to zero in on one of the great scam artists of the past decade: Peter Peterson. I do not think, or at least, I have no evidence, that Pete Peterson is a liar. I think it’s something worse—he believes in the kind of world where Social Security is a crutch for the weak, that debt is a bad thing and that the religion of the "free market" is something to worship more than God.
I’m using Peterson here as an example because he has anointed himself as the savior of the country. Using his huge wealth—and in a moment we’ll look at how he accumulated that wealth—he is the number one funder of the movement to put the deficit "crisis" on the national agenda.
Peterson is, in fact, fabulously wealthy—he ranks 149th on the Forbes wealthiest individuals list, with a cool $2.8 billion. Let’s start with the way he made his fortune: climbing over the backs of others and inflicting misery on countless human beings. That is essentially the history of Blackstone, the private equity firm which, when it went public in 2007, made Peterson a very rich man.
Blackstone is a wrecking machine: buying up companies and immediately trying to wring every penny out of the place, mainly by tossing workers on to the unemployment line. And how do they do it? By piling up massive amounts of debt! It’s almost impossible to ignore the irony and hypocrisy rolled into one. Pete Peterson robbed companies of their wealth by saddling those companies with crushing levels of DEBT—but he sees debt as the evil. Stephen Colbert, are you out there? Pete Peterson is your patron saint of hypocrisy.
In fairness to Blackstone, it is not unique. Most of the private equity (PE) industry operates this way: the billionaire private equity leaders made their fortunes by attacking the standard of living of millions of Americans by trashing wages, cutting jobs and tossing people aside like used condoms.
As Josh Kosman explains in his excellent book, "The Buyout of America", “…these faceless PE firms, with names like Blackstone Group and Carlyle Group, were not helping the companies they acquired. Just the opposite—the PE firms put the companies they acquired under more intense pressure than they would ever feel in the public markets. Their actions hurt the companies they owned, their customers and
employees" [emphasis added]
You want an example? Listen to the tale of Travelport, a travel reservations company based in Los Angeles. Once Blackstone bought the company in 2007, the axe came out, lopping off hundreds of jobs and forcing out another 1,500 people who took buyouts rather than face the prospect of eventually being shown the door with nothing. People who had worked for the company for many years were cast off.
As The Wall Street Journal reported, finding new jobs that paid comparable wages was rough:
For many laid-off employees, finding new jobs hasn’t been easy. Danny Carrasco, a software developer in his 50s, searched for five months before finding a job at a telecommunications company. Technical analyst Robert Renwick, 30, sent out more than 100 résumés over four months before landing a job at the local school district. He and his wife, a first-grade teacher, put off having children, he says. "I can’t believe they would ruin all these lives to make a couple extra pennies," he says. John Kliegel is earning 33% less as a program manager at a satellite company. His twin, Russell, is juggling job hunting with free-lancing. Mr. Kleppinger, the software engineer, once expected to retire at Travelport. He’s now earning 20% less at a new job.
After months of searching, writing résumés and reading books on how to interview, Ms. Fugazzi landed a job with the Colorado Department ofHuman Services. She earns about $33,000 less than she did at Travelport, counting her old bonus. But the government job, she says, "feels more secure."
My bias is clear: I do not believe we, as a society, should admire people who make a fortune by exploiting the misery of others. Peterson did not invent a new gadget. Nor did he create a company that increased the wealth of the people who worked hard for a living. Peterson does not, and has never, apologized for the way in which he became rich. He is not a patriot to be praised. He is a leech on other peoples’ hard work.
Let’s say you don’t buy my leech argument. Fair enough. But, shouldn’t we at least stand up to hypocrisy? Which leads to the next issue about Peterson.
Everyone Should Sacrifice, Except For Pete
Peterson argues that everyone should share in the “sacrifice” to restore “fiscal soundness” to the country. Even the rich. Except for Pete Peterson. And this brings us to a short explanation of “carried interest”.
Private equity firms get a special tax break—it’s called “carried interest” Rather than being taxed at the top rate of 35 percent, the private equity fund managers like Peterson only pay 15 percent through a loophole called “carried interest.” To understand carried interest, you have to first understand how money managers get paid in the yacht-sailing, mansion-buying world of private equity.
First, they receive a fee, which is a percentage of the funds they invest. This fee is usually in the range of two percent, and is taxed like your run-of-the-mill wage income. Second, and far more lucratively, money managers get a fee based on the performance of their fund—a fee in the range of 20 percent. It’s the second fee that is the so-called “carried interest”—and it’s how the money managers of private equity really rake in the big bucks that pay for their Picassos, yachts and mansions.
In the normal world of taxable income (and let me say that nothing in the tax code is simple when it comes to schemes that allow people like Peterson to shelter their money), carried interest is taxed as investment income—at the capital gains level of 15 percent (much lower than the top wage income rate), even though most of these managers invest very little, if any, of their own money.
So, a private equity big shot honcho hauling down millions of dollars in “incentive” is taxed at a 15 percent rate, while the receptionist who works in his office, or the police officer who guards the equity baron’s property, probably earn $50,000 or so if they’re lucky—and those average working people pay a 25 percent tax rate on that income (not to mention payroll taxes), a far larger share of their income than the fellow who
banks “carried interest.”
When this all came to light in 2007, it struck some people as outrageous. In June of that year, Representative Sander Levin, Democrat of Michigan, introduced a bill to correct the loophole that was depriving the government of billions of dollars in tax revenue. In pushing for the change, Levin said, “Congress must ensure that our tax code is fair. We have to be sure that the lower capital gains tax rate is not being inappropriately substituted for the tax rate on wages and earnings. Investment fund employees should not pay a lower rate of tax on their compensation for services than other Americans. These investment managers are being paid to provide a service to their limited partners and
fairness requires they be taxed at the rates applicable to service income just as any other American worker.”
Peterson’s response? “This is a fairness argument…There are so many other partnerships, why pick on this high-growth sector?” [note: I’ve added the emphasis for this blog post]
Oh, I get it. It’s fair for everyone else to pay proper tax rates (putting aside for a moment the absurdly low tax rates of the rich overall) except for YOU, the self-anointed public scold, who wags his finger at everyone else’s perceived financial misdeeds.
Listen here, now, to a great example of how the disease of Elititis Expertitis works in our society in some many ways. It starts with Peterson being seen as a Serious Person because, well, he has a billion dollars and he wants to spread it around to advance the cause of the threat of the “fiscal crisis”. The traditional mainstream media—populated by transcribers of press conferences and press releases (once referred to as “journalists”)—
laps this up. Then, the inevitable profiles follow.