Ten Trillion and Counting

Paul O'Neill


He was Treasury secretary from January 2001 until December 2002, when he was forced to resign over differences on tax cuts and Iraq. This is an edited transcript of an interview conducted on Nov. 24, 2008.

“Here's the fundamental problem: How much money can a society borrow before it begins to have negative effects on our ability to borrow any more?”

How dire is [the national debt], or is it not a problem at all?

For me, it's useful to be careful in defining terms. ... We have arguably $11 trillion worth of acknowledged public debt. ... If you think about it, it's arguably 80 percent of the [$14 trillion] GDP [gross domestic product] that we were expecting this year.

And it's still running?

It's going up every day. ...

Here's the fundamental problem: How much money can a society borrow before it begins to have negative effects on our ability to borrow any more? ... When you get to the point that people won't loan you any more money as a government, you've got a horrendous problem. And it's happened to governments -- in Argentina, most famously, in recent times. Mexico was kind of in that situation until we gave them a very big loan.

... Now, what happens before that is governments raise the interest rates so that people will loan them money. ... Unfortunately, when interest rates get that high, economic activity slows down, and eventually it will stop. We're not at that level yet with our $11 trillion worth of acknowledged debt, but there's a bigger problem out there, which is $53 trillion worth of unfunded liabilities that we, the American people, have signed up for. Most of the American people don't know that we have these so-called unfunded liabilities. An important part of that is Social Security and Medicare. ...

... This financial crisis in retrospect will look like a child's game compared to what we're headed into when we have to begin raising enormous amounts of money through floating debt, or reneging on the obligations we made to people that they thought were good and clear from Social Security benefits and Medicare benefits. ...

... I've got a credit limit -- there's a certain point where nobody is going to give me any credit -- and you, too. ... Does the United States government?

We do. We have a point where we won't be able to get other governments, or the American people for that matter, to lend us money, because they'll be afraid we won't honor our obligations.

... There's several economists that we've spoken to that say the United States dollar is the reserve currency, ... so the chance that the United States is not going to be the refuge of choice, the chance that they're not going to want to be in the United States Treasury, is just nonsense.

All right, so let's imagine a U.S. economy where the interest rates are 25 percent. Maybe you don't remember: In the early '80s we had interest rates at 20 percent and inflation at 20 percent, and our economy was on its back.

I do remember.

All right. So what we're talking about is something far worse than the early 1980s. We're talking about raising interest rates in order to try to attract money and rising inflation because we're debasing our currency. And people around the world -- China, India, Western Europe, even Central Europe -- are going to have better places to invest their money than the United States because the currencies will be more sound than ours and the inflation rates will be lower.

We've been living kind of in heaven, from an economic point of view, for a very long time. But we've sowed the seeds for our own undoing unless we take some action. Now, in my view, this doesn't have to be negative, punitive action. We could actually save our way out of this dilemma, so that if we, the American people, saved 10 percent of our income, we would over time build up the resources to pay for these obligations that are coming along.

... There are 4 million live births in the United States every year. So if we, the American people, said we're going to assure financial security for our citizens when they get to be 65, if we believe that and put it in practice, we put $23,000 in a named account for an individual on the day they were born. ... If [it] grew at 6 percent, when you got to be 65, your annuity in your name would be worth $1.18 million. So we would create real financial security. It would cost us $92 billion a year to do that. Right this year the federal budget is going to be $3.1 trillion. Could we afford, in effect, to become a mandated-saving society? Absolutely.

You understand there are a lot of people who, hearing your suggestions, will say, "Oh, my lord, Paul O'Neill has become a socialist."

I don't think there's anything socialist about provisioning [for] the future at all. What I'm saying is we should mandate that we're going to effectively save for our retirement years. ...

But that is exactly what Social Security and Medicare and Medicaid are intended to do, isn't it?

No. Since 1935 we've talked that talk, like we were saving money. We've been spending money all along. It's a giant fraud; it's a giant Ponzi scheme. Every year we took the money and we spent it on other things.

There's a so-called famous lockbox in West Virginia I went to look at when I was secretary of the Treasury. You know what's in the lockbox? Actually it's a filing cabinet, and there are some pieces of paper that say, "We owe you." There's no money there; there are no investments there. There's nothing there but a piece of paper. That's a fraud.

People think, "Hey, I put money all my life in Social Security and Medicare." You didn't really. The government just took it and spent it on something else. There's no money there. ...

[I spoke with Rep.] Barney Frank [D-Mass.], and I said, "Barney, there are a lot of people who are very worried about entitlements; they're worried about Social Security; they're worried about Medicare." And he said: "Listen, where were those people ... when this economy was collapsing and deregulation was going strong? ... Where were they when the military budget went crazy? They seem to be focused on entitlements. But these other things, which are as big a problem, they're not paying any attention to at all."

You know, I'd love to talk to Barney. I've been saying the same thing since, I think, 1967, at what was then the Bureau of the Budget. And then I became the deputy director under President Ford. ...

I was at the Treasury as the secretary from Jan. 20, 2001 until I got fired at the end of November 2002. I got fired for several reasons, including [that] I kept saying, "I'm looking at all these intelligence reports, and I don't find anything in here that rises to the level of evidence of weapons of mass destruction." ...

In addition to that, as President Bush was getting ready to recommend another tax cut beginning in early 2002, I said we shouldn't have another tax cut. ... I said we could have another 9/11, and if [we] did, it could cost us $100 billion easily.

The 10,000-page tax code, [is] proof we're not an intelligent people, and it desperately needs to be reformed. And it will take some money to smooth the transition from 10,000 pages to 10 pages that [the American people] can understand and believe in.

We need to fix Social Security and Medicare, and that's going to take a fair amount of money to do those things, ... so we shouldn't have a tax cut. And I kept saying it to the point that finally ... I got fired. So it's not really true that Barney Frank can say nobody raised it. I raised it at the highest levels of government. When I went to Congress to testify, I raised these issues with them. There were no takers.

I am interested in what that must have been like for you personally. Is it the kind of thing where Paul O'Neill walks into a room and everybody stops talking? How did that go?

... At the beginning when I started saying these things, there were other people sitting around the circle who nodded their heads and said: "I agree with Paul. I think he's really right. I know something about the economy, and it sounds right to me." But it was noticeable, the more we moved into the summer, the early fall, nobody else was nodding their head anymore.

The president really didn't want to hear what I thought, which was his right. I was happy to be fired at the end of November 2002. I didn't want to be part of something I thought was fundamentally wrong. I would not have wanted to go and testify to the Congress that this was all a wonderful idea when I thought it was a terrible idea. And unfortunately I turned out to be right ....

Did you walk into the Oval Office at any point, you and the president, and say, "Mr. President, I've got to put it on the line: For the country and for the administration, this is a terrible idea"?

I just kept talking about the facts, you know. I didn't ever go in and say, "Hey, this is awful; I'm not going to be part of this." But I said over and over again what I just said to you about the reasons why we shouldn't do this.

To him?

Absolutely to him, multiple times.

What was the president's response?

You know, he didn't really respond.



He had to say a word or two.

No, absolutely not. That was my experience the whole time I was there. I said lots of provocative things to him, and I never really got a response. ...

How about the vice president? Did you talk to the vice president about this?

I did. Well, he told me, as [Ron] Suskind famously reported in the book he did about me, [The Price of Loyalty], the vice president said to me, maybe in November 2002, "Ronald Reagan proved budget deficits don't matter."

He said that to you?

Absolutely. Sat right next to me in the Roosevelt Room. I'll never forget because I was so stunned that anybody could believe that Ronald Reagan proved that budget deficits don't matter.

What did you say in reply?

I was stunned. I didn't say anything. I just sat there in disbelief that a person I thought I really knew well, having worked with him since 1969, believed this idea strong enough to say it in a room full of people. ...

Did anybody else say anything?


So the vice president says budget deficits don't matter, and everybody just sits there quietly?


This doesn't sound like a discussion.


Is that how it worked?


Mandate goes out, right or wrong, everybody shuts up and does it?


Is that any way to run a government?

I don't think so.

You've been around the block; you've worked in government --

Fifteen years.

-- at major companies in the world. Have you ever seen anything like this?

No. ...

How much of the refusal to focus on rising expenditures, capital debt, deficit and the current problems we're going through, do you lay at the feet of the Bush White House?

I think they deserve a fair amount of the credit. But in truth, ... if you look back to the very roots of the problem, we started in 1935. And we knew by 1975 that these things were creeping up on us.

We had a little adjustment ... in 1983, when the Alan Greenspan Social Security Commission made some changes in Social Security, but it was before health and medical care really got out of control, and we started seeing inflation in health and medical care rising at the general inflation rate in the country.

I think you could say since 1983, the size of this problem has been growing. ... It looked like we were in a better position in the second Clinton administration, where the budget was coming under control. In fact, we were beginning to produce surpluses. ...

One of the things that happened during your tenure [in the Bush administration] was, of course, the prescription drug deal. You weren't happy with that.

... It's not a yes or a no, for this reason: I believe we are, as a society, wealthy enough so that we should say to ourselves, the American people, no one in the United States should be without financial access to the health and medical care that they need. Now, this is really important: We need to say to the American people, do you know who is going to pay for it? You are, because there's no other source. The government doesn't have any money unless it takes it away from you. ...

I would like for all checks from the American government to say on the bottom of them: "This is from your friends and neighbors. It's the only place the government can get money."

When they put the prescription drug bill together, surely they thought about --

No, they didn't. It's not how we do things, right? We choose up sides and decide if anybody here [does] not want to give prescription drugs to the lame and elderly. Not too many votes for that for the no vote. So there are a hell of a lot of people saying, "Oh, yeah, we want to do that." So we cobble up this thing, and it adds to our unfunded obligation $8 trillion. That's for the future to worry about.

Nobody thought about how to pay for it?

... They just thought about it; they didn't do anything about it. You know, this is a famous scene in Constitution Hall in Washington: The president has got that little signing table in front of him. He gets his pen out -- actually, he gets about 20 pens out for papers in front of him; he signs it with 20 pens. Behind him are the senior members of the Congress, the chairpersons from the committees that orchestrated the development of this legislation. They've all got smiles on like Cheshire Cats, as though they were giving us something. ... They're acting like they're giving the American people a gift. It's no damn gift; it's from us. It's from the American people. They're taking credit for it; it's our money. That clear?

I'd say that's clear. Now let's drill down a little bit. Social Security: You would say it's a lesser problem, comparatively speaking?

... The size of the so-called regular Social Security deficit is much smaller than the burgeoning gap between what we collect for Medicare and the obligations we have where people believe we're going to pay for their health and medical care benefits in the future. Big difference.

But it's patchable? --

I don't know. Do you think $8 trillion is a problem? Do you think $32 trillion is a problem? Do you think $53 trillion is a problem? I think all of those are a problem if they're unfunded obligations. ...

If you've got a car that you can't make the payments on, you can't make your house payments, and your credit cards are all in default, the bank doesn't care which one is in default. They're all in default. It's the same for this problem.

Do you have a solution for Social Security?

... I think we ought to be a saving society. We ought to organize ourselves so that we actually ... save a substantial amount of money. Maybe someplace between 5 and 10 percent of GDP ought to be saved.

That means you'd like to get rid of Social Security.

No, ... I want to create real financial security for people when their working life is over. And in my scheme, I would begin funding it the day that children are born so that your strength of financial security doesn't depend on your financial success in life; so that when you get to be 65, if you were a person who spent your working life, let's say, cleaning hospital rooms, which is a really important thing, but you only got paid $25,000 or $30,000 a year in today's terms, I'd like for you to be financially independent when you get to be 65. And if we began funding your retirement the day you were born, you'd have financial security. Some people would have a whole lot more, but everybody would have a floor that's gloriously better than what we now provide in Social Security and Medicare benefits. I think we're a rich society, and we ought to do that.

Social Security as it presently exists, in your view, would go away.

Yes, and be replaced by something a hell of a lot better and more in tune with the idea of a Great Society. ...

There are those who would say that you've got it exactly wrong. What you don't want to do is focus on the long-term problems; what you've got to do is focus on what's happening right in front of us. These are the issues that we're facing, and what Paul O'Neill and the deficit hawks are saying is the sky is going to fall someday, but maybe it will, and maybe it won't.

I would invite people who think you can wish this away simply by denying it -- they need to spend enough time to investigate the facts for themselves. And if they can still believe that, I'd say they need remedial education in arithmetic. This is not a problem of quantum physics; this is about simple arithmetic, and the American people need to be educated about the simple arithmetic that's going to kick our teeth in not too far down the road. ...

Let's talk about Medicare and Medicaid. Comparably speaking, a much bigger problem than Social Security, isn't it?

It is.

Give me a sense of it.

... Right now we're spending $2 trillion a year plus on health and medical care in this country. I believe we could save half of that, or a trillion dollars a year, if we practiced with excellence every day. What we've demonstrated in a few places is possible in improving the value equation in health and medical care.

So I'll give you an example: One out of every 12 people in this country who goes into a hospital gets an infection they didn't bring with them. ... We've demonstrated in places that we've worked with, in different places around the country, it's possible to eliminate hospital-acquired infections.


Yeah, eliminate. So if we could do that successfully all over the country, we would save, I don't know, $150 billion from that. We have in this country every year, by best estimates, 300 million medication errors every year. If we could eliminate those medication errors, it would make an enormous difference in cost.

Here's a test I put to people: When the doctor hands you a prescription, if you can't read it and you don't know what it means, you shouldn't accept it.

Well, that's every doctor in the country.

Think about the implications of that. So you can't read it. Your operating assumption is the pharmacist can read it. What makes you believe that?

I have great faith in the system.

Right, you do. You know what pharmacists will do? Often to prevent being hollered at by the doctor, they'll guess. They'll guess. And you know what? It may kill you. ... That scribble on the pad is not an innocent thing. ... If we eliminate those 300 million medication errors every year, again, we'd have a huge improvement.

I'll give you a different kind of an example. For every acute care bed in this country, there's one patient fall per year. Now, a lot of times those patient falls result in people breaking a bone, and that means they stay longer because they have a new condition that has to be treated by the hospital.

A lot of time these falls [happen to] people who are old and feeble, and that means they're in bed. And it's not unusual for someone who is incapacitated like that for a week or two weeks to get pneumonia, and then they die. And then the death certificate says, "Cause of death: Pneumonia." Well, it wasn't. That wasn't the cause of death. They died because they fell down. So can we fix that problem? Why should people fall in a hospital?

I'll tell you an example of where we worked on this problem. People created a process so that when people are admitted to the hospital, their record showed how often they needed to be taken to the toilet so that they wouldn't be tempted to get up in the middle of the night with no assistance and go to the restroom. And in six months' time, they reduced the patient-fall rate by 82 percent.

This is what I'm talking about: living at a level of medical care practice where we no longer accept things [going] wrong as the way it has to be. If we were able to do that systematically across the country, we could save a trillion dollars a year. ...

What you're describing are not problems with Medicare and Medicaid, but problems with the health care system in general.

Well, the money for Medicare and Medicaid goes to pay for all that stuff, good and bad. So if we could stop paying for the bad, that would be pretty fantastic, wouldn't it?

Great idea. I'm just saying you're not describing problems with the Medicare and Medicaid system itself.

I am. The problem with Medicare and Medicaid is the obligations are too big. And if we could bring the obligations down, Medicare and Medicaid would be fine. Do you want to deny benefits to people? I don't. But I'd like for us to have a trillion dollars a year to spend on worthwhile things instead of paying for things gone wrong.

Your solution is to keep Medicare and Medicaid, fix the medical system?

Well, actually not. I want to go back to what I said to you. I want a mandate on every American that we will all have insurance, and I want to make sure the people with low incomes have it by collecting enough money from the rest of us so they can have insurance.

The insurance is a financial process, right? OK, but what is the financial process for? It's to pay for the delivery of goods and services. So if we can reduce the size of undesirable goods and services we're paying for, we're going to have a hell of a lot of money. ...

... Do you believe as a society we should have a system whereby everyone has medical insurance?

Has financial access to the health and medical care needs that they have.

What does that mean?

Well, it means when you show up, you have enough financial wherewithal so that they will treat you, and you won't be told, "Oh, you're not sick enough for us, and you don't have enough of the right kind of money or the right kind of insurance." When people go for a medical encounter, I want them to have a demonstration that their needs will be paid for. ...

... [There are] two schools of thought in terms of dealing with this. One school will say, look, we have a huge financial crisis; we're just going to have to deal with that, and we're going to have to set aside these longer-term deficit and debt questions for now. And others say, no, you can do both at once. What do you say?

I think there's a certain what I would call a royalist view in the idea that the people can only handle one problem at a time. The facts are the facts, and why we wouldn't want the American people to understand these facts that are in their future is beyond me. ... I really believe the truth is your friend. Sometimes it can get you fired, but that's all right. Sometimes it's better to be fired. ...

I think it's really important for the new president to begin educating the people about the real problems that we have, because I think that's one of the most important roles of a president, to help the people understand where we are and where we're going. ...

Are there policies you think should be implemented now?

I think probably it's a good idea to organize a group that the president would charter to give this set of problems some public visibility, with a request to come back so that the president can use that activity as a basis for beginning to educate the people. ...

Right now we've got this financial crisis, and one day we're spending $700 billion, and the next day that gets trumped by "That's not enough; we need another $300 billion." And then we have people saying, "That's not enough; we need $500 to $700 billion more." And so if that's all right and there are no limitations, why don't we make it $4 trillion, or $10 [trillion]?

... Why don't we just give every American a million dollars a year if it's really in our power to endlessly borrow money? And this is what I mean by education. People need to understand why if $1 trillion is good, $10 trillion isn't better.

... I don't believe that those people who are arguing for economic stimulus and for preventing banks from going under are saying money grows to the sky forever on trees. I think they are saying that the house is on fire, and we have to spend some money to put it out; if we don't, the economy might go over a cliff.

So let me say we have two problems. One, we have a meltdown in our financial structure that encompasses the whole world. And let me agree with you that -- I didn't think we did it quite the right way, but what we did initially to recapitalize the banks was something [that] needed doing.

This issue of stimulus is a different issue. This is about borrowing money and spending it for things; it's not about recapitalizing the financial system. So let's use some numbers. Right now we have, arguably, 10 million unemployed people. So if we said we were going to give every one of those 10 million people $40,000 a year for the next couple of years while we're in this ditch, how much would that cost us? Well, let's see: 10 million times 40,000 -- that's $400 billion. So if we're going to do $700 billion, what are we going to do with the other $300 billion?

I believe what the Obama administration is recommending is a public works program where jobs would be generated, certainly, where the economy would be stimulated, certainly. But the basic infrastructure of the United States, which has been lying fallow for a very long time, would be able to be rebuilt.

Oh, I see. So what about the 10 million?

Those are jobs that go in there.

Uh huh. We're going to get the 10 million people employed for $700 billion? I just fixed the 10 million unemployed by showering them with cash.

I'm glad you did, but you didn't fix the roads --

I want to fix the roads too. I want to fix the roads, so why are we only asking for $700 billion? Why don't we ask for $2 trillion? ...

The truth is, you can't endlessly borrow money and have a sound economy, whether you like it or not. In times like we're in now, it's true that you can borrow some money and it won't produce immediate inflation and immediately higher interest rates. But the American people need to understand, why are we only asking for $700 [billion]? ...

Can the United States government go bankrupt?

Not in the classical sense, but we could get ourselves into a position where people won't take our paper anymore. And that's a really desperate position to be in when we've killed the idea of good faith and credit of the United States. That could destroy our society as we've known it.

Can't we just turn the printing press on?

Nope, because at some point people will prefer to have broken pieces of glass than federal money. ... Look at the German economy in 1923. People got paid twice a day in Germany in 1923, because if they waited to spend the money that they were paid at lunchtime at dinnertime, the money wouldn't be worth anything.

And so people were actually willing to pay all of their money, a wheelbarrow full of money, for a broken piece of shiny glass, because the broken glass was worth more than a wheelbarrow full of money. We don't want to get there, but semi-modern societies have gotten there.

You imagine we could get there?

No, because I think we're smarter than that, and I don't think we'll let it come to that. But the answer to your question is, if we don't do something, we could get there, yeah.

The United States has a AAA rating, just shines in the night. Could we lose that?

Eighteen months ago Citigroup had a AAA rating. Could they get there?

A bank isn't the United States government.

No, I know, but you're asking a very radical question: Could the federal government lose its AAA rating? And the answer is yes. We dare not let that happen, but the answer is yes.

If we keep going in a straight line, the answer will be yes?

Yeah. I don't know how we dodge the bullet if we don't change where we're going. ...

Can you take all the stuff that we've been talking about and bring it down to somebody's budget? ...

In the simplest terms, we need to become a society of savers, and there are a bunch of different ways we can do that. But we can no longer fund growing obligations out of current income, so we're going to have to save toward our future instead of only spending toward our future.

posted march 24, 2009

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