The inaugural Peter Peterson Lecture on National Security and Fiscal Policy was held by the Foreign Policy Association on April 19. The session featured John O’Neill, former U.S. Treasury Secretary and former Chairman and CEO of Alcoa.
The far-ranging lecture featured topics such as defense spending, the changing nature of global threats, national debt, wage stagnation, the presidential election, and tax reform. Mr. O’Neill’s overarching message was that we, the people, need to be better fiscal stewards of our country. Within this message he sees the responsibility of broader society to set expectations, manage responsibilities and frame a stronger future for America.
On national defense, Mr. O’Neill sees the reduction in defense spending over recent years as a worrying development given the rise of turmoil across the globe and America’s historically expansive role in international security. He also argues that spending should focus on investments that derive real results, citing that of the 11 aircraft carriers owned by the US Navy, at least half are in maintenance at any one time. He believes investments in cyber security and other innovative threat detection and management technologies should be a priority.
The reduction in defense spending has coincided with growth in the entitlement system, with tax exemptions and social spending rising at significant rates. The growth in national debt to $19 trillion, which includes $6 trillion borrowed from social security, indicates that American society is living beyond its means, according to Mr. O’Neill. Student debt has now topped $1.23 trillion and 40% of graduated student loans are in default. Mr. O’Neill points to this phenomenon as a sign that the core principles of contracts are no longer respected. Fiscal responsibility should, therefore, hinge on paying for what we, as the people, agree is important and what we can afford to pay for.
Mr. O’Neill called for fundamental tax reform. In his view, the system should remove tax credits and exemptions which create inequities and generate perverse incentives. The current system, for instance, provides a greater mortgage tax credit for larger mortgages, effectively providing higher tax relief for higher earners.
On the election, he called for candidates that have a better understanding of the key elements of government such as defense and tax. He referenced President Jimmy Carter as someone who already had a working knowledge on key issues so his decisions were not so dependent on the briefing system. Mr. O’Neill did not see a plethora of candidates with this knowledge.
Finally, he opined on wage stagnation and the plight of the American worker. He noted that when he sat on the board of General Motors in 1995, the average production line worker was paid $145,000 per year including benefits. With the advent of non-union factories, the average wage fell to $60,000 per year. In effect, GM workers had benefited from the ocean as a trade barrier and the belief that no other country could make a good car. While Mr. O’Neill did not discuss potential solutions to wage stagnation, he noted that free trade remained a good ideal and globalization had delivered benefits. He finished saying that if the US does not have a vibrant economy, then we cannot “be the light.”
Sebastian Vanderzeil is a Research Analyst with Cornerstone Capital Group. He holds an MBA from New York University’s Stern School of Business. Previously, Sebastian was an economic consultant with global technical services group AECOM, where he advised on the development and finance of major infrastructure across Asia and Australia. Sebastian also worked with the Queensland State Government on water and climate issues prior to establishing Australia’s first government-owned carbon broker, Ecofund Queensland.