When his secretary burst into his Manhattan office on a February afternoon in 1982, J. Peter Grace was having lunch with publisher Rupert Murdoch. And lucky it was that Murdoch was there. To have what transpired go unwitnessed would have been the supreme anticlimax of Grace's 70 years.
"The President wants you on the phone," Grace's secretary announced.
"Come on, Cynthia, we're busy," said the suspicious scion, who serves as chairman and chief executive officer of W. R. Grace & Co.
"But he's on the phone! He's on the phone! " Cynthia persisted.
Grace picked up the receiver and, sure enough, it was the President, calling from Washington, D.C. "Hi. How are you?" Reagan asked.
"I knew it was him," Grace remembers, "so I said, 'Oh, hi, Mr. President,' " calmly striking Murdoch speechless.
As it turned out, the President was calling to ask a favor. He explained that back in 1967 when he was governor of California, he had asked a group of private-sector executives to survey the state's bureaucracy and find ways to save some money. The scheme, he said, had worked well.
"I want to have that happening here," he said. "We had a poll this morning in my office as to who would be the best one to do it, and you won unanimously. Will you do it?"
Grace agreed without a moment's hesitation. "I'll come right down."
Thus did Grace wind up as the head of the President's Private Sector Survey on Cost Control, now better known as the Grace Commission. Gathering 161 of his peers, mostly CEOs, around him, he set about studying cost-effectiveness -- or, more to the point, the lack of it -- in government. On January 12, 1984, the commission submitted its 656-page report to the CEO of us all, and Peter Grace was photographed with a beaming Reagan. "We passed the whole bloody thing the night before we gave it to the President," Grace recalls. "It was unanimous. There wasn't a single adverse vote."
The President, for one, had reason to be pleased with the results. Granted, the report forecast a $2-trillion deficit for the year 2000 unless something was done and done soon, but it also pointed to 2,478 separate areas where something could be done -- ranging from cutting $58 billion from federal retirement benefits to paying less than the Pentagon's $91 each for screws that cost 3 cents in a hardware store. Indeed, the report promised that some $424.4 billion might be trimmed from federal expenditures in three years simply by making operations more businesslike.
The commission, however, couched its recommendations in the measured, if lackluster, prose of consultancy. That language is foreign to Grace, the commission's peremptory, gravel-voiced spokesman, who has occasionally been forced to eat his ill-considered words. Once, for example, he charged that the "food stamp program is a Puerto Rican program," whereupon W. R. Grace's corporate offices were picketed by irate New Yorkers. He apologized for that remark, but he takes nothing back from his searing criticism of government as a mass of fiscal ineptitude. "[The government] operates 105 million acres of timberland, and they lose their ass on it," Grace notes gloomily. "The government does everything worse than business does."
The multifarious examples of governmental waste form a kind of litany that Grace is given to recite like some pragmatic rite of exorcism. ". . . They operate 71,000 nursing-home beds which cost four times as much [to construct as those in] a private-sector nursing home. . . . Half of [the government's] 17,000 computers are so old that they can't even be maintained by the manufacturer. . . . Inventory is completely mismanaged. . . . They subsidize all the people. . . . They spend $5.2 billion on transportation, and they have no expertise; they don't use travel agents. . . . It costs $4.20 for the Army to issue a [payroll] check; it costs only a dollar in the private sector. . . . They spend $5 billion in freight handling, but they don't negotiate discounts and they don't even audit for two years after the transaction. . . . The spend almost 14 times as much per square foot [for building maintenance] than in the private sector. . . . Pension benefits are three times [greater] for the civil service than for the private sector, but the rate of return on their pension fund assets was 7.4%, versus 14% in the private sector. . . . They trade in vehicles at 9,000 miles, versus 25,000 miles for rental companies. . . . An Oak Ridge scientist has to go through 114 [Department of Energy] offices for funding approval. . . .
"That," sums up Grace, "is a conglomerate! The government is the most gigantic conglomerate in the world."
As it happens, Grace knows a thing or two about such creatures, being the thirdgenration head of what was arguably the country's first genuine conglomerate. Founded in 1854 as a ship's chandler for freighters calling on the west coast of South America, W. R. Grace & Co. today has annual revenues of about $6 billion and has 240 plants, 245 offices, 95 warehouses, 655 retail outlets, and 610 restaurants. Peter Grace himself has been running the whole shebang since 1945, when -- at the age of 32 -- he was called from the polo fields to take over the reins from his suddenly incapacitated father.
To Grace's way of thinking, this background makes him ideally suited to the job of streamlining the federal government conglomerate. "If you're a conglomerate executive, you have much more experience looking at diverse problems," he says. "A guy who did nothing but run one business, why, he wouldn't have the expertise."
A lot of one-business guys might dispute that point, but it is hard to argue with Grace's sense of urgency about the crisis at hand. If nothing is done, he believes, the economy will inevitably collapse -- within the next five years for certain, and possibly as soon as this year.
"It's the compounding thing," Grace explains. "Nobody understands how compounding really affects things." At a rate of 12%, the government will be paying $24 billion in interest to finance its present-year deficit of $200 billion. "That's added to the interest bill each year, and you have to pay interest on the interest." Compounded by ever-increasing interest, the debt -- says Grace -- will eventually grow to $13 trillion by the year 2000, and interest on it, at 15%, will be running at some $1.5 trillion.
"Let's keep it simple," Grace offers by way of further illustration. "I say that one dollar ought to be knocked out of the government spending stream. Now, you are a liberal congressman -- you're Tip O'Neill or someone -- and you say, 'The hell it should!' So you win, because you've got the power. But you just cost the taxpayers $32 for the next 12 years, cumulatively, and $71 for the next 17 years. You get into a compounding situation like that, it's unbelievable. You never know when it's Bingo."
Grace warns that America could reach "Bingo" any day now, as the dollar weakens and money from overseas flows out instead of in. Along with Federal Reserve chairman Paul Volcker, he is "very concerned that we are sucking in this year about $71 billion of foreign money." When this supply of outside capital dries up, "we are going to have a credit crisis," he fears. "Nobody knows exactly when this will happen, any more than when you are staying out every night until one o'clock and you are drinking five martinis a day and smoking three packs. You may feel fine, but in the long run it ain't going to work. Just wait, baby."
Because the Fed can always print money, the country will not go bankrupt, but Grace fears it could easily slide into massive inflation. In his doomsday scenario, the government debt and its financing will soon be so huge that "in 10 years your children will want to buy a house; well, they'll be in line waiting to get a mortgage, because the government says we have to ration credit. Only 10% of all money can be allotted to homes." In another fantasy, Grace sees the government restricting the amount of money with which a traveler can leave the country. Or maybe "the government says nobody should own a car because we're importing so much oil. They can mess you up in every way they can, and they will."
The good news, says Grace, is that such an economic Armageddon can be avoided by adopting only a fraction of the commission's proposals. "Basically, we'll still be in a deficit even if they do all of them, but if they do 50% of what we recommended, it'll make a tremendous difference." Unlike some Reagan advisers, he believes that government can be operated at a deficit as large as "$20 billion to $30 billion a year, because some of the expenditure is capital -- building ships, building various things."
Of course, some of the noncapital over-expenditures may be hard to cut back -- government pensions, for example. The problem there, says Grace, is that the pension system would have to be changed by Congress, whose members are among its beneficiaries. "Are these people going to change it? Hell, no! Not unless taxpayers demand it. The whole thing depends on whether taxpayers care enough, and make it so embarrassing that [Congress] will do it." Toward that end, Grace has made it his mission to rouse the rabble. He is now collecting financing for a media campaign to get his appeal on television, but he is not particularly hopeful. "Maybe it'll never be done."
But even if the legislative branch proves reluctant to deprive its own, some 40% of the trouble spots flagged by the Grace Commission can be attacked outside the consent of Congress by using basic principles of sound business. In foreign trade, for instance, the government could start applying simple rules to guard against currency fluctuations, thereby saving $438 million over three years, according to Grace's calculation.
Then, too, the government could try applying standard cash-management techniques. "They accumulate cash all over the place, but they don't invest it. And they pay too soon, before they have to. When the Department of Justice captures criminals and gets cash, it puts it in a safe deposit box. They don't invest it in an interest-bearing account as you or I would." Nor is Grace referring to a mere drop in the bucket. "If the government moves about $1.8 trillion in and out of the system every year, that amounts to $7 billion per business day." By putting that cash in an interest-bearing account, and then using the interest to reduce the deficit, the Grace Commission figures the government could save $54 billion over three years.
"You can get the thing under control, and without further taxation," claims Grace. "All I care about is the median American income tax family and how they are getting clobbered. [Some government officials] say, 'Let's raise taxes some more.' I say, 'The hell with them. In 1948, the median family income tax was $9. Last year, it was $2,218. These people have been hit and hit and hit." And Grace points out that the upper-brackets don't have that much to contribute, either. "If you took every nickel from everybody in excess of $75,000 on top of all the other taxes, you'd run the government for 10 days," he argues.
But while the taxpayers stand to benefit most by "getting the thing under control," they are also the only ones who can make it happen, Grace insists. "The problem is to get to the people. If they don't care, this will go on forever."