David Stockman’s economic Neverland

April 5, 2013

David Stockman makes a good Cassandra. His The Great Deformation: The Corruption of Capitalism in America is a popular account of why all economic policy since Calvin Coolidge and Herbert Hoover has been wrongheaded. It is a contrarian’s delight. The New Deal “did not end the Great Depression or save capitalism from the alleged shortcomings which led to the [1929] crash.” Richard Nixon’s decision to unharness the dollar from the gold standard was “a sin graver than Watergate.” Milton Friedman, once a conservative saint but recast by Stockman as “a supposed hero,” is dismissed as “foolish.” He assaults Paul Ryan’s budget as “another front in the GOP’s war against the 99 percent.” He even accuses his old boss Ronald Reagan, a conservative paragon, of being fatally mistaken about slashing personal taxes and about encouraging “the highest peacetime spending share of GDP.”

In brief, Stockman believes Keynesian economics is pernicious and has seduced America away from the true path of capitalism. His tract is long on abuse (he scathingly assaults Republicans as well as Democrats, and gives a pass only to Dwight Eisenhower and John F. Kennedy) and short on economic analysis. The theoretical roots of his thinking are missing. The laissez-faire absolutist Ayn Rand is mentioned only in passing to goad those, like Paul Volcker and Alan Greenspan, who brushed up against her. Ludwig von Mises gets a single name-check for his work on the credit boom cycle in 1911. Friedrich Hayek, the inspiration for most of today’s anti-Keynesians, does not even warrant a footnote. Stockman’s failure to anchor his instinctive aversion to deficits, public spending and government borrowing in a cogent intellectual framework undermines his case. His faith-based economics reflects, perhaps, the fact that he became Reagan’s director of the Office of Management and Budget armed only with what he had learned at Harvard Divinity School.

Stockman has, however, found a ready audience for his take on the past 80 years of economic policy because he is a rare bird: a conservative purist prepared to argue that when the financial markets froze in 2008 we should have let the market rip and lived with the consequences. When the stock market began to wobble five years ago, then crashed, tripping a wholesale financial disaster that slowed economic activity, caused businesses to fail and threw millions out of work, it was hard to find an economist of standing to defend the alternative to federal intervention: letting the banks and AIG go bust and allowing the market to find its own level.

While the George W. Bush administration concocted the Troubled Asset Relief Program (TARP) to shore up the banks and an old school Keynesian stimulus to keep the country’s businesses afloat ‑plans followed to the letter by the new president, Barack Obama ‑ the big guns of conservative economics remained conspicuously silent. “I thought we all agreed that Keynesianism doesn’t work,” complained Chris Edwards of the Cato Institute. “With the new stimulus package before Congress, all these Keynesians have come out of the woodwork and I’m wondering where all the theorists are that oppose the Keynesian system.” Robert Lucas, the 1995 Nobelist from the conservative economics redoubt at Chicago University, was less coy. “I guess everyone is a Keynesian in a foxhole,” he explained.

Stockman, for his part, is prepared to speculate on what an alternative economic future might mean, and it is not pretty. Nor, he says, is it practical. In an op-ed last weekend he argued his remedy “would be so radical it can’t happen.” His prescription would entail “sweeping constitutional surgery” giving the president and Congress single six-year terms; the end of Citizens United payola and its replacement with 100 percent public financing of candidates; restricting banks to taking deposits and granting commercial and private loans only; putting the Federal Reserve in a straitjacket; and much more. Since, as he says, no one would dare to implement the political and economic revolution he proposes, Stockman avoids having to estimate what his remedy would cost in lost jobs, collapsing house prices, business bankruptcies and all the rest.

In this he follows the many conservative economists who, disagreeing in principle with TARP, Obama’s $800 billion stimulus and Fed Chairman Ben Bernanke’s hosing of vast sums of money into the system via buying back government bonds, concentrated their fire on asking whether the stimulus worked as well as promised (of course not; no stimulus ever does) and warning that the Fed’s aggressive quantitative easing would lead to rampant inflation (it has not happened yet and would trigger an increase in interest rates by the Fed if it did). While some were content to attack Keynesianism outright and damn all government intervention in the economy on principle, few were prepared to use the tools they readily employed to denigrate the federal rescue of the financial system to paint a true picture of the economic, political and social disaster that would have ensued had the banks been allowed to fail.

We do have a reasonably clear idea of what Stockman’s brave new world would look like because it was tried every year until 1933, when Franklin Roosevelt’s New Deal heralded the era of governments managing economies along Keynesian lines. Debating with Stockman this week, Obama’s former budget director, Peter Orszag, said the hands-off, devil-may-care, unfettered-market policies of Hoover, Coolidge and everyone before them were politically unacceptable and would never return. There was no appetite for an economy lurching from crisis to crisis, with banks going bust and losing their customers’ lifetime savings, widespread homelessness due to foreclosures and bread lines to feed the millions abandoned by the system. Stockman acknowledges that if what he suggests were put into practice “there would be a lot of pain” and the concomitant job losses and plummeting of incomes would last perhaps for a generation. However, those, like Paul Ryan, who propose setting out on the Stockman path cannot bring themselves to spell out the human cost of what their dogma entails.

It is entertaining to speculate on what might happen in an economic Wonderland, so long as it is made clear that it is an unattainable fantasy. Neverland is called Neverland for a reason. To his credit, Stockman concedes that his solution is impractical and that his remedy is for display purposes only. But all those others who advocate an easy return to the pre-Roosevelt days would do their followers and the rest of us a favor by putting some hard figures on what their radical plans would cost. To pretend that all it takes is for governments to stop governing is to perpetrate a fraud as heinous as the perceived economic travesties they affect to despise.

Nicholas Wapshott’s Keynes Hayek: The Clash That Defined Modern Economics is published by W. W. Norton. Read extracts here.

PHOTO: Still from video at Reuters Newsmaker event, April 1, 2013.


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Well, I should have expected reuters’s writers to be unashamed liars. Since when Hoover’s policies were model of hands-off, laissez-faire? Have this author ever read “America’s Great Depression” by Murray Rothbard, which painstakingly analyzes the failed proto-Keynesian Hoover’s policies of large public spending? Are you crazy, Mr Wapshott, or just plain ignorant? Or perhaps you are just an ordinary and typical lying journalist?
I obviously stopped reading this pile of pseudo-journalism after your take on Hoover. I do believe that non-sense statements compound from there though. You are a disgrace, sir.

Posted by KelThuz | Report as abusive

Whoever controls the credit and money supply has ultimate control of an economy. Either it is controlled by the government with legal tender laws, currency monopoly and nationalized credit bureaus requiring continuous government intervention, or it is open to competition and controlled by the true economic order. Without a freely competing currency, without localized credit, a free market cannot exist. There’s no half way. Individuals should be able to choose which currency the keep their store of value in just as they choose which can of corn to buy. If your currency inflates and holds no value, people will cash out. Businesses should be allowed to pay employees in and accept payment from any currency they choose.

The one simple reason this will never be allowed to happen is taxation, which is why there’s no coincidence in how the tax rates exploded after the Federal Reserve Act. And lets not forget that they confiscated gold once before in the past to make sure their newly created currency had no opposition.

Competition first and always. That’s the only way to economic order.

“But all those others who advocate an easy return to the pre-Roosevelt days would do their followers and the rest of us a favor by putting some hard figures on what their radical plans would cost.”

So your saying that all those figures given out post-Roosevelt were correct? Anything more than hot air to appease the masses and maintain faith in their benevolence? Economics is not a mathematical equation and is impossible to predict. If it was, we would have no boom and bust cycle. The “give me insurance that this will work” attitude is what has given the government massive amounts of economic control and caused the whole mess. Papa government was not meant to be an economic insurance company.

Posted by LysanderTucker | Report as abusive

LysanderTucker almost makes one interesting point in his comment, competition between currencies. The proper competition between currencies is the economic competition between national states. This means currencies should be tied directly to national states. Ignoring this in Europe has led to some rather severe problems.

Sorry that neither his nor my comment really address the article.

Posted by QuietThinker | Report as abusive

That Stockman’s analysis in not grounded in theory is, in fact, a plus. He is not forced by theory to ignore what is right in front of his eyes. He does name a cause for the depression: the massive buildup of debt in the 1920s. Similarly, the explosion of debt,from the end of the Breton Woods system until 2008 caused the the current set of crises. Clearly, a further expansion of debt cannot solve the crisis no matter what prescription Stockman would endorse. Yet mainstream Economics and politicians are mostly bumblers as they can’t create solutions without doing so. It is they who suffer the effects of theory. There are no painless solutions. The remaining question is who will suffer the pain? Something truly radical might also involve restructuring the financial systems, both domestically and internationally. Not a step that the clueless and hapless are likely to undertake.
The Economic nationalist view is Stockman’s real weakness. But is also the second biggest reason that muddling through is the only policy option that will be attempted.

Posted by KCapuder | Report as abusive

[But all those others who advocate an easy return to the pre-Roosevelt days would do their followers and the rest of us a favor by putting some hard figures on what their radical plans would cost.]

And this is when it might get interesting. How many will jump on the Stockman ideas, argue for them, but ignore the pain it will cause. Especially if they see themselves coming out ahead.

It has been said if you get 100 economists in a room, you will get 150 solutions. Maybe that is the problem. Solutions, or the failure of solutions only become known years later. 10 years from now, the Fed actions to stave off a depression may look like genius. Or a try that missed the mark.

[He even accuses his old boss Ronald Reagan, a
conservative paragon, of being fatally mistaken about slashing personal taxes and about encouraging “the highest peacetime spending share of GDP.”]

This might be his biggest sin. He has dared to challenge those who worship Reagan.

Posted by pavoter1946 | Report as abusive

So we keep doing the same thing again and again and expecting different results. Who hit the “off” button on our MINDS?

Posted by OneOfTheSheep | Report as abusive

I laughed when the author wrote that Stockman is long on abuse (of past and current practices) and short on economic analysis.

Take it from a guy who earned a Bachelor of Science Degree in Economics. If you want to sell books, go short on Economic analysis.

Mr. Wapshott, here’s an idea for a future column. How about exploring the idea that neither the Krugman’s or the Stockman’s of the world are “right”.

Both sides of this argument work from the premise that capitalism works. They differ as to how or how not to manage it. Over the past few months it’s occurred to me that capitalism itself may not be a sustainable economic system.

Posted by Missinginaction | Report as abusive

Stockman, along with Ron Paul, Mark Fabre, and Peter Schiff, are the only rational minds out there when you talk about econ.

Posted by AJ876 | Report as abusive

Presumably your academic background in politics qualifies you to critique the economic opinions of someone you suggest is a mere Harvard Divinity School graduate but who just happened to work for president Ronald Reagan as director of the Office of Management and Budget. Am I missing something here?

Posted by Mctimm339 | Report as abusive

I see, so what we should keep doing then is allow the Federal government and Federal Reserve to continue picking winners and losers in the economy like our commie brethren in China and the ex-Soviets. Allow the theft of hard earned money from average Americans through excessive (overall within the economy) taxation, silly economic schemes, monetary debasement, interest rate manipulation, and periodic financial fiascos attributable to the above entities.

The above bozos have gotten us to a place where multi-trillion dollar bailouts (add in the theft by low rate bail-out of the banks, stupid consumers, and dumb businesses) are used and do little or nothing in return other than dig a deeper hole. What idiotic, corrupt, children we have running things. Where do you think enormous moronic debt gets us and who pays? Why continually enabled them by listening to those espousing the status quo; as if nothing else can or should be done?

Posted by keebo | Report as abusive