David Stockman’s economic Neverland
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  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.
PHOTO: Still from video at Reuters Newsmaker event, April 1, 2013.