Why Reagan’s former budget chief is like a crazy person howling in the wind. Let’s ignore him.
- By Jared Bernstein<p> Jared Bernstein is senior fellow with the Center on Budget and Policy Priorities and former chief economist and economic adviser to Vice President Joe Biden. </p>
David Stockman, a former budget official in Ronald Reagan’s administration and author of The Great Deformation: the Corruption of Capitalism in America, is one deeply pissed-off dude. The scope of his disdain is wide — it would take a lot of fence to corral those he deems responsible for a century of wildly wrong-headed developments that, in his view, are destined to sink America.
What’s more, his perps would have to be held in separate cells, because they’re of remarkably different stripes. Milton Friedman is implicated (his sin: advocating managing the money supply), but so is Paul Krugman (and of course his spiritual mentor John Maynard Keynes). Franklin Roosevelt is on the list of "policy villains," but so is Richard Nixon, who dealt the final blow to the gold standard. Former Reagan economic advisor Art Laffer (Mr. Supply Side) is there, a few names away from Larry Summers (these days, Mr. Demand Side), who served, most recently, as Barack Obama’s top economic advisor.
If you can figure out what these folks have in common, you’ll be on the way to understanding the connective tissue that (barely) holds together this tirade, which Stockman mercifully summarized in the New York Times. (The book is over 700 pages … like I said, the man is really mad.) So what’s the connection? I’ll give you a hint: They all advocated economic interventions. They thought they could help boost growth, lower unemployment, raise revenues, stimulate investment, smooth out volatility, and so on. And, as Stockman sees it, the problem is not simply that they all failed miserably. It’s that their failure has doomed America.
That’s not hyperbole. In a way that would almost be refreshing if it didn’t surpass the Hunger Games on the dystopia scale, Stockman’s is not one of those arguments that tells you how screwed up things are but then leaves you with hope that all can be solved if we take the author’s advice. Instead, America, according to Stockman, is in "end-stage metastasis." The nation "is broke — fiscally, morally, intellectually."
It’s easy to poke fun at a rant like this, and most of it is just plain wrong (more on that in a moment). But what’s more interesting is to figure out where Stockman is on target. There are, unquestionably, aspects of American capitalism that have been corrupted — in no small part through money in politics, something Stockman vividly rails against. He’s also right that the U.S. economy is seriously underperforming and bad policy is implicated. One of his hobbyhorses, crony capitalism — a frequent target of the very progressive economist Dean Baker — is surely holding back growth, skewing the distribution of income and wealth, and steering investment not toward its most productive uses, but to those most favored by the tax code.
Unfortunately, those points are not central to his argument. What Stockman is most worked up about is that for almost a century, economic policymakers have … um … made policy, and that’s led to cheap money, high indebtedness, and econo-moral turpitude. Sovereign debt is the biggest villain of all here, and there are lots of big numbers — in the trillions! (When folks like Stockman use trillions as opposed to shares of GDP, they’re trying to scare you.) Fiscal and monetary stimulus, which contribute to the debt, are key accomplices. Stockman insists that the market should work out its failures without all these meddlers trying to fix them (there must be "a sweeping divorce of the state and the market economy"); no government investments in industry; central banks shouldn’t mess with the money supply, and so on.
And it is here where he parts company with economic reality. The reader gets tons of invective against interventionists from FDR to Obama, but never a compelling explanation as to why America would have been better off if we did nothing to lessen the economic pain caused by the Great Depression or the Great Recession by applying Keynesian stimulus. Nor is there any analysis of why mainstream economics is wrong to believe, based on decades of empirical evidence from economies across the globe, that such stimulus, both fiscal and monetary, actually works.
Similarly, not only is there absolutely no benefit assigned to any of the Federal Reserve’s actions over the years to push back on inflation and joblessness (and no question, they’ve made mistakes), but Stockman, with apparent ignorance of the historical record, atavistically pines for the gold standard. I urge anyone considering this libertarian canard to spend, oh, about five minutes comparing the length, depth, and frequency of recessions and the volatility of markets, growth, and prices during the years the United States was chained to that inflexible standard to the behavior of all those variables since.
He’s right that the Fed, to its great discredit, missed the dot-com and housing bubbles, and for years (though not now), has overweighted the price side of its inflation/unemployment mandate. But talk about throwing the baby out with the bathwater: If you want to get rid of central banks, you’d better come up with some other stabilizing mechanism a whole lot better than gold buggery. And I’m quite certain that would lead you right back to independent central banks.
Moreover, sovereign debt is neither bad nor good — its assessment must be situational. Even a cursory analysis should stress that debt that’s paying for inefficient health care is a serious problem. Debt that’s financing productivity-enhancing public goods or temporarily offsetting a large demand contraction is a very different story.
The historical record of technological advances in American industry — from machine tools to railroads to lasers to the Internet to fracking, nanotech, GPS, and on and on — shows beyond doubt that private investors will under-invest in innovative sectors due to uncertain returns. Stockman never explains how a market failure such as underinvestment in such sectors would be overcome by simply not having the government help directly by subsidizing research and development or backstopping credit to offset the high risk premiums investors would otherwise demand. He’s too busy ranting to analyze.
Instead, we get a "revisionist history of our era," as he puts it, where Keynes and FDR are villains, Herbert Hoover and Calvin Coolidge heroes, gold is king, central bankers are legal counterfeiters, and debt is always evil. Like I said, he hits some high notes in a few places, but I suspect most readers will react to Stockman’s screed the way I did. It’s like hearing a crazy person on a street corner ranting against whatever: They invariably stumble on some profound and piercing insights, but it’s mostly dark nonsense, and instinctually, we keep our heads down and move on.