The Stockman Backlash (How his opinion piece 'Sundown in America' caused a huge brouhaha)

This week, while economists should have been closely considering the implications of the actual bankruptcy of Stockton, California, they instead heaped scorn on the perceived ideological bankruptcy of David Stockman. In other words, Stockman trumped Stockton.

Ronald Reagan's former Budget Director contributed "Sundown in America" a multi-page opinion piece to the Sunday New York Times which loudly and eloquently described the illusions of our current economic system. While I don't agree with everything Stockman believes, I think he is showing great wisdom and courage in making dire predictions and calling for extreme changes in our policy and politics.

What was perhaps more surprising than the Times' uncharacteristic decision to run the piece in the first place was the vitriolic and largely ad hominem backlash against Stockman that quickly emerged from across the political spectrum. The attacks have focused primarily on his history and personality, and not on his arguments. One would be hard pressed to find any journalistic reaction that did not use the words "screed" "rant" or "unhinged." I believe these responses reveal an acute sensitivity from mainstream economists that arises from defending contorted Keynesian logic.

It can't be easy to take the position that debt doesn't matter and that spending creates economic growth. To do so with any hope of success requires team unity, and Stockman has never really been a team player. His reputation as an apostate and a naysayer has made him an easy target.

Famously, Stockman left the Reagan White House in protest over the Gipper's half-finished mandate. Yes, Reagan had cut taxes, but he never really cut spending. Stockman never bought into the easy idea, championed by Jack Kemp and Dick Cheney, that deficits don't matter and that tax cuts pay for themselves. And although the Reagan revolution did clear the way for a return to better growth in the 80's and 90's, Stockman knew that the piper would call someday to collect the debt. Despite his foresight on that topic, his criticism of the Reagan legacy has earned him the derision of the Republican establishment for whom that particular hero worship is sacred.

This may have informed the attack issued by neo-conservative apologist and Iraq war cheerleader, David Frum, who offered a solely psychological assessment: "Stockman provides an insight into the gloomy mindset that overtakes us in older age, it's a valuable warning to those of still middle-aged that once we lose our faith in the future, it's time to stop talking about politics in public." So much for respecting our elders.

Bloomberg's Jeff Kearns, whose support of Fed policy has earned him regular taps at Ben Bernanke's televised press conferences, provided the most common mainstream dismissal of Stockman: "His warning that the Federal Reserve's quantitative easing is steering the world's largest economy toward a crash is at odds with nine quarters of job growth, record stock prices and unprecedented corporate earnings." This "he must be wrong because things look good now" position supposes that economics can't be understood or predicted, only observed. I received very similar treatment back in 2006 and 2007 when I tried to tell the mainstream that the real estate market was a house of cards. How could it be bad, they said, if it goes up every year?

Despite his misalignment with the Republican hierarchy, the Left has an even greater revulsion for Stockman. Since the crisis, he has become perhaps the most respected figure (with the possible exception of Alan Meltzer) to take the position that a system based on fiat currency is doomed. Those who most visibly argue these points, like Ron and Rand Paul, and myself, come from the libertarian movement. As a result, we can be easily dismissed as cranks. However, Stockman was once a card-carrying member of the power elite. His embrace of these principles is taken more seriously and is thus ripe for instant attack from liberal economists.

While the usual suspects of Jared Bernstein and Joe Wiesenthal weighed in with heaps of invective, the loudest heckles have come from, whom else, Paul Krugman. He began his multi-post campaign by questioning the "mystery" of why the New York Times would sully Krugman's own gravitas by forcing him to share column inches with someone as "non serious" as Stockman. He then offers the back of his hand:

"I thought Stockman would offer some kind of real argument, some presentation, however tendentious, of evidence. Instead it's just a series of gee-whiz, context- and model-free numbers embedded in a rant - and not even an interesting rant. It's cranky old man stuff." For the record, Stockman is only 66.

In actuality, Stockman's NYT piece offers a litany of objectively dismal facts and cogent explanations of how we got here. While most are celebrating the nominal high of U.S. stocks (see my recent analysis of the current rally), he points out that in the five and half years it has taken for the S&P 500 to set a new high, "Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the 'bottom' 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled to 59 million, about one in five Americans." But Krugman fails to find the currency of his stock and trade, the macro-economic statistical models that attempt to describe how an economy works. In truth, those academic ordeals only matter in getting tenure and impressing the global elite. The real economy is much easier to understand.

Case in point: Stockton, California, which on Monday became the largest U.S. city to file for bankruptcy protection. Stockton, a city of 300,000 and two hours from San Francisco, is following the path blazed by many smaller California municipalities that have been unable to support lavish spending, salary and pension guarantees. And although Stockton has tightened its belt over the last few years (unlike similarly bankrupt San Bernadino, which is not even trying), it lacks the capacity to close the gap. Despite its enormous advantages in geography, infrastructure and location, the city is too bloated with government and clogged with taxes and regulation to allow for robust growth. As a result, Stockton is looking to pin the losses on its creditors.

As Stockman makes clear, the United States has been plagued by the same problems that doomed Stockton. His critics argue that the Federal Reserve's printing press provides a foolproof immunity to such pedestrian problems. But in the end, these paper protections will only exist on paper. We're all Stocktonians now.

Except the tax cuts DID pay for themselves. Government revenue rose 40% under Reagan. Spending rose 100%. So the tax cuts absolutely “paid for themselves.” They did in the Kennedy years as well. They did not in the Coolidge years, but revenue shrank only a tiny bit while the money supply shrank a lot, so in REAL dollars they paid for themselves.

One would be hard pressed to find any journalistic reaction that did not use the words "screed" "rant" or "unhinged."

From my long history of online interactions, I know whenever anyone uses the words "screed" and/or "spew" in their responses, they are unworthy of consideration.

Government revenue rose 40% under Reagan.

What we admirers of Reagan don't like to remember, though, is that, beginning in 1983, the Federal Reserve began inflating again. Yes, the tax cuts certainly did spur the economy, but cheap credit supported by newly-printed money really turbocharged it.

That particular bubble ended with the Savings and Loan debacle. Eventually we inflated our way out of that mess, too.

Famously, Stockman left the Reagan White House in protest over the Gipper's half-finished mandate. Yes, Reagan had cut taxes, but he never really cut spending.

The vital goal of increasing saving and capital formation through balancing the government's budget and cutting taxes that fall on saving and productive expenditure can be achieved very simply: namely, by slashing government sending. Such a policy would be consistent with reductions both in taxes falling on saving and productive expenditure and in taxes falling on consumption, and at the same time with a balanced government budget and, indeed, with government budget surpluses. Above all, it would be consistent with preserving and enlarging the freedom of the individual to spend his own income and wealth.

The failure to reduce government spending, on the other hand, makes the achievement of greater saving and capital formation either altogether impossible or impossible only at the price of sacrificing the freedom of the mass of wage and salary earners to dispose of their own incomes.

All the old sages have said that the path the happiness and prosperity was productive work, savings, and prudent investment. These same sages taught that the road to ruin was overconsumption, debt, and speculation - the same “fixes” that economists today recommend. Who do you want to believe, Bernanke and Krugman or pretty every other wise man in recorded human history?

Former Enron advisor Paul Krugman states: "I thought Stockman would offer some kind of real argument, some presentation, however tendentious, of evidence."

I suggest Krugman read Stockman's book "The Great Deformation: The Corruption of Capitalism in America", published earlier this week. It's 700+ pages of real arguments and evidence. I'm only a few chapters into it, but it's a very scary look into how the system has become rigged by system gamers across the political spectrum.

I haven’t studied the M-1 numbers so I can’t say. I do know that the S&L bubble was in part-—not entirely-—caused by FSLIC incentives to be extremely risky because the difference between interest rates and what mortgages were paying (”disintermediation”) was GUARANTEEING the S&Ls would fail at some point, so why not be risky sooner with the hope of making the institutions solvent?

The Fed’s reflation, the Garn-St Germaine Act that led to the S&L debacle, the subprime mortgage mess of the last decade, the repeal of Glass-Steagall, TARP, and QEx were all bipartisan projects.

The GOP is just as bad as the Democrats when it comes to such issues. Nixon didn’t really say, “We’re all Keynesians now”, but he did take the US off the gold standard and mandate wage and price controls.

I haven’t studied the M-1 numbers so I can’t say.

Volcker is best-known [and rightfully so] for his credit-tightening moves of the early eighties that tamed the inflation-beast. As is well-known, those moves resulted in a pretty serious recession. But that is necessary when the central bank has created the inflation in the first place.

In 1983, just as the important tranche of the Reagan tax cut was poised to take effect, Mexico defaulted on its loans and Volcker monetized them to the tune of some $400 billion [if memory serves me]. With that, we were off to the races.

My comments are not meant to criticize Reagan, but to point out that his tax cuts had help from the Fed in sparking the boom we all now remember so fondly. The same is true for Messrs. Clinton and Bush.

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