October 6, 2010
It’s been nearly three decades since David Stockman was the brash and brilliant enfant terrible of President Reagan’s White House, but he hasn’t mellowed with age.
The Bush tax cuts are “unaffordable,’’ he says. Extending them would be a “travesty.” President Obama’s stimulus program was “futile.” Ben S. Bernanke, the Federal Reserve chairman, is undermining the whole economy. Today, Stockman says, “I invest in anything that Bernanke can’t destroy, including gold, canned beans, bottled water and flashlight batteries.”
Stockman, Reagan’s budget director from 1981 to 1985, initially became famous for his zeal in slashing government spending on almost everything except defense. Less government and lower taxes, he fervently believed, would ultimately mean more prosperity for everyone. But he will be best remembered for confessing, in an interview with William Greider for The Atlantic Monthly, his disillusionment with the “supply-side” economic policies that led to soaring deficits under Reagan. “None of us really understands what’s going on with all these numbers,’’ he declared, along with many other criticisms that nearly got him fired.
Today, Stockman is working on a book about the financial crisis, and he recently shared his thoughts with The Fiscal Times about some of today’s most pressing fiscal issues. No surprise — he’s as brutally candid as ever.
The Fiscal Times (TFT): What should the president and Congress do about the Bush tax cuts this year?
David Stockman (DS): The two parties are in a race to the fiscal bottom to see which one can bury our children and grandchildren deeper in debt. The Republicans were utterly untruthful when they recently pledged no tax increases for anyone, anytime, ever. The Democrats are just as bad — running their usual campaign of political terror on social security and other entitlements while loudly exempting all except the top 2 percent of taxpayers from paying more for the massively underfunded government they insist we need.
In effect, we undertook a national leveraged buyout, raising
total credit market debt to $52 trillion, which represented
a 3.6X leverage ratio against national income or GDP.
The fact is, the Bush tax cuts were unaffordable when enacted a decade ago. Now, two unfinanced wars later, and after a massive Wall Street bailout and trillion-dollar stimulus spending spree, it is nothing less than a fiscal travesty to continue adding $300 billion per year to the national debt. This is especially true since these tax cuts go to the top 50 percent of households, which can get by, if need be, with the surfeit of consumption goods they accumulated during the bubble years. So Congress should allow the Bush tax cuts to expire for everyone. By doing nothing, the government would be committing its first act of fiscal truth-telling in decades.
TFT: Should the government provide more stimulus for the economy, or cut spending to bring the deficit down?
DS: We are not in a conventional business cycle recovery, so stimulus is futile and just adds needlessly to the $9 trillion of Treasury paper already floating dangerously around world financial markets. Instead, after 40 years of profligate accumulation of public and private debt, and reckless money-printing by the Fed, we had an economic crash landing, which left us with an enduring structural breakdown, not just a cyclical downturn.
The only solution is a long period of debt deflation,
downsizing and economic rehabilitation, including a sustained
downshift in consumption and corresponding rise in national savings.
In effect, we undertook a national leveraged buyout, raising total credit market debt to $52 trillion which represented a 3.6X leverage ratio against national income or GDP. By contrast, during the 110 years prior to 1980, our aggregate leverage hugged closely to a far more modest ratio at 1.5 times national income.
The only solution is a long period of debt deflation, downsizing and economic rehabilitation, including a sustained downshift in consumption and corresponding rise in national savings.
And a key element of the latter is a drastic reduction in government dis-savings through spending cuts and tax increases — and these measures need to start right now. Keynesian policymakers who say wait for the midterms to address the deficit are like battleship admirals: They are fighting the last war with the same failed strategy that gave rise to our current predicament.
TFT: Do you see the work of President Obama’s deficit commission as important or a waste of time?
The nation has become fiscally ungovernable because the fiscal
policy of both parties is based on what is essentially the Big Lie.
DS: The deficit commission is a complete waste of time. The nation has become fiscally ungovernable because the fiscal policy of both parties is based on what is essentially the Big Lie. The earnest remonstrations of the commission’s report will be lost in the deafening partisan rancor which is certain to swell after the coming election.
TFT: You spent many years as a public official. What do you consider your greatest contribution?
DS: For a flickering moment I helped revive a vision of small government based on low taxes, the denial of weak fiscal claims rather than weak clients, and social progress through liberation of the nation’s entrepreneurial endowments and energies. But that vision has been subsequently crushed by 30 years of fiscal profligacy, warfare state adventurism and crony capitalist policies championed by the lobbies of K Street, the financiers of Wall Street and the farmers, homebuilders, energy producers and sick-care companies of Main Street. After the abomination of the Bush/Paulson bailout of the big banks, the state has no boundaries whatsoever. So fiscal policy is now just a fiscal food fight.
TFT: What’s your biggest regret from your years as President Reagan’s budget director — was it talking to Bill Greider for the Atlantic article?
DS: I do not regret talking to Bill Greider at all. My alleged “confessions” were inadvertent, but in historical hindsight the article was just the wakeup call that was needed at that delusionary hour. By the fall of 1981, we had just gone through an orgy of tax-cutting which reduced the revenue base by a staggering 5 percent of GDP, far more than Reagan had asked for, due to the pile-on of goodies for oil and gas, property developers, equipment vendors, homebuilders and scores of other special interests. At the same time, domestic spending had been cut by less than 1 percent of GDP and even that was being offset several times over by an explosion of defense spending. It was a formula for fiscal catastrophe. Grieder’s piece colorfully dramatized this condition, and helped trigger a slow march of policy — the tax increases of 1982-84 and the slowdown in the defense buildup — backward from the precipice.
TFT: With the midterms just a month away, do you think the GOP will gain as many seats as some are predicting, and if so, will that doom Obama's agenda?
Through at least the spring of 2013, our national debt
will be growing two or three times faster than the economy.
DS: The Republicans will undoubtedly gain a lot of seats, if not congressional majorities. But the main result of that will be not only to doom the Obama agenda, which deserves to be stopped, but also any chance of addressing the fiscal issue until April 2013 at the earliest. Unfortunately, since we are in a chronic debt deflation, the GDP deflator is heading toward zero and real growth may limp along at 1 to 2 percent. That means that money GDP is growing at the shockingly low rate of 2 to 3 percent, or not even $40 billion per month. By contrast, the built-in deficit will result in $100 billion of bond issuance each and every month — meaning that through at least the spring of 2013, our national debt will be growing two or three times faster than the economy. So we are rolling the dice big time in a global bond market which is now a volcano of leveraged speculation and massive front-running of the expected multitrillion quantitative easing 2.0 (i.e. debt monetization) by the Fed. In this environment, one hiccup and it’s game over.
TFT: Your assessment of the Obama's presidency at this point?
DS: Obama’s presidency is a profound disappointment. So far, he’s proven that when Republican’s start elective wars, Democrats can’t end them; when Republicans empty the Treasury, Democrats can’t replenish it; when Republicans put a middle-class destroying money printer at the head of the Fed, Democrats reappoint him; and when the Republicans unleash an orgy of dangerous speculation on Wall Street, Democrats pass a contentless, 2,300 page, enabling act which will do nothing to protect Main Street from another financial meltdown, even as it keeps K Street fully employed.
TFT: What will happen to health care if the Republicans become the majority party?
DS: Health care accounts for 17 percent of GDP and is the dysfunctional heartland of crony capitalism. They only thing which will change if the GOP becomes the majority is that the RNC will collect more of the vigorishes.