August 6, 2010
David Stockman, wunderkind of American economic policy in the early 1980s, recently resurfaced after a couple of decades in the business world with a blistering op-ed article in the New York Times on July 31. Republicans were his principal target, whom he excoriated for destroying the nation’s finances with unaffordable tax cuts and blamed for “serial financial bubble and Wall Street depredations that have crippled our economy” and many other sins. In short, it was vintage Stockman.
Stockman is unquestionably one of the most interesting people I’ve ever known. I first met him in 1977 right after he had been elected to Congress. Although only 30 years old, he was already a congressional veteran, having worked for Rep. John Anderson of Illinois for five years, three as executive director of the House Republican Conference—a very high level position for someone so young.
Dave flirted with the left during his college days at Harvard. But at some point he came under the wing of Daniel Patrick Moynihan—it’s said that Stockman would sometimes babysit for Moynihan’s children. Moynihan was a longtime professor of government at Harvard and one of the most powerful political thinkers of the postwar era. Although a Democrat, he had impressed Republican Richard Nixon enough to offer him a high level White House position.
Moynihan was an old fashioned New Deal liberal at a time when that sort of liberalism was under heavy assault from both the right and left. Students for a Democratic Society, black power advocates and the anti-war movement were just some of the groups on the left that spent most of their time attacking Democrats like Moynihan, while many traditional Democratic groups such as labor unions and Southerners were becoming more and more sympathetic to the Republicans. There were also real problems such as inflation, rising Soviet aggression and the deterioration of the black family that the liberalism of that era was ill-equipped to deal with. This led Moynihan to become one of the original neoconservatives associated with The Public Interest, a small but influential academic journal edited by Irving Kristol.
By 1976, when Stockman decided to run for Congress from his home district in Michigan, he was already interested in supply-side economics. I know that he was an avid reader of The Public Interest and undoubtedly read Jude Wanniski’s pathbreaking article about the original supply-siders, economists Robert Mundell and Arthur Laffer, that appeared in the Spring 1975 issue. I also know that Stockman was part of Congressman Jack Kemp’s network—in fact, he told Jack that he hoped to come back and work for him if he was defeated in his race for Congress.
In early 1977, I joined Kemp’s staff and we worked very closely with Stockman’s—we were almost like one extended office. We would often have brainstorming sessions when Laffer or Wanniski were in town to talk about strategy and ways to advance the supply-side agenda. In 1980, Kemp and the other supply-siders used all the political capital they had to get Stockman appointed as director of the Office of Management and Budget by Ronald Reagan—something Stockman needed very badly because he had unwisely endorsed former Texas governor John Connally for the Republican presidential nomination and was therefore viewed skeptically by Reagan’s people.
But Stockman was able to overcome the skepticism and was appointed by Reagan. In early 1981, Stockman was the primary designer and implementer of Reagan’s domestic program. He was all over Capitol Hill in those days, almost always carrying multiple thick binders crammed with statistics and projections and whatnot.
Later, Stockman was accused by his former mentor Moynihan of cooking the books and lying about the impact of the Reagan tax cut on the deficit. Moynihan, who had been elected to the U.S. Senate from New York in 1976, charged that Congress had been sold a bill of goods and enacted the Reagan tax cut under a false belief that they would pay for themselves through faster growth and not raise the deficit. But the truth is that no official in the Reagan administration ever claimed that the tax cut would pay for itself. Reagan’s budgets all showed large revenue losses consistent with standard revenue-estimating methodology and were virtually identical to estimates made by the Congressional Budget Office. (See p. 47 in this March 1981 CBO document.)
Nevertheless, Stockman did have misgivings about the Reagan program. He felt that not enough effort went into cutting spending and that Reagan had been bamboozled by Defense Secretary Caspar Weinberger into endorsing an unaffordable increase in defense spending. Stockman foolishly expressed his concerns to Washington Post editor William Greider, who published them in the Atlantic Monthly’s December 1981 issue.
There was a huge firestorm when the Greider article appeared. Even today it’s hard to find a book or article about the Reagan economic program that doesn’t quote from it. But somehow Stockman survived and continued to serve as OMB director until 1985, when he left for a high-paying Wall Street job with Salomon Brothers. The following year he published a memoir that mainly defended the points he made to Greider.
While Stockman’s criticism was a shock to Kemp, Laffer and the other supply-siders, the truth is that he had really broken with them intellectually some time earlier. According to Stuart Sweet, who was Stockman’s staff economist, Stockman was profoundly influenced by an article written by Republican economist Herb Stein in 1978. A key concern of Stein’s was that unless saving rose by enough to cover the revenue loss from a big tax cut then there would be insufficient resources to expand investment, which is the wellspring of growth. Alternatively, spending would have to be cut enough to at least keep the federal budget deficit, which represents negative saving, from rising. If the deficit increased, it would negate much of the expansionary effect of the tax cut, Stein believed.
Stockman kept his misgivings about supply-side economics to himself until they came pouring out in the Greider interview. But Sweet was so disturbed by Stockman’s apostasy that he left his staff shortly after Stockman confronted him with Stein’s analysis.
In recent years, Stockman has occasionally come forward to blast leaders of both parties for allowing the nation’s finances to deteriorate. For example, in a March 1993 op-ed article in the Los Angeles Times, he criticized Bill Clinton’s stimulus plan, but was even more critical of the Republican obsession with tax cuts, which Stockman called “deceptive gibberish.”
Presumably, Stockman was ultimately pleased with Clinton’s budgetary performance, which gave us surpluses for three consecutive years in the late 1990s, although I can’t find any statements by him on the record saying so. And Stockman must certainly have been horrified by George W. Bush’s budgetary profligacy—he massively cut taxes and raised defense spending, as Reagan did, but also created a new unfunded entitlement program and never lifted a finger to reduce the deficit. At least Reagan signed 11 major tax increases into law between 1982 and 1988 to shore-up the national finances. But in 2004, Stockman told U.S. News & World Report that the deficit would self-correct and was nothing to worry about. “We’re not structurally out of balance,” he said.
Now that it’s too late to matter, Stockman has resumed his criticism of Republican economic policy. In an article in The Politico earlier this year, Stockman called his former ally Laffer a “charlatan” and lamented the Republicans’ abandonment of the old time fiscal religion, saying that they had become “tax-side Keynesians.”
Stockman’s New York Times article continues the theme, but extends it to the financial sector from which he has now retired. The banks, he says, are wards of the state extracting vast profits from “pointless speculation” and have contributed to a hollowing-out of America as its manufacturing sector dies. The ultra-wealthy like himself got all the gains from growth while the average worker suffered, Stockman acknowledges.
It’s hard to know what to think of someone who has made such an eclectic ideological journey. I wish Dave had stayed more active in the policy process over the years rather than being seduced by Wall Street. But perhaps in the twilight of his life he has decided to get back in the game—and perhaps atone for past sins. At this point, those of us trying to fix our nation’s broken fiscal system need all the help we can get.