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The David Stockman phenomenon
by Bruce Bartlett
This week, a new book, “The Great Deformation: The Corruption of Capitalism in America” by David A. Stockman was published in the US, garnering a great deal of notice. The attention is due not so much to the 742-page book, which is dense with discussions of obscure financial topics, but because of the author, who once played a critical role in American economic policy.
Mr Stockman was the proverbial whiz-kid of American politics. After college, he worked on the staff of the US Congress for Rep John B. Anderson of Illinois, the third-ranking Republican in the House of Representatives. In 1976, Mr Stockman returned to his native state of Michigan to run for Congress himself, winning elective office on his first try.
I first met David in early 1977 while working for Rep Jack Kemp of New York, whom Mr Stockman greatly admired. In fact, his office was like an adjunct of Kemp’s. The two staffs working closely together on a variety of issues. Mr Stockman was a strong supporter of Kemp’s signature issue – an across-the-board tax rate reduction of 30 percent that Ronald Reagan adopted and enacted into law in 1981.
Mr Stockman, however, was not a Reagan man. In the 1980 Republican primaries he supported John Connally, the former Texas governor and Treasury secretary . But he quickly recovered after the election, writing a widely discussed memo to president-elect Reagan on “Avoiding a GOP Economic Dunkirk” that outlined various economic crises looming on the horizon that the new administration needed to tackle immediately.
On the strength of this memo, Mr Stockman was named by Reagan to be his White House budget director. By this time, he had become highly skeptical of a big tax cut without offsetting spending cuts. Rather foolishly, he confided his doubts about Reagan’s plan to cut taxes first and spending later to the journalist William Greider, who published them in the December 1981 issue of The Atlantic magazine.
Although Kemp and other Reagan supporters believed that Mr Stockman had betrayed them, Reagan forgave him and he remained budget director until 1985, when he left Washington to join the Wall Street firm Salomon Brothers. In 1986, Mr Stockman published a memoir, “The Triumph of Politics: Why the Reagan Revolution Failed.”
In the years since, Mr Stockman has kept a low political profile, working in the auto industry. Although out of the public eye, he has remained a symbol of what many people believe was a wrong turn on economic policy in the 1980s. That is when fiscal policy, in particular, got on the wrong track, with large budget deficits emerging that have bedeviled policymakers ever since. It is when Republicans abandoned their long-held support for a balanced budget and became fanatical tax cutters under any and all circumstances.
Mr Stockman himself shares these misgivings. Over the years, his concerns about governmental debt have grown to encompass all forms of debt, which he now appears to view as the root of all evil. His new book is really an extended screed against corporate, financial, housing and personal debt.
In this respect, Mr Stockman has aligned himself with monetary cranks who have long denounced “fiat money” and demanded the return to a rigid gold standard.
One tenet of Austrian economics, which Mr Stockman now embraces, is that all economic downturns are caused by government and only government. Inflation breeds indebtedness which breeds overinvestment which inevitably ends in an economic blow-up. Recessions are viewed both as necessary to cleanse economic excesses and as penance for straying from the one true path of gold, balanced budgets, and the night watchman state that does pretty much nothing except enforce contracts.
Believers in this worldview see Keynesian economics as their blood enemy. Mr Stockman spends many pages in his new book denouncing the British economist John Maynard Keynes as being primarily responsible for leading policymakers from the true path of fiscal and monetary righteousness onto the path sin, as exemplified by debt and fiat money.
Had someone other than Mr Stockman written such a tract or if it appeared at a different time, it would be ignored and quickly disappear. But at a time when excessive debt is at the root of many of the world’s economic problems, when nations like Cyprus simply confiscate bank deposits to pay national debts, and countries like Japan are actively attempting to inflate their currencies, many people are attracted to the simplicity and moral certitude of the old time religion that Mr Stockman articulates.
It may well be true that a more financially conservative set of policies would have spared us the current crisis. But it doesn’t follow that an immediate return to such policies will improve the situation. Preventative and curative measures often require different approaches in both medicine and finance. Using the former when the latter is needed can easily make matters worse.
The writer is a former senior economist at the White House, US Congress and Treasury. He is author of ‘The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take’.
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