If David Stockman, former director of the Office of Management and Budget under President Ronald Reagan, created the political party of “Fiscal Conservatives,” I might have to give serious consideration to signing up. For now, I have to settle for non-partisan organizations like the Peter G. Peterson Foundation who work hard to promote fiscal discipline in government through programs like the movies I.O.U.S.A.
I mention Stockman because he wrote an excellent op-ed in the New York Times called “Four Deformations of the Apocalypse” that I highly recommend you read for yourself. Stockman soundly and sharply criticizes key components of the fiscal policies of Republicans over the past 40 years (he crosses over into monetary policy as well):
“…the new catechism, as practiced by Republican policymakers for decades now, has amounted to little more than money printing and deficit finance — vulgar Keynesianism robed in the ideological vestments of the prosperous classes. This approach has not simply made a mockery of traditional party ideals. It has also led to the serial financial bubbles and Wall Street depredations that have crippled our economy. More specifically, the new policy doctrines have caused four great deformations of the national economy, and modern Republicans have turned a blind eye to each one.”
These four deformations are:
- Nixon’s default on America’s obligations (mainly by taking the U.S. dollar off the gold standard). He points out Milton Friedman’s contribution to this policy. Something I had never before heard or known.
- The extraordinary growth in public debt (emphasis mine): “This debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts.” I think Stockman gives Democrats too much credit here, but I think it is great to hear a Republican-partisan get more vocal and more serious about identifying how the party has contributed to the problem of government deficits.
- “The vast, unproductive expansion of our financial sector.” I agree with his premise here, but I am surprised that he saddles Republicans alone with responsibility on this one: “…the trillion-dollar conglomerates that inhabit this new financial world are not free enterprises. They are rather wards of the state, extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives. They could never have survived, much less thrived, if their deposits had not been government-guaranteed and if they hadn’t been able to obtain virtually free money from the Fed’s discount window to cover their bad bets.”
- “The hallowing out of the American economy” where America has sent jobs overseas and increased debt to afford the consumption of imports. Here, Stockman blames Republicans for turning a blind eye to this downward spiral and for buttressing the Wall Street machinery that has supported this process. The impact was particularly devastating during the days of the housing bubble: “It is not surprising, then, that during the last bubble (from 2002 to 2006) the top 1 percent of Americans — paid mainly from the Wall Street casino — received two-thirds of the gain in national income, while the bottom 90 percent — mainly dependent on Main Street’s shrinking economy — got only 12 percent.” (Andy Grove addressed the jobs issue in an excellent piece “How America Can Create Jobs” although he exhibits a little too much faith in the government’s ability to execute his policy recommendations).
Stockman’s sobering conclusion has been repeated by many, many others who have marveled that the U.S. has avoided a reckoning for so long:
“The day of national reckoning has arrived. We will not have a conventional business recovery now, but rather a long hangover of debt liquidation and downsizing.”
I acknowledge that the government has some role to play in assisting the economy when it breaks down. For example, the recent work of Binder and Zandi made me positively reconsider the usefulness of fiscal stimulus. But these on-going interventions are born in large part by policies that set the stage for the next crisis. I am like many others who have been surprised that this self-feeding cycle has not yet completely consumed itself. It seems like the latest financial crisis represents some sort of end-game, but we will not really know until we are standing on the other side of the aftermath.
I think Stockman is particularly critical of Republicans in this piece because it is traditionally so much more fashionable to blame Democrats and their spending for all the country’s debt problems. Prior to this article, I would habitually turn to the chart of U.S. Federal Debt As Percent Of GDP to demonstrate how America’s debt problems have substantially grown through Republican and Democratic control of government over the past thirty years….starting with Reagan and accelerating nearly unabated except for Clinton’s latter years as President.
I am certain that the more we debate this issue in terms of America’s future and less cloaked in the undying (and even stale) ideologies of being loyal Democrats or Republicans or otherwise, the more likely we will succeed.
Be careful out there!
Full disclosure: no positions