Last week, the Chief Financial writer at the Huffington Post, Mark Gangloff published an incredibly snarky article attacking David Stockman’s new book, The Great Deformation: The Corruption of Capitalism in America. Gangloff’s haughty tone throughout the article likely repulsed even those only mildly sympathetic to Stockman’s pessimistic economic forecast for the United States. I have yet to read Stockman’s book, but I did read his recent Op Ed in the NY Times, State-Wrecked: the Corruption of Capitalism in America, and watched his appearance on the Daily Show. While Stockman’s diagnosis of the illness that ails the US appears to be mostly correct, the solutions he would prescribe do not entirely align with solutions a libertarian purest would endorse.
David Stockman served as President Reagan’s Director of the Office of Management and Budget from 1981 to 1985. After resigning from the Office of Management and Budget in 1985, he wrote a memoir of his experiences with the Reagan administration titled The Triumph of Politics: Why the Reagan Revolution Failed.
Gangloff presented his arguments against Stockman’s bleak diagnosis using a consistently insulting tone. Even the four points that Gangloff cites as disagreements are phrased in an ad hominem manner. The article lists four “Dumb David Stockman Things” argued in his book, The Great Deformation: The Corruption of Capitalism in America:
– Dumb David Stockman Thing One: Capitalism has been corrupted by government
– Dumb David Stockman Thing Two: We should return to the gold standard
– Dumb David Stockman Thing Three: Letting all the banks fail in 2008 would have been no big deal
– Dumb David Stockman Thing Four: Federal debt will explode in the next decade
Let’s review the four “very specific” contentions cited by Gangloff.
Dumb David Stockman Thing One: Capitalism has been corrupted by government: The main thesis of Stockman’s book, right down to its subtitle, “The Corruption Of Capitalism In America,” is that a series of evildoers in the government, from FDR to Stockman’s old boss Ronald Reagan to the Mr. Magoo of global finance, Alan Greenspan, stole the innocence of capitalism. This is almost precisely upside-down. Capitalism gradually took over the government, after long decades of political spending and lobbying and think-tank founding and general whining.
Gangloff gives several examples of think tanks and individuals, such as the American Enterprise Institute, the Koch Brothers, the Cato Institute and Robert Rubin, that have corrupted the government with the ideas of capitalism. He goes on to cite the $646 million banks spent on political contributions in the past two years and $1 billion in lobbying. It is simply astounding that Gangloff fails to see the irony in his own argument. How can capitalism, a philosophy that endorses non intervention in the market place, be responsible for the State increasing their involvement in the market place? If anything, Gangloff is helping to prove one of Stockman’s overarching points that both parties are responsible for the environment of crony capitalism that has flourished in Washington DC. When a Wall Street investment bank, think tank, large corporation or wealthy individual buys off government officials in order to improve their position in the market, this is not capitalism. It is called crony capitalism. This is precisely the problem Stockman is pointing out.
Dumb David Stockman Thing Two: We should return to the gold standard: Stockman declares that the 1933 decision by FDR to get the U.S. off the gold standard was the start of the country’s 80-year descent into destruction (aside from some fleeting moments of glory, such as winning the Cold War and World War II and building the world’s biggest economy). He calls President Nixon’s decision to end gold convertibility in 1971 “arguably a sin graver than Watergate,” the cause of everything from the runaway inflation of the late 1970s to the swollen budget deficits of today.
But returning to the gold standard as Stockman would have us do is an absolutely terrible idea that has been thoroughly rejected by sane economists on the left and right because it chains government policy to the whims of the global gold supply.
Gangloff disagrees with Stockman’s assertion that the US should return to the Gold Standard. Stockman is presenting this solution in order to constrain Federal Government spending and to restore confidence in the dollar. A return to linking the dollar to gold, which was removed by Nixon in 1971, would serve to partially restrain the government, but it is not the most effective solution to our monetary woes. A Gold Standard would allow the government to set the exchange rate of gold into dollar, thus distorting demand of the precious metal. A more effective and practical solution to the current fiat dollar system would be to allow competition in currency. There is no need to link gold and the dollar, rather competition among currencies should be allowed.
As Ron Paul often stated, “legalize the Constitution”. Opponents to gold should not have an issue with this solution, as they would argue that the dollar is a better option due to the backing of the Federal Reserve. Those in favor of gold would be free to buy, sell, and transact utilizing their currency of choice. Let the best money win!
Dumb David Stockman Thing Three: Letting all the banks fail in 2008 would have been no big deal: Stockman believes that the bailout of the banking sector after the collapse of Lehman Brothers was totally unnecessary.”There was never a remote threat of a Great Depression 2.0 or of a financial nuclear winter, contrary to the dire warnings of Ben S. Bernanke, the Fed chairman since 2006,” he wrote in The NYT. “The Main Street banking system was never in serious jeopardy, ATMs were not going dark and the money market industry was not imploding.”
The money market industry was in fact on the verge of imploding, with the value of a share of the venerable Reserve Primary Fund having fallen below the sacrosanct one-dollar level — “breaking the buck” — with 78 other funds at risk of breaking the buck at the time, according to a Boston Fed study. Letting Lehman Brothers fail threatened to crush money funds and set off a chain of failures, from AIG to Goldman Sachs, that would have indeed wasted the economy and potentially thousands of Main Street banks. As it was, even with the bailout, we suffered the worst recession since the Great Depression, and nearly 500 Main Street banks failed.
Stockman is correct with his observation that the bailouts have done more harm than good. If the government would have stayed out of the mess and refused to bailout the large investment banks, the world would not have ended. Sure, many on Wall Street would have lost everything, but the pain would have been short lived. There would have been suffering, investors would have lost money and perhaps some would have lost all of their money, but the sun would continue to rise. The banks would have, in effect, bailed each other out. With the government bailout that occurred, bad debt was not permitted to be liquidated. As a result, the pain that would have been limited has been spread throughout the economy. Rather than allowing for a quick crash that would have liquidated bad debt, the federal government chose to intervene, thus exacerbating the problem and increasing the likelihood that the next depression will be even more damaging.
Earlier in the article Gangloff seemed to oppose the control big banks enjoy in molding government policy. Yet here, he defends their ability to loot the tax payer when they fail.
Dumb David Stockman Thing Four: Federal debt will explode in the next decade: Stockman warns that federal debt will “hurtle” and “soar” from $17 trillion to $30 trillion in the next decade, or 150 percent of GDP. Sounds scary, but these numbers are misleading. For some reason Stockman is counting gross federal debt instead of the debt held by the public, which is the debt we really need to worry about. The debt held by the public was $11 trillion last year and is projected to rise to nearly $20 trillion by 2023, according to the Congressional Budget Office. That’s a lot of money, but it will be 77.7 percent of GDP in 2014 and 77 percent of GDP in 2023, according to the CBO. In other words, as a percentage of GDP, the government’s public debt will hold steady over the next decade.
Gangloff discounts any impact the expansion of the monetary base will have on the average American during the time the federal debt soars from $17 trillion to $30 trillion. If prosperity is as simple as borrowing money and monetizing debt, why are there countries out there that remain undeveloped or are on the verge of financial collapse? If we only need to worry about the percentage of debt to GDP, why don’t we just print money to blow up bridges and rebuild them in foreign lands? With this logic, the government should constantly be deficit spending on infrastructure project and becoming entangled in foreign wars.
David Stockman’s is not the first to criticize the political establishment or recommend radical changes that would change the role of government. For decades, there have been countless opponents of the duopoly that maintains a stranglehold on the molding of policies that endorse governmental intervention. These individuals have provided no shortage of principled opposition to Keynesian policies, crony capitalist favoritism, and irresponsible deficit spending. Murray Rothbard, Hans-Hermann Hoppe, Frédéric Bastiat, Ludwig von Mises and many others sowed the seeds that now provide the educational foundation for the modern liberty movement. Even with so many great minds opposing the status quo, calls for restraint were limited to those pushed to the political fringe.
Thanks to Ron Paul’s recent Presidential runs and the growing influence of the internet, previously blocked libertarian philosophy can now reach anyone with an internet connection. Although, even with the tremendous amount of progress that has been made, many of today’s leading libertarian minds such as Dr. Paul, Lew Rockwell, Peter Schiff, and Tom Woods are still banished to the political fringe.
This is what makes David Stockman’s book so important. The views expressed by David Stockman are significant because of his past affiliation and cooperation with the political establishment. His past experience in the political arena makes his damning accusations even more damaging to those entrenched on the political left and the right. Certainly, Stockman does not have the credentials or consistency of Austrian economic scholars, but his criticisms carry more weight in Washington and the circles of the power elite, and will hopefully help to open the door for libertarian and Austrian influences to infiltrate mainstream channels.