President Reagan's Budget Director Finds Religion

David Stockman is (was?) a staunch Republican.  He was director of the Office of Management and
Budget under President Reagan.  Below is his oped piece in the NYT.   It is a short and extremely accurate description of what four decades of living beyond our means and three decades of Reaganomics and subsequent Republican ethics and economics has wrought.  It is well worth reading.


What infuriates me most about these apparently reasonable Republicans like Stockman and Colin Powell and their ilk is that they will stand on the sidelines, make their fortunes, attend the right parties, complain that there is nothing they can do -- their family welfare comes first -- while they support the most ghastly Republican candidates, and stay quiet in the face of ruinous economic policies and international criminality.

It is only when pioneers like Pete McCloskey have taken arrows in their back that these pusillanimous poltroons step forth and say "It's the fault of the neocons -- we knew better".  BAH!  F@@# sycophantic vomit lickers.   


July 31, 2010

Four Deformations of the Apocalypse

By DAVID STOCKMAN

IF there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation’s public debt — if
honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion. That’s a Greece-scale 120 percent of gross domestic product,and fairly screams out for austerity and sacrifice.

It is therefore unseemly for the Senate minority leader, Mitch McConnell, to insist that the nation’s wealthiest taxpayers be spared even a three-percentage-point rate increase.

More fundamentally, Mr. McConnell’s stand puts the lie to the Republican
pretense that its new monetarist and supply-side doctrines are rooted
in its traditional financial philosophy. Republicans used to believe
that prosperity depended upon the regular balancing of accounts — in
government, in international trade, on the ledgers of central banks and
in the financial affairs of private households and businesses, too. But
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.


The first of these started when the Nixon administration defaulted on
American obligations under the 1944 Bretton Woods agreement to balance
our accounts with the world. Now, since we have lived beyond our means
as a nation for nearly 40 years, our cumulative current-account deficit —
the combined shortfall on our trade in goods, services and income — has
reached nearly $8 trillion. That’s borrowed prosperity on an epic
scale.

It is also an outcome that Milton Friedman said could never happen when,
in 1971, he persuaded President Nixon to unleash on the world paper
dollars no longer redeemable in gold or other fixed monetary reserves.
Just let the free market set currency exchange rates, he said, and trade
deficits will self-correct.


It may be true that governments, because they intervene in foreign
exchange markets, have never completely allowed their currencies to
float freely. But that does not absolve Friedman’s $8 trillion error.
Once relieved of the discipline of defending a fixed value for their
currencies, politicians the world over were free to cheapen their money
and disregard their neighbors.

In fact, since chronic current-account deficits result from a nation
spending more than it earns, stringent domestic belt-tightening is the
only cure. When the dollar was tied to fixed exchange rates, politicians
were willing to administer the needed castor oil, because the
alternative was to make up for the trade shortfall by paying out
reserves, and this would cause immediate economic pain — from high
interest rates, for example. But now there is no discipline, only global
monetary chaos as foreign central banks run their own printing presses
at ever faster speeds to sop up the tidal wave of dollars coming from
the Federal Reserve.


The second unhappy change in the American economy has been the
extraordinary growth of our public debt. In 1970 it was just 40 percent
of gross domestic product, or about $425 billion. When it reaches $18
trillion, it will be 40 times greater than in 1970. 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.


In 1981, traditional Republicans supported tax cuts, matched by spending
cuts, to offset the way inflation was pushing many taxpayers into
higher brackets and to spur investment. The Reagan administration’s
hastily prepared fiscal blueprint, however, was no match for the
primordial forces — the welfare state and the warfare state — that drive
the federal spending machine.


Soon, the neocons were pushing the military budget skyward. And the
Republicans on Capitol Hill who were supposed to cut spending exempted
from the knife most of the domestic budget — entitlements, farm
subsidies, education, water projects. But in the end it was a new cadre
of ideological tax-cutters who killed the Republicans’ fiscal religion.


Through the 1984 election, the old guard earnestly tried to control the
deficit, rolling back about 40 percent of the original Reagan tax cuts.
But when, in the following years, the Federal Reserve chairman, Paul
Volcker, finally crushed inflation, enabling a solid economic rebound,
the new tax-cutters not only claimed victory for their supply-side
strategy but hooked Republicans for good on the delusion that the
economy will outgrow the deficit if plied with enough tax cuts.


By fiscal year 2009, the tax-cutters had reduced federal revenues to 15
percent of gross domestic product, lower than they had been since the
1940s. Then, after rarely vetoing a budget bill and engaging in two
unfinanced foreign military adventures, George W. Bush surrendered on
domestic spending cuts, too — signing into law $420 billion in
non-defense appropriations, a 65 percent gain from the $260 billion he
had inherited eight years earlier. Republicans thus joined the Democrats
in a shameless embrace of a free-lunch fiscal policy.

The third ominous change in the American economy has been the vast,
unproductive expansion of our financial sector. Here, Republicans have
been oblivious to the grave danger of flooding financial markets with
freely printed money and, at the same time, removing traditional
restrictions on leverage and speculation. As a result, the combined
assets of conventional banks and the so-called shadow banking system
(including investment banks and finance companies) grew from a mere $500
billion in 1970 to $30 trillion by September 2008.

But 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 fourth destructive change has been the hollowing out of the larger
American economy. Having lived beyond our means for decades by borrowing
heavily from abroad, we have steadily sent jobs and production
offshore. In the past decade, the number of high-value jobs in goods
production and in service categories like trade, transportation,
information technology and the professions has shrunk by 12 percent, to
68 million from 77 million. The only reason we have not experienced a
severe reduction in nonfarm payrolls since 2000 is that there has been a
gain in low-paying, often part-time positions in places like bars,
hotels and nursing homes.

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. This growing wealth gap is not the market’s fault.
It’s the decaying fruit of bad economic policy.

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 — as suggested by last week’s news that the
national economy grew at an anemic annual rate of 2.4 percent in the
second quarter. Under these circumstances, it’s a pity that the modern
Republican Party offers the American people an irrelevant platform of
recycled Keynesianism when the old approach — balanced budgets, sound
money and financial discipline — is needed more than ever.

David Stockman, a director of the Office of Management and
Budget under President Ronald Reagan, is working on a book about the
financial crisis.
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