David Stockman calls GOP economic policies “bubble finance” and “crony capitalism”
Part 1 of a multipart series
By Frank Thomas and John Lawrence
David Stockman, an integral part of the Reagan administration, has produced a great book, “The Great Deformation,” in which he blames Republican Presidents starting with Richard Nixon for the sad state of the US economy, but he saves his worst invective for Ronald Reagan and George W Bush for their abandonment of sound economic policy and their wild “deficits don’t matter” spending.
He indicts the Reagan administration for a needless, wasteful military build-up and the creation of what he calls the “warfare state.” He also condemns the fiscal profligacy of Republican economic policy for condoning any and all tax cuts for any reason whatsoever, for coddling Wall Street and for decades of money printing and market rigging by the Federal Reserve.
In an article in the New York Times Stockman said: “The destruction of fiscal rectitude under Ronald Reagan — one reason I resigned as his budget chief in 1985 — was the greatest of his many dramatic acts. It created a template for the Republicans’ utter abandonment of … balanced-budget policies … and allowed George W. Bush to dive into the deep end, bankrupting the nation through two misbegotten and unfinanced wars, a giant expansion of Medicare and a tax-cutting spree for the wealthy that turned K Street lobbyists into the de facto office of national tax policy. In effect, the G.O.P. embraced Keynesianism — for the wealthy.”
We find it amusing that the greatest critic of capitalism since Karl Marx turns out to be a libertarian, but Stockman’s criticism is more biting and less generous than is Marx’s, and The Great Deformation is a veritable manifesto, a jeremiad just as detailed and well researched as was Das Kapital.
In both cases their prescriptions are a lot less profound than their descriptions. Marx thought that workers should be paid according to the labor theory of value and capitalists were parasites; Stockman rejects crony capitalism and wants to return to “pure capitalism” where markets are the final arbiters of all values, the false assumption being that unregulated free markets invariably deliver benefits for all.
The reasonably sound social-economic balance prevalent from post WWII through the mid 1970s was one of shared progress, solidarity, and sacrifices in the interests of all – solidified by corporate stakeholder priorities of Employees first, Customers second, Shareholders third.
Then came the dismantling of this stakeholder triad with the Republican “ trickle down, starving the state” paradigm of the last 30 years – successfully polarizing our society into the Haves and Have Nots under the inflated corporate stakeholder regime of Shareholders first, Customers second, Employees third. Stockman acknowledges (30 years after the fact) that Reagan left a legacy of permanent “massive deficit finance” and the financial gospel that “deficits don’t matter”.
A recent Pew Research Report, “A Rise in Wealth for the Wealthy; Declines for the Lower 93%” details how the wealthy have made huge economic gains since the financial crisis of 2008 while the great bulk of the American people have languished. Wealth, as opposed to income, refers to the value of a household’s assets minus the value of household liabilities, or the value of what it owns minus the value of what it owes. (John’s grandfather said, “Pay what you owe; then you will know what you own.”)
It includes the value of nonfinancial assets owned, such as equity in one’s own home and a motor vehicle, as well as the value of financial assets such as bank accounts, savings bonds, stocks, bonds and securities.
When it comes to income the situation is largely the same. The rich made huge gains while most Americans saw inflation adjusted declines in their incomes. Economists Saez and Piketty showed that the vast majority’s average adjusted gross income was $29,840 in 2010. That was down $127 from 2009 and down $4,842 from 2000. The average income of the vast majority of taxpayers in 2010 was just a smidgen more than the $29,448 average way back in 1966.
At the top, the super-rich saw their 2010 average income grow by $4.2 million over 2009 to $23.8 million. Compared to 1966 their income was up on average by $18.7 million per taxpayer. The top 1% have received 121% of the income gains since 2009.
In the early 70s, top executives earned 40 times the income of an average-paid employee. Today, that ratio is over 300 times. American life has dramatically changed as the once honored “middle-class democracy” of shared progress fades into the sunset – worsened by a somber future of structurally slower job growth and static if not declining wages as the economic pie becomes smaller.
One of the facets of Reaganomics that Stockman reserves for his strongest ridicule is the Laffer curve. The Laffer curve attempted to show that the more taxes were cut, the more economic activity would ensue and hence more government revenues would be generated.
History has shown this not to be the case. Reagan’s huge increase in defense spending and tax cuts for the rich saw the national debt increase $1.9 trillion or 186%! Annual 4% deficits were triple those of prior presidencies and GDP growth rates were nothing to rave about. (see Frank’s detailed analysis of taxes, spending and debt under various Presidents here.)
In addition to condemning the economic policies of all Republican Presidents from Nixon to George W Bush, Stockman calls out Fed Chairmen Alan Greenspan and Ben Bernanke for flooding the economy with hot money which has produced nothing but bubbles that have eventually burst.
The floodgates were opened when Congress rejected the 1930s era Glass-Steagall Act which put a firewall between commercial and investment banks thus paving the way for the unlimited growth of derivatives, credit default swaps, collateralized debt obligations and the financialized, casino economy in general.
These problems have not been sufficiently addressed by the Dodd-Frank Wall Street Reform and Consumer Protection Act signed by Obama because the banking lobby managed to dilute any reform with teeth in it. For this reason Stockman and a lot of others are predicting another major crash when the stock market bubble pops.
Reagan, Bush Jr. and Greenspan Inc. believed deregulated capitalism and cheap money would lead to prosperity and ample jobs for everyone. Over the last 33 years, Republican Congressional majorities have given tax cuts to the rich and corporations (including subsidies to the world’s most profitable corporations which are already paying negligible effective taxes) when there were low deficits and even more insanely in high deficit times.
This has escalated the predations of capitalism with its powerful tendency to concentrate wealth and income to the already wealthy and to export and automate jobs away for maximum shareholder returns. This wealth concentration has intensified other nasty economic problems we continue to suffer from today. It has given rise to almost unlimited economic power for a few and has effectively reduced the money circulation in the REAL Economy, thus perpetuating stagnant job and economic levels.
Just as Marx predicted, there has been a concentration and centralization of wealth. Family farms have given away to corporate, industrial farms. Mom and Pop stores have given away to Wal-Marts. Jobs in the real economy have given away to jobs in Wall Street, in the prodigal warfare economy and in the medical-industrial complex.
Stockman gives the lie to the often espoused theory that Democrats are Big Spenders and Republicans are small government conservatives by pointing out that “it was the second Bush who took Reaganomics to its logical extreme, demolishing Republican fiscal rectitude once and for all in a fury of ‘guns and butter,’ and tax giveaways, too.
Federal outlays in the final budget of George W Bush soared to 25% of GDP. [Ed. note: By comparison, under Clinton, Federal outlays were 18% of GDP in F/Y 2000 vs. an average of 22.5% under Reagan.] That was a post-World War II record by a long shot, but even that figure did not assay the full extent of the Bush fiscal debacle.” The Republican ideology of ‘small government’ was honored more in the breach than in the observance. Federal spending as a percentage of GDP under Republican presidencies since FDR has exceeded that of Democratic presidencies.
As Stockman makes clear, Republican administration policies represented Keynesianism for the rich while the Fed “junk” policies of cheap, hot money did nothing to benefit the real economy and the lives of average Americans. The Fed has put itself in the role of producing a prosperity economy by means of perpetual bubble ‘blow-ups’.
As noted earlier, the “mixed economy” of the 50s, 60s and 70s and the unwritten social contract among business, labor and government of shared benefits from economic growth has also been in a process of ‘blow-up’ – as inequality penetrates every pore of American society.
According to The Great Deformation, “Nevertheless, when the false narrative of macroeconomic prosperity is stripped away, what remains is the real story of the Reagan era: how the nation’s conservative party fostered the great fiscal breakdown now upon the land, and got away with it by pretending that the money printers it appointed to the Fed were fostering honest prosperity.
“The whole narrative was wrong. Reaching back to the time of Reagan, it can be shown that fiscal discipline was destroyed first by the ‘neo-cons’ who coddled the warfare state in pursuit of national security illusions; and then by the ‘tax-cons’ who dismantled Uncle Sam’s revenue base in the name of supply-side doctrine; and finally by the ‘just-cons’, the rank-and-file Republicans who fulminated against Big Government but cowered continuously before the assembled lobbies of the welfare state.”
Next time: The bail-out of AIG and the purported ‘contagion’ risk to the real economy