David Stockman: Economic Anarchist

I wonder how much of the comtempt of the federal Reserve from Republican economic policymakers is rooted in the writings of Milton Friedman. Case in point is David Stockman.

A recurring theme of Stockman’s work is that it is precisely these efforts that have sown the seeds for all that ails the economy. He writes in the Times: “As the federal government and its central-bank sidekick, the Fed, have groped for one goal after another — smoothing out the business cycle, minimizing inflation and unemployment at the same time, rolling out a giant social insurance blanket, promoting homeownership, subsidizing medical care, propping up old industries (agriculture, automobiles) and fostering new ones (“clean” energy, biotechnology) and, above all, bailing out Wall Street — they have now succumbed to overload, overreach and outside capture by powerful interests.”

Friedman was highly critical of the Federal Reserve allow the dollar to deflate and not acting fast enough to stop the crash of 1929.

The first bank runs started in 1930. Banks did not have enough revenue to cover businesses and customers withdrawing money. Friedman is correct about the Federal Reserve acting too slow.

Friedman made it popular for conservatives to hate the Federal Reserve. However, Stockman argues that Friedman is wrong. Friedman rightly stated that the Federal Reserves not giving the banks a cash injection in 1929 was wrong. Stockman argues against the selling of Treasury bonds.

“During the four decades since the gold window was closed – the rules of the game have been profoundly altered. Specifically, under Professor Friedman’s contraption of floating paper money, foreigners may accumulate dollar claims or exchange them for other paper monies. But there can never be a drain on US monetary reserves because dollar claims are not convertible. This infernal regime of fiat dollars, therefore, has had numerous lamentable consequences but among the worst is that it has facilitated open-ended monetization of US government debt.” ibid.

Does Stockman actually want to go back to the gold standard? The man has lost his mind.

Hank Paulson, Tim Geithner and Ben Bernanke allowed Lehman Brothers to fall. The three even urged Lehman Brothers to file for bankruptcy. The result was an international economic crisis. International financial institutions froze credit after Lehman Brothers fell. Paulson went to Congress to get TARP passed and bailout AIG and the too big to fail banks. Stockman would have let AIG and the banks fail. The result would have been an economic crisis worse than the Great Depression. I am no fan of the way Paulson, Bernanke and Geithner handled the 2008 financial crisis. However, what Stockman is advocating is anarchy.

David Stockman Hammers Mitt Romney

Former Reagan budget director is no fan of the way Mitt Romney made money.

Except Mitt Romney was not a businessman; he was a master financial speculator who bought, sold, flipped, and stripped businesses. He did not build enterprises the old-fashioned way—out of inspiration, perspiration, and a long slog in the free market fostering a new product, service, or process of production. Instead, he spent his 15 years raising debt in prodigious amounts on Wall Street so that Bain could purchase the pots and pans and castoffs of corporate America, leverage them to the hilt, gussy them up as reborn “roll-ups,” and then deliver them back to Wall Street for resale—the faster the better.

There is a great scene in Wall Street where Gordon Gekko tells Budd Fox that he makes nothing. Yet is very rich.

Gordon Gekko: The Richest 1 percent of this country owns half our country's wealth. $5 trillion. one-third of that comes from hard work, two-thirds comes from inheritance, interest on interest accumulated, widows and idiot sons, and what I do, stock and real estate speculation. It's bullshit.

Gekko: You got 90 percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules pal.

Stockman says the system that Gekko talks about and Romney profits from is corrupt. Stockman should know because he was in the leverage buyout business.

That is the modus operandi of the leveraged-buyout business, and in an honest free-market economy, there wouldn’t be much scope for it because it creates little of economic value. But we have a rigged system—a regime of crony capitalism—where the tax code heavily favors debt and capital gains, and the central bank purposefully enables rampant speculation by propping up the price of financial assets and battering down the cost of leveraged finance.

So the vast outpouring of LBOs in recent decades has been the consequence of bad policy, not the product of capitalist enterprise. I know this from 17 years of experience doing leveraged buyouts at one of the pioneering private-equity houses, Blackstone, and then my own firm. I know the pitfalls of private equity. The whole business was about maximizing debt, extracting cash, cutting head counts, skimping on capital spending, outsourcing production, and dressing up the deal for the earliest, highest-profit exit possible. Occasionally, we did invest in genuine growth companies, but without cheap debt and deep tax subsidies, most deals would not make economic sense.

Don't believe Mitt Romney's campaign rhetoric about him being a job creator.

Trickle Down Economics Redux

Former Reagan administration budget directer David Stockman said that trickle down economics was designed to create deficits, that would justify cutting entitlement programs. The Reagan administration never expected trickle down economics to increase economic growth. Stockman also notes that trickle down economics was renamed supply-side economics because voters would not believe that they would somehow benefit from the wealthy getting tax cuts.

Gregory Mankiw served as Chairman of Council of Economic Advisers, under President George W. Bush. Paul Krugman noted that Mankiw has little respect for the Reagan economic team creating supply-side economics.

Consider Mr. Mankiw, in particular. Modern Republicans detest Keyes; Mr. Mankiw is the editor of a collection of papers titled "New Keynesian Economics." In an early edition of his best-selling textbook, he dismissed supply-side economics - the doctrine embraced by the sainted Ronald Reagan - as the creation of "charlatans and cranks." And, in 2009, he called for higher inflation as a solution to the economic crisis, a position anathema to Republicans like Paul Ryan, the chairman of the House Budget Committee, who warn ominously about the evil of "debasing: our currency.

Even Republican economists admit that supply-side economics is bullshit. Remember that the next time you hear Gov. Rick Scott and GOP presidential candidates talk about how tax cuts for the rich will magically create jobs for the middle class.

Quote of the Day

“While others stick their fingers in the wind to see what the election results from last night mean for their support of the Ryan Plan, I remain steadfast in my support. In fact, my only complaint with the Path to Prosperity Plan is that it does not go far enough, fast enough, to address Washington’s unsustainable spending."

Adam Hasner, on the Paul Ryan plan.

I hope the DSCC remembers this quote. As Digby pointed out, Ryan's plan to make Medicare a voucher program is extremely unpopular with seniors. The Congression Budget Office letter to Ryan gives good reason for people not to support the plan.

To summarize, a typical beneficiary would spend more for health care under the proposal than under CBO’s long-term scenarios for several reasons. First, private plans would cost more than traditional Medicare because of the net effect of differences in payment rates for providers, administrative costs, and utilization of health care services, as described above. Second, the government’s contribution would grow more slowly than health care costs, leaving more for beneficiaries to pay.

If you are a senior or have a pre-existing condition, good luck trying to get private health insurance without insurance companies being required to cover you. Which is what the CBO tells Ryan.

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Rubio Still Dumb

I am not surprised when Marco Rubio says dumb things. The man is not smart. For instance: Rubio has never opened a history book.

America is pretty much the only military power in human history that has not used his power to conquer land and grow it's territory.

Military power was used to take land from the Mexicans and Indians. The fact that a United States Senator is unaware of this is disturbing.

Rubio supports drilling off the coast of Florida. The Daily News editorial board was shocked to learn that Rubio was unaware the Air Force was against offshore drilling because of military exercises.

But he was unaware of military officials’ concern about expanded drilling, which complicates the issue here on the Emerald Coast. In June, the commander of Eglin Air Force Base’s Air Armament Center told our editorial board that more drilling in water ranges that are used for training will, “at some point,” have an impact on national defense.

Mr. Rubio said he would have to research the matter.


The Miami resident also seemed unfamiliar with the National Oceanic and Atmospheric Administration’s recent shutdown of amberjack fishing, which has riled folks in Destin. The most he could muster was a one-size-fits-all observation that federal officials were “overreaching.”

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David Stockman on Increasing Taxes For the Rich

Economist David Stockman has gone on-record saying that trickle down economics does not spur growth. Stockman worked in the Reagan administration. Stockman said Reagan knew tax cuts and increased spending would cause a federal deficit. Reagan wanted to create the deficit to justify killing New Deal programs. Stockman told Fareed Zakaria the Republican Party took the wrong lesson from the Reagan years.

And then when Dick Cheney, who should have known better, in the 2001 debate, I think it was, about the Bush - first Bush tax cut, it was totally not need. He said, well, Reagan proved that deficits don't matter. Reagan proved nothing of the kind, and, yet, that became the mantra and it just led the Republican Party away from its traditional sound money, you know, fiscal restraint principles that were really the heart of the Republican Party and its job in our system.

Stockman said the Republican Party is unwilling to go off-message about cutting taxes. Stockman advocates tax increases for the rich and cuts in federal spending.

ZAKARIA: That simply that the hole is too large that you could - you can indulge in the fantasy that you just do one or the other, but part of what you want to do is you really feel very comfortable raising the taxes - raising taxes substantially on the rich because you feel that there has been a real divergence in the fate of - of Americans over the last 25 years.

STOCKMAN: Yes, because this wasn't a real solid, sustainable, productivity, technology-based prosperity. Much of this was a debt- fuelled money - easy money bubble. In fact, it was a serial bubble. First, the dot-com and then the housing and consumer credit and the ATM machine and everybody buying, you know - borrowing from their house in order to buy things they couldn't afford.

So all of this ended up, strangely enough, shifting wealth and income to the very top strata of our society in a way that we've never seen in history. Because it wasn't real, sustainable, mainstream economic growth and prosperity. One number that I think is shocking is that in 1985 the top five percent of households had $8 trillion of net worth. By the peak of this bubble in 2007 they had $40 trillion.

ZAKARIA: So from $8 to $40 trillion.

STOCKMAN: Eight to 40. Five fold in 25 years.

ZAKARIA: And the economy didn't -

STOCKMAN: A $30 trillion gain.

ZAKARIA: Right. And the economy didn't grow five fold.

STOCKMAN: The economy didn't grow five fold, and it was because of the bubble valuations of assets, stocks and bonds and real estate and all of the other speculative classes.

I'm saying that it is now so distorted that to get the economy back to health, we're going to have to reset some basic parameters of our economy, and one of them in this environment would be a higher tax burden on the upper income than a conservative, like myself, would ordinarily advocate.

But right now, this isn't about growth. This isn't about Morning in America in 1980. This is about solvency. This is about cleaning up the mess the morning after from a 30-year binge that wasn't sustainable as we've learned.

Stockman is one of many economic minds worried that America's economy is fueled more on trading paper than actually inventing new things. Florida gubernatorial candidate Jeff Greene became a billionaire buying credit default swaps that would pay out if the mortgage market crashed. Greene made money placing a wise bet. Not because he was the next Henry Ford or Thomas Edison.

Trickle Down Economics Doesn't Spur Growth

"Sure. But first of all, it’s not clear that that would add trillions to the deficit, because I really believe that if we expand the base of the economy, which we could do by selectively lowering some taxes, you have a broader base on which to apply the tax."

Pat Toomey, Republican Senate candidate.

Senate Minority Leader Mitch McConnell also stated, "There's no evidence whatsoever that the Bush tax cuts actually diminished revenue." Toomey and McConnell are pushing the debunked trickle down economic theory. The reality is the Bush tax cuts created less revenue growth than the Reagan or Clinton administrations.



David Stockman was Ronald Reagan's former director of the Office of Management and Budget. In an interview, Stockman told journalist William Greider that trickle down economics was rebranded supply-side economics. It is hard to sell to the middle class and poor people that tax cuts for the rich will "trickle" down to them.

"It's kind of hard to sell 'trickle down,' so the supply-side formula was the only way to get a tax policy that was really 'trickle down.' Supply-side is 'trickle-down' theory."

In another interview, Stockman said Reagan intentionally used trickle down economics and increased spending as part of his plan to cut New Deal and Great Society programs he loathed.

Back in 1981 David Stockman was the wonderkid of the Reagan administration–the director of the Office of Management and Budget who’d craft in actual budgets the trickle-down miracle Reagan had promised on the campaign trail: lower budgets, lower spending, higher tax revenue. But trickle-down economics was a wish, not a reality. It’s never worked. Lower taxes don’t generate more revenue. They generate deficits.

Reagan knew it. So did Stockman. So did their guru, Friederich von Hayek. The deficits were intentional all along. They were edsigned to “starve the beast,” meaning intentionally cut revenue as a way of pressuring Congress to cut the New Deal programs Reagan wanted to demolish. “The plan,” Stockman told Sen. Daniel Patrick Moynihan at the time, ” was to have a strategic deficit that would give you an argument for cutting back the programs that weren’t desired. It got out of hand.”

Reagan mission was the same as Grover Norquist's drown government in a bathtub quote. Reagan and Norquist didn't really believe tax cuts would magically create surpluses. The new generation of Tea Party Republicans coming up learned economics from talk radio, Republican stump speeches and the National Review. The new breed of Republican candidates are so economically stupid that they actually believe the big lie that is trickle down economics. Toomey has a background in banking. Toomey isn't stupid about economic policy. He is just as cynical as Reagan and Norquist.

Quote of the Day

"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."

David Stockman, former Reagan appointee to the Office of Management and Budget.

John Boehner argued in favor of extending the Bush tax cuts on Fox News Sunday. Host Chris Wallace noted the Bush tax cuts would add to the deficit.

"This is the whole Washington mindset, all these CBO numbers," Boehner dismissively ranted.

Boehner is stating on national television government should not do economic impact studies before making fiscal policy. It is also interesting one of the most powerful men in Washington doesn't like hearing Washington talk. Perhaps Boehner should run the House Republicans from Ohio. I'm sure that would make Eric Cantor happy.