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.

More Marco Rubio Economoc Nonsense: Social Security Edition

Alex Burgos of the Marco Rubio campaign went way off the message by telling blogger and Miami Herald columnist Joy-Ann Reid that Rubio supports privatization of Social Security. Rubio would later run away from supporting privatization of Social Security. Read copies of the emails below and click to enlarge.



Reid explains that Rubio hasn't been honest about his position on Social Security.

Here was my inquiry on February 3rd of this year, regarding Marco Rubio’s view on Social Security privatization, and Mr. Burgos’ on the record response. I was asking Burgos to respond to Texas Rep. Jeb Hensarling’s call to turn Social Security over to the private sector and cutting benefits, so again, the question was specifically about privatizing the program:

Rubio told Neil Cavuto he does not support privatization of Social Security.

RUBIO: Anyone telling you that we shouldn’t touch [Social Security], they are going to play tricky political games, they’re going to go around saying that I’m in favor of privatizing it, or raising the retirement age on current beneficiaries —

CAVUTO: But you are open to privatizing it, sir?

RUBIO: No, I think for that — no I’m not. That time has come and gone.

CAVUTO: What about for young guys like you who could take some of the money and put it in the market?

RUBIO: The problem is that it takes money — it makes it more difficult to balance the system in the long term.

CAVUTO: Do you’d be against it?

RUBIO: Yeah, I don’t think that’s the solution.

Allowing future retirees to invest Social Security taxes into the stock and bond market does nothing to address the funding needs for current or future retirees who wish to stay in the government Social Security Trust Fund. An AARP study found changing over the current Social Security system to private accounts would cost $600 billion - $3 trillion. Recipients of private account would either get less or a negative return. The Wall Street meltdown of 2008 shows how asinine an idea private accounts are.

There are a few factors for conservatives push to privatization. Conservatives hate the successful programs of the New Deal. Interest groups in the financial sector would greatly benefit from the influx of Social Security money into the stock and bond market. Conservatives needed an expert to tell them what they hear They found an unlikely ally in José Piñera.

Piñera was the architect of Chile's private pension plan under the government of Augusto Pinochet. The lattter is noted for abusing the human rights of Chileans. The New York Times reported "3,200 people were executed or disappeared, and scores of thousands more were detained and tortured or exiled." Chile's private pension system was filled with corruption and underfunded by younger workers wisely choosing not to enter the system. To make matters worse, Chile's private retirement system is expensive.

At the moment, the government pays about 5 percent of gross domestic product, or more than it spends for either health or education, on pensions for the poor, payments into a separate military retirement plan and so-called transition and administrative costs. Supporters of the privatized system argue that the state's burden will diminish as older retirees enrolled in the pay-as-you-go system that prevailed here before 1981 gradually die off.

But skeptics point to another developing problem: many young people, who should be enrolling in the system early to accrue maximum benefit, are staying out or paying in very little. Some cannot afford to contribute beyond the obligatory minimum payment, which is 10 percent of wages, while others are either self-employed or have been hired by companies as low-paid independent contract workers and therefore do not have to contribute at all.

"The bottom line is that this system does not work with this labor market," said Andras Uthoff, an economist who is director of the social development division of the United Nations Economic Commission for Latin America here. If trends continue, he added, "only a small percentage of people are going to be able to finance meaningful pensions. What happens then to the rest?"

The Social Security Trust Fund is projected to run out in 2041. Social Security is much more stable than the faulty accounting that is the Department of Defense budget. Conservatives want to trade a retirement fund that has lifted million of Americans out of poverty for a failed banana Republic system. From a fiscal policy standpoint it makes no sense. From a purely cynical profit and greed motive it becomes easier to understand why conservatives want the Chile system.

Side note: the AARP study and reports on Chile's private accounts debunk Milton Friedman's claim that movement Socail Security accounts to private accounts is a "myth."