David Stockman: U.S. Is In 'Race to the Fiscal Bottom'

David Stockman: U.S. Is in "?Race to the Fiscal Bottom'

It's been nearly three decades since David Stockman was the brash and brilliant enfant terrible of President Reagan's White House, but he hasn't mellowed with age.

The Bush tax cuts are "unaffordable,'' he says. Extending them would be a "travesty."  President Obama's stimulus program was "futile." Ben S. Bernanke, the Federal Reserve chairman, is undermining the whole economy. Today, Stockman says, "I invest in anything that Bernanke can't destroy, including gold, canned beans, bottled water and flashlight batteries."

Stockman, Reagan's budget director from 1981 to 1985, initially became famous for his zeal in slashing government spending on almost everything except defense. Less government and lower taxes, he fervently believed, would ultimately mean more prosperity for everyone. But he will be best remembered for confessing, in an interview with William Greider for The Atlantic Monthly, his disillusionment with the "supply-side" economic policies that led to soaring deficits under Reagan. "None of us really understands what's going on with all these numbers,'' he declared, along with many other criticisms that nearly got him fired.

Today, Stockman is working on a book about the financial crisis, and he recently shared his thoughts with The Fiscal Times about some of today's most pressing fiscal issues. No surprise "” he's as brutally candid as ever. 

The Fiscal Times (TFT):  What should the president and Congress do about the Bush tax cuts this year?  

David Stockman (DS):  The two parties are in a race to the fiscal bottom to see which one can bury our children and grandchildren deeper in debt. The Republicans were utterly untruthful when they recently pledged no tax increases for anyone, anytime, ever. The Democrats are just as bad "” running their usual campaign of political terror on social security and other entitlements while loudly exempting all except the top 2 percent of taxpayers from paying more for the massively underfunded government they insist we need.

The fact is, the Bush tax cuts were unaffordable when enacted a decade ago. Now, two unfinanced wars later, and after a massive Wall Street bailout and trillion-dollar stimulus spending spree, it is nothing less than a fiscal travesty to continue adding $300 billion per year to the national debt. This is especially true since these tax cuts go to the top 50 percent of households, which can get by, if need be, with the surfeit of consumption goods they accumulated during the bubble years. So Congress should allow the Bush tax cuts to expire for everyone. By doing nothing, the government would be committing its first act of fiscal truth-telling in decades.

TFT:  Should the government provide more stimulus for the economy, or cut spending to bring the deficit down?

DS:  We are not in a conventional business cycle recovery, so stimulus is futile and just adds needlessly to the $9 trillion of Treasury paper already floating dangerously around world financial markets. Instead, after 40 years of profligate accumulation of public and private debt, and reckless money-printing by the Fed, we had an economic crash landing, which left us with an enduring structural breakdown, not just a cyclical downturn.

In effect, we undertook a national leveraged buyout, raising total credit market debt to $52 trillion which represented a 3.6X leverage ratio against national income or GDP. By contrast, during the 110 years prior to 1980, our aggregate leverage hugged closely to a far more modest ratio at 1.5 times national income.

The only solution is a long period of debt deflation, downsizing and economic rehabilitation, including a sustained downshift in consumption and corresponding rise in national savings.

And a key element of the latter is a drastic reduction in government dis-savings through spending cuts and tax increases "” and these measures need to start right now.  Keynesian policymakers who say wait for the midterms to address the deficit are like battleship admirals: They are fighting the last war with the same failed strategy that gave rise to our current predicament.

TFT:  Do you see the work of President Obama's deficit commission as important or a waste of time?

DS:  The deficit commission is a complete waste of time. The nation has become fiscally ungovernable because the fiscal policy of both parties is based on what is essentially the Big Lie. The earnest remonstrations of the commission's report will be lost in the deafening partisan rancor which is certain to swell after the coming election.

TFT:  You spent many years as a public official. What do you consider your greatest contribution?

DS:  For a flickering moment I helped revive a vision of small government based on low taxes, the denial of weak fiscal claims rather than weak clients, and social progress through liberation of the nation's entrepreneurial endowments and energies. But that vision has been subsequently crushed by 30 years of fiscal profligacy, warfare state adventurism and crony capitalist policies championed by the lobbies of K Street, the financiers of Wall Street and the farmers, homebuilders, energy producers and sick-care companies of Main Street. After the abomination of the Bush/Paulson bailout of the big banks, the state has no boundaries whatsoever. So fiscal policy is now just a fiscal food fight.

TFT:  What's your biggest regret from your years as President Reagan's budget director "” was it talking to Bill Greider for the Atlantic article?

DS:  I do not regret talking to Bill Greider at all. My alleged "confessions" were inadvertent, but in historical hindsight the article was just the wakeup call that was needed at that delusionary hour. By the fall of 1981, we had just gone through an orgy of tax-cutting which reduced the revenue base by a staggering 5 percent of GDP, far more than Reagan had asked for, due to the pile-on of goodies for oil and gas, property developers, equipment vendors, homebuilders and scores of other special interests. At the same time, domestic spending had been cut by less than 1 percent of GDP and even that was being offset several times over by an explosion of defense spending. It was a formula for fiscal catastrophe. Grieder's piece colorfully dramatized this condition, and helped trigger a slow march of policy "” the tax increases of 1982-84 and the slowdown in the defense buildup "” backward from the precipice.

TFT:  With the midterms just a month away, do you think the GOP will gain as many seats as some are predicting, and if so, will that doom Obama's agenda?

DS:  The Republicans will undoubtedly gain a lot of seats, if not congressional majorities. But the main result of that will be not only to doom the Obama agenda, which deserves to be stopped, but also any chance of addressing the fiscal issue until April 2013 at the earliest. Unfortunately, since we are in a chronic debt deflation, the GDP deflator is heading toward zero and real growth may limp along at 1 to 2 percent. That means that money GDP is growing at the shockingly low rate of 2 to 3 percent, or not even $40 billion per month. By contrast, the built-in deficit will result in $100 billion of bond issuance each and every month "” meaning that through at least the spring of 2013, our national debt will be growing two or three times faster than the economy. So we are rolling the dice big time in a global bond market which is now a volcano of leveraged speculation and massive front-running of the expected multitrillion quantitative easing 2.0 (i.e. debt monetization) by the Fed. In this environment, one hiccup and it's game over.

TFT:  Your assessment of the Obama's presidency at this point? 

DS:  Obama's presidency is a profound disappointment. So far, he's proven that when Republican's start elective wars, Democrats can't end them; when Republicans empty the Treasury, Democrats can't replenish it; when Republicans put a middle-class destroying money printer at the head of the Fed, Democrats reappoint him; and when the Republicans unleash an orgy of dangerous speculation on Wall Street, Democrats pass a contentless, 2,300 page, enabling act which will do nothing to protect Main Street from another financial meltdown, even as it keeps K Street fully employed.

TFT:  What will happen to health care if the Republicans become the majority party? 

DS:  Health care accounts for 17 percent of GDP and is the dysfunctional heartland of crony capitalism. They only thing which will change if the GOP becomes the majority is that the RNC will collect more of the vigorishes.

Related Links: Stockman: Bush Tax Cuts Will Make U.S. Bankrupt (NPR) Op-Ed Contributor: Four Deformations of the Apocalypse (New York Times) Former Reagan Budget Director: Cut Spending, Raise Taxes and Allow Austerity to Fix Economy (Wall Street Journal)

I can't agree with Mr. Stockman on the Bush tax cuts at all. He is totally in error when he talks about them being ineffective. The runaway spending of the Bush administration and Republican Congress, Medicare part D being a glaring example, caused the growth of the deficit not the tax cuts. Mr. Stockman is spot on about the deficit, but the deficit needs to be slashed by cutting government spending which is inefficient and unproductive. The baby boomers have to be told they don't get to enslave younger generations through Social security and Medicare. We need a stable dollar from Mr Bernanke, not one whose value falls daily. We need to sustain the fiscal policy of the Bush tax cuts. Job generation will result from that policy mix. Mr. Stockman didn't understand this fact when Robert Mundell and Arthur Laffer had President Reagan's ear and he still doesn't.

I agree with Stockman with one very important clarification.It is profoundly misleading to think of Social Security as a an ordinary "tax," or as "government spending" in the ordinary use of those words.Social Security is an insurance policy for workers paid for by the workers themselves. It is "off budget" for a reason. It has nothing to do with the deficits currently under discussion and will have nothing to do with any future deficits.To pay for the longer life expectancies of the next generation, Social Securiyt will need to raise the payroll tax about half a tenth of a percent per year. This is essentially what CBO says in its option number three. CBO does not say why it stops the increase short of paying the full 75 year projected shortfall. By continuing the tiny increases for another ten years the entire shortfall will be eliminated, and Social Security will emerge fully funded over the infinite horizon.This is a tiny price to pay for old age "security." It is a price the workers will easily be able to afford, and it is money they will get back when they need it most. It is not a tax on the rich. It is not "government spending."This appears to be something neither liberals nor conservatives understand. Conservatives already think Social Security is "welfare," and some liberals sound determined to turn it into welfare. It's not. It is just the best way workers in a complex industrial society have of saving their own money for their own retirement, protected from inflation and market losses by pay as you go financing with wage indexing. Eisenhower understood this as well as FDR.

National savings had not been going up - indeed, people are living off their credit cards now more than ever. It looks like savings is up because banks have been writing debt off of their books - particularly credit card debt. What is needed are efforts to make it easier for households to get rid of unpayable debt, especially mortgage debt, without losing the asset.Cramdowns anyone?

Unfortunately, I think Mr. Stockman's low expectations from Republicans are as accurate as his low opinion of the Democrats' attempt at stewardship. When will we decide to stop letting those two parties take turns making things worse? There is an actual proposal to balance the budget in FY 2012. It comes from two Libertarians, so no one is covering it. But it's the only honest attempt to make ends meet that's on the table right now. You can find it at http://www.grannisforcongress.org/blog/fiscal-responsibility-now

mgrannisAs for "the only honest attempt"..Stockman and Greenspan appear to agree with me that rescinding ALL of the Bush tax cuts would be a good place to begin.I don't have much sympathy for those who want to rescind only the cuts of those richer than they are. There is no reason not to return to the pre Bush tax levels at least until the tax cuts that were going to pay for themselves but didn't, are fully paid for and the deficit is brought back to manageable levels.I would earnestly suggest that the 3% tax increase on the lowest quintiles be devoted to a gradual increase in the payroll tax to fully fund both OASDI and Medicare.... with the latter being reformed somewhat to better manage costs, and re-apply the "cap," so "the rich" aren't carrying more than their own reasonable share.But this needs to be accompanied by a 3% increase in the effective tax rates on income over 100k, and there is no reason the "middle class" should avoid a tax increase. The idea that we can "let someone else pay for it" is going to destroy this country.

We reduce our growth rate every time we make an honorable job illegal. And we illegalize products and services all the time. From store signs that are 'too big' to jitney services that 'compete' with bus lines that don't exist there are thousands of laws, rules, and regulations that reduce economic activity by pandering to special interests. One way to at least reduce the need for tax hikes is to do a code review and slash these job killing laws wholesale. If we cut enough of them, we might find the increased revenues to the Treasury make actual tax rate increases unnecessary. A job legalization effort should be tried first.

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