David Stockman Goes Way, Way Over the Top

March 31st, 2013 at 3:32 pm

He has a featured piece in today’s NYT which, while about 11.8% absolutely and totally on target, is mostly a horrific screed, an ahistorical, dystopic, Hunger-Games vision of America based on debt obsession and willful ignorance of macroeconomics and the impact of market failure.

The first sign of a problem here comes from a mash-up of statistics in the introduction that looked wrong.  I’m not sure what he did, but business investment is up 1.4% per year since early 2000, not 0.8% as Stockman claims, and why start there anyway (he seems to do so because that’s when the stock market last peaked—whatever…)?  Actually, business investment has been a pretty strong performer over this expansion, up 6.6% per year since 2009Q3.  To measure payroll growth from the early 2000s also masks huge variation.   Stockman claims almost no growth annually, but private payrolls are up over 2% per year since they started growing in early 2010.

But here’s the challenge with a piece like this: despite the better statistics you get when you chose different dates, there’s no question that the American economy is seriously underperforming and that bad policy is implicated.  It’s just that the culprits aren’t the ones he thinks they are.

In fact, like most crazed rants, it’s hard to pick out the argument, but I think it’s this: for almost a century, economic policy makers have…um…made policy, and that’s led to cheap money, high indebtedness, crony capitalism, and econo-moral-turpitude.

Everyone’s implicated, left and right.  Keynes didn’t understand macro, Nixon abandoned the discipline of the gold standard, Bush II spent recklessly, Greenspan and Bernanke’s were and are reckless monetary hippies, even Paul Ryan’s a big spender (!), Obama’s policies are “hopelessly glib” (whatever that means), and the central banks of China and Japan are “monetary roach motels.”

Eisenhower gets some love, presumably for running some budget surpluses, though Clinton’s larger surpluses (as a share of GDP) are not mentioned.

It’s a long piece, bursting with passionate fire and brimstone, but again, at least to me, there’s no cogent argument in here, just assertions: sovereign debt is bad; you’ve got to let the market work out its failures without trying to fix them (there must be “a sweeping divorce of the state and the market economy”); no government investments in industry; central banks shouldn’t mess with the money supply.

One could take each one of those apart.  Sovereign debt is neither bad nor good–its assessment must be situational.  Despite the fact that policy makers are working hard to forget this lesson, is well established that allowing market failures to heal themselves causes protracted and unnecessary economic pain that can be avoided with temporary stimulus.  Private investors will under-invest in innovative sectors due to uncertain returns, central banks have played a critical stabilizing role, etc…

So what does he get right?  Of course, all of the above can and are sometimes done badly.   Our debt is in no small part a function of our uniquely inefficient health care sector, not to mention the supply-side, trickle-down, economic snake oil that Stockman himself helped to sell back in the Reagan days.  As Dean Baker has documented, we are awash in crony capitalism—the best parts of Stockman’s screed inveigh against this, with resonant connections to Wall St.—and that leads to government failure alongside market failure.  Some Asian (and German) central banks in particular have contributed to destabilizing global imbalances.

But by mushing this all together under the rubric of evil debt and interventionism instead of analyzing the details—differentiating smart borrowing from wasteful borrowing, giving fiscal and monetary stimulus their due (he’s welcome to point out where they go wrong, but his blanket condemnation is nonsensical)—I suspect most readers will react the way I did: it’s like hearing a crazy person on a street corner ranting against whatever: they invariably stumble on some profound and piercing insights, but it’s mostly nonsense, and instinctually, we keep our heads down and move on.

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23 comments in reply to "David Stockman Goes Way, Way Over the Top"

  1. Perplexed says:

    Reading that article was like taking a ride on roller-coaster! When I got near the end I was almost hoping for the bar-tender to shout out “last call” and for the lights to go on. Is Stockman an economist? While its obviously an impassioned plea for action, I was having a tough time tracing his economic arguments (maybe the gold-bug thing just threw me off).

    On a more sober note, any chance you’re familiar with Barry Lynn’s book “Cornered: The New Monopoly Capitalism and the Economics of Destruction”? Lynn makes some compelling arguments that our manufactures were seriously weakened vis-a-vis large financial and trading monopolies(like Wall Mart)when Congress ultimately overturned “centuries” of laws aimed at preventing price discrimination:

    “What is important here is merely to note that during the neoprogressive revival, Congress in 1975 undid the entire structure of pricing policy that had been erected in the previous centuries when it passed a law called the Consumer Good’ Pricing Act, which at last legalized price discrimination.

    The goal of those who promoted the act was laudable. They believed that big manufacturers like Procter & Gamble had become too fat and lazy. Yet rather than take on the giant conglomerates directly, such as by using antitrust law to make them smaller, the neoprogressives apparently decided that it would be easier to empower retailers to serve as “countervailing” powers able to exert more pressure on the producers.

    Though all but forgotten today, the Consumer Goods Pricing Act must be credited with setting into motion the fantastic concentration of power in the hands of the giant retailers and trading companies that we have witnessed in the last generation. The decision six years later, in 1981, to all but suspend enforcement of our classic antitrust laws only accelerated the process. Perhaps the biggest proof of the lack of wisdom of the act is that the consolidation of power among the retailers eventually provided an excuse for round after round of consolidation among the very producers that the authors had originally set out to weaken, like Procter & Gamble.”

    He raises some great questions e.g. to what extent are we just dealing with new, less recognizable forms, of monopolies that we ourselves fostered by disabling our protections against monopolies. It seems to offer some very plausible explanations for the unprecedented wealth concentration. (Gini .87+ and counting, not a whole lot further to go!)


  2. Scott Supak says:

    Considering that Mr. Stockman was instrumental in crushing the “welfare state,” I find his current delirium to be a kind of Karma. As one of the henchmen of trickle down, he should be condemned to this kind of internal confusion until he finally realizes how much he had to do with the great divergence.

    http://www.stateofworkingamerica.org/files//family_income_median_income_growth_productivity1.png


  3. Michael I. says:

    Give me a break Jared. If Greenspan and Bernanke and not to be blame for the economic mess this country is in, they **surely** at the least were derelict in their duty to allow the dot com bubble, then the credit bubble, the real estate bubble, the oil bubble, the shadow banking system, the rampant fraud on Wall Street et all to inflate ON THEIR WATCH, under their regulatory responsibility.

    For Bernanke to continue to say in front of Congress that bubbles can’t be seen ahead of time is morally repugnant for somebody with a staff of **hundreds** of economists. Let me see: prices for 200 years rose in lock step with incomes and then magically they started going up several standard deviations above that, and Bernanke’s ‘model’ didn’t pic that up??? Nor did he on a common sense level??? Did he not watch TV and see all the ads for refi’s and flipping? Hmmmmmmm, I wonder where those people ALL got the money for their most expensive puchase ever when the Fed itself tracks savings rates…. and savings rates were plunging! How can the Fed be exonerated for allowing the shadow banking system to grow as big as it did unregulated whne they track the flow of money for the entire economy? Must have missed that one, too.

    The Law of Diminishing Returns is rampant across the US economy. It used to take $1 in debt to get $1 in GDP growth now it takes 8, $10, $20 dollars to get the same and still no main stream economist wants to admit it. The more debt they pile on, the harder it gets to move forward.

    US debt has exploded from $8T to $16T, the Fed’s balance sheet at $3T is a continuing testament to how bad their financial models really are, and we just got .4% growth in Q4. Stockman is right.

    Imagine where our economy would be today had we had a sound money and strong willed Fed chairman in place of Greenspan and Bernanke that talked down bubbles, that actually worked outside of academia and understood how Wall Street continues to game them? A lot better place than we are today.


  4. Matthew Holt says:

    Isn’t the question for someone who left public life—either discredited or at the least unable to explain real prices & inflation to Reagan–a long time ago, how did he get that many column inches in the NY Times?

    Not to mention that calling Wall Street the bad guys is pretty rich from someone who spent as much time at Salomon and Blackstone as he did!


  5. gregorylent says:

    so we can expect your examination of the american economy soon, seen through your eyes?


    • Jared Bernstein says:

      You’re kidding, right? That’s what goes on pretty much everyday here at OTE for years now. Pay attention, dude!


      • SeattleAlex says:

        Bernstein SLAM!!! I don’t have any idea what these guys are talking about Jared. Yes Greenspan blew it with the whole
        “there can’t be any more bubbles” talk, but that had nothing to do with Bernanke. Debt is not the problem right now! If anything both Bernanke and congress have not done enough to stimulate the economy. Even if obvious FAST! type stimulus can’t get pushed through I’m still confident the Fed could raise expected inflation to drive real rates down and finally get us some traction.

        And shadow banking?? The whole point is that they are NOT liquidity backed by the Fed through the discount window/FDIC like traditional banks. The regulation is primarily capital controls and BASEL accord stuff with a new sprinkling of Dodd-Frank. That’s all on the federal/international legislators and their weakening of regulations. Man it’s like these dudes don’t even read this blog…


        • Michael I. says:

          SeattleAlex, you repeat the claim that the debt doesn’t matter.

          Hypothetically speaking, what would happen if Bernanke stopped buying 75% of what our Treasury issues like he has been (biggest Ponzi scheme in history outside of Japan) and put interest rates back to where they were in 2007? Does the debt now matter? Because the last time I checked, using artificial valuation inputs like artifically suppressed interest rates doesn’t change the fact that under real world risk scenarios, all that matters is what the real rate should be IN THE LONG TERM, not what it is being suppressed to IN THE SHORT TERM.

          What would happen to the economy under ‘normal’ interest rates, that is interest rates THAT TAKE INTO ACCOUNT THE RISK of an economy that can’t run even at 2% growth w/o ZIRP. Should interest rates in 2013 be higher or lower than where they were in 2007 do you suppose, knowing what we know now that China’s got an enormous bubble, Europe is insolvent, oil is back to almost all-time highs are the pump, and the US can barely grow even with a doubling of the debt since ’07 and extraordinary intervention buy the Fed.

          The incredibly dangerous scenario that’s setting up is that the lender of last resort globally, central banks, are creating new Ponzi where they follow the Fed and buy their own debt. Worse, they’re using up their last bullets before China’s bubble blows or Europe is anywhere near close to re-structuring. And worse, central banks are all printing like mad against each other (devaluations) so everybody sinks together pari pasu.

          What happens the minute that QE’s stop working? Interest rates soar to where they should be and central banks which are all levered 60-1-to-1 or more have to go hat in hand to their governments and ask for a bailout. Then what? Does debt matter more then than now?

          You bet it will. They can only artificially suppress interest rates for so long; there are many scenarios where it blows up in their face and the deeper the hole they dig, the greater the risk on the other side.

          Pretend for a second that we get another major Flash Crash (could easily happen) caused by some external shock and trust in stock markets ends, then what transmission mechanism does the Fed and other central banks have left? Does the debt now matter??? THINK about it.

          Printing money is nothing more than delaying the day of reckoning, it’s dividing up a pie into more pieces but the value of the pie didn’t change.


  6. R. Nemo says:

    I never understood why Stockman was the head of OMB when he was a divinity major. Whatever that is? Worshipper of magic and superstition? NO doubt.

    Yes, Eisenhower had balanced budgets for 15 seconds; but his top marginal tax rate was @ 90 percent, as I recall. Reagan started this crazy cycle of cutting taxes to raise revenue: based on the aptly named “Laugher Curve.”

    It has not worked out so well as Bush continued the non-idea. He is the primal cause of all of this mess.

    Seems no one learns from history.

    I have decided that government policy is just a series of FADS; that no one has any idea why they believe and act on them. Like whether to wear a mini skirt or a knee length skirt. Nothing empirical is involved as lawyers–which most politicians are–don’t grasp the concept of reality apart from rhetoric and persuasion. They appear to be the dumbest fools on earth!


  7. R. Nemo says:

    In 1946 gross debt to GDP was 110 percent. By Carter it was 25 percent. Reagan drove it to 50 percent. Currently it is @69–all cause by BUSH and his policies. There is no crisis. Seems Keynes was right: we need more stimulus to get out of the great recession. No more supply side VOODOO economics!

    Stockman was a fool the first time around; He is just an idiot now.


  8. rp1 says:

    I was surprised by the reactions to Stockman. His point, by and large, comes from a conviction that you can not actually pass the buck forever. I’m not sure his critics accept this.

    The foundations of the economy determine the character of society, because who succeeds and who fails? And thus follows the direction of the country.

    The United States and much of the world has completely embraced moral hazard. Forever passing the buck on deficits, debt, banking reform, and so on, are just instances of this. What follows from this?

    Notice how we never hear of anything being fixed *today*. At best we hear how we will mend our ways, get on the right track, and so on, some time in the future. I believe that attitude never passes a significant test.

    I feel that the US, like many individual Americans, is lurching from crisis to crisis with no coherent plan and no principles to guide it.


  9. Royce Wicks says:

    First perspective. In the paper yesterday, this article appeared linked to Stockman’s newest book and indeed reads like an opening chapter. I felt that if he had more to say, I would be obliged to read the truly scary details in his book.

    Second perspective. His catalog of “errors” this country has made since Calvin Coolidge might find its analogy in communications. Coolidge had the telegraph, telephone, and radio. Should we similarly dismantle newer forms of communication because we don’t like the complexities they add to our lives?

    Third perspective. “Sundown” in the title. Yeah, about 40 years ago I remember reading the futurologists’ concurrence that America’s decline would be obvious in 2020. So, though Stockman and I are nearly the same age, I’m not so foolish as to ascribe American decline with my own. The kids keep doing amazing new things, and they will find new ways to break all the barriers we believe so insurmountable today.


  10. Edward Lane says:

    Let’s leave aside how we got here and whether Stockman cheery-picked his dates to produce the statistics he wanted. There’s too much shooting the messenger here and not enough discussion of what’s next.

    My question/concern is whether the U.S. equity market is, indeed, in a bubble or not and, if so, how and when will it unravel.

    My sense is that the market IS in a bubble, fueled by a loose monetary policy and very low interest rates and goosed by economic green shoots. I suspect the Fed will find a way to unravel the bubble slowly, but who knows?

    What do you think, Jared?


    • Jared Bernstein says:

      Maybe I’ll post on this, but I don’t think there’s a bubble, with one asterisk. Historically very high corporate profits in tandem with very low interest rates (so opportunity costs of bonds high relative to stocks) explain much of the recent “melt-up,” is my hunch. The asterisk is this (and I think Stockman may have made this point too): the market is on tenterhooks re when the Fed will be unwinding. So any signs of that, and I’d watch for a big, unsettling sell off. That includes stronger than expected data which could lead folks to update their expectations re when Fed will move.


      • Edward Lane says:

        Thanks for responding so quickly. I will look forward to your post.

        If you do post, please address what I see as separate but related questions:

        1. Is the market (equities) is in a bubble and, if so, how will it end (you actually already provided what I thought was a good answer to this)?

        2. If we are to reduce our national debt in a meaningful way (a question in itself), can this be done without a) causing a recession or b) disproportionately whacking the bottom 90%?


      • Michael I. says:

        Jared,

        Of course there is a bubble, but it doesn’t have the same characteristics as the previous bubbles where somebody could easily point to high p/e multiples in dot com stocks or real estate. (Of course, the Fed and Main stream economists ignored the easier-to-see bubbles, so why should they see the harder ones, right?) This bubble is no less large than the previous bubbles.

        Did you happen to catch the 60 Minutes piece on China’s real estate bubble? On the ground, the situaiton is even worse because most of their companies use fradulent accounting. China’s rolled over their bad bank debt over and over and over again, the last tranch was $1.7T in 2010 (Google it) and this is despite growing supposedly 8-10% per year. The original debt from the Asian Contagion crisis of the late 90′s only recovered 20cents on the dollar, again, DESPITE China’s growth rate being the highest in the world. So US companies selling there are facing a cliff dive at some point, but for now their earnings are pumped up because that bubble feeds into their earnings.

        One could say the same about Europe’s insolvency. The EU is about, what? $17T in GDP all together, right? Germnay is the only solvent country and it’s GDP is onbly $4T. The ECB, which is therefore only backed truly by Germnay already has a $3T toxic balance sheet headed toward $4T. Germany’s backstop has already been fully spent, and from now on, it’s all just a giant poker game to extend-and-pretend they aren’t insolvent when the math doesn’t lie. Are the earnings coming from Europe to S&P companies real or temporarily fake given Europe’s insolvency?

        In the US we have the Fed suppressing interest rates by several % pts. Back out the ‘windfall profits’ the banks are getting from this artificial suppression, and earnings last year in the US were negative for the S&P. And that’s after trillions in Fed QE and a doubling of our debt in the US (how many jobs were artificially saved because Obama’s gov’t has been running unsustainable trillion dollar deficits?? are the earnings associated with those jobs real or temporary?)

        Different bubble with different characteristics but a bubble nonetheless.

        Without the fakery by central banks, earnings wouldnnt be anywhere near where they are today. There’s the bubble, even at a 15x forward p/e.


  11. Russ Winter says:

    I’m sure readers have noticed the pattern of how certain corruptos get recycled into various posts and positions of power, from K Street and Wall Street to public office to the banking sector and back again, until they’re finally replaced with some new “associate” or “capo” from the same mob-like cesspool. Lone voices that speak up against them are typically muffled, ignored or shuttled aside. The corruptos/posse play the two party system like a fiddle and are still firmly in control.

    Stockman calls this “the posse.” I call it the “sistema”. I’m genuinely grateful that someone of influence finally had the fortitude to say what needs to be said. He uses his insight into economics and politics to make a powerful argument. He also provides a tremendous amount of highly informative historical context, which lends further insight into how things could or should be, rather than the revisionist drivel spewed by the sistema as hollow rationales.

    Stockman takes off the gloves with these scoundrels, and that’s exactly as it should be. While he has a special ire for Henry Paulson and Ben Bernanke (and modern central banking in general), he picks off the rest of the government capture posse gang, too, one by one like a rogue’s gallery.

    Stockman aptly illustrates the consequences of a bubble economy. Stockman describes the fall out,the damage, the maladjustments and deformations create by the bubble dujours, and how the posse uses them as a means to exploit and control the capital markets and economy to benefit their kleptocracy. He brilliantly connects the dots as to why the economy is functioning poorly and paints a picture of a future that will only become worse if the remaining wealth and reserves of the nation are continuously plundered by a crony capitalist sistema.


  12. Michael I. says:

    <>

    There are several possible reasons for why interest rates have remained lower than historical norms would dictate: (1) each time the Fed ended QE’s, the stock market tanked (see any chart) and therefore, it triggered was a flight to Treasuries which kept rates low. The second explantion is that there is a bubble in confidence that central banks for the time being can keep printing, so rates have not risen back to where they were in 2007 before the tightening began because it’s assumed central banks will suppress them for longer periods of time (ie. Bernanke saying he will keep QE’ing until 2014/2015). In both cases, it allows anyone to cite the recent experience and extrapolate to the future that somehow when the Fed ended, nothing bad happened, but they really diudn’t end, did they, if nobody belived they were ending those programs (QE infinity being the latest round of desperation). It’s what happens when QE ends for good that matters, or some external shock happens that puts central banks out of the business of rate manipulation.

    To flip your question back at you, if you really believe Krugman’s argument, then why were rates so high from 2005 – 2007 when business conditions were as ebulent as they were in those bubble years **before** the wheels all fell off?

    Why are junk bond yields today so low (5%!) on the main junk bond index when there are so many risks in the world? Answer: false confidence in central bankers to keep printing money to force them down.


  13. Michael I. says:

    Bloomberg piece on Stockman quotes Jared: “Stockman Sundown Belied by Stocks Showing Morning for Investors‏”

    “You look at the market and you certainly don’t get the message that the sky is falling,” said Jared Bernstein, former chief economist to Vice President Joe Biden and a senior fellow at the Center on Budget and Policy Priorities in Washington. “Recent gains in the stock market are explained by very high corporate profits and very low interest rates.”

    This is the same trap that caught 97% of investors before the crash in 2008. I run one of the handful of funds that made money all the way down because I didn’tr buy into that logic. The issue isn’t what the numbers are, the issue is what **caused** the numbers to be where they are. Is the cause sustainable?

    Of course the numbers look good. If I owned a company and convinced my banker to lower my interest expense by 4/5ths for a year and then tried to get you, Jared Bernstein, to buy my company at a 15x p/e ratio on those inflated earnings, would you say yes to it? Shame on you if you would.

    Investors right now are temporaily saying yes to it every day. Why? Because Wall Street gets paid to gamble with OPM (Other People’s Money). They’re telling everybody who will listen that the p/e ratio of 15 is real and cheap and using historical p/e’s to justify it (blah, blah we used to be at 17x back in the day). Unless interest rates were 4/5th’s lower back then, it’s apples to oranges.

    In valuing companies, you always adjust one-time events out to adjust earnings back to normal. Is ZIRP normal???? We’re in one of those strange periods of ‘suspension of disbelief’ when Wall Street is seducing gullible investors to pay all-time bubble highs in stocks using fake math (p/e’s) to lure them in

    Btw, if you had to describe economic conditions in 2007 and 2008 before the crash, would they have told you the entire banking system was insolvent??? Then why are you, Jared, using the same flawed logic in 2013. Look behind the numbers. There is a huge bubble in Asia, Europe is insolvent any way you look at it, and the US is only being held up by QE forcing rates down: does anyone deny that if rates were back at 2007 levels that our economy wouldn’t blow up?

    So why should anybody buy the argument that because stocks happen to be mispriced again due to the printing press that it’s a good thing?


  14. Dana F. Blankenhorn says:

    I think I identified your problem http://www.danablankenhorn.com/2013/04/the-great-deception-of-david-stockman.html

    Stockman is spouting Austrian economics, just as Amity Schlaes’ biography of Calvin Coolidge spouts it. Both are supported, financially, by the same right-wing crowd.

    What’s going on? By dating conservatism back to Coolidge, Reagan becomes a liberal. He can be disowned, as can all his actions. Conservatism, like communism, must not fail. It can only BE failed. And for the same reason. It starts with a theory, then fits the evidence to it, rejecting all evidence that doesn’t fit.

    A lot of that in “creationism” as well.


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