Radical Surgery Needed
April 2, 2013 Leave a comment
The New York Times published a scathingly critical op-ed piece by David Stockman this weekend. It was in preparation for this week’s release of his latest book, The Great Deformation.
Stockman was Ronald Reagan’s budget director from 1981 until 1985. He is an old-school conservative who resigned from Reagan’s cabinet to protest what he calls Reagan’s “utter abandonment of the balanced budget policies of Calvin Coolidge.” He looks back fondly at what he calls the “golden era of sound money and fiscal rectitude” under Dwight D. Eisenhower, and is harshly critical of every administration since.
In particular, he argues the Reaganite mantra that “deficits don’t matter” became a required test of orthodoxy in Republican circles. It gave George W. Bush complete freedom “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.”
The result, he says, has been disastrous. He warns, “Without any changes, over the next decade or so, the gross federal debt, now nearly $17 trillion, will hurtle toward $30 trillion and soar to 150 percent of gross domestic product from around 105 percent today.” Such continued expansion of the public debt is clearly unsustainable.
Then he switches from the analogy of a fiscal bubble that will eventually burst to that of an uncontrollable cancerous growth. Stockman warns, “These policies have brought America to an end-stage metastasis. The way out would be so radical it can’t happen. It would necessitate a sweeping divorce of the state and the market economy. It would require a renunciation of crony capitalism and its first cousin: Keynesian economics in all its forms.”
Stockman argues “The future is bleak,” and such drastic reforms “will never happen.” Maybe. But I try very hard not to be a fatalist about such things. If the situation becomes severe enough, people will insist that action be taken.
Looking for a Cure
So what would that action look like? Despite his pessimism, Stockman lays out an effective action plan. If life-saving surgery could be done, he says, it would have to be quite radical surgery. It would require that the state “get out of the business of … economic uplift and social insurance and shift its focus to managing and financing an effective, affordable, means-tested safety net.”
It would also require ending political cronyism and the inordinate influence of lobbyists over publicly elected officials. Stockman notes:
Prying them apart would entail sweeping constitutional surgery: amendments to give the president and members of Congress a single six-year term, with no re-election; providing 100 percent public financing for candidates; strictly limiting the duration of campaigns (say, to eight weeks); and prohibiting, for life, lobbying by anyone who has been on a legislative or executive payroll. It would also require overturning Citizens United and mandating that Congress pass a balanced budget, or face an automatic sequester of spending.
It would also require purging the corrosive financialization that has turned the economy into a giant casino since the 1970s. This would mean putting the great Wall Street banks out in the cold to compete as at-risk free enterprises, without access to cheap Fed loans or deposit insurance. Banks would be able to take deposits and make commercial loans, but be banned from trading, underwriting and money management in all its forms.
It would require, finally, benching the Fed’s central planners, and restoring the central bank’s original mission: to provide liquidity in times of crisis but never to buy government debt or try to micromanage the economy. Getting the Fed out of the financial markets is the only way to put free markets and genuine wealth creation back into capitalism.
Where to Begin?
That does amount to some pretty radical surgery. But where should the surgeon apply the knife first? There are so many areas that need urgent attention – the Fed’s lending policies, improved financial regulation, entitlement reform, changing the tax code, eliminating government waste, and on and on.
I believe Stockman is correct on this one essential point: none of these remedies will have the slightest chance of being implemented until the coercive ties between the lobbyists and elected officials have been ended. That is where the knife needs to be applied most urgently. Then, perhaps, America can return to the principle of effective government “of the people, by the people and for the people.”