David R. Henderson

David Stockman Screeches

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David Stockman, Reagan's first director of the Office of Management and Budget, has a strange op/ed in today's New York Times and "Angus" (aka Kevin B. Grier) does a nice take-apart. I don't agree with all of his criticisms, but I do agree with most.

Stockman writes:

Since the S&P 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually.

But, as "Angus" points out:
As you can see, there's nothing special about 2000. There's a tiny blip, but the balance sheet stays on its path from 1900 to 2008, when it explodes.

And of course, that is/was the Fed's RESPONSE to the great recession. The terrible numbers Stockman gives for GDP growth and job growth are a direct result of the great recession. Real GDP grew strongly from 2000 to 2007, then collapsed.


Stockman writes:
This explosion of borrowing was the stepchild of the floating-money contraption deposited in the Nixon White House by Milton Friedman, the supposed hero of free-market economics who in fact sowed the seed for a never-ending expansion of the money supply. The Fed, which celebrates its centenary this year, fueled a roaring inflation in goods and commodities during the 1970s that was brought under control only by the iron resolve of Paul A. Volcker, its chairman from 1979 to 1987. Under his successor, the lapsed hero Alan Greenspan, the Fed dropped Friedman's penurious rules for monetary expansion, keeping interest rates too low for too long and flooding Wall Street with freshly minted cash.

On this, I disagree even more than Angus does. For why, see here and here and follow the links.

Where I don't agree with Angus? On this statement of his: "Bernanke has actually done a very good job during this crisis and slow recovery." But my disagreement here is not for Stockman's reasons. Like Jeff Hummel, I think the Fed did not print enough money at the start of the crisis and, instead, is turning the Fed into a central planner.

By the way, Stockman's piece reminded me of how shrill he often was. My Hoover colleague, Martin Anderson, in his book, Revolution, said it best:

David Stockman was profoundly pessimistic by nature. If he were ever to write a history of American baseball, he would probably describe Ted Williams of the Boston Red Sox, one of the greatest players of all time, this way: Even at the height of his career, Williams managed to get base hits only 40 percent of the time and struck out repeatedly.

Elsewhere, Martin Anderson calls Stockman's book, The Triumph of Politics, "a self-righteous work with the tone of a screeching bluejay."


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CATEGORIES: Monetary Policy



COMMENTS (7 to date)
Richard A. writes:

I suspect that the expansion of the monetary base late in 2008 was more than sufficient. Where the Fed went wrong was their decision to pay interest on excess reserves (that got as high as 1%) late in 2008 that help bring down the M1 money multiplier from 1.6 to less than 1.

Andre Mouton writes:

If Stockman were arguing that monetary expansion in the last twelve years was solely responsible for the poor economic performance in that time, then Angus' point is well-taken. It's clear, though, from the quotes above that Stockman was taking issue with the great moderation as a whole, and Greenspan's policies from the 1980's on. The issue isn't whether monetary policy in 2008 dominates the data - clearly it does - but whether monetary policy 1987-2007 was easier than in previous periods, or in some way precipitated the crisis.

Maybe Stockman makes his argument poorly, or just unpleasantly, but attacking the man - either directly, or by focusing on the peculiarities of his argument and not the meat of it - contributes little to the discussion.

BigEd writes:

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Johannes Yohighness writes:

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Pace George Stigler, 'Nothing polite can be said about such [Stockman's] analysis.' The only thing worse than the vapidity of Stockman in writing such drivel was the editorial judgment in publishing it.

He never seems to have bothered with even a cursory fact check. Right off the bat we get;

Over the last 13 years, the stock market has twice crashed and touched off a recession....

Except that the NBER dates the last recession as beginning in December 2007, and the stock market crash didn't come til late 2008.

Though I suppose Stockman has a point about crony capitalism; if he makes millions on Wall Street (with his Divinity School education) peddling this kind of (worse than) nonsense, just what is going on there?

Marc Joffe writes:

David: I had a very different reaction to the Stockman piece, perhaps because I was less focused on the monetary aspects and the dig at Milton Friedman. Selected highlights that had me nodding violently in agreement:

Washington is piling a soaring debt burden on our descendants, unable to rein in either the warfare state or the welfare state or raise the taxes needed to pay the nation’s bills. ... The culprits are bipartisan, though you’d never guess that from the blather that passes for political discourse these days. The state-wreck originated in 1933, when Franklin D. Roosevelt opted for fiat money (currency not fundamentally backed by gold), economic nationalism and capitalist cartels in agriculture and industry. ... Then came Lyndon B. Johnson’s “guns and butter” excesses, which were intensified over one perfidious weekend at Camp David, Md., in 1971, when Richard M. Nixon essentially defaulted on the nation’s debt obligations by finally ending the convertibility of gold to the dollar.

Stockman's piece is refreshing anti-Statist and anti-Keynesian. I am impressed that it would be published in MSM, let alone by the New York Times. But, further to your blog post, I have to admit that his analysis is not without his flaws.

I gather than some in the Reagan administration see Stockman as a Judas for resigning and writing a negative book about his experiences. But it seems to me that the key point in that book was true and has been vindicated: Reagan did not match tax cuts with sufficient spending cuts, giving rise to large deficits and to the unfortunate belief that large deficits aren't harmful. This belief is especially unfortunate because it is partially true. A few large deficits are manageable, but, unfortunately, the government just can't stop itself at a few.

Stockman clearly bamboozled The New York Times. He did not cite criticize, directly, the economic performance of the current leftist administration so vigorously cheered by NYT. He did not point a finger at Democrats for the housing fiasco. Although he gently jabbed President Obama, and Democrats he came down harder on President Reagan and Republicans. Curiously, Stockman might also have been too harsh toward J.M. Keynes in calling Keynesianism a "first cousin" of crony capitalism. My sense is that Keynes would have been appalled by the self-interest of our Wall Streeters who gave us the "too big to fail" concept. (I alway thought TARP actually stood for "to assist rich people.")

Perhaps Keynes would have agreed that the Wall Streeters have given vitality to Madison's acknowledgment, in Federalist No. 57, that there are people seeking the "ambitious sacrifice of the many, to the aggrandizement of the few," no less than he agreed with Lenin that the way to undermine a capitalist nation is to undermine its currency. Keynes also acknowledged to Hayek that
some British socialists are "closet totalitarians." I have a hunch that Keynes would find reason to be concerned that the Obama administration takes advice from individuals aware of Lenin's dictum on undermining a capitalist nation, and who, themselves, are "closet totalitarians."

What the U.S. needs, I believe, are leaders faithful to the counsel set forth by Madison, in Federalist No. 57, leaders who, following this counsel, would reject Greenspanism -- which views the Dow-Jones level as barometer of the country's economic well-being, and would reject national capitalism in all its form. I prefer "national capitalism" to "crony capitalism" because, I believe, it better describes our reality where a self-serving few turned the nation's economy into a trough for private benefit, resulting in, quite clearly, the "ambitious sacrifice of the many, to the aggrendizement of the few." My sense is that both Keynes and Hayek would have opposed national capitalism on moral, as well as economic, grounds.

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