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April 5, 2013 7:20 pm
It takes a lot for an official who served at the heart of the White House to go beyond the pale in Washington, but a diatribe against all economic policy since 1933 – attacking everyone from Franklin Roosevelt to Milton Friedman – is one way to manage it.
David Stockman, budget director for Ronald Reagan from 1981 to 1985, is the man who will be short of dinner party invitations after becoming the most mainstream figure to argue that all America’s economic problems stem from the welfare state and the end of the gold standard.
Mr Stockman’s new book, The Great Deformation , highlights the enduring conservative appeal of a kind of economic primitivism that harks back to the days when laisser-faire ruled and macroeconomics had not been invented.
“The modern Keynesian state is broke, paralysed and mired in empty ritual incantations about stimulating “demand”, even as it fosters a mutant crony capitalism that periodically lavishes the top one per cent with speculative windfalls,” wrote Mr Stockman in the New York Times article that set off a minor furore in Washington this week.
The reaction, left and the right, was scathing. Jared Bernstein, former economic adviser to vice-president Joe Biden, gave one of the gentler liberal critiques. Mr Stockman, he said, was “about 11.8 per cent absolutely and totally on target” with his criticisms of crony capitalism. But the other 88.2 per cent was “a horrific screed, an ahistorical, dystopic, Hunger Games vision of America based on debt obsession and wilful ignorance of macroeconomics and the impact of market failure”.
The right was not much more impressed. David Frum, a speech writer for former president George W. Bush, called it “primitive” as economics, “silly” as advice, and diagnosed Mr Stockman with a mild case of elderly depression.
“As an insight into the gloomy mindset that overtakes us in older age, it’s a valuable warning to those still middle-aged that once we lose our faith in the future, it’s time to stop talking about politics in public,” he wrote.
Forecasts based on this world view have been spectacularly wrong in the last five years – instead of hyperinflation and a debt crisis, America has price rises of 1.3 per cent and a 10-year Treasury yielding 1.69 per cent. But Mr Stockman taps a strain of market discontent with fiscal stimulus and the US Federal Reserve’s policy of quantitative easing.
“There is nothing [Stockman says] that others haven’t,” says Peter Schiff, chief executive of the broker Euro Pacific Capital, with a similar outlook. “But when someone from the establishment criticises the establishment then everyone has to jump on him and discredit him.”
For the economic mainstream – which argues activist policy helps stabilise the economy, considers the gold standard ludicrously unworkable today, and diagnoses America’s primary problem as lack of demand – the 19th century critics are a challenge as there is some substance to the risks they identify.
There is legitimate concern about the rally in asset prices that has taken the S&P 500 index to a new high, and is spreading to real estate. Equity and property prices fell to long-run measures of fair value during the financial crisis, but not below, and have already moved above them.
“A lot of the inflation is in assets,” says Mr Schiff. “You can see it in the bond markets, you can see it in the stock market, you can see it in real estate. Real estate is already too high.”
The Fed rejects that QE – purchases of assets to drive down long-term interest rates – has formed an asset-price bubble. But concerns about stability have intensified at the central bank and led to debate about when to slow QE down. If a bubble were to form and then to burst, it would seem to prove Mr Stockman and his colleagues right.
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