Last Sunday the New York Times published an editorial by David Stockman called State-Wrecked: The Corruption of Capitalism in America. Stockman is a former congressman, and after that he served as Ronald Reagan's budget director until 1985, when is resigned in protest of "the destruction of fiscal rectitude" (his words). I've had occasion to feature Stockman on DOTE from time to time because he is one of the "good guys" who understand why America has failed economically.
Stockman's editorial was over-the-top. He strayed into what I would call "Doomer" territory, predicting that this latest bubble in the stock market will crash within a few years—that isn't (or shouldn't be) controversial—but also asserting that the U.S. economy will collapse as a result. He concluded with this—
When the latest bubble pops, there will be nothing to stop the collapse. If this sounds like advice to get out of the markets and hide out in cash, it is.
Stockman also puts forward a questionable economic history of the United States starting with Roosevelt and the Great Depression. In fact, that historical account takes up the bulk of his long editorial. I should also mention that Stockman is trying to sell his new book The Great Deformation: The Corruption of Capitalism In America. So much of what we read or hear is somebody selling their book, both literally and figuratively.
I will comment further on Stockman's views at the end, but for now, lets look at the reactions of others to the editorial, for that's the interesting part of this exercise. If Stockman's editorial was over-the-top, so were the reactions to it. I'll quote from Skeptics Scoff at David Stockman’s Doomsday Scenario.
His call has been ridiculed by academics, investors and economists of all stripes. Mark Thoma, economics professor at the University of Oregon, gives Stockman what he calls “the wingnut of the day award.”
Princeton economist Paul Krugman calls Stockman a cranky, old man:
“Actually, I was disappointed in Stockman’s piece. I thought there would be some kind of real argument, some presentation, however tendentious, of evidence. Instead it’s just a series of gee-whiz, context- and model-free numbers embedded in a rant — and not even an interesting rant. It’s cranky old man stuff…Sad.”
Jared Bernstein, who was an economic adviser to the Obama administration from 2009 to 2011, says Stockman’s analysis “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.” From Bernstein:
“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.”
That's only a small sample of the scathing ridicule Stockman received. For example, Joe Weisenthal of the sensational content mill The Business Insider wrote an attack piece with the self-explanatory title David Stockman Writes Huge Unhinged Screed About How America Is Doomed And How You Should Get Out Of The Market NOW. There will be more rancor in the days and weeks to come.
Stockman is a former establishment figure who has betrayed the Powers That Be, which explains some of the reaction. But that fact in itself does not explain the ferocity of the attack on Stockman. Those putting him down were more unglued than he was in the editorial.
There is much at stake for those deeply vested in (or running) this failed enterprise called the United States. It comes down to this—
The indefensible must be defended at all costs. The illusion that the U.S. economy has not failed must be maintained. The illusion that the economy is merely experiencing growing pains during the "recovery" must be maintained. The illusion that we will soon be on the road to greater prosperity for all must be maintained. These are the necessary illusions Americans are supposed to swallow. This is the kool-aid.
The bearer of bad news (Stockman) must be marginalized to help manage these perceptions.
Stockman's main points about the economy are (or should be) uncontroversial. He believes the bailed-out financial sector and other large non-financial corporations dominate American economic policy (check). He believes that there is a firewall between the prospering Wall Street economy and the dilapidated Main Street economy (check). He believes gambling has replaced investment (check). He believes that corrupt "crony capitalism" has replaced functioning markets (check).
I'll quote from the early part of Stockman's editorial. This excerpt summarizes the indefensible that must be defended at all costs.
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.
Real median family income growth has dropped 8 percent [graph below], and the number of full-time middle class jobs, 6 percent. The real net worth of the “bottom” 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans.
So the Main Street economy is failing while 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. By default, the Fed has resorted to a radical, uncharted spree of money printing. But the flood of liquidity, instead of spurring banks to lend and corporations to spend, has stayed trapped in the canyons of Wall Street, where it is inflating yet another unsustainable bubble.
Graph from Sentier Research (February 2013). I added the dashed trend line and notes.
Any mainstream figure (like Stockman) who dares to question whether the United States is a viable enterprise going forward must be marginalized by the elites (i.e. those representing them) to maintain the necessary illusions. Otherwise, American politics has no meaning—it does not—and mainstream discussions of the economy are entirely worthless—they are. Here's Stockman again.
The modern Keynesian state is broke, paralyzed and mired in empty ritual incantations about stimulating “demand,” even as it fosters a mutant crony capitalism that periodically lavishes the top 1 percent with speculative windfalls.
The Democratic Keynesians, as intellectually bankrupt as their Republican counterparts (though less hypocritical), had no solution beyond handing out borrowed money to consumers, hoping they would buy a lawn mower, a flat-screen TV or, at least, dinner at Red Lobster...
And so on. If you are not brain-dead, and if you are not heavily vested in the economic status quo, the essential truth of these colorful statements is indisputable. But Mark Thoma, Paul Krugman, Jared Bernstein, Joe Weisenthal, and other representatives of the status quo are dedicated to propping up the illusions by which Americans are meant to be guided.
It is truly unfortunate that Stockman did not stick to "the basics" in making his attack on the current economic and political regime. By getting very doomerish, he opened himself up to the kind of attacks and subsequent marginalization he is now experiencing. He overreached, and is now suffering the consequences. Furthermore, he is talking his book, which does not help him make his case.
Regarding Stockman's prediction of a collapse once the current stock market bubble crashes, I do not think that outcome is likely. As far as I can see, the only reason offered for this conclusion is stated here—
If and when the Fed — which now promises to get unemployment below 6.5 percent as long as inflation doesn’t exceed 2.5 percent — even hints at shrinking its balance sheet, it will elicit a tidal wave of sell orders, because even a modest drop in bond prices would destroy the arbitrageurs’ profits. Notwithstanding Mr. Bernanke’s assurances about eventually, gradually making a smooth exit, the Fed is domiciled in a monetary prison of its own making.
Most Americans don't care about treasury bond yields and prices—traders care. Certainly the stock market will undergo a large "correction" at some point in the next few years—this is a new bubble, after all—but why would that drop in stock values affect the Main Street economy? Most ordinary Americans are not in the market, of course, and losing value in inflated pension funds is nothing new. We experienced these things in 2008/2009. The Main Street economy is already hosed, and will remain that way. Raising interest rates may slow down the rate of new borrowing for cars or houses, but so what? Sales for new homes and cars are already at historically low levels, although "consumer" demand was lower four years ago.
In short, most Americans won't be able to tell the difference if the Fed stops perpetual QE and raises interest rates.
Things will get worse for ordinary Americans if we have another deep recession, but that's a far cry from a collapse. You can't take away what people do not have, although things can get worse on the margins—fewer new jobs, more wage declines, more people on food stamps, etc.
In fact, it's hard to see how Main Street America will be affected at all if the Fed "hints at shrinking its balance sheet." This conclusion simply follows from the fact that there is an impenetrable firewall between the Wall Street and Main Street economies,as Stockman already knows.
Stockman also believes that when the stock market crash occurs, the Big Money Boys will not be bailed out, but why wouldn't they be bailed out? No reasons are offered. The big corporations (both banks and non-financial) run the show. The elites running these organizations are the puppeteers, and of course they're going to be bailed out by their hand puppets at the Fed or the Congress or the Treasury, or some combination of these.
Nonetheless, and despite the fact that Stockman let his passions rule him, I am here to praise him, not to bury him. The vehement, mean-spirited reactions to his editorial only serve to emphasize his basic points about how things are going in the United States. I have referred to the Bubble Era as the period 1995-2007, but I'm amending that definition. The Bubble Era is now 1995-???