by Justin Raimondo,
David Stockman rocketed to fame as Ronald Reagan’s chief
of the Office of Management and Budget (OMB), his name loosely associated with
the "trickle down economics" of the supply-siders, but his recent
book, The Great
Deformation: The Corruption of Capitalism in America, will correct the record: Stockman is not only a libertarian critic of the
Milton Friedman school of monetarism and supply side economics, he is also a
principled opponent of American militarism. His new book is a
massive 700 pages-plus, but don’t let that deter you: inside you will find a
scintillating analysis of where, why, and how America went wrong, starting with
the New Deal and ending with the Great Recession of ’08 and the subsequent Obama-Bernanke
attempts to re-inflate the bubble of America’s debt-driven
"prosperity."
His basic thesis is that the Federal Reserve, starting with Richard Nixon’s decouplingof
the dollar from gold, has acted as the central planner of the American economy,
blowing up the bubble of a false prosperity. This mostly served to fatten the
wallets of the One Percent, giving Wall Street a blank check while looting the savings and aspirations of Main Street.
His is a complex argument, and it
assumes a knowledge of economic theory that I fear many – including myself – do
not possess, but his analysis is clear and forthright: the Fed, instead of
acting as a neutral arbiter and manager of the money supply, has engaged in
"prosperity management," as he terms it, implanting a "borrow, spend,
gamble, and get-rich-quick regimen" that poisoned and
deformed the economy and the culture. The decoupling of gold from
the value of money led to the financialization – and bifurcation – of the
American economy, so that the financial manipulations of Wall Street
increasingly had little to do with the production of actual things, and the
real performance and value of the financial "assets" they were
dealing in, but instead were based on the "free" money being printed
hand over heels by the all-powerful Federal Reserve. The hedge funds, the wild
speculations of Wall Street’s most distended-from-reality "assets" –
like those sliced-and-diced toxic mortgages that led to the housing bust – are
all products of the Fed’s central planning: "They consume," says
Stockman, "vast resources without adding to society’s output or wealth,
and flush income and net worth to the very top rungs of the economic
ladder." Although
the free market is getting the blame for
this, the reality, says Stockman, is that these deformations of capitalism were
made possible by massive State intervention via the Fed, which enabled
politicians to spend without taxing – and the militarism of the alleged
"conservatives" was a key factor in all this.
"A
riotous expansion of the Warfare State was foremost among the policy errors of
the Reagan Revolution," writes Stockman:
"Within
days of Reagan’s taking office, the White House made a historically devastating
mistake by signing over to the Pentagon a blank check known as the ’7 percent
real growth top line.’ This massive injection of fiscal firepower nearly
tripled the defense budget from $140 billion to $370 billion within just six
years. More importantly, it fueled powerful expansionist impulses throughout
the military-industrial complex at exactly the wrong time in history."
After all, the Soviet Union was on
its last legs, you’ll recall, but, says Stockman, "the neocon branch of
the military-industrial complex trumpeted a new version of the phony missile
gap that John Kennedy had promoted during the 1960 campaign." The neocons
were hyperventilating about a supposed Soviet effort to give
the Kremlin a first-strike capability, building a new fleet of heavy bombers
and vastly improved long-range missiles. Yet the evidence for this alleged
drive to achieve first-strike capabilitynever really existed.
Furthermore, the Reagan administration’s efforts to counteract this phony
"threat" had nothing to do with mounting the appropriate
countermeasures. Instead, as Stockman points out, the US embarked on an
unprecedented buildup of conventional forces: "land, sea, and air forces
that were utterly irrelevant to the imaginary Soviet nuclear first
strike."
They
were, however, "well-suited to imperialistic missions of invasion and
occupation," writes Stockman. "Ironically, therefore, the Reagan
defense buildup was justified by an Evil Empire that was rapidly fading but was
eventually used to launch elective wars against an Axis of Evil which didn’t
even exist." And, says Stockman, it wasn’t just a question of wasting a
few percentage points of GDP:
"The
Reagan defense buildup gave birth to a historical monstrosity: the Bush wars of
occupation and imperial pretension that were possible only because of the
immense conventional war machine the Gipper left behind."
That
machine was useless for its ostensible intended purpose – deterring and
defeating the declining Soviet empire – but perfect for policing, occupying,
and pacifying "the vast open deserts and the crumbling mud and stone
walls" of the Middle Eastern battlefields of the future.
Much of the blame goes to the bad
advice Reagan got from Caspar Weinberger, his defense chief, but Stockman also issues
a full-throated condemnation of the sainted President himself:
"In
fact, Reagan was an out-an-out statist in the realm of the military and
national security. All the well-warranted skepticism he had about Big
Government – the empire-building tendency of the bureaucracy, the inherent
inefficiency and waste of public sector monopolies, the self-serving propensity
of bureaucrats to hide the facts and twist the truth – did not apply on the
Pentagon side of the Potomac."
In tracing the long, winding history of how we became a
nation of debtors, Stockman goes back to the New Deal and the war economy that prevailed after Pearl Harbor. The Fed became an arm of the War Department (as it was
then called), becoming the biggest buyer of Treasury securities, "thereby
‘monetizing’ federal debt on a scale never before imagined." The Fed thus
positioned itself as the motor and central control panel of the American
economy, "rigging the government bond market and the Treasury curve yield
by persistent massive open-market purchases of Treasury paper. Today this is
business as usual, but then it was a radical departure, a theretofore rarely used
tool that now became institutionalized owing to the exigencies of wartime
finance."
War is the health of the
State, as Randolph Bourne famously noted, and Stockman fills us in
on the economic details, down to the numbers in the Fed’s balance sheet
footings – which, as he shows, underwent "a twelve-fold expansion during
the four years of world war." As he puts it:
"The
Fed opened its doors in November 1914. But owing to the exigencies of wartime
its purpose and modus operandi were twice turned upside down during its first
thirty-one years. It can fairly be said that the Fed became a permanent denizen
of the government debt market during its service to the warfare state, forging
the T-bill standard, as it were, in the crucible of war."
Stockman
points out that the Fed was sold to the politicians and the American public as
a "banker’s bank," a ready source of liquidity that would prevent the
disruption of commerce during recessions, and obviate the need to call in loans.
It was never intended to be a dumping ground for the national debt, or so its
congressional supporters believed. Thirty years later, however, the main
selling point of the Fed – that it would be the impartial custodian of the
nation’s reserve funds and a bulwark of fiscal discipline – were turned up side
down. "This development," Stockman writes, "was the result of
two wartime borrowing sprees and the resulting wholesale abandonment of the
nation’s historic balanced-budget discipline. The public debt thereby grew from
midget to giant dimension."
War
increased the power and reach of the Fed by leaps and bounds, leading it to
assume its eventual role as the primary mover of the national economy –
displacing the original version of the Fed’s role, which was supposed to
respond to trends in the real economy. "Under the original version of the
1913 act," avers Stockman, "the business economy was in the monetary
driver’s seat. It generated the ebb and flow of loans, deposits, and reserves
in the banking system and the final aggregates of money and credit. Federal
Reserve credit arose from commerce that already existed: it did not seek to add
even a dime to existing bank loans or GNP."
But
World War II changed all that:
"By
contrast, during the period of war finance between 1942 and 1945, the Federal
Reserve became a powerful, proactive manager and manipulator of the nation’s
entire commercial banking system. Its purpose during that interval of national
crisis was to manage the nation’s ballooning war debt, but these very same
tools of banking system management were later adapted to management of the GDP
itself.
"It’s
apotheosis came six decades later, when the Fed orchestrated a veritable dance
of the zombies during the aftermath of the September 2008 meltdown. Reaching
back to its school days in war finance, the Fed again engineered a steep
Treasury yield curve by driving front-end rates to nearly zero. In doing so, it
gifted legions of insolvent banks with a simulacrum of profits. It thereby
reduced depositors to penury, of course, even as it kept zombie institutions
alive and their executives in bonuses a while longer."
How much longer? Stockman’s thesis is
that we haven’t
got much time left. The Great Deformation took decades to work its destructive
effects into the fabric of the nation’s economic life, corrupting its integrity
and financializing a hollowed-out productive capacity that had once been the
envy of the world. Yet the warning signals – the crash of ’08, and its many
precedents – have been flashing for some time, and if alarm bells
aren’t going off in Washington, particularly in the Eccles Building, then that is due to the illusion of a
debt-based "prosperity."
This
sounds like standard old-style fiscal conservatism, but Stockman serves it up
with a twist. Unlike most "free market" economists of the sort that
hang around the Heritage Foundation and other "conservative"
thinktanks, Stockman understands the origins and development of the system that
led to the
current crony capitalist regime are firmly rooted in the soil of militarism.
In his chapter on "War
Finance," Stockman busts the Keynesian myth that we spent our way out of the Great
Depression because of huge government expenditures during wartime.
He points out that 80 percent of the costs were financed by the forced
"savings" of confiscatory taxation and
the "voluntary" purchase of war bonds by private citizens. Of course,
since essentials were rationed, and "luxuries" virtually nonexistent,
there was nothing much for anyone to buy. Stockman points out that, contra the
Keynesians, who point to World War II to illustrate the alleged
"success" of deficit spending," total debt did not rise during
the war years: instead, it actually declined. In 1945, the total debt – private
and governmental – was lower than under the peacetime New Deal, circa 1938. The
lesson of the facts and figures Stockman presents in numbing detail is a point
that conservatives of today would do well to absorb:
"What
the warfare state of 1941-1945 proved was that wars should be funded with taxes
and savings, not that federal deficits are harmless or that they were a cure
for the Great Depression."
At the end of the most destructive
war in history, the machinery that would enable the metastasis of the
Warfare-Welfare State was firmly in place: a Federal Reserve system that had
grown beyond its original mandate into the central planner and supreme arbiter of the nation’s
economic condition, and a worldwide military presence that had displaced the British empire as the policeman of the
world.
Yet
there was to be a brief reprieve from this looming prospect in the fiscally
conservative pay-as-you-go wartime spending of the Truman administration during
the Korean conflict, and what Stockman regards as Eisenhower’s golden age of
fiscal conservatism and Pentagon budget-cutting. I briefly discussed Stockman’s
treatment of the Eisenhower era in my speech to the Republican Liberty Caucus
of California, at their recent convention, but I’ll go into it in more depth in
my next column – because it is truly a fascinating and little known story.
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