David Stockman was Ronald Reagan’s first Budget Director. He left the political world for things like Private Equity. Lately, he has been making headlines for his statements regarding the economy and fiscal matters. He says "In some ways Herbert Hoover got a bad rap." in this interview with the WSJ’s Alan Murray. Stockman lays out a merciless Austerian view of the economy with a plan for economic recovery and cutting spending, raising taxes, and allowing for years of austerity. It is a good interview, although the part 13 1/2 minutes through on fraud and Stockman’s personally benefiting from cheap money is very awkward. Watch for it.
Now, if Stockman had said "cut spending and cut taxes," for recovery, that might have sounded believable. But he’s not saying that; he’s asking for a double dose of austerity. This doesn’t sound like a recipe for recovery to me – more likely a debt deflationary spiral and GD II. But, hey, it is the road I am saying we may be on soon.
Apparently, Stockman is unfamiliar with the basic economic accounting identities that make plain that cutting spending and raising taxes leads to Depression – not recovery. He seems to understand this when he says “you can’t have growth and deleverage at the same time.” But he needs to go that extra logical step.
P.S. – All of the deficit in the U.S. has to do with unemployment, military spending or social programs. Which of these three areas do you think people like Stockman will put under the spotlight?
Also see David Stockman – Four Deformations of the Apocalypse – NYTimes.com from this past month’s New York Times in which he makes similar arguments. As I originally wrote this, I was negative on Stockman’s comments. However, I am very sympathetic to his basic argument that the last generation of growth was illusory, ginned up by excess consumption and leverage and that a massive deleveraging is necessary. I should also add that I agree with Stockman that the government cannot fine tune the economy; he says this fine tuning via an asymmetric easy monetary policy is largely responsible for creating the leveraged and unstable financial system globally. I would agree with this. In fact, on may levels, Stockman makes a lot of sense. However, we are in a policy cul de sac here. Stockman should realize that severe American austerity means Depression in America and globally, which also undoubtedly means civil unrest and military confrontation in a nuclear world.