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Thursday, February 11, 2010

David Stockman comes in from the cold

Great stuff from the Director of the Office of Management and Budget under Ronald Reagan.

How Politics Caused Fiscal Disaster, from minyanville.com.

My proposition today is that we’re in a fiscal calamity caused by the further, and perhaps, final triumph of politics. Admittedly, I issued this very same forecast awhile back -- 23 years ago to be exact. But I’m not reluctant to try again. Having read Grant’s continuously since 1988, I’ve learned there’s no shame whatsoever in being early -- even often!

The Triumph of Politics was published early, mainly in the unflattering sense that I’d not completed my homework. I was hip to statist fiscal and regulatory evils, but had only dimly grasped the Austrian masters’ wisdom on money; that is, in printing money backed by nothing, central banks inherently threaten prosperity. So today I’ll add the proposition that fiscal decay is the inevitable step-child of the very monetary rot that the Austrians -- Mises, Hayek, Rothbard -- so deplored.

...

The “panic of 2008," therefore, wasn't a random policy error, nor was it caused by the machinations of overly-bonused bankers. In fact, the massive quantities of unsupportable debt and the vast malinvestments in housing, banking, shopping malls, office buildings, and Pilates studios, too, which came crashing down last September, were rooted in history’s other star-crossed rail car. That was the gilded club car which in November 1910, had secretly whisked away Senator Nelson Aldrich and his coterie of Morgan, Rockefeller and Kuhn Loeb bankers to a duck-hunting blind on Jekyll Island, Georgia.

The truth is, the monster that was hatched there -- the Federal Reserve System -- has always been an instrument of politics; that is, the politics of the speculative classes, whether domiciled on Wall Street, Main Street, or the Agrarian plains. Let the political chatter get fevered enough about unfairly “low” prices for goods, grains, or labor and there's invariably been a new theory and willing maestro at the Fed to print-up some easy credit.My thesis today is that monetary rot underpins fiscal decay, but that’s not to gainsay the complicity of Capitol Hill and the White House in the march to budgetary ruin -- particularly the complicity of the type of Republican Whiggery which emerged after the 2000 election.

The truth is, just as the Great East Asian Deflation called for monetary hardening, not ease, it also warranted a large increase in national savings -- including public sector surpluses. But by then there had been assembled in Karl Rove’s political assault camp, a coalition of the neo-cons, the social-cons, the tax-cons and the just-cons. None of them gave two hoots about real fiscal discipline.

The neo-cons postured as big-time thinkers, articulating a lofty policy case for an American Imperium. But unlike real imperialists, the neo-cons had nothing to say about the crucial issue of war finance.

Indeed, since DOD couldn’t seem to keep a pipeline open in the planet’s second richest oil province, the neo-cons couldn't even fallback on the imperialist’s traditional gambit of looting the colonies. Obviously, the real answer was a war tax -- especially since the war at issue was an elective. But that idea was anathema in Karl Rove’s assault camp, so the neo-cons simply ignored the fiscal consequence of the multi-hundred billion annual drain on the treasury their policies entailed. War finance, it seems, was relegated to the GOP’s all-purpose folklore -- the myth that lower taxes and more growth would cover any fiscal hole.

The tax cons, for their part, did not even think about fiscal policy; they issued Papal Edicts. Consequently, a kernel of truth -- the notion that lower marginal tax rates are economically beneficial -- became ensnared in a body of debatable doctrine, even outright claptrap.

Foremost among the latter is the alleged absence of a correlation between deficits and either interest rates or real growth. Fine. If that’s the test, let’s abolish taxes completely and put the Federal government on a regimen of 100% bond finance.

Likewise, the tax-cons have shamelessly misapplied evidence that a lower capital gains rate did generate higher revenue. True, these cuts sped the realization of gains already extant, but that has nothing to do with the revenue impact from lowering or raising rates on 95% of what we actually tax; that is, accrued payrolls and earned income.

Not technical quibbles, these points highlight the folly of elevating tax-cutting to the status of religious writ. Indeed, unwilling to cut spending by so much as a single veto in eight years, the Bush Administration needed to get revenue raising on the table as a matter of pure math. But the tax-cons, having totally befuddled what passes for GOP fiscal thinking, were able to drive the herd in just the opposite direction, slashing Federal revenues twice more during the Bush fiscal debauch. The profound financial danger, therefore, is that there's no longer in the United States a conservative fiscal opposition even worthy of the name.

Moreover, this fiscally perilous condition continues to be exacerbated by the tattered remnants of Karl Rove’s political assault camp. The social-cons, relentless as ever in their bible-thumping and immigrant-bashing, help to elect real socialists, as often as not. And the just-cons continue to turn fiscal responsibility into a bad joke. Last election, 85% of the American people were against the abomination called TARP. But on that central issue, the Republican standard bearer went radio silent while chattering endlessly about appropriations earmarks. But taken together, those 8,000 earmarks add-up to just 15 hours of annual Federal spending. The needless bailout of Wall Street engineered by Bubbles and the Henry "Hammer" Paulson, by contrast, destroyed forever any residual will to control spending that remained on Capitol Hill.


So basically, this thing won't end until it ends. The US government's bonds continue to be sold at an artificial discount, as the Fed outright monetizes the debt and shell-shocked banks loan to the federal government rather than the private sector. Eventually, the twin trade and fiscal deficits will be unsustainable at current rates of interest. The economic activity (such as it is) from the bailout and stimulus will be liquidated in its turn, and Bernanke's bag of tricks will be empty.

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