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David Stockman, Reagan economist, on U.S.'s debt spree

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  • David Stockman, Reagan economist, on U.S.'s debt spree

    (05-30) 04:00 PDT Greenwich, Conn. --

    David Alan Stockman, director of the Office of Management and Budget in the Reagan administration, sat down to discuss the federal debt and the economy.

    Q: What similarities do you see between the situation in Washington in the 1980s and the situation now?

    A: I think it's dramatically different, a night-and-day difference. (In the 1980s) we had an economy that was encouraging and beckoning to entrepreneurs. I think we have an economy today that's on the edge of insolvency. We'll be dealing with an age of sacrifice, austerity and an age of pain. You have to stop pretending that we're in a normal business cycle.

    Q: So what do we do about it?

    A: The fall of 2008 and the financial market meltdown was simply a wake-up call that we were in an unsustainable debt spree. The first step is to recognize the new reality we're in, which is not something politicians ever want to do. They certainly do not like to tell people that we have to eat our broccoli and we have a political class in the Beltway that's totally out of shape, incapable of dispensing pain to the electorate. The stimulus spending got totally out of hand. We borrowed money from the Treasury and handed it out to people to spend. The Republicans are just focusing on tax cuts while Democrats are defending their spending and they aren't willing to compromise. You're going to need to allow the Bush tax cuts to expire and, on top of that, find some new revenue sources. Now, we seem to think that we can have 3 percent of GDP deficits forever. It's like a runway, and the airplane is near the end of it. The Republican Party is being reckless in historic proportions, reckless to the extreme.

    Q: What about Obama?

    A: He's got to stop talking about taxing only the top 2 percent. Tax increases are going to have to include the middle class. On this path we're heading toward class warfare.

    Q: What will it take to break that cycle?

    A: I think it'll take a thundering conflagration in the global bond market. The budget deficit isn't going to be addressed, and we have not had a two-way market of supply and demand. We now have what I call a "monetary roach motel," where the bonds come in and never come out. China has now got an economy that is so overheated - it means that they will be buying less dollars and far fewer bonds. Over half of the $9.5 trillion in U.S. Treasury debt is owned by central banks and has been purchased recently. I think we're at the last days of the artificial interlude and we're going to be entering the real days.

    Q: Is the situation in Europe going to speed this process?

    A: It should be a loud wake-up call. We're basically following the same path as the Greeks and the rest of Europe, and there's going to be a great day of reckoning, of reawakening. Once that starts, there could be a rapid, severe and even violent adjustment.

    Q: What happens with that adjustment, and what does it do to the economy and corporations?

    A: Everything is priced off the 10-year Treasury debt, so if that adjusts, it will ricochet in the fixed income market. That's why it's so dangerous. They're rolling the dice with an unstable market. This year, we're borrowing 43 cents on every dollar we spend. It's a violation of every canon of sound finance that has been believed in the Western world for the last 200 years. There's been no recovery; there's just been a massive medication. The (Rep. Paul) Ryan plan has been said to be brave and heroic as he faces the problems. He doesn't. The problem is here and now and the so-called modest recovery has come out of borrowed money. Since the peak of the last cycle in the fall of 2007, disposable personal income is up $1.1 trillion, but of that $1.1 trillion gained in the last 40 months, $700 billion is due to transfer payments and $300 billion is due to cutting taxes to the lowest point they've been at since 1948. A trillion is borrowed money. The point I'm making is that it's not sustainable.

    Q: If some politicians could explain this to people, would they get votes?

    A: The politicians have had their head in the sand for so long about this issue that I really don't think they can compute reality anymore. We had the tech bubble, the housing bubble and now the Feds are stimulating what I call the "risk-on" bubble. We've gotten the worst of both worlds: a false signal to Congress that sovereign debt is virtually free and a message to Wall Street that says, 'Go back to reckless speculation.' This is not causing the real economy to recover, and it's creating this massive IOU of unfunded public fiscal action that sooner or later is going to have to be paid.

    We need a drastic downsizing of our war machine, especially after they got Osama bin Laden. As welcome as that event was, that kind of problem is a police problem at home, not something that needs a globe-spanning war machine. We should be rethinking whether we need an $800 billion defense budget. That's a vital part of the equation.

    Q: What happens if suddenly there are no more defense contracts?

    A: If you finance a military budget honestly out of savings, it has an immediate offsetting effect, but if you finance it dishonestly, as Bush did, by simply having the Fed print the money, then you're setting up the economy for a bad headache the morning after. (With the Arab Spring), it's pretty clear we've been fired as the world's policeman.

    Q: So bottom line, what can we do?

    A: In a pure world, I think you could cut a lot of spending. There would be a way of getting back to a government where we do a social safety net on a means-tested basis, but that is never going to happen in this world.

    Revenue is absolutely necessary, both as a practical matter and a matter of numbers. We should put a variable levy on imported oil at $100 (a barrel); whatever the price is coming in, you pay a levy to bring it to $100. We increase the power of the economy, both supply-side and demand-side, if we give investors a certainty of the price.

    If we have a Tobin tax - a small tax on every transaction in this casino we used to call the stock market - we can easily generate $100 billion in revenue. We have a massive high-frequency churning in these markets today, and they're not accomplishing anything that's productive for the rejuvenation of the private economy.

    Q: Are you still a fan of entrepreneurial capitalism?

    A: Yes, but we don't have entrepreneurial capitalism anymore, we have crony capitalism. We've had a tremendous reverse Robin Hood redistribution of income to the top. I don't think it's Armageddon. I think it's just one crisis after another.

    -----------------

    David Alan Stockman

    Born: Nov. 10, 1946, Fort Hood, Texas

    Education: Bachelor's degree, Michigan State University. Graduate work, Harvard University.

    Politics and public service: Former three-term congressman from Michigan; director of the Office of Management and Budget, 1981-85, in the Reagan administration.

    Business career: Former managing director of Salomon Brothers; founding partner, the Blackstone Group; founder, Heartland Industrial Partners LP, a private equity firm in Greenwich, Conn.

    Legal problems: Indicted in 2007 in an alleged fraud scheme in relation to a troubled auto-parts manufacturer he ran, Collins & Aikman. "I have done absolutely nothing wrong," Stockman said, maintaining that the company's travails were due to the industry's collapse, not to fraud. In 2009, federal prosecutors agreed and announced that they would not prosecute him.

    Books: "The Triumph of Politics: How the Reagan Revolution Failed," Harper & Row, 1986; and "The Real David Stockman," St. Martin's Press. 1986. Working on another book, due in 2012.

    Personal: Married, father of two, resident of Greenwich, Conn.

    Read more: http://www.sfgate.com/cgi-bin/articl...#ixzz1Nt3OrbRx
    Facts do not cease to exist because they are ignored. -- Aldous Huxley
    Two things are infinite: the universe and human stupidity. -- Albert Einstein

  • #2
    David Stockman is a fruitcake.

    He was FIRED by Reagan. Indicted a few years ago. Has very little credibility with either side of the aisle.

    Says cutting taxes never brings in revenues. Says the Reagan Revolution never worked. Even plenty of Democrats would disagree with that one.

    Comment


    • #3
      David Stockman was a very successful businessman. I thought you extolled the wisdom of businessmen.

      Although, under the right circumstances, cutting tax rates can result in higher tax collections in the long run, it is very unlikely to do so in the short run. Right now, we urgently have to cut the deficit quickly, not over 10 years. I don't see either party being willing to do that. I don't foresee any significant cuts to entitlements.
      Facts do not cease to exist because they are ignored. -- Aldous Huxley
      Two things are infinite: the universe and human stupidity. -- Albert Einstein

      Comment


      • #4
        Originally posted by DAL View Post
        David Stockman was a very successful businessman. I thought you extolled the wisdom of businessmen.

        Although, under the right circumstances, cutting tax rates can result in higher tax collections in the long run, it is very unlikely to do so in the short run. Right now, we urgently have to cut the deficit quickly, not over 10 years. I don't see either party being willing to do that. I don't foresee any significant cuts to entitlements.
        LOL, DAL....hell, even Adolf Hitler was a businessman. I'm disappointed in your gross overgeneralization.....GALACTIC overgeneralization....it's not like you at all, lol.

        Just for the record, I lump people who work in securities firms in a different category as all the rest of us entrepreneurs and capitalists. Frankly, a lot of them make me sick. Great numbers crunchers and gamblers, but not the type entrepeneur I think of when I say "entrepreneur" or "business person." There are enough good ones with integrity, but too many with questionable ethics.

        Comment


        • #5
          In other words, in my minds eye, many of them are just gloried gamblers.

          Comment


          • #6
            Originally posted by DAL View Post
            .

            Although, under the right circumstances, cutting tax rates can result in higher tax collections in the long run, it is very unlikely to do so in the short run. Right now, we urgently have to cut the deficit quickly, not over 10 years. I don't see either party being willing to do that. I don't foresee any significant cuts to entitlements.
            Oh, and you're also not grasping the psychological impact....remember how a huge part of economics is psychology and anticipation? Why do you think that business froze more than they had in decades until it was announced the Bush tax cuts would stay in place and all of a sudden things started to loosen up some?

            Comment


            • #7
              By the way, Stockman was not prosecuted, and his criticism of the Reagan years was that Congress was unwilling to cut spending in line with the tax cuts. As a result, deficits increased.

              It's so easy to criticize, but I don't see any suggestion for a political feasible solution. Did I miss something? Is there a reputable economist out there who says that things are just fine and we should keep taxes low while continuing to spend?
              Facts do not cease to exist because they are ignored. -- Aldous Huxley
              Two things are infinite: the universe and human stupidity. -- Albert Einstein

              Comment


              • #8
                Originally posted by DAL View Post
                his criticism of the Reagan years was that Congress was unwilling to cut spending in line with the tax cuts. As a result, deficits increased.
                How about that....you found something smart Stockman actually said.

                And asking if I'm implying things are fine is like asking if I think unemployment is at 0. And even the most stubborn liberals are starting to join the chorus about cutting spending. As for what to do with taxes, there are plenty of economists who don't think we should be raising taxes in such a screwed up economy. But as I keep saying, many economists are Keynsian-trained, and have no actual experience in the trenches.

                Comment


                • #9
                  Another non-answer.

                  The reason Reagan fired Stockman was for being honest.
                  Facts do not cease to exist because they are ignored. -- Aldous Huxley
                  Two things are infinite: the universe and human stupidity. -- Albert Einstein

                  Comment


                  • #10
                    Originally posted by DAL View Post
                    Another non-answer.

                    The reason Reagan fired Stockman was for being honest.
                    DAL, seriously, you really need to go get some real business experience BUILDING a business.

                    Comment


                    • #11
                      Originally posted by EmmaPeel View Post
                      DAL, seriously, you really need to go get some real business experience BUILDING a business.
                      How does that comment have ANY relevance to what he said?

                      Comment


                      • #12
                        Originally posted by BigPat View Post
                        How does that comment have ANY relevance to what he said?
                        Go back and read my first post. I said Stockman was a fruitcake who doesn't have much credibility on either side of the aisle. he's nothing but a number cruncher.

                        Comment


                        • #13
                          Originally posted by EmmaPeel View Post
                          How about that....you found something smart Stockman actually said.

                          And asking if I'm implying things are fine is like asking if I think unemployment is at 0. And even the most stubborn liberals are starting to join the chorus about cutting spending. As for what to do with taxes, there are plenty of economists who don't think we should be raising taxes in such a screwed up economy. But as I keep saying, many economists are Keynsian-trained, and have no actual experience in the trenches.
                          Keynes argued for raising taxes in boom times as a means to smooth the business cycle and prevent economic bubbles and inflation. He didn't argue for broad tax increases during recessionary spending. Keynes argued for government deficit spending that would be paid for later. What we are doing now, and have been doing since the days of Reagan, is deficit spend, which is a Ketynesian's dream.

                          Comment


                          • #14
                            Originally posted by EmmaPeel View Post
                            Go back and read my first post. I said Stockman was a fruitcake who doesn't have much credibility on either side of the aisle. he's nothing but a number cruncher.
                            I was talking about your snide little "you need to start a business" remark. What relevance did that have to the discussion at hand?

                            Comment


                            • #15
                              I like this guy. Taxes are at an all time low (since Korean war era) and we are facing all time highs in budget deficits. Raise the tax rates or close the damn loopholes and giveaways. Get something done! The debt ceiling has already been reached and our Treasury is scrambling to keep the country operating normally. We need money now or there won't be any later.

                              Comment

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