The Great Disinformation: Why David Stockman is Wrong

David Stockman, former Republican congressman and former budget director under Ronald Reagan, wrote an inflammatory op-ed piece in the New York Times a week ago Sunday (State-Wrecked: The Corruption of Capitalism in America) in which he declared “this latest Wall Street bubble, inflated by an egregious flood of phony money from the Federal Reserve rather than real economic gains, will explode.” Stockman, whose most recent book, “The Great Deformation: The Corruption of Capitalism in America,” was published last month, has been trumpeting the end of the world as we know it in any venue that will have him. His tendency to spew a flood of statistics, framed in overblown, apocalyptic language, lends a superficial weight to his arguments that evaporates upon closer examination.

Not wishing to begin with an ad hominem attack, we must nonetheless note that Stockman’s formal training involves a BA in history and some time spent at the Harvard Divinity School, which explains to some degree the lack of economic coherence in his arguments, which tend instead to be political and philosophical in nature. In his usual overheated language, he declares that our “state-wrecked” condition arose because, “we’ve had eight decades of increasingly frenetic fiscal and monetary policy activism,” concluding, “The toll has been heavy.”  Heavy indeed. In fact, the U.S. economy, in real, inflation-adjusted terms, is nearly 20 times larger today than it was eight decades ago.  Miracle of growth might be a better term than “heavy toll.”

Stockman then goes on to bemoan the perfidy of Franklin Roosevelt, who took the U.S. off the gold standard, and Richard Nixon, who ended the convertibility of the dollar to gold (after the French made a “run” on Fort Knox), “a sin greater than Watergate” he concludes. We won’t spend time on an extended discourse on why “fiat” money is superior to gold-backed money, other than to say it doesn’t make sense to limit the growth of the money supply to something as disconnected from real productivity and economic expansion as the stock of gold held by the government.

Stockman is also very much obsessed with the evils of the Federal Reserve and its aggressive actions in the face of a bursting real estate bubble. He confidently declares: “There was never a remote threat of a Great Depression 2.0 or of a financial nuclear winter; contrary to the dire warnings of Ben S. Bernanke.” We believe that anyone who honestly revisits their memories of those dark days in 2008 and 2009 will recall that circumstances on the ground seemed quite dire indeed. And, in the end, we must give more weight to the assessments of Ben Bernanke, arguably the world’s greatest expert on the Great Depression, than to Stockman, who has never formally studied economics and has only his afore-mentioned BA in history to fall back on.

As for Stockman’s obsession with bubbles, we certainly don’t deny that they occur- the recent real estate bubble is too powerful an example to ignore – but his claim that we are in the midst of a Wall Street bubble is readily refuted. The fact is that US and global companies have real earnings from selling real products and services to real customers who are no longer going into debt to buy those goods and services. And markets are valuing those real earnings at a reasonable level: the U.S. stock market’s price-to-earnings ratio is currently near the long-run average of 15, not the nosebleed levels above 30 that we saw at the peak of the dot-com bubble.

So, in the end, we find Stockman’s diatribe thin on real evidence and reject his conclusion that “the future is bleak” and that America has reached “an end-stage metastasis.”

A 1981 profile of Stockman, written shortly after he became budget director under President Ronald Reagan, reported:

“How The World Works. It was a favorite phrase of Stockman’s, frequently invoked in conversation to indicate a coherent view of things, an ideology that was whole and consistent. Stockman took ideology seriously, and this distinguished him from other bright, ambitious politicians who were content to deal with public questions one at a time, without imposing a consistent philosophical framework upon them.”

Ideology is indeed at the center of Stockman’s arguments.  And his ideology is whole and consistent. And dyspeptic and dystopian. While he sees decline and decay spanning the last eight decades, we see an economy that has grown nearly twenty-fold. While he sees a nation in fiscal collapse “like a Greek/Cypriot tragedy,” we see a nation slowly but successfully climbing out of one of the worst recessions in 80 years. While Stockman sees a “future that is bleak” and an America brought to “an end-stage metastasis,” we see an America that is growing, with unprecedented new energy sources, a surge in new manufacturing, a consumer sector that is rebuilding its balance sheet, and new innovations arising every day that show that the spark of creativity and entrepreneurial vigor has not left us.

Stockman the student of history seems to have missed its greatest lesson: over the long run, optimism has been rewarded vastly more than pessimism.