Can America’s Descent into Crony Capitalism be Reversed?

by John Butler

by David Stockman: The
Forgotten Cause of Sound Money

David StockmanÂ’s
Great Deformation
is a tour de force work of historical
revisionism that demolishes the conventional economic and political
wisdom prevailing both prior to and in the aftermath of the 2008
global financial crisis. Approaching his subject from many different
angles, he demonstrates in thorough and specific detail, including
much direct personal experience, that the roots of the crisis stretch
back many decades. Few if any stones are left unturned; few if any
major US political actors escape criticism; and all are subject
to healthy scrutiny regardless of their orientation on the left-right
spectrum. Indeed, Stockman makes clear that the facile left-right
distinction of US politics obscures a deeper crisis of capitalism
that spans the breadth of the American economic and political landscape.
While he admits he has little hope that America can now change course,
in closing he does offer a few specific policy recommendations that
might, just might, lay the foundation for a Great American Reformation,
were they to be implemented in future.

A Most Credible

There is no
more credible source for a book detailing the myriad policy failures
collectively contributing to AmericaÂ’s decent into crony capitalism
than David Stockman. Elected to Congress in the 1970s while still
in his 20s, he was selected by President Reagan to be his first
budget director at age 31 and was thus the youngest Cabinet-level
US official to serve in the entire 20th century.

and bushy-tailed in comparison to the seasoned older guard dominating
the Reagan White House, Stockman became rapidly disillusioned by
the striking contrast between ReaganÂ’s lofty rhetoric on the
one hand and the reality of White House policies on the other. He
left politics in 1985 for the private sector and entered the world
of private equity as a partner at the Blackstone Group.

As Stockman
himself admits, however, he is not entirely above the criticism
he levels repeatedly at others throughout the book. Three prominent
examples include his admission of avoiding the Vietnam draft by
enrolling in Harvard Divinity School; being repeatedly outmanoeuvred
by highly experienced political operatives while serving in the
Reagan White House; and bearing at least some responsibility for
a handful of poor investment decisions while working at Blackstone.

This honest
introspection only serves to make the book more credible. Stockman
is an American taking a long look in the mirror and asking the tough
questions that few in power will ask, associated as they all are,
in some way, with the great tragedy he describes in thorough detail.

The First
Polemical Punch

Stockman wastes
no time in landing his first polemical punch: On the first page,
he observes that the US ‘Fiscal Cliff’, around which there
was such high political drama late last year, is both “permanent
and insoluble,” and that the chronic US deficit and debt problem
is “the result of capture of the state, especially its central
bank, the Federal Reserve, by crony capitalist forces deeply inimical
to free markets and democracy.”

What follows
is page after page of shocking detail regarding the metastatising
crony-capitalist cancer consuming the US economyÂ’s once great
potential. While primarily concerned with recent developments, a
great strength of the book is that it seeks always to trace the
roots of The Great Deformation back to their beginnings, for example,
in early 20th century Progressivism; in President RooseveltÂ’s
New Deal; or in the Republican PartyÂ’s fateful decision in
the 1960s to sever its small-government roots.

the Conventional Wisdom

the book, Stockman relentlessly attacks the economic conventional
wisdom. In one instance he reaches back into the Great Depression
to demonstrate that numerous policy errors both in the United States
and abroad contributed to the 1929 stock market crash and subsequent
banking crises of the early 1930s. Moreover, he demonstrates convincingly
that it was not the military Keynesianism of the 1940s that ended
the Depression but rather a severe and prolonged household and corporate
deleveraging facilitated by a combination of women entering the
workforce en masse, a general shortage or outright absence of many
consumption goods and the associated, unusually high national savings

This goes directly
against the mainstream interpretation that increased rates of savings
only serve to make financial crises even worse. But Stockman does
not stop there. He shows how the rapid public sector deficit reduction
in the immediate postwar period and the general fiscal prudence
of the Truman and Eisenhower years enabled the rapid, healthy, sustainable
growth of the 1950s and 1960s to proceed absent any material increase
in the public debt and absent inflationary pressures on prices.

This began
to change during the Kennedy administration but it was under Johnson
and Nixon that traditional American fiscal convervatism was shown
the door for good. From this point forward, the tone of the book
changes dramatically as Stockman initiates a devastating assault
on the conventional wisdom: The entire left-right narrative of US
politics is demonstrated to be a great charade. Even the early Reagan
years in which Stockman was a direct policy participant are shown
to be an exercise in the relentless growth of government, associated
deficits and debt. As he explains it, “Rather than a permanent
era of robust free market growth, the Reagan Revolution ushered
in two spells of massive statist policy stimulation.” Indeed,
Stockman characterises the Reagan and Bush years as a ‘Keynesian

As Stockman
explains, for all the talk to this day of ReaganÂ’s fiscal conservatism,
the only meaningful conservative policy victory of the time was
achieved by the Fed, not the government. Paul Volcker did what was
required to stabilise the dollar and bring down inflation following
the disastrous stagflationary 1970s, the inevitable consequence
of JohnsonÂ’s and NixonÂ’s fiscal largesse, the hugely expensive
Vietnam war, soaring government deficits, de-pegging the dollarÂ’s
link to gold and the FedÂ’s accommodation of, among other associated
phenomena, higher crude oil prices via OPEC.

As is the consistently
the case throughout the book, however, Stockman highlights the links
between failed economic policies and their unfortunate social consequences:
The relentless growth of moral hazard and crony capitalism. Once
Volker had left the stage, replaced by Alan ‘Bubbles’
Greenspan (sic), he explains how the Fed began to de facto target
asset prices, in particular the stock and housing markets, and that
“Under the Fed’s new prosperity management regime…the
buildup of wealth did not require sacrifice or deferred consumption.
Instead, it would be obtained from a perpetual windfall of capital
gains arising from the financial casinos.” Wow.

right, for decades the stock market has been a financial casino,
rigged as desired by the Fed to (mis)manage the economy, and now
all that is left is a “bull market culture” that has “totally
deformed the free market.”

Stockman also
points out how the decades leading up to 2008 were replete with
‘foreshocks’ of the eventual financial earthquake. For
example, there was the SL crisis of the late-1980s and early
1990s. There was the Long-Term-Capital debacle. And each and every
time that the FedÂ’s economic management led, either directly
or not, to near-calamity, the bailout beneficiaries were enriched

With most of
StockmanÂ’s criticism is directed at Washington, Wall Street
and the Fed, he nevertheless reserves some for the non-financial
corporate sector. As he explains:

the FedÂ’s cheap credit regime, there arose a noxious distortion
of the tax code best summarized as ‘leveraged inside buildup’.
The linchpin was successive legislative reductions of the tax
rate on capital gains that resulted in a wide gap between high
rates on ordinary income and negligible taxes on capital gains.
This huge tax wedge became a powerful incentive to rearrange capital
structures to that ordinary income could be converted into capital

In StockmanÂ’s
view there is thus plenty of blame to go around. On a few occasions
he even criticises the defence establishment, holding up Eisenhower
as the last example of Pentagon budgetary discipline. While he hardly
comes across as a dove in foreign policy, he is certainly not as
hawkish as recent administrations and he points out a handful of
examples of failed defence policies and budgetary largesse past
and present.

Beyond Left
and Right

Readers who
attempt to understand this book according to any variation of the
current economic policy mainstream or through the obsolete left-right
narrative of US politics will struggle to understand StockmanÂ’s
independent perspective. The Great Deformation is written by an
old-school, small-government ‘Eisenhower Republican’ and
champion of the free-market who is more perceptive than most just
how far the insidious crony-capitalist rot has spread, whether it
be facilitated by purportedly left-leaning ‘regulation’
or encouraged by right-leaning tax-reform. As Stockman repeatedly
demonstrates, the concept of ‘capture’ applies equally
to both.

Perhaps unsurprisingly
given the horrifying state of affairs he so cogently describes,
Stockman is not sanguine about AmericaÂ’s future. The US is
travelling down Hayek’s fabled ‘Road to Serfdom’
as the government and central bank respond to the damaging effects
of failed interventionism with escalating interventionism. Indeed,
since at least 2008, the evidence is overwhelming that America has
been accelerating down that tragic road.

In closing,
Stockman offers some ideas that might help the US to reverse course,
although he strongly doubts that they will be adopted. If anything,
the political winds from both left and right continue to blow in
the other direction. No doubt his polemic will be rebuffed by those
in power on both sides of the aisle in Congress and his recommendations
for reform will go unheeded. That Stockman knows this, but wrote
this book regardless, demonstrates his love for America. Anyone
sharing that love should read it.

with permission from

25, 2013

© 2013 Financial