The Great Deformation: The Corruption of Capitalism in America by David A. Stockman, (Public Affairs 2013), 768 pages.
Most leftist critiques of libertarianism focus on an alleged blind defense of corporate power. Indeed, left-libertarian Kevin Carson has helpfully criticized the very real problem of “vulgar libertarianism,” the working assumption that current economic realities are a product of free-market dynamics and therefore deserve an emphatic defense. In truth, massive wealth accumulation in at least a few conspicuous sectors, the plight of workers, and growing inequality all flow at least in large part from government interventions in behalf of the economically powerful, and libertarians err insofar as they ignore this.
On the other hand, the conflation of laissez faire and corporate power is at least as common on the Left, which often derides libertarians for the sin of “market fundamentalism.” The argument sometimes comes that libertarians are hypocrites, failing to see how much government props up fat-cat beneficiaries, but rarely do progressives or so-called liberals follow through and argue that real free markets are the answer. It seems, to the contrary, that many on the Left would much prefer the conservative variants of economic management we get from Republican politicians, inequality and all, over the unplanned results of genuine free enterprise.
In fact, radical libertarians have often argued against corporate privileges that much of the Left ignores or even defends. Libertarians have for generations drawn attention to the Federal Reserve’s cozy relationship with the banks. We have long criticized the distribution of wealth arising from unfair land policies. Libertarians provide many of the most trenchant critiques of patent and licensing privileges, which entrench powerful economic players. A lot of the economic interventions that appear egalitarian are in fact regressive, but even some of the ones that are obviously regressive — sales taxes, occupational permit requirements, eminent domain — have long received far more aid and comfort among progressives than among any kind of libertarians.
At any rate, we who favor the market should rejoice at the sight of pro-market critiques of modern American capitalism, such as it is. One reason is dialectic and historical — classical liberals traditionally championed the economically weak against consolidated corporate power, and much of the reason libertarians are associated more with the latter lies in historical accident, the circumstantial alliance libertarians made with conservatives against New Deal liberalism in the last century. Another reason is substantive. Corporate power drives state power, and vice versa, and misunderstanding that relationship will not bring us any closer to a free society.
When conservatives, and not just libertarians, turn against the corporate status quo, we can learn a bit about public trends in discourse, as well as arm ourselves with knowledge gained from those critiques, leveled as they are from an unusual perspective. A pro-market attack on big business is always welcome, and when it comes from relatively mainstream conservatives, and not only from radical libertarians such as Carson, there are likely to be fresh arguments for libertarians to consider.
David Stockman was Ronald Reagan’s director of the Office of Management and Budget. His recent book, The Great Deformation: The Corruption of Capitalism in America, contains much of value to complement the libertarian critique of the corporate status quo, while remaining within the broader tradition of conservative thought. The book jumps around chronologically, from the 2008 bailouts to the Reagan years, from the New Deal to the financial shenanigans leading to today’s recession. At more than 700 pages, the volume warrants that thematic organization for readability.
Stockman does not believe that “greed” alone can explain why the financial markets went haywire in 2008. He blames “an unprecedented aggrandizement of the state and its central banking branch,” leading to “the vital nerve center of capitalism, its money and capital markets,” to become “perverted and deformed.” The crisis was thus “about the need to drastically deflate the Wall Street behemoths — that is, dangerous and unstable gambling houses — fostered by decades of money printing and market rigging by the Fed,” but instead “policy veered in the opposite direction.”
The author would have allowed multiple financial institutions to fail and for the bad investments to liquidate, a prescription advocated by a fair number of libertarians. His detailed criticism of the AIG bailouts is especially worth reading. And he reminds us of how seriously we should take mainstream interventionists: “During the midst of the housing boom, of course, Fed policy makers insisted that nothing was amiss.”
The book gives us a valuable reminder of other times when the establishment was wrong, including the immediate aftermath of the crash. Politicians declared a “threat that a financial contagion would ripple out from the corpus of AIG, bringing disruption and job losses to the real economy.” But Stockman makes the compelling argument that there existed “no logical or factual basis for the incessantly repeated claim of Washington high officials that Wall Street’s losses would spill over into the nation’s $12 trillion commercial banking system and from there ripple outward to infect the vitals of the Main Street economy.” The “‘run’ on the wholesale money market was almost entirely confined to the canyons of Wall Street.” That surely suggests that the many got shafted for the benefit of the few in the bailouts, which Stockman describes as “crony capitalist plunder.”
Puncturing Reagan and the New Deal
The economic theories dominating both mainstream Left and Right could not explain the crisis. The conservatives resorted to “conjuring a mythical past — an alleged golden age of Reaganomics,” when in fact the “Reagan Revolution had … been a progenitor of the calamity now upon the nation.” The Left, in its own response, mostly “channeled FDR and the New Deal,” misunderstanding the true nature of Franklin Roosevelt’s legacy.
One very welcome feature of Stockman’s analysis is that it so harshly criticizes both Reaganite conservative economics and New Deal liberalism, casting both as big-government, crony capitalist disasters. How refreshing!
During Reagan’s second term, “federal outlays averaged 21.7 percent” of GDP — which Stockman notes was “obviously no improvement at all on the 21.1 percent of GDP” under Jimmy Carter or the 19.3 percent of GDP under Lyndon Johnson. Aside from high spending, the Reagan years were characterized by a “false prosperity” fueled by a “massive exercise in Keynesian deficit finance.” Stockman also takes issue with what he regards as an illusory reduction in inflation in the 1980s. As for the 1990s, the Fed precipitated a “$13 trillion credit bubble” that “caused a phony boom on Wall Street.”
Stockman is harshly critical of the high defense spending under Reagan, but more unusual is his critique of the Reagan-era “triumph of the welfare state.” Reagan’s embrace of a bipartisan fiscal package rendered him “the tax collector for the welfare state,” adding to the defense spending surge to create an atmosphere of massive deficit finance across the board. Under the 12 years of Republican rule from 1981 to 1993, “cumulative deficits … totaled $2.4 trillion, causing the national debt to triple.”
If conservatives suffer confusion about the profligate nature of pre-Clintonian Republican governance, liberals are just as deluded about the New Deal’s relationship to their current ideology. Roosevelt had no “affinity for anything that resembled full-strength Keynesian demand stimulus” like the Democratic rescue package of early 2009. “The only New Deal initiative that even remotely embodied Keynesian demand stimulus was the giant veterans’ bonus payment of 1936,” which Roosevelt vetoed.
Stockman criticizes Roosevelt’s public-works projects as acts of political expediency, and levels other such somewhat common conservative critiques. More interesting is the characterization of Roosevelt as “the patron saint of crony capitalism.” The author describes the rise of Fannie Mae and other government-sponsored enterprises, which corporate liberals often celebrate as “public/private partnerships,” as in fact products of “crony capitalism,” whose “cancerous growth is truly perilous.” Stockman also identifies corporate graft in Roosevelt’s hayseed coalition — the farming interests that profited from the Agricultural Adjustment Act. “The AAA’s original seven-crop cartel included corn, wheat, cotton, rice, milk, peanuts, and tobacco, and provided for government controlled acreage and production restrictions and artificial price supports.” In the farming sector, crony capitalism continues to thrive: “the USDA’s crop cartels have been vigilantly stationed at the epicenter of American fiscal politics ever since the New Deal.”
Finally, Stockman views the New Deal’s interventions into gold and money as the major condition allowing for never-ending fiscal recklessness. Roosevelt’s domestic policies constituted “a development which was bound to end in the triumph of crony capitalism and the fiscal bankruptcy of the nation.”
Nonpartisan critiques of American empire and debt
Much in Stockman’s analysis of modern U.S. political economy runs against conventional wisdom. He lauds John Kennedy for backing the Bretton Woods attempt to shore up gold, contrasted with Johnson’s “entirely hollow” promise to “defend the $35 gold price.” Despite the common characterization of Alan Greenspan as a Fed chairman who was too deferential to the free market, Stockman blames Greenspan for “the end of free market finance” and for much of the advent of “speculative finance” wherein firms gambled with leveraged credit, wallowing in a swamp of moral hazard. Stockman attributes the decline in household savings to Greenspan’s stock bubble.
Wall Street banks used to show some restraint, but Keynesian policies unleashed their drunken recklessness. “As recently as 1998 … the combined balance sheet [of Goldman, Morgan Stanley, Merrill Lynch, Lehman, and Bear Stearns] or their predecessors was only $1 trillion. And back in 1980, before these ‘investment banking’ houses were reborn as hedge funds, their footings had totaled only a few ten billions.” By the “eve of the 2008 crisis, these five Wall Street houses had combined balance sheet footings of $5 trillion, meaning that their girth exceeded the GDP of Japan at the time.” Stockman blames 1 percent interest rates for the subprime crisis. He gives an entertaining account of how fats cats stripped their businesses of actual assets, intoxicated by easy credit.
Always rising above partisanship and frequently attacking liberal and conservative sacred cows in unpredictable ways, Stockman provides some fun critiques of both Mitt Romney and Barack Obama. Unusual among conservatives, Stockman even criticizes the business model that enriched Romney personally, which Republican partisans have celebrated. The author sees those successes as a product of irresponsible gambling fueled by easy credit.
Overall, the Obama domestic program has amounted to “reactionary welfare, progressive style”:
Four years after the crisis, median family income has fallen by 10 percent in real terms…. [The] main street economy has been failing for years…. Yet the total amount of funding for means-tested assistance in the Obama stimulus was just $28 billion, or 3.5 percent, of the $800 billion package. Funding for unneeded bridges, interchanges, and road repair got more money than the combined total for food stamps, the earned income tax credit, and federal grants for public assistance and WIC (the health and nutrition program for women, infants, and children).
That is just a sample of the refreshingly unusual critiques that flow throughout the book. One thing Stockman is not is a predictable partisan commentator.
Stockman blames Milton Friedman’s monetarist economics for modern finance policies that led to the “unshackling [of] the Fed from the constraints of fixed exchange rates,” which he goes so far as to say “rendered trivial by comparison the ills owing to garden variety insults to the free market, such as rent control or the regulation of interstate trucking.” Friedman’s “monetary theory actually placed the nation’s stock of bank reserves, money, and credit under the unfettered sway of what amounted to a twelve-member monetary politburo.”
Libertarians are divided on monetary theory, and some Austrians will cheer Stockman’s criticism of Friedman, while others will say it’s unmeasured or wrong, although it will win over progressive critics of libertarianism. At any rate, it is not the only analysis that will give some libertarians pause. Stockman is a little bit soft on Herbert Hoover for my taste, and implicitly defends the myth of World War II prosperity when he says that ultimately it was “the outbreak of war in 1939–1940 which pulled the world out of the rut of economic nationalism and stagnation to which FDR’s quixotic action had condemned it.” He also seems a bit too enamored of how America’s wars used to be financed. “As it turned out,” he writes, the Korean War “marked the end of sound war finance, and also the beginning of extended wars of occupation — in Vietnam, Iraq, Afghanistan — that were financed with Treasury bonds.” And yet World War II occasioned far more actual inflation, hurting everyday people, than the most recent wars.
Libertarians will also rebel against one of Stockman’s main “crucial steps” to fix the economy, as he advocates a “Super Glass-Steagall II” to force large banks “to divest their deposit banking business, and cap their balance sheets at 1 percent of GDP ($150 billion) for ten years.” That seems to play into the progressive myth of the significance of the eroded regulatory boundaries between investment and commercial banking leading to the 2008 crash, when in fact those regulations were virtually unique to the United States among the developed nations and were most likely irrelevant. Stockman also advocates various federal safety nets as an alternative to the current mixed-economy approach, and calls for a national sales tax, which has been effectively condemned as a horrible idea in several articles in this very publication.
Nevertheless, many of his prescriptions are worth celebrating: reining in the Fed, abolishing deposit insurance, scrapping the welfare state, closing “ten major federal agencies and departments,” and adopting a less belligerent foreign policy. But regardless of the policies he advocates and whatever flaws we might find in his analysis, Stockman’s book is worth reading as a conservative critique of crony capitalism.