M.D. Harmon: Former Reaganite Offers Dire Economic Warning

David Stockman (right) with Ronald Reagan at a 1981 Cabinet meeting to discuss the federal budget. (Jeff Taylor/AP)
David Stockman (right) with Ronald Reagan at a 1981 Cabinet meeting to discuss the federal budget. (Jeff Taylor/AP)
David Stockman (right) with Ronald Reagan at a 1981 Cabinet meeting to discuss the federal budget. (Jeff Taylor/AP)

If America’s fiscal state is as bad as David Stockman thinks it is, then it is in very bad shape indeed.

But what if it’s worse?

I’m no economist, just a schlub who tries to make income and outgo more or less balance at the end of the month. And, yes, some months end up in the black and others in the red.

Still, the long-range household debt trend is down, so I can usually feel a bit of satisfaction more months than not.

That is, by the way, exactly the opposite of the way our country is heading. Indeed, it has been trending into ever-increasing deficits for many decades, beginning long before Stockman, a former congressman, quit as President Ronald Reagan’s budget director out of dissatisfaction with rising spending levels that today look miniscule in the light of President Obama’s trillions in new spending and debt.

Stockman didn’t make himself any friends among conservatives with his bailout. Many Reagan supporters believed his stringent fiscal recommendations would have made it impossible, with Congress generally in Democratic hands, to maintain enough of a defense establishment to avoid defeat in the Cold War (let alone win it, which Reagan did) and still keep Democrats on board.

On March 31, however, the long-suffering Stockman returned with a vengeance, using a major article in the Sunday New York Times headlined, “Sundown in America” (a play on Reagan’s “Morning in America” campaign theme) to tell Americans that their hopes for a return to prosperity were the stuff of pure fantasy.

STOCKMAN ISN’T THE ONLY ONE saying this. On Jan. 28, Robert J. Samuelson, an economic analyst considered a liberal by some but a centrist by others (including me) wrote in a Real Clear Politics column headlined “America in Decline?” that some Wall Street analysts (he quotes extensively from a report by Goldman Sachs) believe that the United States has considerable advantages over other nations that will support future growth and a return to prosperity.

They include huge U.S. oil and natural gas deposits, a relatively young workforce, leadership in innovation and an economy that, despite its problems, remains twice the size of China’s, our closest rival.

But Samuelson still sees problems: “Up to a point, this is convincing. America’s strengths have been underestimated. Compared with Europe and Japan — the world’s other enclaves of affluence — our prospects are brighter. But the Goldman report, which advises investors where to put their money, is an incomplete guide to the future. It may explain why U.S. stocks have recovered to near pre-crisis records. But it’s not how most people view national ‘decline.'”

He explains his less optimistic outlook thusly: “If your neighbor’s house burns down and only half of yours does, you are relatively better off than your neighbor — but you’re worse off than you used to be. It’s in that sense that America’s prospects exceed Europe’s and Japan’s.

“But this advantage doesn’t erase the huge economic losses suffered by millions of Americans,” Samuelson says. “Most will reasonably conclude that their country is in decline. Demoralized, they will be less supportive of U.S. economic, political and military leadership abroad. This is how domestic disappointment translates into global retreat.”

Where does this lead us? Facing the fact that “most of the affluent world — again, the United States, Europe and Japan — faces similar threats.”

For one thing, “Their welfare states are overwhelmed. Aging societies face a collision between promised benefits and acceptable taxes. Either the first must be cut or the second must be raised. The politics are poisonous.”

And the idea that government can manage the economy is “breaking down. Before the 2007-09 financial crisis, most economists thought they could avoid deep slumps and engineer acceptable recoveries. Confidence has given way to contentious disagreements.”

Finally, “Countries depend increasingly on international trade and money flows. But globalized commerce is menaced by nationalistic, ethnic, religious and political differences among nations.”

Thus, Samuelson concludes, “A second American Century, though possible, seems a stretch. The harder question is whether the affluent world can defeat these deeper and more persistent threats to political and economic stability.”

AND STOCKMAN MAKES Samuelson look like an optimist.

In his Times article, Stockman writes, “Since the S&P 500 first reached … (above 1,500), in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet six fold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually.”

He adds, “Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the ‘bottom’ 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans.”

Think that’s bad news? How about this:

“…..the White House, Congress and the Fed, under Mr. Bush and then President Obama, made a series of desperate, reckless maneuvers that were not only unnecessary but ruinous. The auto bailouts, for example, simply shifted jobs around — particularly to the aging, electorally vital Rust Belt — rather than saving them. The ‘green energy’ component of Mr. Obama’s stimulus was mainly a nearly $1 billion giveaway to crony capitalists….”

Meanwhile, “Less than 5 percent of the $800 billion Obama stimulus went to the truly needy for food stamps, earned-income tax credits and other forms of poverty relief. The preponderant share ended up in money dumps to state and local governments, pork-barrel infrastructure projects, business tax loopholes and indiscriminate middle-class tax cuts.”

In the meantime, Stockman says, both parties in Washington are not telling Americans truth about the fiscal black hole they face. The Fed is locked into keeping interest rates low for borrowers (and thus for savers as well, greatly injuring those now living on fixed incomes who counted on savings growth to help them survive) at the cost of inflating the money supply, a cycle that cannot last forever but will have negative consequences no matter how it ends.

And politicians of both parties will not say how much the real deficit is slated to grow, going into the red by $15 trillion to $20 trillion over the next decade when social programs are factored in, far beyond the Congressional Budget Office’s still-astounding $7 trillion.

In the end, Stockman says, “Without any changes, over the next decade or so, the gross federal debt will … soar to 150 percent of gross domestic product from around 105 percent today. … [The] nation’s fiscal collapse will play out incrementally, like a Greek/Cypriot tragedy, in carefully choreographed crises over debt ceilings, continuing resolutions and temporary budgetary patches.”

THE ONLY WAY OUT of our “end-stage metastasis,” he says, involves economic, governmental and social changes that have no chance whatsoever of being enacted. They include making the federal government “get out of the business of imperial hubris, economic uplift and social insurance and shift its focus to managing and financing an effective, affordable, means-tested safety net.”

That would involve “sweeping constitutional surgery: amendments to give the president and members of Congress a single six-year term, with no re-election; providing 100 percent public financing for candidates; strictly limiting the duration of campaigns (say, to eight weeks); and prohibiting, for life, lobbying by anyone who has been on a legislative or executive payroll. It would also require overturning Citizens United and mandating that Congress pass a balanced budget, or face an automatic sequester of spending.”

After that, we should “put the great Wall Street banks out in the cold to compete as at-risk free enterprises, without access to cheap Fed loans or deposit insurance.”

Finally, we must end up by “benching the Fed’s central planners, and restoring the central bank’s original mission: to provide liquidity in times of crisis but never to buy government debt or try to micromanage the economy. Getting the Fed out of the financial markets is the only way to put free markets and genuine wealth creation back into capitalism.”

His conclusion? “The United States is broke — fiscally, morally, intellectually — and the Fed has incited a global currency war (Japan just signed up, the Brazilians and Chinese are angry, and the German-dominated euro zone is crumbling) that will soon overwhelm it. When the latest bubble pops, there will be nothing to stop the collapse. If this sounds like advice to get out of the markets and hide out in cash, it is.”

THAT’S A VERY ODD FINALE to his list of horrible prospects. If what he says will happen does occur, cash assets will also suffer, either from Fed-induced inflation that will let the government pay off its debt in less-valuable currency (which is where “quantitative easing” — printing money — will end up) or from debt repudiation, which will destroy the national economy another way by driving away those now willing to invest in Treasury bonds.

What’s the good news? Well, Americans could wake up, realize the politicians telling them that their entitlements can continue forever are lying to them, and vote for people willing to take the difficult steps that will set things right — which will be painful to many, and take years to implement.

Or, we can go on as we are now. But not forever. Or not, very likely, for even another few years.

M.D. Harmon, a retired journalist and military officer, is a free-lance writer and speaker. He can be contacted at: mdharmoncol@yahoo.com

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  1. The minutes of the Federal Reserve’s 2006 Open Market Committee were released in 2011. These showed that the Fed’s governing body had no clue about the extent of the impending crisis although it was aware that a real estate bubble had blown up. Bernanke was among the optimists. In that same year a team of economists led by Robert Wiedemer predicted a melt-down. Now Wiedemer’s worst case scenario is a 90% drop in the Dow Jones.

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