I was probably the only kid in my high school who knew who David Stockman was. I found the former Reagan budget director's memoir to be a fascinating window into the world of economic policy. So that makes it a bit ironic that he and I both have books coming out this week that have completely opposite takes on the most crucial questions of how the U.S. economy ought to work.
Stylistically, our books are very different: "The Great Deformation: The Corruption of Capitalism in America" is a long, spittle-filled diatribe on how the Federal Reserve, Wall Street, FDR, and Richard Nixon ruined America. (Or so I gather — the book only came out today. But here are Stockman’s Sunday New York Times piece and an early review by Marcus Brauchli.) Mine is a reported narrative of the rise of central banking and the response of the leading central bankers to the 2007 to 2012 crisis.
Stockman and I seem to be direct antagonists on this fundamental question: Should government, in particular central banks, endeavor to corral the ups and downs of capitalism to try to steer their nation toward prosperity?
A recurring theme of Stockman’s work is that it is precisely these efforts that have sown the seeds for all that ails the economy. He writes in the Times: “As the federal government and its central-bank sidekick, the Fed, have groped for one goal after another — smoothing out the business cycle, minimizing inflation and unemployment at the same time, rolling out a giant social insurance blanket, promoting homeownership, subsidizing medical care, propping up old industries (agriculture, automobiles) and fostering new ones (“clean” energy, biotechnology) and, above all, bailing out Wall Street — they have now succumbed to overload, overreach and outside capture by powerful interests.”
There are some interesting arguments buried in his essay, and, I expect, the book. But pause for a minute to consider how fundamentally nihilistic Stockman’s view of the economy seems to be: that basically anything the state does to try to fix things is undermining some elegant capitalist order and will inevitably lead to chaos.
Consider one of the historical episodes that Stockman views as turning point on the United State’s road to perdition: the Roosevelt administration taking the dollar off the gold standard in 1933. The country was in a dire position at that time: a quarter of the population jobless, desolation rampant, the hopelessness fueling political extremism. A surprising number of people in the United States and Western Europe were starting to consider Communism a more attractive option, and in Germany this despair led directly to the rise of Nazism.
The consensus macroeconomic view, best established by Milton Friedman and Anna Schwartz in their “Monetary History of the United States,” is that the economic collapse was driven by a steep contraction in the money supply. Banks had been allowed to fail by the hundreds, contracting credit, and the commitment to the gold standard meant that the Federal Reserve was unable or unwilling to use other means to pump money into the economy to offset it. Prices were falling; while people were starving in the cities, grain sat in silos in farm country because prices had dropped so low. The gears of capitalism had stopped turning. The result was a catastrophe.
Stockman seems to think that the very practical step that the Roosevelt administration took to unshackle Americans from the gold standard was the beginning of an unmooring of capitalism, an unleashing of violent forces that have ruined our economy. But his alternative is . . . what? Forcing millions of Americans to endure grinding poverty because gold is good.
There is no perfect state-of-nature capitalism from which Richard Nixon and Franklin Roosevelt led us astray. Capitalism can only exist in a framework — monetary and legal — set up by the government. Reasonable people can disagree over what that framework should look like, and how interventionist that government or its monetary authority should be. But just because the specific set of options (should monetary policy be aimed at stabilizing the business cycle or at keeping the price of the dollar fixed versus a shiny metal?) doesn’t mean that one set of choices is a natural and perfect arrangement and that deviating from that policy will inevitably bring chaos.
Is basing the value of currency on a yellow metal that people find in the ground really less arbitrary than having a group of sober-minded economists get in a room eight times a year and try to adjust the supply of money so that prices rise about 2 percent annually? I’d take the group of sober-minded economists every time! They at least have the potential to learn from the mistakes of the past — the hyperinflation of 1920s Germany, the Great Depression of the 1930s, the high inflation of the 1970s and, for the generation ahead, the failure to contain excessive growth in private-sector debt that triggered the housing and mortgage bubbles in the 2000s that popped so calamitously in 2008.
I view each of those historical economic crises as a learning experience for humankind, as we grope toward a better way to create an economy where people can fulfill their potential, earn an income and count on their savings being secure. The best we can ask of our public servants is for them to learn from that history. That’s why I’ve spent the last few years of my life trying to write it.