President Barack Obama’s latest budget, tabled on Wednesday, tries to perpetuate the charade that he actually cares about the deficit. His fiscal blueprint pretends to woo Republicans by tweaking pension and health-care spending in exchange for another $600-billion (U.S.) in tax increases on the rich. It stands virtually no chance of getting through Congress.
Despite the cries of “austerity” that greeted automatic cuts that kicked in last month, the United States continues to spend like there’s no tomorrow. Only there is, and it isn’t looking pretty. The federal debt is on track to reach $30-trillion within a decade, up from $17-trillion now and $10-trillion in 2008. Even if the expiry of stimulus spending curbs the deficit in the near term, it’s destined to balloon again as Mr. Obama’s health-care law and retiring baby boomers overwhelm Social Security, Medicare and Medicaid.
Zero interest rates and the printing of unfathomable amounts of money by the U.S. Federal Reserve Board are the only reasons markets continue to indulge the charade-playing policy makers in Washington. Nearly five years of “quantitative easing” has bloated the Fed’s balance sheet by a factor of six and sent investors piling into the stock market. Easy money is the OxyContin that enables all to disregard the dangers of debt.
A stock market boom is exactly what Fed chairman Ben Bernanke had been hoping to engineer. He’s counting on the “wealth effect” generated by rising stocks to boost confidence and produce a virtuous cycle of job creation and economic growth. Instead, all it’s doing is inflating the latest of the Fed’s “serial bubbles.”
The current financial bubble is the most insidious yet. When it bursts, as it must, it will make the previous popping of the Internet, commodity and housing bubbles look like minor Orville Redenbacher mishaps. There can be no bailouts. The U.S. Treasury is broke, having spent the past decades either in the throes of supply-side tax cutters or part-time Keynesians. (The full-time Keynesians, who understand the importance of balancing the books in calmer times, are in Ottawa.)
Think the doomsday talk is unduly alarmist?
Actually, it’s a soberer summary of David Stockman’s new book, The Great Deformation. The title is a rejoinder to Mr. Bernanke’s 2004 contention that the U.S. had entered the Great Moderation, an era of blissfully sustainable growth thanks to the Fed’s ingenious ability to tame the business cycle. Instead, Mr. Stockman says the free market has been subverted by the “overreaching, overloading and outside capture” of policymakers in Washington. The U.S. is now an officially crony capitalist state.
Mr. Stockman, a former Reagan-era budget chief with a history of these kind of outbursts, repeatedly goes off the rails in his book. He viciously skewers every president from Franklin Roosevelt (who abandoned the gold standard) to Mr. Obama, although Dwight Eisenhower and Bill Clinton get passes, and there’s strange praise of such loose cannons as libertarian ex-congressman Ron Paul and socialist Vermont Senator Bernie Sanders. The latter two get high marks for opposing the bank bailouts.
Indeed, in Mr. Stockman’s eyes, the “BlackBerry Panic of 2008” was nothing but a trumped up “crisis” aimed at saving Goldman Sachs, the former employer of then-treasury secretary Hank Paulson. “The so-called financial meltdown,” Mr. Stockman says, “was purely in the canyons of Wall Street, where it would have burned out on its own and meted out to speculators the losses they deserved.” He calls the auto bailouts the “quintessence of crony capitalist plunder” that merely reshuffled jobs from “rising plants in right-to-work (red) states to dying plants in the UAW (blue) states.”
Critics have every right to question Mr. Stockman’s credentials. He’s not an economist. After breaking with the supply-siders in the Reagan administration over their indifference to the deficit, he went on to a less than illustrious career in private equity. He had a run-in with securities regulators and paid $7.2-million in 2010 to settle allegations of accounting fraud.
Whether or not you like his answers, however, you have to admit that Mr. Stockman asks some penetrating questions. Such as: “How did it happen that the nation’s central bank printed nearly twice as much money in thirteen weeks [in 2008-09] as it had during the entire century before?” Or: “How had the top-ten Wall Street banks been valued at $1-trillion in mid-2007, only to crash into a paroxysm of failure and bailouts 12 months later?”
Those are unsettling questions to ponder as the charade in Washington plays on. For now.