Why David Stockman Yearns for 19th Century America


David Stockman, budget director under President Reagan, spoke to Paul Solman on The PBS NewsHour Tuesday.

As regular readers already know, we recently aired an interview with David Stockman, the former budget director under President Reagan and private equity player, about his book, “The Great Deformation.” You can find the transcript here. For a response we turned to Paul Krugman, New York Times columnist and Nobel-winning economist at Princeton University. That interview is slated to air on the PBS NewsHour tonight but you can watch it here right now.
Here on the Making Sen$e Business Desk, Stockman and Krugman have offered dueling plans for solving today’s economic problems. Stockman argued that we have to “get the free market back into finance.” Krugman called for “more spending right now.” Today, we bring you their quite different takes on pre-Fed America, starting with Stockman’s:

Paul Solman: Paul Krugman called you a “cranky old man.” You’re not a lot older than me, if at all. Neil Irwin in the Washington Post called yours a “a spittle-filled diatribe,” and the essence I think of both of their critiques was that you are putting all of your faith in a free market that surely has its own excesses, its own degradations, its own horror shows, no?

David Stockman: No. I think if you look at all the great cycles we’ve had since World War II, they were all caused by the Fed, or they were caused by the warfare state, and so therefore the idea that the market is a monstrous unstable dystopia is an illusion created by Keynesians.

The people who attack me, the two names that you mentioned, are unreconstructed Keynesians. And I’ll tell you what, my book is a polemic against decades of Keynesian policy. I struck a raw nerve because I said, “You guys are pedaling nothing more than debt, and debt, and more debt, and more money printing, and it’s not sound economics and it’s going to fail.” And, they didn’t like that.

Paul Solman: But there were depressions, crashes in 1837, 1857, 1873 — they called that one the Great Depression at the time –1893, 1907 — we created the Fed in response to that. So, there have been huge contractions.

David Stockman: But, we got over them very quickly. The whole dystopian idea that the 19th century was one crash after another is just mythology.

Paul Solman: Was it also mythology that there was an incredible difference between the people at the top and the people at the bottom?

David Stockman: We had the greatest growth in GDP [in the] 40 years from 1870 to 1912: 3.7 percent compounded [over] 43 years, nothing like it ever since; nothing like it before.

There were some crashes on Wall Street because of the old National Banking Act. That was the main cause of it. Those crashes did not spill over into Main Street. Of the five big panics, three of them had no effect on GDP at least to the extent that they can measure it retroactively.

So, we had the greatest growth in standard of living in human history during that period. Twenty-five million people migrated to America during that 40 year period when we started with only 45 million citizens. Why did they come here? Because it was a dystopia? Because there was a crash every two or three years? Because there were constant depressions? Bologna! They came here because this was the greatest economic opportunity that had ever existed prior to then in human history.

Paul Solman: So rough and tumble sure, winners and losers sure, but net/net this is just better than what we’ve got now?

David Stockman: I would say with one addition the 19th century would be in good shape. We had sound money. We had fiscal discipline. We had free markets. We didn’t have a safety net for people that [needed] help from their fellow citizens and that’s what we added in the New Deal. He didn’t say it was a safety net but essentially that’s what was added.

Paul Solman: “He” meaning Franklin Roosevelt?

David Stockman: Roosevelt and all the rest of them. It needed to be perfected. Milton Friedman said, “Take all these different benefit programs, put them into a negative income tax and thereby provide cash benefits to people that need support.” Add that to free markets, fiscal rectitude, and honest money — not this Fed money printing machine; honest money and you will have a viable democracy and you will have a more prosperous Main Street.

Paul Solman: But you don’t think that’s likely to happen any time soon?

David Stockman: Not a chance. Not a chance of it happening.

Paul Krugman weighed in on this too. We’ll post his analysis shortly.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions