Republican Greyhairs Got Ape

Former Fed Chairman Alan Greenspan on NBC's "Meet the Press" said that Republicans pushing to extend the Bush tax cuts without offsetting the costs elsewhere would create a disasterous situation for the economy. He slammed the idea that tha tax cuts paid for themselves by generating revenue and productivity. He said they did neither. Greenspan also said that we have very few tools left to change the unemployment situation. While jobs will be created, the level of unemployment will remain about the same.

David Stockman, the former director of the Office of Management and Budget under President Reagan and known for "being taken to the woodshed" for his criticisms of Reagan's policies, had a virtual tantrum on the pages of the New York Times in an op-ed entitled "Four Deformations of the Apocalypse." In this lengthy piece, he lays out the Republican economic fallacies of the last four decades. His lead sentence says it all. "If there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing."

David Stockman recalls the days when Republicans used to believe that prosperity depended upon the regular balancing of accounts--in government, in international trade, on the ledgers of central banks and in financial affairs of private hosueholds and busineses,too. The new catchism, Stockman warns, has amounted to little more than money printing and deficit finance--"vulgar Keynesianism robed in the ideological vestments of the prosperous classes."

He argues that this approach has led to the serial financial bubbles and Wall Street depredations that have crippled our economy. He claims that these new policy doctrines have created four great deformations to the national economy.

The first of these he says started when the Nixon Administration defaulted on American obligations under the 1944 Bretton Woods Agreement to balance our accounts with the world. Since then , he says we have lived beyond our means as a nation with a cumulative current-account deficit--the combined sortfall on our trade in goods, services and income--of around $8 trillion. He frontally attacks Milton Friedman on this saying that if the free market set currency rates, then the trade deficits would self-correct. Obviously, that didn't happen since politicians around the world cheapened their own currency.

The second unhappy change in the American economy, according to Stockman, has been the extraordinary growth of our public debt. In 1970, it was about 40% of gross domestic product. When it reaches $18 trillion by 2015, this will be forty times that of 1970. He blames the debt explosion not on Democratic spending but instead on the Republican's embrace of the Dick Cheney motto "Deficits don't matter." He blames the neo-conservatives for pushing the military budget skyward without any revenue base. He notes that the old Republican guard fought through the 1984 election to control the deficit by rolling back 40% of the original Reagan tax cuts. But he said when the time came when Paul Volcker crushed inflation, that a new generation of tax-cutters claimed that the economy would outgrow the deficit if it were plied with enough tax cuts. This is the slogan of congressional Republicans today.

The net effect was that by 2009, the tax-cutters reduced federal revenues to 15% of GDP, lower than they had been since the 1940s. Then he points out That George W waged two wars that were unfinanced,and signed a $420 billion non-defense appropriations, which was a 65% increase from what he had inherited.

The Third change in the American economy has been the vast, unproductive expansion of our financial sector. He blames the Republicans for removing traditional restrictions on leverage and speculation. As a result, combined assets of conventional banks and the so-called shadow banking system grew from a mere $500 billion in 1970 to $30 trillion in September 2008. He says that these trillion-dollar conglomerates are not free enterprises but are wards of the state, extracting billions from the economy with speculation in stocks, bonds, commodities and derivatives. They could never have survived, if their deposits had not been government-guaranteed.

The fourtth destructive change has been the hollowing out of the larger American economy. This I have alluded to in other posts. In the past decade, the number of high-value jobs in goods production and in service categories like trade, transportation, information technology and the professions has shrunk by 12% to 68 million from 77 million. The only reason there has not been a greater reduction in nonfarm payrolls is that low-paying jobs have made up the difference.

Stockman writes that during the last bubble (2002 to 2006) the top 1% received two-thirds of the gain in national income, while the bottom 90 percent got only 12 percent. He claims that this is not the market's fault but that of bad economic policy.

The result Stockman says is the day of reckoning has arrived. Rather than a conventional economic recovery, we will have a long period of debt liquidation and downsizing. He argues that the old Republican virtues are what's called for, not the hyper-trickle down of current congressional Republicans.

If you want to learn about Republican plans for the future, just read Rep. Ryan's "Blueprint for the Future", which the CBO says will deepen deficits for the future and only produce a balanced budget in 70 years. The effect on the country would be to guarantee we would become the world's biggest banana republic.