Tax the Rich and Hogtie the Fed

David A Stockman says our fiscal path is leading toward calamity


by Rudolph Bush

Source: Dallas Morning News 

David A. Stockman has spent a career tilting against the conventional wisdom of Wall Street, Washington and the Federal Reserve. The former congressman and Reagan administration official spoke recently to the National Center for Policy Analysis, based in Dallas, about his thoughts on the financial collapse and why the response will only lead America into deeper financial trouble.

In his latest book, “The Great Deformation: The Corruption of Capitalism in America,” he calls for neutering the Federal Reserve, limiting Congress and the president to a single six-year term, and imposing a massive one-time tax on the nation’s wealthiest citizens.

The common perception is that the Wall Street bailout and subsequent federal monetary policy were necessary to save the nation from financial collapse and another Great Depression. You argue that’s bogus. Why?

The 2008 bailouts were based on a grotesque urban legend that we were faced with Great Depression 2.0. None of that was true. I lay the details out in my book. The resulting spree of massive lunatic money printing since then, in my view, is a monetary time bomb that will trigger the third thundering collapse of the 21st century. The meltdown going around was almost entirely in the canyons of Wall Street. The gamblers running the last remaining casinos, otherwise known as investment banks, had hit the wall because they were funding massive multitrillion-dollar balance sheets loaded with toxic securities. It would have finished and burned out in the canyons of Wall Street.

You argue that the response of the Federal Reserve, to hold down interest rates and engage in so-called quantitative easing, will cause more harm to the economy in the long run than it cured in the short run.

When you put the money market rate at zero and keep it there for what is now six years running, you are causing vast mispricing throughout the financial system. Assets everywhere are overvalued. They are being funded on overnight zero leverage, exactly what brought us to the last crisis in 2008. We’re heading for an even more calamitous breakdown down the road.

You’ve called for a massive new tax or levy, equal to 30 percent of wealth on the richest people in this country. That’s a far cry from the Reagan-era trickle-down economics that you famously rejected. What would such a levy accomplish, and why do you think it’s needed now?

We need to couple it with a thoroughgoing reform of our fiscal constitution. We need to have a balanced budget constitutional amendment. If we don’t put some handcuffs on the politicians, they will bankrupt the country sooner or later. If you get rid of the phony Congressional Budget Office forecast of the next 10 years, you will see that we are heading for $30 trillion-$35 trillion national debt. It would take the system down. It would bankrupt the country. We need to stop the buildup of this debt any further and actually pay it down.

My proposal was a one-time wealth tax on the top 5 percent or so in order to pay down this massive federal debt. Couple it with the abolition of the corporate income and capital gains tax so that in the future, current producers and entrepreneurs and risk-takers will have an incentive to restart this badly damaged economy.

You’ve also advocated for a value-added or consumption tax that would spread out taxation more widely. Why would that not be harmful in a country where the economy’s health is so tightly tied to consumption?

Once you become addicted to something, you are either going to stay addicted and end up meeting your demise or you are going to end up going through a painful therapy and cure to overcome your addiction. Everyone’s spending every dime they can earn and every additional dime they can borrow. We desperately need much higher productivity and investment in order to compensate for our very high wage cost and cost of living. We therefore need to curtail consumption, change the basic equation so people are required to save, especially as the baby boom (retirement) continues to gather momentum.

You cannot think this economy will continue to work 10 years from now with 20 million more retirees, with all of the entitlements that need to be paid, if we don’t have a downshift in consumption. That will cause the economy to go through a period of slow growth or even recession. But we’ve been having a party for 30 years. We’ve been living beyond our means. The longer we wait to face up to the facts and the longer the politicians lie to the public and say you just need to go out to the mall and buy some more junk you don’t need, the greater is going to be the eventual day of reckoning.

You’ve written that a “golden era of fiscal rectitude” ended with Lyndon Johnson’s “guns and butter” policies and Richard Nixon’s decision that the U.S. would no longer convert dollars to gold. Are you advocating a return to the gold standard? Wouldn’t that exacerbate the economic difficulties you see us facing now?

What I’m saying is, liberate interest rates. Hogtie the Fed. Get them out of the government bond market completely. If we retain a Federal Reserve, put an anchor and handcuffs on them in the form of some external standard. Gold worked well historically.

Zero interest rates, quantitative easing, the wealth effect, arguing that by attempting to levitate stock prices and encouraging people to get out of savings accounts and into so-called risk assets — that’s a euphemism that mom and pop and grandma should be buying some junk bond funds or some high-risk stock. That’s dangerous. It’s inappropriate. It won’t work, and it’s the greatest gift to the 1 percent in this society. It totally crushes savings. It is destroying savers on fixed incomes.