Former Michigan Congressman and Reagan Budget Director David Stockman’s new book “The Great Deformation” provoked a flurry of insult and ridicule when it first came out back in April. I’m late to the party because as a law school graduate I spend all of my spare cash on liquor; in fact, I have not yet read the book. Fortunately for me, book tour promotional speeches are readily available on Youtube, and Stockman has no instinct for holding back.
Here is the gist; the Bretton Woods Conference made the dollar the reserve currency of the world, it was gold-based until 1971 when Nixon decided to let it float free, allowing the US to run endless trade deficits with mercantilist, export-led industrializing countries in East Asia. Along the way, the US ran up an enormous government debt – selling bonds to the East Asian economies that were gradually undermining American industry – to expand the welfare state, fight a half-dozen wars, fund some peanut farmer’s idea of Synfuels, wind power, weapons systems that weren’t even used in the half-dozen wars, and what Stockman refers to as the HES – Healthcare, Education, and Social Services employment sectors – government jobs funding the consumers of Chinese goods.
Calling the Federal Reserve a “Bubble Machine,” Stockman digs into their low-interest rate policies and attempts to fine-tune capital allocation through the Tech Bubble, the Housing Bubble, and the Government Bubble that is, according to Stockman, about to pop.
I see no reason to doubt Stockman’s basic assertions; the stock market is playing with new highs even as the labor participation rate slips – only about 47 percent of adult Americans have full time jobs – and a full 100 million Americans receive some kind of food aid from the federal government.
What remains of American prosperity is Crony Capitalism in Stockman’s terms, where politically-connected operators get all the benefits of cheap money from the Fed, tax breaks only they can claim, and bailouts when things go bad; and the bulk of the people get nothing, not even jobs.
There is no escape, either. Stockman doesn’t hold back regarding Social Security, Medicare, the massive debt already on the books, and the massive tax hikes that will be required to keep the grist mill turning, assuming the next generation of tax oxen can even earn income – and Stockman doesn’t seem to think that they will.
The stunning loss of what he calls “Breadwinner Jobs,” which are jobs that actually pay the bills, has gone hand-in-hand with the loss of sound money and the growth of the welfare state.
The middle classes have been the main patrons of sectors ranging from real estate, insurance, retail, and even my field, the law. The nobility of Europe could commission artists for grand portraits and sculptures, but it took a growing bourgeois class with the money to buy houses worth decorating to spur the great easel painters of the Dutch Golden Age or the salons of 19th Century Paris. From art to coffee, the principle is inescapable; the indulgences might exist in some form regardless, but their proliferation takes middle class aspiration.
I think that our middle class is in trouble; Stockman believes this, too. With bills that we cannot pay, debts we cannot service, interest rates that cannot stay low forever, a large population of labor rendered unemployable by circumstances, and no indications of growth beyond the rather disturbing rise in the number of coffee shops around the Des Moines Metro area – patronized by students and a handful of investors who “feel wealthier” because the Dow is up – then the next meltdown will be far worse.
Do you deny that the middle class is shrinking? I have an exercise for you – right now, get in your car and take a drive through the nearest urban area. Count the number of times you see the following scene:
A super-discount retailer (Family Dollar, Dollar Tree, etc…) sharing a parking lot with a payday loan outlet, and a bucket-shop tax preparation shop (they specialize in helping low-income people claim the Earned Income Tax Credit) and some sort of no-frills dining. Depending on where you are, you might even see a blood plasma collection company and in the near vicinity there will be a “buy here pay here” auto lot, where used cars are sold on credit to people who cannot get formal bank loans.
Hardly the commercial trappings of a wealthy economy.
About the Author
Mr. Waechter is an attorney and a recent graduate of Drake University.
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