David Stockman warns of economic collapse, critics cry 'cranky old man'

David Stockman, who served as President Reagan’s budget director, has liberal economists like Paul Krugman and Jared Bernstein in an uproar over his new book, “The Great Deformation,” that will be released Tuesday.

Mr. Stockman, who left government for a lucrative tour on Wall Street, has done what every author wants: get people talking about a forthcoming book. He summarized his grim diagnosis of the US economy in an essay which covered three quarters of the front page of The New York Times’s Sunday Review section. The piece is likely to have a much wider audience than the relative handful who plow through a 768 page book weighing in at more than two pounds.

“We should be very afraid,” the first paragraph of Stockman’s essay concludes. Don’t be misled by the stock market’s recent record high, Stockman argues. The recovery has been fueled by “an egregious flood of phony money from the Federal Reserve” and the bubble will burst leading to “an era of zero sum austerity and virulent political conflict.”

Bottom line, Stockman contends: “When the latest bubble pops, there will be nothing to stop the collapse. If this sounds like advice to get out of the market and hide out in case, it is.”

Princeton economics professor Paul Krugman, who won the 2008 Nobel Prize in economics, was dismissive. On his Conscience of a Liberal blog Mr. Krugman wrote: “I was disappointed in Stockman’s piece. I thought there would be some kind of real argument, some presentation, however tendentious, of evidence. Instead it’s just a series of gee-whiz, context- and model-free numbers embedded in a rant – and not even an interesting rant. It’s cranky old man stuff…”

Krugman, a New York Times op-ed columnist, found himself implicitly criticizing his journalistic home, noting “the verdict among everyone who knows anything is that Stockman’s piece, mysteriously given star treatment, was pathetic and embarrassing.” Krugman said he was "especially annoyed" by Stockman's argument that there has been bipartisan runaway spending since the 1950s. Significant debt problems started after 1980 under Presidents Reagan and George H.W. Bush, Krugman says, and fell under President Clinton. And deficits were an appropriate reaction to the recent financial crisis, he says.  

Others offered somewhat less passionate criticism. Jared Bernstein, who served as Vice President Joe Biden’s economic adviser, wrote on his On the Economy blog: "There’s no question that the American economy is seriously underperforming and that bad policy is implicated. It’s just that the culprits aren’t the ones he thinks they are.”

Mr. Bernstein especially took exception to Stockman’s criticism of “eight decades of increasingly frenetic fiscal and monetary policy activism intended to counter the cyclical bumps and grinds of the free market.”

Stockman fails to differentiate “smart borrowing from wasteful borrowing,” Bernstein argues. “His blanket condemnation is nonsensical – I suspect most readers will react the way I did: it’s like hearing a crazy person on a street corner ranting against whatever: they invariably stumble on some profound and piercing insights, but it’s mostly nonsense, and instinctually, we keep our heads down and move on.”

The Econlog blog observes that Stockman has a reputation as a pessimist. It quotes Reagan economic policy adviser Martin Anderson in his book "Revolution” as saying: “David Stockman was profoundly pessimistic by nature. If he were ever to write a history of American baseball, he would probably describe Ted Williams of the Boston Red Sox, one of the greatest players of all time, this way: Even at the height of his career, Williams managed to get base hits only 40 percent of the time and struck out repeatedly.”

A more even-handed view of Stockman’s arguments comes from Marcus Brauchli, the former top editor at both The Wall Street Journal and The Washington Post. Writing in the Post, Mr. Brauchli notes that Stockman “has cast his acid eye on the country’s entire economic edifice. What the former divinity student sees doesn’t merely dismay, it outrages him morally, page after page, chapter after chapter."

Still, Brauchli observes, "Even as he indulges his spleen, Stockman produces a persuasive and deeply relevant indictment of a system dangerously akilter."