The former budget director under President Ronald Reagan said something you don’t hear often from people who have worked under Reagan or from conservative politicians. That is, that the conservative idol and oft-referred to leader of a bygone era left a “horrible legacy.”
“The thing that came out of the Reagan era, which really was a horrible legacy, was the notion that deficits didn’t matter and the rationalization that we were only trying to starve the beast and if the deficit got big enough or persistent enough or extended far enough in time, surely they would wake up and shrink the government,” said David Stockman, former Director of the Office of Management and Budget from 1981-1985, at the Cato Institute Wednesday.
On paper, “starving the beast,” as Stockman called it, looked like this:
In 1982, the first full year Reagan had in office, government outlays as a percentage of the gross domestic product was 23.1 percent (the previous year was 22.2 and included spending from the Carter administration).
In contrast, outlays as a percentage of GDP the last full year of Jimmy Carter’s administration was 21.7. Before that, the three years prior were around 20 percent of GDP each. (In 2011, this figure was 24.1.) No year under Reagan was spending as a percentage of GDP less than 21 percent.
Additionally, deficits under Reagan from 1982-1988 equaled $1.259 trillion and averaged $179.9 billion per year. In comparison, deficits under Carter from 1978-1980 equaled $173 billion total. They averaged $57.9 billion those three years.
That legacy of “starving the beast didn’t work” Stockman says.
“It has only led to a two-party competition in free lunches,” he said. “The Republicans being the party of stimulating the economy–and frankly, that’s statist,” he said adding that the GOP became the “Keynesians of the prosperous classes” through micromanaging the economy through the IRS tax code over the years.
“Versus the Democrats using traditional Keynesian spending and liberal interventionist approaches,” he continued. (Economist Robert P. Murphy defines Keynesianism as an economic school of thought “that prescribes budget deficits as a way to lift the economy out of out recession and restore full employment” in his book Lessons for the Young Economist.)
Stockman explained that when there are two parties competing for the electorate driven by their respective versions of Keynesianism “you end up with massive consistent growing and ultimately incurable national debt.”
That debt, by the way, stands at $16.8 trillion as of April 2, according to the Treasury Department.
And by the end of Reagan’s first full year in office (1982), the U.S. national debt hit $1.142 trillion – the first time the national debt hit one trillion dollars in its history. And near the end of his last full year in office, the national debt stood at $2.6 trillion.
Another aspect of the Reagan legacy that Stockman took issue with was the defense build-up of the 1980s. During the military defense build-up, defense spending went from $134 billion in 1980 to $253 billion by 1989. (Defense spending according to official numbers in 2012 was $530.5 billion and by other estimates it was really closer to $928.7 billion once defense-related items from other departments are added in.)
“Ronald Reagan was terrible on defense,” Stockman said. “This massive defense buildup that we had was unnecessary. It was allegedly directed against the threat of the Soviet first strike capability and all that. We now know the Soviet Union was collapsing under its own weight.”
He explained that once the Reagan administration had the money for defense they spent it on a “massive armada” of conventional weapons with air, land, and sea capabilities but “had no use against the Soviet Union,” adding that they were “wonderful fighting machines for wars of occupation and intervention.”
Reagan’s “unintended legacy” was handing a fighting machine to his successor George H.W. Bush and his son, George W. Bush, for later uses in wars of occupation.
“It handed this vast fighting machine to the Bushes who could then intervene in places we never should’ve been involved in and they didn’t have to go to the public and ask for the taxes to do that,” he said to mild applause in the Cato auditorium.
Total national defense spending was on the rise since 1973, almost a decade before Reagan entered office. That year, defense spending was $77 billion. It grew to $134 billion in 1980.
In 1981, which includes some spending from the Carter administration, defense spending was $157 billion, $23 billion more than Carter’s last full year. But by 1988, defense spending reached $290.9 billion.
(Defense spending also topped $300 billion in the George H.W. Bush years and relented only slightly to $292 in Clinton’s first year in office. Defense spending hit a low under Clinton in 1996 but steadily began to climb again. Defense spending never dropped after 1998.)
Milton Friedman: The Central Planner That Didn’t Know It
Stockman also took issue with libertarian economist and founder of the Monetarist school of economics Milton Friedman, calling him a “central planner.”
“The kind of Fed that came out of Friedman’s idea…it is the opposite because it set a board of 12 people [who] could decide how much M1 we need,” he said. “And therefore knowing how much M1 we need they would know how much credit would be created by the banking system and if the banking system created the right amount of credit the economy would grow at the right rate.”
(M1 is a measure used by economists of the total amount of money in an economy. By this measure, all the money in an economy is not just what’s in people’s wallets and the stores they shop in. It also includes checking account balances. These balances can’t be all withdrawn at once, because there is less physical paper bills in the economy than money that’s actually in the economy.)
“Actually, Milton Friedman was a central planner and he didn’t know it,” Stockman said. He also said Friedman was “naive politically.” His book has a chapter on Friedman called “Milton Friedman’s Folly: Rise of the T-Bill Standard.”
Stockman was there to discuss his book “The Great Deformation: The Corruption of Capitalism in America.”
He says the book–768 pages in all–is “a massive diet we need in this nation both fiscally and in terms of the scope and scale and purposes of government.”
Additionally, it’s also about getting the “rogue, out-of-control” Federal Reserve Banking System led by Chairman Ben Bernanke “back into some kind of box where it is not a clear and present danger to the United States.”
Stockman says he doesn’t always stay on the libertarian “straight and narrow,” but says that three big ideas–fiscal rectitude, sound money, and free markets–run through his book that are on the “libertarian mainstream.”
“I have been a deviant every now and then on certain issues,” Stockman said.
As for being in the libertarian mainstream, the book was recently praised by former Chief of Staff under Ron Paul (1978-1982) Lew Rockwell, now chairman of the Ludwig Von Mises Institute in Auburn, Alabama.
He says that because of the book “not a shred of the regime’s propaganda is left standing.” Stockman’s book was released on April 2.