'We're Going to Have a Crisis': David Stockman's Stark Warning for America

The onetime Reagan budget chief has gone from supply-side guru to prophet of doom -- and his new book predicts stormy times ahead for the U.S.

David Stockman (right) with Ronald Reagan in happier times, at a 1981 Cabinet meeting to discuss the budget. (Jeff Taylor/Associated Press)

David Stockman, formerly a leading conservative Reaganite, now blames some of the economic program that he once supported for the 2008 meltdown and sluggish recovery. But liberal Democrats who may be excited about a Stockman defection will be sorely disappointed: His critique of the Obama economic program is just as strong as what he says about his erstwhile friends in the Republican Party.

With his new book, The Great Deformation, published today, Stockman positions himself as a whistleblower of the highest order, offering a scathing appraisal of what's happening in Washington. His history gives the story an unusual perspective. In the late 1970s, as a young Republican congressman from Michigan, Stockman was in a group of politicians, economists, and journalists who championed supply-side economics -- the theory that cutting taxes will lead to an economic boom. Ronald Reagan embraced the theory in his 1980 campaign for the presidency, landing Stockman a spot in Reagan's inner circle of advisers. After Reagan won, he appointed the then-34-year-old Stockman to one of the most influential positions in Washington: director of the Office of Management and Budget. From that position, Stockman led Reagan's economic program for the next several years. Stockman became an object of controversy in part to the remarkable cover story in the December 1981 issue of The Atlantic, a behind-the-scenes look at the making of budget policy in the capital. "None of us really understands what's going on with all these numbers," Stockman told author William Greider.

That article, coupled with Stockman's break with the supply-siders in the mid-1980s, made him persona non grata with many Reaganites. He later joined Salomon Brothers and the Blackstone Group.

In Sunday's New York Times, Stockman wrote an arresting diagnosis of the country's economic condition: It's worse than everyone thinks. And he argues that it's only getting darker. I visited with him to discuss his outlook, the 1981 Atlantic story, and the long journey that brought him to this point. The interview has been condensed and edited.

A couple of months ago, in the State of the Union, President Obama said, "After years of grueling recession, our businesses have created over six million new jobs. We buy more American cars than we have in five years, and less foreign oil than we have in 20. Our housing market is healing, our stock market is rebounding .... We have cleared away the rubble of crisis, and can say with renewed confidence that the state of our union is stronger." Obviously, you don't agree with his conclusion.

He's dreamwalking. I agree with a few of the things he said, particularly getting out of Afghanistan as fast as possible. But in terms of facing down the real domestic issues, I think he missed the boat. He has this idea that's been peddled to him by his advisers that we're making great headway on chiseling away at the deficit, but that's based on a rosy scenario that makes the one we used in 1981 look pale by comparison. If you do an honest projection, the deficit over the next decade will be $15 to $20 trillion. He's lost.

You and the late Jude Wanniski were some of the original champions of supply-side economics. What would he think about your new book?

He would probably denounce it because what I'm saying is inconsistent with the free lunches and economic magic that is the essence of supply-side.

But aren't incentives important? Won't people work harder if they get to keep more of their own money?

Incentives are important. Ultimately, economic growth, wealth, and prosperity come from the supply side of the economy and not the demand. But Jude turned that into something superficial. He argued that Republicans didn't have to be the party of root canals, warning the public about the dangers of deficit financing, or always saying no. Why don't we become the Santa Claus Party and give tax cuts to everybody? We'll win elections and live happily ever after -- well,I think that's just another variation of the Keynesian magic that the state can solve everything. There needs to be discipline. Economic growth, wealth, and prosperity take a lot of effort, sweat, and real-world endeavor over long periods.

The GOP program has the supply-side, low-tax position at its core. If it won't generate the results they promise, why is it still such a part of the Republican agenda?

Because Republicans claim that we had this great Golden Age in the 1980s, that there was a boom in the 1990s, and that everything was going well during the George W. Bush era until some mysterious comet came in from deep space and caused a meltdown in 2008. My argument is that this was mostly a phony prosperity built on massive additions to public and private debt. That so-called prosperity came from the printing press in the Eccles Building run by Alan Greenspan and Ben Bernanke. The "prosperity" didn't come from tax cuts made by Republican policy makers.

But if cutting taxes doesn't create a roaring economy, why did people such as Wanniski and Jack Kemp champion this idea for so long?

Jude argued that there would be an instantaneous shock of higher gross domestic product on merely the announcement of tax cuts -- even before they were implemented.

Mitt Romney used a variation of that on his infamous "47 percent" video. "If we win on November 6," Romney said, "there will be a great deal of optimism about the future of the economy. We'll see capital come back and we'll see -- without actually doing anything -- we'll actually get a boost in the economy."

In the real world, it takes time for these things to play out. That's where the supply-siders got way off base.

Was Jack Kemp a magical thinker?

He wasn't overboard. He was in the middle. In the early 1980s, I was part of Jack's group, and so was Phil Gramm. We believed in sound money and were what we called "sound-money Republicans." It wasn't very fashionable to talk about the impact of ending the gold standard, but we believed that's what caused the first of the great inflation of the 1970s and helped get us to where we are today.

What did Kemp say about your decision to divorce the supply-siders?

He wasn't very happy. My view is to cut spending first but if you run out of options and don't have the votes, then you have to pay the government's bills. You do that by asking people to pay taxes. Jack was totally unwilling to do that. So that's where we parted company. I agreed with him that lower tax rates are better than higher tax rates.

Rep. Paul Ryan, the chairman of the House Committee on the Budget, cites Kemp as his mentor. What's your assessment of Ryan?

He's all hat and no cattle. Beyond that, I think he's intellectually dishonest. His budget plans are bogus.

Senator Rand Paul seems to be taking a more libertarian approach than his GOP brethren. What's your view of him?

I'm in the Ron Paul camp, and Rand sounds pretty good, too -- at least on liberty, the warfare state, anti-interventionist foreign policy, opposition to big government, and the Keynesian deficit delusion. And he's also solid on the clear and present danger to the American economy posed by [Federal Reserve Chair Ben] Bubbles Bernanke and his loony band of money printers.

How culpable is the Federal Reserve for the mess we're in?

It's at the heart of it. We've got a rogue central bank that's violating the principle of sound money that mankind accumulated over centuries. Interest rates were dropped to zero in early 2009 -- I say zero, but 10 basis points is the same thing -- and Bernanke's suggesting he'll keep them at that level through 2015. That's six years when money markets have zero interest rates. That's a lunatic economic proposition. Capital has to have a price. Money has to have a price. When it's driven to zero, you're essentially disarming the financial system. It can't function without prices.

In your 1986 book The Triumph of Politics, you wrote that FDR was willing to grab any idea that was handy to fix the economy. Then you have a scene where Kemp tells you that he's been to California for a secret meeting with Reagan before the 1980 campaign and convinced him of supply-side. Did Kemp really convert Reagan? Or was Reagan just grabbing a handy idea, like FDR?

Once Reagan left the left in Hollywood, he embraced the Republican view: High taxes are bad for the economy. They undermine capital formation and the rate of growth. President Eisenhower believed that under sound Republican economics you must balance the budget first by cutting spending. That earns you the right to implement a tax cut. Reagan was pretty much of that same persuasion even when he was governor of California in the sixties and to some degree when he ran for president in 1976.

So what happened in Kemp's meeting with Reagan?

Jude Wanniski and economist Art Laffer went to that meeting with Kemp, too. They persuaded Reagan that the old linkage -- balanced budget first, tax cuts later -- was invalid. They told Reagan that the Republicans would never get to the tax cut because it was too hard to balance the budget. They argued that the tax cut would cause so much growth that it would be easier to balance the budget. So they said, "Reverse the order, don't keep tax cutting hostage to first balancing the budget." That was the big change.

And that marked a major change for Republicans.

It was the Rubicon. Once the conservative party said, We don't have to balance the budget first in order to earn a tax cut, then it just became a bidding war as to who could come up with the greatest gimmicks to stimulate growth.

So if Reagan had never taken that meeting with Kemp and the others...

Well, the people who met with Reagan made up a cadre that nobody paid any attention to. Remember that in January 1980, Republican elders wanted nothing to do with Kemp. They thought he was like a gadfly. He was an interesting rabble-rouser who put a nice, young, energetic slant on the Republican gospel but they thought he was a wild man and the huge tax cuts he was talking about were dangerous. Senator Howard Baker, the Republican from Tennessee, called Kemp's program a "riverboat gamble." But those guys who met with Reagan changed everything.

Today's GOP constantly invokes Reagan. Even Obama refers to Reagan as one of the most transformative figures of the last 100 years. This many years out from his presidency, how do you rate Reagan?

Somewhat negative. His defense build-up was unnecessary -- most of it went into a vast conventional armada of ships, planes, and tanks that could be used to invade places such as Iraq and Afghanistan and had nothing to do with the so-called Soviet threat. I would give him terrible marks for being so stubborn and insistent in that defense build-up.

What about his domestic policy?

He had a vision of trying to shrink government, but every time some real tough choices came along, he walked away from them because the political heat was so great. He was easily talked into rationalizations for things that were very antithetical to free markets and supply-side. For instance, he put quotas on auto imports from Japan because he got double-talked into it by Secretary of Transportation Drew Lewis and the auto industry.

Do you attend Reagan Administration alumni events?

I haven't been to too many lately.

Would you be turned away?

I don't know that I would be that welcome, to tell you the truth.

Daniel Patrick Moynihan, the famous Democratic senator from New York, was your friend. What did you learn from him?

I was a radical back then, and he helped me to see a way to a more middle-of-the-road view. When I was a graduate student at Harvard's Divinity School in the late sixties, I needed a job. I answered an ad for a live-in babysitter and it turned out to be Moynihan's family. He was working in the Nixon Administration, but his family lived in Cambridge. So I moved in, spent a year there, and as a result of that experience became friendly with him and his family.

So is it fair to say that Moynihan helped make you a conservative?

He helped me get from a Marxist view of the world to, let's say, a democratic capitalist view of the world. I'm still a democrat, and I'm still a capitalist. But I'm as anti-war as I ever was.

Do you have an economic mentor for your philosophy?

Not really. Milton Friedman was right on a lot of things -- he said that regulation and government intervention would harm rather than help the economy. I would take his views on that, but he was wrong on the monetary question.

In 1983, you told the Washington Post's Lois Romano the job you most wanted was editorial page editor of the Wall Street Journal. "The editorial page of the Journal is very influential in that it shapes opinion on the daily course of government and public policy," you said. Given that the Journal's editorial page has been such a potent influence in the Republican Party, how might the country be different if you'd landed that job?

I'm sure the editorial page would have been different. I don't know about the country. I'm against most of what the editorial page stands for today. They're neocon warmongers. I started as an anti-war protester in college during the sixties, and I've never really changed. In light of all the disasters that we've had in Iraq and Afghanistan, I've become even more strongly convicted. That's the opposite of what you hear from the Wall Street Journal.

But you and the Journal both agree that lower taxes are preferable.

I also believe in the old-time fiscal religion: Pay your bills in peacetime, and don't run the government on permanent large deficits. The Journal has given that up. They've basically said that all we have to do is have enough economic growth and everything will go away. Well, if dogs could whistle the world would be a chorus. That's make-believe. In the world we live in today, you'll never get enough growth. Baby boomers are retiring, we're $17 trillion in debt. The people at the Journal's editorial page are just engaged in ritual incantation. If I had any target in writing this book, it is to use a conservative point of view to correct the gross errors and heresy of the Wall Street Journal's editorial page.

In The Great Deformation, you write that if we eliminate 10 cabinet departments and federal agencies, repeal Obamacare, and end bailouts, then we'll be on the road to recovery. Isn't that pretty much a Tea Party agenda?

What I've said is consistent with a small government Tea Party, an anti-Federal Reserve Tea Party, and an anti-war Tea Party. But there are other elements of the Tea Parties that I don't agree with at all. Some are rabid against gun control. Look, I think the Second Amendment is obsolete. It's archaic. It's from the 18th century, not the 21st century.

Who did you vote for: Barack Obama or Mitt Romney?

I couldn't bear to vote for either of them.

You wrote that at the start of Reagan's presidency, "For the first time since the New Deal, everyone was talking about cutting the budget instead of adding to it." What has to happen for the country to have that conversation again?

That was a fleeting moment. The only way we can get back to the narrative of 1981 is if we have a massive financial market conflagration that suddenly shakes everybody out of the current frame of mind.

So you think this conflagration is inevitable?

It would be extremely destructive and unpleasant. At some point, the market is going to lose confidence that the Fed and other central banks can keep buying $85 billion of securities backed by the Department of Treasury and mortgages. The minute they lose confidence that the central bank can keep everything medicated and propped up and some of the smart money starts selling, then the opposite dynamic will set in. There will be a real crisis in the bond market because it's totally artificial. Nobody owns the bonds -- they all have it for a trade. And the minute people think the price of bonds is going down and the yield is going up, they'll sell them as fast as they bought them.

When you were director of OMB, some Democrats felt that deficits were out of control and sided with you and President Reagan. Do you see anything like them in today's party?

Not so much. That faction was called the Boll Weevils. They were mostly from Southern and rural areas -- they weren't big-city Democrats. Today, the Democrats and Republicans have eliminated the middle-of-the-road. That's what happened because of several decades' worth of redistricting. Also, most of the Democrats who lost in the GOP landslide of 2010 were the so-called Blue Dog Democrats. They had a modicum of middle-of-the-road fiscal restraint in their playbook. Moderate Republicans lost in '06 and '08, so now we have almost no basis for agreement on fundamental fiscal issues. Democrats are dreaming they don't have to cut Social Security and Medicare. Republicans are dreaming that all they have to do is cut taxes enough and the economy will grow out of the problem. Neither is true.

You were a freshman in Congress in 1977. If you were starting in Washington this year, would you view your role as hopeless?

Yes. Hopeless. Because both parties have lied to the public for so long. The things that the base of each party believes are fundamentally untrue. Pat Moynihan taught me a phrase -- "everybody is entitled to his own opinion, but nobody is entitled to his own facts." What the Democrats and Republicans believe about the fiscal issue is so detached from the facts that there's no basis for governance.

Do you think your OMB successors see what you're seeing, at least in their private moments?

No. They're caught up in this Keynesian fog -- The economy is going through a disappointing recovery but if we just keep working at it, everything will work out for the better. The latest OMB and CBO forecasts show no recession through 2023. Well, the latest recession ended in June 2009. Their forecast implies that 14 years are going to go by and there aren't going to be any accidents, hiccups, and dislocations in our economy or in the world. That's nuts. It's never happened in recorded history. We're going to have recessions. There will be a crisis.

When William Greider interviewed you for The Atlantic in 1981, you were already getting disillusioned with the ways of Washington. As crestfallen as you were then, did you ever imagine you'd be saying the things you are today?

I didn't foresee that Alan Greenspan would end up creating this two-decade long era of bubble finance. This allowed the problem to fester and reach magnitudes that are probably beyond the capacity of a democracy to cope with.

So you think that even our system is incapable of addressing the problem?

If you're talking about a deficit that's five to 10 percent of GDP, imagine what happens. That means harsh dislocation to all kinds of taxpayers and spending beneficiaries. The great Keynesians didn't think about overloading the capacity of the political system to make decisions, to cope, to govern. That's where we are today: the Keynesian doctors are running around the operating room incapable of making any decisions because the magnitude of the problem is so large that it's impossible to form a consensus.

How would your life be different if Greider hadn't written that story?

I think I would have ended up in the same position of conflict with what the hard-core Reaganites wanted to do anyway. Sure, that story caused a crisis. It made a huge problem visible. But we were on a collision course with reality and Greider's article dramatized it.

In Lois Romano's Washington Post story from 1983 that I mentioned earlier, you were referred to as the "GOP Savior." Even the Democrats are listening to David Stockman, she wrote.

Yeah. (long pause) That was once upon a time.