Despite its history of failure, Keynesianism continues to be the favored justification for cronyism among lawmaker and interest groups, according to David Stockman.
In an interview with Proactive Investors UK on Tuesday, Stockman, a former congressman who also served as Director of the Office of Management and Budget under President Reagan, discussed his new book, “The Great Deformation: The Corruption of Capitalism in America,” in which he argues that, “policies undertaken in the name of public good inexorably become captured by special interests and crony capitalists.”
“Programs born out of desperation or idealism 75 years ago have ended up as fiscal time bombs like Social Security or as captive fiefdoms of one crony capitalist syndicate or another,” Stockman said.
The Federal Reserve, for instance, was intended “to encourage the banking system to extend credit to the business and household sectors, thereby stimulating economic growth,” but Stockman points out that this formula relies on ever-increasing levels of debt, and “the problem today is that we have reached ‘peak debt’.” (RELATED: The Dems are Fed Up with the Federal Reserve)
“Consequently, the household sector has been unable to borrow more money,” he said, meaning that “the Fed’s injections of liquidity never leave the ‘canyons of Wall Street’.” Instead of boosting household consumption, the Fed’s easing policies “essentially fuelled more carry trades and speculative buying of financial assets,” creating overvaluation and financial bubbles.
Stockman blamed the Fed’s overreach in part on “a natural tendency, or impulse, towards expansion of the State,” which he says is common in modern democracies. (RELATED: Long Congressional Tenures Increase Government Spending)
That impulse was freed from external restraints when America abandoned the gold standard in 1971, allowing the government to monetize debt and run much higher deficits without immediately harming the financial system.
As a result, “politicians came to realize that they could run deficits with impunity,” and despite giving occasional lip service to the desirability of a balanced budget, “one party is reducing the revenue base, and the other party is expanding the spending level,” leading to “massive cumulative growth in public debt.”
The ongoing expansion of government, in turn, has created a mindset among Washington politicians which “holds that the economy of market capitalism is like a ‘frail flower’ that is constantly in danger of faltering,” providing an excuse for “continuous and almost unlimited intervention and stimulus” in both monetary and fiscal policies.
“Interest groups,” Stockman pointed out, “are always happy to accommodate the desire of politicians to find ways to help the economy,” leading him to conclude that, “crony capitalism is really the stepchild of the Keynesian idea.” (RELATED: Both Parties are United in Support of Corporate Welfare)
The alliance between special interests and well-meaning politicians, he said, explains such “boondoggles” as our loophole-ridden tax code, failed efforts to stimulate the economy through government spending, and massive interference in virtually every sector of the economy.
Yet, despite the fact that “all of this crony capitalism results in a waste of resources, inefficiency, and grotesque unfairness,” Stockman predicts that “crony capitalism will predominate and the free market will become an ever more remote figment of the past,” as long as Washington continues to believe that its main job is to protect the economy from itself.
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