David Stockman on Why Austerity Isn't Discretionary
David Stockman is taking a beating from all sorts of journalists and economists over his screed in the New York Times last weekend, in which he warned of a coming market crash, said "the United States is broke -- fiscally, morally, intellectually," and blamed the country's bleak future on failed policies by U.S. leaders ranging from former President Franklin Roosevelt to Federal Reserve Chairman Ben Bernanke.
The former Republican member of Congress, who was President Ronald Reagan's budget director from 1981 to 1985, is pitching a new book, called "The Great Deformation: The Corruption of Capitalism in America." So perhaps we should expect some amount of provocation. Even by the standards of Chicken Little, however, Stockman came off as more than a bit extreme. Which is why I thought it would be a good idea to show him at one of his better moments.
My favorite Stockman quote is one he uttered last July during an interview with Alex Daley, an analyst at Casey Research. (You can watch the clip and read the transcript here.) The subject was "austerity," and how it is not something governments and their citizens have much choice about. The point is as topical as ever, now that Cyprus has become the fifth euro-area country to seek an international bailout. Here goes:
"Austerity isn't an elective course. Austerity is something that happens to you when you're broke. And yes, it is painful, and spending will go down, and unemployment will go up, and incomes will be impaired. But that is a consequence of the excess debt creation that we've had for the last 30 years. So austerity is what happens when you break the rules.
"And somehow we have this debate going on: 'They're making a mistake. They chose the wrong strategy.' Do you think Greece chose the wrong strategy with austerity? No. No one would lend them money. That's why they ended up in the place they were. Do you think that Spain today is teetering on the brink because they said, 'Oh, wouldn't it be a good idea to have austerity?' No, they had a gun to their head. They were forced to do this because the markets would not continue to lend, and even now their interest rate is again rising. The markets are losing confidence, and unless the ECB prints some more money and bails them out some more, they are going to have austerity.
"So the austerity upon us is the backside of the debt super-cycle we had for the past 30 years. It's not discretionary."
If austerity were discretionary, Cyprus would be choosing not to have it.
(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)