DDP Newsletter Vol. XXXVI, No. 6
Today’s great threat to capitalist prosperity, personal liberty, and constitutional government is not Marxism, socialism or any other variant of traditional left-wing ideology, states David Stockman, in a five-part series in David Stockman’s Contra Corner, written in February 2021. Stockman was Director of the Office of Management and Budget (1981-1985) under President Ronald Reagan.
The threat is scientism, which he defines as “the false claims that economic science, public health science and climate science, among others, require sweeping increases in state intervention and control.” Real-time instances include John Kerry’s recent proclamation that we have just 9 years until irreversible climate disaster and the on-going depredations of the Virus Patrol (https://tinyurl.com/3ak2vyba).
Proposals that call for the extirpation of fossil fuels, lockdowns, or massive monetary and fiscal stimulus are based on invented, goal-seeking “science.”
The Virus Patrol was never about curing people or preventing illness, as evidenced by neglect or even active suppression of potential individual patient-based therapies—hydroxychloroquine/zinc, ivermectin, convalescent plasma, vitamin D supplementation, and countless more experimental therapies and physician-formulated cocktails, which were grounded in actual medical science and practice.
Instead, we have a kind of Scientism that “functions as Leviathan’s handmaid in a far more potent and dangerous way than the scribblings of left-wing academic idealists and fanatics ever could.” It falsely posits an existential threat and then pursues a Zero-Case solution through sweeping applications of the state’s regulatory, police, and fiscal powers.
“That is, Zero Covid cases, Zero Fossil Fuel use and Zero Unemployment above an arbitrarily defined full employment threshold in the domestic economy.”
“But when you empower the state to pursue Zero of anything in the context of social life’s inherent complexity,…you have a recipe for a new kind of economic and liberty-impoverishing totalitarianism that is truly something new under the sun.”
MACROECONOMIC SCIENTISM
Keynesianism—the practice of macroeconomic stimulus—has become accepted Gospel on both sides of the political aisle, Stockman writes. Trillions of federal dollars, created from thin air, are being distributed in an attempt to revive an economy crushed by COVID “mitigation.”
Since Richard Nixon said, 50 years ago, “We are all Keynesians now,” the public debt has grown 78-fold, and the nominal GDP only 19-fold.
Stockman states that the last 150 years readily disprove Keynesianism. He points out that free-market capitalism “worked brilliantly from 1870-1914 without fiscal intervention or any central bank at all,” and that “the rate of growth and increase in per capita prosperity has never been equaled since.” When it was created in 1914, the Federal Reserve had the modest mission of providing liquidity to the banking system, based on sound commercial collateral. “There was no latitude or wiggle room for a state takeover over the national economy via the false science of Keynesian macro-economics” (tinyurl.com/k6xj4t4w).
Then came the Great War and Woodrow Wilson’s insistence on financing it mainly with debt and not taxes. The Fed’s backdoor financing of the massive Liberty Bond issues opened the door to monetization of the public debt and activist central banking. The original ban on Fed financing of government debt was repealed.
During the war, U.S. GDP went from $40 billion pre-war to a peak of $92 billion in 1920. “Fortunately, however, the sound money men who had been drafted to serve on the boards of the 12 Reserve Banks still knew phony prosperity when they saw it. So rather than attempting to ‘stimulate’ an unavoidably deflating war economy, the free market was permitted to adjust back to a sustainable peacetime level…. Federal outlays of $18.5 billion in 1919 cratered by 82% to just $3.2 billion in 1922.” Yet, the U.S. economy did not descend into an economic black hole, but quickly recovered.
These facts should have demolished Keynesian Scientism—save for the claim that free-market capitalism fell apart during the Great Depression of the 1930s.
“What literally changed the course of history was the accident of 1922,” Stockman writes. “That’s when the nascent central bank spread among 12 highly independent regional branches discovered the poisoned fruit of open market operations.” When earnings from Liberty Bonds dropped precipitously the Fed cranked up the printing presses to buy government bonds to prop up its P&L statement. Then, it started buying assets in order to “guide interest rates…and steer the course of macroeconomic activity.” It now buys $4 billion worth of assets every day (tinyurl.com/2s9cweaw).
The brutal stock market crash of 1929 followed the debt and speculation-bloated GDP peak of 1929. The initial 10% decline in real GDP in 1930 was about the same as the 9% decline in 1921, but capitalism didn’t spring back like it had in 1922 “because this time unlike Warren Harding sitting on his back porch calling for a return to ‘normalcy,’ the politicians got in the way big time.” These state interventions prolonged the Great Depression for most of the decade and established the founding myth that justifies today’s relentless and destructive monetary and fiscal machinations (tinyurl.com/26cbfbuv).
Stockman provides a detailed analysis of the banking crises and the “ad-hocery” of New Deal policies. The most devastating legacy was FDR’s abolishing the basis for sound money (https://tinyurl.com/4an8u6r9).
Unlike after the Great War, we don’t have an overexpanded production that is returning to peacetime levels, but depressed production owing to previous off-shoring of industry and even agriculture, and now COVID lockdowns. A “Green New Deal” would cripple production permanently. The Fed continues deliberate inflation, while the accepted belief holds that failure to create enough money caused the deflationary Great Depression. Thus, we have a trifecta of destructive policies based on Scientism.
Economist Davis Rosenberg recognizes that we have a “Potemkin economy,” and that the S&P 500 would be at least 500% lower without the Fed’s interventions. However, he appears to think, according to Stockman, that Washington simply overdid it. Policy recalibration won’t work in a condition “in which the State is pervasively and toxically at war with the Economy.” Stockman notes that in 2019, real net investment per capita was 22% below 2000. Also, transfer payments (government social benefits) have soared from around 5% of GDP in 1970 to more than 20% of GDP during 2020, and in 2020, the net national savings rate hit nearly an all-time low of 1.1% (tinyurl.com/4b9698s4).
Stockman hopes that actual science might counter the road to serfdom, and the “dark clouds of totalitarian poverty,” but laments the lack of coherent political opposition.
Science appears to be losing on all three issues at present.