Trump’s War on Capitalism
by David Stockman
Hot Books, 2024; xi + 245 pp.
David Stockman is, to say the least, no admirer of Donald Trump, but even those inclined to a more favorable view of the former president than his will find much of value in this book. Stockman, who served in Congress in the 1970s and was budget director during Ronald Reagan’s first term, is a combination of a fiscally conservative Republican in the style of Robert Taft and a supply-sider stressing the importance of growth in productivity over the manipulation of aggregate demand through fiscal and monetary policy.
Stockman sharply distinguishes between the productive sector of the American economy and the financial sector, in which, owing to malfeasance by the Fed, an elite can accumulate vast fortunes without contributing to genuine growth. He assails the high levels of inequality in income and wealth that now prevail, but he does not ascribe these to inherent flaws of capitalism but rather to “financialization.” He says, for example: “When viewed on a per household basis the results border on the hideous. According to the Fed’s own data, the stock portfolios of the top 1 percent of households gained $9 million each versus $1800 each for the bottom 50 percent. . . . These megadistributions to shareholders at the tippy-top of the economic ladder, in turn, were a function of a bubble-bloated and speculation-ridden equity market that was fueled by the Fed’s relentless money printing. . . . Under the rules of the freemarket, of course, businesses are entitled to do what they deem best with their cash flows, and we do not question that axiom for a moment. But corporate executives should not be artificially induced to distribute rather than invest by baldly inflationary monetary policies” (emphasis in original).
A general feature of Stockman’s approach to economics is that he often arrives at conclusions broadly similar to what Austrians favor, although he is not an Austrian in the strict sense.
For example, Stockman concurs with Austrian School economists in calling for an end to the manipulation of the economy by the Fed, but unlike the Austrians, he does not call for the Fed’s abolition. Instead, he says that the Fed as originally conceived by Congressman (later Senator) Carter Glass was sound in principle, enabling businesses to gain liquidity to cope with downturns. “[Glass’s] vision was that the Fed’s purpose would be to safeguard sound money and to ensure that the commercial banking system remained liquid as the US economy expanded in the normal course or encountered temporary rough patches from time to time. . . . [Glass] was a believer in what was called the ‘real bills’ doctrine back in the day. In simplified terms it held that bank loans backed by already produced goods . . . were the only suitable collateral for loans at the Fed discount windows.”
Another example of Stockman’s common ground with the Austrian School is his support for the gold standard. He makes an interesting criticism of freely floating exchange rates, famously advocated by Milton Friedman, who, according to Stockman, “more than anyone else convinced Nixon to crash the Bretton-Woods gold-anchored dollar in favor of fiat money and free market–based FX [floating exchange] rates. It is plain as day, however, that since August 1971 there has never been a free market in currencies. To the contrary, what has materialized instead are massive, continuous ‘dirty floats’ representing central bank manipulation of exchange rates in the service of mercantilist trade policies all around the world, but especially in Asia.”
Stockman argues that the Fed’s inflationary measures would in the normal course of events have led to a devaluation of the dollar but that this tendency has been thwarted by foreign devaluations, leaving the dollar in a strong position internationally. American firms, taking advantage of these devaluations, can obtain cheap labor abroad, at the expense of American workers. Stockman holds that under fixed exchange rates, doing so would be much more difficult and that American firms would likely employ more American workers.
In his strategy for coping with economic downturns, Stockman again resembles the Austrian School in his conclusions, though he does not mention the Austrian theory of the business cycle. Contrary to Keynesians’ and monetarists’ assertions, Stockman maintains that retrenchment is needed: bad investments must be liquidated, and deflation, not inflation, is the proper course of action.
As costs, including wages, fall in industries where malinvestment has occurred, resources will move to areas where demand is greater and productivity will increase. Deflation leads to higher interest rates, and thus Stockman applauds Paul Volker, who raised interest rates vary substantially when he served as Fed chairman.
Donald Trump, by contrast, wants interest rates to be low, and this is a major source of Stockman’s dissatisfaction with him. “From the moment in 2017 when the Fed began its tepid moves to get the federal funds rate off the preposterously low zero bound and to shrink its elephantine balance sheet, as Bernanke had promised upon the launch of QE [quantitative easing] years earlier, The Donald was all over the Fed’s back.”
Stockman criticizes Trump’s policies during the covid pandemic as inflationary and inimical to rising productivity, which, it will be recalled, he takes to be the key measure of economic progress. Although at first inclined to doubt that the pandemic called for drastic action, Trump was soon bamboozled, at least temporarily, by Anthony Fauci’s highly dubious alarmism, and supported shutting down much of the economy in order to cope with the alleged dire emergency. To help the people the shutdowns prevented from working, Trump sponsored massive subventions to them. Discouraging productivity and increasing government spending are precisely the opposite of the policies Stockman favors.
Stockman makes a powerful case against Trump’s economic policies, but he overlooks some of the beneficial effects of Trump’s tax cuts. The recent book by Arthur Laffer and his colleagues, Taxes Have Consequences, makes the best case for Trump’s economic program of which I am aware, and I highly recommend reading both that book and Stockman’s. Laffer and Stockman are both eminent supply-siders, but they view Trump’s policies very differently.
