09.11.2012 0

Stockman’s dose of honesty

By Robert Romano — So much for being the left’s new darling.

David StockmanIn his continued gambit to make enemies with just about everyone in the Washington, D.C., former Reagan Office of Management and Budget Director (OMB) David Stockman is now taking aim at the Federal Reserve’s zero-interest rate policies that he says are incentivizing reckless spending and borrowing on Capitol Hill.

“All the way out to five years, you can fund this debt at 65 basis points,” an indignant Stockman charged appearing on CNBC, noting that five-year treasuries yield about a paltry 0.65 percent interest rate. He’s got a point. If the entire $16 trillion national debt were financed at that rate, annual gross interest payments would only total $104 billion compared to today’s $454 billion.

Stockman explained how the Fed’s low interest rates are distorting congressional prerogatives: “I know what it takes to have [Congress] fall on the sword, to really reform entitlements, or finally face up to the military industrial complex, or maybe begin to reform the tax code. But they’ll never do it if you can keep borrowing free money forever because the Fed and these lunatics who are running it, and I use that word advisedly, are basically telling the whole world untruths about the cost of money, about the cost of risk, about how you allocate capital.”

Indeed. Why should Congress ever cut spending if the Treasury can refinance the debt at near-zero percent interest rates and never have to repay the underlying principal?

But the problem has even wider implications for restoring robust economic growth in the U.S., Stockman notes. “[T]he Fed is the heart of the problem. We have destroyed capital markets, the money markets. Interest rates mean nothing. Everything is trading off [of] the Fed. Wall Street isn’t even home, it’s a bunch of computers trading word-clouds emitted by this central bank or that.”

He summed up the dilemma, “In that environment, everybody’s being given the wrong signal.”

Significantly, Stockman warned that Mitt Romney’s growth plan will likely be foiled if he does not take on the Federal Reserve. “If Romney were real about what he’s saying about restoring capitalism, he would say day one, hour one, job one: Bernanke is fired,” he said, adding that Romney needs to “clean house at the Fed, because that’s where this crisis came from in 2008, that’s why we’re still buried.”

Stockman railed against bailouts and Republicans, saying everything Ronald Reagan stood for was destroyed in Sept. 2008 “when they bailed out Wall Street, when they came in with this TARP, which was an abomination”. Hard to argue with that.

Stockman also clarified his views on budgetary matters, calling for deep cuts to Social Security and Medicare through means-testing and slashing the national security budget including defense by one-third, or more than $250 billion. He reiterated his criticism of Paul Ryan’s budget plan for putting off reforming entitlements until 2023.

But never mind Ryan’s budgets for its faults, he says the Obama budget is even worse. “The Obama budget is total fantasy. He is saying we’re foursquare for protecting Social Security forever, and Medicare you can’t take a dime out of.”

He succinctly summed up Washington’s malady: “The problem we have right now is two free-lunch parties, and it’s feeding bad signals to everybody.”

Interestingly, on taxes, Stockman blasted even Democrat proposals for not raising taxes enough: “You can’t go out and say we’re going to keep taxes low on 98 percent of the population.”

Stockman added, “What are the progressives thinking? Half of the population doesn’t even pay income tax, they’re getting protected already. The rest of the population has to pay for the government all these Democrats and big government, big spenders want.”

So there it is. You want this much government, Democrats? You pay for it.

Here, again, Stockman is on to something. He is referring to the fact that most voting-age Americans do not pay income taxes — approximately 50.6 percent.

That includes 53.91 million Americans who pay nothing in income taxes, and 64.7 million who get refunds in excess of what was owed.  That’s 118.61 million out of 234.6 million Americans 18 years and older, based on data compiled by the Joint Committee on Taxation and the U.S. Census Bureau.

Stockman would change that, saying, “[W]e have to raise taxes on everyone.” Here, he is essentially channeling Reagan’s infamous declaration that “Taxes should hurt.”

Now, one can disagree with Stockman’s overall plan (I certainly do), that taxes should be raised to pay for the government we have. After all, spending could be cut even deeper than he proposes to balance the budget and avoid the crushing tax increases which even he acknowledges would be recessionary. The question ultimately boils down to how much government we’re willing to pay for.

But Stockman is being honest. He sees a real emergency, and wants to solve it by taking on sacred cows — the Federal Reserve, too-big-to-fail banks, defense, entitlements — not by making friends. Sadly, he may be right, that, unless taxpayers feel the pain, and the government feels the burden of its debt with higher interest rates or worse, there may be no incentive to rein it in.

Robert Romano is the Senior Editor of Americans for Limited Government.

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