*The Great Deformation*

by on January 31, 2013 at 1:48 pm in Books, Current Affairs | Permalink

The author is David A. Stockman and the subtitle is How Crony Capitalism Corrupts Markets and Democracy.

I am a big fan of The Triumph of Politics, for its understanding of American government, but in this book I disagree with too many of the key points.  The author likes “sound money” and dislikes “easy money” yet this position is never really argued for.  Fiat money is responsible for a very large number of ills but of course financial crises and bubbles are hardly new.  Consistently, the author knows to vilify Milton Friedman.  He is an explicit liquidationist of the kind you thought Brad DeLong was simply imagining.

On money and macro, I am more persuaded by Friedman, Irving Fisher, early Keynes, David Hume, and Scott Sumner, among others.  If you are not, you will find this a very energetic economic history, including the New Deal, from a passionately argued point of view.  There is an odd mix of historical detail and theoretical lacunae.  I am still wondering what we are supposed to do when the deflationary shock arrives.  The Stockman of The Triumph of Politics, I think, would have seen that our current institutions are not up to supporting such volatility.

DocMerlin January 31, 2013 at 2:33 pm

“I am still wondering what we are supposed to do when the deflationary shock arrives.”

Oh no! Prices are dropping! Oh no!
Maybe one day you will realize that deflation isn’t the problem, its monetarily caused deflation that is the problem. The central bank suffers from the socialist calculation problem and can’t tell the difference between the two until its already too late. And adding extra money to a supply side deflationary shock creates bubbles.
This means the only answer is taking control of the money supply away from the central bank.

” I am more persuaded by Friedman”

You mean the guy who wanted to remove any and all discretionary ability away from the central bank?

david January 31, 2013 at 3:02 pm

Sometimes I wonder whether any Austrians besides, I suppose, Boettke are at all aware of the worship New Keynesians pay to time inconsistencies and non-discretionary rule-guided central banking.

david January 31, 2013 at 3:37 pm

And actually, formalizing the “can’t tell the difference between relative and absolute price level changes, with the CB especially bad at it” notion sounds appealing, and someone’s probably done it as a spin on Lucas’s signal extraction. But then Austrians would carp about the philosophy of uncertainty, because even the most extreme of policy ineffectiveness still doesn’t justify free banking or metal-backed currency.

Of course, it doesn’t sound so nice to then acknowledge “yes, our school is solely distinguished by our insistence that people respond to Knightian uncertainty in the this quirky twenty-dollar-bill-left-on-the-sidewalk way, and we’re totally not pulling the post-Keynesian trick of smuggling arbitrarily non-profit-maximizing behaviours in here…”.

DocMerlin January 31, 2013 at 5:46 pm

“because even the most extreme of policy ineffectiveness still doesn’t justify free banking or metal-backed currency”

1) er, yes it does.

2) The requirement for justification should be on those wishing to ban, non-governmental currencies.

david February 2, 2013 at 7:37 pm

Nope. Extreme policy ineffectiveness implies no gain from the shift. That’s really the problem: the policy shift there is ineffective, too. You need to invoke the non-neoclassical Austrian magic of price calculation to get that effect.

DocMerlin January 31, 2013 at 5:56 pm

Also, I am not merely arguing that the bank is ineffective, but that its actively harmful.

derek January 31, 2013 at 8:38 pm

It comes down to a public choice issue. The central bank is, no matter how independent on paper or structure, a political structure swayed by the political winds of the time. Strict rules will last until the next chairman who has better ideas, or the next congress.

“our current institutions are not up to supporting such volatility”. Volatility is the feedback mechanism that tells us something isn’t right. If the US had in the late 1990′s or early 2000′s faced the reality of a collapsed bubble caused by a dysfunctional governmental philosophy (Rubin and the driving of prosperity by extending credit) and a financial system that was beginning to resemble a developing country’s, it would have hit volatility. Instead, the issues were shuffled away by monetary and fiscal action designed to smooth things out, the Great Moderation. So the second bubble in a generation happened. And there is still more volatility and uncertainty, now hinging on whether the central banks have deep enough pockets to pull out the rabbit this time.

The magic of Capitalism is nothing more than driving failure.

dearieme January 31, 2013 at 3:06 pm

As you say, The Triumph Of Politics was excellent. I particularly liked the clarity with which he wrote about the views of his opponents within the Reagan administration. Both he and they were right. He was right that government extravagance would have dreadful consequences, they were right that nothing would be done about it until the moment of crisis. i wonder when that will arrive?

Go KIngs, Go! January 31, 2013 at 3:49 pm

What is “early Keynes” vs other Keynes? And were your other influences immune to periodic changes to their macro?

david January 31, 2013 at 3:58 pm

There’s pre- and post-Depression (aka, debt-deflation) Fisher. And Friedman was highly subject to shifting politics whilst he was alive – as the zeitgeist moved rightward, he moved further.

DocMerlin January 31, 2013 at 5:53 pm

Debt-deflation is actually a pretty good explanation overal, imo. Much better than this AD, nonsense.

david February 2, 2013 at 7:34 pm

It’s not actually sufficient, you still need to package information asymmetries and coordination failures, and then it starts looking suspiciously New Keynesian.

Ray Lopez January 31, 2013 at 5:17 pm

I agree with TC on this one. I have pre-ordered Stockman’s book and will read it, but he seems to be mirroring Amity Schales’ revisionist history. BTW, conservative Conrad Black, convicted felon (on obstruction of justice, like Martha Stewart, nothing more serious, albeit he clearly has contempt for common shareholders) has written that FDR deserves some praise in conservative circles for foreclosing something worse (had FDR not acted). Black may be right. And Keynes/TC/Sumner/Krugman may be right that deflation is the enemy–most contracts written in the 20th century are not designed for falling prices. Maybe it was different in the 19th C?

DocMerlin January 31, 2013 at 5:55 pm

“most contracts written in the 20th century are not designed for falling prices”

You are, like Tyler conflating supply-side and monetary-caused price changes. The supply side causing prices to fall is not bad. The monetary side causing short-term prices to fall, is bad.

Ray Lopez February 1, 2013 at 9:06 am

Not really Doc. I think if I, a layman and engineering type, and TC, a professional economist, are in agreement, it may be by coincidence, or that we are both right, or, it could be your world view is warped. I agree supply side causing prices to fall is good (primitive man knew that–a good rainfall means lots of grain will be grown and animals will abound, so the barter price of hides will go down), and short term prices falling due to monetary restriction is bad, but, when short term demand falls, and prices fall, that creates a freeze in the system, since, as I say, the system is not geared for falling prices. Again, your econ 101 textbook is a help: note the long-run AS curve is vertical, and only shifts right or left slowly. Do you really think the Great Recession was a supply shock? No. It was pure lack of AD caused by panic due to overleveraging. The US bubble that burst in 2000 was due to $7T in stocks being overvalued, yet the economy rebounded a few years later. The US bubble that burst in 2008 was due to $7T in real estate being overvalued, yet so far no recovery–since maybe ‘housing is different than stocks’ in the minds of consumers. In any event, it’s not a ‘supply side’ phenomena, but a AD phenomena IMO.

maguro January 31, 2013 at 9:35 pm

The idea that the New Deal “saved capitalism” is hardly a novel insight, it’s the bread and butter of FDR apologists everywhere.

prior_approval February 1, 2013 at 12:43 am

Well, you don’t hear it much from any other apologists – after all, with the American supported exception of the British Empire, there weren’t any democratic free market societies left with any capability to resist the fascists, the communists, or the Japanese vision of co-prosperity.

AT February 1, 2013 at 6:26 am

The revision is to consider FDR as the savior and the New Deal as the solution.

Ted Craig January 31, 2013 at 6:07 pm

Hedrick Smith offers this insight in his book, “The Power Game”: “Stockman is a true believer, a political zealot, Jesuitical in his pursuit of whatever is his current truth, even if that means renunciation of what he believed a few months, or weeks, ago.”

Personally, I have no use for Stockman following the Collins & Aikman debacle, but I guess he still gets his books published on the basis of a 30-year-old reputation.

anne February 1, 2013 at 10:32 am

+1

Charles Pham January 31, 2013 at 6:20 pm

Monetary Communism: The last refuge of the central planner.

Rodrigo February 1, 2013 at 6:39 am

This article is not directly linked to the blog posting or the book, but rather to your book The Great Stagnation:

http://online.wsj.com/article/SB10001424127887324539304578259883507543150.html

Hopefully the loads of evidence will make you revise your hypothesis that innovation and technological change is slowing down. Quite the contrary!

NNM4 February 1, 2013 at 8:37 am

“On money and macro, I am more persuaded by Friedman, Irving Fisher, early Keynes, David Hume, and Scott Sumner, among others.”

Tyler once wrote that he finds David Hume, and other classic non-fiction authors, to be at times hilarious. The line above reminds me that I find the same thing about Tyler.

Ray Lopez February 1, 2013 at 9:09 am

As TC wrote once to somebody (saw this in the archives) this blog is not peer-reviewed and not meant to be taken too seriously. As he wrote to that econ candidate, in fact, if you spend a lot of time posting here it’s evidence that you have nothing better to do, and that’s meant as an insult. Yes, I often am the first poster in this threads, lol. So don’t take yourself so seriously NNM4. What? ?? “You are posting comments too quickly. Slow down.” HOW DARE YOU BOT!

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Bryce February 2, 2013 at 10:54 am

I was the CFO of Collins & Aikman where David Stockman was the CEO and was indicted for accounting fraud that I discovered. Even after discovering the fraud and knowing what he did I have immense respect for his intellect. I look forward to reading his book. I am an avid reader of this blog.

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