DRI-325 for week of 5-26-13: Stockman on Reagan: He Should Have Known

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Stockman on Reagan: He Should Have Known

The publishing sensation du jour – at least in the field of politics and economics – is the cautionary memoir of former Reagan administration budget director David Stockman, entitled The Great Deformation. The title derives from the religious Great Reformation of the 16th century, which befits the missionary zeal Stockman brings to his tale. The titular deformation was suffered by American capitalism during the 20th century, but particularly during Stockman’s adult life.

Stockman’s book is part history, part gloomy prophecy and part score-settling with his critics. Each part has value for readers, but it is his historical recollections that deserve primary attention. Stockman assigns significant responsibility for the ongoing demise of free-market capitalism to policies initiated during the Reagan administration he served. One of those policies is widely considered to be President Reagan’s crowning achievement – the demise of the Soviet Union.

Stockman’s Revisionist View of Soviet Decline

The conventional account has the Soviet Union declining rapidly during the 1980s before finally toppling of its own weight between 1989 and 1991. The proximate cause was economic: the Soviet economy was so ponderously inefficient that it eventually lost the capacity to feed and clothe its own citizens, most of whom were forced to either stand in queues for hours daily at government stores or purchase basic goods at elevated prices in the black market. The government devoted most of its resources to producing military goods or subsidizing Communism abroad.  The lack of a functioning price system – current prices for goods and services and interest rates determining the value of capital goods – severed the link between the production of goods and services and the wants of the people, thereby leaving the economy adrift and floundering.

Stockman does not quarrel with this verdict. In fact, he endorses it so forcefully that he claims that the celebrated Reagan-administration defense build-up of the early 1980s was unnecessary and counterproductive. It was unnecessary because the Soviet economy was already collapsing of its own weight and, consequently, the Soviet military was no threat to the U.S. (The emphasis is mine.) It was counterproductive because military expenditures are an inherent drag on the production of goods and services for private consumption. And during the 1980s, we experienced what Stockman called “the greatest stampede of Pentagon log-rolling and budget aggrandizement by the military-industrial complex ever recorded.”

Stockman accuses Reagan defense Secretary Caspar Weinberger of selecting 7% annual increases in a baseline defense-spending figure of $142 billion annually out of a hat, simply because it represented the midpoint between candidate Reagan’s promised 5% annual increase and the 8-9% demanded by a hawkish group of advisors led by Senator John Tower of Texas. Stockman waxes at indignant length about the budgetary waste embedded in this program. He juxtaposes this fiscal profligacy alongside the Administration’s incapable efforts to cut spending on entitlement programs, which resulted in a feeble reduction of 1/3 of 1% in the percentage of GDP deployed by government.

Stockman goes on to record the fiscal depredations of the two Bush administrations that followed, curiously lauding the Clinton administration for its budget “surpluses” despite the fact that these were really accounting artifacts achieved by off-budget borrowing. He then describes, with mounting alarm, the fiscal death spiral executed by the Bush-Obama regimes – more properly linked as a hyphenate than were Reagan-Bush – which combined monetary excess with fiscal profligacy to nose-dive the U.S. economy into the ground.

The 742-page volume contains a wealth of valuable material, much of it insider information delivered by a participant in federal budgetary battles and Wall Street machinations. But the datum of immediate interest is Stockman’s putative debunking of Reagan’s role as Soviet dragon slayer.

History as Hindsight

David Stockman claims that the Soviet Union was in terrible economic shape when Ronald Reagan took office in January, 1981 – so bad that it presented no serious military threat to the U.S. Given the force of his argument, it may seem somewhat surprising that he presents no direct evidence to support this claim. It is not difficult to grasp the nature of his inferential case, though.

The Soviet Union’s political collapse began in 1989 and occurred with shocking suddenness. Even more stunning was its non-violence; hardly a shot was fired despite various confrontations involving tanks and troops. Stockman’s implicit argument presumably runs something like this: “In order for public mobilization against the government to have attained this critical mass by 1989, economic deterioration as of 1981 must have been well under way and quite advanced.” This is a reasonable inference. Moreover, it is supported by the research and release of documents that occurred in the window of time between 1991 and the onset of the Putin regime, when access to Soviet archives was closed to the West and even to Russian researchers.

But that isn’t all. Implicitly, Stockman continues along the following lines: “Because we now know that the Soviet Union was scheduled to fall apart beginning in 1989, it was therefore unnecessary for the Reagan administration to waste all that money on its defense build-up. And since that build-up was a major contributor to the ensuing decline and fall of the U.S. economy and free markets, Reagan himself must bear a big share of responsibility for the fix we are in today.” Obviously, the quoted paraphrase is my interpretation of Stockman’s argument; the reader will have to judge its fairness.

But if it is a fair rendering of Stockman’s case, then that case fails utterly. Each of the three elements comprising it is false. The first of these is the most obvious. Stockman has committed the fallacy of hindsight. Thirty years later, we now know that the Soviet Union was scheduled to fall apart in 1989. But in 1981, Ronald Reagan didn’t know it. In fact, nobody knew it.

Soviet Disintegration: The View From 1981

Based on David Stockman’s harsh judgment of Ronald Reagan’s conduct, one reads The Great Deformation with bated breath, waiting for the meeting with Reagan at which Stockman sternly declaims, “Mr. President, the Soviet Union is falling apart. You know it as well as I do. How dare you waste all this money on military spending? You’re going to spend us into the poorhouse. Thirty years from now, our economy will implode.”

But we wait in vain; no such passage is included in the book. Presumably, no such conversation took place because David Stockman was just as ignorant of the Soviet Union’s true economic status as Reagan was.

Actually, there is every reason to believe that Reagan was better informed than Stockman. At least two books have been written about Reagan’s campaign to win the Cold War, the better one being Reagan’s War, by Peter Schweizer. We learn that Reagan himself expected the Soviet economy to collapse; he was one of the few people outside the ranks of hard-core free marketers who did. What he didn’t know was when this would happen.

This is the economist’s eternal bugbear, after all, and Reagan was the only U.S. President to actually hold a degree in economics. Economists usually know what’s going to happen, but they are notoriously unable to predict the timing of events, which accounts for their lackluster forecasting reputation.

At the point of Reagan’s inauguration, the Soviet Union’s star was ascendant internationally. It had not yet retreated from Afghanistan and its advisors and acolytes were meddling in Third World countries around the world. The U.S. was under worldwide pressure to succumb to détente and negotiate away its nuclear superiority – the very factor that Stockman claims made its defense build-up superfluous.

Since Stockman didn’t know that the Soviet Union was a basket case but is implicitly saying that Reagan should have known it, he must mean that somebody else who did know it told him the truth, or should have told him. Who would this have been? The logical candidate would have been the CIA. But we now know that the CIA didn’t know it; their failure to provide advance warning of the Soviet collapse is proverbial.

Perhaps Stockman thinks that economists should have anticipated the economic collapse of the Soviet Union. At first thought, this doesn’t seem so unreasonable, does it? But the leading academic economist of the day, Paul Samuelson of MIT, is now famous – no, make that infamous – for including a running graph in succeeding editions of his best-selling college textbook that shows the Soviet Union overtaking the U.S. in per-capita economic growth during the 1980s. (Actually, the point of convergence was quietly moved farther back in time in later editions.) Clearly, Samuelson didn’t have a clue about actual economic growth in the Soviet Union or he never would have made a fool of himself in print for posterity.

Maybe some of Reagan’s free-market economist friends knew the truth, or should have known. Certainly F.A. Hayek and Ludwig von Mises knew that the Soviet economy was fated to collapse in the 1930s when they argued that economic calculation under socialism was impossible. But Mises was dead by 1981 and Hayek was in his 80s, only recently rehabilitated within the profession by the award of his Nobel Prize in 1974. In reality, free-market economists were demoralized by their ostracism from the profession and the seeming invulnerability of the Soviet Union to public criticism and the laws of economics. They had long ago predicted its demise, only to be confounded and humiliated when it kept rolling along – aided in no little part by the subsidies it received from Western governments and the praise it gained from Western intellectuals. Few, if any, free-market economists were optimistically predicting the end of Communism in 1981.

Realistically speaking, nobody should now expect Ronald Reagan to have predicted the future then. But suppose, hypothetically, he knew the general state of the Soviet economy. When then? The fact is that even this knowledge would not have made Stockman’s argument valid – just the opposite would seem to be true.

History is Not a Controlled Experiment

If the Soviet Union had been as impregnable as most of the world believed it to be, then there might have been a case for détente or a milder policy of rapprochement. Reagan didn’t know the truth, but he suspected that the Soviet economy was shaky. He told his advisors, “Here’s my strategy of the Cold War: We win, they lose.” He wanted to give the Soviet economy the push that would shove it over the cliff and destabilize the regime. He knew that forcing the Kremlin into an arms race would pose a fatal dilemma: Either the Soviet government would devote more resources to military production or it would refuse the challenge and devote more resources to civilian goods and services. The former choice would expose it to civil revolt and eventual rebellion. The later choice would condemn it to inferiority in conventional arms as well as nuclear capability; it would pose no threat to the U.S. or the rest of the world and could be isolated to die on the vine in good time.

The Soviet Union had killed upwards of 100 million people during the 20th century by means of execution, deliberately contrived famine and exile to gulags. Reagan felt that the Soviet economy would collapse eventually. But when? For all he knew, it might take ten years, twenty years, thirty years – after all, they had last 64 years up to that point and they had most of the world on their side. There seemed to be a window of opportunity to win the Cold War now, but he wouldn’t be President forever. If he failed to do the job on his watch, his successor(s) might give away whatever advantage he had gained. In the event, despite the single-minded dedication of Reagan and his small band of advisors, it took two full terms – nearly 9 years – to get the job done as it was.

World War II was a conventional war against totalitarianism, fought with conventional weapons against Hitler, Tojo and Mussolini. It was won by spending (and wasting) vast quantities of money on soldiers, bombs, ships, planes, tanks and the like. Most of these armaments were actually used for their intended purposes. Millions of people were killed in the process.

The Cold War was an unconventional war against totalitarianism, fought and won by Ronald Reagan by the unconventional means of spending his Soviet opponents into submission when they elected to compete with him militarily. The superior American economy provided the wherewithal to defeat the inferior Soviet economy. In the direct sense, nobody was killed in the process, although the tremendous waste involved did cost many lives. But because the Soviet Union killed millions of people directly and indirectly and would have continued to do so, Reagan’s actions saved many lives.

The futility of Stockman’s case is illustrated by his criticism of Reagan’s build-up of conventional weapons. Reagan had campaigned against the Soviet Union’s nuclear capability, Stockman maintained, yet insisted on spending vast sums on conventional weapons. “What actually kept the Soviets at bay was the retaliatory [capability] of submarine-based Trident missile warheads…along with…land-based minuteman ICBMs…This deterrent force was what actually kept the nation safe and had been fully in place for years.” In contrast, Stockman scoffed, “the $20 billion MX ‘peacekeeper’ missile…was an offensive weapon that undermined deterrence and wasn’t actually deployed until the Cold War was nearly over.” No, the MX contributed as much, if not more, to winning the Cold War than Polaris and the ICBMs because all these weapons were not used to fight a conventional war. They were not even valuable primarily for their deterrent effect, although that was also quite useful. They “fought” the war peacefully by forcing the Soviet Union to use resources to compete with them. Indeed, the greatest weapon of the Cold War was never even produced. Former Premier Mikhail Gorbachev and his advisors specifically cited the Strategic Defense Initiative (derisively termed “Star Wars” by its detractors) as the crucial factor in the Soviet Union’s demise.

At this juncture in the discussion, the point may seem almost too obvious to need stress: Ronald Reagan’s actions themselves contributed to the collapse of the Soviet Union and may well have been its proximate cause; therefore we cannot assume that the Soviet Union would have collapsed anyway if Reagan had not acted as he did.

 

The first element of Stockman’s case is that because we now know the Soviet Union was falling apart, Reagan should have known it and should have guessed that the Soviet Union would therefore collapse in 1989. This is false; it is the hindsight fallacy. The second element is that because the Soviet Union did collapse in 1989, it would have done so even if Ronald Reagan had not actively won the Cold War. This is not merely false; it is an absurdity since Ronald Reagan’s actions themselves contributed decisively to the speed and completeness of the collapse.

The Fiscal Fallout: Eisenhower vs. Bush

At this point, David Stockman’s case against Ronald Reagan as Cold Warrior is on the ropes. But there remains a counter-argument to the points raised in opposition. Even if Reagan did win the Cold War, it must have come at a terrible cost if it led on a direct line to the end of free-market capitalism in America and impending fiscal and monetary collapse, as David Stockman says it did. Who could argue with that?

David Stockman, as a matter of fact. Stockman himself provides the final refutation to his own argument against Reagan’s role in the Cold War. And, incredibly, he shows no realization of it. Stockman lists President Eisenhower among his heroes for the courage he displayed by taking on a job disdained by his predecessor, Harry Truman. Eisenhower and his Treasury Secretary, George Humphreys, recognized that wartime tax rates were far too high to promote prosperity. But they were determined to complement a reduction in tax rates with spending reductions that would bring government’s percentage take of GDP (then called gross national product or GNP) back into line with historic norms. So between them they hammered out over $145 billion in defense-budget reductions over three years that accomplished the de facto demobilization of the military.

Stockman is fortunate that the Reagan-era parallel was not a snake; else he would be in need of anti-venom serum. The Soviet Union’s collapse was not clear-cut until just after Reagan left office. Reagan had no chance to unwind the successful chain of events he had set in motion. Thus, to make Reagan’s triumph complete, his successor George Bush needed to do the same job Eisenhower did – namely, drastically downsize a military budget whose only rationale had been to win the Cold War non-violently. It was the cravenness and stupidity of the Bush Administration, not Ronald Reagan’s failings, which started the budget rot leading to our present problems. At least, that is the end product of David Stockman’s own logic.

The third element of David Stockman’s case – that Reagan’s fiscal program led directly to our present malaise – is refuted by Stockman’s own choice of Eisenhower as hero and Stockman’s explanation of Eisenhower’s defense-budget cuts. Bush, not Reagan, was the malefactor.

 

The Stockman Manifesto

David Stockman’s manifesto is a tour de force that commands our close attention. In particular, his debunking of the so-called “financial crisis” in 2008 should be required reading for every American. Unfortunately, his omnibus explanation of our fiscal and monetary woes explains too much – or not enough, depending on how you choose to express it. Perhaps Stockman’s own involvement in the Reagan Administration colored his analysis of Reagan’s policies. For whatever reason, his history of the Cold War is inexcusably short-sighted and unworthy of somebody whose views are otherwise acute.

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