DRI-266 for week of 10-13-13: Don’t Raise the Debt Limit

An Access Advertising EconBrief:

[The following was completed one day before the debt-limit deal between Congressional leaders was announced on Wednesday, October 16, 2013.]

Don’t Raise the Debt Limit

The political melodrama now unspooling in Washington, D.C. is unique because it is playing on split screen. Our point of focus is the government shutdown – or rather, the partial shutdown, since somehow we just can’t seem to get the federal government shut down no matter how hard we try. Somebody can always find an excuse to fire up the machinery of government, cut checks, get them signed and sent out for some ostensibly vital purpose.

Meanwhile, up in the corner of our field of vision, always distracting our attention even though not occupying it fully, there is the debt-limit crisis. October 17 is the deadline for Congressional approval on raising the limit on the total volume of federal-government debt, thereby clearing the way for Treasury borrowing to finance expenditures in excess of revenue collections. The party line has it that failure to increase the debt limit by that date will put the U.S. government in “default” of its financial obligations to holders of its debt. The implication is that we have to borrow more money to pay the interest on the money we have already borrowed.

And what happens if we default on our debt? Well, opinions vary. They vary from “financial disaster” to “the end of life on earth.” According to Warren Buffet, the threat of default “should be like nuclear bombs… it should never be used.” Lloyd Blankfein of Goldman Sachs declares gravely that default would be “magnitudes worse” than the current shutdown in its effects. Perhaps sensing a need for escalation, former Treasury official and current BUP Paribas SA executive Tim Bitsberger ups the ante by stating that default “…blows Lehman out of the water” in its potential effects, implying that the 2008 financial crisis would be dwarfed in comparison.

Alternative to Default: Sales of Federal-Government Assets

If we’re not to default, what are we to do? En masse, the Democrat Party wants to simply raise the debt limit enough to get by the current fiscal year. That is what Congress has been doing for decades. That is what has enabled the culture of tax-and-borrow-and-spend – a culture that has made Washington, D.C. and environs the most prosperous, recession-proof habitation in the nation. Gradually, the Republican Party has evolved into a go-along-to-get-along enabler to this culture. They have tolerated vocal dissenters among their ranks because that provides convenient cover for the tacit collusion of the majority with the Democrats.

The recent emergence of the Tea Party and current mutiny led by Sen. Rand Paul and Congressman Ted Cruz has discomfited veteran Republicans almost as much as it has their opposition. But the mood of the general public – on both the political right and the left – is so dissatisfied with the status quo that the pols are bent on preserving that they are reluctantly contemplating the need for some sort of change. At the moment, though, the problem is getting past the immediate crisis.

That is now the motif of the governing process: a calendar dotted by scheduled crises and spotted by unscheduled ones. Its momentum is best characterized as a stagger from one crisis point to the next.

On the one hand, the Establishment – consisting of most of Congress and the entire Executive branch, plus all the bureaucrats, rank and file employees, lobbyists, contractors and news media – maintains that the only option is to raise the debt limit. They say this because the increase is the only option that would keep their world intact – at least for awhile. The alternatives would shake its foundations or topple them.

The general public is largely unaware of any third option beyond increasing the debt-limit and default. That is by design. The Establishment views any option averse to the current spending culture the way a vampire views the dawn.

Yet there is such a third option. It sticks out a mile. It is the option customarily exercised by private businesses overburdened with debt.

The federal government owns a huge portfolio of assets, both liquid and non-liquid. Its total value can only be estimated, but it is only modestly less than the estimated value of privately owned U.S. assets. The most cogent approach to the immediate – debt-limit – crisis is to begin selling off those assets to fund government operations. Government assets are more than ample to support annual operations, particularly due to the sequester’s success in temporarily reducing the deficit for this fiscal year.

Every year, some private companies work their way out of trouble this way. The key is acknowledging the company is in trouble, then taking steps to dig it out of its hole, rather than doing business as usual and hoping for miracles. Today, the federal government (along with many state governments) is in trouble. Like many corporate conglomerates, it is bloated and over-extended. It needs to stick to its core businesses and sell off its conglomerate holdings to those who can preserve them and make them pay off.

Over the course of this fiscal year, branches and agencies of the federal government can concentrate on raising revenue by selling liquid and non-liquid holdings. Meanwhile, Congress can tackle the job of cutting spending – a task too time-consuming to consummate prior to October 17.

And speaking of October 17 – the date itself has very little meaning once it becomes known that the government is selling assets and revenue is assured. Creditors – even bondholders – are more than willing to wait for a payment they know is coming, as opposed to a situation when everybody knows that incoming revenue is insufficient and somebody will inevitably get stiffed. That is why the option of asset sales is a viable way of rejecting a debt-limit increase.

The last thing Republicans should do is to raise the debt limit. This is an act of surrender to the spending culture, a can-kicking capitulation to the Establishment. It is not the failure to raise the debt limit that is irresponsible; it is the act of raising it that throws responsibility to the winds.

Estimates of the Federal Government’s Assets

At various times, estimates have been made of the federal government’s financial and tangible assets, both liquid and non-liquid. Despite the fact that they were often made when annual deficits were higher than the one projected for the coming fiscal year, the estimates invariably found that assets sales could easily support annual government operations.

Using mostly Treasury and Federal Reserve data from 2011, economist Robert Murphy identified federal government liquid assets of about $1.6 trillion. In June, 2011, the Treasury reported “international reserve assets” of $144.2 billion. They consisted of gold, securities, foreign-currency deposits of euros and yen, Special Drawing Rights [an international asset provided to governments by the International Monetary Fund] and IMF reserves. (The IMF assets were developed specifically to provide liquidity in emergencies like this one.) The official valuation is distorted, since the government’s 261.5 million troy ounces of gold was valued at a par value of $42.2 per ounce rather than its then-current market value of $1500 per ounce.

We can update Murphy’s numbers with some back-of-the-envelope calculations. Adjusting the numbers using a current gold price leaves non-gold assets of approximately $133 billion and a true valuation of roughly $337 billion in gold, yielding liquid assets of $470 billion+. Subsequently, gold has declined while the yen and euro have fluctuated in value. A current estimate of $450 billion would be conservative.

The Strategic Petroleum Reserve held about 726 billion barrels of recoverable oil. At today’s price nearing $100 per barrel, that would be worth about $72 billion. But since the oil is actually buried in salt caverns, Murphy suggested a discount of 25% to reflect recovery costs and time. Tack on another $58 billion to our current liquid-asset total, then.

The federal government owns offshore oil deposits whose estimated recoverable reserves total some 59 billion barrels. Murphy estimated the royalty income in years 8-38 of recovery at about $14 billion per year. He discounted that income at 5% and came up with $164 billion, which is an estimate of what the government might receive from selling the rights to that revenue for a lump sum.

So far, we have come up with nearly $675 billion. Murphy also found some $786 billion in “credit-market instruments” in Federal Reserve documents. These include $138 billion in agency-backed and GSE-backed securities and $355 billion in student loans. This total is much larger now, since the Fed has been buying mortgage-backed securities in order to support their market prices. He also included $55 billion in corporate (TARP) equities, which have mostly since been sold back into private hands. If we assume the changes cancelled out, we can stick with Murphy’s original $786 billion.

That produces somewhat less than a trillion and a half, far above the anticipated $650 billion deficit. It is reasonable to assume that the mortgage-related securities would be sold slowly over the course of the year and the full holdings might not be depleted, so as not to depress mortgage prices unduly.

We have not yet even touched the federal government’s huge land holdings. The government owns most of the state of Nevada, for example, among its 650 million acres of land. A couple years ago, then-OMB head Peter Orszag estimated that there are some 14,000 “excess” structures and 55,000 un-utilized or under-utilized structures and buildings in the federal government’s portfolio. These could and should be sold. The government’s power-generation facilities and the electro-magnetic spectrum are other lucrative holdings that are ripe for sale and privatization.

If we were to construct a net worth statement for the federal government, the bottom line would probably astound most Americans. Financial analyst John Rutledge has occasionally attempted it and come up with government asset valuations of between $150 and $200 trillion. (He estimates the value of private U.S. assets at $230-$250 trillion.) Thus, the potential for solving our debt problem completely by selling assets is clear. Of course, this would involve various technical and logistical complications. It would unquestionably alter the fundamental character of the federal government as it exists today. But isn’t it about time to do just that?

Arguments Against Selling Federal-Government Assets

The foregoing is persuasive. But it is only natural to wonder what drawbacks might lurk under its surface. In 2010, Treasury Secretary Timothy Geithner responded to calls for asset sales by pooh-poohing the idea. Holding a “fire sale” of government assets would damage “financial markets and the economy and undermine confidence in the United States,” Geithner maintained.

Each of these contentions deserves some scrutiny. It is perfectly correct that when a company starts selling assets, it tells the world that it is in trouble and it runs the risks that this knowledge will have adverse effects. Among other things, the company may now have more trouble borrowing money and its stock price may well decline (assuming the stock trades publicly). But these are not fatal flaws, merely tradeoffs; they have to be weighed against the risks of inaction.

The drawbacks of straightforwardness do not tell nearly as heavily against a country as against a single company. A company can sometimes hide its financial condition from the public and the markets, but a country can’t. We aren’t fooling anybody by sitting on our gigantic stockpile of assets; our credit rating has already been downgraded and our debt and deficit problems are open secrets. Sooner or later, our interest rates are going to rise – the only question is how much debt is weighing us down when they do. The world will have a lot more confidence in a United States that has finally started whittling down its debt than one that has buried its head in the sand while continuing to spend itself silly. This assessment is not merely speculative; two days before the financial equivalent of “Mayan calendar” oblivion, a Wall Street Journal headline reads “Uneasy Investors Sell Billions in Treasurys.” Apparently confidence in the debt-limit-raising approach is not exactly unshakeable.

Geithner’s warning about “damage to the economy” presumably derives from the Keynesian concept that government sales of assets to the public drain money from the circular flow of income and expenditure, thereby reducing income and employment. As Murphy points out, this requires us to believe that people would rather end the year with $650 billion or so of IOUs than $650 billion worth of valuable assets formerly managed (often mismanaged) by the government. How could asset sales “damage the economy” as much as the status quo of wasteful spending and debt accumulation?

There is at least some superficial cogency to Geithner’s concern about financial markets, since some of the liquid assets in the federal portfolio were purchased in the first place to prop up the asset’s price. Clearly, selling will have the opposite effect, especially in quantity. This is why sales of mortgage-backed securities would presumably be strung out over long time periods, although the anticipation of continued sales would have the effect of driving down prices in advance of sales anyway. But the real issue is the legitimacy of the price itself. In effect, Geithner is admitting that the so-called housing “recovery” is really an artifact of government contrivance and will evaporate without it. How long is this supposed to go on, anyway? Is the tail of the housing sector supposed to wag the general economic dog forever? Orderly asset sales would seem the indicated exit strategy for this misguided policy.

Democrat arguments against government-asset sales are a pretext. The sales would represent a turning point in over a century of big-government, “progressive” policy. According to progressive doctrine, government is supposed to accumulate power, control and authority – not cede it.

The ironic thing is that asset sales would leave the skeletal structure of big government intact. The entitlement programs – Social Security and Medicare – would be untouched. Most of the regulatory agencies would be unaffected; only those entrusted with caring for assets that were sold off would be downsized or eliminated. (A major benefit of selling assets would be that the overhead expense of minding them could be offloaded.) Yet this minor impact on the welfare state has little effect on the Democrats’ intractable opposition to the idea. The fact that government does a perfectly terrible job of managing assets is also completely beside the point. Democrat policies are inherently designed to exploit the many for the benefit of the few and this demands not only big government but continually expanding government. Anything that threatens that, threatens their livelihood.

Hole Card?

A recurring theme among reactions to the prospect of default is incredulity that Congressional negotiators (read: Republicans) would be so reckless as to tempt fate by flirting with the debt-limit date. How dare they run even the tiniest risk of default?

For several years, the Federal Reserve has already been doing the unthinkable, more or less in plain sight but without provoking the same sort of outrage from the business and financial community. It has been “monetizing the debt” by buying new issues of federal-government debt directly from the Treasury using newly created money for the purpose. That activity has been technically illegal throughout the Fed’s existence, but the Fed circumvents the intent of the Federal Reserve Act by acquiring new issues directly from the primary dealers who transact directly with the Treasury. This was an important part of the QE (quantitative expansion) policy, which was designed to keep the federal-funds rate (thus, short-term interest rates in general) as low as possible. If the rest of the world was becoming reluctant to take on more and more U.S. debt – why, then, the Fed would just have to step into the breach. After all, it’s not as if the federal government should actually have to cut spending, is it?

Of course, there was the little matter of all that money that the Fed created. Ordinarily, the money would have had a multiple effect on the total money stock. The Fed formerly did its bond buying in the secondary bond market for the express purpose of creating reserves for banks to use as a reserve base for pyramiding loans to businesses and households. (Students will recognize the term “money multiplier,” used to estimate the amount by which the money stock increases based on an initial injection of money.) When the money was spent, this effect produced economic effects extending beyond the initial recipients of the spending. The trillions of dollars the Fed has recently created (some of which has financed U.S. government debt) would be sufficient to kindle hyperinflation when fed through an ordinary market process. Throughout history, this kind of money-creation has been considered strictly “the policy of the desperado,” as F.A. Hayek called it. Allan Meltzer, whose multi-volume history of the Federal Reserve has cemented his reputation as perhaps the world’s leading monetary economist, admits that despite his personal liking for Ben Bernanke, “It’s pretty hard for me to argue that if you have a few trillion dollars of excess reserves in the banking system, you think you’re doing it for the good of the economy.” Once again, though, the Fed has escaped censure for its actions thus far.

Doubtless this general insouciance is explained by the results. The created money and/or its loan potential has mostly sat idle in bank excess reserves, because a law change allowed the Fed to pay interest on money held in excess reserves by its member banks. Meanwhile, the bonds themselves have been quietly added to the Fed’s portfolio, where they have been quietly drawing interest. The Federal Reserve has now become one of the world’s leading holders of U.S. debt.

This raises an interesting possibility. Even though the Federal Reserve is a bank and operates as such, earning profits and suffering losses on individual transactions, it is not an ordinary bank. One quaint feature of its operations as a “quasi-public” institution is that it remits interest earned on its holdings of federal-government bonds to the Treasury. (It does this in spite of the fact that the Federal Reserve System is composed of its member banks and the Fed presumably has a fiduciary responsibility to them.) Thus, when the Fed buys bonds from the Treasury and holds them, that means the Treasury is getting interest-free financing for its deficit expenditures with money the Fed creates.

This raises the possibility that the Obama Administration’s debt-limit hole card may be an arrangement with the Fed that it will buy up all new debt in the coming fiscal year – and maybe more besides. Remember, the Fed was widely expected to end its program of quantitative easing in September, but continued it unabated, confounding markets and the public. Its explanation for this was confused – even normally tame Fed-watchers criticized Bernanke for leaving markets in the lurch. Remember, also, what everybody is most worried about – that default on our debt will take away the U.S. government’s ability to borrow.

Preempting the bond market is not something the Fed would normally be happy to do. U.S. Treasury bonds are traditionally one of the world’s leading fixed-income assets. People line up to buy them. Frustrating this demand would be unprecedented. But recently the Fed has been buying most of the new Treasury debt anyway; Bloomberg estimated that in 2012, the Fed was starving the market for Treasurys by soaking up 90% of new issues. In any case, the prospect of a debt default might be considered a big enough emergency to justify such high-handed action. And the Administration would be willing to consider any alternative to spending cuts or asset sales, as explained above.

The Fed’s actions are so outré and its politicization so apparent that this kind of hidden agenda makes about as much sense as any other explanation for its actions. It isn’t as if Bernanke’s tenure thus far has been squeaky clean and free of any taint of political collusion. Quite the contrary.

And this theory doesn’t argue in favor of raising the debt-limit, either. Thus, the verdict on the debt limit is clear-cut: Don’t raise it.

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

An Access Advertising EconBrief:

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.