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David Stockman’s Truth Serum and I
April 13, 2013 //
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GALLUP
The Chairman’s Blog
Thursday, April 11, 2013
Americans Can’t Handle the Truth
David Stockman’s new book, The Great Deformation: The Corruption of Capitalism in America, is getting a lot of attention these days. I recommend you don’t buy it. It’s much better to ignore the book and continue to listen to the White House and Wall Street, both of which tell us everything will work out just fine.
Stockman, President Ronald Reagan’s first budget director, confronts us head-on with blunt truths we simply can’t handle. He argues that our current economy — and recent prosperity — aren’t real. Instead, they’ve been fueled by a series of artificial bubbles created by runaway deficit spending and reckless money-printing at the Federal Reserve. This is all going to lead to an epic crash, Stockman predicts, and next time around, there won’t be any bailouts.
I hate to say it, but most of us would rather the president and our representatives in Congress don’t cause us any pain. That means don’t touch my Social Security in any way, don’t do anything to cap the runaway growth in Medicare and Medicaid, and don’t raise my taxes either. And keep printing money. We elect our officials to create no discomfort for us, and they deliver.
Inspired by Stockman’s blunt assessment, I’d like to focus on three areas where all of us — the White House, Congress, and citizens, too — need a heavy dose of truth-telling: the unemployment rate, the unsustainability of healthcare, and the reality of America’s economic growth.
The unemployment rate in the U.S. is stagnant at best. Yes, the U.S. Department of Labor says the rate has dropped from 7.8% to 7.6%, but it’s actually frozen when you apply a more accurate measure. In simple terms, the Bureau of Labor Statistics’ survey of 60,000 households per month doesn’t count you as “unemployed” unless you looked for a job in the past four weeks.
I think it’s better to turn the number upside down and ask, “What percentage of the population does have a good job?” According to Gallup’s monthly payroll to population (P2P) survey of 30,000 adults, the employment situation has failed to improve recently and has remained relatively little changed year-over-year. Workers haven’t found the full-time jobs they’ve been seeking, and the labor force and unadjusted unemployment rates are flat.
Healthcare costs are out of control. We must confront this problem now — it cannot wait any longer. At $2.5 trillion annually, the U.S. healthcare tab is three times the size of the defense budget and nearly two times the whole Russian economy. It’s also roughly twice the size of the whole Indian economy, and India has a billion-plus population.
The fact is, healthcare is breaking America faster than Social Security and other pension benefits. And healthcare is growing at an average of 6% per year, which means the new costs over the next decade will be a staggering $10 trillion over and above where we currently are.
We need authentic economic growth. While I agree with Stockman that the current booming stock market is an illusion driven by money-printing and deficit spending — namely, that it doesn’t reflect real prosperity — many of his solutions are more political in nature: abolish the electoral college, impose term limits on the president and Congress, and so on. I have a more straightforward fix: Restore and encourage the spirit of American free enterprise. Get the engine of business roaring again.
Whatever anyone in the White House or on Wall Street says, don’t forget that our economy is currently growing at a pathetic 1%, where we need a minimum of 2.5% GDP growth just to tread water, in my view. That being said, I think we need GDP growth of about 4.5% to get the economy humming again. We’re not going to get there with more deficit spending and with the Federal Reserve handing out more free money to investors.
What will get us to authentic economic growth and job creation is for federal, state, and local governments to do everything in their power to help America’s 6 million small businesses succeed. That means restoring their confidence in the future — 30% of small-business owners are worried they may not be in business in 12 months, according to a Wells Fargo/Gallup Small Business Index survey — and removing any barriers they may face. What most people probably don’t know is that small businesses — not large enterprises — create most of the good jobs in America.
Maybe Stockman’s political reforms are the right way to go, but whatever the case, I think that restoring the spirit of robust, free-market capitalism will cure most of our ills and put the country on a sustainable path for the future.
But first, we need to start telling ourselves the truth about what really drives prosperity and what’s just an illusion. David Stockman has done us all a favor by getting us to confront reality. Of course, I actually do recommend his book.
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Global Edition Opinion
Op-Ed Contributor
Four Deformations of the Apocalypse
By DAVID STOCKMAN
Published: July 31, 2010
IF there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation’s public debt — if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion. That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice. It is therefore unseemly for the Senate minority leader, Mitch McConnell, to insist that the nation’s wealthiest taxpayers be spared even a three-percentage-point rate increase.
More fundamentally, Mr. McConnell’s stand puts the lie to the Republican pretense that its new monetarist and supply-side doctrines are rooted in its traditional financial philosophy. Republicans used to believe that prosperity depended upon the regular balancing of accounts — in government, in international trade, on the ledgers of central banks and in the financial affairs of private households and businesses, too. But the new catechism, as practiced by Republican policymakers for decades now, has amounted to little more than money printing and deficit finance — vulgar Keynesianism robed in the ideological vestments of the prosperous classes.
This approach has not simply made a mockery of traditional party ideals. It has also led to the serial financial bubbles and Wall Street depredations that have crippled our economy. More specifically, the new policy doctrines have caused four great deformations of the national economy, and modern Republicans have turned a blind eye to each one.
The first of these started when the Nixon administration defaulted on American obligations under the 1944 Bretton Woods agreement to balance our accounts with the world. Now, since we have lived beyond our means as a nation for nearly 40 years, our cumulative current-account deficit — the combined shortfall on our trade in goods, services and income — has reached nearly $8 trillion. That’s borrowed prosperity on an epic scale.
It is also an outcome that Milton Friedman said could never happen when, in 1971, he persuaded President Nixon to unleash on the world paper dollars no longer redeemable in gold or other fixed monetary reserves. Just let the free market set currency exchange rates, he said, and trade deficits will self-correct.
It may be true that governments, because they intervene in foreign exchange markets, have never completely allowed their currencies to float freely. But that does not absolve Friedman’s $8 trillion error. Once relieved of the discipline of defending a fixed value for their currencies, politicians the world over were free to cheapen their money and disregard their neighbors.
In fact, since chronic current-account deficits result from a nation spending more than it earns, stringent domestic belt-tightening is the only cure. When the dollar was tied to fixed exchange rates, politicians were willing to administer the needed castor oil, because the alternative was to make up for the trade shortfall by paying out reserves, and this would cause immediate economic pain — from high interest rates, for example. But now there is no discipline, only global monetary chaos as foreign central banks run their own printing presses at ever faster speeds to sop up the tidal wave of dollars coming from the Federal Reserve.
The second unhappy change in the American economy has been the extraordinary growth of our public debt. In 1970 it was just 40 percent of gross domestic product, or about $425 billion. When it reaches $18 trillion, it will be 40 times greater than in 1970. This debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts.
In 1981, traditional Republicans supported tax cuts, matched by spending cuts, to offset the way inflation was pushing many taxpayers into higher brackets and to spur investment. The Reagan administration’s hastily prepared fiscal blueprint, however, was no match for the primordial forces — the welfare state and the warfare state — that drive the federal spending machine.
Soon, the neocons were pushing the military budget skyward. And the Republicans on Capitol Hill who were supposed to cut spending exempted from the knife most of the domestic budget — entitlements, farm subsidies, education, water projects. But in the end it was a new cadre of ideological tax-cutters who killed the Republicans’ fiscal religion.
Through the 1984 election, the old guard earnestly tried to control the deficit, rolling back about 40 percent of the original Reagan tax cuts. But when, in the following years, the Federal Reserve chairman, Paul Volcker, finally crushed inflation, enabling a solid economic rebound, the new tax-cutters not only claimed victory for their supply-side strategy but hooked Republicans for good on the delusion that the economy will outgrow the deficit if plied with enough tax cuts.
By fiscal year 2009, the tax-cutters had reduced federal revenues to 15 percent of gross domestic product, lower than they had been since the 1940s. Then, after rarely vetoing a budget bill and engaging in two unfinanced foreign military adventures, George W. Bush surrendered on domestic spending cuts, too — signing into law $420 billion in non-defense appropriations, a 65 percent gain from the $260 billion he had inherited eight years earlier. Republicans thus joined the Democrats in a shameless embrace of a free-lunch fiscal policy.
The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector. Here, Republicans have been oblivious to the grave danger of flooding financial markets with freely printed money and, at the same time, removing traditional restrictions on leverage and speculation. As a result, the combined assets of conventional banks and the so-called shadow banking system (including investment banks and finance companies) grew from a mere $500 billion in 1970 to $30 trillion by September 2008.
But the trillion-dollar conglomerates that inhabit this new financial world are not free enterprises. They are rather wards of the state, extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives. They could never have survived, much less thrived, if their deposits had not been government-guaranteed and if they hadn’t been able to obtain virtually free money from the Fed’s discount window to cover their bad bets.
The fourth destructive change has been the hollowing out of the larger American economy. Having lived beyond our means for decades by borrowing heavily from abroad, we have steadily sent jobs and production offshore. In the past decade, the number of high-value jobs in goods production and in service categories like trade, transportation, information technology and the professions has shrunk by 12 percent, to 68 million from 77 million. The only reason we have not experienced a severe reduction in nonfarm payrolls since 2000 is that there has been a gain in low-paying, often part-time positions in places like bars, hotels and nursing homes.
It is not surprising, then, that during the last bubble (from 2002 to 2006) the top 1 percent of Americans — paid mainly from the Wall Street casino — received two-thirds of the gain in national income, while the bottom 90 percent — mainly dependent on Main Street’s shrinking economy — got only 12 percent. This growing wealth gap is not the market’s fault. It’s the decaying fruit of bad economic policy.
The day of national reckoning has arrived. We will not have a conventional business recovery now, but rather a long hangover of debt liquidation and downsizing — as suggested by last week’s news that the national economy grew at an anemic annual rate of 2.4 percent in the second quarter. Under these circumstances, it’s a pity that the modern Republican Party offers the American people an irrelevant platform of recycled Keynesianism when the old approach — balanced budgets, sound money and financial discipline — is needed more than ever.
David Stockman, a director of the Office of Management and Budget under President Ronald Reagan, is working on a book about the financial crisis.
Copyright 2010 The New York Times Company
David Stockman
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David Stockman
Reagan Cabinet – Class Photo 1984 cropped.jpg
David Stockman (front)
25th Director of the Office of Management and Budget
In office
January 21, 1981 – August 1, 1985
President Ronald Reagan
Preceded by James T. McIntyre
Succeeded by James C. Miller III
Member of the U.S. House of Representatives
from Michigan‘s 4th district
In office
January 3, 1977 – January 21, 1981
Preceded by J. Edward Hutchinson
Succeeded by Mark D. Siljander
Personal details
Born David Alan Stockman
November 10, 1946 (age 66)
Fort Hood, Texas
Political party Republican
Spouse(s) Jennifer Blei Stockman
Profession Businessman
David Alan Stockman (born November 10, 1946) is a former U.S. politician and businessman, serving as a Republican U.S. Representative from the state of Michigan (1977–1981) and as the Director of the Office of Management and Budget (1981–1985).
Contents
1 Early life and education
2 Political career
2.1 Congress
2.2 Office of Management and Budget
2.3 Fiscal legacy
3 Business career
3.1 Collins & Aikman Corp.
3.2 Criminal and civil charges
4 Personal life
5 Quotes
6 Works
7 References
8 External links
Early life and education
Stockman was born in Fort Hood, Texas, the son of Allen Stockman, a fruit farmer, and Carol (née Bartz).[1] He is of German descent and his family’s surname was originally “Stockmann”.[2] He was raised in a conservative family and his maternal grandfather, William Bartz, was a Republican county treasurer for 30 years.[3][4] Stockman was educated at public schools in Stevensville, Michigan. He graduated from Lakeshore High School in 1964[5] and received a B.A. in history from Michigan State University, East Lansing, during 1968. He performed graduate studies at Harvard University, 1968–1970 and 1974–1975. He attended Harvard Divinity School.[6]
Political career
He served as special assistant to United States Representative and 1980 Presidential candidate John Anderson of Illinois, 1970–1972, and was executive director, United States House of Representatives Republican Conference, 1972–1975.
Congress
Stockman was elected to the United States House of Representatives for the 95th Congress and was reelected by two subsequent elections, serving from January 3, 1977, until his resignation January 21, 1981, to accept appointment as Director of the Office of Management and Budget for U.S. President Ronald Reagan.
Office of Management and Budget
Stockman became one of the most controversial OMB directors ever during a tenure that lasted until his resignation during August 1985. Committed to the doctrine of supply-side economics, he assisted the approval of the “Reagan Budget” (the Gramm-Latta Budget), which Stockman hoped to be a serious curtailment of the “welfare state“, gaining a reputation as a tough negotiator with House Speaker Tip O’Neill‘s Democratic-controlled House of Representatives and Majority Leader Howard Baker‘s Republican-controlled Senate. During this period, although only in his early 30s, Stockman became well known to the public during the contentious political wrangling concerning the role of the federal government in American society.
Stockman’s influence within the Reagan Administration decreased after the Atlantic Monthly magazine published the famous 18,246 word article, “The Education of David Stockman”,[6] in its December 1981 issue, based on lengthy interviews Stockman gave to reporter William Greider. The White House’s public relations team thereafter attempted to limit the article’s damage to Reagan’s perceived fiscal-leadership skills. Stockman was quoted as referring to Reagan’s tax act as: “I mean, Kemp-Roth [Reagan's 1981 tax cut] was always a Trojan horse to bring down the top rate…. It’s kind of hard to sell ‘trickle down.’ So the supply-side formula was the only way to get a tax policy that was really ‘trickle down.’ Supply-side is ‘trickle-down’ theory.”[7] Of the budget process during his first year on the job, Mr. Stockman is quoted as saying: “None of us really understands what’s going on with all these numbers,” which was used as the subtitle of the article.
After Stockman’s first year at OMB and after “being taken to the woodshed by the president” due to his candor with Atlantic Monthly’s William Greider, Stockman became inspired with the projected trend of increasingly large federal deficits and the rapidly expanding national debt. On 1 August 1985, he resigned OMB and later wrote a memoir of his experience in the Reagan Administration titled The Triumph of Politics: Why the Reagan Revolution Failed (ISBN 0060155604), in which he specifically criticized the failure of congressional Republicans to endorse a reduction of government spending as necessary offsets to the large tax decreases, in order to avoid the creation of large deficits and an increasing national debt.
Fiscal legacy
President Jimmy Carter’s last signed and executed fiscal year budget results ended with a $79.0 billion budget deficit, ending during the period of David Stockman’s and Ronald Reagan’s first year in office, on October 1, 1981.[8] The gross federal national debt had just increased to $1.0 trillion during October 1981 ($998 billion on 30 September 1981). By 30 September 1985, four and a half years into the Reagan administration and shortly after Stockman’s resignation from the OMB during August 1985, the gross federal debt was $1.8 trillion.[9] Stockman’s OMB work within the administration during 1981 until August 1985 was dedicated to negotiating with the Senate and House about the next fiscal year’s budget, executed later during the autumn of 1985, which resulted in the national debt becoming $2.1 trillion at fiscal year end 30 September 1986.[10]
Business career
After leaving government, Stockman joined the Wall St. investment bank Salomon Brothers and later became a partner of the New York–based private equity company, the Blackstone Group.[11] His record was mixed at Blackstone, with some very good investments, such as American Axle, but also several large failures, including Haynes International and Republic Technologies.[12] During 1999, after Blackstone CEO Stephen A. Schwarzman curtailed Stockman’s role in managing the investments he had developed,[13] Stockman resigned from Blackstone to start his own private equity fund company, Heartland Industrial Partners, L.P., based in Greenwich, Connecticut.[14]
On the strength of his investment record at Blackstone, Stockman and his partners raised $1.3 billion of equity from institutional and other investors. With Stockman’s guidance, Heartland used a contrarian investment strategy, buying controlling interests in companies operating in sectors of the U.S. economy that were attracting the least amount of new equity: auto parts and textiles. With the help of about $9 billion in Wall Street debt financing, Heartland completed more than 20 transactions in less than 2 years to create four portfolio companies: Springs Industries, Metaldyne, Collins & Aikman, and TriMas. Several major investments performed very poorly, however. Collins & Aikman filed for bankruptcy during 2005 and when Heartland sold Metaldyne to Asahi Tec Corp. during 2006, Heartland lost most of the $340 million-plus of equity it had invested in the business.[15]
Collins & Aikman Corp.
During August 2003, Stockman installed himself as CEO of Collins & Aikman Corporation, a Detroit-based manufacturer of automotive interior components. He was ousted from that job days before a Chapter 11 filing on May 17, 2005.
Criminal and civil charges
On March 26, 2007, federal prosecutors in Manhattan indicted Stockman in “a scheme … to defraud [Collins & Aikman]‘s investors, banks and creditors by manipulating C&A’s reported revenues and earnings.” At the same time, the Securities and Exchange Commission brought civil charges against Stockman related to actions he performed while CEO of Collins & Aikman.[16] Stockman suffered a personal financial loss, estimated at $13 million, along with losses suffered by as many as 15,000 Collins & Aikman employees worldwide. Stockman said in a statement posted on his law company’s website that the company’s end was the consequence of an industry decline, not fraud.[17] On January 9, 2009, the U.S. Attorney’s Office announced that it did not intend to prosecute Stockman for this case.
Personal life
Stockman lives in Greenwich, Connecticut.[14] He is married to Jennifer Blei Stockman and is the father of two children, Rachel and Victoria. Jennifer Blei Stockman is a chairperson emeritus of the Republican Majority for Choice,[18] and President of the Solomon R. Guggenheim Foundation Board of Trustees.[19]
Quotes
“(Social Security) has to be means-tested. And Medicare needs to be means-tested…Let the Bush tax cuts expire. Let the capital gains go back to the same rate as ordinary income.”[20]
“The Republican Party has totally abdicated its job in our democracy, which is to act as the guardian of fiscal discipline and responsibility. They’re on an anti-tax jihad — one that benefits the prosperous classes.”[21]
“I invest in anything that Bernanke can’t destroy, including gold, canned beans, bottled water and flashlight batteries.”[22]
Works
David Alan Stockman, The Reagan economic plan, 1981
David Alan Stockman, The Triumph of Politics: Why the Reagan Revolution Failed, Harper & Row, 1986, ISBN 978-0060155605
David Alan Stockman, The Great Deformation: The Corruption of Capitalism in America, PublicAffairs, 2013, ISBN 978-1586489120
References
^ Hunter, Marjorie (December 12, 1980). “Office of Management and Budget David Alan Stockman; Strong Support From Kemp Chosen by House Republicans Views on Economy”. The New York Times.
^ http://www.stockmanfamily.net/news65.htm
^ [1]
^ [2]
^ Heibutzki, Ralph (2012-06-04). “Stockman Surprise Speaker at Lakeshore’s Graduation”. The Herald-Palladium. Retrieved 2012-06-04.
^ a b William Greider (December 1981). “The Education of David Stockman”. The Atlantic Online.
^ “The Education of David Stockman” by William Greide (1981)
^ Office of Management and Budget Historical Tables see Table 1.1 (Excel Spreadsheet)
^ Treasury Department’s Historical Debt Outstanding – Annual 1950 – 1999
^ Ibid.
^ David Carey and John E. Morris, King of Capital: The Remarkable Rise, Fall and Rise Again of Steve Schwarzman and Blackstone (Crown 2010), pp. 125-27.
^ Ibid., pp. 144-47.
^ Ibid., p. 146.
^ a b “Collins & Aikman seeks to emerge from bankruptcy,” Bloomberg News article by Jeff Bennett, published in the newspaper The Advocate of Stamford and (identical version, perhaps with changes by the local editor in the common business section for both newspapers) in the Greenwich Time on September 5, 2006, page A7, The Advocate
^ David Carey and Lou Whiteman, “PE firms find buyer for Metaldyne,” The Deal, Sept. 1, 2006.
^ “Stockman Outsmarts Self in Detroit by Doron Levin“. Bloomberg, March 29, 2007
^ “Ex-Collins Chief David Stockman Charged With Fraud (Update10)”. Bloomberg. March 26, 2007. Retrieved 2010-08-02.
^ About Us Republican Majority for Choice
^ Trustees, Solomon R. Guggenheim Foundation
^ “Why David Stockman Isn’t buying it”. CBS News. March 2, 2012.
^ Dickinson, Tim (Nov. 9, 2011). “How the GOP Became the Party of the Rich”. Rolling Stone. Retrieved 2011-11-10.
^ David Stockman: I Invest In Anything Bernanke Can’t Destroy, John Carney, CNBC, October 6, 2010
External links
Biography at the Biographical Directory of the United States Congress
Voting record maintained by The Washington Post
Appearances on C-SPAN programs
Works by or about David Stockman in libraries (WorldCat catalog)
Four Deformations of the Apocalypse, David Stockman, The New York Times, July 31, 2010, op-ed
Ronald Reagan, Ron Paul, & the Fed: Q&A with David Stockman, Reason.tv, January 2011
Fixing America’s Finances interview on On Point, May 2011
David Stockman on ‘The Great Deformation’ and Our Economic Doom, Daniel Gross, The Daily Beast, April 1, 2013, interview
United States House of Representatives
Preceded by
J. Edward Hutchinson Member of the U.S. House of Representatives
from Michigan’s 4th congressional district
1977–1981 Succeeded by
Mark D. Siljander
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Minyanville > Business News > Politics And Regulation
David Stockman on Fisker and Tesla: Green Vanities of the Billionaires
By David Stockman Apr 10, 2013 12:00 pm
In the following excerpt from his new book, Stockman argues that the “big bucks from Washington are being used to prop up billion-dollar bids by venture capitalists to create totally new car companies.”
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Editor’s note: David Stockman’s new book The Great Deformation: The Corruption of Capitalism in America (PublicAffairs, 2013) has triggered strong reactions from economists and reporters although it only hit store shelves in the first week of April. Stockman — who was Ronald Reagan’s budget director (1981-1985), and is a former member of Congress from Michigan (1977-1981) — has stirred controversy and heated debate by questioning the Fed’s low interest rate policy. In a recent New York Times op-ed, he referred to the recent highs seen in the Dow (INDEXDJX:.DJI) and S&P 500 (INDEXSP:.INX), saying, “Instead of cheering, we should be very afraid.” He added, “Sooner or later — within a few years, I predict — this latest Wall Street bubble, inflated by an egregious flood of phony money from the Federal Reserve rather than real economic gains, will explode, too.” Although Paul Krugman, a left-leaning, Nobel Prize-winning economist and New York Times columnist, has come down hard on Stockman’s outlook, many reviews of the book have pointed out that The Great Deformation is anything but partisan. As one reporter says, the book has ”something for everyone to hate, including Republicans, Democrats, central bankers, and Wall Street executives of all stripes.”
The following is an excerpt from the book used by permission of the publisher; it picks up from a chapter about solar companies in the US. To read David Stockton’s past articles for Minyanville, click here.
The Great Deformation: The Corruption of Capitalism in America, Chapter 29
The solar boondoggles are modest compared to the crony capitalist capers in the electric vehicle (EV) sector. Here the Obama administration has guaranteed loans of $530 million for Fisker Automotive and $465 million for Tesla Motors (NASDAQ:TSLA) and provided $270 million in stimulus money for a company called A123 that makes electric vehicle batteries. The first two of these are essentially failing vanity projects of Silicon Valley billionaires that are now being bailed out by the taxpayers for no discernible reason. The third has already filed for bankruptcy, taking the taxpayers down the drain with them.
The US treasury was put in harm’s way in all three of these cases not simply to boost the debatable concept of electric-battery vehicles. The global automotive industry is already rife with efforts in that direction by incumbent car companies including the Toyota Prius, the Nissan Leaf, the Chevy Volt, the upcoming (2013) Ford (NYSE:F) Escape electric vehicle, and countless more.
Instead, the big bucks from Washington are being used to prop up billion-dollar bids by venture capitalists to create totally new car companies. Yet unless you believe in tin-foil hat theories about Detroit buying up all the patents on magic carburetors which get a hundred miles per gallon, the last industry that needs start-up companies fostered by government is autos. In fact, the global automobile industry is hungry for new product markets owing to its vast overcapacity and is endowed with all of the engineering and manufacturing competence that could ever be needed to bring electric cars to market—that is, if consumers wanted to buy them.
Since gasoline still sells at 1973 prices in real terms, however, there remains only a tiny market for hybrid and electric vehicles. Thus, notwithstanding approximately $1.2 billion of venture capital funding, mainly from Kleiner Perkins Caufield & Byers, Fisker Automotive is literally going down in flames: in addition to massive financial losses, many of the five hundred gasoline-electric hybrid cars it has actually sold have ended in fiery destruction in their owners’ driveways. Indeed, the folly of Washington’s Fisker caper could not have been more poignant than when Hurricane Sandy hit the New Jersey docks with its vast storm surge; more than a dozen Fisker cars ignited and burned to rubble when washed over by seawater.
Given the $100,000 price tag for these vehicles, however, the story is not really about any hardship suffered by the credulous buyers of the Fisker Karma. The actual hardship will soon fall on the taxpayers because the underlying deal stinks to high heaven. It seems that Silicon Valley’s leading venture capital firm had a failing auto start-up and Vice President Joe Biden had a failed GM (NYSE:GM) auto plant in his home state of Delaware. Kleiner Perkins’s chief green energy maven and major Obama fund-raiser, John Doerr, therefore arranged a deal.
In return for the aforementioned $530 million from Uncle Sam, Doerr and his purportedly Republican partner Ray Lane would present a new business plan to Henrik Fisker, the intrepid designer-entrepreneur behind their start-up auto company. Flush with vast new money from Washington, the struggling Fisker Automotive would develop a second version of its electric vehicle—a “people’s car” that could retail for a mere $50,000—and build it in Joe Biden’s empty auto plant.While the vice president thought this was a swell solution and duly cut the ribbon at the plant’s reopening, Fisker was not the most likely man for the job of building a people’s car in Newark, Delaware. In fact, before becoming an electric vehicle tycoon, he had been a famous designer of ultra-luxury vehicles including the 2005 Aston Martin DB9 Volante. The latter carried a price tag of $250,000 and was built by hand in what is essentially an automotive museum in the United Kingdom.
Nevertheless, pending the development of a people’s car to be called the Atlantic, Fisker got a $170 million installment from the Department of Energy to complete the design, engineering, tooling, and manufacturing launch of the $100,000 per copy Karma. After repeated delays, the first Karma was delivered to the company’s launch customer (and investor) Leonardo DiCaprio, but it is surely the case that the green crusader–actor had not calculated the full carbon footprint of the Karma when it arrived at his Beverly Hills estate.In fact, the vehicle had been assembled in Finland based on an aluminum frame that was manufactured in Norway and an interior cabin that was made by automotive giant Magna International of Canada, and sent to Finland for final assembly. Moreover, the heart of the vehicle, the electric battery power train, was also shipped back to Finland after it was made by A123, based in Waltham, Massachusetts.The latter was both an investor in Fisker and also a recipient of $260 million of Obama stimulus money. A few months after DiCaprio got his car, A123 filed for bankruptcy under a cloud, some of which emanated from the fiery demise of batteries it had installed in the five hundred or so Karmas which had been actually delivered to customers.So the carbon footprint from its far-flung supply chain is considerable, given that all of these components are shuttled to Finland and back. But that’s not the half of the Karma’s severely challenged claims to being green. One of the great truths of the modern economy is that central-station electric power is grossly inefficient as a thermal matter, with less than 30 percent of the BTUs delivered to plant boilers actually ending up as useful work in homes and factories. Therefore, the fuel efficiency of electric-battery cars can only be fairly measured on a so-called “wells-to-wheels” basis, thereby taking account of the vast thermal losses at power plants and distribution grids from the hydrocarbon fuels originally consumed.It turns out that the Karma gets nineteen miles per gallon on a wells-to-wheels basis; that is, it has worse fuel economy than the Ford Explorer. So the question recurs as to why public money is being used to fund toys for rich people and to bail out the approximate $1.2 billion that has been invested in Fisker by Kleiner Perkins, Al Gore, and Qatar Holdings, among numerous well-endowed others.
The People’s Car From Goldman Sachs
To be sure, electric vehicles are the red-hot flavor of the month, even on Wall Street. That explains how Goldman Sachs (NYSE:GS) got into the act, too, bringing to market in April 2010 the IPO of the Fisker Automotive clone called Tesla Motors. The latter also makes high-end electric-battery vehicles and was created by another billionaire venture capitalist who has also been a serial harvester of the Washington money tree, one Elon Musk. Indeed, so incestuous is the plot that Musk hired Henrik Fisker in one of the latter’s earlier ventures to perform design work on an electric vehicle, then sued him for design theft when Fisker launched his own EV venture.
Not surprisingly, the ostensible reason Tesla got its very own $465 million loan guarantee from the DOE was to perform exactly the same gambit as Fisker. Tesla had developed a $110,000 electric vehicle called the Roadster, and so the taxpayer money was supposed to help it develop a people’s car called the Model S which would retail at $55,000 before the $7,500 electric vehicle buyers’ tax credit that Uncle Sam also had on offer.
Not surprisingly, Tesla has stumbled bringing its people’s car to market just like Fisker has. In fact, Fisker is so far behind that even the DOE has had to freeze its funding; the company has fired the few workers who had been hanging around Joe Biden’s empty car plant and now suggests the Atlantic may not appear until 2015, if ever.
Yet the Tesla stumble is the more egregious because it was brought to the public market by Goldman and its billionaire promoter in an utterly cynical manner as an upside call on the US treasury. As it happened, Tesla had lost in excess of half a billion dollars building and selling about two thousand Roadsters, notwithstanding their $110,000 sticker price and well-advertised celebrity owners like George Clooney.
So with the company at death’s door by late 2008, Elon Musk had to publicly confess that the long-promised high-volume S Model was a pipe dream and suspended development; that is, until Tesla could get on Uncle Sam’s life-support system by obtaining the massive DOE funding needed to develop the “people’s car” version of his electric battery vehicle. Not surprisingly, the Obama administration had no trouble believing that the world needed another car company, and that a true believer in the green gospel like Musk could bring a volume production vehicle to market.
In June 2009, Tesla got its $465 million in federal money and proceeded to plow it into the development of the S Model and funding of a corporate ramp job designed to suggest a muscular business with orders and factory production capability. To that end, it promoted advance sales through $5,000 deposits which conveniently could be recovered from $10,000 worth of federal and California electric vehicle tax credits.
This was cash-out financing for the prosperous classes. Not surprisingly, the company has booked about 10,000 orders and upward of $100 million of customer cash via this backdoor infusion from the IRS. It also used $40 million of its federal loan in May 2010 to purchase the cavernous but shuttered General Motors–Toyota assembly plant in Fremont, California—approximately one mile from the Solyndra plant, as it turned out. The Potemkin village aspect here lies in the fact that the Freemont plant had assembled upward of 250,000 cars per year in its salad days compared to scheduled S Model production of less than 3,000 vehicles in 2012.
But a bulging order book, even if an artifact of EV tax credits, was exactly what Goldman needed to pump the Tesla story. So the IPO at $17 per share was launched in June 2010, just one month after the company acquired its taxpayer-financed manufacturing plant. After rising 40 percent the first day, Tesla became a favorite rabbit of the momo chasers, and spurred by breathless “research” from Goldman and other Wall Street firms, the stock price reached $35 by later 2010 and has cycled around that level since. In short, Tesla has been valued at about $3.5 billion by the stock market on the strength of the S Model hype and the simulacrum of a company
propped up by Uncle Sam’s $465 million loan and EV tax credits.
The company’s SEC filings leave little doubt that it is the humble taxpayers of America who have fueled Elon Musk’s pretensions of grandeur. During the eighteen quarters since January 2008, Tesla has booked $500 million of revenues, but has racked up $750 million of net losses and nearly $1 billion of negative operating cash flow. Not surprisingly, in October 2012 Tesla got a delay from DOE on its loan repayment obligations and a waiver on its debt covenants. So as Tesla circles the drain, it is essentially following the playbook that had been used by its former next-door neighbor, Solyndra.
It goes without saying that Tesla would have been Chapter 11 bait years ago without the $465 million federal loan, and will likely end up there anyway. Yet the question recurs as to why the public purse was opened to this scam in the first place. After all, the S Model has turned out to be a high-end luxury sports sedan which will retail with normal customer options for at least $75,000. Like all EVs, its environmental benefits are dubious at best. Unlike most of its more stodgy competitors, however, it does accelerate from 0 to 60 mph in 4.4 seconds.
In truth, the historic boundary between the free market and the state has been eradicated, and therefore anything which can be peddled by crony capitalists like Musk and Doerr in the name of social uplift is fair game. In this instance, the Obama administration adopted the entirely capricious goal of one million electric vehicles on the road by 2015 and had the dollars to throw at it, thanks to the bipartisan fiscal follies that have now become firmly entrenched.
While much of the funding for this misguided effort came from the Obama stimulus, the fact is that $20 billion came from the Bush administration’s Advanced Technology Vehicles Manufacturing Loan Program. This was the source of the loan guarantees for both Fisker and Tesla and, more importantly, also provided the political cover.
Thus these EV boondoggles were not really Obama’s green energy waste; these were “Republican loans” and had been applied for during the Bush administration under a program which it had embraced. Indeed, Fisker’s lead director, Ray Lane, claimed to be a Bush-supporting Republican benefactor, and dismissed as “silly” the notion that an automotive company could be started without government aid.
He was correct on that point, although the idea that the government should be starting car companies, in a world drowning in auto capacity, was apparently not yet a well-known part of the Republican creed. So whether acknowledged or not, it was the Bush White House which paved the way for the abomination of Fisker and Tesla.
That a megalomaniacal promoter like Elon Musk could walk off with half a billion in taxpayer money, blow it in less than four years, and make himself the toast of Hollywood in the process is powerful evidence that the putative conservative party has vacated the ramparts of the US Treasury Department. The latter now stands politically helpless in the face of whatever flavor-of-the-month projects crony capitalist raiders happen to be promoting.
The Green Energy Dog Which Didn’t Bark
At the end of the day, Tesla and Fisker did not have much to do with real conservation. That is evident in the policy dog that didn’t bark; namely, a rip-snorting increase in the gasoline tax. To be sure, it is not evident that dragging BTUs through the roundabout path of the electric power grid would really alter the carbon footprint of the typical auto’s 10,000 vehicle miles per year. Yet if reduced gasoline consumption is the policy objective, a European scale fuel tax, say, $4 per gallon, would cut US consumption by upward of 3 million barrels per day, or about 35 percent.
In fact, it turns out that Secretary Steven Chu spent nearly as much time disavowing his earlier support for a stiff gasoline tax as he did handing out subventions to crony capitalists of the green energy persuasion. And that symbolizes the problem in a nutshell.
The virtue of a high energy tax is that it harnesses the pricing mechanism silently, efficiently, and relentlessly to the task of altering behaviors throughout the nooks and crannies of the entire Main Street economy. That would be especially true if the tax were levied broadly as a variable level on petroleum imports. Using that mechanism, policy could permanently fix a minimum domestic price floor at, say, a $125 per barrel equivalent by raising or lowering the levy to capture the difference between the floor and the world price.
Henceforth, every consumer and producer in the domestic economy would react as they saw fit to the rule of one price: $125 per barrel of liquid hydrocarbon equivalents, always and everywhere. Thousands of entrepreneurs would be thereupon unleashed to conserve liquid petroleum BTUs whenever investments, from insulation to solar panels to electric vehicles, were profitable under the floor price. Likewise, consumers might decide to buy smaller cars with fewer features and less powerful engines under a guaranteed, permanent régime of high fuel prices. They might even choose to live in smaller houses or locate closer to work or make day trips by light rail.
By the same token, there would be no possible excuse for government subsidies and loan guarantees to encourage energy production or for the myriad oil and gas tax breaks now in place. With a permanent price floor, the message of the marketplace would be “Drill, baby, drill” wherever it was economic, including the cost of regulatory compliance. The big bucks would go to petroleum engineers and geophysicists, not K Street lobbies.
It goes without saying that there is a ferocious bipartisan consensus against a variable petroleum levy; that is, against drafting the marketplace to accomplish conservation goals set by the state, if goals must be set at all. Such a régime would put the energy branch of crony capitalism out of business. It would allow the state to sit back with its feet up on a stool, and to abolish its congressional committees on energy and its busy-body departments and agencies which ceaselessly meddle in markets and waste societal resources. Most importantly, it would remove the energy sector from the checklist of spending options next time Washington gets out the stimulus napkin.
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Saturday, April 13, 2013
Home > News > Breaking News
Lewis: David Stockman has blown some bubbles, too
Posted: 04/09/2013 11:10:53 AM MDT
Updated: 04/09/2013 11:10:54 AM MDT
By Al Lewis
Dow Jones Newswires
WASHINGTON — David Stockman, President Ronald Reagan’s former budget director, is getting plenty of blowback from his new book, “The Great Deformation: The Corruption Of Capitalism In America,” and his Easter Sunday piece in the New York Times calling the U.S. “state wrecked.”
“I’m not a real author,” Stockman said last week during a panel discussion at the Society of American Business Editors and Writers Conference at George Washington University. “According to some, I do rants and screeds and gold-buggery.”
Nobel Prize-winning economist and New York Times columnist Paul Krugman, who is 60 years old himself, called Stockman, who is 66, “a cranky old man.”
Krugman also wrote, in similarly ad hominem style, “The verdict among everyone who knows anything is that Stockman’s piece, mysteriously given star treatment, was pathetic and embarrassing. It’s full of big numbers that are scary because they’re big numbers.”
To Krugman and others who argue against Stockman, the U.S. economy is plenty big enough to manage its burgeoning debt load. Plus, interest rates are so low that the world is virtually paying the U.S. to take its money. So why not borrow trillions and trillions more until the economy recovers?
I was still on my way to the SABEW conference when Stockman spoke, but he’d made such an impression on my fellow business writers, I just had to go back and watch the video on C-Span. It’s well worth a gander at www.c-spanvideo.org/program/311904-1
Stockman appeared beside former U.S. Comptroller General David Walker, who has been touring the nation trying to get people to fathom the size of the hole Washington is digging for our children. Although Walker is generally less hysterical and sees at least some hope for redemption, it was difficult for questioners to get the pair to disagree.
Stockman warned that the long-imbalanced federal budget was a “doomsday machine” and that the money-printing Federal Reserve was a “bubble machine,” creating the Internet bubble, the housing bubble and now an even-more-devastating bond-market and government-debt bubble.
Anything anyone can point to and call a sign of recovery has been artificially juiced with printed or borrowed money, Stockman said. The Fed is buying $85 billion a month in Treasurys and mortgage-backed securities, adding to trillions more it already has purchased since the 2008 financial crisis. The government, even after sequestration, still overspends by hundreds of billions a year. Eventually, the nation will be more than $20 trillion in debt, interest rates will rise, and the interest payments due on the debt will become crippling.
“We’ve been cooking the books for a heck of long time, both fiscally and in the monetary system, and on Wall Street,” Stockman said. “This is all bubbles. It’s not real. We’re not recovering. We’re in the third one. It’s going to go down like the last two.
“If we don’t wake up to the fact that all of this is artificial, as a result of really bad fiscal policy, and of a central bank that is out of control, a rogue central bank, that’s just one of many doing the same thing around the world, we’re going to have some pretty horrible things to deal with the morning after.”
When the financial world collapsed in 2008, Federal Reserve Chairman Ben Bernanke and then-Treasury Secretary Hank Paulson led Wall Street’s “coup d’etat” of the nation, Stockman said.
Wall Street investment firms were overleveraged hedge funds facing the consequences of their bad bets and should have been left to fail, he said. Instead, Bernanke, Paulson and others told Congress that if it didn’t cough up unprecedented billions in bailouts, the ATMs wouldn’t work and they’d have to establish martial law.
“This is the mythology that has led to the crony capitalists’ capture of policy,” Stockman said.
The Fed then injected trillions of dollars more into the banking system, turning Wall Street into an even-bigger casino.
He claimed the crisis wouldn’t have led to the Great Depression 2.0: “It would have burned out within weeks on Wall Street. The public would not have panicked. And we would have gone on to the reconstitution of whatever remnants, pieces and parts came from the people who where chastised, learned a generational lesson, and stopped gambling.”
Stockman complains about this great “corruption of capitalism,” but he’s been accused of a little corruption himself. He was once chief executive of an auto-parts supplier where he allegedly did a little book cooking as he drove the company bankrupt. In April 2010, he agreed to pay $7.2 million to settle fraud charges from the Securities and Exchange Commission. He neither admitted nor denied guilt, and previous criminal charges were dropped.
Stockman was also the big thinker behind Reaganomics, the trickle-down theory, supply-side economics, or what President George H.W. Bush called “voodoo economics.” You know, the idea that if we just give all the money to the rich and their big corporations, instead of blowing giant asset bubbles, they will be sure to see that everyone has a job.
To his credit, Stockman walked away from these ideas and humbly calls himself “a defrocked Republican.” He’s not too keen on free-spending Democrats, either, or the wonks who crunch the numbers for the government. “I know something about rosy scenarios,” he said, “because I did the first one.”
I still can’t help but think Stockman could become one of those guys who rises from “cranky old man” to “visionary” if America stays on its present course for just one second too long.
“None of this massive printing and bond buying has gone into the real economy, Main Street,” Stockman said. “It is basically circulated internally within the canyons of Wall Street.”
He sees no solution. Only a great reckoning. “It will hit the wall in the next few years,” he said. “Don’t expect anything to stop it.”
Al Lewis: 212-416-2617 or al.lewis@dowjones.com; read his blog at tellittoal.com.
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Article Comments (5)
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Jerry F 3 days ago I’m reading Stockman’s book; it seems rather factual to me.
From a review:
“Over the past 40 years, the United States has become a strange fantasy land where many politicians think deficits don???t matter, regulators are closely entwined with their charges, and the Federal Reserve manages the economy through high-stakes, high-risk experimentation. The financial turmoil of the past few years is just a glimpse of what lies at the end of the road we???re on, [David] Stockman warns???.What Stockman has written is a book that makes clear we are that future generation of the past, inheritors of all the wishful thinking, simple illogic and flawed compromises that produced the near-term benefits our parents and grandparents worried about but ultimately wanted.”
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Green Truth 3 days ago Krugman is right. Responsible fiscal policy is just sooooo primitive. Knuckle draggers like Stockman want us to believe that Obama and Big Bernanke have created this Ponzi scheme where the United States must keep exponentially increasing its debt or the economy will collapse. Sure, debt under Obama is now over $16 trillion, almost double all previous presidents combined, and sure our unfunded liabilities are now over $123 trillion. So what? Obama and Krugman have a magic printing press.Clearly, Stockman, Jim Rogers, Mark Faber, Kyle Bass and that whole gaggle of gold worshiping knuckle draggers clearly do not know about modern economics introduced by the great professor Keynes. Keynes enlightened to us that we must fire up those printing presses after a credit collapse. And boy did we ever have one heck of a credit collapse.Rome tried it Kurgman’s way, by debasing the silver in their coins by more than 90%, and look how that turned out. Oh, never mind. Weimar Germany fired up their printing presses to fight a credit collapse, and… oh, never mind.Argentina, Zimbabwe…, countless others, well you know what I’m trying to say.None of this matters because of our magic printing press. We can print jobs, prosperity, oil, buy votes, we can even print endless food stamps, government jobs, disability checks and no one at all has to actually ever work again. Our dear children will love us for it.What could possibly go wrong?FORWARD!http://www.usdebtclock.org/
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Doug H 3 days ago I am sure it was Stockman who said that the Republican plan was to hope that the country got into such debt and had so many problems, that they could then force the end of social programs like Medicare and Social Security. You can look it up !Well good old George Bush sure did his best to the Republicans to the point where they can start demanding an end to these social programs. Permanent link to this comment Permalink Report Abuse Reply to this comment Vote this comment up Vote this comment down
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