"Game Over" for Tax Cuts, David Stockman Tells Republicans in PBS Interview

"The Republicans think their mission in life is to cut taxes. Sorry -- game over. We're now in the tax-raising business. And we're going to be in the tax-raising business for the next decade."

The Republicans, and most Americans, will want to turn a deaf ear to this advice. But we all ought to listen--not only because it's an accurate assessment of the current state of our Union, but especially because of who's making it.

The source is not Paul Krugman or Thomas Friedman or E.J. Dionne, or any of the other liberal experts conservatives love to hate. The source is David Stockman, the supply-side budget chief of the Reagan administration and self-described Wall Street "gunslinger," in an interview Friday with Paul Solmon on PBS.

Solmon was following up on Stockman's equally surprising January 18th op-ed piece in the New York Times, praising President Obama's proposed tax on big banks:

"While supply-side catechism insists that lower taxes are a growth tonic, the theory also argues that if you want less of something, tax it more. The economy desperately needs less of our bloated, unproductive and increasingly parasitic banking system."

Stockman argued that the Fed and the U.S. Treasury have been enablers of Wall Street's worst instincts:

"National economic policy has come to this absurd pass because for decades the Fed has juiced the banking system with excessive reserves. With this monetary fuel, the banks manufactured, aggressively at first and then recklessly, a tide of new loans and deposits. When Wall Street’s “heart attack” struck in September 2008, bank liabilities had reached 100 percent of gross domestic product — double the ratio of a few decades earlier.

"This was a measurement of the perilous extent to which bad investments, financed by debt, had come to distort the warp and woof of the economy. Behind the worthless loans stands a vast assemblage of redundant housing units, shopping malls, office buildings, warehouses, tanning salons and fast food restaurants. These superfluous fixed assets had, over the past decade, given rise to a hothouse economy of jobs that have now vanished...

"The baleful reality is that the big banks, the freakish offspring of the Fed’s easy money, are dangerous institutions, deeply embedded in a bull market culture of entitlement and greed. This is why the Obama tax is welcome: its underlying policy message is that big banking must get smaller because it does too little that is useful, productive or efficient."

In the interview with Solmon, Stockman argued for an absolute partition between investment banks and banks with federally insured deposits:

"I would give the administration credit for trying to move us back to something that's a lot saner than trillion-dollar banks being propped up by the taxpayers, which is exactly where we are today.

"The fact is, Wall Street is entirely involved in capital markets activity, which is fine. But that's free market activity. They shouldn't be involved in it if they have got deposit insurance and if they have got the Fed window behind them. That's for deposit banks, not for gunslingers and for hedge funds and for capital market players.

Is Stockman uncomfortable sounding like so many critics of the economy on the left? He told Solmon:

"I'm mortified by that thought. But, at some point, you have to ask, what's good policy? And we have gotten into this syndrome, I think, over the last 20 years, where policy of the Treasury and of the Fed has been dictated by Wall Street, that, if Wall Street threatens to have a hissy fit, or the stock market is going to go down, the Fed has basically capitulated and is creating a very unstable and dangerous financial system in our economy."

Solmon asked how Stockman squared this with his "starve-the-beast" argument during the Reagan administration, i.e., that tax cuts would force government to cut spending. That's when Stockman acknowledged how much things have changed in the last few decades:

"I think the lesson of the last 25 years is that it doesn't work. You can keep cutting taxes until you reach the point where this year -- or the year just ended, we spent $3.6 trillion, and we only collected $2.2 trillion.

"So, we are now so far out of kilter that it's irrelevant. Taxes are going to have to be raised. And the beast needs to be trimmed back. But it can't be starved enough to even begin to cope with our fiscal problem. And this is where I think all the politicians are faking in both parties, but the Republicans especially."

Unlike most conservatives, Stockman understands that times have changed and that the federal government desperately needs revenue, not just to carry out its most basic functions, but also to put a stop to business practices that have driven the economy into the ground.

Whether the Republicans will join Stockman in thinking twice about conservative tax dogma remains to be seen. But the country will continue to spiral downward if they do not.

Conservative analysts like George Will and Charles Krauthammer and the crowd at Fox News and the Wall Street Journal like to bemoan what they call the American "entitlement culture." They believe what's most fundamentally wrong with our country is retired people who feel entitled to Social Security and Medicare, sick people who feel entitled to health care, unemployed people who feel entitled to government assistance, state and local governments who feel entitled to bailouts from federal tax dollars, etc. There is little that government does that escapes their scorn.

What the conservatives refuse to acknowledge is the over-arching entitlement they have been claiming for four decades: the entitlement of U.S. citizens not to be taxed. The logical outcome of that entitlement is no government at all--even for the few things they'd really like government to do.

Going back to California's Proposition 13 in 1978, conservatives have successfully promoted the fantasy that government can sustain itself without revenue. The fantasy has never been true. But true believers like David Stockman have not been able to face it--not until the financial disasters we've suffered since 2007.

Now that time and facts have overwhelmed his theory, Stockman has bravely acknowledged them. His devotees, alas, are still busy avoiding the facts, denying history and working to starve government into even more dangerous paralysis. As Stockman says so aptly about cutting taxes, "game over." Let's move on, while we still can.