Review: The Great Deformation, by David Stockman

The Great Deformation: The Corruption of Capitalism in America, by David Stockman. Philadelphia: Perseus Books Group, 2013. 768 pp. $25.24 (hardcover).

deformationWhen the U.S. economy collapsed in 2008, most economists, policy analysts, and government advisers were caught flat-footed. For more than a decade, the experts had assured Americans that such a catastrophic economic event had become impossible.

In 2004, Ben Bernanke (now chairman of the Federal Reserve), declared a “Great Moderation,” beginning in the mid-1980s, during which “improvements in monetary policy” at the Federal Reserve had led to “a substantial decline in macroeconomic volatility” (Fed-speak for a taming of the business cycle).1 Robert Lucas gave a presidential address to the American Economic Association in 2003, declaring that the “central problem . . . of macroeconomics”—maintaining recession-free growth without runaway price inflation—“has been solved, for all practical purposes.”2

Yet the seeds of the so-called Great Recession, David Stockman argues, were already there for anyone to see.

The Great Deformation is Stockman’s attempt to explain and diagnose the economic crash, connect it to historical trends, and warn against policies that will bring worse economic disasters in the future. Stockman presents a compelling case, based on economic theory and exhaustive research. His warnings for the economic future are chilling but powerfully argued.

The “Great Deformation” named in Stockman’s title is the distortion of the economy brought about by the Federal Reserve’s credit expansion since 1971, when Richard Nixon ended the last vestiges of the gold standard.

Stockman reviews several major financial developments of the 20th century. Prior to Nixon’s move, he recounts, the developed world was governed by the Bretton Woods Agreement, signed in 1944. Although not a full-fledged gold standard, Bretton Woods kept the world economy tethered to gold. All major currencies were pegged to the U.S. dollar, which in turn was redeemable in gold at $35 per ounce.

Bretton Woods limited any country’s ability to inflate. For America, it meant that any inflation by the U.S. government—creation of money to cover government debt—led investors to trade value-losing dollars for value-retaining gold. Thus, the effects of creating new money would show up immediately and painfully in the banking system.

Chafing under this fiscal restraint, on August 15, 1971, Richard Nixon unilaterally reneged on the agreement, ended the convertibility of U.S. dollars to gold, and laid the groundwork for an unprecedented series of financial crises.

Nixon’s move had an immediate, dramatic effect, Stockman writes: skyrocketing prices for oil and other commodities in the 1970s. In four years, the price of oil increased from $1.40 to $13 per barrel. A ton of scrap steel went from $40 to $140, and even such a humble commodity as coffee went from 42 cents to $3.20 per pound.

Abandonment of the gold standard enabled unfettered deficit spending without immediate consequences in the capital markets, Stockman writes. Every ill-conceived government program—from unnecessary roads and highways; to needless military bases; to studies on why people fall in love, why prisoners want to get out of jail, and what body dimensions airline flight attendants have—became untouchable. Whereas in the past, even during the profligate administration of Lyndon Johnson, Congress was forced to make difficult trade-offs to keep the budget close to balanced and avoid a run on the U.S. dollar, now “comprehension of the dollars and cents of budgeting was overwhelmed by a cavalcade of spurious economic justifications” (p. 129).

The greatest evil of inflation, Stockman writes, is not the steady erosion of the value of a dollar, but rather the undermining of the entire economy by encouraging massive mal-investment of capital. Stockman offers several examples, including these:

  • Companies faced with constantly rising resource costs are forced to build up uneconomical inventories, which become a crushing burden when inflation pauses.
  • Easy credit drives investors to overinvest in industries such as housing and commodity markets because that is where the credit market has the most impact. Thus, when credit is tightened even slightly, those bloated industries crash.
  • When the Federal Reserve lends to investors at artificially low rates, the investors have incentive to borrow Fed money and lend it willy-nilly, thus creating the market for a Rube Goldberg system of investment vehicles to soak up (in economists’ terms, “capture”) newly created money before it reaches the productive parts of the economy. Thus, the huge shift away from the standard goods-and-services part of the economy toward finance. Because this all depends on the continued flow of credit from the Fed, any tightening will cause rapid collapse.

When any of these disasters starts to unfold, politicians and Federal Reserve Board members face great incentive to reinflate and start the whole process again. Thus, the financial system under the post-Nixon, post-gold standard is “a dangerous perpetual motion machine of financial instability” (p. 128).

The climax of economic distortion occurred during the administration of George W. Bush, Stockman argues. Having watched GDP numbers rise despite massive budget deficits throughout the 1980s, Bush’s advisers concluded that budget deficits do not matter. With massive welfare-state expansions (more than 7 percent per year throughout his presidency) and war costs, the eight years of his presidency saw federal spending reach 25 percent of GDP, a record since World War II. “Measured in inflation-adjusted dollars
. . . federal spending increased by 50 percent, rising from $2.1 trillion to $3.2 trillion in only eight years” (p. 62). As a result of all that credit washing through the economy, the financial industry soared, as did defense and related industries, but average real wages rose not at all during the supposed economic “boom” times of 2002–2007.

Stockman summarizes the economic history of the Bush–Obama era:

Long-term investment has grown by less than 1 percent annually since 2000 and the nonfarm payroll count has hardly increased at all for 12 years. Likewise, the real incomes of the middle class have fallen back to 1996 levels—even as the American economy has tumbled into a frightful debt to the rest of the world. In short, the American economy did not falter due to a mysterious “contagion” in September 2008. It had been heading for a crash landing for the better part of three decades. (pp. 58–59)

Though deficit spending made it look as though America’s economy was growing throughout the first seven years of the 2000s, Stockman argues, in fact the economic fundamentals were crumbling. In 2008, the house of cards collapsed when many mortgage-backed financial assets proved worthless.

Unfortunately, Stockman continues, Bush and Obama responded to the financial crisis by adding more poison. Into an economy wrecked by government profligacy and easy credit, first Bush and then Obama poured huge amounts of government largesse and “relief” for “troubled” (i.e., insolvent) institutions and assets. In particular, Stockman cites the massively destructive bailouts of Chrysler and GM, which he discusses in fascinating detail.

On Stockman’s account, it should come as no surprise that Republicans, from Nixon to Reagan to Bush II, were far more destructive to capitalism than were Democrats in recent decades, as Republicans more often debased the currency. Stockman shows that even the famous “defender” of capitalism, Milton Friedman, became an agent of its destruction by advocating the end of the Bretton Woods agreement.

Part V of the book, “Sundown in America,” indicates Stockman’s prognosis for America, and it is not good. America is, he argues, “only a few short years away from total suffocation under a crony capitalist–style statist régime” (p. 630).

However, Stockman does provide “Another Road That Could Be Taken,” by restoring sound money, abolishing government support of the banks, and “separat[ing] the state and the free market.”

Although Stockman’s book is substantially good, it is not a laissez-faire manifesto. He accepts the alleged need for government “maintaining a sturdy, fair, and efficient safety net” (p. 712). He argues for certain regulations on banks that are “too big,” as well as for other forms of populist government intervention. He repeatedly uses the package-deal “crony capitalism,” which implies both that the system of government corporate favoritism is a form of capitalism and that the “cronies” themselves are capitalists. The latter implication, in turn, suggests that “capitalists” are to blame for America’s economic woes; this is especially indicative of conceptual confusion, given that Stockman’s own book demonstrates clearly that the fault lies squarely with the government, not with capitalism or capitalists.

In addition to those errors of fact, Stockman’s language is frequently hyper-technical, assuming far more than a layman’s understanding of the economy. The book desperately needed an editor committed to making the ideas comprehensible to its intended audience. (It should also be noted that Stockman has been affiliated with the anarchists at the Ludwig von Mises Institute, who reject the ideas on which liberty depends and who betray the ideas of Ludwig von Mises.)

Despite those flaws, The Great Deformation is an important work of historical and economic scholarship, based on sound principles and extraordinary research. It will help readers understand the recent economic crash, the past century of economic history, and the likely future of our economy. It is also a clarion call for sound money and freer markets.


1 Ben Bernanke, The Great Moderation, Federal Reserve Board, February 20, 2004,

2 Robert E. Lucas, Macroeconomic Priorities, American Economic Association, January 4, 2003, priorities AER 03.pdf.

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