The Triumph of Politics Over Economics

David Stockman on TARP, the Fed, Ronald Reagan, and Ron Paul


At the very start of Ronald Reagan's presidency, David Stockman debunked the myth that Reagan and the modern Republican Party were dedicated to small government.

In 1981, the 35-year-old Stockman gave up his Michigan seat in Congress to become the new president's budget director. A vocal critic of what he continues to call the "welfare-warfare state," Stockman had signed on because he believed in the limited-government principles that Reagan so vigorously espoused. Once inside the White House, however, Stockman became disenchanted. In his first year as budget guru, he gave an interview to journalist William Greider that became the basis for an explosive Atlantic article in which Stockman admitted that Reagan's tax cuts for most Americans had been a 'Trojan horse' used to bring down the top rate. In his 1985 memoir, The Triumph of Politics, Stockman chronicled and criticized Reagan's reluctance to fulfill his campaign promise of shrinking the size and scope of government and balancing the budget. During Reagan's two terms, the budget was never balanced, net government spending was never cut, and the gross federal debt tripled.

Last fall Stockman was the GOP defector du jour once more, arguing against extending George W. Bush's tax rates in The New York Times and on 60 Minutes, The Colbert Report, Parker-Spitzer, ABC, NPR, and MSNBC. Stockman's argument —that it's irresponsible to cut taxes when cumulative U.S. debt is steadily mounting as a percentage of GDP—is based on the principle that budgets can be balanced only when revenues meet expenditures. If we are not willing to actually shrink government spending, he says, then we should pay full freight now, rather than forcing our children and grandchildren to foot the bill.

Here is what didn't come across in Stockman's media blitz: Since writing The Triumph of Politics he has, in his words, "completed his homework" by reading such libertarian economists as Ludwig von Mises, F.A. Hayek, and Murray Rothbard. He thinks the Troubled Asset Relief Program (TARP) was a crony-capitalist boondoggle, that the bailouts of GM and Chrysler were unconscionable, and that stimulus spending is a hoax. He sees the abandonment of the gold standard in favor of floating exchange rates as the root cause of both the country's fiscal problems and the 2008 financial crisis. He says Rep. Ron Paul (R-Texas) is the only politician today "who gets it," and he's hopeful that Paul's growing influence may begin to shed light on "the scholastic arrogance" of the Federal Reserve. He is still against the welfare-warfare state, and he still thinks government should be cut down to size.

After leaving the White House, Stockman joined Salomon Brothers and the Blackstone Group before creating Heartland Industrial Partners, a private equity firm. In December, Nick Gillespie, editor in chief of reason.com and reason.tv, sat down with Stockman in his Greenwich, Connecticut house for a wide-ranging discussion of politics and economics, both past and present. A video version of this interview can be viewed and downloaded at reason.tv.

reason: You've emerged as a fierce proponent of letting all of the Bush-era tax rates expire and going back to the Clinton rates. Why do you want to revert to higher tax rates?

David Stockman: In pure philosophy, lower tax rates would be better. The problem is that we've had a 30-year referendum on spending—every aspect of the welfare state. We made a tiny bit of progress in '81 that was restored over the course of the next couple of decades. Then we finally had Republican government in the Bush era, both in the Congress and in the White House, and nothing was cut. Everything was ratified. In fact, they added to Medicare through the drug benefit.

reason: Bush raised total federal outlays about 60 percent in 2010 dollars.

Stockman: That's exactly right. So now we're at the point where we have this large welfare state that seems immutable politically and this expanding warfare state that both parties seem to want to fund. In that environment, you're kidding yourself if you think cutting taxes today is really cutting taxes. We're simply deferring massive tax increases into the future, unfairly and immorally putting huge debt burdens on future generations, and that is just wrong.

(Article continues after the video.)

reason: There's a presumption there that if we raise more federal revenue, it would actually go to fund existing programs, as opposed to just expanding into new areas.

Stockman: That's always a risk, but I think there isn't much pressure for structural expansion of the budget right now, and there hasn't been for years—other than the one or two initiatives during the Bush period.

reason: Does there need to be, though? Medicare is set to continue to expand, particularly after 2020. So there doesn't need to be a politician saying, "Let's create whole new entitlements," because we've got ones that are on autopilot to explode.

Stockman: Oh, yes. The cost trajectory of the entitlements and the program structure that is there will rise over time, and part of the fiscal battle will be to find ways to contain that. So I very strongly believe that, in addition to allowing the tax cuts to expire, we need to means-test—radically—the retirement entitlements.

The combination of Medicare and Social Security—a few years out, that's $1.5 trillion of spending annually. That's the heart of the budget, and the top one-third of that goes to retirees who have private assets, private pensions, other sources of income. They shouldn't be dependent on the government. Nobody earned all that, and there really is no trust fund there—that's all fiscal mythology.

reason: With FICA taxes, there is no trust fund; it goes into the general revenue. But is it right to say to people who pay this money, under the pretense that it's going to a retirement fund, "Hey, you know what, you make too much money, so screw you"?

Stockman: Yeah, I think it is right. I mean, in a way it would mean defaulting on a promise—not a legal obligation, but a political promise that has been made over the years, because for decades we've been collecting slightly more from the payroll tax than we've been paying out. But of course that money wasn't saved or hived away somewhere—it was spent on cotton subsidies and bribes to warlords in Afghanistan. The fact is, this is simply an intergenerational transfer program. It's not anything more than that—social insurance is a myth, in my judgment—and so you have to look at it as spending. And government should spend nothing for people unless it's means-tested. That's a fundamental principle that I have. We should means-test everything—veterans' benefits, Social Security, Medicare—and trim down what we spend to what is absolutely necessary to maintain the social safety net.

reason: In the last few years we've seen under Bush, and then continued under Obama, things like TARP and stimulus spending. Are we in a place where bailouts will be a constant part of American life? Are we going to see a bailout every year for the next company that's going to go belly up? And is that a pressure on the budget?

Stockman: That is a pressure, and that is a clear risk. I believe in some ways it was a profound moment in political history in September 2008, when [Treasury Secretary Henry] Paulson panicked—and of course Bush was a deer in the headlights; he had no clue about what was going on—and stampeded the Republicans into enacting TARP. Even the House Republicans knew in their better judgment that it was a terrible idea, and they voted initially against it. But then they were basically stampeded.

The only panic that occurred was in the Treasury Building and the Eccles Building [home to the Federal Reserve] in Washington. I don't think there was panic on Main Street in America. The idea that the ATMs were going to shut down and the payrolls couldn't be met—there is no factual basis to support that whatsoever. What was happening was that the big pyramids of debt on Wall Street were coming crashing down. Had we allowed nature to take its course, maybe the Goldman Sachs stock would have gone down to $10. But that's their problem and that's the problem of speculators who owned the stock, not a systemic problem for the economy. Maybe a couple of banks would have been closed by the FDIC, but whether you believe in deposit insurance or not—which I don't—it was there, and that was the function of deposit insurance

reason: So why did the forces of panic and bailouts win the political battle?

Stockman: Because Paulson frankly is the most incompetent, reckless secretary of the treasury that we've had in modern history, if ever. He had no schooling in public policy, he had no schooling in the longer-term issues of fiscal management, or even what sound money is all about, for crying out loud! And as a result, as the crisis metastasized in September and October 2008 and he got all these panicked calls from his buddies on Wall Street who were seeing their pyramids of debt coming crashing down, and particularly when the stock of Goldman Sachs started to plunge, he panicked. There was no philosophy behind it; there was never an analysis done. This whole idea that there was systemic risk was purely made up by people who were looking for ways to meddle in the economy.

reason: Should the Fed—or the feds, or any portion of the federal government—have bailed out Bear Stearns, Lehman Brothers, Goldman Sachs, or GM? Do bailouts at any point make sense?

Stockman: No. I think absolutely not. The fundamental principle of free market capitalism is that you have to be free to succeed as well as fail. That when you go in the opposite direction and socialize losses and privatize gains, you will destroy the system because of moral hazard and the encouragement of reckless risk taking, misallocation of capital.

You can't say enough about it in terms of the harm that it would do economically. But there is a bigger harm, and it's the harm politically. Once the broader public sees that the cronies of capitalism are bailed out by their friends in Washington or the Fed, why should they believe that the system we have is fair or is working in their interest? It's just politicizing even further the economy and suffocating the only hope that we have for real prosperity, which is free enterprise, neither supported nor hindered by the government and its central banking branch.

reason: But isn't this the oldest story of American capitalism? There is always somebody who's too big to fail—or more correctly, too politically connected to fail. Certainly in the Reagan administration there were bailouts of various sorts. Carter bailed out Chrysler. And then if you go back into the 19th century, if they weren't bailed out per se, firms or players were given monopoly contracts.

Stockman: I think the risk has always been there, but historically there was, at least in the Republican Party, principled beliefs that the marketplace had to be allowed to operate and that both gains and losses would occur. Even though there was pressure from time to time for interventions and bailouts, it was pretty rare, if at all, during the Eisenhower administration, for instance. Even though Ike was suspected of not being a good conservative, if you look at the economic policy of the Eisenhower era, it was pretty solid. He actually believed in balancing the budget and balanced the budget three times. During the Ford era, again, President Ford was pretty much a free enterprise believer. There aren't too many examples that you can come up with where there were outright bailouts.

But I think the problem really gathered momentum in the late '70s, after inflation got out of control, because we closed the gold window in 1971. Then politicians began to find reasons for expediency. The Chrysler bailout was a terrible thing. In the Reagan era, I thought we were free enterprise, and mostly we were, but we bailed out Continental Bank, against the strong belief of myself and many others in the administration. It was kind of forced through in panic. So then these things began to build.

reason: What do you do with savings and loans? Was that systemic risk when the S&L industry collapsed, or should that have just been washed and hosed down the sewer?

Stockman: Well, first of all, the problem that blew up in the late '80s was encouraged by bad mistakes made by the Reagan administration in the early '80s. We deregulated the S&Ls and allowed them to speculate in all sorts of real estate and land development, and so forth—

reason: Which, per se, is not a problem, right?

Stockman: It's a problem if they have guaranteed deposit insurance and if they have federal entities to turn to to bail them out if they make reckless mistakes. Well, all of them did. So we ended up with insolvent institutions en masse in the late '80s.

I think that they did more or less a reasonable job of dealing with that, because all of them were closed and liquidated and losses were absorbed by the equity speculators and the junior bond speculators in these failed S&Ls. The depositors were protected, because that's what the deposit insurance system is, but it was a good lesson that we had danger built into the heart of our banking system because of deposit insurance, which allowed speculators to raise money without worrying about the risk of investing. And they had access to the Fed window.

In other words, the S&L crisis was a wake-up call that deposit insurance and the Fed were about ready to fuel a far greater banking system bubble and blowup. And sure enough, 15 years later, that's exactly what we had. And then when the crisis came, we went in and bailed out the whole thing again, and have just created the condition for even more traumatic excess in the future.

reason: Does the Dodd-Frank financial regulation bill address any of the issues that you're talking about?

Stockman: Really not at all, because it's just another crony-capitalist shuffle. If we really have a problem in our banking system of too big to fail—which I profoundly believe we do—then the institutions involved are too big to exist. And by that I mean, exist with access to the federal deposit insurance guarantees, and therefore the ability to raise hundreds of billions or trillions in deposits, and with access to the Fed window.

So what happened? At the end of 2007, before the crisis hit fully, the top four banks in this country had $5 trillion of asset footings combined. After the whole crisis of too big to fail and all of the bailouts, today the top four banks have $7 trillion of asset footings. What we did, and what the FDIC and the Federal Reserve did in their wisdom, was to steepen and enlarge the problem.

I believe in narrow banking. I believe that if you're going to have deposit insurance, it should be for banks that can lend for only short periods of time, for commercial activities, where the risk of loss is minimal. And if you want to be in the speculation business, if you want to be in the over-the-counter derivatives marketing business, if you want to make long-term loans in speculative real estate and even business enterprises, fine—be my guest, do it as a free enterprise financial institution, but don't look for guaranteed deposits to raise your funding, and don't think that you should have access to the Fed window in case you make large mistakes. That is the fundamental line of demarcation that needs to be addressed, and the legislation passed by Congress doesn't do any of that. It simply involves 2,300 pages of enabling act which empowers the same institutions that fostered this crisis—the Fed, the FDIC, the comptroller of the currency—to determine what these mean, and it's more or less a full employment act for lobbyists, lawyers, accounting consultants, and so forth to find ways to build loopholes, which is easy enough to do.

reason: In The New York Times over the summer, you laid one of "the four deformations of the fiscal apocalypse" on the heads of pointless speculation in stocks, bonds, commodities, and derivatives. Are you arguing that, essentially, this trade only existed because of regulations, or because of a government system or political economy where people knew that if they were playing around with that kind of stuff, they would get bailed out?

Stockman: Well, I think it goes further back than that. I think it goes to the closing of the gold window in 1971.

reason: Because it was the last shred of anchoring of the U.S. dollar to a gold standard?

Stockman: Yes, and because that system—it had its defects, Bretton-Woods—but at the heart of it was a fixed exchange rate system and an obligation on each country to settle its accounts at the end of every year. If you began to run chronic payments deficits, you were going to, under that system, lose your monetary reserves. And what that did was foster continuous financial discipline—because any country losing large-scale reserves would find its banking system contracting, its interest rates rising, its economy slowing down—and the basis for sustainable adjustment to occur.

When we got rid of all of that and went to pure fiat money, it began a process in which financial volatility and instability reached what had been previously unimaginable levels. And if you have exchange rates careening all over the place, if you have interest rates soaring and then declining and then bouncing to and fro, the market will invent hedges—currency futures and hedges of every kind, interest rate hedges of every imaginable kind—in order to meet the need of participants in the system to have some certainty about the value of things. We need to get to the heart of the problem. It's not the derivatives; it's what generated this massive speculative casino.

The other point I want to make is that once these things were invented because of the turbulence in the market for legitimate hedging, there was nothing to stop all the casino players from jumping in and simply speculating. So today probably 99 percent of currency futures are for speculation and 1 percent might be for legitimate trade hedging. That's the problem we have in the whole financial system today.

reason: This is probably a good time to bring up some of your Austrian friends. On the one hand you would have somebody like Murray Rothbard, who believed in free banking but also a gold standard. Then you have somebody like Friedrich Hayek, who talked about competing currencies. With the breakdown of the gold standard, the breakdown of Bretton-Woods, don't we effectively have what Hayek would consider a market in competing currencies? To the extent that different countries' money isn't sound, investors will devalue it and the market will respond to that. Why is that not working in a way that Bretton-Woods might have at some point, to keep people from just printing cheap money?

Stockman: The system that he imagined, if I understand it correctly, was privately issued currencies. What we have is currency issued by the sovereign, the United States, in unlimited quantities, in a context of a global system where all the other central banks are lined up in some sort of caravan, trying to mimic the policies of the Fed, mostly defensively. When we flood the world with dollars, they have to buy them up and print their own currency in order to prevent their exchange rate from going up.

Ultimately, what really is the issue is the need for periodic settlement of accounts—financial discipline. And once we got rid of that, what happened was something Milton Friedman said could never happen. He said, "Don't worry about the balance of payments prices under Bretton-Woods. Close the gold window, let the dollar float, and the world currency market will take care of trade imbalances." He was totally wrong. We've had $8 trillion worth of cumulative currency account deficits with the rest of the world since the late 1970s, year after year.

reason: What is the real effect of that, though? Some people would say that we're getting more for our money.

Stockman: No, the real effect of it is that we're living way beyond our means. We're building up service obligations to the holders of all that paper. When you run a current account it's the same thing as borrowing from the rest of the world. The Chinese own well over a trillion dollars of claims on the United States, and the Japanese and the OPEC producers and on and on you could go. The idea that we're getting something for free makes no sense to me.

Secondly, you're encouraging the mercantilist export model of East Asia to become even more virulently destructive than it actually is, because they somehow believe they can export their way to permanent prosperity. And if they have to build up massive dollar reserves of greater and greater and greater magnitude, which is exactly what they're doing, they seem to think that will work. Obviously, in the long run it won't—Japan is already proof of that—but it leads to these kinds of massive imbalances and distortions in the international trade and monetary system that I believe are on the verge of major conflagration as the whole things heats up in the current environment.

reason: You went to Michigan State, you were a congressman from Michigan before you became budget director, you've written fondly of people like Hayek, Rothbard, and Mises. Where did these ideas come from, when did you get interested in economics, and how do you define yourself in economic terms?

Stockman: The thing you left out was that yes, I grew up in Michigan, but I was an anti-war radical as a student at Michigan State. In the heat of the total nonsense of the Vietnam War, I developed a skepticism of the warfare state and of the military and of an adventurist foreign policy.

reason: Were you always a Republican?

Stockman: No, I was an SDS quasi-Marxist radical. Then as I went to Capitol Hill as a staffer, I began to see the virtues of the libertarian view, which isn't that far, in some ways, from the radical left that I believed in as a student.

reason: What's the common thread?

Stockman: The common thread is individual action, and freedom to pursue both economic and other ends is the core of what society should be built on. And so I became very interested in free market economics as a staffer on Capitol Hill. Then I was elected to Congress and pursued that further.…

reason: Talk a little bit about that. Who were you a staffer for? And you say "then I was elected to Congress" as if you were walking down the street and you got hit by something falling out of a window. What went into those determinations?

Stockman: Well, I was a staffer for Congressman John Anderson, who was chairman of the Republican caucus. He was considered a moderate, but actually he was the right kind of Republican in my view, because he was a social liberal and an economic conservative. And the work I did was a lot of things on deregulating transportation, the minimum wage being counterproductive, the need to reorganize or eliminate the whole Great Society set of programs that had developed, and so forth. On the other hand, he didn't believe the government ought to be intervening in our private lives. And I agreed with that then, and I still do now.

I ran for Congress and was elected in 1976 and had a chance to begin to develop those ideas legislatively. One was deregulation of natural gas. That was the leading edge of the whole fight with Carterite statist energy policy. I was on the Energy Committee and was one of the leaders of the fight to deregulate natural gas, but opposing all the other Carter nonsense like Synfuels Corp. and regulatory standards for the energy efficiency of toasters and so forth. So I began to see there the danger of statist industrial policy or economic policy and had some good experience fighting it.

reason: It's peculiar that Carter deregulated interstate trucking, railroads, and airplanes, but then was just a statist in these other fanciful dreams that he had.

Stockman: Well, I think he depended on the advisers. He had some advisers who could see the insanity of the Civil Aeronautics Board, or the Interstate Commerce Commission trying to set tens of thousands of rail tariffs and trucking tariffs and so forth. But then on the energy side, there was a short-run panic about what was going on with OPEC and the oil price—which was really a function of inflationary monetary policy, but the bad monetary policy led to a perception that there was something wrong with the energy economy, which generated [Secretary of Energy] James Schlesinger and all his minions running around trying to create a state run energy sector. So I fought that, and I learned a lot about the danger.

Shortly after that came the Chrysler bailout. I was from Michigan, and there were a lot of Chrysler suppliers in my district. But I strongly opposed it, gave a loud speech on the floor about it, found that Lee Iacocca was about to run me out of the state on a rail, or wished he could have, but the thing is, I was right. Not only that, but in the next election I got the largest vote that I'd ever received.

reason: What does that say about political economy? There you are in Michigan saying one of the major employers in the state should live or die in the market, and it didn't hurt you politically.

Stockman: Because the rank and file of businessmen in my district—the machine tool shops, or someone running a plant where they mixed fertilizers, and distributed to farmers—they knew that they weren't too big to fail, and if they were ever up against the wall, their creditors would put them into Chapter 11, and that's the way the system works.

I think the problem we have in our political system is enough politicians are not willing to think that through. They hear the squeaky wheel, and they respond, and they really don't have to. I also was a liberal on social issues. I voted against the Hyde amendment—the anti-abortion amendment—110 times. And my district was very conservative. But they respected my opinions. I think the idea that you just have to kowtow to all the pressure groups and all the squeaky wheels is not really necessary. But now, 30 years later, it's probably unavoidable, because money has become such a massive force in the electoral process.

reason: So you go from being in Congress to being Reagan's budget director. You came into the Reagan administration and you believed the hype, that he was going to cut taxes and cut spending, that he was going to cut the size and scope of the federal government. And you worked long and hard on coming up with a way to cut taxes, right?

Stockman: Right. The top tax rate on earned income was 50 percent at the time, and I think we ended up in the low 40s. But it was about a 30 percent cut.

The thing I learned out of that tax-cutting exercise was that there wasn't much popular support for across-the-board rate reductions that would benefit the average citizen, or even the entrepreneur. The only way that we got that through, despite all the urban legends that exist today, was through a massive Christmas tree of special-interest tax benefits and loopholes that was appended to it. The numbers are simple. The revenue reduction was a trillion dollars over five years from the tax cut. Half of it, $500 billion, was for the rate reduction. The other half was for oil depletion incentives, real estate tax breaks.…

reason: So in other words, you're giving back half of that through goodies.

Stockman: Yeah. And so we ended up reducing the revenue far beyond what was feasible, even if there had been a determination to really cut spending. But what happened subsequently was almost no spending was cut, and the defense budget soared out of control.

We knew going in that there was a commitment by President Reagan to rebuild defense capability. But what happened in the early days was that the Pentagon distorted campaign promises for real growth of 5 percent [in military expenditures], which they then raised to 7 percent—and Reagan went along. And then they started it from a much higher base, which is to say, a supplemental bill. And as a result of that, defense spending got totally out of control.

reason: Even though nondefense discretionary was coming down?

Stockman: A little bit, it did come down. But we cut very little out of the entitlements, other than some things that were appropriate and have survived—food stamp reform and AFDC [Aid for Families with Dependent Children]. But the middle-class entitlements weren't cut, the whole complex of veterans' programs weren't cut, agricultural subsidies were not seriously tampered with. As a result of that, we may have gotten a few tens of billions annually of savings, but over time most of that crept back in.

reason: Reagan was famous for saying that government wasn't the solution to the problem; government was the problem. Why wasn't he more skeptical of Pentagon claims of what they needed and of where their financial estimates were coming from?

Stockman: That's one of the mysteries of the time, I guess, and it's one of the factors that led to the utter failure of spending control. He was utterly uninterested in any detail of the defense budget, of any of the claims for dollars made by the Pentagon. He gave them a blank check, without question, and that had a two-fold effect. One, it ballooned spending just as we were massively reducing the revenue. But second, it created an enormous political impasse. And that is, the spending increases were so huge in defense that it became almost impossible to get anybody to look at you with a straight face on Capitol Hill and say we're gonna go after the food stamp program or school lunches, when you're just showering tens of billions of dollars on ammunition accounts and spare parts replacements and a massive expansion of the Navy, which was totally uncalled for.

reason: Was the defense buildup necessary in your mind to winning the Cold War?

Stockman: I don't know. Someone said that the SDI [Strategic Defense Initiative] was never a program, it was a speech, but the speech was enough to make Gorbachev realize that it was game over. But my view is that communism never worked. The Soviet Union was a house of cards from day one in 1917. If we had really believed our free enterprise principles and our understanding of a free society we would have realized in 1980 that the Soviet empire was going to collapse sooner or later under its own weight, and we didn't need to try to spend it into collapse because it was already happening. So I don't buy the idea that this huge Reagan defense buildup was what allowed us to win the Cold War.

Someone said that in the 1980s we were in a race with the Soviet Union to see who could reach bankruptcy first. They won by a hair.

reason: Between '81 and '85, the Reagan administration basically doubled the national debt. You left the White House in '85. By '88 it had gone up about two-and-a-half times. What would you have done differently, knowing how things played out, if you were starting again as budget director in 1981?

Stockman: Well, I think you would really have to sit down and make some very large and honest cuts. And that is, how much defense do we really want? Let's lay it out, let's justify it, let's analyze the tradeoffs. That's one big piece of the state.

Then, what is the welfare state that we're going to keep? And if that's 20 percent or 24 percent of GDP, then what is the optimum tax system that will raise 20 percent or 24 percent? And therefore, if we need to lower income taxes—which I believed at the time, and still do for incentive purposes, or because of bracket creep—then what alternative revenue mechanism, such as the value-added tax or some other consumption-oriented tax, do we need to put in place to fund the government we've concluded we need?

reason: Why don't we have those conversations about defense? Defense spending has gone up tremendously —about 75 percent in real dollars—in the last 10 years.

Stockman: I think it's partly the way the whole political debate has evolved. The last honest war president was Truman, surprisingly. When the Korean War budget ballooned, he demanded that Congress institute major tax increases—excise taxes, income taxes—to pay for the war on a pay-as-you-go basis. Now, I'm not sure we ever accomplished anything useful in the Korean War, in light of history. But he was right: We always should have had the principle that if you're going to have a Vietnam War or a Gulf War I or an Iraqi invasion, then attach it to war finance, to the taxes needed.

I think you'll get a better decision. People will ask, do we want to spend a hundred billion dollars on wars of occupation in places that are the ends of the earth and not strategically important?

reason: Reagan was very much a child of the Great Depression and of World War II, an era of real privation. The baby boom came along in a radically different world. Even in the mid-'60s seniors had a much higher than average poverty rate; now they're far below the average poverty rate. Isn't it time we restrike this intergenerational entitlement?

Stockman: I think that conversation will happen.

reason: Is that what the Tea Party is about?

Stockman: Maybe that's a tiny glimpse that the conversation is starting. I don't really think the Tea Party is that coherent. I think it's simply more reaction to the economic turmoil that's occurred, the fear that's been generated on Main Street, and the appropriate antipathy that's developed towards the crony-capitalist policy of bailing out anybody that's big and strong like GM and Goldman Sachs. But beyond that, I don't think the conversation has really started, although the facts are that the current generation of workers is going to be turned into tax slaves, just like the workers in Ireland today are finding out that they are. That will have to change, but it will only change when the crisis comes. It's going to be a very bad hair day, but it's unavoidable.

reason: Do you see anybody in the political arena who seems to get what you're talking about?

Stockman: I think the harder problem is that our monetary system is out of control; our money printing is destroying and distorting and contorting our economy. It's leading everything to a kind of casino speculative system, not a sustainable, productivity-based growth system. There's only one guy who understands it, and that's Ron Paul.

reason: He's newly ascended in terms of power. Do you think that could be the beginning?

Stockman: Maybe it'll begin to disinfect the process. Maybe it'll begin to shed some light on all the pretensions and the scholastic arrogance of the Fed's economists and the Federal Reserve itself. That may be at least a small step towards beginning to address the real problems in this country. 

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  1. Stockman admitted that Reagan's tax cuts for most Americans had been a 'Trojan horse' used to bring down the top rate.

    Because bringing down the top rate had nothing to do with the largest peacetime economic expansion in history? Or because Stockman believes that only the rich got richer?

    We can't cut spending? Yo' fuck Stockman.

    1. Why fuck Stockman, because he's right? We apparently can't cut spending based on the fact we haven't.

      1. Just because we haven't been able to cut spending yet doesn't mean it can't be done.

        How is Stockman "right" when Nick has repeatedly shown how you don't need to increase taxes to balance the budget? True, from Stockman's employers point of view, unlimited "revenues" are most preferable.

        1. Just because we haven't been able to cut spending yet doesn't mean it can't be done.

          Right; and just becuase we haven't created Utopia yet doesn't mean it can't be done. We just need the right people to lead us poor sheep to green pastures.

      2. Well that is good news...that means we won't die!

  2. the principle that budgets can be balanced only when revenues meet expenditures.

    Bullshit. Budgets are balanced by cutting revenue and talking about cutting spending.

    Also, cutting defense spending is less of a priority because the Pentagon isn't full of uppity poor people who need to learn their place.

    1. Needs more DURR and less HURR.

    2. Eh, I thought the DURR was about right. You have to be careful about overdoing it. The idea (I've been told) is to look like an idiot. Too much DURR and you give away the store.

      1. But the DURR is the real meat of the matter. The HURR is sort of the side-dish. The best scalloped potatoes ever can't salvage a terrible steak.

        1. Very true, but I'm sure you've heard the expression "small potatoes make the steak look bigger." That's an axiom of steroid users. And trolls.

          1. His name is Robert Paulson.

            1. Ah, the role Meat Loaf was born to play. You ever notice one of the rules of Fight Club was "no shirt, no shoes" yet Bob wore a shirt during his fight?

              1. His tits were big enough to be weapons. He wore a shirt in order to not have an unfair advantage.

                1. It might have been to protect himself. From two black eyes.

  3. If we are not willing to actually shrink government spending, he says, then we should pay full freight now, rather than forcing our children and grandchildren to foot the bill.

    This is enough to show that Stockman is an economic-illiterate.

    As has been demonstrated by Steven Landsburg (and no doubt many others), the only thing that matters (from the perspective Stockman brings) is how much you spend, not when you pay for it. You can do the math yourself, but it's pretty simple: you can cut taxes now and "pass the debt onto the grandchildren" or your can raise taxes now and "pay full freight" in the current generation, but each amounts to the same net wealth left for "the grandchildren." If you raise taxes now, you leave less capital and interest to the next generation (because it's confiscated now), and if you cut taxes now, you leave them more capital and interest with which to pay those later debts. It's a perfect wash.

    1. I thought you were quoting Steve Landesberg.

    2. Still pimping that get rich quick Keynesian scheme, I see. You know, the financing of government spending really does crowd out private investment, and it exacerbates even more pressure on actually meeting consumer demand during a down turn. Just sayin', Stockman is not the illiterate in anything here.

      1. Ah, but he is the illiterate. Taxes crowd out private investment to the same degree that government borrowing does. At the end of the day it's the spending, whether you finance it by taxes or debt.

    3. Not if you are paying interest on the debt and the share of the total that belongs to interest keeps increasing. Same as with a credit card. Except that I can't debase the currency and pay with cheaper dollars. I have to wait for the Fed to do that for me.

      1. Jeebus H. Christ but you guys are slow (and yes, I'm including sr7). Here's a hint for you: if you (Mr. Taxpayer) have $100 and you let it earn interest at 1% for a year, you'll have $101 after one year. That's the same rate of interest as the debt is accruing. So now, $100 of debt is also going to take $101 to pay back, after the same one year period. So, you can pay it now ($100), or later ($101), but in the latter case you, Mr. Taxpayer, has earned interest in the $100 you were allowed to keep (by not being taxed). Do I need to bring out the sock puppets?

        1. he's mentioned debasing the currency. So if inflation is approx. 3%, but you owe 1% in interest, then you will see a reduction in your debt. Sure, the amount will go up, but the value of it is lowered. So, you actually have lower debt. It works only if the interest is lower than the rate of inflation. Works great for those taking on debt, but it hurts those who save.

        2. So it doesn't matter how much the bank pays in interest on deposits or charges on loans as long as they only lend the same amount of principle?

          1. You can buy treasuries. You can loan (to the government) at the same interest rate the government borrows (from you). I thought this was obvious.

        3. If that taxpayer dies in July, than who meets his debt obligation come next January? The debt burden is still there, but he is dead. His kid then? His kid didn't vote for the maroons voting for this government like his retarded pop did, why does he have to fork it over when he was going to put that buck in his college savings fund. I guess it is alright that no one pays it, eh? Except, that is not how it works. It is an expenditure, and it is coming out of someone's behind, as I pointed out below:

          After that it was off the races. When the debt super-cycle apogee came in 2007, it took $4 trillion of debt growth to produce a gain of just $700 billion of GDP. At the point, the debt-to-income growth ratio had climbed to 6.0X, and shortly thereafter the man from Citigroup finally stopped dancing.

          You can't just keep kicking it down the road without there being consequences. How can you call yourself an economist and think like that, swifty?

          1. His kid didn't vote for the maroons voting for this government like his retarded pop did,

            His kid didn't vote for the maroons comprising this government like his retarded pop did . . .

            1. Your first statement made sense. Electors = maroons.

      2. That interest is just the way tracking time preference. In any event, you loose the PV of those potential investment dollars today. That's the actual cost of govt spending.

    4. Since you seem to think public debt is Thanksgiving gravy, here is a real economist, David Stockman, to explain the problem to you:

      But notwithstanding choice of stimulants, Republicans too believe that the U.S. economy is in a conventional business cycle, and that the rebound remains much too fragile to tolerate any jarring fiscal actions. Thus, the renascent Keynesian consensus will result in kicking the fiscal can down the road again and again.

      It is here that the true nightmare scenario arises ? owing to the possibility that this mainstream outlook is completely erroneous, and that the nation's deep economic ills are rooted in the massive excess debt burden accumulated on the U.S. balance sheet after 1971. In that event, we would be in the midst of an Austrian debt deflation, not a Keynesian cyclical rebound.

      From a fiscal perspective, a prolonged debt deflation would be the coup de gr?ce. That's because debt deflations crush nominal GDP growth, owing to the evaporation of credit-fueled additions to spending. In turn, low nominal GDP growth is bad news for revenues because what we tax, obviously, is money incomes.

      Moreover, the actual GDP data suggests that debt deflation is already resident in the numbers. Total U.S. credit market debt essentially stopped growing in late 2007 at a level slightly above $50 trillion compared to a $14.3 trillion level of GDP. During the three years since, total debt growth has been at a tepid 1.5% annual rate ? with public debt growing much faster than this and financial and household sector liabilities actually shrinking.

      Not surprisingly, nominal or money GDP has gained only $530 billion during those 36 months, meaning that the annualized growth rate has been only 1.2 percent. There is no three-year streak that anemic anywhere in the data since the 1930s. Moreover, even if you allow for the alleged rebound since Q2 2009, the rate of money GDP growth has only been 3.8%, and was actually just 3.2% in the most recent quarter.

      By contrast, the new White House budget projects money GDP growth of 5.6% per annum over the next five years ? meaning that nominal GDP would reach $20 trillion by then. At a 3.5% growth rate, however, which is triple the growth rate of the last three years and in-line with the post-June 2009 rate of advance ? money GDP would come in at only $18 trillion by 2016.

      This $2 trillion variance might be written off to wild-blue speculation. Then again, at the current marginal Federal tax yield, the implied revenue shortfall is another $400 billion annually. Stated differently, the current policy deficit may actually be in the $2 trillion annual range after factoring in realistic incomes and revenues.

      The infernal engine of the dollar may thus have been doubly diabolical on the fiscal front. First, it hooked the American political system on the "deficits don't matter" theorem by eliminating the economically painful squeezes and drains on the monetary system that traditionally accompanied fiscal deficits.

      Secondly, to the extent that it fueled the debt super-cycle that swelled from 1980 until 2008, it generated a false prosperity and bubble-derived fiscal windfalls that have now evaporated.

    5. False prosperity, waahh?!? You ask in disbelief. Yes, indeed, to continue:

      Wall Street bulls and Keynesian economists ? to indulge in a redundancy ? insist that this extra $30 trillion of debt is no sweat. Presumably, they would otherwise not be forecasting 10 years of standard growth rates with no recession, and would not be capitalizing corporate earnings at the conventional 15X EPS.

      Put another way, by the lights of mainstream opinion, our recent parabolic departure from the golden constant of leverage apparently represents nothing more than a late blooming enlightenment ? the shedding of ancient superstitions about the perils of too much debt in households, businesses and governments alike.

      If this were true, it would be a pity. Had our benighted financial forebears only known better, they would have levered up the USA long ago ? producing unimagined surges of growth and wealth.

      Indeed, economic miracles like the Internet might have been generated at a far earlier time ? say in 1950, not 1990; and it might have been invented by Senator Albert Gore Sr. of Tennessee rather than his son Albert Gore Jr. of Hollywood.

      The alternative possibility, however, is that our forebears actually knew a thing or two about finance. Perhaps they understood that in not settling our accounts with the world ? we were merely borrowing GDP, not growing it.

      The numbers, in fact, suggest exactly that. During the era of the golden constant, about $1.50 of debt growth accompanied each dollar of GDP growth. By 1989, each dollar of GDP growth took $2.50 of debt increase, and by 1999 the ratio rose to $3.30.

      After that it was off the races. When the debt super-cycle apogee came in 2007, it took $4 trillion of debt growth to produce a gain of just $700 billion of GDP. At the point, the debt-to-income growth ratio had climbed to 6.0X, and shortly thereafter the man from Citigroup finally stopped dancing.

      That last is the important point that cannot be ignored. Public debt accompanied by the unreality backing monetary policy crowds out private growth.

    6. If that's the case then why run deficits? I thought the deficit was supposed to boost GDP at some future point. You're telling me all we can ever do is break even.

      I think you're assuming a perfectly efficient market. If its not, then goverment can only help if they can beat the market. Is that what you want? Government as day trader?

      1. What he's saying is not that deficits don't matter, but that when you create a deficit for gdp growth you're only borrowing your gdp growth; and when you borrow at a 6:1 ratio you're really getting f'd in the a

    7. More DURR and and less HURR

    8. Yeah, his reasoning is backwards. What is the value of paying the tab now if they just keep building it up higher for our grandchildren to deal with? Its entirely meaningless if we don't seriously revise our economic policies. For the sake of future generations a change in policy has to come first.

    9. Not at all correct Draco.
      Life and Government are the same you can't spend more out of the Left pocket than you have coming INTO the right pocket. No matter what dream land money you "think" you have coming in" tomorrow".

      Basically if you tie spending to income and cap it there unless your at war and have permission from the people to be at war, it will force politicians to have to make decisions that are good for growth of the economy and wealth at the same time, not crony Capitalism crap that has happened for the last several years. (bail outs, buy outs, and "reform")

      Face it this country must be run like a business. If not it will fail!

  4. Someone has dared to question St. Reagan. This injustice cannot stand.

    1. Well, I know I got all excited, then I realized the guy questioning St. Reagan wants smaller government, so it's a pyrrhic victory.

  5. If we are not willing to actually shrink government spending, he says, then we should pay full freight now, rather than forcing our children and grandchildren to foot the bill.

    So, Stockman would support not cutting a frickin' nickel, as long as we raised taxes enough to cover the outlay?

    For 2010, our annual fedgov outlays are roughly $3.7T, and receipts are roughly $2.2T. To increase receipts to $3.7T, we would need to increase taxes by 68%. And keep raising them every year as spending goes up.

    Does he seriously believe that raising federal taxes by 68% wouldn't vaporize the economy?

    1. I read the interview in the print edition, and my take-away was not that he's seriously saying raise taxes, but rather to stop lying to people, by charging them 60 cents for a dollars worth of government.

      1. That is my take also.

    2. I didn't read it that way. He said in several parts of the interview that he does support cutting spending, and he specifically called out defense spending, social security, agricultural subsidies, etc. I read that comment to mean that, if we are not going to cut spending, we should raise taxes to at least pay for it. And if it weren't for the fact that tax hikes have not been shown to increase revenue, I would agree with him.

      1. And if it weren't for the fact that tax hikes have not been shown to increase revenue, I would agree with him.

        That's where it really gets tricky. In the particular instance Stockman addressed, the charts I've seen show that the Bush tax cut did result in a loss of revenue, especially the middle class portion of the cut that all parties wanted to keep. On the other hand, higher business taxes do tend to be self defeating in the long run.

        Of course, I don't advocate raising taxes. I advocate getting rid of most government functions, as it will have to be done anyway.

      2. I would agree with him.

        I second that. People need to feel the consequences of the 'freebies' they *think* they are getting.

  6. Would you look at the crease on Reagan's pants? How can anyone say that isn't pure Presidential awesomeness?

    1. Where is this "crease" meme coming from?

      1. David Brooks had a perfectly silly article around the 2008 election in which he equated Obama's perfectly creased pants with the ability to be an effective President.

        He might have been trying to argue that it represented Obama's attention to detail (a conceit long since disproven, obviously), but regardless, he came off sounding like a star-struck fanboi who was as dazzled by Obama's media-created image as Peggy Joseph.

  7. Reading through the whole long article, it is clear that Stockman is advocating pay-as-you-go as a means of psychological pressure on the public to make more rational decision when voting because the "pain" of those decisions are felt now, not by hypothetical grand-children.

    I completely agree with this idea. It is not too far from proposals to move Tax Day nearer to Election Day or to eliminate withholding to turn a slow drip of money into a huge bloody mess of a check you have to write.

    1. Finally, someone else seems to get that the principle is essentially psychological. Economic models too often assume fully informed, rational actors, and we forget that people will quite often make irrational decisions when the impact is so far in the future as to fall on someone else.

    2. We too believe other people should pay as we go.

      1. How about you just go.... like off a cliff!

  8. David Stockman: The problem is that we've had a 30-year referendum on spending?every aspect of the welfare state.

    That's news to me. I don't remember ever voting on a referendum on cutting spending. He's just a member of that segment of the political class who claims to want limited government while blaming voters for not being willing to accept cuts in government spending and intrusion as if the Red and Blue ever give voters a real choice. Stockman loves Big Government. Insincere prick.

    1. your flawed assumption is that "we" = "you". You know at some point people really liked the idea of, say NCLB, PPACA, MMA, OIF, OEF. The public at large was complicit with these excesses. I think TARP was really the only thing that met with large scale protesting.

      1. Bullshit. The really big political waves during my lifetime were Reagan's Presidential elections, 1994 and 2010. In all cases the message from voters was "Government is too big and intrusive" and in all cases (including 2010 it looks like), the political class sabotaged any real effort to limit the expansion of government. Every government program has its supported leeches. Any effort to end a government program experiences resistance. That resistance is always treated by most of the national media as broad, deep, insurmountable and politically dangerous to ignore. Polls are generated, sob stories are invented and publicized, the usual-suspect pundits issue dire warnings about negative political consequences that will leave the proponents of reform in the political wilderness for decades. Virtually all of this resistance is manufactured astroturfical nonsense, but it is used by statists to constantly insist that the American public really does love big government and true reform is politically impossible.

        Also, it is rare that, when a program is first proposed, politicians stand up and forcefully oppose what is being advanced, effectively explaining why the new program is ideologically a bad idea. The pro voices are usually loudest and the program gets pushed through without any real public input.

        1. The problem, it seems, is that the public doesn't have the guts to stick with that message for more than one election cycle. Perhaps 2012 will be different...

    2. By voting for us, it's the polar opposite of a referendum on cutting spending.

  9. This was my take away as well. I don't think he is advocating a 90% top marginal as much as "raise taxes to pay for it then see how fast the cuts come" approach.

    I could be wrong...but that rarely happens, unless you talk to my wife.

    1. I think you're right, and I largely agree with stockman. I tend to advocate a flat tax, which will raise taxes for the rich and the poor (but not the middle class so much).

      1. I tend to advocate a flat tax, which will raise taxes for the rich and the poor (but not the middle class so much).

        And cut the deductions. Keep it simple. One or two brackets with a few basic deductions. The problem is that after a while the deductions and multiple brackets will just creep back in.

  10. This article piqued my interest because I caught "Reagan/GOP/Defector/disenchanted".

    Then I read this and realized that I can't abide this man or his ideas:

    He is still against the welfare-warfare state, and he still thinks government should be cut down to size.

  11. When Stockman talks about raising taxes he is simply representing his employer.

    Blackstone is the world's largest independent alternative asset manager, serving the investment needs of leading public pension funds, academic and charitable institutions and other investors for more than 20 years.

    This small quote from Blackstone's web site would have placed this article in its proper perspective. A rent seeker looking for the government to collect more rent.

    1. Even if he's just talking his book, I can see his point--that if you want goodies, housed in a huge welfare/warfare/bureaucratic complex, you have to be prepared to pay for it. It's immoral to pass on a trainload of debt to future generations just because the current ones didn't want to feel the pain.

      The most idiotic belief of the left is that "the rich" have enough money to pay for goodies for everyone in perpetuity, since they have enough to pay for themselves. For all their posturing about being "forward-thinking," most progressives are really medievalists at heart.
      They refuse to take the last 90+ years into account, thinking, "Well, if other countries can take in over 20% of GDP in taxes, we can too!", disregarding the fact that it took an unsustainable economic bubble, resulting in a sub-4% U3 driven by revolutionary technology and increasingly widespread access, to even get to that threshold since the passage of the 16th Amendment. They don't account for human behaviors, nor current geopolitical or economic realities, as if America's growth in the 1950s happened in a self-sustaining vacuum.

      The point is that there won't be an honest conversation on the ability of our government and our economy to maintain itself until EVERYONE, from the poor all the way up to Bill Gates, is forced to foot the bill to sustain it. When people can't afford to put food on the table because 70% or more of their paycheck is going to keep the deadbeat class in government cheese, it won't matter at that point how hard professional activists and the media push the idea that cutting government spending will "hurt" the disadvantaged, because the disadvantaged will be paying for that, too.

  12. So, you can pay it now ($100), or later ($101), but in the latter case you, Mr. Taxpayer, has earned interest in the $100 you were allowed to keep (by not being taxed). Do I need to bring out the sock puppets?

    Wait, what?

    I'm not sure how Punch and Judy can help you.

  13. I feel silly even mentioning this, but


    Fucking hell.

    1. True. When I spend money I earned, I get something I value at least as much as what I spent. When the govt does it for me, I get nothing and society gets less than full value. Tax dollars are not spent that carefully.

  14. But...but...Reagan Revolution! He got the government off our backs! And defeated the Soviet menace!


  15. Always cut spending, never raise taxes.

  16. Stockman is allowing himself to be used as a poster boy of the leftist by calling for repealing the Bush tax cuts.

    I don't know how many times I've heard some leftists throw that up.

    If Stockman wants to get real on taxes, why doesn't he call for increasing taxes on the approximately 50% of the population who aren't paying any taxes at all?

    Those folks are certainly sucking up government services and subisidies.

    Cut the subsidies out and make them start paying up for government the same as the people who already pay taxes.

    1. Because what this country needs is even more regressivity.

    2. I suggest whenever Stockman is thrown in your face for being in favor of repealing the Bush tax cuts you suggest they read the rest of his statement. Saying "I hate fire" means something very different than "I hate fire in my kitchen."

  17. You gotta love Stockman. Decries the Fed's easy money, after working years on Wall Street -- the big beneficiaries of the Fed. BTW, I don't think Ron Paul would raise taxes. Dr. Paul understands the problem is spending.

    1. I would recommend looking up the Henry Hazlitt Memorial speech from which I quoted extensively above. The debt burden is indeed dampening the private economy to a greater extent than even the tax burden. I don't think it has really sunk in for most of us. That really is how bad the crowding out effect is now. I don't recommend increased taxation, and I understand those who are angry at Stockman for letting the left media mischaracterize the substance of his critique in order to justify government 'largess'. However, the fact the Federal Government generated more debt in the first two months of this year than it did in all of 2007 is a much more damaging concern than a return to Clinton era taxation if you weigh those two factors.

      It is not binary, of course, and that is where Stockman's critics have a valid point. Cut taxes, cut spending considerably more than you cut the taxes, eliminate regulation and fire most of those who work in Washington and this nation might actually have a chance. If you only raise taxes but not eliminate the problem of spending, well there is not a chance in hell I'm keeping my eggs in the American basket even if the majority can somehow live with the consequences of doing nothing (essentially raising taxes would be because it encourages more spending).

      1. "a return to Clinton era taxation if you weigh those two factors."

        A good retort to throw in the face of liberals who spout returning to Clinton era tax rates would be to say only if we can return to Clinton era spending levels to go with it.

        If the principle is good enough for one side of the equation, it's good enough for the other side as well.

    2. As a bonus, in the section I didn't quote from, he shreds TARP to pieces.

  18. David is right about the counter productive nature of printing. The free market uses price signals to determine what is to be made. If prices are distorted by printing, the free market does not work properly.

    If printing confiscates the majority's IRAs and pensions, the majority is dependent upon Social Security. If printing lowers productivity, there are simply not enough resources left to fund Social Security at a reasonable level. The printing press is creating a dismal future for the country, all to generate a small amount of useless activity today.

  19. Stockman comes across as a "true believer", disappointed in his Messiah. Unfortunately, what he believes isn't necessarily true. He loses credibility when he talks his book. Gold standard, simple and wrong headed. Look at the series of economic calamities in the late 1800s and early 1900s.

    In my opinion, although I agree with most of Reagan's policies, his primary failing in the economic realm was believing "people" act rationally as a group. When I have less money coming in (less revenue in terms of the govt), I spend less. That happened to an extent under Reagan, as the belief in Big Government was quetioned, but evidentially not so much any more.

    1. What would you like me to look at about the economic calamities of the 1800's and early 1900's? What about that one economic calamity of the 1930's?

      Please consider that you have no objective way to compare economic calamities between post-1913 and pre-1913. It's merely an accounting trick brought about by Mr. Wilson.

  20. I agree with much of what Stockman says. What he fails to note is the effect of low earned income tax rates on economic growth. How does he explain the great prosperity which lasted from 1982 right through the 90's and helped everyone including Bill Clinton? His retrospective on both Korea and Vietnam are also lacking any humanitarian or economic contexts. I see a guy who says a lot of interesting stuff but whose own rigidity and blind spots keeps him from any mainstream movement which could restore real job creation and real economic growth.

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