'Reaganomics' pioneer faces jail term for fraud

Once he was the poster child of "Reaganomics", the workaholic whizz-kid who masterminded the trickle-down, supply side economic revolution launched by the 40th US President, before he spectacularly fell into disgrace with his boss.

Now, however, David Stockman risks a far greater disgrace: conviction and a prison term for fraud, false accounting and obstruction of justice in the downfall of the car components company he ran before it went bankrupt in 2005.

That strange circle was completed on Monday as Mr Stockman, 60,and three fellow defendants surrendered to a federal court in Manhattan. There, they entered not-guilty pleas to charges that carry a maximum of 30 years in jail.

The alleged offences relate to the management of Collins & Aikman, which was acquired in 2001 by Heartland Industrial Partners, a private equity firm founded by Mr Stockman. Four years later, Collins & Aikman went bankrupt, brought down, as Mr Stockman claims, by the larger crisis engulfing the Detroit car-makers that were its prime clients.

Mr Stockman and his co-defendants are accused of duping potential lenders into committing funds into a failing Collins & Aikman by cooking its books to make it look much sounder than it was.

But Mr Stockman denies any wrongdoing, brushing off the charges as "hypertechnical" and noting that he lost a great deal of money trying to save the business.

"I moved into a motel next to the headquarters, worked long hours without compensation, and personally absorbed millions in company expenses that Collins & Aikman could not afford to cover," he told reporters, emphasising how his case bore no resemblance to the frauds at Enron, Worldcom and the like, where the protagonists made fortunes as their companies collapsed.

Whatever the truth, it is a far cry from a quarter of a century ago, when the then two-term Republican Congressman from Michigan was made Director of the Office of Budget and Management at the White House at the age of 34.

In that post, he masterminded the Reagan economic strategy which was based on tax cuts and high government spending, particularly on defence.

Dismissing the short-term growth in deficits, Mr Stockman argued in public that the stimulus would boost economic output, generating greater prosperity for everyone, as well as extra tax revenue to balance the budget.

But he had private doubts and then made the error of confessing them to a journalist, who published them. President Ronald Reagan, in Mr Stockman's words, then "took him to the woodshed". In 1985 Mr Stockman left the administration and made a fortune on Wall Street. He also distilled his White House experiences into one of the political bestsellers of the 1980s, The Triumph of Politics: Why the Reagan Revolution Failed, which laid bare the machinations of Washington.

His original theories, however, live on. Huge tax cuts and big boosts in Pentagon spending are hallmarks of the George W Bush White House and, after initially ballooning, the federal deficit is indeed contracting, as "Reaganomics" used to theorise.

Critics are now asking the inevitable question: did Mr Stockman use the same techniques in business that some say he once employed at the White House?

"They resorted to lies, tricks and fraud," Michael Garcia, a federal prosecutor, said, adding that "in the end, Stockman and his co-conspirators were unable to hide the truth" at Collins & Aikman.

Which is more or less what Democrats and fiscal conservatives used to say about President Reagan and the Stockman-led economic policies of a generation ago.