American economic historian Michael Hudson is one of the most prominent and considered of the neo liberal agenda critics (although he prefers to use post-classical to neo liberal). In a long but reasoned speech in Australia in 2009 he provides plenty of evidence against the logic behind asset sales complete with historical background. While both Labour and National may find history inconvenient to their economic agenda, Hudson exposes the lies and half truths, the hijacked and bastardised theories of the past and perhaps most importantly when looking for alternatives for the future, the capture and corruption of economic academia, the high priests used to provide intellectual horsepower to what Hudson repeatedly refers to as “junk economics”. Here are some selected extracts.
“Debt pyramiding is depicted as generic “profit,” as if financial engineering were industrial engineering. And the symbiotic finance, insurance and real estate (FIRE) sector is reported as part of gross domestic product (GDP), not as extracting what actually are transfer payments from the rest of the economy.
An economy used to be measured as GNP (Gross National Product) but was changed as part of the deregulatory reforms to the cruder GDP (Gross Domestic Product) Convenient as the key difference is that GNP measures and deducts transfer payments abroad ie dividends to overseas shareholders like banks which have been growing and would thus present a far less buoyant picture of the economy than GDP, probably even showing it going backwards. Likewise measurements like unemployment have changed to create a rosier picture. If you hear the refrain again that unemployment today is not as bad as during the great depression this is true, but using the same measurement used in the 1930’s would make it significantly higher than today’s official figure. Apples for apples!
Alternatively, finance claims to be a necessary ancillary to the industrial economy. This was the rationale for the $13 trillion Bush-Obama bailout of Wall Street – as if the economy could not recover without making financial speculators whole. According to this trickle-down logic, labor needs its employers, who in turn need their bankers and bondholders. Likewise, renters need their landlords who need mortgage lenders. Populations need governments to run up debts to subsidize (but not regulate) the financial sector to extend credit (debt) to the economy.
How often do you hear that banks are vital to the national and global economy and that everything will collapse if they are not protected and bailed out – the Armageddon threat. But the whole thing is premised on the role of credit, that extending more and more credit is the only way to grow an economy. Unfortunately there is so much credit now that this is partly true and can’t be resolved without some pain and economic dislocation, yet the alternative of continuing down the same route proposed by National and Labour with a tweak and fiddle here and there will lead inevitably to another GFC of even bigger proportions.
This kind of junk economics was almost unthinkable a century ago. Classical political economy was evolving from the “Ricardian socialism” of John Stuart Mill to the industrial socialism of Marx and the Progressive Era’s Social Democratic and Labour parties. But today these parties endorse a tax shift off property and finance onto labor and consumers.
Tony Blair’s British Labour Party has outdone Margaret Thatcher’s Conservatives in privatizing railroads and other public infrastructure in the notorious Private Finance Initiative. An anti-government (and indeed, pro-rentier) model leaves resource allocation and planning centralized in the hands of a financial sector being deregulated rather than steered along the social lines anticipated by economic futurists a century ago.”
The Blair Government in Britain and the Keating Government in Australia mirrored the Rogernomics reforms here in New Zealand – Labour parties adopting neoliberal policies especially privatising public assets and deregulating the financial industry. While all of them have softened their policies for public consumption, basically they all remain, the New Zealand Labour Party included, fully committed to the neoliberal agenda. Labour and National sign from basically the same hymn sheet when it comes to economics.
The classical distinction between earned wealth created by one’s own labor, and unearned or socially created wealth obtained without one’s own effort or cost – by inheritance or special privilege appropriating what nature, the public sector or asset-price inflation provides – points to an economic policy of taxing away income not necessary for production and distribution. This fiscal reform triggered a reaction by vested interests receiving such gains….
Rather than describing how economies worked, the new doctrine was based on hypothetical reasoning more akin to science fiction than descriptive of the real world. It avoided dealing with unearned wealth and economic parasitism by assuming that all income was earned productively.
This is the familiar complaint against GDP as an economic indicator of actual output. It leads to productivity being defined as output (the sum of all costs) divided by labor time.
A perverse result of this methodology is that labor productivity in the financial service sector is deemed to rise in proportion to the wages and salaries paid out. When bankers pay themselves more, their productivity is deemed to rise.
This is where the idea of meritocracy springs from. The salaries of the financial sector are earned and rational. Who cares if they don’t “make” anything. They create “wealth” especially for themselves in the form of non returnable fees, salaries and bonuses, although their clients don’t always fare as well. Get in – make your fortune – get out is the modus operandi. Screw up, get fired, often with a golden parachute. Even without a healthy severance payment there is no clawback of salary and bonuses already in the pipeline. That was “earned” (even if your clients lost all their money) All care and no responsibility. The landlord who buys several houses and sits on them for capital gain, sometimes ignoring maintenance and the welfare of tenants is as meritorious as the entrepreneur who builds a business, employs people and sells their products.
It also portrays government spending, subsidies and taxes only as deadweight, inherently unproductive. Yet throughout most of history the public sector has provided basic infrastructure investment in roads, railroads and bus systems, education, research and development to enable economies to obtain basic services most efficiently at minimum cost and on fair terms.
The largest capital investment in nearly every economy consists of public infrastructure and enterprises such as have been privatized on credit since 1980 under “free market” carve-ups of the public domain. Economies have been turned into “tollbooth” opportunities for the buyers of hitherto public monopolies to extract access (“rent-seeking”) charges in what is, from the overall economic vantage point, a zero-sum set of transfer payments.
Marginal utility theory leaves no room to analyze this appropriation of wealth from the public domain. It depicts consumers as choosing from an existing menu, without discussing the advertising, deception, rent extraction and price fixing involved in real life. The resulting model is based on a crudely quantitative analysis of satiation of food or other commodities – but not wealth addiction to monetary and property aggrandizement.
Partial asset sales anyone? The problem many have with floating of publicly owned assets on the share market is the government is trying to sell to the public (as well as corporates) shares in assets they already own as taxpayers and citizens. The government can argue that the money received is also for public benefit (thus the shifting rationale to spend some of it on health and education assets as well as pay down debt) But these assets are natural monopolies and will arguably be sold too cheap. The reason the state has usually built things like ports, railways, dams, roads etc is because firstly, as Hudson points out, it is the most effective way to provide widespread and cost-effective services to the whole population. Not all roads or rail lines may be “profitable” but it has been decided it is in the greater interest for smaller towns to have access to transport. The private sector by itself could not afford to build, maintain and operate most of the assets being sold. It needs to wait until the general taxpayer has done so before moving in to cherry pick the most profitable assets and ignoring or discarding the rest. Most big assets would be too financially risky for the private sector to build themselves otherwise they would already have done so. Ditto Convention Centres requiring a subsidy or Private Partnership roads etc in Australia and Britain needing to be underwritten by the government.
The result is a view of prices between individual buyers and sellers as heuristic stand-ins for relations between consumers and producers in a more realistically complex economic system. Credit is treated as if “savers” defer consumption so that consumers can “enjoy” more in the present.
There is no acknowledgement of the fact that banks create interest-bearing loans freely, or of a wealthy rentier class (and financial firms, hedge funds and kindred money managers) whose aim is simply to make more money faster than anyone else, not to consume more.
Austrian theory attributed payment of interest by individuals to “time preference” – an “impatience” to consume in the present rather than in the future. Yet most consumer borrowing is to obtain essentials: mortgage loans for housing, student loans to get education to qualify for a decently paying job, auto loans to get to work, and credit-cards to buy such basic necessities as food, transportation and clothing. Interpreting this consumer demand in terms of impatience shifts the blame for consumer debt off the economic system as a coercive trap.
Most of the population still believe a bank is merely and intermediary between savers and borrowers. We have also become accustomed to using credit to pay for everything. The neoliberals of Labour and National argue that reducing government expenditure on social services allows them to reduce taxes. But what if the middle class and poor are just spending any paltry tax reductions on interest payments on loans they have to take out for the services the government used to supply from taxation? In one the tax goes to the govt, in the other the “tax” is in the form of interest to the bank. What’s more, because deregulation lets banks create credit freely and at no cost, the “tax” burden in the form of interest actually grows as easy credit allows the price of housing in particular to be bid up faster than wages grow. The result a declining standard of living and declining consumption absent the easy availability of yet more credit. Neoliberals will claim free markets and individual choice but using housing as an example again, shelter is an essential not a discretionary item.
One can understand why right-wing parties avoid making a value judgment between earned and unearned income or acknowledging wealth addiction, predatory behavior and privatized rent-seeking monopolies extracting economically unnecessary charges.
But why have the Labour and Social Democratic parties dropped the value judgments and scope of classical economics that made it so effective a force for reform and so empirically and scientifically realistic?
The most interesting economic analysis concerns the forces that are transforming financial, fiscal and social structures. How should the tax laws, for instance, be changed to promote prosperity and justice? The fact that Social Democratic and Labour parties have not proposed an alternative would seem to be a major reason for their declining popularity at the polls.
Why should anyone vote for a party that doesn’t have an alternative to a system that nearly everyone except academic economists can see is radically malstructured?
Labour’s support for neoliberal ideals and lack of alternatives just make it look like National in drag and are the reason they will eventually fade into political oblivion. The Green Party now provides the only demonstrable systemic alternative to National. Even if many think the system is rotten, they will continue to vote for National out of misplaced optimism and fear of the unknown. Of the two status quo parties National is the most attractive at the moment because of its leader with the “midas touch” who many hope will translate his personal wealth into national prosperity. The irony that his personal wealth was gained from inside the very financial system that has bought the global economy to its knees seems to be lost on these voters.
Popular opinion accepts that it is quite all right for the government to create credit out of thin air to match foreign exchange inflows (for credit that foreign commercial banks create “out of thin air” on their own computer keyboards). But that if a government creates money for domestic spending, commercial bankers accuse this of being inherently inflationary and undesirable.
The reason for this policy asymmetry seems to be the desire by private bankers to open up high-interest foreign-exchange markets such as Australia (and New Zealand) for arbitrage rake-offs, while keeping domestic markets for themselves rather than having governments create their own credit.
In principle, the effect of public and private credit creation should be identical – if governments and commercial banks lent for the same thing. But they don’t. Commercial banks finance the purchase of property, currency speculation (for which it seeks government credit creation to finance this speculation) and domestic bond financing (where it wants the government to leave the field free for private banks to create credit and lend out at a mark-up).
Governments create money to spend on domestic production and consumption, paying income to wage earners and buying goods and services.
This is the argument for Public Credit I covered in an earlier article. Banks create credit and loan with interest is good but governments create money and spend directly into economy bad.
The history of economic thought was taught as a core course when I attended graduate school in the early 1960’s. It has been replaced by mathematical economics, trivialized by being based on conceptually questionable, ideologically based statistical categories. My most imaginative students at the New School where I taught in New York City dropped out of the discipline and went into sociology or something else. They wanted to study economics to discover how the world operated, but were disappointed to find that this is no longer what the discipline is about.
The situation is worse for those students who stayed in the field and sought academic positions. Promotion is conditional upon publication in “vetted” journals. The key publications are controlled censorially by an intellectual inquisition that blocks any critique of pro-financial free market ideology.
Free market ideology ends up as political Doublethink in countering any freedom of thought. Its remarkable success in the United States and elsewhere thus has been achieved largely by excluding the history of economic thought – and of economic history – from the economics curriculum.
In other words if you want to work in certain jobs at a certain level, don’t rock the boat! It’s bad for your income and promotional prospects. You may even lose your job if you are too critical and draw too much flak. Charles Ferguson did a great job of exposing the intellectual dishonesty of the economic academic elite in Inside Job (2010). Watching Glenn Hubbard in particular hang himself was a highlight of the documentary.
Classical reformers sought to free industrial capitalism from the legacy of feudalism. Above all were the vestiges of landownership created by the warlord invasions of England and other European realms. An aristocratic rentier class lived off its ground rent, while governments ran into debt to international bankers to wage foreign wars, and then preserved their credit rating by creating and selling off private monopolies to pay these debts….
By privatizing monopolies from the public domain and cutting taxes on rent-yielding wealth (real estate and financial privilege), the policy of Margaret Thatcher and other neoliberals since the 1980’s is just the opposite of what Smith and other “original” liberals represented.
Compounding this, the World Bank and International Monetary Fund have rendered economies almost hopelessly high-cost by imposing the Washington Consensus policy on debtor countries throughout the world, most notoriously on the post-Soviet states since the breakup of the USSR in 1991.
Economies are being sacrificed to pay creditors – and indeed, to vest a post-modern rentier class – by using tax systems and privatization sell-offs as a policy aimed at squeezing out revenue almost as if the subject economies were conquered militarily.
The alternative to today’s neo-rentier (I might almost say neo-feudal) economies would be to default on loans to the financial class for whom the IMF and World Bank act as collection agents.
You could argue that the English banks are doing what hundreds of years of feudal repression and occupation could not do in Ireland, or the German banks trying to finish the WW2 occupation of Greece. The financial and political elite in each country have acted as the collaborators, deregulating, not paying their taxes, bankrupting their government, granting themselves privileges, before finally abandoning their fellow citizens to the mercy of foreign banks and privatising assets at knock down prices.
Short of default, governments face a choice between raising real estate taxes (which would threaten the profit margins of land speculators but would reduce housing prices by leaving less rental income to be capitalized into bank loans), raising sales taxes (which would drive buyers to other states while eating into labor’s net purchasing power and thereby shrinking local markets), raising income taxes (driving employees and companies to move out), or selling off public infrastructure.
The logical implication is that economies must shrink and shrink until such time as they finally write off debts that can be paid only by polarizing the economy between increasingly wealthy creditors at the top of the economic pyramid, and an increasingly indebted population at the bottom, reduced to debt peonage.
This either/or choice when it comes to confronting the all-devouring financial dynamic of debt explains the political warfare of our post-modern age. Governments risk pariah status and currency raids, right wing coup d’êtats and assassination of their leaders, if they hesitate with more than a blink of an eye to sell off the public domain to privatize rent-seeking monopolies.
The effect is to raise the prices that people must pay for essentials as the privatizers erect tollbooths at key access or choke points to roads, the communications spectrum, water and other basic needs.
This neo-rentier phenomenon is spreading throughout the world. Sponsored mainly by the financial sector, it is a resurgence of what classical liberals wanted to avoid by their policy of keeping prices in line with technologically necessary costs by taxing away economic rent or (in the case of public utilities) regulating administered prices to prohibit such charges. Today’s policy gives tax breaks to an unnecessary and parasitic rentier class.
The latter’s response was to promote a doctrine misleadingly called “neoliberal.” Instead of freeing markets from rentier charges as the original liberals sought to do, neoliberal policy imposes these charges on markets.
Today’s anti-classical doctrine depicts rentiers as playing a positive role, increasing “value added” by squeezing out higher rental access charges – as if privatizing public assets was more efficient rather than less so on an economy-wide basis.
The cost savings consist more of shifting from hitherto normal working conditions to dangerous cost cutting that verges on asset stripping – while CEO mega-salaries and bonuses, interest and management fees to parent financial conglomerates end up absorbing most of the operational cost savings.
This bankers’ eye view of the wealth of nations is a travesty of what Adam Smith advocated.
Poor Adam Smith, he of the most abused metaphor in history – the “invisible hand”. Neoliberals don’t mention his advocacy of land and inheritance taxes (taxing “unearned” income). Despite the shambles of the 1987 share market crash, the debacles of DFC and the BNZ, Air NZ and NZ Rail, excessive dividends to Telecom shareholders and low reinvestment, private sector “discipline” and “efficiency” is preferable to state ownership and justification for inflated salaries and bonuses. It would be laughable if it didn’t affect us all as taxpayers and citizens.
Capitalizing rent-extraction privileges and selling them off to buyers on credit – whose interest charges are treated as a tax-deductible cost of doing business – builds in a rent overhead that adds to society’s cost of living and doing business. The financial sector encourages prospective buyers to bid against each other, with the winner being the one who agrees to pay the highest proportion of rental income to the banks or other creditors.
This turns monopoly rent into financial overhead, much as mortgage lending does in the case with land rent.
Buyers on credit are willing to pay rental income to bankers because they hope to come out with a capital gain. Their first policy is to squeeze more money out of customers – rental tenants or the users of the basic infrastructure being privatized.
The shareholders of any privatised state asset are looking to maximise their return. In recent years this has included the government as it sought to supplement its official tax take with its increases in unofficial “tax” on electricity in particular. Give with one hand (income and company tax cuts) and take back with another. Unfortunately electricity is an essential not discretionary item. The bailouts of privatised “strategic” assets like Air NZ and Tranz Rail hopefully have not set a precedent for any future difficulties other privatised state assets will encounter. Maybe if the government was smart it would play the private sector at its own game, “pumping and dumping” the assets and buying them back or nationalising them for peanuts later. Air NZ and Tranz Rail would have been much cheaper for the taxpayer from the receivers.
So why are employees working longer hours each week and more intensively? Why are entire families – wives as well as elderly men – being forced into the labor force instead of having the carefree life that technology seemed to promise? Why are people being driven deeper and deeper into debt and losing their homes instead of saving more? Why has home ownership, education, medical care and retirement involved a proliferation of debt pollution?
Nobody expected this. People are suffering and see that something is wrong. But nobody has explained why it does not have to be this way. Indeed, to do so is not a path to career advancement in today’s world – certainly not to public policy-making positions or to applause by judges placed in the leading foundations, universities, political and business centers that shape popular economic ideology.
Economic futurists talked about the promise of technology, not about the threat of debt, monopoly power and a resurgence of the old vested interests.
And nobody expected the academic curriculum to drop the study of economic history and the history of economic thought to eradicate warnings from the past about the road to debt serfdom along which today’s world is careening.
Indeed. By now we were supposed to be working less, more leisure time, robots, super efficient transport systems, modern sustainable houses…. Instead first came the two income household as wives, some willingly, some not were integrated into the workforce to maintain lifestyle. Then came the longer hours and finally when even two income earners working longer and longer hours wasn’t enough to keep up, financial deregulation bought easy credit. Can’t earn and save it, borrow it. Now that we are bouncing along the limits of how much debt we can service, what is next?
The great problem of our time is the financialization of our economic life – our business and corporate enterprise, our personal life and the government itself. The debt problem is the most burdensome since medieval war-torn states and ancient Rome (and even then, there was no corporate debt; tangible capital was debt free).
By financialization I mean capitalizing every form of surplus income and pledging it for bank loans at the going interest rate: personal income over and above basic expenditures, corporate income over and above cash flow (that is, after meeting the break-even cost of doing business), and whatever the government can collect in taxes over and above its outlay.
From the banker’s point of view, equilibrium is reached at the point where the entire economic surplus is committed to be paid out as interest. The whole economy is capitalized – and the capitalized value of its income pledged to bankers is taken as the measure of the nation’s financial wealth. It is as if economies grow by being able to borrow more from banks against their earning power, rather than by tangible capital investment and rising living standards.
The problem is that paying out all the economic surplus as interest leaves nothing over for living standards and what economists in the 18th and 19th centuries described as the human capital formation (training and education) required for labor productivity to rise….
This recycling of debt service and financial gains (and government bailout grants) into new loans reaches its limit at the point where debt service ends up absorbing the entire economic surplus, leaving no cash flow for new capital investment.
Depreciation (untaxed revenue) is paid out to creditors rather than being used to replace equipment that is wearing out or becoming technologically obsolete. No seed money is left, no revenue for governments to spend on infrastructure because all is earmarked to pay bondholders. Families are unable to afford an education or save for their retirement. The economy collapses.
Debt ridden economies turn down not for the reason that John Maynard Keynes worried about in his General Theory – people saving too much as economies become more prosperous. Economies are shrinking because of debt deflation.
Families, industry and the government have run too deeply into debt to afford to buy enough goods and services to keep the circular flow (“Say’s Law”) intact between production and consumption. Market demand and employment shrink. This is the problem that is plaguing economies today.
Karl Marx may have been off with his solution but he was bang on with his analysis of capitalism. Financial capitalism will be its own undoing.
The analysis of markets is reduced simply to measuring supply and demand – what individuals buy from the menu put in front of them. Micro-economists focus on individual choice, but few ask what creates the market in the first place – who created the menu’s contents, how high a price actually needs to be paid, and most of all, who gets wealth and how fortunes are acquired, e.g., by inheritance, special privileges, insider dealing, or by their own labor and enterprise….
Traumatized by the writings of Mill and subsequent socialist reformers, the landed aristocracy pressured the government to stop estimating land value. The timeless guiding principle is that if the tax collector doesn’t see the land’s rental value, there is less chance of it being taxed. So land – which used to be deemed “visible wealth” (in contrast to finance as “invisibles”) became statistically invisible, not only to the tax collector but to government policy makers and the economics profession….
Real estate investors certainly want to know what they are buying and selling, but want outsiders to know as little as possible. They worry that if the government measures land value – especially the appreciation of land prices – political pressure will arise to tax it.
The upshot is that governments measure wages and corporate profits, but have only the roughest estimate of wealth, its distribution and rate of growth. Only Japanese statistics have good measures of land prices. No national income statistics today measure the most important asset on which classical economics focused: unearned income and unearned wealth….
I find it remarkable that nobody has pointed out that Adam Smith did not say what neoliberals repeat when they count him as their patron saint. His aim, like that of subsequent classical reformers, was to free society from privatized land rent, monopoly rents, and financial interest and fees.
Inevitably, the rentiers fought back. They naturally preferred a post-classical economics that was careful to avoid looking at what is really important in life, especially at how wealth was being obtained. Wealthy people like to think of themselves as earning income, not extracting it or getting a free ride. They even like to think of themselves as hosts, not as parasites – it is the poor, the welfare recipients and even their employees who are the parasites whose income is to be minimized, not their own privileged rake-off income, which they demand should receive special tax benefits because the wealthy financial classes are so essential for economic survival.
You get the feeling that the National Party in particular would love to be able and come out and say what Mitt Romney does in the US, that the extremely wealthy are the meritorious overlords of the weak, underprivileged and unworthy, that without them we would all be destitute. Therefore we should confer on them every tax break and privilege we can because if they feel unloved they might go somewhere else. Oh that’s right Sir Douglas Myers said just that a few years ago from London and poor Michael Fay and David Richwhite were so unloved they felt obligated to move to Geneva.
The symbiosis between predatory finance and land ownership is an old problem – one that buried the Roman economy two thousand years ago. Individuals who managed to gain wealth bought landed estates, seeking the prestige of joining the gentry rather than pursuing enterprise, which was disparaged as ungentlemanly. ….
Yet modern discussion over what caused the decline and fall of Rome no longer points to the debt crisis described in great melodramatic detail by its own historians Livy, Plutarch and Diodorus. Just as debt problems have been excluded from the economics curriculum, they have become buried in the narrative of Western civilization’s social history.
The reason is not hard to understand. A realistic economic theory would describe the problems caused by the tendency of debts to grow faster than the means to pay. Recognizing the phenomenon of debt deflation would lead to political pressure to stop the process and save the economy by writing down debts to the ability to pay.
This would prevent the asset stripping and concentration of power in the hands of a financial class. Although this would save the economy – and indeed, enable it to continue to grow – it is not what the financial class desires. Its aim is to check any public power threatening to save the economy from indebtedness.