Days of Revolt: How We Got to Junk Economics

now you talk about Tara I've been till around Almighty Hammond all my day hi I'm Chris Hedges welcome to days of revolt today in a two-part series we're going to be discussing the great Ponzi scheme that defines the not only us but global economy how we got there in the first segment and secondly where we're going and with me to discuss this issue is the economist Michael Hudson author of killing the host how financial parasites and debt destroy the global economy a professor of economics who worked for many years on Wall Street where you don't succeed if you don't grasp Marx's dictum that capitalism is about exploitation and he is also I should mention the godson of Leon Trotsky welcome Michael thank you good to be here I want to open this discussion by reading a passage from your book which I admire very much which I think gets to the core of what you discuss you write Adam Smith long ago remarked that prophets often are highest in nations going fastest to ruin there are many ways to create economic suicide on a national level the major way throughout history has been by indebting the economy debt always expands to reach a point where it cannot be paid by large swaths of the economy this is the point where austerity is imposed an ownership of wealth polarizes between the 1% and the 99% today is not the first time this has occurred in history but it is the first time that running into debt has occurred deliberately applauded as if most debtors can get rich by borrowing not reduced to a condition of debt peonage so let's start with classical economics who certainly understood this they were reacting of course to feudalism and and what happened to the study of economics so that it became gamed by ideologue well the essence of classical economics was to reform industrial capitalism to streamline it and to free the European economies from the legacy of feudalism and the legacy of feudalism were landlords that were extracting land rent and living as a class that took income without producing anything and the banks which were not funding industry the leading industrialists from James Watt was a steam engine well no there could get money from your book you you make the point that banks almost never funded industry that's the point that they never had and by the time you got to Marx later in the 19th century you had a whole discussion largely in Germany over how do we make banks do something they didn't do under feudalism right now we're having a the economic surplus being drained by the landlords and by drained by the the bondholders Adam Smith uh was very much against colonialism and because that led to Wars and he was against Wars because that led public debt and he said the solution to prevent this financial class of bondholders burdening down the economy by imposing more and more taxes on consumer goods every time they went to war was to finance Wars on a pay-as-you-go basis instead of borrowing you'd tax the people then he thought that if everybody felt the burden of war then in the form of paying taxes they'd be against it well it took all the 19th century to fight for democracy and to extend the vote so that instead of the landlord's controlling the Parliament and the lawmaking in the tax system through the House of Lords you'd extend the vote to labor to women to everybody so on the theory that society as a whole would vote in its own self-interest and it would vote for the 99% not for the 1% and so when by the time Marx wrote in the 1870s he could all already see what was happening in Germany that the German banks were indeed making trying to make money in conjunction with the government by lending to heavy industry largely to the Terry industrials Bismarck Bismarck is kind of social I don't know what we call it it was a form of capitalist socialist they called it state capitalist a capital there was a long discussion by Engles saying wait a minute state capital state socialism or state capitalism isn't what we mean by socialism and there are two kinds of state or I mean I mean I should just interject I mean there was a kind of brilliance behind Bismarck's policy because he created pension funds he provided health benefits and he directed banking towards industry towards the industrialization of Germany which as you point out was very different in Britain and the United States well the German banking was so successful that by the time World War Two where were one broke out there were discussions in other English journals saying we're worried that Germany and the axis power is he going to win because their banks are more suited to fund industry and without industry you can't have brilliant military whereas the the British banks only Lin for foreign trade they lend for speculation in the stock market is a hit-and-run operation they want a quick in-and-out to make the profits where is the German banks don't insist that their clients pay as much dividends German banks own stocks as well as bonds and there's much more of a partnership and that's what most of the 19th century imagined was going to happen that the world was on the way towards socializing banking towards moving capitalism beyond the feudal epoch and getting rid of the landlord class getting rid of the rent getting rid of interest and really it was going to be labor and capital profits and wages with the profits being reinvested in more capital and you'd have an expansion of technology and around the early 20th century most futurists imagined that we'd be living in a leisure economy by now including Karl Marx that's right yeah ten hour workweek and to mark socialism was just the reformed state of capitalism at the time that isn't what happened in large part because of the defeat of Germany in World War one but also because we took the understanding of economists like Adam Smith and maybe Keynes and I don't know who you would blame for this whether it's Ricardo or others and we created a fictitious economic forum or economic theory that erased Ron TA or a rent derived interest derived capitalism and countered it as a productive force within the economy perhaps you can address that well here's what happened Marx sort of traumatized classical economics by taking the concepts of Adam Smith and John Stuart Mill and the others and pushing them to the logical conclusion he said that the progressive capitalism people called Ricardian socialists like John Stuart Mill said ok we want a tax away the land or nationalize it we want to have the government take over the heavy industry and build infrastructure to provide low-cost basic services this was traumatizing the landlord class and the the 1% and they fought back now none of the classical economists could even imagine how on earth tin the feudal interests these great vested interests and that had all this money actually fight back and succeed they thought the future was going to belong to capital and labor and around the late 19th century certainly in America you had people like John Bates Clark come out with a completely different theory the the whole classical economics what made Adam Smith and the physiocrats and John Stuart Mill physio you had expander the French these enlightened Yantra penis yeah well the common denominator among all the classical economists was the distinction between earned income and unearned income and the unearned income was rent an interest the earned income were wages and and profits well John Bates Clark came and said there's no such thing as unearned income the landlord actually earns the money by taking all this effort to provide a house in a land to renters and the banks that provide credit and their interest every kind of income is everybody earns their income so anyone who accumulates wealth by definition according to his formulas get rich by adding to what is now called gross domestic product was that in almost all cases those who had the capacity to make money parasitically off interest and rent had either if you go back to the origins looted and seized the land by force or inherited it that that's correct in other words the unearned income well the result of this sort of anti classical revolution that you had just before World War one was that today almost all of the economic growth in the last decade has gone to the one percent it's gone to Wall Street and you in you but you blame this on what you call junk economics well the junk economics was the anti classical reaction and and and and explain a little bit how in essence that's a fictitious form of measuring the economy well suppose you have a crook and your take it you're going to the bank I went to a block away we had a Chase Manhattan Bank and I used to bank there I took out money from the bank and as I was going out to pick pot when pushed me over and the other grabbed the money and ran out just I was ten feet from the teller the guard stood there and so I naturally asked for the money back and said look I was robbed in your bank right in front and they said well you know we we don't arm our guards because if they shot one of the people he the the thief could sue us and we don't want to do that we'll just give you money back well imagine if you count all of this crime all the money that's taken is an addition to GDP because now the crook has provided the service of not pushing me down or not stabbing me or suppose somebody's held up at an ATM machine your money or your life okay here's the money the crook has given you the the choice of your life well in a way that's how the gross national product accounts are put up you have Wall Street extracting money from the economy you have landlords and their Arrangements go back they're extracting money from the economy by by debt peonage by raising but by not playing a productive role right basically oh it's a credit card interest mortgage interest car loans student loans that's how they make their funds that's right and so they don't money is not a factor of production but in order to have access to credit in order to get the money in order to get an education you have to pay the banks right and at New York University here for instance they have Citibank I think a Citibank people were on the board of directors of NYU you get the students when they come here to start at the local bank and once you are in a bank and have monthly funds taken out of your account for electric utilities or whatever it's very hard to change so basically you have what are the classical economists called the Ron TA class the class that lives on economic rents landlords monopolists are charging more and the banks so that if you have a pharmaceutical company such that raises the rate of a drug from $12 a shot to a 200 that's all of a sudden their profits go up their increased price for the drug is created is counted in the national income accounts is if the economy is producing more so all of this presumed economic growth that has all been taken by the 1% in the last 10 years and people say the economy is growing but the economy isn't growing because it's not reinvested that's right it's not it's not production it's not consumption the wealth of the 1% is obtained by essentially lending money to the 99% and then charging interest on it and re recycleing this interest at a exponentially growing right and why is it important as I think you point out in your book that economic theory counts this Ron TA income as productive income explain why that's important if you're a Ron ta you want to say that hey I earn my income but while Goldman Sachs ya know Goldman says perfect if you up well yes the head of Goldman Sachs came out and said Goldman Sachs workers are the most productive in the world that's why they're paid what they are and the concept of productivity in America is the income divided by the labor so if you're Goldman Sachs and you pay yourself 20 million dollars a year in salary and bonuses you're considered to have added 20 million to GDP and that's enormous ly productive so we're talking with tautology we're talking of circular reasoning here so the issue is whether Goldman Sachs wall straight predatory pharmaceutical firms actually add the product or whether they're just exploiting other people and that's why I called my book parasite ism because the parasite people think of the parasite is simply taking money out taking blood out of the host or taking money out of the economy but in nature it's much more complicated the parasite can't simply come in and take something first of all it needs to numb it has an enzyme that numbs the host so the host doesn't even realize the parasites there and then the parasites have another enzyme that makes the host it takes over the hosts brain and it makes the host imagine that the parasite is part of the body that actually part of itself to be protected well that's basically what Wall Street has done it's made it depicts itself is part of the economy not as a wrapping around it not as external to it but actually is the part that's helping the the body grow and that actually is responsible for most of the growth when in fact it's the parasite that's taking over the the growth so the result is an inversion of classical economics it turns Adam Smith upside down it says that the what the classical economist said was unproductive parasite ism actually is the real economy and the parasites are labor an industry right that if it get in the way of apparent what the parasite wants which is to reproduce itself not help the host labor and gap in the classical economists like Adam Smith were quite clear that unless that Ron TA income you know the money made by things like hedge funds was heavily taxed and put back into the economy the economy would ultimately go into a kind of tailspin and and I think the example of that what you point out in your book is what's happened in terms of large corporations with stock dividends and buybacks and maybe you can explain that well there's an idea in sort of superficial textbooks in the public media that if companies make a large profit that somehow they make it by being productive and which is still in textbooks isn't it yes and also that if a stock price goes up you're just capitalizing the profits in the stock price reflects the productive role of the company but that's not what's been happening in the last ten years just in the last two years 92 percent of corporate profits in America have been spent either on buying back their own stock or in paying out as dividends to raise the price and explain why they do this about 15 years ago at Harvard a professor called Jensen said the way to ensure that corporations are run to make most efficiently is to make the managers increase the price of the stock so if you give the manager stock options and you pay them not according to you know how much they're producing or extent you're making the company bigger or expanding production but the price of the stock then you'll have the corporation run efficiently financial style so the corporate managers find there are two ways that they can increase the price of the stock the first thing is to cut back long term investment and use the money instead to buy their own stock just and when you buy your own stock that means you're not putting the money into capital formation you're not building new factories you're not hiring more labor you can actually increase the stock price by hiring very rarely temporarily by using the income from the past just to buy the stock fire the labor force if you can not work it more intensively pay it out as dividends and that basically is the corporate raiders model you use the money to pay off the but the junk bond holders at high interest and of course this gets the company in such trouble after a while because there's no new investment market shrink that you then go to the labor unions and say gee I think this company is really near bankruptcy and we don't really want to have to fire you and the way that you can keep your job is if we just downgrade your pensions and instead of giving you what we promised the defined benefit pension it's a defined contribution you know what you pay every month but you don't know what's going to come out at all so you wipe out the pension funds push it on to the government the Pension Benefit Guaranty Corporation and all of a sudden you use the money you were going to pay for pensions to pay a stock dividends and then push it up and then the whole thing turns down and it's hollowed out and you shrink in you collapse but by that time the managers will have left the company will have taken their bonuses and salaries and run I want to read this quote from your book written by David Harvey in a brief history of neoliberalism and have you comment on it the main substantive achievement of neoliberalism has been to redistribute rather than to generate wealth and income accumulation by dispossession I mean the commodification and privatization of land and the forceful expulsion of peasant populations conversion of various forms of property rights common collective state etc into exclusive private property rights suppression of rights to the Commons colonial neo-colonial and the Imperial processes of appropriation of assets including natural resources and usery the national debt and most devastating of all the use of the credit system is a radical means of accumulation by dispossession to this list of mechanisms we may now add a raft of techniques such as the extraction of rents from patents and intellectual property rights and the diminution or a ratio of various forms of common property rights such as state pensions paid vacations and access to education and healthcare one through a generation or more of class struggle the proposal to privatize all state pension rights pioneered in Chile under the day to ship is for example one of the cherished objectives of the Republic in the u.s. this explains the kind of day no more the final end result where which you speak about in your book is in essence allowing what you call the run ta or the speculative class to cannibalize the entire society into collapse well a property right is not a factor of production look at what happened in Chicago are the city where I grew up Chicago didn't want to have to raise the taxes on real estate especially on all of the expensive commercial real estate there so the budget ran up a deficit they needed money to pay the bondholders and so they sold off the parking rights to have meters you know along the curbs for the Chicago streets well the result is that they sold to Goldman Sachs a seventy five years of the right to put up parking meters so now look the cost of living and doing business in Chicago was raised by having to pay off the parking meters if Chicago is going to have a parade or something and block off the traffic Chicago has to pay Goldman Sachs what it would have made if there wouldn't have been the closed off upper right for parade and all of a sudden it's much more expensive to live in Chicago because of this but this added expense of having to pay parking rights to goldman sachs to pay out interest to its bondholders is counted as increase in GDP because you've now created more product by charging more if you sell off a road a government or local road and you put up toll booths and make it into a toll toll road all of a sudden GDP goes up if you go to war abroad and you spend more money on the military the military-industrial complex is all this is counted as increased production none of this is really part of the production system of the capital and labor building more and more factories and producing more things that people need to live and to do business all of this is overhead but there is no distinction between wealth and overhead and failing to draw that distinction means that the host doesn't realize that there is a parasite there the host economy the industrial economy doesn't realize what the industrialists realized in the 19th century that if you want to be an efficient economy and be low-priced and sell undersell competitors you have to cut your price by having the public sector provide roads freely medical care freely education freely if you charge for all of these then you get to the point that the economy is in u.s. economy is in today when if American workers and then who worked for factories where to get all of their consumer goods for nothing all of their food transportation clothing furniture everything for nothing they still couldn't compete with Asians or other producers because they'd have to pay up to 40 percent 43 percent of their income for rent or mortgage interest ten percent or more of their income for student loans credit card debt fifteen percent of their paycheck is automatic withholding to pay Social Security to cut taxes on on the rich or to pay for medical care so Americans you've built into the economy all of this overhead and there is no distinction between growth and overhead and it's all made America so high price that were priced out of the market regardless of what trade policy and we should add that that under this predatory form of economics you game the system so you privatize pension funds you force them into the stock market an overinflated stock market but because of the way companies are go public it's the hedge fund managers who profit and it's those citizens whose retirement savings are tied to the stock market who lose and maybe we can just conclude by talking about how the system is fixed not only in terms of burdening the citizen with debt peonage but by then forcing them into the market to fleece them again well we talked about an innovation economy as if that makes money let's suppose you have an innovation and a company goes public they go to goldman sachs and other companies Wall Street investment thanks to underwrite the stock what they say we're going to issue the stock say $40 a share what's considered a successful float is immediately the goldman and the others will go to their insiders and they'll say you know will you buy this stock you'll guarantee it'll go up a successful flotation doubles the price in one day so that at the end of the day the stock sell and they have the option to buy it before everyone else yes and and knowing that by the end of the day will be inflated and then they sell it off that's exactly and so the pension funds come in and buy it at an inflated price and then it goes back down it may go back down or it may be that the company just a short changed from the very beginning and here that here the important thing is that the Wall Street underwriting firm and the the speculators that come in that it rounds up get more in a single day than all the years it took to put the company together the 40 the company gets 40% these people get also a $40 other people get $40 so basically you have the financial sector ending up with a much more of the gains in the name of the game if you're on Wall Street isn't profits its its capital gains and that's something that wasn't even a part of classical economics they didn't anticipate that the price of assets would go up for any other reason than earning more money and capitalizing and income and actually what you have in the last 50 years really since World War two has been asset price inflation that most families have middle-class families have gotten of the wealth that they've got since maybe 1945 not really by saving what they've earned that well working but by the price of their house going up they've benefited by this price of the house and they think that that's somehow made them rich and the reason the price of the house has gone up is that a house is worth whatever a bank is going to lend against it and if banks have made easier and easier credit lower a down payments then you're going to have a financial bubble and so now you have indeed real estate having gone as high as it can I don't think it'd take more than 40% of somebody's income to buy it but now if you imagine if you're joining the labor force you're not going to be able to buy a house at today's prices putting down a little bit of your money and then somehow end up getting rich just on the house investment all of this money you pay the bank is now going to be subtracted from the amount of money that you have to spend on goods and services so we've turned the post-war economy that made America prosperous and rich we've turned it inside-out and somehow the most people believe that you could get rich by going into debt to borrow something that's going to rise in price and you can't get rich ultimately and going into debt in the end the creditors always win and that's why every society since Sumer and Babylonia have had to either cancel the debts or you come to a society like Rome that didn't cancel the debts and then you have a Dark Age everything collapses and that's the topic of our second discussion which is where we're headed thank you Michael and thank you for watching days of revolt and eat our watermelon patch then you don't put me on our side you

Channel: The Real News Network

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Keywords: therealnews, realnews, real, news, media, politics, Chris Hedges, Junk Economics, Michael Hudson, Marx, capitalism, socialism

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Length: 28min 26sec (1706 seconds)

Published: Mon Mar 21 2016