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The Hudson Report
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Left Out, a podcast produced by Michael Palmieri, Dante Dallavalle, and Paul Sliker, creates in-depth conversations with the most interesting political thinkers, heterodox economists, and organizers on the Left.

We’re excited to announce our new weekly series called The Hudson Report with the legendary economist Michael Hudson. Every episode we’ll pick Professor Hudson’s brain for 10 or 15 minutes on an economic issue that is either being ignored—or hotly debated—that week in the press.

Michael Hudson is a Distinguished Research Professor of Economics at the University of Missouri at Kansas City. He counsels governments around the world on finance and tax policy and has served as an economic adviser to the US, Canadian, Mexican, and Latvian governments. Michael is a financial analyst and a veteran of Wall Street, an economic historian and one of the world’s leading experts on the history of private property, debt, and real estate and the origins of economic civilization in the Ancient Near East. He’s widely credited with being one of the few economists who foresaw the financial crisis of 2007-08. His new book, …and forgive them their debts: Credit and Redemption From Bronze Age Debt Remissions to the Jubilee Year, releases in May of 2018.

LISTEN to this week’s first episode of The Hudson Report on modern-day debtors’ prisons in America and debt in antiquity:

*If you’re enjoying Left Out, please consider becoming a supporter on Patreon. Your small donations are crucial to keeping this show alive.

[FULL TRANSCRIPT]

Paul Sliker: So Michael, in conjunction with Harvard University’s Peabody Museum you headed up an archaeological research team on the origins of private property, debt, and real estate and the origins of economic civilization in the ancient Near East. You actually have a new book coming out in May called ‘…and forgive them their debts: Credit and Redemption From Bronze Age Debt Remissions to the Jubilee Year’. And speaking of debt that’s a perfect segue into the topic of our first discussion here. A new ACLU report just got released called A Pound of Flesh: The Criminalization of Private Debt, that shows that thousands of debtors are arrested in jail each year in the U.S. because they owe money–and millions more are threatened with jail. The debts can be as small as a few dollars and can involve every kind of consumer debt from medical bills to car payments to student loans to credit card debt.

It goes sort of something like this… cities and private collections agencies have teamed up to bring back a system of modern day debtors’ prisons to skirt around federal law that has prohibited debtors’ prisons since 1833. And it’s also in clear violation of the Equal Protection Clause of the 14th Amendment. And these agencies and their hired lawyers will send out a notice to someone who’s missed a payment. That person won’t show up to court. They get a notice of contempt and then it goes on their record and an arrest warrant is issued for their failure to appear in court. And this takes some pretty big cooperation or coordination with the prosecutors and the judge. One of the most alarming things is that there’s sort of a business relationship or a quid pro quo between collection agencies and the prosecutors.

So my question for you Michael is, as an economist and someone who is an expert on the history of debt, can you give us your reaction to this report?

Michael Hudson: Well I think much of the modern variable is the privatization of prisons. If you have a privatization of prisons you run them for profit. And what do you need in order to run the prison for profit? Well, you need inmates. So the first question is how are you going to get inmates. And that’s what brings us back to the issue of debt.

So far for the last 20 or 30 years most of the inmates have been racial minorities on drug deals…marijuana and other drug deals putting them in. But now that’s being phased out because they realize how destructive and racist it is. So they want an equal opportunity source of inmates and debt is a major source of the inmates to be employed to make a profit. Now in a way this goes back to the very origins of debt. I’m a little surprised that the title that the ACLU gave its report A Pound of Flesh. That obviously refers to Shylock’s loan–and that was a zero interest loan. And that misses the whole point. The whole point of debt is interest!

We’ve done a number of books recently through the Harvard group. One is on labor in the ancient world, where we look at the origins of how labor was mobilized in the Neolithic and the early Bronze Age in Egypt. And originally there were no workers for hire. There was no labor for hire… you couldn’t say well I’m a cultivator on the land and I need to make some money so I think I’ll go into town and get a job. The governments could mobilize labor to work on public building projects and that’s how the infrastructure was built up. How would individual merchants or even temples or palaces get labor? The only way of doing it was to make an interest bearing loan to a cultivator where the interest was paid in the form of labor and where the worker himself or his family member –his son, his daughter or a household servant– was pledged as collateral. The collateral was supposed post to work off the interest. The original way of getting labor for hire was to make a loan, and it was paid as interest, not to pay wages. Wages only developed maybe in the second millennium very largely on the basis of what labor had to be paid or supported when it was pledged for debt. So the idea of working off a debt by one’s labor and in the form of being a bondage pledged to one’s creditor is a very old idea.

What’s fairly new in history is that there are public institutions–public jails–that you’d be pledged for if you couldn’t pay a debt. Instead of being pledged to the creditor to work off the debt you would be–especially in England it was known from the medieval times through pretty recent times–they still have the debtors’ prisons open and if you couldn’t pay a debt you’d be consigned to a debtors’ prison. You’d have to pay for your own food and board and you’d be charged for the support. And the only way if you didn’t have any money to pay for your own food–or if you didn’t have friends who would bring by food for you–would be to stick your hands out of the grate for alms. Many people who were Almsgivers would go by the debtors’ prison supporting the debtors so they wouldn’t simply starve to death.

Paul Sliker: And Michael I want to talk a little bit about about the reasons for why debts have been written down over the course of history. So I mean, you know, according to your work from my perception, writing down debts obviously reduces the overall economy’s financial costs… so the perception of this long term macroeconomic dynamic explains why debtors’ prisons have been closed and things like bankruptcy laws have become increasingly humanitarian to enable debtors to make a fresh start and become economic actors and start spending into the economy again.

So what are the reasons why they’re sort of trying to bring back these arrangements particularly here in the U.S. today?

 
• Category: Economics • Tags: Financial Debt 
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SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries coming to you from Baltimore. The Organization for Economic Cooperation and Development, or known as the OECD, predicted on Tuesday that Trump’s tariffs on aluminum and steel imports could initiate a wave of protectionism and slow global economic growth. The tariffs have already spurred various countries to announce retaliatory measures. For example, the European Union plans to impose tariffs on Harley Davidsons and blue jeans. China has also promised to retaliate. Meanwhile, US companies that use steel and aluminum as raw materials for their production processes already report significant cost increases by as much as 40%.

Joining me now to analyze Trump’s tariffs is Michael Hudson. Michael is a distinguished research professor of economics at the University of Missouri Kansas City. He’s the author of several books, the most recent among them is J is for Junk Economics. Michael, welcome back.

MICHAEL HUDSON: Great to be here again, Sharmini.

SHARMINI PERIES: Michael, what do you think of Trump’s tariffs on aluminum and steel, will they protect US manufacturing industries?

MICHAEL HUDSON: On the one hand, it’s supposed to protect and rebuild US manufacturing. But to really rebuild manufacturing, you need much more than a tariff against foreign goods. You need public infrastructure, and that’s not going to happen. You also need a different tax system, and that’s not going to happen. You need a more competitive economy; that’s not going to happen. So I think there’s not really any attempt to repeat how America built up manufacturing by what Henry Clay called the American System in the 19th century: infrastructure, public investment, tariffs and an industrial banking system.

We’re still in a Thatcherite economic policy, so I think what Trump really wants to do is use diplomatic leverage and economic threats against Canada and Mexico. I think what is on his mind is “We’ll let Mexico’s steel in, but it’ll have to build the wall and pay for it. If it doesn’t do that, then we’re going to punish it. For Canada, you’re going to have to surrender to all of our renegotiated NAFTA demands. You have to buy more American cars. You have to do whatever we tell you to, otherwise we’re going to create unemployment in your steel industry.”

That’s called national security somehow. But how can it really be national security if he’s willing to let in most of the aluminum and most of the steel if Canada and Mexico do things that have nothing to do with national security at all?

His policy is what we call an internal contradiction that doesn’t make sense. Canada has already announced that it is not going to renegotiate NAFTA and let the tariff be used as a threat. The Canadians are getting fed up with American pushing special interest favoritism against it. The Mexican president refused to come up a few weeks ago when it was obvious that Trump was going to make demands on Mexico that were so much against its national interest that they just canceled.

SHARMINI PERIES: So then why is US manufacturing, steel manufacturing in particular, predicting a 40% increase in prices?

MICHAEL HUDSON: It’s not just a prediction, Sharmini. The Financial Times just had a chart, and steel prices have already gone up 40%. Aluminum prices have already gone up one-third. If you look at the forward market, the prices are already up. We don’t have to say this is a dire prediction, it’s already happening.

SHARMINI PERIES: Michael, historically tariffs and protectionist policies have been used by countries as a strategy to industrialize. Can this strategy work again in light of the fact that US has been de-industrializing for several decades now?

MICHAEL HUDSON: It can’t work again, for a number of reasons. For one thing, from the very beginning of the 19th century, ever since Henry Clay put forth the American System in the 1840s of internal improvements, protective tariffs, and a national bank and financial policy to fund an industry, those three had to go together. In order to make industry competitive, you need not only tariffs to block imports, you need to support manufacturing by infrastructure investment, roads, canals, an educational system.

By the end of the 19th century, you had the Conservative Party in Britain, Benjamin Disraeli, saying “Health is everything. We have to have a health policy to promote our workforce.” In Germany, Bismarck said “We need a pension system. We need an industrial banking system to fund Germany. We need government spending on infrastructure, on railroads.” You had European, French, German and English investment in public spending. But Trump is a Thatcherite. You cannot have a Thatcherite economy, which is basically an asset-stripping economy, you cannot have a tax policy like Trump has, which is basically a financialization policy, and at the same time, have an industrial policy.

In fact, what Trump is saying is that he wants this to be the first salvo in a trade war against the whole world that has a mixed economy. He’s announced pretty much that within the World Trade Organization he’s going to promote blockages against any country where the government plays a role. For instance, if they tax companies that pollute with a pollution tax, any government that regulates, any government that provides subsidized services like subsidized education, subsidized healthcare, subsidized roads and railroads, this is somehow not a free market economy.

A free market economy is an austere economy sort of like Thatcherism. This aim is to dismantle industry, and Trump is essentially saying “Any economy that has an industrial strategy, we’re going to exclude from the American-centered way of reorganizing society.” Basically, this means that either you’re going to join the neoliberal Thatcherite block, or the rest of the world is going to be a state socialist or other socialist, or just plain mixed economy block.

But no other country outside of the neoliberal countries is going to say “Okay. We’re going to privatize our education just like America’s doing. We’re not going to give free education or subsidized roads. We’re not going to regulate industrial monopolies.” No country is going to go along with this attempt to essentially declare war on countries that are not “free enterprise economies,” meaning financialized economies.

SHARMINI PERIES: Michael, legally, trade policies are supposed to be coordinated through Congress. However, Trump is sidelining Congress and saying that he has the right to negotiate and to do his wheeling and dealing from The White House. We just saw a recent decision where he’s denied the $177 billion Broadcom takeover of Qualcomm that he considers this a national security threat. We don’t know whether it is or not but let’s take it for granted that it is. This kind of wheeling and dealing and sidelining Congress, does that concern you?

MICHAEL HUDSON: Yes, for two reasons. Number one, it’s the imperial presidency. It’s an attack on the American Constitution. You’re right, Congress is supposed to be in charge of trade policy, just as it’s supposed to be in charge of declaring war, but the president can say that there’s a national security emergency. The problem with this is that ever since the World Trade Organization was created anew in the 1990s, no country, not even the United States, has used the national security excuse to impose tariffs. George W. Bush thought about it, but then he was told that there was no persuasive basis for it.

 
• Category: Economics • Tags: Donald Trump, Free Trade 
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Trump’s series of threats this week was a one-two punch. First, he threatened to impose national security tariffs on steel and aluminum, primarily against Canada and Mexico (along with Korea and Japan). Then, he suggested an alternative: He would exempt these countries IF they agree to certain U.S. demands.

But these demands make so little economic sense that they should be viewed as an exercise in what academia used to call power politics. Or in Trump’s world, Us versus Them, a zero-sum game in which he has to show that America wins, they lose.

It won’t work. Trump’s diplomatic ploy with Mexico is to say that he’ll be willing to exempt them from the steel and aluminum tariffs if they agree to (1) build the wall that he promised to make them build, and (2) give other special favors to the United States. He can then go to American voters and say, “See, we won; Mexico lost.”

This is unlikely to elicit a Mexican surrender. Its president already has said that building a wall makes no sense, and cancelled the planned diplomatic visit to Washington last week. Giving in to Trump’s election promise to American voters (or more to the point, indulging in his own ego trip about the wall) would be political suicide. Trump would crow that he made Mexico bow to his bidding.

Matters aren’t much better in Canada. While some Pennsylvania and Ohio steel companies probably will try to make Trump look good by hiring back a few hundred workers if and when the tariffs are announced, Canada and other suppliers employees would have to be laid off. Canadian resentment already has been building up for decades, ever since the auto agreement of the 1960s and ‘70s that favored U.S. suppliers.

But the real economic problem comes from within the United States itself. If new steel workers are hired, they may be laid off in a few months. Most important is the bigger economy-wide picture: The Chamber of Commerce and other groups have calculated that the loss of jobs in steel- and aluminum-using industries will far outnumber the new hiring of steel and aluminum workers.

NPR on Wednesday had a maker of beer kegs explain that if the cost of steel goes up, he can’t afford to match the prices of foreign keg manufacturers who buy their raw materials cheaper – and do NOT have tariffs raised on higher manufactures.

There are many good arguments for protectionism. These arguments are in fact much better than the free-trade patter talk used to indoctrinate college economics students. Of all the branches of today’s mainstream economics, free-trade theory is the most unrealistic. If it were realistic, Britain, the United States and Germany never would have risen to world industrial power. (I review the fallacies of free-trade theory in Trade, Development and Foreign Debt.)

Economic history provides a long and successful pedigree of good arguments for protective tariffs. Britain created its empire by protectionism, stifling manufactures in the United States as long as it pursued free trade. After the Civil War ended, America built up its industry and agriculture by protectionism, as did Germany and France. (I discuss the strategy in America’s Protectionist Takeoff: 1815-1914.)

But as each of these nations became world leaders, they sought to pull up the ladder and prevent other countries from protecting their own industry and agriculture. So they changed to “free trade imperialism.” The aim of industrial leaders is to convince other countries not to regulate or plan their own markets, but to let the United States engineer an asymmetrical trade policy whose aim is to make other countries dependent on its food exports and monopoly exports, while opening their markets to U.S. companies.

Since the 1920s the protectionist economies that came to support free trade have rewritten history to white out how they got rich. The strategy of protectionism has been forgotten. Trump’s so-called protective tariffs against steel and aluminum are the antithesis to every principle of protectionism. That is why they are so self-destructive.

A really nationalistic trade strategy is to buy raw materials cheaply, and sell finished manufactured goods at a high value-added price.

The idea of industrial protectionism, from British free trade in the 19th century to U.S. trade strategy in the 20th century, was to obtain raw materials in the cheapest places – by making other countries compete to supply them – and protect your high-technology manufactures where the major capital investment, profits and monopoly rents are.

Trump is doing the reverse: He’s increasing the cost of steel and aluminum raw materials inputs. This will squeeze the profits of industrial companies using steel and aluminum – without protecting their markets.

In fact, other countries are now able to legally raise their tariffs to protect their highest-technology sectors that might be most threatened by U.S. exports. Harley Davidson motorcycles have been singled out. They also can block U.S. monopoly exports, such as bourbon and Levi blue jeans, or pharmaceuticals. Or, China can block whatever U.S. technology it decides it wants to compete with.

Trump’s tariff threats caused short-term aluminum prices to jump by 40 percent, and steel prices by about 33 percent. This raises the price of these materials to U.S. manufacturers, squeezing their profits. Foreign manufacturers will not have their material prices increased, and so can out-compete with U.S. steel- or aluminum-using rivals. The global oversupply in fact may make the price of steel and aluminum decline in foreign markets. So foreign industry will gain a cost advantage.

On top of that, foreign countries can legally raise tariffs in their own markets – for whatever industries they deem will best gain from this advantage.

Trump’s tariffs will not induce new capital investment in steel or aluminum

America’s logic behind protective tariffs after the Civil War ended the Southern free-trade policies was that tariff protection would create a price umbrella enabling U.S. manufacturers to invest in plant and equipment. Britain already had made these sunk costs, so the United States had to include the cost of capital in its revenue.

That’s how America built up its steel industry, chemical industry and other manufacturing industries.

But no steel or aluminum company is likely to invest more or hire more U.S. labor as a result of higher tariff revenues. These companies may raise their prices, but neither investment nor trickle-down effects are likely.

For one thing, aluminum is made out of electricity, and America is a high-cost producer. Alcan – America’s largest supplier – has a rip-off deal with Iceland, getting electricity almost for nothing.

For steel, it takes a long time to build a modern steel mill. No company will do this without an assured market. Trump’s tariff increases do not guarantee that.

America’s policy of breaking international agreements (we’re the “indispensable nation”)

Few companies, labor groups or banks in New York City have been willing to trust Mr. Trump in recent years. He should have called his book “The Art of BREAKING THE deal.” That’s how he made his money. He would sign an agreement with suppliers to his hotels or other buildings, and then offer only 80 cents (or less) on the dollar. He’d tell them, in effect: “You want to sue? That will cost you $50,000 to get into court, and then wait three or four years, by which time we’ll have made enough money to pay you on the cheap.”

 
• Category: Economics • Tags: Donald Trump, Free Trade 
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SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries coming to you from Baltimore. President Trump presented his infrastructure plan on Monday. The long-awaited plan proposes to spend $200 billion in federal funds over the next 10 years. This is to be complemented with another 1.3 trillion in spending from cities, states, and private investors for a total of 1.5 trillion. Another major component of the plan is to reduce red tape and approval processes so that projects are approved much faster.

Here’s what Trump had to say in presenting the plan.

DONALD TRUMP: This morning, I submitted legislative principles to Congress that will spur the biggest and boldest infrastructure investment in American history. The framework will generate an unprecedented $1.5 to $1.7-trillion investment in American infrastructure. We’re going to have a lot of public-private. And that way it gets done on time, on budget.

SHARMINI PERIES: Joining me now to analyze the infrastructure proposal is Michael Hudson. Michael is a distinguished research professor of economics at the University of Missouri-Kansas City. He’s the author of several books, the most recent among them is J is for Junk Economics. Welcome back, Michael.

MICHAEL HUDSON: Good to be here, Sharmini.

SHARMINI PERIES: Michael, it sounds like you had your own infrastructure failure experience last night. Tell us about it.

MICHAEL HUDSON: Well, I was coming back from Washington from a week at Democracy Collaborative on a $400 round trip on the Acela Express, which is supposed to be the elite Amtrak. We left Washington at 3:00. At 5:30, just before we got to New York, the train stopped. The conductor said, we were told we can’t go any further, there is a track outage, no trains are running in and out of Penn Station. He suggested if anyone wanted to take the Jersey tubes across the station, they could do that. But there was no idea when things would be restored.

So, everybody waited about five minutes. Then about half the people got off and got into the New Jersey tube train standing shoulder the shoulder. But that wasn’t moving because they had an announcement there was no electricity going in and out of New York, you can’t get there. So, I had to spend, I shared a Uber car with someone who was sitting next to me to get into Manhattan. And I must say the trip was so jiggly that it was very hard to read or to write along the whole route.

And this whole idea that somehow the infrastructure plan can develop a China-style, high-speed transit is just a fantasy because in order to have high-speed transit, anything fast you need a dedicated roadway. Otherwise, well, while I was in Washington, the Republicans, as you know, were going to their meeting down south, and their Amtrak train crashed into a garbage truck. You can imagine that a train track that goes through crossing gate crossings wouldn’t possibly work for high-speed rail.

And the cost would, I think, be closer to $20 trillion just to buy the land rights along the current railroad or other railroad because the land is all built up in America. And there’s a law of eminent domain and there have been so many lawsuits that it’s completely infeasible to rebuild the railroads.

SHARMINI PERIES: So, Michael, let’s go over some of the key points in the plan, which includes deregulation and the so-called private-public partnerships you speak of and of course incentives to states and cities from matching funds. Let’s take up first the issue of deregulation. What effect will this have on communities?

MICHAEL HUDSON: Well, many states and localities have blocks to prevent privatization, and they want to prevent what’s happening to them from what happened in Indiana with the toll road. They say, “Wait a minute. Privatization is going to be a giveaway. It’s going to triple the costs of providing infrastructure services. It’s going to price our cities and states out of the market if we try to go along with this plan.” And Trump says, “Well, in order to qualify for public funding, you have to abolish these restrictions on private funding.”

You have to let yourself be robbed blind by the hedge funds and Wall Street. That’s basically what he said. He said just as the hedge funds robbed Chicago blind on the parking meters getting a huge rate of return that probably will force Mayor Rahm out of office, you have to let other privatizers come in and vastly increase your cost of living.

So, the infrastructure is going to really destroy America’s competitiveness instead of contributing to it. It’s going to vastly raise the price of the cost of living rather than providing more resources and making things easier for the population.

SHARMINI PERIES: Michael, the American Society of Civil Engineers agrees with you that this is inadequate in terms of funding, that the Trump plan is just not sufficient. In fact, it needs, they say, just to deal with the backlog a $4.6-trillion investment by 2025 and Trump’s plan doesn’t even come close. What do you make of this?

MICHAEL HUDSON: Well, to begin with, Trump’s plan would triple the cost of what the engineers say to $22 trillion and the reason is that it’s a Thatcherite privatization plan. Trump’s plan reverses the last 150 years of public infrastructure. And in fact, it’s the biggest attack on industrial capitalism in over 100 years, more serious than a socialist attack.

Now, America’s first professor of economics at the first business school, Simon Patten, said public infrastructure is a fourth factor of production, but unlike labor, land, and capital, the role of public infrastructure is not to make a profit. It’s to provide public services that are basic for the economy’s living standards and capacity to produce at a subsidized rate. So, America got rich and came to dominate the world industrial economy by subsidizing all of the basic costs. Low-cost roads, low-cost infrastructure. The government bore these costs so that, in effect, public infrastructure subsidizes the economy to lower the cost of production.

Trump’s plan is to vastly increase it because he forces all of this into the marketplace. Instead of offering, say, roads at the cost of production, he’d actually triple the cost of production by insisting that it be privately financed, probably by hedge funds and by bank credit that would add the interest charges, the capital gains charges, the management fees, the oversight charges and the fines for criminal fraud that goes with it by factoring all these prices into the cost.

Look at the, for instance, the Indiana Toll Road. That was done by a Trump-style private and public infrastructure and the toll roads are so high to try to pay off the hedge fund backers that people don’t use them. They go on the free, slower internal roads. And that sort of is a horror story that anyone who’s thinking of Trump’s plan should be there.

Trump mentions, for instance, water privatization. All you have to do is look at Thatcher’s water privatization in Britain, which has vastly increased the price of water. The water companies have been bought out by hedge funds, registered abroad by foreign owners that are opaque and it’s become probably the most unpopular privatization plan of all. So that part’s a disaster.

SHARMINI PERIES: Michael, another part of the plan is what is known as value capture financing in order to raise more funds. First of all, what is value capture financing? And what are its implications for states and communities that apply this principle?

 
• Category: Economics • Tags: Donald Trump, Privatization 
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For many decades the Federal Reserve has rigged the bond market by its purchases. And for about a century, central banks have set interest rates (mainly to stabilize their currency’s exchange rate) with collateral effects on securities prices. It appears that in May 2010, August 2015, January/February 2016, and currently in February 2018 the Fed is rigging the stock market by purchasing S&P equity index futures in order to arrest stock market declines driven by fundamentals, and to push prices back up in keeping with a decade of money creation.

No one should find this a surprising suggestion. The Bank of Japan has a long tradition of propping up the Japanese equity market with large purchases of equities. The European Central Bank purchases corporate as well as government bonds. In 1989 Fed governor Robert Heller said that as the Fed already rigs the bond market with purchases, the Fed can also rig the stock market to stop price declines. That is the reason the Plunge Protection Team (PPT) was created in 1987.

Looking at the chart of futures activity on the E-mini S&P 500, we see an uptick in activity on February 2 when the market dropped, with higher increases in future activity last Monday and Tuesday placing Tuesday’s futures activity at about four times the daily average of the previous month. Futures activity last Wednesday and Thursday remained above the average daily activity of the previous month, and Friday’s activity was about three times the previous month’s daily average. The result of this futures activity was to send the market up, because the futures activity was purchases, not sales. http://www.cmegroup.com/trading/equity-index/us-index/e-mini-sandp500_quotes_volume_voi.html

Who would be purchasing S&P equity futures when the market is collapsing from under them? The most likely answer we can come up with is that the Fed is acting for the PPT. The Fed can actually stop a market decline without purchasing a single futures contract. All that has to happen is that a trader recognized as operating for the Fed or PPT enters a futures bid just below the current price. The traders see the bid as the Fed establishing a floor below which it will not let the market fall. Expecting continuing declines to make the bid effective, they front-run the bid, and the hedge funds algorithms pick it up, and up goes the market.

Is there another explanation for the shift in the market from decline to rise? Are retail investors purchasing dips? Not according to this report in Bloomberg — https://www.bloomberg.com/news/articles/2018-02-12/record-23-billion-flees-world-s-largest-etf-as-panic-reigns — that last week a record $23.6 billion was removed from the world’s largest ETF, the SPDR S& 500 index fund. Here we see retail investors abandoning the market.

If central banks can produce zero interest rates simultaneously with a massive increase in indebtedness, why can’t they keep equity prices far above the values supported by fundamentals? As central banks have learned that they can rig financial asset prices to the delight of everyone in the market, in what sense does capitalism, free markets, and price discovery exist? Have we entered a new kind of economic system?

 
• Category: Economics • Tags: Federal Reserve, Wall Street 
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Introduction

The idea of annulling debts nowadays seems so unthinkable that most economists and many theologians doubt whether the Jubilee Year could have been applied in practice, and indeed on a regular basis. A widespread impression is that the Mosaic debt jubilee was a utopian ideal. However, Assyriologists have traced it to a long tradition of Near Eastern proclamations. That tradition is documented as soon as written inscriptions have been found – in Sumer, starting in the mid-third millennium BC.

Instead of causing economic crises, these debt jubilees preserved stability in nearly all Near Eastern societies. Economic polarization, bondage and collapse occurred when such clean slates stopped being proclaimed.

(2) What were Debt Jubilees?

Debt jubilees occurred on a regular basis in the ancient Near East from 2500 BC in Sumer to 1600 BC in Babylonia and its neighbors, and then in Assyria in the first millennium BC. It was normal for new rulers to proclaim these edicts upon taking the throne, in the aftermath of war, or upon the building or renovating a temple. Judaism took the practice out of the hands of kings and placed it at the center of Mosaic Law.[1]

By Babylonian times these debt amnesties contained the three elements that Judaism later adopted in its Jubilee Year of Leviticus 25. The first element was to cancel agrarian debts owed by the citizenry at large. (Mercantile debts among businessmen were left in place.)

A second element of these debt amnesties was to liberate bondservants – the debtor’s wife, daughters or sons who had been pledged to creditors. They were allowed to return freely to the debtor’s home. (Slave girls that had been pledged for debt also were returned to the debtors’ households.) Royal debt jubilees thus freed society from debt bondage, but did not liberate slaves.

A third element of these debt jubilees (subsequently adopted into Mosaic law) was to return the land or crop rights that debtors had pledged to creditors. This enabled families to resume their self-support on the land and pay taxes, serve in the military, and provide corvée labor on public works.

Commercial “silver” debts among traders and other entrepreneurs were not subject to these debt jubilees. Rulers recognized that productive business loans provide resources for the borrower to pay back with interest, in contrast to consumer debt. This was the contrast that medieval Schoolmen later would draw between interest and usury.

Most non-business debts were owed to the palace or its temples for taxes, rents and fees, along with beer to the public ale houses and other payments to these institutions. Rulers initially were cancelling debts owed mainly to themselves and their officials. This was not a utopian act, but was quite practical from the vantage point of restoring economic and military stability. Recognizing that a backlog of debts had accrued that could not be paid out of current production, rulers gave priority to preserving an economy in which citizens could provide for their basic needs on their own land while paying taxes, performing their corvée labor duties and serving in the army.

Most personal debts were not the result of actual loans, but were accruals of unpaid agrarian fees, taxes and kindred obligations to royal collectors or temple officials. Rulers were aware that these debts tended to build up beyond the system’s ability to pay. That is why they cancelled “barley” debts in times of crop failure, and typically in the aftermath of war. Even in the normal course of economic life, social balance required writing off debt arrears to the palace, temples or other creditors so as to maintain a free population of families able to provide for their own basic needs.

As interest-bearing credit became privatized throughout the Near Eastern economies, personal debts owed to local headmen, merchants and creditors also were cancelled. Failure to write down agrarian debts would have enabled officials and, in due course, private creditors, merchants or local headmen to keep debtors in bondage and their land’s crop surplus for themselves. Crops paid to creditors were not available to be paid to the palace or other civic authorities as taxes, while labor obliged to work off debts to creditors was not available to provide corvée service or serve in the army. Creditor claims thus set the wealthiest and most ambitious families on a collision course with the palace, along the lines that later occurred in classical Greece and Rome. In addition to preserving economic solvency for the population, rulers thus found debt cancellation to be a way to prevent a financial oligarchy from emerging to rival the policy aims of kings.

Cancelling debts owed to wealthy local headmen limited their ability to amass power for themselves. Private creditors therefore sought to evade these debt jubilees. But surviving legal records show that royal proclamations were, indeed, enforced. Through Hammurabi’s dynasty these “andurarum acts” became increasingly detailed so as to close loopholes and prevent ploys that creditors tried to use to gain control of labor, land and its crop surplus.

Fast-forward to today’s world. The most recent financial clean slate was the 1948 Allied Currency Reform of Germany. Basic business debts were left in place, along with employer debts to employees. The population was allowed to keep minimum working balances. But the residue of debts was cancelled, on the logic that most were owed to former Nazis. Applauded as a “free market,” Germany’s economy was freed from the postwar debt legacy that had shackled it after World War I. The aftermath in 1948 left Germany’s economy effectively debt-free, paving the way for the Economic Miracle that followed.

(3) Social purpose of Debt Jubilees

The common policy denominator spanning Bronze Age Mesopotamia and the Byzantine Empire in the 9th and 10th centuries was the conflict between rulers acting to restore land to smallholders so as to maintain royal tax revenue and a land-tenured military force, and powerful families seeking to deny its usufruct to the palace. Rulers sought to check the economic power of wealthy creditors, military leaders or local administrators from concentrating land in their own hands and taking the crop surplus for themselves at the expense of the tax collector.

By clearing the slate of personal agrarian debts that had built up during the crop year, these royal proclamations preserved a land-tenured citizenry free from bondage. The effect was to restore balance and sustain economic growth by preventing widespread insolvency.

Babylonian scribes were taught the basic mathematical principle of compound interest, thereby increasing the volume of debt exponentially, much faster than the rural economy’s ability to pay,[2] an argument recently revived by Thomas Piketty, in Capital in the Twenty-First Century, (2014). That is the basic dynamic of debt: to accrue and intrude increasingly into the economy, absorbing the surplus and transferring land and even the personal liberty of debtors to creditors.

Debt jubilees were designed to make such losses of liberty only temporary. The Mosaic injunction (Leviticus 25), “Proclaim liberty throughout the land,” is inscribed on America’s Liberty Bell. That is a translation of Hebrew deror, the debt Jubilee, cognate to Akkadian andurarum. The liberty in question originally was from debt peonage.
To insist that all debts must be paid, regardless of whether this may bankrupt debtors and strip away their land and means of livelihood, stands at odds with the many centuries of Near Eastern clean slates. Their success stands at odds with the assumption that creditor interests should always take priority over those of the indebted economy at large.

 
• Category: Economics, History • Tags: Consumer Debt, Debt, Financial Debt 
Outlook for the 1% (and the Democratic Party split), 2018
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Low interest rates, “quantitative easing,” and the mitigation of antitrust laws led to more mergers and acquisitions in 2017, but that’s only going to fuel greater wealth inequality and tighten the corporate grip on the political system, explains economist Michael Hudson.

GREGORY WILPERT: Welcome to The Real News Network. I’m Gregory Wilpert coming to you from Quito, Ecuador. The year 2017 is turning out to be another banner year for the centralization of capital, that is, according to an article in the Financial Times this week, “Global mergers and acquisitions exceeds three trillion dollars for the fourth straight year.” The article goes on to point out the following: Faced with the prospect of Amazon’s entry into the pharmacy business, the US’s biggest drugstore chain, CVS Health, agreed to acquire health insurer, Aetna for about $69 billion. Encroachment by Facebook and Netflix into sports, media and film production led Rupert Murdoch to sell most of his 21st Century Fox empire to Disney in a $66 billion deal.

The US remained the most active region for mergers and acquisitions with $1.4 trillion in deals. The numbers of US deals struck in 2017 combined climbed above 12,400 for a record figure. The largest deal in 2017 has yet to be resolved as Broadcom pursues a hostile $130 billion bid for rival chip maker, Qualcomm. Joining me to analyze the causes and consequences of this massive centralization of capital in 2017 is Michael Hudson. Michael is a distinguished Research Professor of Economics at the University of Missouri/Kansas City. He’s author of several books. The most recent among them is J is for Junk Economics. Welcome back, Michael.

MICHAEL HUDSON: Good to be back here.

GREGORY WILPERT: So, what at heart is causing all of this frenetic activity for companies to gobble up one another and thereby creating and ever greater centralization of capital?

MICHAEL HUDSON: It’s part of the neoliberal strategy to inflate the wealth of the 1%, basically by inflating the stock market and the real estate and the bond prices. Central banks are pursuing quantitative easing that offers money at almost zero interest rates. At the same time, you have the tax system’s giveaways to the FIRE sector, capped by deregulatory policies that are encouraging mergers and acquisitions by dismantling the antitrust legislation that has been in place since the New Deal.

The tax giveaways in the Republican tax law two weeks ago enables companies that have kept hundreds of billions of their earnings tax-free in offshore banking enclaves and tax avoidance centers to now shift them to their head office accounts. (Most were kept in U.S. dollars all along, but in the name of “false flag of convenience” companies.) All this tax-avoidance money that has been accumulating since 2004 can now be replaced in the name of the head companies instead of their just-pretend foreign affiliates in these tax avoidance centers.

So the companies are going to be very cash-rich. They’ve anticipated most of this and you can look at these mergers and acquisitions as part of an arbitrage operation. If a hedge fund, a bank or large corporation can borrow at 1%, they can buy stocks that are yielding 10% or even more – or, for that matter, even less. They can get an arbitrage difference between the 1% they pay and the stocks whose dividends pay a higher rate of return, 5, 6, 7, 8, or 9%.

When you buy enough stocks to give you control of a target company, that’s called mergers and acquisitions or corporate raiding. Hedge funds have been doing this, as well as corporate financial managers. With borrowed money you can take over or raid a foreign company too. So, you’re having a monopolistic consolidation process that’s pushed up the market, because in order to buy a company or arrange a merger, you have to offer more than the going stock-market price. You have to convince existing holders of a stock to sell out to you by paying them more than they’d otherwise get.

But suppose you’re a company that doesn’t want to be bought out. Suppose you’re a corporation trying to defend yourself from this merger and acquisition movement. In that case, you do is what they’ve done since the 1980s: You take a poison pill, using your earnings to buy your own stock. Some companies even borrow to buy up their own stock, or they simply increase their dividend payouts so much that it pushes up the stock and leaves nothing in the corporate treasury to be raided by these raiders.

The upshot is that on the part of attackers and defenders alike, you have a process that bids up stock prices. Since the vast majority of stocks are owned by the 1%, and certainly by the 10%, the effect is to increase the wealth of the 1 to 10% in comparison to the wages the bottom 99% get. That basically is the financial and fiscal war in a nutshell.

GREGORY WILPERT: Just a quick question. You’re saying that low interest rates and quantitative easing are among the key factors here. But aren’t those policies also good for the bottom 90%? After all, it keeps interest rates low for ordinary borrowers, such as people who have mortgages or credit cards to pay off, and also helps keep unemployment low. What would be the alternatives if you don’t want to cause unemployment to go up by raising interest rates?

MICHAEL HUDSON: Why on earth would the 1% want to help the 99%? No, it hasn’t helped them at all.

If you’re a member of the 99%, you don’t get to borrow at 1%. Banks and hedge funds get to borrow at 1%. If you’re a credit card customer, you’re paying the same credit card rate as you’re always paying. And if you miss a payment, even to a utility company, your rate still goes up to 29% or whatever. And if the bank won’t lend to you, you still have to pay 50% or 100% or 500% to the payday loan people backed by JPMorgan Chase and other Wall Street banks as major customers. So no, the 99% have not benefited from quantitative easing. Quantitative easing is to benefit the financial sector, which means basically the 1%, not benefit the rest of the economy.

We’re living in a world that’s divided into two economies: the economy of the 1%, and the economy of the bottom 99%. I guess you could be more “centrist” and say the top 10% versus the bottom 90%. But there’s definitely a stratification at work here.

GREGORY WILPERT: The Financial Times quotes analysts who say that they expect mergers and acquisitions to accelerate even more in 2018. You touched on this when you mentioned the Republican tax reform. So would you basically agree that M&A will accelerate? What are some of the underlying causes for a further continuation of this process of centralization?

MICHAEL HUDSON: There are two underlying causes. For one thing, now that the Republicans are in power in the United States – and I don’t think it would matter if Hillary’s Democrats were in power – they’re not enforcing the antitrust regulations. What deterred a lot of mergers and acquisitions in the past was the threat of creating a monopoly, so the antitrust laws prevented you. But now they’re saying, you can make a monopoly, but make sure the 99% pay through the nose. You can make a monopoly and charge the 99% higher monopolized prices.

So, what you’re having is a rentier revolution. The aim of the 1% isn’t to make money by profits by employing labor. It’s to make economic rent. It’s to make monopoly rent, land rent and financial rent.

For instance, if you end internet neutrality and permit mergers of the big information technology corporations, that’s a form of rent seeking. It’s part of today’s political revolution.

 
• Category: Economics • Tags: Neoliberalism, Wall Street 
Introduction to the German Edition
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In theory, the global financial system is supposed to help every country gain. Mainstream teaching of international finance, trade and “foreign aid” (defined simply as any government credit) depicts an almost utopian system uplifting all countries, not stripping their assets and imposing austerity. The reality since World War I is that the United States has taken the lead in shaping the international financial system to promote gains for its own bankers, farm exporters, its oil and gas sector, and buyers of foreign resources – and most of all, to collect on debts owed to it.

Each time this global system has broken down over the past century, the major destabilizing force has been American over-reach and the drive by its bankers and bondholders for short-term gains. The dollar-centered financial system is leaving more industrial as well as Third World countries debt-strapped. Its three institutional pillars – the International Monetary Fund (IMF), World Bank and World Trade Organization – have imposed monetary, fiscal and financial dependency, most recently by the post-Soviet Baltics, Greece and the rest of southern Europe. The resulting strains are now reaching the point where they are breaking apart the arrangements put in place after World War II.

The most destructive fiction of international finance is that all debts can be paid, and indeed should be paid, even when this tears economies apart by forcing them into austerity – to save bondholders, not labor and industry. Yet European countries, and especially Germany, have shied from pressing for a more balanced global economy that would foster growth for all countries and avoid the current economic slowdown and debt deflation.

 

Imposing austerity on Germany after World War I

After World War I the U.S. Government deviated from what had been traditional European policy – forgiving military support costs among the victors. U.S. officials demanded payment for the arms shipped to its Allies in the years before America entered the Great War in 1917. The Allies turned to Germany for reparations to pay these debts. Headed by John Maynard Keynes, British diplomats sought to clean their hands of responsibility for the consequences by promising that all the money they received from Germany would simply be forwarded to the U.S. Treasury.

The sums were so unpayably high that Germany was driven into austerity and collapse. The nation suffered hyperinflation as the Reichsbank printed marks to throw onto the foreign exchange also were pushed into financial collapse. The debt deflation was much like that of Third World debtors a generation ago, and today’s southern European PIIGS (Portugal, Ireland, Italy, Greece and Spain).

In a pretense that the reparations and Inter-Ally debt tangle could be made solvent, a triangular flow of payments was facilitated by a convoluted U.S. easy-money policy. American investors sought high returns by buying German local bonds; German municipalities turned over the dollars they received to the Reichsbank for domestic currency; and the Reichsbank used this foreign exchange to pay reparations to Britain and other Allies, enabling these countries to pay the United States what it demanded.

But solutions based on attempts to keep debts of such magnitude in place by lending debtors the money to pay can only be temporary. The U.S. Federal Reserve sustained this triangular flow by holding down U.S. interest rates. This made it attractive for American investors to buy German municipal bonds and other high-yielding debts. It also deterred Wall Street from drawing funds away from Britain, which would have driven its economy deeper into austerity after the General Strike of 1926. But domestically, low U.S. interest rates and easy credit spurred a real estate bubble, followed by a stock market bubble that burst in 1929. The triangular flow of payments broke down in 1931, leaving a legacy of debt deflation burdening the U.S. and European economies. The Great Depression lasted until outbreak of World War II in 1939.

Planning for the postwar period took shape as the war neared its end. U.S. diplomats had learned an important lesson. This time there would be no arms debts or reparations. The global financial system would be stabilized – on the basis of gold, and on creditor-oriented rules. By the end of the 1940s the United States held some 75 percent of the world’s monetary gold stock. That established the U.S. dollar as the world’s reserve currency, freely convertible into gold at the 1933 parity of $35 an ounce.

It also implied that once again, as in the 1920s, European balance-of-payments deficits would have to be financed mainly by the United States. Recycling of official government credit was to be filtered via the IMF and World Bank, in which U.S. diplomats alone had veto power to reject policies they found not to be in their national interest. International financial “stability” thus became a global control mechanism – to maintain creditor-oriented rules centered in the United States.

To obtain gold or dollars as backing for their own domestic monetary systems, other countries had to follow the trade and investment rules laid down by the United States. These rules called for relinquishing control over capital movements or restrictions on foreign takeovers of natural resources and the public domain as well as local industry and banking systems.

By 1950 the dollar-based global economic system had become increasingly untenable. Gold continued flowing to the United States, strengthening the dollar – until the Korean War reversed matters. From 1951 through 1971 the United States ran a deepening balance-of-payments deficit, which stemmed entirely from overseas military spending. (Private-sector trade and investment was steadily in balance.)

 

U.S. Treasury debt replaces the gold exchange standard

The foreign military spending that helped return American gold to Europe became a flood as the Vietnam War spread across Asia after 1962. The Treasury kept the dollar’s exchange rate stable by selling gold via the London Gold Pool at $35 an ounce. Finally, in August 1971, President Nixon stopped the drain by closing the Gold Pool and halting gold convertibility of the dollar.

There was no plan for what would happen next. Most observers viewed cutting the dollar’s link to gold as a defeat for the United States. It certainly ended the postwar financial order as designed in 1944. But what happened next was just the reverse of a defeat. No longer able to buy gold after 1971 (without inciting strong U.S. disapproval), central banks found only one asset in which to hold their balance-of-payments surpluses: U.S. Treasury debt. These securities no longer were “as good as gold.” The United States issued them at will to finance soaring domestic budget deficits.

By shifting from gold to the dollars thrown off by the U.S. balance-of-payments deficit, the foundation of global monetary reserves came to be dominated by the U.S. military spending that continued to flood foreign central banks with surplus dollars. America’s balance-of-payments deficit thus supplied the dollars that financed its domestic budget deficits and bank credit creation – via foreign central banks recycling U.S. foreign spending back to the U.S. Treasury.

In effect, foreign countries have been taxed without representation over how their loans to the U.S. Government are employed. European central banks were not yet prepared to create their own sovereign wealth funds to invest their dollar inflows in foreign stocks or direct ownership of businesses. They simply used their trade and payments surpluses to finance the U.S. budget deficit. This enabled the Treasury to cut domestic tax rates, above all on the highest income brackets.

 
2017 compared to 1917
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Socialism a century ago seemed to be the wave of the future. There were various schools of socialism, but the common ideal was to guarantee support for basic needs, and for state ownership to free society from landlords, predatory banking and monopolies. In the West these hopes are now much further away than they seemed in 1917. Land and natural resources, basic infrastructure monopolies, health care and pensions have been increasingly privatized and financialized.

Instead of Germany and other advanced industrial nations leading the way as expected, Russia’s October 1917 Revolution made the greatest leap. But the failures of Stalinism became an argument against Marxism – guilt-by-association with Soviet bureaucracy. European parties calling themselves socialist or “labour” since the 1980s have supported neoliberal policies that are the opposite of socialist policy. Russia itself has chosen neoliberalism.

Few socialist parties or theorists have dealt with the rise of the Finance, Insurance and Real Estate (FIRE) sector that now accounts for most increase in wealth. Instead of evolving into socialism, Western capitalism is being overcome by predatory finance and rent extraction imposing debt deflation and austerity on industry as well as on labor.

Failure of Western economies to recover from the 2008 crisis is leading to a revival of Marxist advocacy. The alternative to socialist reform is stagnation and a relapse into neofeudal financial and monopoly privileges.

Socialism flowered in the 19th century as a program to reform capitalism by raising labor’s status and living standards, with a widening range of public services and subsidies to make economies more efficient. Reformers hoped to promote this evolution by extending voting rights to the working population at large.

Ricardo’s discussion of land rent led early industrial capitalists to oppose Europe’s hereditary landlord class. But despite democratic political reform, the world has un-taxed land rent and is still grappling with the problem of how to keep housing affordable instead of siphoning off rent to a landlord class – more recently transmuted into mortgage interest paid to banks by owners who pledge the rental value for loans. Most bank lending today is for real estate mortgages. The effect is to bid up land prices toward the point where the entire rental value is paid as interest. This threatens to be a problem for socialist China as well as for capitalist economies.

Landlords, banks and the cost of living

The classical economists sought to make their nations more competitive by keeping down the price of labor so as to undersell competitors. The main cost of living was food; today it is housing. Housing and food prices are determined not by the material costs of production, but by land rent – the rising market price for land.

In the era of the French Physiocrats, Adam Smith, David Ricardo and John Stuart Mill, this land rent accrued to Europe’s hereditary landlord class. Today, the land’s rent is paid mainly to bankers – because families need credit to buy a home. Or, if they rent, their landlords use the property rent to pay interest to the banks.

The land issue was central to Russia’s October Revolution, as it was for European politics. But the discussion of land rent and taxation has lost much of the clarity (and passion) that guided the 19th century when it dominated classical political economy, liberal reform, and indeed most early socialist politics.

In 1909/10 Britain experienced a constitutional crisis when the democratically elected House of Commons passed a land tax, only to be overridden by the House of Lords, governed by the old aristocracy. The ensuing political crisis was settled by a rule that the Lords never again could overrule a revenue bill passed by the House of Commons. But that was Britain’s last real opportunity to tax away the economic rents of landlords and natural resource owners. The liberal drive to tax the land faltered, and never again would gain serious chance of passage.

The democratization of home ownership during the 20th century led middle-class voters to oppose property taxes – including taxes on commercial sites and natural resources. Tax policy in general has become pro-rentier and anti-labor – the regressive opposite of 19th-century liberalism as developed by “Ricardian socialists” such as John Stuart Mill and Henry George. Today’s economic individualism has lost the early class consciousness that sought to tax economic rent and socialize banking.

The United States enacted an income tax in 1913, falling mainly on rentier income, not on the working population. Capital gains (the main source of rising wealth today) were taxed at the same rate as other income. But the vested interests campaigned to reverse this spirit, slashing capital gains taxes and making tax policy much more regressive. The result is that today, most wealth is not gained by capital investment for profits. Instead, asset-price gains have been financed by a debt-leveraged inflation of real estate, stock and bond prices.

Many middle-class families owe most of their net worth to rising prices for their homes. But by far the lion’s share of the real estate and stock market gains have accrued to just One Percent of the population. And while bank credit has enabled buyers to bid up housing prices, the price has been to siphon off more and more of labor’s income to pay mortgage loans or rents. As a result, finance today is what is has been throughout history: the main force polarizing economies between debtors and creditors.

Global oil and mining companies created flags of convenience to make themselves tax-exempt, by pretending to make all their production and distribution profits in tax-free trans-shipping havens such as Liberia and Panama (which use U.S. dollars instead of being real countries with their own currency and tax systems).

The fact that absentee-owned real estate and natural resource extraction are practically free of income taxation shows that democratic political reform has not been a sufficient guarantee of socialist success. Tax rules and public regulation have been captured by the rentiers, dashing the hopes of 19th-century classical reformers that progressive tax policy would produce the same effect as direct public ownership of the means of production, while leaving “the market” as an individualistic alternative to government regulation or planning.

In practice, planning and resource allocation has passed to the banking and financial sector. Many observers hoped that this would evolve into state planning, or at least work in conjunction with it as in Germany. But liberal “Ricardian socialist” failed, as did German-style “state socialism” publicly financing transportation and other basic infrastructure, pensions and similar “external” costs of living and doing business that industrial employers otherwise would have to bear. Attempts at “half-way” socialism via tax and regulatory policy against monopolies and banking have faltered repeatedly. As long as major economic or political choke points are left in private hands, they will serve s springboards to subvert real reform policies. That is why Marxist policy went beyond these would-be socialist reforms.

 
It should be called the Leona Helmsley tax plan, only the little people will pay taxes
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S. Peries: It’s the Real News Network. I’m Sharmini Peries coming to you from Baltimore.

A general consensus is emerging that Trump’s tax plan, which he presented last Wednesday will benefit mostly the country’s upper classes and corporations. In fact the only people that got a tax increase are the poorest taxpayers. A quick scan of even business press headlines will reinforce what I’m saying. For example, Bloomberg writes, “Tax reform could open a huge loophole for wealthy Americans”, and the conservative magazines National Review has a headline that reads, “Congressional Republicans tax plan isn’t great for Trump suburbanites.” However Trump himself promised on Wednesday that he and the rich generally would not benefit from this plan. Here’s what he said.

D. Trump: Our framework includes our explicit commitment, that tax reform will protect low income and middle income households, not the wealthy and well-connected. They can call me all they want, it’s not gonna help. I’m doing the right thing, and it’s not good for me, believe me.

S. Peries: Joining us to analyze what Trump’s tax plan would mean for us is Michael Hudson. Michael is a distinguished research professor of economics at the University of Missouri, Kansas City. He’s the author of several books, and the most recent among them is J Is For Junk Economics. Good to have you back, Michael.

M. Hudson: Good to be here, Sharmini.

S. Peries: Michael. Let’s cut to the chase here. Everyone seems to agree that this tax plan will benefit only the rich. Give us a sense of your main points of why you want to contest this tax plan is beneficial for all.

M. Hudson: Sure. It should be called the Leona Helmsley tax plan. Only the little people will pay taxes. But about the loopholes, the interesting thing is Trump said he wasn’t going to gain a penny, and he may have been telling the truth. That would be true if he’s already paying zero income tax. So his income tax rate is going to go from zero to zero.

That’s about the same for a lot of the biggest corporations in America. Apple, Google, Alphabet, these companies that have been taking all of their profits abroad, trillions of dollars, supposedly, that they’re holding abroad. They haven’t paid any U.S. taxes on this money, because they’ve held them nominally in a teeny little office in Ireland, or the Cayman Islands, claiming that they have to pay hardly any income tax at all.

The misrepresentation here is that Trump says that he can now bring all this money back from these offshore enclaves and tax avoidance zones. The reality is the money’s never been in these zones. It’s been in America all the time. Apple, Google and rich real estate companies simply hold all this “foreign” money in an American bank, but in the name of the foreign affiliate, an office registered in Panama or some other offshore enclave.

So there’ll be zero effect on the balance of payments, but it will lock in their zero rate, enabling them to have avoided taxes for over a decade. I think 2004 was the last such tax holiday. They’ll bring them all back now, without having to pay much tax at all.

S. Peries: Michael, another method that wealthy individuals and companies can use to avoid paying taxes is deducting investment expenses. Tell us how this works.

M. Hudson: If you look at the real estate sector’s loopholes, since World War II the National Income and Product Accounts (NIPA) report that real estate is hardly paying any income tax at all. If you own a building and you’re an absentee owner – not living there, not a homeowner, but absentee owners – they avoid paying any income tax because they don’t earn any reportable income. They pay interest, which is a tax-deductible expense, or they pretend – under the accounting rules that their lobbyists have bought from Washington – that the buildings actually are depreciating in value, even while the price is soaring. It’s going way up, they don’t have to pay an income tax. Then finally, when they die neither their estate nor their heirs have to pay any capital gains. The heirs get it without having to pay any tax.

The richest people have to pay an estate tax, but that’s being knocked out also. I think that everybody, as you pointed out, who’ve looked at the tax plan, says, “All the benefits are at the top. Where’s the benefit for the low-income people?”

Well, the wage earners are going to have to pay more tax. The minimum tax rate is actually raised from 10% to 12%. Also, people who live in Democratic states, New York, New Jersey, Maryland, California and so forth, will not be able to subtract the state and local taxes that they’ve been deducting from their taxable income all these years. So the tax rate for wage earners, for people who actually have to file tax forms and declare an income, is actually going to go up. The economy is going to be made poorer.

S. Peries: Now, Trump and his supporters argue that tax reductions will make the U.S. more competitive, and it will lead to more investment. In an earlier interview that we had with Dean Baker, he points out that historically this has not happened when taxes on corporations and on the wealthy were reduced. So if it does not lead to more investment, what do the corporations do with this additional untaxed income?

M. Hudson: They’re going to do the same thing they’ve done with 92% of corporate earnings in the last decade. They’re going to pay it out as higher dividends, pushing up the stock price, and most of all they’re going to use the money for stock buybacks. They’re going to buy back their stocks to raise the price. They are not going to invest.

The reason you would invest would be to sell more goods to the market and expand the economy. But most corporations, and certainly Wall Street, know that the game is over. The economy has not grown since 2008, except for the financial sector and the real estate sector. That is, except for the richest 5%. For 95% of Americans the economy has shrunk, just like it’s shrinking in Europe.

Corporations know this and say, “There’s only one thing we can do, now that the game is over and the economies are shrinking. We’re going to take the money and run. We’re going to pay all the tax cuts we get and give it to our stockholders.”

S. Peries: What are the consequences of this for us?

M. Hudson: It means the class war is back in business with a vengeance. But I don’t think it’s going to go through. There is no way that a group of Republican senators are really going to commit political suicide by actually voting for this plan, any more than they voted for Trump’s medical health plan revoking Obamacare.

What this is really doing politically though, is driving a stake through the heart of the Democratic party. The Democrats are so sure that the kerfuffle over this tax plan is going to backfire against the Republicans that the knives are out. They’re fighting like they’ve never fought before against the supporters of Bernie Sanders, against Elizabeth Warren. The Wall Street-Hillary, wing of the Democratic party says, “Now we’re going to win the election. We don’t need Bernie supporters. We don’t need the working class. We can form an even more right-wing party than Hillary had and what her program was.”

 
• Category: Economics, Ideology • Tags: Donald Trump, Neoliberalism, Tax Cuts 
Michael Hudson
About Michael Hudson

Michael Hudson is President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City and author of The Bubble and Beyond (2012), Super-Imperialism: The Economic Strategy of American Empire (1968 & 2003), Trade, Development and Foreign Debt (1992 & 2009) and of The Myth of Aid (1971).

ISLET engages in research regarding domestic and international finance, national income and balance-sheet accounting with regard to real estate, and the economic history of the ancient Near East.

Michael acts as an economic advisor to governments worldwide including Iceland, Latvia and China on finance and tax law.