‘J is for Junk Economics’: Michael Hudson on TRNN (2/5), February 28, 2017.
Trump’s infrastructure plan will privatize all the benefits for the financiers and make sure that the population at large gets zero benefit from it while paying the costs, says economist Michael Hudson
SHARMINI PERIES: Welcome back to The Real News Network. I’m speaking with Michael Hudson, the author of, J is for Junk Economics, a Guide to Reality in the Age of Deception. Don’t miss it. We’re going to be talking about this book, and some of the misleading concepts that are out there, in terms of economics, and understanding economics.
SHARMINI PERIES: So Michael, one of the things that you really try to tackle in this book is the euphemistic concepts of economics. Trump’s economic plan has focused on infrastructure investment as one of its key plans for the economy. And he says this will create a better business climate and good jobs. What do you think of that?
MICHAEL HUDSON: Well, everybody is in favor of infrastructure. Since the beginning of civilization – starting with the Pyramids, temples and city walls – most of the capital investment in every country of the world, even today, is in infrastructure. That’s why banks, corporations and wealthy investors want to privatize it, because privatizing it is like conquering a new country and being able to take its income.
You can take into your own hands, for your own profit, the largest capital investment there is – what used to be in the public domain. The roads, railroads, airline companies, water and sewer systems and everything that people need, including now the schools can be privatized and instead of providing them to the economy, to make the economy operate at a lower cost, you can make people pay two or three times as much as they were doing. Operating this infrastructure for profit (with high-interest credit) will vastly increase the cost of the economy, without increasing wages or the ability to pay for these privatized services. This will squeeze the living standards while sucking up more and more money to the top of the economic pyramid.
So I do talk about infrastructure in the book, but I also talk about important economists who discussed it. One individual whom I cite in the dictionary section is Simon Patten. He was the first economics professor at the first business school in the United States, the Wharton School at the University of Pennsylvania.
Patten said that there are four factors of production. Classical economics talks about three factors of income — land, labor and capital. But there’s a fourth factor of production, and that’s public infrastructure. However, its function, Patten said – and this is a pro-capitalist saying it, this is the business school – the function of public infrastructure, roads and schools is not to make a profit, like a private investor would do. The public aim is to lower the cost of living and doing business, so as to make the economy more competitive.
If a country does what the United States did, and finances a vast public school system, public extension system for agricultural education, and provides low cost roads, low cost transportation, water and sewers, parks and communications – if you provide all of this either freely or at least at a subsidized price – then you’re going to be able to undersell economies that don’t socialize the means of production.
That’s why, Patten said, socialized economies with active public infrastructure can undersell other economies. Imagine if you’re competing with an economy that does what Margaret Thatcher did in England. When she privatized the electric and water companies, everybody’s electricity and water rates went up. If countries privatize their roads and airlines, the private owners are going to want to borrow all the money needed to invest, and they’re going to pay interest on this.
That’s why banks and brokerage underwriters love privatization. The usual the rate of return to privatizers, over and above interest in the United States, is 12%. But this pales before capital gains of 50% and even 100%. That’s the real rip-off, because public assets are underpriced when being sold to insiders and bank underwriters.
British Telephone made a return of about 25% in just a day or two! That’s how Mitt Romney and other hedge fund operators go about privatizing. They add all sorts of managerial costs for their “services” (mainly looting, downsizing and scaling back pensions while intensifying working conditions to burn out labor – euphemized as “raising productivity”) as well as interest and profits.
They’re going to make a capital gain on the stock that’s issued. And all these payments to the privatizers, in what’s called a private-public partnership (PPP) is going to vastly increase the cost of popular access to this infrastructure.
Look at what happened in Indiana when it built a toll road. The state said that it needed a highway. Absolutely true. Every state needs highways. It paid privatizers to make back their investment (and then some!) with a toll. Needless to say, they set the toll very high, so as to pay the private investors their profits – and pay the bank for its loan, and pay the stockholders. All this cost so much money that drivers in Indiana didn’t use the toll road. They preferred the slower old routes.
To prevent this kind of free market, the privatizers and their banks insisted on a clause in the private-public partnership assuring investors that if Indiana lets private investor build a toll road, it can’t then build any other roads that might compete. The aim is to force people to use the toll road.
By contrast, the purpose of public investment for 100 years in the United States was to prevent such monopolies. That’s why we had anti-monopoly regulations. That’s what made America so much more competitive in the late 19th century and early 20th century. It was able to undersell European and other countries that followed the private-sector emphasis.
The public-private partnership isn’t really a partnership at all. It “socializes” the losses, while privatizing the profits. Instead of society – consumers and also business – being the beneficiary of roads, schools, cable TV systems and communication systems, they are victimized. Instead of providing gains in technology to society at a low cost or even freely, so that people don’t have to earn high enough wages to pay these higher privatized costs, you raise costs. The effect is to squeeze family budgets.
By privatizing healthcare, for instance, people have to pay much higher health insurance in America than anywhere else. You have to pay the insurance companies, and you don’t enforce monopoly rules against the pharmaceutical companies. You don’t even bargain with them or buy in the cheapest market. You buy in the most expensive market, because they’re your largest campaign contributors and that’s what you’ve promised to do.
I fear that the way Trump will choose to finance infrastructure is the upside-down way to do it, the wrong way. Its aim is simply to make his class rich. If you’re building transportation, you’re going to vastly increase the rental yield and hence the price of real estate all along the new routes. If you build new schools, you make the neighborhood more desirable for people to go. Rents and housing prices are bid up – forcing people to take out even larger bank loans to move into such areas.
The guiding idea of classical economics was to recapture this added value created by infrastructure investment. A city or state could self-finance such expenditures by recapturing them as a windfall-gains tax on the rising rent-of-location. (I define these terms in my book.) That wouldn’t be the case with Trump. He’s not going to recapture anything. He wants to privatize the benefits of infrastructure. His aim is make sure that the population at large gets zero benefit from it. All the benefit is to go to the financiers and corporate owners.
SHARMINI PERIES: Why are you so apprehensive? I mean, when Trump talks about the cost of pharmaceuticals, he says the problem is that we don’t negotiate the price with the pharmaceutical companies, and he’s a negotiator. He’s a businessman. So, why shouldn’t we believe him?
He’s going to try to say, “Oh, the Republican Congress won’t let me.” So then the reply should be: “When are you going to run against these candidates, and support candidates who will support what you’re trying to do?” So, he’ll reply, “That’s not my department.”
MICHAEL HUDSON: He’s made his business in real estate. The way most real estate operators make money is to have public investment increase the value of their property. In one of your shows we talked about the Second Avenue subway in New York. That’s increased the rents and property values all along the Second Avenue subway line. But they did it by raising the price on the subway fares, not taxing the windfall gains of the landlords who backed the projects. That’s how Trump made much of his money.
They did it by raising the taxes in New York City. The same thing is happening in Vancouver, Canada, which we also have talked about. They’re adding on a value-added tax to build transportation that’s going to vastly increase what landlords own.
So, of course he thinks this is a wonderful way to create wealth. Well, it does create wealth for him. But the wealth that he makes should have accrued to the population as a whole. It didn’t. That’s why he got wealthy, and the rest of New Yorkers didn’t.