Michael Hudson With a Little History

I found this clip by way of Naked Capitalism.  In it, Michael Hudson discusses the history of the federal income tax in the United States.  With references to Henry George, Adam Smith and John Stuart Mill, I found it fascinating.  What I found most interesting is the dicussion towards the end of the purposeful degradation and mutation of language to "normalize evil."



FYI - The "Tax the Rich" banner shown above appears nowhere in the clip (at least that I can tell).  That was added by the site, presumably to stir up passions.  I actually find that choice of framing counterproductive because what Hudson discusses in the clip is not the "taxing of the rich" per se, but taxing rents and other speculative gains so as to discourage speculation and encourage real capital formation and investment that creates jobs in the United States. 

Financialism and the Disappearing of Labor From Economics

Previously, I noted that classical economics (exemplified by Adam Smith and David Ricardo, for example) analyzed economics in terms of capital, labor and rent.  In response to the criticisms of Henry George and his proposed Single Tax, which would have eliminated rent, the rentiers funded the founding of neoclassical economics which analyzed economics solely in terms of capital and labor.  In response to socialism and Keynesian theory, which would have elimintated rents, if eliminated, the rentiers funded the founding of the neoliberal movement, which included both social instutitions and a new form of economics, which most people still call neoclassical economics but which I believe is more properly called neoliberal economics because of its origins and aims.  In my original post about Henry George, I intuitied that neoliberal economics had disappeared labor, just as neoclassical economics had disappeared rents.

My conclusion that neoliberal financial theory is normative and renders traditional economic theory inoperative confirms this: the only thing that matters in the economic decision-making of firms and governments is capital and yield.  Under financialism, labor is merely a cost that factors into the calculation of yield.  Nothing more, nothing less. 

I suppose that I shouldn't be surprised that financialism was the real end game.  Neoclassical economic theory has its roots in classical liberalism: both microeconomics and macroeconomics were consructed and sold as scientifically proving that laissez-faire economics and free trade benefited society as a whole.  But as I said before, the primary goal of neoliberalism was to excise the "communistic fiction" from Smith's Invisible Hand, to establish that firms had no social responsibility.  Unfortunately, neoliberal macroeconomic theory-- whether from the Chicago or Austrian schools-- cannot satisfy that ultimate goal, as both must be sold as achieving the greatest benefits to society, and they are.  A higher level of abstraction-- finance -- was required to achieve the goal. 

As Michael Hudson has said, what we're seeing is nothing less than the Counter-Enlightenment, which I believe will result in international neo-feudalism.  Hudson has a new piece out here.

One-Two CounterPunch: Michael Hudson and Paul Craig Roberts

Michael Hudson and Paul Craig Roberts have new pieces up today over at CounterPunch.

Hudson goes for the jugular in his piece, which is entitled "Obama's Greatest Betrayal: The Coming Sell-Out to the Super Rich and What it Means for the Rest of Us."  I've only skimmed it, but there are some tasty nuggets in it, like this one:

Baudelaire quipped that the devil wins at the point where he manages convince the world that he doesn’t exist. Today’s financial elites will win the class war at the point where voters believe it doesn’t exist – and believe that Obama is trying to help them rather than shepherd them into debt peonage as the economy settles into debt deflation.

Where Hudson is focused strictly on domestic policy, Paul Craig Roberts turns his attention to the latest news out of Burma to illustrate "The Stench of American Hypocrisy."  The opening paragraph is devastating:

Ten years of rule by the Bush and Obama regimes have seen the collapse of the rule of law in the United States. Is the American media covering this ominous and extraordinary story? No the American media is preoccupied with the rule of law in Burma (Myanmar).

On civil liberties issues, Paul Craig Roberts is like Glenn Greenwald, but with a spine and a clenched fist.

Michael Hudson Gets It

Here's the latest from Michael Hudson, an interview on Democracy Now! with Amy Goodman and Juan Gonzalez:



You can find the full transcript here.  One aspect that I had not fully appreciated is that the debt-fueled financial speculation is not just in staple commodities but also in foreign currencies (i.e., currency wars).

I found this exchange starting at the 11:40 mark to be quite insightful:

JUAN GONZALEZ: Well, and meanwhile, the impact, because obviously this decision was made the day after the elections at the Fed meeting, they saw what the political landscape was. There wasn’t going to be any kind of stimulus coming from Congress, so they had to come up with a stimulus for Wall Street the day after the elections. But the impact on the American people of maintaining these historically low interest rates—you know, as we were talking earlier before the show, if you have a little bit of money in a savings account right now, you’re getting virtually no interest. So you’re, in essence, being pressured to end up going into the stock market to be able to get any kind of return on your money—those who still have savings. The same thing with the pension funds. What’s happening to the American people as a result of this same kind of policy?

MICHAEL HUDSON: Well, if they have money to put in pension funds or savings, they’re only able to get about one percent, if they keep it safe. Otherwise, they’re taking a risk in the stock market. But the key is not simply lowering interest rates. The idea is to flood the economy with credit so the banks will lend out more debt. And if the Fed’s policy works, then housing prices are going to go back up so high that most consumers are going to have to pay 40 percent of their income for housing. They’re going to have to pay more money for credit card debt. The purpose is to help the banks make money at the expense of the economy. It’s not to help the economy at all. That’s the really important thing. When they say the economy, they mean—the Fed means its constituency: the banks. And the banks’ product is debt. And that’s what they’re trying to produce.

 AMY GOODMAN: Is this inflationary?

MICHAEL HUDSON: It will inflate asset prices. It won’t inflate consumer prices. It’s actually deflationary for consumer prices, because if you’re an American consumer and you spend 40 percent of your income for housing, 15 percent for debt service to the bank, 11 percent goes out in your FICA wage withholding, and about ten to 15 percent in actual income taxes, that means that the average American has maybe one-third or a quarter of their salary to actually spend on goods and services. So they have to spend so much on debt service and finance and insurance and real estate that there’s no money to buy goods and services, so that’s why so many stores are closing throughout the cities on the big shopping streets. It’s deflationary for the economy, inflationary for the people who have wealth, inflationary for the banks. And it’s the banks really at the expense of the economy.

I agree that the endgame is deflationary for the reasons Hudson describes, but there will be short term spikes in consumer staples due to commodity speculation (i.e., screwflation).

The Postcatastrophe Economy: A Summary

I recently finished reading Eric Janszen's The Postcatastrophy Economy: Rebuilding America and Avoiding the Next Bubble.

While I continue to believe that Janszen's book is the best I've read regarding the ongoing economic crisis, I find myself strangely disappointed.  The reason?  The book starts out amazingly strong, but it fails to carry the same levels of energy and clarity into the second half.  In fact, I'd argue that towards the end, Janszen undermines some the clarity of the first half of the book.  Nevertheless, as a whole, the book represents quite an achievement for an entrepeneur turned investment advisor. 

The book is divided into three sections.  First, he describes the FIRE (finance, insurance, real estate) economy that caused the current crisis.  Second, he describes his solution and alternative to the FIRE economy, which he calls the TECI (transportation, energy, communication, infrastructure).  Finally, he provides his "midterm macro forecast."

The first section, which spans a little over half the book, details the FIRE economy, how it operates, and how it led to the crisis that began in 2007 and continues today.  Janszen is clearly familiar with the economics of Michael Hudson, which form the foundation of Janszen's analysis of the FIRE economy, but Janszen extends Hudson's economic theories and synthesizes them into something that is far more accessible to the lay person than Hudson's original works.  He also introduces the interesting metric of "dollar-of-debt" per "dollar-of-GDP."

Things start to break down in the second section, which presents Janszen's vision of a solution to the FIRE economy, which I find compelling but not fully baked.  Janszen is clearly speaking from a position of legitimacy as a technology entrepeneur, and it is clear that his experience shades his judgment of what needs to be done.  This is when some of his blindspots become apparent.  First, his vision is one that caters to people like him, which is a common failing whenever somebody tries to plot a course for the future.  The good news is that his vision is complete enough that it can easily be extended to be more inclusive.  Second, while he understands the economics of the FIRE sector, it is not clear that he grasps how many of our laws, regulations and "rules of thumb" would have to fundamentally change in order to fully break free of the FIRE economy and the embrace the TECI economy.  This is not fatal to implementing his vision, it just means that this is a much larger undertaking than he realizes.  That's why I call his solution merely a vision of a solution.

Things almost fall apart in the final section, primarily because he puts on his investment advisor hat.  I'm not saying that his predictions about things like "peak cheap oil" or gold will prove wrong.  What I'm saying is that, in spite of his understanding of the FIRE sector, he does not seem to truly he understand that he is actually a "speculation advisor" not an investment advisor, and in that role he actually perpetuates the financialization of the real economy by the FIRE sector.  When he cannot see his role in perpetuating the FIRE economy, how can he be correct that the FIRE economy is already over?  Answer: he can't be.

At the end of the day, I do not believe these relatively minor flaws detract from the genius of the book, which is found in the first two sections.  Janszen probably felt it necessary to tack on the third section to treat the preparation of the book as a business expense (advertising), and some people will find the third section alone justifies buying the book.

Michael Hudson and Steve Keen, Together!

I was over at Steve Keen's place.  His latest post includes links to audio and video of a conference that he spoke at recently. 

A couple of the links are to the audio/video for a panel discussion where Hudson and Keen two of the panel members. Here is the audio for the discussion, which I find fascinating.  Check out the whole post, though.

Latest Michael Hudson: Taking Krugman to Task

Hudson's latest piece, "America's China Bashing," can be found here.

Here are some choice statements:

The U.S. and foreign economies alike are suffering from the idea that the way to get rich is by debt leveraging, and that the wealth of nations is whatever banks will lend – the “capitalization rate” of the available surplus. The banker’s dream is to lend against every source of revenue until it ends up being pledged to pay interest. . . .

But Paul Krugman and Robin Wells blame China for Wall Street’s junk mortgage binge. Instead of pointing to criminal behavior by the banks, brokerage companies, bond rating agencies and deceptive underwriters, they take the financial sector off the hook:  . . .

This sounds more like what one would hear from a Wall Street lobbyist than from a liberal Democrat. It is as if the real estate bubble didn’t stem from financial fraud, junk mortgages, NINJA loans or the Federal Reserve flooding the U.S. economy with credit to inflate the real estate bubbles and sending electronic dollars abroad to glut the global economy. It’s China’s fault for running large trade surpluses “at the rest of the world’s expense.” . . .

The FIRE sector’s business plan has priced U.S. labor out of world markets. There seems little likelihood of making Chinese and German workers pay rents or mortgage interest as high as the United States? How can American economic strategists force them to raise the price of their college and university tuition so that they must take on the enormous student loans of the magnitude that Americans have to assume? How can they be persuaded to follow the high-cost U.S. practice of adding FICA-type wage withholding to the cost of living to save up pensions, Social Security and medical insurance in advance, instead of the pay-as-you-go basis that Germany quite rightly follows?

Such suggestions are a cover story for America’s own financial mismanagement. The U.S. idea for global equilibrium is to demand that that the rest of the world follow suit in adopting the short-term time frame typical of banks and hedge funds whose business plan is to make money purely from financial maneuvering, not long-term capital investment. Debt creation and the shift of economic planning to Wall Street and similar global financial centers is confused with “wealth creation,” as if it were what Adam Smith was talking about.

A Proposal

China is trying to help by voluntarily cutting back its rare earth exports. It has almost a monopoly, accounting for 97 per cent of global trade in these 17 metallic elements. These exports are “price inelastic.” There is little known replacement cost once existing deposits are depleted. Yet China charges only for the cost of digging these rare metals out of the ground and refining them. They are used in military and other high-technology applications, from guided missile steering systems and computer hard drives to hybrid electric automobile batteries. This has prompted China to recently cut back its exports to save its land from environmental pollution and, incidentally, to build up its own stockpile for future use.

So I have a modest suggestion. If and when China starts re-exporting these metals, raise their price from a few dollars a pound to a few hundred dollars. According to a theory put forth by Paul Krugman and the U.S. Congress, this price increase should slow demand for Chinese exports. It also would help promote world peace and demilitarization, because these rare metals are key elements in missile guidance systems. China should build up its national security stockpile of these key minerals for the future – say, the next prospective five years of production. Let this be a test of the junk paradigms at work.