An Interview with Michael Hudson
Getting to the Heart of America's Economic Crisis
We trim this 2008 interview from Alexander Cockburn's Counterpunch of July 1 which also appeared in Dissent. The interviewee, Michael Hudson, is a colleague, professor at University of Missouri at KC, formerly at the Chase Manhattan Bank (now JPMorgan Chase), Arthur Anderson, the Hudson Institute (no relation), and was candidate Dennis Kucinich’s Chief Economic Advisor.
By Mike WhitneyMichael Hudson: The discussion of WHAT to tax should take precedence over how much to tax. The main source of taxation should be unearned income, defined as land rent, monopoly rent, other forms of economic rent -- income extracted without playing a role in production. If government could tax the free lunch of economic rent at its source, I would prefer not to tax corporate profits or income at all.
Real estate is our largest sector; most of its market price consists of the land's site value. The first income tax fell mainly on the wealthy, and specifically on real estate, mining and monopolies. Those were the main sources of wealth then, just as they are today.
Most wealth is gained by special tax privileges, and the financial sector is the largest contributor to political campaigns, followed by real estate. The Democrats traditionally have been based in the large cities. As Thorstein Veblen pointed out in Absentee Ownership, urban politics is essentially a real-estate promotion project.
Raise the income tax to 100% and you’d still not capture the actual cash-flow of real estate, monopolies, and multinationals. They plow back their sales proceeds into buying more assets; this is what the great majority of wealth-holders do. Then they charge off interest as a tax-deductible expense and depreciate their buildings, despite property prices rising long-term.
Foreclosures are an age-old problem. If a creditor made a loan without having a realistic idea of how the debtor was to pay it back, the transaction would be deemed to be fraudulent and the debt would be declared null and void. The mayor of Cleveland went further. He brought public nuisance charges against banks whose mortgage lending has led to foreclosures leaving homes vacant; they're being stripped by robbers and used as crack houses. Junk mortgage lenders should be liable to pay the clean-up costs of the debt pollution they've created.
Another way to keep people in homes is to assess what a realistic market price for the property would be, and write down the mortgage to that price.
The high cost of housing -- mainly the cost of carrying a mortgage -- plus non-mortgage debt is onerous. Wage earners cut back consumption. Debt, plus exorbitant management remuneration and legal fees, is one reason employers have not invested as much in new equipment, research, and development. State, local, and federal governments cut back on maintaining infrastructure or improving services. These cutbacks shrink the domestic market, leading to lower investment and hiring.
Creditors turn around and lend out their flow of debt service to yet new borrowers. This involves finding more and more risky markets, while the debt becomes heavier and heavier.
As debt breeds inflation, dollar-denominated stocks, bonds and real estate are worth less and less in terms of euros, sterling, or other harder and foreign currencies. This doesn't provide much incentive for foreigners to invest here. And if we go into a recession (not to speak of depression), there will be even fewer profitable opportunities to invest.
MW: Wouldn't it be better if there were no reserve currency and the value of money were dependent on economic strength and balanced budgets?
Michael Hudson: Foreign countries aren't ready for a political leap out of the American financial empire.
Banks simply print money. Instead of creating credit to fund industrial capital formation, the banking system is lending to bail out bad financial pyramiding. The Treasury and Federal Reserve created $1 trillion in bailout credit for the financial sector in April alone -- while making the hypocritical asymmetrical claim that Social Security will be broke in 40 years because of ITS trillion-dollar deficit. Iraq added another trillion or so.
MW: The financial sector repackages other people's debt (like mortgage-backed securities) and markets them to gullible investors. Is the massive expansion of credit, and debt, shrinking the middle class?
Michael Hudson: Credit is a product that's almost free to create. Its main cost of production is the lobbying expense to buy Congressional support.
MW: What policies should President Obama enact to rekindle the American dream and breath some life into the battered middle class?
Michael Hudson: I think economic circumstances will help impel Mr. Obama to make a swing back toward more classically progressive economic and tax policies.
MW: Alan Greenspan admitted that he supported the invasion of Iraq. How much of a role do the major financial institutions and corporate giants actually play in determining foreign policy?
Michael Hudson: Banks rarely support wars. When I was at Chase Manhattan in the mid-1960s, Wall Street was not pushing the Vietnam War. Chase's CEO, George Champion, said it was fiscally irresponsible. It set in motion an inflation that led to a 35-year downturn in the bond market, from 1945 to 1980, rising interest rates pushed down bond prices. Bonds always have been the key more than stocks.
MW: In 1985 there were 13 US billionaires. Now there are more than 1,000. In 2005 the US saw 227,000 new millionaires created. The average worker's wage rises merely match inflation and 36 million people live below the poverty line. Are we approaching a crisis in this inequality gap?
Michael Hudson: We're indeed entering a Two Economy society. For a crisis to occur, there needs to be at least two opposing forces or trends. The worst problem about America's present quandary is that there seems to be no force opposing financial polarization. Without a counterforce, without an opposition to the financial Counter-Enlightenment that's taking place, economic horizons will continue to shrink.
MW: How do we turn this trend around and push for changes to strengthen the middle class while providing a safety net for those who have slipped through the cracks?
Michael Hudson: Take control of finance. Shift taxes as outlined above.
Green Tax Shift Drawing More Attention
Real Estate and Homeownership
Immobile Taxation in a World of Mobility
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