Russia's Economic Interests (Part 1) | Credit Writedowns.
If you'd like to understand more about the US economy and how we might solve some of our most pressing problems, I comment to your attention two consecutive blog posts by Michael Hudson:
A few lifts:
from Russia's Economic Interests (Part 1)
We all know that the world is unfair. The most useful question to ask
is how much poverty is economically necessary, how much is a product of
policies that can be alleviated?
...
For starters, it is necessary to distinguish between how much poverty
is “economically” justified and how much is unnecessary. There are many
ways to get rich, and countries are experiencing various kinds of
poverty. The good news is that much of today’s poverty does not stem
from technological or other “objective” causes such as low productivity.
Rather, it stems from special interests carving out privileges to
extract income without any technologically necessary cost of production,
but simply by ownership of “tollbooths”: land, mineral rights, or basic
monopolies and banks privileged to create credit.
Poverty and austerity are the result of special interests
monopolizing the economic surplus at the expense of the economy at
large. The main rentiers falling into this category are the financial
class, landowners and natural resource owners at the top of the economic
pyramid. It is to them that the bottom 90% are indebted and must pay
interest, rent, user fees and other access charges. Rent seeking is an
economically unnecessary burden – and one from which the classical
economists sought to free society. The idea of a “free market” from the
Physiocrats and Adam Smith down through John Stuart Mill and the 19th
century socialists was to free industrial capitalism from the rentier
class that itself was a carry-over from Europe’s feudal epoch.
However, today’s neoliberal advisors turn this classical idea of free
markets upside down. Their idea of “free” markets is one free of
government price regulation, “free” of taxation on land rent, monopoly
rent, financial interest and other categories of what the classical
economists called “unearned income.” So we find ourselves with two quite
different ideas of the economy. The classical idea was to grow by
avoiding “artificial poverty,” purely extractive forms of wealth-seeking
at society’s expense.
The neoliberal idea is to dismantle the government’s ability to
regulate markets to steer growth and economic advance in the national
interest. They claim that this is an alternative to centralized
planning. But the reality is that it simply centralizes planning in the
hands of bankers – primarily those of Wall Street and the City of
London, followed by financial interests in satellite economies and other
subordinate partners in this policy.
Neoliberal economists endorse this as being the “natural” way in
which economies grow and accumulate wealth. Their concept of “wealth” in
this case takes the form of financial riches and special privileges,
not the means of production, education and skills, or research and
technology. In this respect, “bad” forms of wealth-seeking have become
the major threat to national economic growth and power today. This in
turn results from a failure to draw the classical economic distinctions
between productive and unproductive investment.
...
I suggest to focus on public tax policy and infrastructure investment
to steer wealth to expand national output and living standards, because
this is the line of least resistance in overcoming poverty and economic
polarization spurred by bad taxes – not by taxes as such, but by
dysfunctional taxes favoring special interests at the expense of the
economy at large.
...
In Western textbooks the wealthy are supposed to earn income and grow
rich by investing in economic growth. Corporate profits are re-invested
in new plant and equipment, to raise productivity. Credit is supposed
to finance investment that will generate enough new income to pay off
loans with interest, leaving a profit for the entrepreneur or other
investor.
Since the 19th century, industrialists have justified their personal
wealth by claiming to use it to invest in building up the economy’s
stock of capital, employing more labor in the process – and of courses,
donating to charity, especially to universities and policy “think tanks”
these days. The business schools and lobbying tanks that they endow
depict them as wise managers of companies run by industrial engineers.
But this is not what happens in reality. It is easier to make money by
predatory means. That is how the great American fortunes were made, by
the railroad land barons, and by Wall Street railroad and stock market
manipulators. Heavy industry was turned into trusts that fought against
labor unionization, against the drive for safer and better working
conditions, and to raise prices without regard for costs.
The vested interests broke away from classical political economy’s
value system that underlay this takeoff. The break was mainly over the
claim that all wealth is “earned.” There’s no recognition of unearned
wealth achieved at other peoples’ expense. This “value-free” doctrine
rejects not only Marx, but also Adam Smith, John Stuart Mill and other
classical economists. Every way of getting rich is now deemed to be
“productive,” in proportion to the wealth it creates at the top of the
economic pyramid. The neoliberal Chicago economist Milton Friedman went
so far as to claim that “There is no such thing as a free lunch.”
But even as he made this claim, the U.S. and European economies were
becoming more and more about how to get a free lunch. By the 1980s a new
form of economic polarization occurred. If industrialists were getting
rich by squeezing out more profits to invest in capital,
industrialization would have called for more employment, and also
higher-grade labor. Instead, wealth has concentrated at the top of the
economic pyramid by financial means, and by creating monopolies bought
and sold on credit – on terms where the gains are paid out as interest
and dividends. While industrial profits have shrunk, the financial
sector has increased its share of reported profits in the U.S. national
income and product accounts (NIPA) to 40%. This phenomenon has
gone hand in hand with de-industrialization of the U.S. economy – and
also those of the post-Soviet states, I should add.
...
Domestically, in each economy the bubble economy raised the price of
housing, forcing consumers to take on a lifetime of debt to afford it.
The rental income was turned into interest. Educational fees also were
imposed, financed by student loans. In the United States, these loans
cannot be wiped out via bankruptcy. Many students took on debt that will
take a number of decades to pay off – without regard for their ability
to earn income as unemployment levels rise.
The financial sector also funded the takeover of companies. Raiders
used corporate cash flow (ebitda: earnings before interest, taxes,
depreciation and amortization) to pay their bankers and bondholders, and
simply to buy up their own stock in an effort to increase its price –
and hence, the value of their own stock options. Industrial companies
were run by Chief Financial Officers, not by industrial engineers or
even salesmen. The aim was not to make the economy richer, but to make
themselves wealthier – not by new direct investment, but by
disinvesting, downsizing and outsourcing, and in the end by asset
stripping.
This was the mentality of the neoliberals who came to “help” Russia
during the 1990s. They did not come to exploit your labor by hiring it
and squeezing out surplus value. They didn’t want much to do with your
labor at all. They wanted your raw materials resources on the cheap.
They wanted to help your leading scientists and industrial engineers to
emigrate to America, because the United States was producing mainly
financial graduates, not technology-oriented graduates. And they wanted
your flight of capital as well as skilled labor.
The financial polarization process went hand in hand with fiscal
polarization. From the 1980s onward in the US, the tax burden was
shifted off the higher wealth brackets and onto employees – onto the
middle classes and indeed, the bottom 80% of the population. Taxes on
real estate and financial gains were slashed to only a fraction of
income taxes (if such gains were taxed at all). Meanwhile, public social
spending on Social Security, Medicare and other programs were treated
as “user fees” and financialized – paid for in advance by employees (up
to a $102,000 cut-off point), providing the government with enough
revenue to cut taxes on wealth. The result was that the tax system
became regressive instead of progressive.
...
from "Policy Conclusions for Russia (Part 2)"The most obvious caused poverty is by debt. And the largest category
of personal debt in today’s world is mortgage debt to obtain a family
home of one’s own. The price of homes rises when taxes are lowered (or
shifted off property and onto employees), because more rental value is
left for new buyers to pledge to banks for loans to buy the property on
credit. From America to much of Europe, families have to take on a
lifetime of debt in order to obtain housing of their own. The winning
bidder for property is whoever pays the most of the site’s rental value
as interest. So the banks end up with the rent. This is why the
financial sector has grown so rich, and also why debtors have so little
money remaining to spend on goods and services. So markets shrink and
economies fall into recession.
The second problem impoverishing labor from North America to Europe
is the tax shift off wealth (especially off finance, real estate and
monopolies) onto employees and consumers.
These two problems can be solved simultaneously by following what
classical economists recommended: basing the tax system on “free lunch”
income: land rent and monopoly rent, while keeping as many natural
monopolies as possible in the public domain to provide services at
subsidized rates or freely (as in the case of roads, water, etc.).
It may seem counter-intuitive to say that rising real estate taxes
will lower housing prices, but it is easy to explain. A major reason why
real estate prices have soared is the fact that the tax collector has
relinquished its tax obligation. The high point of land taxation in
England, for example, was in the Domesday Book
ordered by William the Conqueror. The idea was that land ownership
would be the tax base. Increasingly, landlords fought back to “free”
themselves of this tax. These efforts forced governments to tax sales
and income of labor and industry. The result was that lower property
taxes “freed” land rent to be pledged to the banks for mortgages, while
shifting the tax burden onto the production-and-consumption economy.
This tax shift had a major negative impact on the national interest.
Taxing the land and monopolies leaves less to be pledged for bank loans,
and hence keeps down the price of housing, office building and other
debt-financed rent-yielding assets. But taxing labor and industry (via
sales taxes, income taxes, etc.) raises the cost of living and doing
business. So this tax shift makes economies less competitive
internationally.
... American
business economists of the late 19th century explained that the nation
could become more competitive by treating public infrastructure
investment as a “fourth factor of production” alongside labor, capital
and land (Simon Patten’s words). Its “return” did not take the form of
income (wages, profits or rent), but rather the degree to which it would
lower the national price structure.
By contrast, privatization in a financialized manner adds on
pseudo-costs. These technologically unnecessary charges are headed by
the credit borrowed to buy the asset from the government, high payments
to management, and most of all, stock options and capital gains. In
effect, privatizers install “toll booths” across the economy to extract
economic rent.
