This is a transcript from our interview on Meet the Renegades with economist Michael Hudson.
You can watch the full interview with Michael here>
Michael Hudson: I’m Michael Hudson. I’m a professor of economics at the University of Missouri, Kansas City and Peking University. My focus is on the distinction between the financial economy and the real economy at large. I treat the financial sector and debt as an economic overhead, so my focus is on how society can deal with the debt and to explain why society cannot recover from the current depression until it writes down the debts to what can be paid.
Ross Ashcroft: Michael, we’re almost a decade on since 2008 and we sit here now in the developed west and we look at the global economy. To even an untrained eye, things aren’t still right and haven’t been right for some time. Where are we and what’s your view on why we’re here?
MH: We’re in a permanent debt deflation. To make it brief, people think in terms of business cycles – as if whenever things go down, they automatically recover. But every business recovery since World War II has taken place with a higher level of debt – higher and higher and higher. Finally, by 2008, the volume of debt was so high that it was absorbing all the economic growth. At that point the stock markets plunged, especially when it became apparent that the business plan of the large banks was economic fraud and junk mortgages.
People say when Queen Elizabeth asked “Why didn’t anybody foresee it?” The fact is, everybody foresaw that there was going to be a crash. That’s why they used the term “junk mortgage.” That’s why they coined the term NINJA: No income, No job, no assets. All this terminology was widely used. The FBI in 2004 explained that there was the largest wave of financial bank fraud in history, but George Bush shifted the investigators out of the FBI into national security, so nothing was done.
When President Obama ran for election, he promised to write down mortgage debts to the real value of property, not the junk mortgages in excess of the value. The terms that Congress set for the bailout of the banks, the Troubled Asset Relief Program or TARP, were that banks would rewrite the mortgages so that homeowners who could not pay the nominal mortgage would simply pay what the rental value of their property was.
RA: And what happened?
MH: In practice nothing was done. The banks were saved, not the economy. Tim Geithner, who was a protégé of Robert Rubin, was moved on behalf of Citibank into the Treasury, and he bailed out the banks – leaving all the debts in place, not writing them down. Banks stopped lending mortgage money, and began to call in their credit card loans by about 100 billion dollars, from one trillion to about 900 trillion. Mortgages were not written off, so homeowners had to pay so much money to pay off the debts that had been built up during the bubble economy that they didn’t have enough income left to buy goods and services.
RA: You make a distinction between the real economy and Wall Street or the financialized economy and when you say that the debt has built up since World War II, year on year. Are you’re saying that when the real economy can no longer service that debt, we have a financial crisis?
MH: That’s when you have a crisis.
RA: So it isn’t a black swan as such?
MH: It is inevitable. The magic of compound interest means that interest grows and the debt accumulates. When you add in new money creation, debts grow faster than the economy at large. So the situation that existed in 2008 remains the case today: Debt in almost every country is equal to the entire GDP, the entire national income. Now, if debt is equal and the interest rate on debt that people have to pay is 4 percent, then if economies only grow at 1 or 2 percent (as they are today), then all their economic growth has to be devoted to paying the financial sector.
RA: For interest payments?
MH: On interest alone – not mentioning the repayments of principal to pay down the debt. This is the phenomenon of debt deflation that was discussed in the 1930s. It’s a phenomenon that is inherent in the mathematics of compound interest. In fact, this should be the focus of the economic curriculum.
RA: Can you explain?
MH: If you’re teaching economics, you should begin with the relationship between finance and the economy – between the buildup of debt and the ability to pay. That should be the starting point if you realize that the problem of our time is how can society cope with the debt buildup that has occurred. That is what is keeping the economy from recovering?
“If you’re teaching economics, you should begin with the relationship between finance and the economy – between the buildup of debt and the ability to pay.”
RA: So people listening to that must think “Well God that is the obvious place to start. Why doesn’t every undergrad economics course start with that?”
MH: I taught money in banking at the New School for Social Research in the 60s and 70s. Bob Heilbroner, the department chairman, wanted to conform to the mainstream and teach the Chicago School monetarism that treats the economy as if it operates on barter. If you look at almost any economic textbook, all the way through the Ph.D., they treat the economy as being barter. They then factor in money creation as if money it directly affects prices proportionally –and claim that this doesn’t change basic relationships, even between debtors and creditors.
This kind of tunnel vision led people to call the bubble economy’s lead-up stage “the Great Moderation.” It was a Great Moderation in the sense that the banks were able to lend homeowners and companies and governments enough money to pay the interest. There has been the largest increase in credit creation in history since 2008, with almost no increase in consumer prices or wages. All the money creation has gone to buy stocks and bonds into the financial sector.
RA: So just let’s define the Great Moderation. Which years would you put the great moderation between?
MH: About 1995 to 2008. As Alan Greenspan explained it, he said that it was moderate because labour didn’t complain. Productivity was soaring and wage rates did not go up in the American economy. He explained this before the Senate committee, as what has been called the “Traumatized Worker Effect.” He said that workers are so deeply in debt that they’re afraid to strike. They’re afraid to complain about working conditions, because they could be walked out the door, and if they are fired, if they don’t have a job, then suddenly the interest rates they pay on their credit cards go up to 29 percent. They’re one month away from insolvency, one month away from homelessness.” So Greenspan said, in effect, “We’ve hooked them. We’ve got them.”
RA: And his view is that’s the optimum state for workers, why?
MH: Because that’s what he calls a “free market.” It’s a free market where the 1% get to smash the 99% without any ability of the 99% to fight back. A free market in which people do what they’re told. That is the opposite of what Adam Smith and John Stuart Mill and other classical economists meant by a free market. They meant a market free from rentiers, free from landlords, free from banks – so that where everybody got only what they deserved and produced. But under Greenspan and modern economics, a market is “free” from government regulation, free from throwing the bankers in jail when they commit crime, free from any kind of policymaking by government, by labor unions, or by society. So a free market today is a centrally planned economy, but it’s not planned by government. The planning is shifted out of government to the banks.
“They meant a market free from rentiers, free from landlords, free from banks – so that where everybody got only what they deserved and produced.”
RA: …and Wall Street.
MH: Wall Street in the United States, and the city in London.
RA: There can be no bigger failure, as we sit here, when you look at the actions of central bankers. When you talk about the real economy, where next for them?
MH: It’s hard to take people who have a tunnel vision and expand it, because they’re like the old-time Stalinists or religious sectarians. Their minds are absolutely set, there is no way you can have a reasonable argument with the Federal Reserve economists, because they know who appoints them: the Wall Street institutions. They’re drawn from these Wall Street institutions. It’s also the financial sector that endows the universities and the business schools. Hardly by surprise, these schools teach that there is no such thing as unearned income, no exploitation. They teach that the financial sector is the most productive sector in the economy, instead of a burden that should be subtracted from GDP, because it’s an overhead that the rest of the economy has to pay.
This was the basic classical economics of Smith, Ricardo and John Stuart Mill. They all looked at what the landlords got – and what banks got – as socially unnecessary overhead. The economy could function technologically without a landlord class, without a banking class. But there was a political malformation of markets.
Market economists take the status quo for granted. They assume that “the market” is what exists, as if this has occurred naturally through some kind of Darwinian evolution. As Margaret Thatcher said, “There Is No Alternative.” That’s what central bank theory is like: there is no alternative to central banks serving their clientele, the commercial banks.
RA: So let me suggest that there is an alternative, and get your thoughts on this, because this idea has run its course. People are now starting to wake up and say” enough.” You’ve written a lot about unearned versus earned wealth – unearned wealth or unearned increment, if you like – and it goes back to a man called John Bates Clark. He was one of the first neoclassical economists. I think I’m right in saying that. Just talk a bit about him, he said there was no differentiation, is that right?
RA: And that seemingly innocuous proclamation has had huge effects.
MH: By the 1870s and ‘80s there was a lot of pressure in all countries, especially in the United States, by socialists on the one hand and followers of the journalist Henry George on the other. George wanted to tax away the land’s economic rent and use that as the tax base, instead of taxing labor and industry. So John Bates Clark wrote about the philosophy of wealth, and said “There’s no such thing as unearned income. Everything that the economists before me have written is wrong. Everybody earns exactly what they contribute to national product and that means that whatever their earnings are will be added to national product.”
I’ll give you an example of where this leads. About two years ago the head of Goldman Sachs, Lloyd Blankfein, said that Goldman Sachs managers were the most productive people in the American economy, because they earned $22 million a year in salary – not counting their stock bonuses. What he meant was that all this $22 million is added to GDP. If productivity is measured by the income received per laborer, and if by definition, everything you’re paid to Goldman Sachs is in addition to GDP instead of a subtraction from it, then we at Goldman are the most productive. That is their tradition that John Bates Clark got us started along.
RA: No wonder he got funded!
MH: He got so well-applauded by the bankers, landlords and the FIRE sector that the American Economic Association established the John Bates Clark Award for economists under 40 years old who were writing in this anti-classical tradition. They call it “neoclassical” to erase the fact that they are the exact opposites of classical economics.
RA: Wow and that medal – or that award?
MH: It goes to free enterprise right-wing economists to legitimize their trickle-down pattern talk. There’s been a pretense that the only legitimate economists are people with a tunnel vision who say it’s OK to give Wall Street whatever it wants. Their line is that governments shouldn’t regulate prices, they should not throw the bankers in jail, they shouldn’t even regulate consumer protection, because that’s added paperwork and only adds to consumer prices. If you get rid of government, everybody will be happy. So the 1% say: “Trust us we’re job creators.” In fact, of course, they’re job destroyers when they use leveraged buyouts to take over a firm, downsize the labor force, wipe out the pension fund and outsource labor to China or wherever.
RA: Just so we’re clear on terminology, can you give us your definition between earned wealth and unearned wealth or income, because people on the ground know that there’s something wrong but they can’t define what the problem is.
MH: The classical economists said there were three kinds of unearned income: Land rent of absentee owners, that you have to pay just because their ancestors conquered the land and established a hereditary rental claim. Monopoly rent by a monopolist, and natural resource rent by mine and other owners. They all charge a price that’s much more than the cost of production justifies. Finally, there is interest and financial charges. These are technologically unnecessary. We have economies that share the same technology all over the world. So essentially, “economic rent” was the term that the classical economists used for unearned income. It’s the excess of price over actual cost value.
How much does a product, a pharmaceutical, for instance, actually cost? If it costs $2 to make a pharmaceutical pill and they sell it for $200 ,that difference of price over value is “rent.”
RA: And is that called the economic rent?
MH: That’s called monopoly rent. It’s one of the three forms of economic rent. Unearned income is income that really is paid to an unnecessary class. They used to be called the idle rich in the 19th century.
RA: What did Veblen call them?
MH He called them the vested interests. They were the people who actually run society and they secure their status by dumbing down economics. Veblen wrote wonderful books about the decay of education, which he said was the ideology of the ruling class. The purpose of economic education is not to explain how the world works, but to give a vocabulary that will confuse people into believing that the world has to be the way it is, so that there is no alternative, instead of thinking about possible reforms.
Vested interests do not want the history of economic thought taught. When I studied economics and got my Ph.D. there were still courses in the history of economic thought, all of this has been dropped from mathematics now. So when people talk about Adam Smith on a pedestal, or John Stuart Mill, they have no idea that Smith actually was criticizing the rentier sector, the landlords, the monopolists and the banks. He’s made out to be a prototypical Alan Greenspan, a lobbyist for the banks and for the real estate sector.
“Vested interests do not want the history of economic thought taught.”
RA: Where do you see the discipline? You touched on it earlier. Professor Luis Garicano at the LSC – when the Queen asked him, she said “Why did no one see it coming?” He couldn’t answer the question. Economics is the dismal science, and it couldn’t get more dismal. It’s a field you’ve worked in all your life. Where do you see it going from here?
MH: You can’t turn a cold-blooded frog into a warm-blooded mammal by saying “Why don’t you just warm up your blood?” It takes an entirely different entity. I don’t think academic economics can be reformed from within, because you have locked in the old vested interests. You can’t change the thoughts of somebody whose mind is trained in tunnel vision.
You have to do what was done a century ago and create a new discipline. Unfortunately, sociology has met the same fate as economics, largely at the hands of the University of Chicago. So you have to have something else: You could call it “futures studies,” or “reality economics.” But it would be a different discipline. We still call it economics at the University of Missouri at Kansas City, where I am a professor. Our graduates, however, have difficulty being hired by other universities, because in order to be hired in America you have to publish articles in refereed journals. The right wing, the monetarists, the Libertarians and neoliberals, especially through the Chicago school – they have taken over the economic journals, and will not let any alternative analysis or views be pushed.
That’s the genius of Chicago free-market economics. It’s the Pinochet principle: You cannot have a Chicago-style free-market unless you’re willing to kill or eliminate everybody who disagrees with you. Free-market economics Chicago-style must be totalitarian. There must be no alternative. This is what is happening. This is how economic education in the United States is. It’s the Pinochet model without the machine guns.
RA: Don’t they see the irony in this?
MH: No, they see their paychecks.
RA: If we take it to its logical conclusion, where does it end? Totalitarianism?
MH: It ends with economic planning shifting out of the hands of democratic government into the hands of the central bankers and the Treasury. They will do to Europe what they’ve done to Greece. They will do to the United States what they’ve done to the Baltics, who celebrate austerity and mass immigration and demographic collapse as if it is a miracle instead of economic disaster and suicide.
So you have a vocabulary that has been twisted into what really is junk economics. You have euphemisms, an Orwellian-type vocabulary of using words that actually mean the opposite. So a “free market” really means “the road to debt peonage.” You have Friedrich Hayek calling any kind of consumer protection or government protection of the economy the Road to Serfdom instead of the road away from debt peonage.
Basically, free market economics is “blame-the-victim” economics. It says that if you don’t have a job, if you owe money and can’t pay your education debt, that’s your fault. You’ve made the wrong economic decisions. If you were smarter, as smart as Goldman Sachs people, you would make money. The rich people are simply the smart people, and if you’re poor it’s because you’re dumber than the smart people. That, basically, is what it’s all about: intelligence.
Well you don’t need intelligence to make money. All you need is greed, and that’s not taught in business schools. That’s why Goldman Sachs and other Wall Street firms, already 50 years ago when I was on Wall Street, said that the best people they recruited came either from the Brooklyn slums or the Hong Kong slums. They’re the best foreign exchange traders because all they want to do is make money. They’re the people that Wall Street investment banks want. But that has nothing to do with being smart. It’s a tunnel vision, a short termism. The economy, by living in the short term, is destroying itself in the long term.
“The economy, by living in the short term, is destroying itself in the long term.”
RA: Let’s end on a positive. Where do you see a hopeful scenario? Where do you see change coming from? I know you’re saying we’re locked into this. It’s sort of structurally determined. But there must be glimmers of hope that you see?
MH: In the end there’s only one way of solving the problem. That’s to write down the debts. There is no way today’s debts can be paid. The only way to free the economy from these payments for debt service is to write down the debts. That’s what finally happened in Rome. That was what Jesus’ first sermon was all about, wanting to restore the Jubilee Year.
“In the end there’s only one way of solving the problem. That’s to write down the debts.”
RA: We know what happened to him.
MH: That’s what finally happened in the 1920s when Germany and the allies were pushed into depression by German reparations to the allies, for them to pay their Inter-Ally war debts to the United States. Finally these were all cancelled in 1931.
So after about a decade of depression, there will be enough people who will finally see that the debts have to be written down. But there’s not that awareness yet, because there is a feeling that money doesn’t matter – that debts don’t matter, and the economy is really just barter. Unless people think of debt in terms of the whole economy being wrapped in a context of debt and property ownership and rent extraction, they won’t realize that’s what’s being sucked out of the economy doesn’t have to be. It doesn’t have to be this way.
RA: So you’re saying there is an alternative.
MH: Yes, there is alternative.
RA: Flesh out that view.
MH: Well, it’s the view that classical economists had. They were reformers. Their idea was to keep natural monopolies – including health care and pharmaceuticals, water and electricity – in the public sector. You’d have a public alternative to provide basic services and basic needs that cost.
The first business professor in the United States, Simon Patten, said that government infrastructure is a fourth factor of production, alongside labor, land and capital. But unlike private capital, it doesn’t aim at making a profit. It aims at supplying health care and water, and banking either at cost or at a subsidized price or freely. That’s how you make an economy low-cost. If there is a natural rent in some land sites, you use that as a tax base. You tax economic rent, not labor, not industry. Basically, you tax free-lunch income. You don’t use a tax system that adds to cost instead of subtracting from costs.
RA: If you approach the economy as a design job and say “This is the economy we want to design.” The social and economic indicators are going to start to go in the right direction. You’ll have a completely different set of indicators. But we are diametrically opposed to that system at the moment?
MH: Yes, that’s correct.
RA: And really, because you’ve written ‘Killing the Host’, which, by the way, is excellent and what a contribution. This depicts it because the parasite is now so big, the host is labouring badly under that.
MH: The key of parasitism in nature is not simply that the parasite takes the life blood of the organism. In order to do that, the parasite has to take over the brain. It takes over the brain of the host to make the brain think that the parasite is actually part of the host’s bod, and even the baby. So what you have today is an economy that imagines that the financial sector and the Donald Trumps of the world and the real estate speculators are part of the economy, part of GDP instead of being an overhead, a tumour. You can get rid of the tumour, through a proper tax policy and by having a public option as an alternative.
“So what you have today is an economy that imagines that the financial sector and the Donald Trumps of the world and the real estate speculators are part of the economy, part of GDP instead of being an overhead, a tumour.”
RA: If you were going to run I’d vote for you.
MH: I don’t think I could raise as much money from Wall Street as the other side.
RA: Why not? You don’t think they like this message?
MH: Well, politics is not about reality. You saw what happened to Bernie Sanders and all the stuff that’s come out from WikiLeaks about how the election was fixed against him. The delegates that Hillary won at the beginning were in the South, which are Republican states. So she won the Republican states as her major backers within the Democratic Party. That means that the candidate of the Democratic Party was elected primarily both from apparatchiks within the party and by Republican states. That’s the irony of all this.
RA: Congratulations on ‘Killing the Host’
MH: Thank you very much.
RA: An excellent book.
MH: Just finishing the sequel to that and the companion volume, which is “J for Junk Economics”-
RA: Tell us about it. Plug it.
MH: It basically shows how the economic vocabulary has become Orwellian. The words that economists use have become the opposite of what they were really meant to be. “Free-market” now means the opposite of what Adam Smith meant by a free market. Right down the line, you have junk economics, which is basically neoliberalism, the Chicago school. It’s a fictitious picture of how a hypothetical universe might work if the 1 percent were really job-creators. If they really ran the economy in order for a long-term growth, instead of in the short-term to make money for themselves and take the money and run. So it confuses a good economy with a bad economy. Reality economics with desert island economics, which is the kind of individualistic asocial, almost autistic economics that passes for economic education today.
“Free-market” now means the opposite of what Adam Smith meant by a free market.”
RA: So you’re not surprised that Greenspan and Ayn Rand were good mates and actually that she talked to him about sociology. You’re not surprised about that?
MH: When I worked on Wall Street for Chase Manhattan, he was brought into a study I was doing on the oil industry. Chase was very worried that just his presence on the study would discredit it, because he was notorious for saying whatever a client asked him to say. He was a lobbyist already in 1966 when this occurred. So I was given the job of firing Alan Greenspan from the study, and removing it, because they said “He’s such a little bastard, we don’t want him to come after us. You’re a little guy, you’re in your 20s, he doesn’t even know who you are. So give them the information that we know he faked the figures, we know where he faked.”
I was given the job of finding where he faked them from and writing it all up in the small print. So when Greenspan finally left the Federal Reserve, the BBC had on its screen for that day, “After me, the deluge.” with Michael Hudson because they asked me what do I thought of it. He left the economy knowing he was jumping ship, just like investors are jumping ship today from the economy that they’ve driven into debt deflation.
RA: Thank you very much. It’s an awesome book and so what’s coming up is ‘J for Junk Economics’.
MH: Yes that’ll be out later in December. I’m just going over the proofs now and ‘Killing the Host’ was just translated into German in late November by press.
RA: It’s always nice to shake the hand of a man whose fired Alan Greenspan.
MH: Thank you.
You can watch the full interview with Michael here>