[A-List] The Latest in Junk Economics

[Tony B.]

...Fine essay. Illuminating as always...yet (there's always a 'yet')..

"[To the possessor of money capital] the process of prodution appears merely 
as an unavoidable intermediate link, as a necessary evil for the sake of 
money-making. All nations with a capitalist mode of production are therefore 
seized periodically by a feverish attempt to make money *without the 
intervention of the process of production*".

 (Capital, Vol 3, emphasis added].

... I think we must not see Finance Capitalism as radically divorced from 
capitalism in general...It is a variant, and, moreover, contiguous to the 
larger animal. To ask of it then that it should - or could, even in theory 
(for any significant time) - take command of itself to support a rational 
economy (under the hypothetical guidance of 'Progressive Era clasical 
economists') is to ask that capitalism renounce its core identity.

Tony


----- Original Message ----- 
From: "Bill Totten" <shimogamo at ashisuto.co.jp>
To: "a-list" <a-list at lists.econ.utah.edu>
Sent: Thursday, May 28, 2009 8:13 PM
Subject: [A-List] The Latest in Junk Economics


>
> Marginalist Panaceas to Today's Structural Problems
>
> by Michael Hudson
>
> Personal correspondence (May 21 2009)
>
>
> It looks like bookstores are about to be swamped this summer and fall by
> a forest of advice for which publishers gave respectable advances a year
> ago as the economy was going off the rails. Seeking to minimize the risk
> of cognitive dissonance, the marketing strategy seems to be to offer
> advice by well-placed or celebrity insiders on how to recover the kind
> of free lunch that American pension plans - and popular hopes for easy
> wealth - have long assumed to be part of the natural law of economic
> growth, if only it can be better managed. The fantasy people want to buy
> is that the happy 1981-2007 era of debt-leveraged price gains for real
> estate, stocks and bonds can be brought back. But the Bubble Economy was
> so debt-leveraged that it cannot reasonably be restored. This means that
> publishers have achieved the marketer's dream of planned obsolescence:
> Readers a year or so from now will have to buy a new slew of books as
> they feel hungry again from the lack of intellectual protein.
>
> For the time being we are supposed to be satisfied Wall Street defenses
> of the Bush-Obama (Paulson-Geithner) attempt to re-inflate the Bubble by
> a bailout giveaway that has tripled America's national debt in the hope
> of getting bank credit (that is, more debt) growing again. The problem
> is that debt leveraging is what caused the economic collapse. A third of
> US real estate is now estimated to be in negative equity, with
> foreclosure rates still rising. So publishers have only a short window
> of opportunity to sell the current spate of books before people wake up
> to the fact that attempts to renew the Bubble Economy will make our
> financial overhead heavier.
>
> In the face of this stultifying financial trend, the book-buying public
> is being fed appetizers pretending that economic recovery simply
> requires more "incentives" (a euphemism for special tax breaks for the
> rich) to encourage more "saving", as if savings automatically finance
> new capital investment and hiring rather than what really happens: Money
> is being lent out to create yet more debt owed by the bottom ninety
> percent to the economy's top ten percent. Publishers evidently believe
> that the way to attract readers - and certainly to get reviews in the
> major media - is to propose easy solutions. The theme of most of this
> year's Bubble books therefore is how we could have avoided the Bubble
> "if only …" If only there had been better regulation, for instance.
>
> But to what aim? After blaming Alan Greenspan for playing the role of
> "useful idiot" by promoting deregulation and blocking prosecution of
> financial fraud, most writers trot out the approved panaceas: federal
> regulation of derivatives (or even banning them altogether), a Tobin tax
> on securities transactions, closure of offshore banking centers and
> ending their tax-avoidance stratagems. But no one is going so far as to
> suggest attacking the root of the financial problem by removing the
> general tax deductibility of interest that has subsidized debt
> leveraging, taxing "capital" gains at the same rate as wages and
> profits, or closing the notorious tax loopholes for the finance,
> insurance and real estate (FIRE) sectors.
>
> Right-wing publishers are re-warming their articles of faith such as
> giving more tax incentives to "savers" (another euphemism for more
> giveaways to the rich) and a re-balanced federal budget to avoid
> "crowding out" private investment. One of Wall Street's dreams is to
> privatize Social Security to create yet another Bubble to feed off of.
> (Fortunately, such proposals failed during the Republican-controlled
> Bush administration as a result of taxpayer outrage after the dot.com
> bubble burst in 2000.)
>
> What is not heard is a call to finance Social Security and Medicare out
> of the general budget instead of keeping their funding as a special
> regressive tax on labor and its employers, available for plunder by
> Congress to finance tax cuts for the upper wealth brackets. Yet how can
> America achieve competitiveness in global markets with its pre-saving
> retirement tax (Social Security) and privatized health insurance,
> debt-leveraged housing costs and related personal and corporate debt
> overhead? The rest of the world provides much lower-cost housing, health
> care and related employee costs - or simply keeps labor near subsistence
> levels. Our lack of affordability is a major problem for continued
> dreams of a renewed Bubble Economy, yet the international dimension is
> ignored.
>
> The latest panacea being offered to jump-start the economy is to rebuild
> America's depleted infrastructure. Alas, Wall Street plans to do this
> Tony Blair-style, by public-private partnerships that incorporate
> enormous flows of interest payments into the price structure while
> providing underwriting and management fees to Wall Street. Falling
> employment and property prices have squeezed public finances so that new
> infrastructure investment will take the form of installing privatized
> tollbooths over the economy's most critical access points such as roads
> and other hitherto public transportation, communications and clean water.
>
> Surprisingly, one does not hear even an echo of calls to restore state
> and local property taxes to their Progressive Era levels so as to
> collect the "free lunch" of rising land prices and harness its gains
> over time as the main fiscal base. This would hold down land prices (and
> hence, mortgage debt) by preventing rising location values from being
> capitalized into new mortgage loans against "capital" gains and paid out
> as interest to the banks. Restoring Progressive Era tax philosophy (and
> pre-1930 property tax levels) would have the additional advantage of
> shifting the fiscal burden off income and sales - a policy that would
> make labor, goods and services more affordable. Instead, most reforms
> today call for further cutting property taxes to promote more "wealth
> creation" in the form of higher debt-leveraged property price inflation.
> Instead of housing prices falling and income and sales taxes being
> reduced, rising site values merely will be recycled to the banks for
> ever larger mortgages, not taxed to benefit local government. In this
> scenario, local governments are forced to shift the fiscal burden onto
> consumers and business, impoverishing the community.
>
> The new books advocate merely marginal changes to deep structural
> problems. They include the usual pro forma calls to re-industrialize
> America, but not to address the financial debt dynamic that has undercut
> industrial capitalism in this country and abroad. How will these timid
> "reforms" look in retrospect a decade from now? The Bush-Obama bailout
> pretends that banks "too-big-to-fail" only face a liquidity problem, not
> the growing bad-debt problem we now face along with the economy's
> widening inability to pay. The reason why past Bubbles cannot be
> re-inflated is that they have reached their debt limit, not only
> domestically, but also the international political limit of global
> Dollar Hegemony.
>
> What needs to be written about is what the marginalists leave out of
> account and what academic jargon calls "exogenous" considerations, which
> turn out to be what economics really is all about: the debt overhead;
> financial fraud and crime in general (one of the economy's
> highest-paying sectors); military spending (a key to the US
> balance-of-payments deficit and hence to the buildup of central bank
> dollar reserves throughout the world); the proliferation of unearned
> income and insider political dealing. These are the core phenomena that
> "free market" idea strippers have relegated to the "institutionalist"
> basement of the academic economics curriculum.
>
> For example, the press keeps on parroting the Washington mantra that
> Asians "save" too much, causing them to lend their money to America. But
> the "Asians" saving these dollars are the central banks. Individuals and
> companies save in yuan and yen, not dollars. It is not these domestic
> savings that China and Japan have placed in US Treasury securities to
> the tune of $3 trillion. It is America's own spending - the trillions of
> dollars its payments deficit is pumping abroad, in excess of foreign
> demand for US exports and purchases of US companies, stocks and real
> estate. This payments deficit is not the result of US consumers maxing
> out on their credit cards. What is being downplayed is that military
> spending in most years since the Korean War (1951) that has underlain
> the US balance-of-payments deficit. Now that foreign countries are
> starting to push back, this trend cannot continue much longer.
>
> Inasmuch as China's central bank is now the largest holder of US
> Government and other dollar securities, it has become the main
> subsidizer of the US balance-of-payments deficit - and also the domestic
> US federal budget deficit. Half of the federal budget's discretionary
> spending is military in character. This places China in the
> uncomfortable position of being the largest financier of US military
> adventurism, including US attempts to encircle China and Russia
> militarily to block their development as economic rivals during the past
> fifty years. That is not what China intended, but it is the effect of
> global dollar hegemony.
>
> Another trend that cannot continue is "the miracle of compound
> interest". It is called a "miracle" because it seems too good to be
> true, and it is - it cannot really go on for long. Heavily leveraged
> debts go bad in the end, because they accrue interest charges faster
> than an economy's ability to pay. Basing national policy on dreams of
> paying the interest by borrowing money against steadily inflating asset
> prices has been a nightmare for homebuyers and consumers, as well as for
> companies targeted by financial raiders who use debt leverage to strip
> assets for themselves. This policy is now being applied to public
> infrastructure into the hands of absentee owners, who will themselves
> buy these assets on credit and build the resulting interest charges into
> the new service prices they collect, in addition to being allowed to
> treat these charges as a tax-deductible expense. This is how banking
> lobbyists have shaped the tax system in a way that steers new absentee
> investment into debt rather than equity financing.
>
> The irresponsible cheerleaders applauding a Bubble Economy as "wealth
> creation" (to use one of Alan Greenspan's favorite phrases) would like
> us, their audience, to believe that they knew that there was a problem
> all along, but simply could not restrain the economy's "irrational
> exuberance" and "animal spirits". The idea is to blame the victims -
> homeowners forced into debt to afford access to housing, pension-fund
> savers forced to consign their wage set-asides to money managers at the
> large Wall Street firms, and companies seeking to stave off corporate
> raiders by taking "poison pills" in the form of debts large enough to
> block their being taken over. One looks in vain for an honest
> acknowledgement of how the financial sector has turned into a
> Mafia-style gang more akin to post-Soviet kleptocrat insiders than to
> Schumpeterian innovators.
>
> The cursorily reformist gaggle of post-Bubble tomes assumes that we have
> reached "the end of history" as far as financial problems are concerned.
> What is missing is a critique of the big picture - how Wall Street's
> collaboration in financializing the public domain has inaugurated a
> neo-feudal tollbooth economy while privatizing the government itself,
> headed by the Treasury and Federal Reserve. Left untouched is the story
> how industrial capitalism has succumbed to an insatiable and
> unsustainable finance capitalism, whose newest "final stage" seems to be
> a zero-sum game of casino capitalism based on derivative swaps and
> kindred hedge fund gambling innovations.
>
> What has been lost are the Progressive Era's two great reforms. First,
> minimization of the economy's free lunch of unearned income (for
> example, monopolistic privilege and privatization of the public domain
> in contrast to one's own labor and enterprise) by taxing absentee
> property rent and asset-price ("capital") gains, keeping natural
> monopolies in the public domain, and anti-trust regulation. The aim of
> progressive economic justice was to prevent exploitation - for example,
> charging more than the technologically necessary costs of production and
> reasonable profits warranted. Progressive Era reforms had a fortuitous
> byproduct: Minimization of the free lunch enabled economies such as the
> United States to out-compete others that didn't embrace progressive
> fiscal and financial policy, creating a Leviathan that has now fallen to
> its knees.
>
> The second Progressive Era reform was to steer the financial sector so
> as to fund capital formation. Industrial credit was best achieved in
> Germany and Central Europe in the decades prior to World War One. But
> the Allied victory led to the dominance of Anglo-American banking
> practice based on loans against property or income streams already in
> place. Because of this, today's bank credit has become decoupled from
> capital formation, taking the form mainly of mortgage credit (eighty
> percent), and loans secured by corporate stock (for mergers,
> acquisitions and corporate raids) as well as for speculation. The effect
> is to spur asset-price inflation on credit, in ways that benefit the few
> at the expense of the economy at large.
>
> The consequences of debt-leveraged asset-price inflation are clearest in
> the post-Soviet "Baltic syndrome", to which Britain's economy is now
> succumbing. Debts are run up in foreign currency (real estate mortgages,
> tax-avoidance funds and flight capital), without exports having any
> prospect of covering their carrying charges as far as the eye can see.
> The result is a debt trap - chronic austerity for the domestic market,
> causing lower capital investment and living standards without hope of
> recovery.
>
> These problems illustrate the extent to which the world economy as a
> whole has pursued the wrong course since World War One. This long detour
> has been facilitated by the failure of socialism to provide a viable
> alternative. Although Russia's bureaucratic Stalinism got rid of the
> post-feudal free lunch of land rent, monopoly rent, interest and
> financial or property-price gains, its bureaucratic overhead overpowered
> the economy in the end and Russia fell. Ideology aside, the question is
> whether the Anglo-American brand of finance capitalism will follow suit
> from its own internal contradictions.
>
> The flaws in the US economy are tragic because they are so intractable,
> embedded as they are in the very core of post-feudal Western economies.
> This is what Greek tragedy is all about: A tragic flaw that dooms the
> hero from the outset. The main flaw embedded in our own economy is
> rising debt in excess of the ability to pay, which is part of a larger
> flaw - the financial free lunch that property and financial claims
> extract in excess of corresponding costs as measured in labor effort and
> an equitably shared tax burden (the classical theory of economic rent).
> Like land seizure and insider privatization deals, such wealth
> increasingly is inherited, stolen or obtained through political
> corruption. Adding insult to injury, wealth and revenue extracted via
> today's finance capitalism avoids taxation, thereby receiving an actual
> fiscal subsidy as compared to tangible industrial investment and
> operating profit. Yet academics and the popular media treat these core
> flaws as "exogenous", that is, outside the realm of economic analysis.
>
> Unfortunately for us - and for reformers trying to rescue our
> post-Bubble economy - the history of economic thought has been
> suppressed to give the impression that today's stripped-down, largely
> trivialized junk economics is the apex of Western social history. One
> would not realize from the present discussion that for the past few
> centuries a different canon of logic existed. Classical economists
> distinguished between earned income (wages and profits) and unearned
> income (land rent, monopoly rent and interest). The effect was to
> distinguish between wealth earned through capital and enterprise that
> reflects labor effort, and unearned wealth from appropriation of land
> and other natural resources, monopoly privileges (including banking and
> money management) and inflationary asset-price "capital" gains. But even
> the Progressive Era did not go much beyond seeking to purify industrial
> capitalism from the carry-overs of feudalism: land rent and monopoly
> rent stemming from military conquest, and financial exploitation by
> banks and (in America) Wall Street as the "mother of trusts".
>
> What makes today's Bubble different from previous ones is that instead
> of being organized by governments as a stratagem to dispose of their
> public debt by creating or privatizing monopolies to sell off for
> payment in government bonds, the United States and other nations today
> are going deeply into debt simply to pay bankers for bad loans. The
> economy is being sacrificed to reward finance instead of remaining
> viable by subordinating and channeling finance to promote economic
> growth via an affordable economy-wide cost structure. Interest-bearing
> debt weighs down the economy, causing debt deflation by diverting saving
> into debt payments instead of capital investment. Under this condition
> "saving" is not the solution to today's economic shrinkage; it is part
> of the problem. In contrast to the personal hoarding of Keynes's day,
> the problem is that the financial sector is now using its extractive
> power as creditor instead of wiping out the economy's bad-debt overhang
> in the historically normal way, by a wave of bankruptcies.
>
> Today, the financial sector is translating its affluence (at taxpayer
> expense), into the political power that threatens to pry yet more public
> infrastructure away from state and local communities and from the public
> domain at the national level, Thatcher- and Blair-style. It will be sold
> off to absentee rentier buyers-on-credit to pay off public debt (while
> cutting taxes on wealth yet further). No one remembers the cry for what
> Keynes called "euthanasia of the rentier". We have entered the most
> oppressive rentier epoch since feudal European times. Instead of
> providing basic infrastructure services at cost or subsidized rates to
> lower the national cost structure and thus make it more affordable - and
> internationally competitive - the economy is being turned into a
> collection of tollbooths.
>
> How disheartening that this year's transitory wave of post-Bubble books
> fails to place the financialization of the US and global economies in
> this long-term context.
>
> http://www.billtotten.blogspot.com
> http://www.ashisuto.co.jp
>
>
>
>