[R-G] [BillTottenWeblog] Getting to the Heart of America's Economic Crisis

[Bill Totten]

An Interview with Michael Hudson

by Mike Whitney

Counterpunch (July 01 2008)

Mike Whitney: Before John Kennedy took office, anyone making an income
of over $200,000 was taxed at a rate of 93 per cent. Corporations also
paid a much higher percentage of the total tax burden than they do
today. The higher tax rates on the wealthy never hurt Gross Domestic
Product (GDP) which was consistently over four percent during these
years, and the middle class flourished in a way that was unprecedented
in world history. Why don't we return to the "redistributive" policies
which worked so well in the past? Do you think "progressive taxation" is
crucial for maintaining democracy and establishing greater equity among
the people?

Michael Hudson: I think you're framing the tax problem too narrowly. At
issue is not simply the tax rate on the income that's being taxed - at
present, mainly wages, followed by profits. Classical economists focused
first and foremost on WHAT should be taxed. From the Physiocrats through
Adam Smith and John Stuart Mill to socialists such as Ferdinand Lasalle
and America's Progressive Era reformers, they concluded that 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 necessary role in production) and capital gains on these
rent-yielding assets, mainly land sites.

As matters stand today, you could raise the income tax to 100% and still
not capture the actual cash-flow revenue of real estate, monopolies, and
multinationals who use transfer pricing to manipulate their income and
expense statements to show no reportable taxable income at all. So the
first concern should be what kind of revenue to tax. Owning a real
estate rental property is like owning an oil well in the days of the
depletion allowance. In addition to charging off interest as a
tax-deductible expense (rather than a financing choice), owners pretend
that their buildings are depreciating, despite the fact that property
prices have risen almost steadily.

So in most years no taxable income is reported at all. Real estate
owners don't even have to pay a tax on capital gains - what Mill called
the unearned increment - if they plow back their sales proceeds into
buying even more assets. And this is just what the great majority of
wealth-holders do. They keep on trading and accumulating, tax-free. The
situation is much the same with companies taken over by corporate
raiders. Paying interest to junk bond holders absorbs what formerly were
taxable earnings paid out as dividends. This is what really is crippling
the US tax system and de-industrializing the economy.

When Kennedy became president, one of the first things he did was to
pass the Investment Tax Credit. This gave industrial companies a credit
for making tangible capital investment. Real estate got in on the ride
too, but the idea was to use the tax system as an incentive to spur
investment and employment so as to keep industrializing America.

Fast forward to today. The tax system favors speculative gains and
absentee ownership. Ironic as it may sound, really wealthy people prefer
not to make any income at all. They prefer to focus on total returns,
which they take in the form of capital gains. This is why hedge fund
billionaires pay a much lower tax than their secretaries. Real estate is
still our largest sector - most of its market price consisting of the
land's site value - rather than industry and other means of production.
Given the existing loopholes, I would prefer not to tax corporate
profits or even income at all, if the government could tax the free
lunch of economic rent at its source. The discussion of WHAT to tax
therefore should take precedence over how highly to tax the scant income
that wealthy people are obliged to declare from the FIRE sector -
finance, insurance and real estate.

Perhaps the best way to frame the issue is to call this a
re-industrialization discussion. Obviously, the more regressive the tax
system is, the more poverty and inequality there will be. And as
Aristotle said, democracy is the political stage immediately preceding
oligarchy. That's what the economy is now evolving into.


Mike Whitney: Why are Democrats so squeamish about taxing the people who
have benefited most from our system? Do you see any sign that liberals
will join the fight against the far-right ideologues who have dominated
the economic debate for thirty years?

Michael Hudson: The short explanation as to why Democrats haven't taxed
wealth is the power of lobbyists whom the special interests hire and the
public relations think tanks they employ to promote Junk Economics. Most
wealth is gained by special tax privileges these days, 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 (1923),
urban politics is essentially a real-estate promotion project.

A century ago the tax issue was at the forefront of American politics.
Reformers fought hard to enact the income tax - just the opposite of
today's attempt to abolish it. The reason was that the first income tax
fell mainly on the wealthy, and specifically on real estate, mining and
monopolies, which were the main sources of wealth then, just as they are
today.

The deep problem is an absence of economic philosophy of how the economy
works as an overall system. Without distinguishing what kind of
investment and wealth-seeking we want, it's hard to define a fiscal
policy. The idea of a flat tax, for instance, is that all income is
equally worthwhile - except that the flat tax avoids taxing property or
cash flow that FIRE-sector lobbyists have managed to get the IRS to
counts as costs. So it is not only value-free, it is explicitly
anti-labor. You can find it applied most purely in the former Soviet
countries such as the Baltic States.

I don't see the tax issue being discussed by Congress, except by
anti-government tax cutters. And I don't see a realistic discussion
beginning until people define just what progressive taxation means. It
has to start with defining some kinds of income and investment as more
economically productive than others. This would end the tax subsidies
for debt leveraging and financial speculation.


Mike Whitney: How should Obama approach the issue of "debt relief" for
the victims of the housing boondoggle who are now losing their homes in
record numbers? African Americans were particularly hurt by the subprime
fiasco. Is there a way to minimize the losses of people who were trapped
in a banker's scam?

Michael Hudson: Foreclosures are an age-old problem, so there is a broad
repertory of ways to deal with them. In my mind the most effective law
is New York State's law of Fraudulent Conveyance. On the books back when
New York was a colony, it was retained when New York joined the United
States. The problem was that rapacious English creditors sought to grab
New York's rich upstate farmland. Their ploy was to lend mortgage money
to farmers who pledged their land as collateral. Then they would
foreclose - sometimes before the crop was in and farmers simply lacked
the liquidity to pay. Other lenders would lend too much for the
borrowers to pay back when the loan was suddenly called in - as could be
done back then. So New York passed a law ruling that 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.

In the 1980s, companies brought this defense against corporate raiders
using junk bonds as their weapon of choice. Targeted companies claimed
that they would be forced to downsize radically or even have their
assets stripped to the point of bankruptcy. I thought that Third World
countries that borrowed from the large New York banks should have raised
this defense, as the only way they could pay was by either borrowing the
interest, or (as matters turned out) stripped their assets by
privatizing their public domain to raise the dollars.

Today, fraudulent bank loans such as Countrywide is accused of making
would be prime examples of junk mortgages that should be annulled. But
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.


Mike Whitney: That sounds pretty radical.

Michael Hudson: But that's where the law itself is moving. Just last
week, on June 26 after attorneys general in California, Illinois and
Connecticut brought fraud charges against Countrywide, the Wall Street
Journal quoted a California law professor spelling out that if the
states can persuade the courts to grant restitution, it could be a
staggering blow against Countrywide, requiring it to give back its
profit on all those loans and conceivably give back houses on which it
has foreclosed. Financial fraud is a serious matter. The remedies have
long been on the books.


Mike Whitney: Is there a less radical way to keep people in homes which
may be too expensive for their incomes or should we be looking for other
alternatives?

Michael Hudson: The answer depends on how you define homes as being too
expensive. If you're talking about the mortgage's interest-rate jumps
and amortization payments being too high to be afforded, then one way to
keep them there is a partial write-down of the mortgage loan. Treasury
Secretary Paulson already has endorsed a step that remains market-based:
to assess what a realistic market price for the property would be, and
write down the mortgage to that price.

The problem comes from homes that are WAY too expensive. This might be
the result of a sudden expensive health problem, in which case they
probably will have to move, as the United States doesn't have
European-style health insurance and prefers to blame the victim for
having gotten sick or injured. But if the lender knowingly made a bad
loan in the first place and the buyer does have to move because their
income is insufficient to begin with, they should get some relocation
compensation at the very least, and the full legal remedy for fraud at best.


Mike Whitney: Is their a viable alternative to "free trade" or will
American workers continue to face persistent job losses, lower living
standards and a "race to the bottom?

Michael Hudson: The reason US labor has lost its competitiveness is not
simply a race to the bottom. To see why US exports are being priced out
of world markets, you need to look not only at the take-home pay of
workers, but also at what employers are not investing to raise capital
productivity, and what they don't get from government in the form of
basic infrastructure support.

One reason why employers have not invested as much in raising the
productivity of their plant and equipment is that they are saddled with
having to pay out more of their cash flow as interest to bondholders and
banks, and dividends to assuage shareholder activists, the new euphemism
for financial raiders.

US corporate philosophy has been more driven by knee-jerk ideology than
by enlightened self-interest. General Motors has pointed out that it has
to pay enormous health care costs that its foreign competitors don't.
Some sixty years belatedly it's finally discovered that socialized
medicine is more efficient than health care privatized by predatory
financial and insurance operators. Government services don't build in
interest rate costs, dividends, exorbitant management remuneration,
stock options and legal fees. All this absorbs a big part of the
corporate expense for its work force - without raising labor's living
standards in the process.

Meanwhile, educating doctors, dentists and nurses is much less costly
abroad. Here, they emerge from medical school with hundreds of thousands
of dollars in debt, and then have to take on more debt to set up their
offices, then they need to buy expensive liability insurance. Once they
get on an HMO schedule, they usually have to wait for a year or so to
actually get paid. Meanwhile, they have to hire their own full-time
bookkeepers just to deal with the HMOs. Doctors, dentists and nurses are
being put on rations.

Most of all, the price of labor reflects the high cost of housing here
-mainly the cost of carrying a home mortgage - plus non-mortgage debt.
Labor doesn't benefit from these costs. And as matters have turned out,
industry hasn't benefited either. It's the price the US economy as a
whole is paying for having become financialized and privatized in a
dysfunctional way.


Mike Whitney: You have said that the financial crisis is analogous to a
"boa constrictor wrapping itself around the economy and slowly
strangling it". Would you elaborate on that?

Michael hudson: I was referring to debt deflation. As the debt overhead
grows exponentially, it siphons off more and more money from being spent
on production and consumption. For the financial sector, this is
applauded as being the miracle of compound interest. The volume of loans
keeps on growing by purely mathematical principles, without much regard
for the economy's ability (or inability) to generate a large enough
surplus to pay. More and more wages, corporate profits and tax revenues
have to be earmarked to pay creditors. These creditors then 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.

To pay the carrying charges on these debts, wage earners cut back
consumption while debt-wracked companies cut back on new capital
investment, research and development. State, local and federal
governments also pay interest on their deficits by cutting back on
spending to maintain infrastructure or improve services. These cutbacks
shrink the domestic market, leading to lower investment and hiring. All
this is applauded as the magic of the marketplace in allocating
resources. But it's the financial sector that is doing the applauding,
not industry.


Mike Whitney: Does that mean that there will be sudden jolts to the
system like a major bank -perhaps Citigroup or Merrill - keeling over
and sending the stock market crashing?

Michael Hudson: The economy reaches a Ponzi stage where banks lend their
customers the interest to keep payments current. More and more mortgage
loans have been structured this way in recent years. When creditors stop
making these loans, there's a break in the chain of payments and
defaults spread, crashing markets.


Mike Whitney: Is the dollar doomed, or can the US lower its
dual-deficits (fiscal and trade deficits) and continue to attract
foreign capital in the future? And if the recession takes hold, business
slows and unemployment rises, would that strengthen the dollar?

Michael Hudson: I assume that by doom you mean that the dollar will
continue to sink against foreign currencies, while price inflation eats
away at what wages will buy. The idea that a worse economy will be
self-curing is IMF anti-labor ideology and Chicago School propaganda.
This is indeed what Nobel Economic Prizes are given for, I grant you.
But it's Junk Economics. A falling dollar threatens to become
self-reinforcing. For starters, dollar-denominated stocks, bonds and
real estate are worth less and less in terms of euros, sterling or other
harder 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.

Meanwhile, US import dependency will continue to rise as the economy
de-industrializes - that is, as it is further financialized. US overseas
military spending will throw yet more dollars onto the world's foreign
exchange markets. So a weak economy here does NOT mean that the dollar
will strengthen; it means we have a bad investment climate! Austerity
will make us more dependent on foreign countries. For a foretaste, just
look at what has happened when the IMF has imposed austerity plans on
Third World debtors. And remember, last time when Robert Rubin was given
a free hand, in reforming Russia under Clinton, the result was
industrial collapse and bankruptcy.


Mike Whitney: Wouldn't it be better for the world if there were no
"reserve currency" at all and the value of money was simply dependent on
economic strength and balanced budgets? As long as there is an
"international currency", like the dollar, there will be an Empire,
because the paper money of one country (US) dominates all others. Is
democracy really possible without greater parity between the world's
currencies?

Michael Hudson: Exchange rates are independent of political systems.
That being said, oligarchic economies tend to go bust as a result of
shifting the tax burden off real estate, monopolized and privatized
infrastructure, and onto labor and industry. This makes them
uncompetitive. For instance, the military-industrial complex operates on
a cost-plus basis rather than a cost-minimizing basis. The question
therefore is whether they can extort foreign tribute from other
countries by enough to compensate. Spain couldn't do this from the New
World after 1492, and Rome earlier simply destroyed Asia Minor and other
imperial appendages.

Can the United States succeed better today? Dollar hegemony looks like
the only way it can pull it off. By definition, a reserve currency is a
loan from one government to another. This ends up becoming taxation
without representation. It's inherently inequitable.

There are two reasons for central banks to hold dollars. One is for
stabilization purposes to prevent currency raids such as occurred in
Asia in 1997. The other is that keeping dollar receipts in the form of
dollar-loans back to the United States holds down the price of their own
currencies, and hence the price of their exports. This effect also could
be achieved by imposing a floating tariff against imports from countries
whose currencies are depreciating, with the money provided as a subsidy
to exporters. But foreign countries aren't yet ready for this great a
quantum political leap out of the American financial empire.

Regarding tax policy, there's not really a need for balanced budgets.
Starting with the greenbacks during the Civil War years, the United
States has demonstrated that governments don't have to raise taxes to
spend money. They can simply print it. That's what the commercial
banking system does, after all. In either case, the money is created
spontaneously. 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 forty years because of ITS trillion-dollar deficit. Iraq added
another trillion or so.

The moral is that economic strength consists of the ability to create
credit that fuels economic growth. But the privatized banking sector is
crippling this strength in the United States these days. Instead of
creating credit to fund industrial capital formation, the banking system
is lending to bail out bad financial pyramiding.


Mike Whitney: Do you see the growth of the financial sector as a
positive development, or not?

Michael Hudson: Its behavior has become antithetical to the development
of industrial capitalism. 19th century reformers inspired by Henri St
Simon in France sought to reorganize finance from debt financing to
equity financing. But today's economy is going in just the opposite
direction. It's replacing stocks with bonds and loans by banks and
buyout funds, creating debt that is not being used to build up the
productive capacity to pay back this debt with its interest charges. The
result is what classical economists called unproductive debt.


Mike Whitney: The financial sector seems less inclined to lend to
develop useful products and enterprises. It prefers to repackage other
people's debt (like mortgage-backed securities) and market them to
gullible investors. Are the investment banks responsible for the massive
expansion of credit and debt presently destroying the middle class and
ruining the country?

Michael Hudson: That's what's happening. But a major reason why savings
are flowing into these banks [is] because the tax laws make it more
profitable to debt leverage than to invest in industrial capital. The
tax system has shaped a market where it pays more to speculate than to
invest in building up new means of production. The financial sector has
been deregulated on the logic that whatever makes the most money is the
most efficient. The product that banks are selling is debt, and help in
corporate takeovers, mergers and acquisition. Credit is a product that's
almost free to create. Its main cost of production is the lobbying
expense to buy Congressional support.


Mike Whitney: So we're back to politics. What do you know about Barack
Obama's economics advisors? Should we expect a repeat of Bill Clinton's
"Rubinomics", where Wall Street got everything they asked for and
American workers got NAFTA, currency deregulation, the repeal of Glass
Steagall and other "trickle down" policies? Is there any hope that Obama
may chart a new coarse and move in a progressive direction? What
policies should President Obama enact to rekindle the American dream and
breath some life into the battered middle class?

Michael Hudson: I'm not in any position to speak about what Mr Obama
will do. As for, economic advisors, their role in a political campaign
usually is not so much to shape policy as to mobilize their constituency
to support the candidate. The role of Mr Rubin and his associates, at
least at present, is therefore to round up Wall Street support. What
influence such advisors will have after next January is yet to be seen.
It probably will depend on the circumstances.

I can only hope that Mr Obama will not pull a Tony Blair New Labor
turnabout and revert to Clinton's pro-Wall Street, anti-labor type of
policy. If that really were to happen, it would cause such
disillusionment that it could fracture the Democratic Party irreparably.

I hope the opposite will happen, and I'm doing what I can to help bring
that about. But regarding politicians, I can only speak for my friend
Dennis Kucinich. He has asked me to organize a Roosevelt-type Brains
Trust of economic and political advisors to develop a program to
re-industrialize America and save it from succumbing to the kind of
polarization that was known as the Spanish Syndrome after the 16th
century, and the Roman Empire syndrome before that: an economy where the
wealthy magnates made themselves tax-free, shifted the burden onto labor
and industry, and withdrew into their estates as economies lapsed back
into localized subsistence production.

So all this has happened before, again and again. There is no automatic
guarantee of progress. It has to be steered. Right now the only parties
steering it are the large financial institutions on behalf of their
wealthy clients. Hardly by surprise, their attitude is anti-labor.

I think economic circumstances will help impel Mr Obama to make a swing
back toward more classically progressive economic and tax policies. And
I can't think of any other candidate who is in as good a position to
force Congress to go along with his reforms. He can come out and back
candidates willing to oppose the more recalcitrant Democratic
Congressmen and Senators.


Mike Whitney: On CBS "60 Minutes", Alan Greenspan admitted that he
supported the invasion of Iraq. That's hardly surprising, since it is
difficult to imagine that a nation can trudge off to war without the
support of the banking establishment. How much of a role do the major
financial institutions and corporate giants actually play in determining
foreign policy? Is there something particular to our economic system (or
our financial institutions?) that drives us to war over and over again?

Michael Hudson: I don't think the invasion of Iraq was a result of a
financial sector decision. As for Mr Greenspan, he's a public relations
specialist, not a global strategist. I think that banks just try to
maneuver as best they can in any given political system. But as a
sector, they 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
steady 35-year downturn in the bond market.

Think of it. Thirty-five years of rising interest rates, from 1945 to
1980, pushing down bond prices. Bonds always have been the key more than
stocks. The rise in interest rates meant that the price of existing,
lower-rate bonds went down steadily. And that was the result of the
war's balance-of-payments deficit and President Johnson's guns and
butter approach encouraged by Junk Economics at the hands of
faux-Keynesians such as Gardner Ackley, Johnson's Chairman of the
Council of Economic Advisors.

The moral is that you can't really have a grab for empire - and the wars
that go with it - and at the same time have a booming economy.

Something has to give, as we're seeing now. The remarkable thing is that
people are not relating America's attempt to create a unipolar empire
with the spreading economic polarization and financial squeeze that's
going on. Industry for its part is losing out to finance, but simply has
sought to make money by financializing itself.


Mike Whitney: Paul Harris wrote a terrific article in the UK Guardian,
"Welcome to Richistan, USA" in which he discusses the huge
wealth-disparity in America today. He says:

"America's super-rich have returned to the days of the Roaring Twenties.
As the rest of the country struggles to get by, a huge bubble of
multi-millionaires lives almost in a parallel world. The rich now live
in their own world of private education, private health care and gated
mansions. They have their own schools and their own banks. They even
travel apart - creating a booming industry of private jets and yachts.
Their world now has a name, thanks to a new book by Wall Street Journal
reporter Robert Frank which has dubbed it Richistan (2007).

In 1985 there were just thirteen US billionaires. Now there are more
than 1,000. In 2005 the US saw 227,000 new millionaires being created.
One survey showed that the wealth of all US millionaires was $30
trillion, more than the GDPs of China, Japan, Brazil, Russia and the EU
combined. The rich have now created their own economy for their needs,
at a time when the average worker's wage rises will merely match
inflation and where 36 million people live below the poverty line."

So here's my question: The middle class is being squeezed like never
before while the chasm between rich and poor gets bigger and bigger. Do
you think we are we approaching a crisis phase in this inequality gap,
or am I being an alarmist?

Michael Hudson: 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 here.

We're indeed entering a Two Economy society. John Edwards picked up the
theme and almost the same wording that British Prime Minister Benjamin
Disraeli made popular in the late 19th century. He created Britain's
Conservative Party in its modern form, recruiting compassionate
conservatives known as Young England. Much like the socialists decrying
the unfairness of the market economy in the brutal form it took in
Britain. Their dream was to make industrialization compatible with a
more socially minded morality. Disraeli's major political adversary was
not socialism but liberal free-market ideals that urged nations to
compete by lowering their wages - what today is called a race to the
bottom. His welfare legislation was highlighted by the public health
system introduced from 1874 to 1881 and promoted under his motto Sanitas
sanitatum, Health, all is health. Compare that to today's conservatives!

In 1845, three years before the Communist Manifesto and the revolutions
that swept across Europe in 1848, he addressed the horrors of unbridled
laissez faire in a novel, Sybil, or The Two Nations. The subtitle
referred to the rich and the poor, two nations between whom there is no
intercourse and no sympathy, and - who are not governed by the same
laws. Although Disraeli placed his hopes in a morally regenerate
aristocracy, he assigned the loftiest ideals to Sybil, the daughter of a
factory worker. And when the novel's protagonist, Egremont, asks about
conditions in British cities, a young stranger, dressed modestly in
black, explains that although "men may be drawn into contiguity, they
still continue virtually isolated ... In great cities men are brought
together by the desire of gain. They are not in a state of co-operation,
but of isolation, as to the making of fortunes ... Christianity teaches
us to love our neighbour as ourself; modern society acknowledges no
neighbour." "Well, we live in strange times ... society may be in its
infancy", said Egremont ... "but, say what you like, our Queen reigns
over the greatest nation that ever existed". "Which nation?" asked the
younger stranger, "for she reigns over two ... Two nations; between whom
there is no intercourse and no sympathy; who are as ignorant of each
others habits, thoughts, and feelings, as if they were dwellers in
different zones, or inhabitants of different planets; who are formed by
a different breeding, are fed by a different food, are ordered by
different manners, and are not governed by the same laws". "You speak
of?" said Egremont, hesitatingly. "THE Rich and THE Poor".

Disraeli depicted financial interests as the villain (popularizing the
myth of the Jewish banker). His major political adversary was not
socialism but liberal free-market ideals that urged nations to compete
by lowering their wages - [today's] ... race to the bottom. The
Conservative Party's economic compassion, however, was limited by the
fact that it also was the party of landowners, above all those in the
House of Lords who blocked the Liberal attempt to tax groundrent in
1909. The dichotomy is not merely between an elite and the masses, or
between the vested interests and the downtrodden, the cultured and the
great unwashed. It is something much more specific. These two nations,
two cities, actually are two economies - Economy #1 (production and
consumption) versus financial- and property-based Economy #2 which
controls the economic surplus in the form of savings and investment. And
the different characteristics of these two economies go far beyond the
merely economic dimension. I cite this example to show what a true
compassionate conservatism might be. It would be a good framework in
which President Obama might present his policies in ways that would
maximize support from groups that used to be called liberal Republicans.
Much of the business community might come on board if he balances his
program well. In fact, it was a British Conservative banker, Geoffrey
Gardiner, who drew my attention to Disraeli's novel. Charles Dickens
Tale of Two Cities (1859) expressed the same idea of cities divided
between the idle rich and those who had to work for a living. It is hard
to imagine any politician writing such a novel today, although the
socialist Michael Harrington popularized the theme in the 1960s in The
Other America (1962), and Democratic Vice-Presidential candidate Edwards
campaigned in 2004 on the two Americas theme.


Mike Whitney: 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? Do we need to rethink how we deal with
people who are stuck in a cycle of grinding, unrelenting poverty?

Michael Hudson: The left wing focuses on people who have slipped through
the cracks, the poor and the homeless, and ethnic and racial minorities.
But the most serious problem lies at the economic core. Failure to
restructure it and take control of finance will lead to excluding more
and more people from participating in what you call a middle-class life.

As the Roman Empire polarized, the economy and its political wrapping
were beyond saving. All that Christianity was able to do was provide
charity on an individual basis. It could deal only with symptoms, not
root causes. When the point has been reached where you can deal only
with people who have slipped through the cracks, the long-term game is lost.

The problem is that the economic system as such is broken. So we're back
to the beginning of this interview: What is needed is an alternative to
the post-classical economics of the Chicago Boys and their fellow
financial lobbyists.

_____

Michael Hudson is a former Wall Street economist specializing in the
balance of payments and real estate at the Chase Manhattan Bank (now
JPMorgan Chase & Company), Arthur Anderson, and later at the Hudson
Institute (no relation). In 1990 he helped established the world's first
sovereign debt fund for Scudder Stevens & Clark. Dr Hudson was Dennis
Kucinich's Chief Economic Advisor in the recent Democratic primary
presidential campaign, and has advised the US, Canadian, Mexican and
Latvian governments, as well as the United Nations Institute for
Training and Research (UNITAR). A Distinguished Research Professor at
University of Missouri, Kansas City (UMKC), he is the author of many
books, including Super Imperialism: The Economic Strategy of American
Empire (new edition, Pluto Press, 2002) He can be reached via his
website, mh at michael-hudson.com

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