No subject

crises, what appears at first glance to be a pension and Social Security
problem turns out to be a financialization (debt) problem. In an attempt
to maximize dividend payouts, companies in the auto, steel, airline and
other industries made a bargain with labor to take its wages in the form
of deferred pension and health-care payments. And labor - being much
more farsighted than corporate financial managers - chose to defer the
latter.

In the case of public sector pensions, the problem is the anti-tax
ideology promoted by the financial sector, which prefers government to
borrow from the wealthy rather than tax them. Cities from New York to
San Diego chose not to raise taxes but to promise public sector
employees future retirement income and health care. Also like companies,
they chose to finance their budgets by borrowing, by issuing bonds
rather than by taxing their traditional real estate tax base. In a
nutshell, they chose to borrow from the rich rather than tax them.

Corporate and public bond issuers point out that there is not enough
revenue to pay all claimants. But rather than blaming the lenders for
making loans to be paid by carving up and selling off assets rather than
by producing more, financial lobbies are taking a neo-Malthusian
position. They are blaming the corporate and public sector cost squeeze
on pension obligations stemming from the fact that people are living
longer. The number of retirees per employee or taxpayer is rising - and
the much-vaunted rise of science, technology and productivity is not
supposed to be able to carry this extra load.

Or rather, economies cannot carry this load and also pay exponentially
rising debt service and money-management fees. But this blame-the-victim
logic ignores the fact that today's debts - and property prices - are
growing at compound interest, beyond the ability of economies to produce
a net economic surplus to pay. Something has to give. For the financial
sector, what gives is supposed to be labor's wages, industry's profits
and the government's taxing power.

We got into this mess by giving special tax breaks to real estate and
finance at the expense of labor and industry, and warping the tax system
to favor debt over equity. Financial managers and politicians conformed
to type by living in the short-run. Labor did not demand that government
take responsibility for what is commonly provided to employees and
retirees in most civilized countries: a living income and health care.
Instead, both labor and its employers took this responsibility on the
private sector itself. It was a cost that other countries are spared
from having to bear - and from having to "financialize" by pre-saving in
the form of financial speculation, to pay pensions and health care out
of capital gains that are to be ensured by the government cutting taxes
to leave more profits and other revenue to capitalize into yet higher
loans to bid up asset prices. The entire detour of financialization has
added a vast non-production cost to the expense of doing business and
hiring labor in America. To put matters bluntly, we have taken a wrong
path - yet hardly anyone in authority is explaining how to retrace our
steps to get out of the present dilemma.

As long as one believes that government can only add to overhead waste -
and that the financial sector can only "economize" and make the economy
more efficient - there will be little motivation to seek an alternative.
Without doubt, one can point to exorbitant retirement giveaways such as
New York City's pension arrangements for public transport workers,
policemen and firemen. Their craft unions obtained pension and health
care rights substantially above those of the labor force in general. But
such deviations from the norm are inevitable in a system where pensions
and health care are left to company-by-company, city-by-city and
state-by-state negotiations rather than negotiated nationally as is the
case in social democracies. The situation is the same with taxes
negotiated at the local level. Companies and real estate investors play
states and cities against each other to extract special tax breaks for
locating in their areas. Political lobbying and insider dealing become
rife under such conditions.

At the root of America's pension and health care problems is an
ideological opposition to public services and taxation at the national
level. In the aftermath of World War II, corporations opposed
"socialized medicine". This left companies to pay for health care out of
their earnings rather than leaving it to government to organize and pay
out of the general tax base. This probably made sense to the vested
interests when they bore the brunt of progressive taxation. But they
seem not to have noted that this attitude has ceased to be self-serving
now that the richest families have shifted the taxes onto the lower
brackets. General Motors recently has protested that health care costs
more money per auto than steel. Yet someone must pay for health care and
retirement. If not the government, then who - besides one's employer? So
one wonders just what General Motors wants more: the luxury of an
obsolete anti-Bolshevist rhetoric, or to make consumers pay for their
health care and Social Security as "user fees" without the upper tax
brackets taking the responsibility that they take in countries with more
progressive tax systems.

In retrospect it would seem that companies did not act in their
self-interest when they insisted on taking responsibility on themselves
for providing medical care whose price has soared, largely because the
medical profession itself has been taken over by financialized health
management organizations (HMOs) in the insurance sector (an increasingly
prosperous element of the FIRE sector). They have put doctors as well as
patients on rations - fee-for-service in the case of physicians, and
rationed care for the hapless insured. And this is supposed to be the
free market alternative to centralized planning!

The explanation for companies acting this way is to be found in the era
of progressive taxation. More than two centuries of classical economic
analysis had shown the logic of taxing predatory wealth (land ownership,
monopoly rights and financial claims on the economy) rather than labor
and industry. The objective was to tax all forms of income that were not
necessary for production to take place. Above all were rights to land,
which is provided by nature, for the purpose of charging an access fee,
and other extractive property rights and financial charges loaded on top
of what actually is needed to be spent on production.

The early income tax captured such "unearned income". The wealthy
classes thus opposed public provision of services, including medical
care as well as basic infrastructure, in an epoch when they were the
major parties being taxed. But being sclerotic and rigid, the rentier
classes failed to shift their attitudes toward public service as they
moved to free themselves from taxation. Ever since the United States
enacted its first modern income tax in 1913, finance and its major
clients - real estate and monopolies - have lobbied to distort the tax
code to make their gains tax-exempt. Rather than declaring taxable
income, they count as a cost of production interest and
over-depreciation for real estate, as well as payments to corporate
shells in offshore tax-avoidance centers. The finance and property
sectors also take their returns in the form of capital gains rather than
as profits, trading through financial hedge funds whose revenue is taxed
at only half the rate of normal income.

The wealthiest one percent take their returns in the form of bonuses,
not wages, and enjoy a cut-off point of only $102,000 for FICA Social
Security and Medicare wage withholding. When Wall Street Journal
editorials assert that the richest one percent earn "only" a small
portion of taxable income, all this really means is that a shrinking
portion of their economic returns are deemed subject to the income tax.
Their buildup of wealth takes a form not classified as "income".
Inherited wealth meanwhile is the great loophole for avoiding ever
having to pay capital gains that have accrued on real estate and other
assets rising in price.

If the rentier classes act flexibly, they will see that as they shed
their national, state and local fiscal burden, it is time to "socialize
of the risks" as a travesty of true socialism by passing the costs of
pensions and health care off of companies and localities onto the
federal government. After all, now that labor and consumers are paying
the lion's share of taxes, is it not all right to extend public spending
to take over areas of cost hitherto borne by corporate business and
other private-sector employers? This promises to be the next big
political fight.

But ideological sloganeering dies slowly, and corporate business and the
financial sector continue to oppose "big government" even as they are
un-taxed. That is the problem with the vested interests: they live only
for themselves in the short run. The financial mentality is
opportunistic ("after me, the deluge"), caring little about the future.
Labor cannot enjoy this luxury. It needs to look to how it will live
after its working years end and health care becomes a rising expense.
This perspective involves a more far-sighted economic and social contract.

Meanwhile, property taxes continue to be phased out as the basis for
state and local finance. The tax burden is being shifted onto income and
sales levies that fall on consumers, not on the preferred tax status of
high finance and property. For many years now, the political drive to
un-tax real estate led cities such as San Diego and entire states such
as New Jersey to pay their work force in the form of retirement and
health care obligations rather than current wages, while borrowing from
the rich rather than taxing them. The income hitherto paid as property
tax was available either to pledge to bankers for loans to buy property
rising in price as it was untaxed.

All this was fiscal and economic madness from a long-term vantage point
- not the madness of crowds, but that of self-serving lobbying by the
financial sector. The result has been a trend that cannot go on for
long. But having managed to free themselves from progressive wealth and
income taxation, the vested financial and property interests evidently
believe that they can pull the same trick again and free themselves from
the obligation to live up to the pension and health care promises that
corporate and public-sector employers have made to their work force.

Such evasion requires a populist rhetoric. Malthusian doctrine worked
well two centuries ago, so why not try it once again? Blame population
growth - in this case, not the tendency of the poor to have more
children, but the ability of employees to live beyond the retirement age
at which they were supposed to die if they had conformed to the models
used so hopefully by their employers in explaining their financial
position. The claim is being made that paying business and public-sector
commitments to labor will bankrupt both. There is no mention of debt
payments to bondholders for funds borrowed to cut progressive taxes on
the rich. Nor is the burden of high housing and other real estate prices
that the July 30 bailout of mortgage lenders aims to create.

Something has to give, but it is this old worldview. No doubt when the
next financial crisis hits we will see all the usual journalistic
adjectives: "unexpected", "surprising everyone by the depth of the
problem", et cetera. Give me a break! Can no major media see the obvious
trends at work?

_____

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 & Co.), 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

http://www.counterpunch.com/hudson07312008.html


TO POST A COMMENT, OR TO READ COMMENTS POSTED BY OTHERS, please click
on the word "comment" highlighted at the end of the version of this
essay posted at http://billtotten.blogspot.com/