Transcript of a Guns And Butter Radio Interview by Bonnie Faulkner originally broadcast on KPFA radio June 25, 2008
There is a rising sense of alarm in the United States, as tangible effects of the economic crisis of empire are unmistakably apparent at every hand. Ordinary people are burdened by debt as never before, and the soaring prices of fuel and food severely affect many tens of millions, bringing into question even the short term sustainability of American living standards. Our media and political elite only offer modified versions of business and usual. Barack Obama's chief economic advisor, for example, is an open and long-time of NAFTA and Wal-Mart as good for poor people. So much for the politics of change.
Dr. Michael Hudson on the other hand, is a financial economist and former chief economic advisor to presidential candidate Dennis Kucinich. In part one of this wide ranging interview, originally broadcast on the Pacifica program Guns and Butter, Hudson explains how the parasitic dominance of the financial sector has led to the creation of a completely fictitious U.S. economy which creates nothing, but is exclusively devoted to extracting wealth from the rest of us.
The following is a transcript of the first half of an hour-long interview with financial economist Dr. Michael Hudson, that was broadcast on the Pacifica Radio program Guns and Butter. The interviewer was the show's host, Bonnie Faulkner. A link to the MP3 audio of the full hour is provided below.
BF: Dr. Hudson is a financial economist and historian. He is president of the Institute for the Study of Long Term Economic Trends, a Wall Street financial analyst, and distinguished Research Professor of Economics at the University of Missouri, Kansas City. His 1972 book, Super imperialism, the Economic Strategy of American Empire is a critique of how the United States exploited foreign economies through the IMF and World Bank. He is also author of The Myth of Aid, and Global Fracture, the New International Economic Order. On today's program we discuss his newest book, in progress, the Fictitious Economy; How Finance is Destroying Industrial Capitalism, and Paving the New Road to Serfdom. We examine what is meant by the term fictitious, as the term is applied to aspects of today's economy including real estate and housing corporate junk bonds, pension plans, capital, statistics, theory and ideology. We take a look at the role of war and the demise of the dollar, the bubble economy, and what could unfold in the future.
Dr. Michael Hudson, welcome.
MH: Thank you Bonnie.
BF: Your new book the Fictitious Economy; How Finance is Destroying Industrial Capitalism, and Paving the New Road to Serfdom, details many fictitious aspects of the economy today, fictitious incomes, costs, capital, savings, statistics, theories and ideologies. What do you mean by fictitious?
MH: Something that's unreal, something that's pretend, for instance pretend earnings of companies that really aren't earned, or pretended values for mortgages that were given by Wall Street banks, and their affiliates when there's no underlying value there, or fictitious costs. Most economic theory today justifies fictitious costs, for example the Federal Reserve came up with a method of assessing land values that almost seems to come up negative in some years, because it treats buildings as steadily rising in value as their reproduction costs grow, leaving land as a residual, this understating the value of land and overstating the value of buildings.
"...if you're wealthy in today's economy, you don't make any money at all, because it's all a (tax deductible) cost..."
The tax code is fictitious, because real estate owners have been permitted for the last half century to pretend that buildings are losing value very rapidly, so they can take so much off for building depreciation that they pay no income taxes at all, as it works out. The fact is, buildings don't lose value if they are well-maintained with normal maintenance and repair. If landlords don't do this either they're brought to court for violating the residential building laws, or they break the commercial lease. Right down to the seemingly empirical statistics and theory, the whole economy is based on a kind of parallel universe, a what-if world of assumptions designed to show that the wealthiest people don't have any income at all.
In fact if you're wealthy in today's economy, you don't make any money at all, because it's all a (tax deductible) cost. Corporations don't seem to make any money because they seem to have everything as an expense. For instance interest payments are the largest item that the IRS permits corporations to take off as an expense of doing business. But it's not an expense of doing business at all, it's a function of what outside raiders and corporate junk bond holders have paid to buy up the company, and instead of doing business, they're carving them (companies) up, closing them down, stopping their long term research and other projects, and doing just the opposite of what's needed for an industrial economy. That's why the book deals primarily with what the financial sector, which is not part of the economy at all, nor is the property sector part of the economy. They are a completely separate consumption process, more in the character of a parasite, than of (producing) actual goods and services....
I should say that I am in the process of writing this book, it won't be out for another year. I only sent you an indication of what I'm writing now. What we're talking about is not a book that people can go out and buy, it's a work in progress. I'm presenting part of it at a meeting of the university in Kansas City next weekend, at their annual post Keynesian heterodox economics meeting
BF: To follow up on what you've just said, Dr. Hudson, in your book that you're working on, you say the economy is really two economies. There's a productive industrial one that produces the needs of society, and a financial superstructure, sometimes called the FIRE sector, Finance, Insurance and Real Estate that is siphoning income away from workers and industrial capital and loading them down with ever-increasing debt. Could you explain this a little further?
MH: The National Income and Product Accounts treat everyone who earns an income as producing a service. So if you're taking money out of an ATM machine, and I'm holding a gun, saying “your money or your life” then I'm giving you the service of your life for the money you're taking out. This is the opposite of what classical economics is all about.
A century ago when the classical economists, Adam Smith, John Stuart Mill, in the reform era, tried to say look, there are some incomes that are not earned. Rent is not earned, it's an excess price. Interest is not earned, it's a monopoly price. Monopoly profits aren't earned, they're extortionate. All this was viewed (by classical economists) as something that government regulators should get rid of, either by not permitting it in price, or by holding the monopolies in the public domain, or by the land itself being either nationalized or taxed. The classical economists divided almost the entire economy into productive and unproductive labor, into wealth, and overhead, into real income and costs. This threatened the vested interests with taxing away their free lunch, so you have an anti-classical reaction that is epitomized by the Chicago school of anti-government, anti-tax people whose leader, Milton Friedman, said there's no such thing as a free lunch.
"...a free market means that predators are free to extort any price from the public, they are free to deregulate, free to lie to consumers, free to exploit, free to load any company they want down with debt..."
Well, classical economics was all about the free lunch. Look at Ricardian rent theory. That's all about the free lunch. The role of modern economic theory --- I should call it post-modern economic theory and statistics is to pretend that the banks, the landlords and the monopolies actually earn their income instead of extracting it from the (productive) economy.
BF: Your book is really an antidote to the dominant Chicago school of free marketeers. What is the meaning of “free market” these days, as understood on Wall Street?
MH: It's exactly the opposite of what Adam Smith, and Ricardo and the classical economists defined as a free market. Classical economics defined a free market as one that is free of overhead charges, free of unnecessary charges of production, free of watered stock. Today a free market means that predators are free to extort any price from the public, they are free to deregulate, free to lie to consumers, free to exploit, free to load any company they want down with debt, and basically lead (us) to a world of debt peonage... So the whole concept of freedom has been turned upside down by the Chicago school and by the Bush administration.
BF: Why is today's understanding so different?
MH: Because hundreds of millions of dollars have been spent to mislead people and to endow business schools and universities to stop teaching the history of economic thought, to stop teaching the classical economist9999ffs, and essentially to brainwash students, so that those with a sense of realism simply drop out of the field of economics and go into some other field.
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