Piketty’s Wealth Gap Wake Up

Karl Fitzgerald of Renegade Economists interviews Michael Hudson about Thomas Piketty’s new book and also discusses the lastest developments in the Ukraine.


Karl Fitzgerald: Sweeping the world have been glowing reviews of the new book by Thomas Piketty, Capital in the 21st Century. I’ve been pounding on the bookshop doors asking when it’s arriving, this 700-page opus. It hasn’t hit here yet but I’ve read many book reviews. Have you had a chance to grab a hold of this must-read document?

Michael Hudson: No, but I have worked on the statistics that he uses for the last 50 years, so I know the problems with the statistics and what they can do and what they can’t do. And I’ve read what he’s been publishing all along with his colleague in California,
Emanuel Saez, about the concentration of wealth and income at the top of the pyramid.

Karl: And that’s the big point is that he’s renowned, along with Saez, for working on income inequality, but this book really looks at wealth inequality.

Michael: The problem with Piketty’s statistics are that it vastly understates how unequal the world really is and that’s because – you may know in Australia that our Queen of Mean, the hotel lady Leona Helmsley said “Only the little people pay taxes”. What she means is only the little people earn income. Rich people in America don’t earn income, they make capital gains and capital gains are not in everybody’s income statistics, they’re not in the statistics basically that are reported. And the IRS, the Internal Revenue Service of the United States, only conducts a study of capital gains once every ten years or so, and countries like England and many European countries don’t even have a tax on capital gains, so they’re not going to appear in the statistics.

So one of important results of Piketty’s work, if you know what you’re reading, is that the disparity in wealth is much greater than the disparity of income, and that’s because of tax avoidance by the rich. They don’t earn an income. And the same is true of corporations. The largest American corporations I think in the world are Google and Apple. Apple takes all of its income in Ireland, not in the United States, so how are you going to treat all of this? That’s the element that’s left out of this, that rich people don’t earn an income.

The other thing that is left out of the income tax statistics is of course how fortunes are really made, and that’s crime and fraud. The good thing about Piketty is he points out, why is it that French novelists and English novelists tell you much more about wealth than economics? And he points out that in the 19th century novels by Jane Austen and Balzac, the way to make a fortune is to marry into it. That’s true, but what Balzac also said is that behind every fortune is a great theft.

Now, let’s look at Forbes’ list of the richest people in Russia, China, the Ukraine or the post-Soviet economies. I can guarantee you that they didn’t make this wealth by saving up income, they didn’t earn a higher income; they stole the property by fraud and internal bribery, the same way that the great fortunes were made in the United States. The History of Really Great American Fortunes by Gustavus Myers shows how the railroad land grants made fortunes by bribing congressmen and by privatising the land. The great fortunes are made by privatising natural resources, land and the public domain, and since 1980, when the concentration of wealth and income have really taken off, as Piketty shows, this is the age of privatisation, of Margaret Thatcher, of Ronald Reagan, and Boris Yeltsin in Russia.

Karl: But that’s been the interesting point is even with these limited statistics, he’s had to delve into the tax records to try and find this incredible wealth that’s come through privatisation, that’s come through this rent-seeking. That even with all those limitations you’ve pointed out, he has still come up with some incredibly strong statistics that people like Paul Krugman are just floored by. And it seems like it’s slapped the economics profession in the face to say look, we’ve got to get beyond income inequality and really focus on this wealth issue and have a look at how this wealth is created and what we can do to redirect economics, to look at the distributive side of the equation.

Michael: You’re right. He’s started the discussion by showing the fact of vast inequality. What needs to be done now is to explain how did this inequality come about and what do you do about it? And as you and I have talked on this show before, the solution of simply taxing fortunes, which is very hard to do, is a very broad hammer. And you and I have spoken about particular kinds of wealth and particular kinds of making fortunes are predatory, and that’s namely economic rent, whether it’s land rent, natural resource rent, monopoly rent or the kind of money that the financial sector makes. So Piketty’s book, large as it is, didn’t discuss this except at the end to say “Well, you need to somehow tax the wealth away”. Well, that’s true, but that’s for another book in the future. How do you tax it away? What’s the best kind of tax to make economies grow?

One of the things that Piketty does not discuss when it comes to making fortunes is the role of debt, that most of these fortunes that have taken off since 1980 have taken off because of the increased debt leverage. As interest rates have fallen since 1980, you’ve had more and more bank credit going in to just bid up real estate prices, stock prices, bond prices, every kind of price, not to mention fine arts trophies that have gone with this. So, just as you’ve had the rising ratio of wealth to income of the 1%, you also have a rising ratio of debt to income. And so this indebtedness and the net worth again is very unequally distributed. Most peoples’ families, the major asset they have is in their home but these homes are also very heavily mortgaged and the mortgage payments they make, basically the 99% makes interest payments to the 1%.

And what to me really has been accelerating wealth at the very top is the financial sector, is the ability of the 1% to get the other 99% in debt to them by saying “Look, we’re controlling the access point to buying a home, to buying basic needs, in America to getting an education, and you can’t afford to buy a home or get an education or even a car without borrowing money. And we’re going to charge you enough interest so that everything you earn in effect you’re going to be paying us for interest”. And that’s the same thing that is leading the corporate raiders and the activist shareholders to try to raid corporations and say “Pay up more of your money as dividends”.

So you’ve actually had a dismantling of tangible wealth and an increase in what used to be called fictitious capital or fictitious wealth, which is all basically debt leveraged wealth.

Karl: Now one of the things Thomas Piketty goes into great detail and has earned him quite a few plaudits is looking at the difference between economic growth rates and the return on investments. And his general thesis is that when the economic growth rate falls below the long term average of 5% that the wealth gap accelerates because the wealthy, who own all this land, the mines, the privatised utilities, they can claim a greater return than what the rest of the people who actually have to rely on earning income when there’s low growth rates. And the thesis is that with an ageing demographic we have a period of low growth coming and from that we’re going to see an increased inequality in wealth. So this Gilded Age has really only just begun. What did you think of that thesis?

Michael: I think his conclusion, the gilded age is just beginning, is correct but the logic is not the logic that I’m following in my exposition. He’s saying the exact opposite of Adam Smith. Adam Smith said that the rate of interest is often highest in countries going fastest to ruin. So the fact is you can go to ruin for high interest or low interest.

When he talks about the rate of return the largest sector in the United States, and other countries also, is the real estate sector. If you look at from 1945 to today, the real estate sector doesn’t make an income. As you know, real estate by the billionaires is run as a personal charity. They don’t pay any income – if they made an income, of course, they would pay an income tax and declare it, but they don’t make any income. Almost all the rent they make is paid out either as interest or they charge depreciation as a cost. So what Piketty is referring to is not earnings before interest, taxes, depreciation and amortisation, but one portion of declared earnings excluding taxes, excluding interest, excluding depreciation and amortisation. The next highest wealth industry is oil and gas, they don’t declare any income because either they have a depletion allowance that makes them tax-exempt or they make all their income offshore in the flags of convenience countries. So the actual returns that are made, including the capital gains and total returns, simply are not available in the statistics that he looks at.

Secondly, what is growth? If you look at the American National Income & Product Accounts, for instance, 40% of all corporate profits in America a year ago when the statistics came out were made by the banks, by the financial sector. Now, these returns are basically a transfer payment. They don’t really add to growth. Financial services are not a service, unless you believe that a hold-up man that comes up to you in front of an ATM machine and says “Your money or your life” is giving you the service of giving you your life; it’s actually a transfer payment. He’s taking your money.

So there’s a question about whether all this financial activity and the real estate speculation and all this money paid to Wall Street and to bank managers and corporate managers really is growth or is it just a kind of fictitious growth to go hand-in-hand with the fictitious capital formation? You’re having the statistics take on an increasingly fictitious element, to the degree that they’re made by corporate tax accountants that pay enormous sums to the government not to tax the income they have. I think you have that in Australia in the mining sector where the richest lady in Australia pays a lot of money to make sure that she doesn’t earn a penny. Although she obtains for herself billions per year, none of this is really earned.

Karl: You’re on 3CR’s Renegade Economists and this week we’re with distinguished research professor Michael Hudson, the author of The Bubble & Beyond.

So Michael, what you’re saying there is that, shocking as Piketty’s statistics are, they’re drastically understated and part of the reason that people such as Paul Krugman – you know, he’s written a book review where he says here “Even if the surge in US inequality to-date has been driven mainly by wage income, capital has nonetheless been significant too”. So why does Paul Krugman continue to ignore this incredible wealth advantage that some people have by owning the Earth and the rest of us struggle to keep up with good old wages?

Michael: The simple answer is that Krugman is a neoclassical economist. Neoclassical means anti-classical. He does not recognise that there is such a thing as economic rent. He also got in a big argument with your Australian Steve Keen two years ago saying that banks don’t create credit. “All banks do,” Krugman said, “is lend out savings.” He said it’s inconceivable that a bank can actually create credit or inflate asset prices.

So Krugman is applauded by the right-wing to be their liberal of choice not because he understands the economy, but because he doesn’t understand the economy. If he understood how the economy worked he wouldn’t have won the Nobel Price, because that’s a prize for people pretending that there’s no such thing as economic rent; there’s no such thing as unearned income. And that’s why Krugman’s focus is on, well, the real problem is that these managers of companies are paid so much more and they earn so much more income. But he’s even wrong as to his statistics and, remember, he’s a professional bank lobbyist. He’s paid by the banks. He went to Iceland to support the banks against the government trying to rein them in. So, of course the bankers love Krugman because he’s their lobbyist.

Take the Wall Street incomes that he’s pointing to. In the United States, under US Tax Law the income they make is not really an earned income; they make most of their money through stock options and trading gains, speculation. These are countered as capital gains and not taxed as normal income, but taxed much lower. So once again we have this fictitious accountant’s view of the world of what is income and what isn’t income. And looking at the tax returns one’s obliged to use, the categories that these tax accountants who’ve paid enormous sums to governments to distort content of and to make it appear as if the wealth really doesn’t exist. That’s why they call financial wealth “invisible wealth” in comparison to real estate, which is visible wealth. The whole idea of wealthy people is to make their wealth invisible because if it’s seen it will be taxed and it’ll be resented.

Well, what Piketty has done is make this wealth seen. So at least by his wealth statistics he says “Look, we see it there and we can measure it and we can see how unequal it is. What we can’t see is really how they got this wealth. All we have to show is the income tax statements that reflect the degree to which this wealth finds its counterpart in income”. But it’s sort of like looking – if you drop your keys you look where the light is instead of where you dropped the keys. All he has to go on statistically are the income tax records and he’s done an enormous technical job there, and that’s the only job that one can do as a starting point.

But one would really have to spend even more time reworking the statistics to untangle them to find out what is the actual reality behind this. You’d have to say “What are the capital gains that have enabled these Wall Street and financial managers to make an income?” And their contracts are very clear as to what makes it. To the extent that a corporate manager’s income is tied to the stock price, they get either a bonus or they get a stock option. Well, if they get a bonus based on the stock price what are they going to do with corporate earnings? They’re going to take the corporate income and instead of investing in new equipment and plant, instead of developing a new market, instead of producing more, they’re going to use the money simply to buy up their own stock instead of capital investment. So by buying up the stock, the stock price goes up and they can say “Look at how my management of the company has increased the price of the stock, give me my higher compensation and my stock options and my bonuses”.

So the failure to tax these capital gains away, the sort of free lunch, is leading to the warping of the economy that produces the statistics that Piketty’s come up with.

Karl: So Piketty’s book Capital in the 21st Century is essentially a retake of Marx’s Das Kapital?

Michael: I don’t believe that one bit. That his public relations at work. This has nothing whatsoever to do with Marx. Marx’s Das Kapital focused on depreciation. It was Marx who coined the term “primitive accumulation” meaning privatisation and fraud. Piketty’s analysis is completely different from Marx, despite the fact that his parents were Trotskyists.

Karl: So he talks about a drift towards oligarchy, he’s pointing out this rising inequality. But in Marx’s theory, Michael, I just wanted you to try and clarify things because I like looking at these economic issues from different perspectives. And the one Marxist concept they say is the most important economic law of all is this tendency for the fall in the rate of profit.

Michael: Oh my God, there’s nothing that is more misunderstood than that. What Marx said was that as capital increases relative to labour in production, as you mechanise production and buy capital, more and more of the return to capital is going to be taken in the form of depreciation that is a return of capital, not as a profit. He was talking about cost accounting. The example he uses is – and he’s criticising the Physiocrats and Quesnay there.

When Quesnay made the Tableau Economique he talked about the circulation of income in the economy and what landlords did with the rent they got, and they spend some of it, they invest some of it. What they left out was the amount of rental income that has to be used as seed grain, to buy the new seed grain. Marx says that in a factory and under industrial capitalism if you’re going to spend $1million building a factory with machinery and you want to make a profit on that, you’ll not only get the profit on the $1million – let’s say at 5%, $50,000 a year – you also get your $1million back. So of the price they charge the price includes not only the $50,000 a year profit, it includes enough money to pay back the $1million they put into the factory in equipment as it wears out or as it becomes obsolescent.

So there’s a misinterpretation of almost all people who have not read Marx or read his theories of surplus value where he explains the falling rate of profit. I explain all of this in my book, The Bubble & Beyond, I go into what Marx meant by this. But when a non-Marxist talks about Marx and talks about the falling rate of profit you should just sort of walk away, because they don’t have a clue as to what they’re talking about.

Karl: So it’s part automation, it’s part competition pushing down the price, but also you’re saying it’s a depreciation element that is wound up to hide the profits, in a way, so that these aren’t taxed?

Michael: In the case of real estate it becomes more bizarre. In the United States you’re able to pretend that while your real estate is going way up in value, the building is actually losing value because it has a lifetime and the landlord is allowed to recapture the capital as if real estate, which in effect means the land, as if real estate somehow wears out, like a machine, or becomes obsolescent, like you buy a computer and after three years you have to upgrade it and buy a new computer. But that’s nonsense.

In New York City, where I live, the older the building, the more valuable it is because it doesn’t wear out, it’s maintained – most landlords spend about 10% of their income on maintenance and repairs. So the pretence is landlords pretend that their building is like a machine, wearing out, they charge depreciation and because of that they say “I didn’t make any profit, this is a return of capital”. And as soon as they’ve depreciated a building in full they then sell it among themselves or they buy it all over again and start the whole process all over, so you can depreciate the same building, say it’s 100 years old, you can keep depreciating it again and again and again and again as if it’s worn out all these times, and it’s the same building. But the owners and the next owners and the next owner and the next owner doesn’t have to pay any tax on this.

Karl: Right, so that’s why when this law is critiqued and people say “Look, the falling rate of profit can’t continue for hundreds of years, this is wrong” you’re saying really it is still a valid analysis for the wealth gap?

Michael: Marx was talking about the composition of EBIT, of cash flow. Cash flow is earnings before interest, taxes, depreciation and amortisation. And Marx said within cash flow, to the extent that industry becomes more capital-intensive with machinery, you will have a rising role of depreciation relative to what’s left as profit. So it’s the relationship between the return of capital and the return to employing labour and other expenses.

Karl: Okay, well, let’s switch over to the Ukraine now and since 1991 Russia has suffered this huge capital flight, some $25billion a year leaving the country annually, that’s mounted up to over half-a-trillion dollars. There’s been a huge drain on their economy because this drift to oligarchy has continued and the Ukrainians are now suffering, they can’t afford to maintain the gas payments to Russia, this has escalated tensions there, ethnic tensions. And Michael, I wonder, you’ve done a number of interviews on this topic of recent. It must be so frustrating for you to see what the West has done with the economic policy reform encouraging this sense of reliance by undermining the public finance system?

Michael: What happened in Ukraine is what happened in Russia and all the other post-Soviet economies. American advisors came in and said “Just give away all the public property to individuals. It doesn’t make any difference who you give it to; property has its own logic”. Well, Ukraine was the most inequitable, the most rapacious country of all, except maybe Moldova. They call it the “Nigeria of the North”. Its income and wealth are almost all in the hands of kleptocrats. This is not the kind of thing that Piketty’s analysis can explain. The kleptocrats have sort of taken everything in the Ukraine and, as a result, there’s no money left to run the government because the kleptocrats, both in the West and the East, have been taking all the money.

So the IMF came in and said “Look, you borrowed money, you’ve got to pay. We’re going to insist you stop subsidising the price of gas to your people, you have to remove the gas subsidy and begin charging them more”. And so they said “Well, if we do that they won’t have enough money to keep stealing at the rate we’re stealing, so we’re going to stop paying for the gas”. So Mr Obama and the Secretary of State of America said Russia must give its gas free to the Ukraine. It must give a half-a-billion dollars a month free and not charge anything so that Ukraine will have enough money to buy military arms and invite NATO in to put hydrogen bombs on our border, so we can bomb you if you don’t do what we say.

This is the most despicable misrepresenting in the public media of anything that I’ve ever seen. Material has been coming out today, the Americans trained a group of neo-Nazis, wearing Nazi symbols, wearing Nazi uniforms, in Poland to be trained for two or three weeks as snipers, brought them in to the Maidan Square and had them begin shooting at the police and their own people and then trying to blame this false flag operation on the Russians, when actually it was all done by the Americans. And all this was caught on the telephone, the Americans said “We want our thug to take over the country”, their thug being Yatsun, the bank lobbyist that they put in. So they put in a thug and they’ve been sending these neo-Nazi assassination groups out to the West to get American sympathy. The neo-Nazi’s published anti-Semitic pamphlets, pretended that they were given by the Russians, even though most of the Russian speakers in the Ukraine are Jewish. That’s where Trotsky came from, from Odessa. Ukraine has huge Jewish communities.

So they pretended that the Russians are threatening the Jews, when actually immediately the Jewish synagogues in the Ukraine said “No, these are the Americans that are doing this. These are false flag. The Russians are not doing this”. They forged the signature of a Russian speaker as if he was doing it and Obama and Secretary of State Kerry come right on and lie blatantly as if they can somehow convince people that these lies are true and trying to get the Americans to build up hate. And people are wondering why on Earth is Obama doing this? Is he trying to start World War III? Why are they sending warships with atomic weapons right off Crimea surrounding Russia? I mean, what is this nonsense? It’s absolutely crazy. It’s as if Obama has decided to reinvigorate class war by taking the side of the Nazis in World War II, by these neo-Nazi groups that said “We’re sorry, the wrong side won World War II. We wished Germany conquered Russia”. Well, you can imagine the effect this has on the Russians.

Karl: In the background of course is Ukraine’s prime location as a major throughfare for the Russian gas. And so, again, it seems like pipeline politics, that’s caused so much trouble in the Middle East, is here turning up in Eastern Europe. Michael, what sort of deals have been arranged and are the Ukrainians receiving a realistic payment for the incredible access rights for the Russian gas to go through, remembering that the Russian gas Putin has ensured is still owned by Russian-based companies in the large?

Michael: Well, Russia has accused the Ukraine of just siphoning off this gas for itself and not paying for it. The American-backed Right Sector has said “We want to blow up the pipelines”. Russia hasn’t come out and said it, but obviously Putin is going I think to China in a week or two to negotiate selling the gas to China instead. So obviously Russia would like to keep the European market, it doesn’t want to be in the hands of just a single customer such as China, but the effect of the American revolution in the Ukraine is to turn Russia towards China as a market for its gas. And the beneficiary, of course, will be China. The loser will be Germany, which is why the Germans have taken the lead in coming out and saying “Wait a minute, this is crazy. You’re hurting us, not Russia”. Russia’s going to get by, one way or another, because it’s largely self-sufficient but this is going to vastly increase the German costs of industry and, in fact, how are they going to do their cooking and how are they going to run many factories if the gas is turned off?

So about a week or two ago the Russian TV station ARD sent an investigative team into Ukraine to find out what was behind all of this Maidan shooting and the sniping. And they found out that Obama and Kerry were lying through their teeth and they talked to the witnesses, they talked to the doctors, they talked to the relatives of the shooters. The shooting came from the Ukraine Hotel which is where the American-backed snipers were shooting from and it was all essentially pushed by what’s called the Right Sector. These are really the Pinochet people. America’s trying to do in Ukraine what it did in Chile. It’s backing a terrorist organisation to come in and just shoot people who oppose American policy, meaning people who believe they should be paid for their gas and so forth.

So you’re seeing a replay of Chile under Pinochet and the military dictatorship in the Ukraine now. And the result, of course, will be to tear Ukraine apart – it’s bankrupt, no matter what, there no doubt will be civil war there. The Americans are hoping to use the civil war as an opportunity to move in NATO and to move H-bombs right onto the Russian border. This is risking a threat of war. This is crazy.

Karl: With the added side benefit of undermining Germany’s economic sovereignty with their energy prices. And I find that geopolitical play a very interesting one following on the heels of the very embarrassing NSA phone hacking of Merkel, and it sounds like this is another little side play to undermine another country’s growing importance on the world stage.

Michael: Well, I guess an American would reply that if you can’t tap their phone, how do you know who to shoot? It’s obvious they’re control freaks by now and to the Germans, especially to Angela Merkel who came out of East Germany with the Stasi tapping everybody’s phones, you can just imagine the effect there. America is losing its cache as a democratic country and people are beginning to think that it’s moving into the position that Russia used to be in, while you’re having Russia act as the reasonable party trying to avoid war in this case. They’re turning the Cold War inside out and the result is that European politics are being torn apart with it.

Karl: And so are you saying that out of this that Vladimir Putin really, he’s not the bad guy? Is that what you’re saying? Because it looked very suss as this invasion and all this hoo-ha over Ukraine happened just four days after the Winter Olympics.

Michael: I would not say that any politician is not a bad guy. The question is his hand is being forced. You can be a bad guy and still have your position forced and you can still be attacked. You know what President Nixon said in our country: paranoids have enemies too. So even if you don’t like Vladimir Putin, you can say Vladimir Putin can also be attacked and maligned and forced into a situation where he has to protect himself and his own position within Russia by responding and by protecting Crimea from the American attempt to pry the naval base in Sevastopol away from Russia. Of course he had to act, he had no choice. That doesn’t mean he’s a good guy or a bad guy; it means that the Americans forced these events on him.

Karl: Well, let’s hope more people start to look at this natural resource wealth that underpins such geopolitical machinations because really things seem to be speeding up faster and faster and it’s becoming more and more obvious to people like yourself, Michael, what’s going on. But to see the Paul Krugmans, to see them just so surprised that such wealth inequality is occurring is just staggering.

And I just wanted to finish off today’s interview with a bit of discussion on a new economic law that’s perhaps coming through, Michael. It’s called Hudson’s Law. What’s this all about?

Michael: I think the neo-Liberals have found out that – it’s essentially the Stockholm syndrome on a political scale. For years people thought that, well, in a democracy, if people are getting poorer and poorer and wealth is becoming more and more unequal, the poor are going to fight back and they’re going to elect different leaders who are going to change the tax laws and get out of their poverty. But what they found is exactly the opposite.

You have the most unequal impoverished neo-Liberal economy in Europe, Latvia that continues to vote for the neo-Liberals, putting almost the entire tax on labour, not on real estate, not on the oligarchs. And they found that the more labour is oppressed, the more emotionally depressed and frightened they become. That when workers are very badly paid they’re so frightened of losing the job, they’re so frightened of being one paycheque away from homelessness that they won’t strike, they won’t protest. They’ll just say “I’ll do whatever you say, Master”. They thought if they are obedient enough and support the rich that the rich will somehow treat them nice in a kind of patron-client relationship, such as you had at the end of the Roman Empire. And, of course, that’s not really what happens. Once the rich begin to abuse the poor and they find the poor take it, the abuse gets worse and worse and worse and that corruption of democracy is one of the political counterparts to the disparity in wealth that Piketty’s been tracing.

Karl: And so what you’re saying there is that the greater the wealth gap, the more the weak identify with the strong and they hope to really be helped out by their oppressors?

Michael: Because the wealthy become celebrities. In America, the most widely admired people are people like Donald Trump or the rich Wall Street bankers that have made their money basically through what my colleague Bill Black calls “control fraud”. They admire people who are rich, no matter how they get their richness, and basically they imagine that somehow they could get rich in the same way if only they’re obedient enough and follow the system. It’s unrealistic, but that’s psychology.

Karl: Michael, just to finish off then, you must have a few stories on Donald Trump and the incredible unearned income he’s benefited from. Is there one play that defines his ride to uber-wealthdom through unearned income?

Michael: Well, as one friend of mine at the NYU real estate department said, when Trump buys a building and puts his name on it, just putting his name on it adds 10% to the building’s value. Somehow, so many people want to identify with him personally because he’s rich that just putting his name on, without earning money, will add to the value of the building. And in terms of earning money, his former wife wrote about ten years ago that they were walking down the street and they passed a homeless guy sitting begging for quarters. And Donald said “You know, that man is as rich as I am” and the wife said “You mean, he’s a billionaire?” and Donald said “No, he has at least a zero net worth. I have a negative net worth, I’m so much in hock to the banks”.

Well, what Trump did was, he simply didn’t pay the banks. And the banks are so desperate for real estate people to come in, borrow the money and manage the properties to make enough interest to pay them, that they let him scale back the money to the banks. He did the same thing with his gambling casinos in Atlantic City and managed to avoid paying. So you have Trump, who made his money by extreme debt leverage, by having negative net worth at various times in his life, somehow coming out on top thanks to the fact that the Federal Reserve under Alan Greenspan was flooding the economy with enough money to inflate the price of his property above water and to create a Rentier class rich enough to buy property in his buildings and pay him the price that he was asking for.

Karl: Well, Professor Michael Hudson, thanks very much for joining us here on the Renegade Economists.

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  1. Middle Seaman

    It’s a new brave world. We listen to experts who know everything about the economy and Ukraine. Next, they’ll treat diabetes.

    1. Banger

      That’s kind of a strange comment–what do you mean? Do you mean Hudson is wrong–if he is what is he wrong about? Very non sequitur-ish of you….

    1. susan the other

      Wasn’t it Gorbachev who wanted glasnost about the causes of WW2? It never happened here in the land of the free; never a book review on CSPAN about how WW2 was really the Nazis against the Nazis; and both of them against the commies. A lot like the Great Financial Crisis, I betcha. We are just trying not to use nuclear bombs these days – since financial bombs will do an even better job. Heaven forbid we should ever acknowledge that triumphant capitalism is a lot of nonsense. Loved all of Hudson’s insights here, as usual. Especially the bit about the cherished depreciation of real estate – a capitalist staple. Layers of depreciation not unlike layers of leverage or layers of rehypothecated collateral.

  2. Brindle

    Yes. The end of having any discretionary income for many or most people is a reality and goal of the current kleptocracy, predatory capitalism or whatever name you give it.

    —And what to me really has been accelerating wealth at the very top is the financial sector, is the ability of the 1% to get the other 99% in debt to them by saying “Look, we’re controlling the access point to buying a home, to buying basic needs, in America to getting an education, and you can’t afford to buy a home or get an education or even a car without borrowing money. And we’re going to charge you enough interest so that everything you earn in effect you’re going to be paying us for interest”.—

  3. John

    An interesting take down on Mr Krugman. I had no idea he was / is a bank lobbyist. If so, he is not to be listened to.

    1. W. Fergus

      I’d like to see Hudson’s source on the Iceland relationship. It seems especially strange given how Krugman has consistently praised the Icelandic government’s response to the financial crisis.
      I am an admirer of Professor Hudson’s work, but a lot of what he said regarding Krugman constitutes an ad hominem attack that I think is beneath the good professor’s considerable skills. Especially the part about being the right’s favorite liberal economist. From everything I’ve seen coming from the right, Krugman should be fitted with horns and a pitchfork! I wish Hudson would stick to the substance of his disagreements with Krugman. That stuff is interesting and educational, to say the least.

      1. backwardsevolution

        W. Fergus – all you need to look at is this:

        “He also got in a big argument with your Australian Steve Keen two years ago saying that banks don’t create credit. “All banks do,” Krugman said, “is lend out savings.” He said it’s inconceivable that a bank can actually create credit or inflate asset prices.”

        W. Fergus, come on! Krugman is a lackey.

      2. Michael Hudson

        That’s the problem. He HAS praised the former Icelandic government’s response — while the population overwhelmingly voted them out because of their support for the banks.
        I have gone to iceland, lectured at its university, given TV interviews, worked closely with Icelandic politicians, and met a number of their prime ministers.
        The pro-EU austerity party (the Social Democrat/Green coalition) were backing the crooked banks, and invited Krugman (at a high price) to fly over and essentially give a presentation regurgitating the propaganda he’s been given as a handout.
        The bottom line is that Iceland is NOT a success story. Banks have enormous sums of domestic currency that they would like to move out. It looks like chronic capital controls must remain in place for the foreseeable future.

      3. Benedict@Large

        Hudson actually worked with Iceland in developing its response to its banking crisis. Krugman only attended a conference there. If one looks only at the surface (as Krugman did), one sees a great response by Iceland to that crisis. Hudson got to look deeper however as the neoliberals re-established control. A lot of people there got hurt unnecessarily as that happened, and many had to ex-patriate to escape onerous debt obligations. Hudson has a real problem with that, and has written about it. (Check his website.)

    2. John Mc

      “The simple answer is that Krugman is a neoclassical economist. Neoclassical means anti-classical. He does not recognise that there is such a thing as economic rent.”

      He carries the neoliberal water for the centrist-left, fully capable of criticizing the Rubin’s, Summers’ and Geithners’, while using intellectual paper mache to explain away control fraud and economic rent.

  4. James Levy

    “And they found that the more labour is oppressed, the more emotionally depressed and frightened they become. That when workers are very badly paid they’re so frightened of losing the job, they’re so frightened of being one paycheque away from homelessness that they won’t strike, they won’t protest. They’ll just say “I’ll do whatever you say, Master”. ”

    If Hudson is correct in this assessment, then the game is up. I am not sure if he is or isn’t. A case can be made both ways. I do know that in a year of trying I’ve applied for jobs above, at, and below my range of competency and haven’t gotten an interview. Is this because I have a big mouth and always sign my name to everything? I know I would have done much better if I was a conformist and didn’t stick up for what I believed was right. If I’d jumped through every dumb hoop and agreed to every change that I didn’t believe in and thought was wrong, I would have gotten tenure. Have I shot myself in the foot? I know I’ve shunted the burden of keeping me housed, clothed, and fed onto my wife. If she were as pleasantly uncooperative with the system (I’m a very genial, well mannered man at work, but have a tendency to politely talk back and argue against anything that strikes me as stupid, which is plenty) as I have been, we’d be royally screwed.

    I just am not sure in this case what is true and what can be done.

    1. Banger

      You have to be who your are–somebody has to question for things to move along. We’re in a certain category that must exist for the system to properly right itself. At times we’re useless but, in times like these, we are essential to cultural and human survival. We will not get much monetary reward but my guess is that we’ll have enough to survive on–sometimes through miraculous means. Life is not worth living if you can’t be the way you are James. We need to take risks to be who we are or our lives have no meaning and we will wither while the assholes of the world will thrive. We thrive by serving truth only–no amount of money will give us satisfaction (I’ve had a bit of money and it was useless and now it’s all gone and I’m better off).

      1. just_kate

        i don’t know Banger. i’m currently the only working person in my household and can’t jeopardize my job by being myself at work – and that’s why i don’t post using my full name. is my life really not worth living because right now i’m not able to stand out/up publicly and risk losing our only source of income which supports us and helps our elderly parents? and this is probably not temporary, so what is your advice to me?

        i agree with what you say about community so i am surprised to see you post something like this that makes such a necessity of my life (and others) sound so worthless.

        1. Banger

          You present the argument for community. If we really cared we would see to it that you had alternatives. But, as it is, you have to do wiphat you have to do when we have no good options. So bless you for taking care of your family and that is no cause for shame–the shame is with the rest of us.

          I’ve done plenty of things just to support my family and I am neither proud of it nor regret it–it was reality. Could I have, in retrospect made better choices? Absolutely! But I didn’t because I lacked faith in my own vision and I was frightened of the world and it was a justified fear–we live in a system that inspires alienation, mistrust and fear. It is fear that keeps us bound because we have so little support of our fellows–this is the great tragedy of our times.

          Still, if you can find the courage to be yourself in a giving and loving way, you might be surprised at the results. I sit today living constantly on the edge of chaos doing unreasonable things with the intention of helping others–will I have to find a “normal” job? Will my business fail? I can’t afford to even think that–at least my kids are all grown up and set up for life with me holding their student debt so it’s easier for me to be me.

          1. just_kate

            in case you see this – thanks for the response. i don’t feel shame for having to work a day job as allcoppedout rightly pegs below – and i do work with some really good people – its just happenstance of needing the income/benefits from a fortune 100 that is pretty much a caricature of that rah-rah empty ‘good job, here is a certificate of award’ BS whilst the C suite makes out with all the profit.

            when you wrote “Life is not worth living if you can’t be the way you are James..” it just touched a nerve since he had said he relied on his wife right now financially.

        2. allcoppedout

          They have us over the day-job barrel Kate. Indeed, I think that is the key control. Academics I worked with were dire-scared of losing their sinecures and far too stupid to see what they were becoming. I left 10 years ago because I couldn’t work on the back of debt-fees, but still do the odd lecture gig to make ends meet. We can’t beat the system without stopping it. The kleptos running the show are the ones who can offer jawbs. Most lefties haven’t noticed this is the argument.

        3. rob

          This is life under occupation.The world is occupied by fascists.friendly fascists.
          Who is to judge what we all must do to survive?

    2. Gregory C. Smith

      Oh, I think he’s correct in general–without knowing much of anything about Latvia or

      I’m an enormous admirer of Hudson’s work, namely his determination to see the world
      as it really is, and the issue you discuss is one of its most disturbing implications: do “people” often react to their environment from standpoints other than those of their selves, their families or their factions?

      I once read an article to the effect that crony capitalism has been the historical rule
      rather than the exception–the institutional reflection of factional interest rather than
      devotion to the “common good.”

      Indeed, this behavior may be so basic to our species as to be unconscious in many.
      One would like to hear the philosophy of, say, Robert Rubin expressed in an
      unguarded moment. I doubt that he sees himself as the Genghis Khan of

      A little self-examination never hurts, either. We, for instance, are “rentiers” in a
      small way, our seemingly simple and harmless lifestyle notwithstanding.
      Things might be otherwise were we, or many rational folks, able to have
      more faith in the state, but our experience hasn’t supported that option.
      None of this is to say that I have any alternatives to offer.

      So, I think Michael Hudson’s work is very close to the heart of the problem, without
      necessarily offering any overriding solution.

    3. backwardsevolution

      James Levy – I think the game is up! People are terrified of losing their apartment, their home, their families. When you get people to this position, you have got them. Charles Hugh Smith said the 50’s and 60’s were anomalies. There was a shortage of labour, and labour had the upper hand. The elite did not like this.

      What we have now is the opposite. Too few jobs, and even when there are jobs, they’re bringing in foreign workers in many cases to fill them. Plus they’re not doing anything about illegal immigration. They offshoring jobs, when they can, or automating them.

      A surplus of labour – the corporate elite love it. You’re not going to say anything.

  5. allcoppedout

    I prefer Hudson to Piketty. Can’t help wondering why we have to prove the massive wealth (and for me) and income disparity. I would suggest we are missing a lot of what is going on when we need to make arguments about the ‘bleeding obvious’. Around the world people have to live under dire, mad, often sexually deviant kleptos of one kind or another. Do we really think we are so different? Max Weber gave an account of charismatic leadership – we could do better now. We are in the pre-fascist decadence stage of our Lakatosian commercial-legal paradigm decay. Most of is avert our eyes to the dictatorship, because long, long ago, we were taught that one seeing dictatorship one has a duty to revolution. The worst of it all is we have chosen to live on our knees.

    I’d prefer academics like Thomas to do more on money. I don’t see the way we use it as remotely sensible as a scientist. I also think the echonomists don’t understand what data is at all. To scientists its something we can’t cheat with (unless we commit fraud for big business), To echonomists and politicians its what they cheat with. I think this was a big motivation behind Capital – to win the argument through data rather than incommensurable theory. I think this still misses what data is. Inequality and its effects have been mind-bogglingly obvious for centuries. So why do we allow it and why do we have so many goading us to groaf the planet can’t afford as flaneurs to the celebrity lifestyle of piss poor excess? And what is Piketty doing writing this tome, catching (thank goodness in a way) the media attention as an expert in the bleeding obvious?

    1. Banger

      I think you make a great point about data in science as opposed to economics but science is not so good with data either particularly, as you imply, when there is money and career at stake. But it’s not only that–we can’t keep the observer and culture out of the picture.

      The fuss over income (should be wealth not income) is interesting and comes at a time when we are all on our knees and can do little about it. In part our collective situation is a result of a worship of wealth and power as the highest moral good not just the machinations of the power-elite.

      1. allcoppedout

        True – the literature from Carson’s ‘Silent Spring’ (62) on should make this clear to everyone. We were also promised electricity as cheap as water when the piles involved were for military purposes, and ‘hot fusion’ has been just round the corner since I before I was born. Incidentally, we are taught to lie about our lab results to get good marks in undergrad practicals.

        The core concept here is that we all lie and cheat. There are even occasions when this may be the moral choice (but rare). I have even been known to smash “cheating equipment”. Data always spins with theory of some kind, even in my dog’s head. But this isn’t the end of the story. At crude levels I have pointed to an accused in court and said ‘it was that gentleman I saw’ – prize for the first correct guess of the number of expletives in my head whilst saying ‘gentleman’. Deeper in, even the mathematical theory chosen in a research programme depends on approximation judgement, as do many features of the measurement problem (Gunther Ludwig – but who he?).

        The short version is we’d get more data if we got out more and we’d also ‘get data’ more. Our mathematical conception of the cosmos has changed very radically over the years – yet old observations still fit the new theory. This and more practical experience of non-science gives us the idea of data as a neutral observation language. This is never the case. However, it’s worse than Banger’s drift. From our general perspective in here, it is surely impossible to understand, without insulting concepts like the docile body, why we and our fellows are not occupying government all over the world to remove “the rubber-masked aliens”. All of us are unlikely to think inequality a good (even if we recognise it’s a portmanteau concept and needs unpacking). Big questions in economic data concern what is being made neutral. Most echonomists are as “neutral” as I was giving evidence as a cop playing to the rules of courtroom evidence and pretence of rationality in same. There are ways of saying ‘lying scumbag’ whilst pointing to a “gentleman”. Too often, echonomic data is skewed simply by using numbers to ‘describe’ people who are starving.

        1. Banger

          I’m not sure I can do your comment justice but let me tell you where I’m coming from. I am, chiefly, a mystic and have a certain prejudice against data–but I respect it. I believe we under the tyranny of indirect perception. Money, data and numbers provide certainty or the appearance thereof via externalities. Can you, from data, determine an honest person? Many people think they can and data is used, through credit reports, that determine whether we can be trusted or even hired. Yet, in most human culture such judgements were and are still made with a long informed look.

          When the West lost faith in their religion after the Thirty Years’ War it looked for some other substitute for certainty and Faith (sadly Christianity completely misunderstood Faith) and numbers and data became the new religion at least for intellectuals (yes, there were dissenters over time but they were part of the boho underground). We now judge by numbers–life span becomes a virtue in itself, money becomes “net worth” and so on. The mystic works in the eternal moment and I believe that we need to marry reason and even data with mystical insight.

          1. allcoppedout

            There is much talk in science corridors on a cosmic code (physicists) and information world (biologists). I suppose, if I was looking at slave ants that ‘rebel’ I’d bee looking for what chemical signal starts their killing of the slavers’ young. Yet what brings about this ‘co-evolutionary arms’ race’ in the first place? Something “lurks”. Human brains scan differently alone and together plus loads more.

            The data thing is too difficult for this format. Those of us with ‘book-keeping’ experience know numbers are a good way to find quick focus for improvement. And why not be efficient – yet what ‘efficiency’ is unemployment or ever more neurotic planet burning? Imagine a trip to Cambodian slave ships, months on a jack tuna boat in one shared male only crew quarters, mud wall building by hand, living in a South African mine, trying to do what you could in an African war with an MMT Bible – my students used to get scared down mines and in foundries. Now read Piketty What wasn’t “data”? I’d suggest the tax and estate records ain’t. Why would they be – some need to scale up so as not to be anecdotal? Some record better than what mere people can say or see? Do/did people live in slums for the better quality of life? Do we not believe the whole of history relevant on inequality?
            There’s a difference between mystic and mystifying.

    2. Dan Kervick

      Inequality and its effects have been mind-bogglingly obvious for centuries.

      Inequality is obvious, but the historical trends are not. Many economists and economic historians have argued that modern market economies, over the long haul, trend in the direction of broader prosperity and decreased inequality. It is still common to hear arguments to the effect that while there is a current widening of inequality in the US and some other places the overall global trend due to the spread of market systems is toward decreased inequality. The free market defenders would argue, then, that the best approach to inequality is juts to promote free markets and let them do their long term work.

      The importance of Piketty’s research is to rebut this optimistic picture. Looking at the available economic data, and analyzing long term trends in the developed world over the past couple of centuries, he identifies a general tendency toward spreading inequality and the concentration of wealth, particularly inherited wealth, based on a pattern of the rate of return on capital consistently exceeding the economy’s growth rate – exceeding it by a lot during periods of low growth and still exceeding it by a little even during periods of high growth. Piketty argues that the periods in which inequality has contracted – such as the trentes glorieuses in France corresponding with the post-WWII period in America – are the anomalous exceptional periods of global capitalist development, not the rule.

      One thing Piketty emphasizes – in Chapter 11 the book – is that he is not describing a “market imperfection” phenomenon. Rather he thinks the tendency for the return on capital to be significantly higher than the growth rate during periods of low growth, and at least somewhat higher than the growth rate during periods of higher growth, is a consequence of normally functioning markets in a capitalist economy, even under efficient, non-monopolistic conditions of freedom and competition. He says “rent is a reality in any economy where capital is privately owned.” Thus, if we want to do something about inequality, we can’t do it just by making markets more free and making markets more competitive and less monopolisitic.

      He then says this:

      Economic and technological rationality at times has nothing to do with democratic rationality. The former stems from the Enlightenment, and people have all too commonly assumed that the latter would somehow naturally derive from it, as if by magic. But real democracy and social justice require specific institutions of their own, not just those of the markets, and not just parliaments and other formal democratic institutions.

      He argues later in the book that we should be attending to new forms of democratic control of capital.

      1. allcoppedout

        This is true too Dan. I first heard these arguments sans tax material in union circles after I got out of the cops in the early 80s. I’m sure from what you write you must have known this pre-Capital21. I had a mate doing folk-singing gigs on trickle down not reaching his bottom glass when I did my postgrad while recovering from disability (I had to fight for my funding, but people are being turned down flat now – a sign of our “better times”). I even had a job in the 80s that was about ‘spreading industrial democracy’. Data-driven social epidemiology has said all of this, though I by no means find Piketty unwelcome. Critical Theory has long said it all, perhaps cumulating in Jurgen Habermas’ (1984) volumes on ‘communicative rationality’.

        On ‘as if by magic’ one only has to think of invisible hands, trickle down and echnometric Mumbo-Jumbo (spirit god myth used to keep women ‘in order’) like austerity, which everywhere has meant we’ll get richer while you get poorer. As a public we have not been shifted by the arguments – and this suggests to me we are getting the essential data wrong. It lies in how people put up with the current unfair system and imagine this is the best we can do. I think we have technical ways to get at this now, much as we might float an evacuated lead balloon into space to test gravity waves. My guess is we have deep, traumatic fears on getting anyone to do anything on responsibility and commonality-duty, rather than fascist-based charismatic leadership.

      2. financial matters

        I think these are good points. Shock Doctrine points out how political independence gains in place like Poland and South Africa didn’t lead to corresponding financial sovereignity for the people’s benefit and this negated many of the political gains.

        Piketty’s emphasis on income inequality also points out how the US general population (99%) isn’t benefiting from their financial sovereignity and many of the below recommendations would apply.

        Fadhel Kaboub describes how this paradigm could be changed in Egypt.


        “Egypt’s leaders understand the concept of “national sovereignty” (political and territorial sovereignty), but unfortunately they are unaware of the critical role played by financial sovereignty, which Egypt lacks because of its massive external debt (not to be confused with domestic debt denominated in Egyptian pounds).

        This is an open invitation to all the progressives who care about Egypt’s future to focus on restoring financial sovereignty by developing a series of 5-year plans with the following core features:

        Leverage domestic labor resources to be the engines of sustainable growth and development (a Job Guarantee program, rather than welfare and subsidies programs): focus on youth employment and university-sponsored R&D.

        Renegotiate dollar-denominated debt: Convert loans into bonds and allow investors to use bonds to pay taxes and fees owed to the government (i.e. convert foreign debt into domestic debt).

        Crackdown on domestic speculators who profit from Egypt’s foreign debt (capital controls).

        Leverage the Suez Canal importance in global trade to negotiate debt cancellation and technology transfer.

        Invest in renewable energy (both in rural and urban areas), sustainable agriculture, sustainable public transportation, and sustainable urban development.

        Use export revenues to fund import priorities that will maximize domestic production rather than consumption.

        Cancel Egypt’s odious debt.”

    3. Benedict@Large

      Piketty’s done something very important with this book. You don’t have to even understand what it is to know this. All you have to do is look at the response from the right. They look like deer in headlights. They don’t get that way for no reason.

  6. Dan Kervick

    FWIW, Piketty’s data is not based entirely on income tax data, but also on estate records and inventories. There is no confusion at all in Picketty’s book between wealth and income, and he is interested in analyzing separate historical trends toward inequalities of labor income, inequalities of wealth distribution, and inequalities in the income that is derived from wealth. Capital gains figure into changes in the distribution of wealth.

    1. allcoppedout

      Yep – and in being reminded of this, I note there is a lot of bickering about intellectual property rights on the ‘left’ going on – and I’ve caught myself doing some of it. We should be shifting this debate forward to what productively invested money is and how this might be modularised from ‘spending money’. If Piketty is right, we have centuries of echonomics doing the wrong thing entirely. My guess is we have long confused our ability to tell risk-takers from morons.

    2. Yves Smith Post author

      Dan, Hudson’s point is that data is suspect. I think the only place he has asset data is from France, and then I believe it’s just landholdings where you can trust the values. Do you seriously think an 19th century French tax collector could value a business? They might have had rules of thumb, but modern valuation techiniques weren’t developed till later. Admittedly more wealth was held in land than in businesses, but it makes the exercise dubious. People who’ve looked at the charts he has derived from them (he makes a generalization to all economies) say it is sus.

      1. Dan Kervick

        Well right, the data is always incomplete. But claims about historical trends based on analysis of the data that is available are always better then claims about historical trends that are made up on the basis of a priori models.

  7. Banger

    My take on Hudson is that his critique is mainly against the received wisdom of the mainstream narrative on all issues whether economic or geopolitical. I would say that our culture is dominated by an intellectual class that has completely abandoned the search for truth. It is most obvious in the mainstream media outlets that function as increasingly crude suppliers of propaganda and public relation releases for various rich clients or just plain entertainment as can be graphically seen by CNN’s decision to focus on disasters which is, at least, more honest than the other outlets who pretend to offer us “objective” news reporting.

    But it is the intellectual class that seems to have sunk further in corruption and cant than any of us thought possible decades ago–Hedges has done an excellent job at critiquing that phenomenum in his books and I hang my head with him over this tragedy.

  8. allcoppedout

    I’m still hacking through the Piketty data – from previous papers too. It look suspiciously like a good chemistry undergrad who has just produced a fairly difficult synthesis in the lab to expected theoretical yields less a bit. I reject his data as data for analytic reasons, but this still leaves immanent questions within his epistemological take.

    It’s not long since he and Saez were concluding this on USA tax data:
    ‘ Our series suggest that the large shocks that capital owners experienced during the Great Depression and World War II have had a permanent effect on top capital incomes. We argue that steep progressive income and estate taxation may have prevented large fortunes from fully recovering from these shocks. Top wage shares were flat before World War II, dropped precipitously during the war, and did not start to recover before the late 1960s but are now higher than before World War II. As a result, the working rich have replaced the rentiers at the top of the income distribution.’ – that was to 1998.

    You can get a flavour of how this has been debated from this McGill syllabus:

    I might, for cruelty’s sake, get students looking at the mass data lodged here: http://piketty.pse.ens.fr/fr/capitalisback

    After a few hours being forceably disorientated by this neutral data, I find students quickly submit to me passing Sooty’s Magic Wand over it and taking my story of what is going on as gospel.

  9. john c. halasz

    Haven’t finished the screed, but the bit about Ukrainian Russian speakers being mostly Jewish is way off the mark. The Jewish population of the Ukraine is put usually at .5%. That’s always a difficult figure to pin down, because many are secular, non-observant Jews and because of mixed marriages, etc. But aside from the vast numbers killed during the War, the Jackson-Vanik law privileged the emigration of Soviet Jews over all other Soviets, and after the economic collapse of the 1990’s, large numbers of formerly Soviet Jews emigrated to Israel to escape the economic fall-out, (and then, if they didn’t like what they found there, to elsewhere in the West, on the basis of an Israeli passport).

    Hudson has many valid, provocative things to say, but it would help, if he didn’t shoot from the lip so much.

  10. financial matters

    “The whole idea of wealthy people is to make their wealth invisible because if it’s seen it will be taxed and it’ll be resented.”

    This also applies to the rentier nature of health insurance companies which obamacare has made very visible.

    1. john c. halasz

      Kinda the obverse of Talleyrand’s: “It’s worse than a crime; it’s a mistake!”

  11. TomDority

    Labor (L1) (active component of wealth creation) = unavoidabe
    Land (L2) – (resources, raw materials)…passive component of wealth creation= unavoidable and available prior to human economics. Worthless in monetary terms until humans assigned value to it or needed it to create wealth/functionality through labor. An asset class whose value is derived by the commons/civilization the congregation of man. IMHO the increase in it’s value should be taxed back into use by those who created this value…used for the commons…see planet Earth. Currently, the asset inflation/increased value is landing into private hands….the value created by the commons is being funneled into private hands. The value added by John Q public is being looted by the private sector to drive asset inflation in a circular fashion due to an unjust revenue system…see Kleptocracy.
    Capital (C1) – (facilities, machines, paint brush, creativity etc.)…a product of labor and land= wealth. Currently, Financial Capital is being used to re-finance existing C1 at higher notational value to increase an interest stream…that interest stream is IFC and it does not add Labor and use Land ie; no wealth creation or increase income to labor (labor=humans/consumers/wealth creators)
    Taxes (T) (includes all forms..sales tax, gas tax, income tax…) an additional cost imposed to enable civilization or common action (used to deter or coordinate) see US Constitution, state, nation and any other form of human cohabitation. See licences, food safety, common defence…the support of the commons, infrustructure etc. Can be used for progress or supression of common rights – see constitution and declaration of independance.
    Finacial Capital = FC=0
    Interest on Finacial Capital (IFC) …an additional cost imposed to ‘compesate for risk’. A private tax whose revenue falls into private hands. IFC is a driver of asset inflation.
    Profit (P)….a surplus derived from the addition of labor to land. Value add. Clay fashioned by Labor into a cup, bowl,vase, heat shield-(wealth)

    L1+L2+C1+T+IFC+P+(fc=0) = cost of goods made and sold.
    If you increase the cost of any one of the components of production you raise prices of goods. Every laborer is a consumer…the only active component in our economy and the only thing that adds value to anything including land.
    Ought we not look at where all that value (monetary value) that we humans have created goes? With all the concern about raising everybodies boats; should we not be asking how to harness the mechanism (economics) to create a better place to live for all species on this planet….you know,alliviating the crushing yolk of poverty, food insecurity, loss of biodiversity, global warming, energy sustainabiltiy…..progress.
    This madness of juicing up land values to the point of making it too expensive for people to work and live is ridiculous. Take food prices – introduce the above equation to get your sales price of corn. Where do you suppose the biggest cost of food is? IMHO it stems from inflated land costs. Those land values are currently going directly to IFC and to those speculators who raised the cost of land upon which labor toils to produce food – we also tax (inhibit labor).
    We somehow do not recognize that the biggest driver of the cost of corn is the cost of aquiring land and IFC. Both of these imposed cost do not contribute 1 iota to the creation of corn or labor income and non of this gain goes into public use but, instead, self cycles asset inflation which raises the cost of living and working.
    Tax economic rent seekers and detax wealth creators.

    As written back in the 1920’s and found in Tax Facts
    Laborers knowing that science and invention have increased enormously the power of labor, cannot understand why they do not receive more of the increased product, and accuse capital of withholding it. The employer, finding it increasingly difficult to make both ends meet, accuses labor of shirking. Thus suspicion is aroused, distrust follows, and soon both are angry and struggling for mastery.
    It is not the man who gives employment to labor that does harm. The mischief comes from the man who does not give employment. Every factory, every store, every building, every bit of wealth in any shape requires labor in its creation. The more wealth created the more labor employed, the higher wages and lower prices.
    But while some men employ labor and produce wealth, others speculate in lands and resources required for production, and without employing labor or producing wealth they secure a large part of the wealth others produce. What they get without producing, labor and capital produce without getting. That is why labor and capital quarrel. But the quarrel should not be between labor and capital, but between the non-producing speculator on the one hand and labor and capital on the other.
    Co-operation between employer and employee will lead to more friendly relations and a better understanding, and will hasten the day when they will see that their interests are mutual. As long as they stand apart and permit the non-producing, non-employing exploiter to make each think the other is his enemy, the speculator will prey upon both.
    Co-operating friends, when they fully realize the source of their troubles will find at hand a simple and effective cure: The removal of taxes from industry, and the taxing of privilege and monopoly. Remove the heavy burdens of government from those who employ labor and produce wealth, and lay them upon those who enrich themselves without employing labor or producing wealth.

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