Michael Hudson on Big Government

Michael Hudson’s latest book J is for Junk Economics is a treasure trove of, by current mainstream standards, radical economic ideas. Here he is on Big Government, that much-maligned feature of modern capitalist economies (p.41-2):

“Europe’s 1848 revolutions by the bourgeoisie against Europe’s royalty, landed aristocracies and their allied vested interests sought to transfer power away from government bodies controlled by these classes (eg., Britain’s House of Lords). Subsequent democratic reform movements favored progressive taxation, consumer protection and general economic regulation. These original liberals fought to tax special interests, not to free them from taxation. The thrust of parliamentary reform since the 19th century accordingly has been to make governments strong enough to tax rent extractors such as landlords, high finance and monopolists.

These rentiers have fought back by wrapping themselves in the rhetoric of individualism. Accusing politicians of corruption and insider dealing, populist demagogues assert that government is by nature incompetent as compared to private management – which turns out to be giant Wall Street corporations and trusts. The effect (indeed, the lobbying aim) of downsizing democratic government is to turn the economy over to the financial sector and its allied rentiers to administer in their own interest. The wealthy are all in favor of Big Government when it is oligarchic.

Trickle-down economists accuse social spending programs of leading to budget deficits that are inherently inflationary, but applaud tax cuts and bank bailouts that benefit primarily the FIRE (finance, insurance and real estate) sector. Their lobbyists craft a demagogic rhetoric to attack progressive taxation, regulation and social spending programs by insisting that public management is inherently inefficient as compared to private ownership of basic infrastructure, banking and health care. Claiming that public services are not a proper function of government, they advocate privatization of state-run enterprises, roads and the post office.

Frederick Hayek’s Road to Serfdom (1944) argued that public planning to subsidize basic needs or regulate “the market” (rent extractors, banksters and fraudsters) to protect consumers and employees leads to socialist or fascist autocracy. His libertarian followers insist that government regulation violates their personal rights to charge whatever the market will bear. Their oligarchic alternative to big government is to roll back democratic reforms by attacking social spending programs, replacing progressive taxes with a low flat tax and sales taxes that fall on labor/consumers; abolishing minimum wage protection, Social Security and other public services; and privatizing public infrastructure to turn it into feudal-style rent-extraction opportunities. The aim is to un-tax the FIRE sector (mainly the One Percent) and eliminate the consumer protection and labor reforms put in place in the early 20th century Progressive Era. The meaning of the word “reform” has been inverted, using libertarian-style language coined in the late 19th century against Big Government under the control of aristocrats and other rentiers.

The real question is thus whether governments will be democratic or oligarchic. Will they subsidize the economy and undertake public infrastructure investment, or will they tax the population at large to subsidize the FIRE sector and other special interests?”

Keynes on global trade, conflict and full employment

keynesThe passage below is taken from the concluding pages of John Maynard Keynes’ famous General Theory, where he speculates on the benefits to international relations from avoiding conflict over international trade. If full employment can be achieved domestically through judicious government policies this would, he hoped, lessen the need for countries to come into conflict with each other over the balance of payments of trade, investment and capital flows.

Given the historical record, I am actually skeptical about the possibilities for achieving and sustaining full employment, however that might be defined. I am therefore not a perennially optimistic Keynesian. Sooner or later, growing economic imbalances will give rise to crisis and recession, and rising unemployment. However, I do think the world economy could be more wisely managed than it is now, with the US the (still?) reluctant hegemon and a rising China among other potentially destabilising trends. Continue reading

Michael Hudson on Finance Capitalism

Iconoclastic economist Michael Hudson on ‘Finance Capitalism’, taken from J is for Junk Economics (p.99-100). In today’s finance-dominated economies, his words are especially relevant, even though the term is not a recent one.

“Finance Capitalism: A term coined by Bruno Hilferding in Finance Capital (1910) to signify the evolution of industrial capitalism into a system dominated by large financial institutions, usually in conjunction with government (especially military spending) and heavy industry. To the extent that Wall Street managers take control of industry, their policy typically is to bleed profits to pay interest, dividends and other financial charges instead of investing in new capital formation and hiring. Today’s finance capitalism thus has become antithetical to the needs and dynamics of industrial capitalism.

Finance capitalism is defined by the relationship between creditors and debtors, and speculation for financial gains not related to tangible capital investment or production. The aim is to extract interest and financial fees by indebting labor, industry, real estate and government. Mortgage bankers aim to absorb all the net rental cash flow.

The culmination of this dynamic is the point at which the expanding debt overhead siphons off all net discretionary personal income and business profits. For loans to governments, the aim is to absorb the net tax revenue, and then to strip away the public domain in payment (eg., in the eurozone loans to Greece since 2010).

To increase its gains, the financial sector promotes (indeed, demands) the creation of legal monopolies and privatization of land ownership and public infrastructure, to be sold on credit. This builds interest charges into the break-even cost of doing business, increasing the economy’s overall cost structure. In the bubble stage of finance capitalism, the measure of financial productivity is total returns: interest plus capital gains. These gains on stocks and bonds are engineered by debt leveraging. Homebuyers, real estate speculators and corporate raiders pay their current income as interest, hoping that prices for assets bought on credit will rise at a faster rate.

These gains appear to be “saving” with interest being paid for expectations of capital gains. This economic and political dynamic of finance capitalism following feudalism and industrial capitalism, ends in debt peonage and a plunge of asset prices as the economy succumbs to debt deflation. The effect is a kind of neofeudalism.”

 

Our resurgent enemy: authoritarian nationalism trumps neoliberalism

Institutionalist economist Geoffrey Hodgson writes a fascinating and highly informative blog entitled New Politics. This post from January discusses the authoritarian nationalist turn in world politics and the vital importance of liberalism in countering this threat. His writing is lucid, compelling, and very well-informed by lessons from history.

Although the post is more about politics than economics, from a political economy perspective, the two are more useful when analysed together. In modern capitalist economies, the role of the state is inseparable from other institutions such as the rule of law and the market.

The debate over economic policy should be thoroughly exercised in the public realm of a healthy democracy. This requires well-educated citizens open to engaging critically in such a debate, allowing space for diversity and pluralism without dictating their terms. Intolerance is present in elements of both left and right and is contrary to the liberal perspective. Continue reading