Susan Weissman interviews Michael Hudson
Susan Weissman, an editor of Against the Current, interviewed author Michael Hudson this past April on her program “Beneath the Surface” on radio station KPFK, Pacifica in Los Angeles. Many thanks to Walter Tanner for transcribing. The following is an abridged and edited text of the interview.
SUSAN WEISSMAN: MICHAEL Hudson, in the lead article in the April issue of Harpers magazine, says “The one sure mark of a con is the promise of free money.” Michael Hudson is a Distinguished Professor of Economics at the University of Missouri in Kansas City, and the author of many books on international and domestic finance, including Superimperialism: The Origin and Fundamentals of U.S. World Dominance, published by Pluto Press and reviewed right here on this program.
Michael, the April Harpers cover shows a pyramid, dollars being held up by people, and it says “The $4.7 Trillion Pyramid: Why Social Security Won’t Be Enough to Save Wall Street.” Will you explain why you see Bush’s privatization plans for Social Security as a Ponzi (pyramid) scheme?
Michael Hudson: Essentially, he wants to take the trillions of dollars now invested in Treasury securities and put them in the stock market. Now, prices in the stock market are determined by the flow of funds. For the last few decades what’s been pushing stock prices up has been pension fund demand.
But now the pension funds are in trouble because the companies haven’t been putting enough money in. Bush’s idea is that if he can take the trillions of dollars of Social Security, and put them into the stock market, it’ll push up stock prices, and that will create a boom.
That will work for the short term, until more people begin to retire than pay in, in about thirteen years. Once people retire, then all this money that’s been pushed into the market is going to begin to be sold out of the market; and once stocks are sold, prices are going to go way down, and the retirees are going to be left with stocks that aren’t going to be anywhere near as valuable as the money that paid for it.
At that point the government, having wrecked Social Security and gotten it out of the government’s hands, will say “Gee, that’s the madness of crowds, too bad you guys all lost your money.”
SW: We already saw that with Enron, of course…But just on this issue, there’s no regulation about these pension funds that workers contribute to? In other words, do the employers have to keep some of them in that so-called lockbox?
MH: There’s not effective regulation. Whenever stocks go up, the government does a favor for the companies — it says “Gee, you don’t need to put as much money into the pension plans.” And so companies actually take money out of the pension plans and use them for their own purposes, like giving stock bonuses to the CEOs or to use them for mergers and acquisitions.
When the stocks don’t go up, as during the last three years, is that the companies are underfunded and the government says “Well, you don’t really have to put in more money, what you can do is declare bankruptcy” — as United Airlines, U.S. Steel and U.S. Airways have done.
“If you go bankrupt, we’re going to protect all of the bank creditors. The creditors we’re not going to protect will be the pension fund investors.” They’ll be wiped out. Then the government, instead of regulating the funds, insures them, saying “OK, if you’re wiped out, then the government will take up the tab for maybe three quarters of the pensions.”
But right now the government pension insurance agency says “Wait a minute, we’re already almost insolvent.” If United Airlines and U.S. Airlines go bankrupt again and wipe out the pension plans, that’s going to wipe out all of the reserves in the government pension insurance plans.
SW: I think you mention in your Harpers article that General Motors adds $675 to the price of each car to pay for their retirees?
MH: That’s right. Initially, GM put enough money into its pension plan to be easily able to pay its retirees. But then it decided, let’s take the money out of the pension plans and use it to become a financial company; so they used it for other purposes, as have many other companies.
So basically corporate America is turning around to its employees and saying “Well, we haven’t been putting as much money in as we promised you, you’re just going to have to be realistic and realize that you’ve been cheated fair and square, we’ve stolen your pension money, what are you going to do about it?
SW: You know Newt Gingrich admitted to Charlie Rose a few months ago, just as Bush was beginning his campaign around the country to win support for this so-called “ownership society” and personal accounts, that privatization would free up the capital needed to compete with China and India in this century. Are we at last getting to the true intentions of the program, and do you think this is the case about China and India?
MH: No, not at all. There could be $100 trillion or $200 trillion put into the stock market that wouldn’t give a single penny of capital. The myth in all this is that if you put money into the stock market, somehow this money gets invested by the companies into factories, equipment and employee labor. That’s not what happens at all.
When you buy a stock, that stock has already long been issued. The money goes to a previous stockholder. You know who the stockholders are that are selling all these stocks that the pensions funds then buy?
SW: Tell us.
MH: About 40% of the stockholders are the CEOs and upper management of the companies. They are the people, like Bill Gates, who had 40% of Microsoft. What he’s been doing is selling about $20 billion worth of Microsoft stock. This is the $20 billion the pension funds have been buying. Essentially the money that the pension funds or individuals are putting into the stock market goes mainly to reimburse the original incorporators for their own stock holdings, but none of this money goes into companies.
When companies make investments in new plants and equipment, they reinvest their earnings. GM, Chrysler and other companies don’t borrow from the banks, they don’t issue stock for investment — that’s not why stocks are issued. Stocks are issued against capital that’s already in play, not to create new capital.
The myth is that when the stock market does well, somehow investment will benefit, but the reality is just the opposite. IBM, for instance, spends $10 billion a year, year after year, buying its own stock to support its price. But this is money that it decides not to invest in research and development, not to invest in new facilities.
Pretty much right across the board, companies are buying their own stock in place of making actual new investment. When the stock market is booming at 10 or 12% a year, why should anyone build a factory and make 8%, which is the current profit rate, if you can invest in real estate or the stock market and make 15 or 20%?
SW: In your article you state that what Bush is trying to do is build the next bubble — which begs the question, Michael, are bubbles the only growth plan for capitalism these days?
MH: Well, it’s what a hundred years ago was called “finance capitalism.” Marx used the term “fictitious capital,” Henry George said “fictive capital,” everybody realized a hundred years ago that securities and debt wasn’t the same thing as physical capital.
SW: Your book Superimperialism was just reissued by Pluto Press about a year ago, right?
MH: Yes, and there’s a new book coming out next month, Global Fracture, on the international economic order and how the U.S. essentially has applied parasitism on a world scale.
SW: In your article you do talk about other attempts to privatize pensions in Chile and Britain under Pinochet and Thatcher. What lessons are to be learned by us?
MH: All the dividends and all the interest that’s earned on every pension fund, every national social security system from Chile to England has been taken by the financial managers. Right now the dividend rate is about 2%; if stocks go up it will fall to 1%.
The management fee in England was about 20% of the total. In Chile the management fees were so high that every privatized social security fund in the first six years of operation went bankrupt through fraud by Pinochet’s military supporters.
The stock companies and financial industry are the largest single contributor to Bush’s campaign because they know if they can get their hands on managing the Social Security fund, that will be the biggest ripoff in human history. They will get in management fees all the dividends and the interests, none will be available to the private fund holders, and this will essentially double the profits of the financial industry, well worth their campaign contributions.
The individual account holders will have only one thing they can hope to get, the capital gains. But as you’ve seen from (New York Attorney General) Spitzer’s prosecutions of the financial firms, these guys are crooks. I’ve spent my life working for firms, I was a banker for Chase-Manhattan, I worked for Scudder Stevens running a big mutual fund, I know these guys; they chuckle and laugh that this is legalized robbery and they’re happy to do it.
The security Bush is talking about is for the upper 1% of the wealth holders, not the bottom 99%. If you look at the statistics in the economy of savers, the bottom 90% of America is in debt to the upper 10%. So the country essentially is saving more and more, but it’s all done by the richest layer of the population, and they keep lending all their gains to the bottom 90%, mainly for real estate mortgages but also credit card and other loans.
SW: We’ve danced around it, but let’s get deeper into the ideological issue behind this effort to privatize Social Security.
MH: The reason Social Security was a working-class program in the 1930s is because people were not embarrassed to realize they were working-class, to say, “Look, when I retire and I’m 65, I’m going to need money because I’m only getting a little bit of pay right now.”
Today, a large proportion of Americans believe they are going to be millionaires. The fact is that most people, if they do get a home, have to take out a mortgage and spend their entire life working off their mortgage debt. They think if they have a home that’s rising in price that this benefits them, when what it really means is that every time they move or they buy a home or their children buy a home, they have to go deeper and deeper in debt.
SW: Michael, we’ve run out of time and there’s so much more I want to ask, but finally: Do you think this scheme will succeed, and what’s your prognosis?
MH: No, because the Democrats realize Bush has gone out on a limb now. Believe it or not, the Terri Schiavo case actually helped the Democrats since 71% of Americans were all for supporting the husband with the right to die. They realized all of a sudden that Bush has overplayed his hand in the “right to life” movement, and now that he’s overplayed his hand on the Social Security issue. And this time the Democrats seem to think they have a winning cause, until such time as the financial industry contributes to their campaigns.