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Austerity isn’t Working, Can Keynesian Reforms Save the System?

Saturday, 8th of June 10:00am-11:50am
Pace University, New York City

Room: W613

Abstract: Three contributions on the question, Is a Reformist Solution Possible?
Hillel Ticktin looks at the conflict between the Keynesians and those who favor a return to 19th Century capitalism; Michael Hudson asks whether Austerity is simply a European mis-step or is the Class War Back in Business, and Robert Brenner analyzes the roots of the crisis looking at Finance and the Real Economy. Suzi Weissman chairs/moderates.

Chair, Speakers: Suzi Weissman — Saint Mary’s College of CA and KPFK Los Angeles, Hillel Ticktin — Editor, Critique Journal, Michael Hudson — University of Missouri, Kansas City, Robert Brenner — UCLA

Primitive Accumulation in Light of the Current Onslaught of Austerity
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Saturday, 8th of June 12:00pm-01:40pm
Pace University, New York City

Room: W613

Abstract: This panel addresses the damage austerity is doing to the economy and society. Its backdrop will be Karl Marx’s analysis of the role of classical primitive accumulation. For all its brutality, classical political accumulation may deserve some credit in promoting the development of capitalism’s productive capacity. In contrast to classical primitive accumulation, the modern variant seems to be almost entirely extractive, feeding the voracious appetite of finance capital, by consuming what might otherwise nourish the lives of the people, including those parts of the public sector that serve human needs.

Chair, Speakers: Michael Perelman — Economics Department, California State University Chico, David McNally — Political Science Department, York University, Toronto, Michael Hudson — Research Prof of Economics, University of Missouri, KC, and Research Associate at the Levy Institute

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This year’s theme of Left Forum is “Mobilizing for Economical/Ecological transformation.” 
Speakers include Noam Chomsky, Oliver Stone and Bolivian Vice President Alvaro Garcia Linera

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Keiser-Hudson on bread to debt, 2nd half of the show.

Edited transcript

Michael Hudson: Obama’s “bargain” on social security reform will push more retirees into poverty in exchange for a minor increase in high end income tax – a class that receives most revenue from capital gain.

Obama’s Social Security reform
April 11, 2013.

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay.
President Obama released his budget, and the most controversial piece of it is he wants to make some cuts to Social Security. Now here’s a little bit of what he said: “Most economists agree that the chained CPI provides a more accurate measure of the average change in the cost of living.” This chained CPI is at the heart of the controversy, because critics are saying this is in fact a cut to Social Security benefits in the future.
Why is President Obama doing all this? Well, the logic for it is given more or less by The New York Times in their report on the budget. Here’s what they wrote:
“Social Security benefits would increase from $860 billion next year, less than the projected $743 billion in payroll tax revenues for the program, to $1.4 trillion in 2023 fiscal year, about equal to the entire amount of discretionary spending, Medicare and Medicaid, which would total $504 billion and $267 billion, respectively, next year. Each would be nearly double those amounts in 2023, and interest on the federal debt, projected to be $222 billion next year, would be four times that in 2023.”
Now joining us to talk about all of this is Michael Hudson. He’s a distinguished research professor of economics at the University of Missouri-Kansas City. His two newest books are The Bubble and Beyond and Finance Capitalism and Its Discontents.

Thanks very much for joining us, Michael.
MICHAEL HUDSON, RESEARCH PROF., UMKC: Thank you, Paul.
JAY: So first of all let’s start with the New York Times quote, where they give a fairly apocalyptic sense of where we’re heading in terms of debt and Social Security and Medicare, Medicaid not being able to be paid for. What do you make of that?
HUDSON: It reminds me of The Hound of the Baskervilles, where Sherlock Holmes said the important thing is that the dog didn’t bark. When the government printed $13 trillion to give to the banks after the 2008 breakdown, nobody complained at all about the fact that the government can simply print the money and pour it into the economy. Nobody is complaining about the increased war spending that we’re doing, the waste that the Pentagon itself is complaining to congress about.
Why is it that these complaints focus on one particular small part of the budget, Social Security and medical care and health care? And the reason is this is pure, naked class war. There’s no other word for it. You can’t believe that people are being honest when they don’t talk about the whole budget or the overall economy when they’re singlemindedly tunnel-visioned, focused only on how do we pay retirees less, so that we can give the bankers more when President Obama continues the bank deregulation he’s sponsoring. The idea is to cut back Social Security in order to gear up for the next big bank bailout that’s going to result from current policies.

JAY: So what do you make of the prediction that deficit spending will lead to interest on the debt becoming four times what it is now? Isn’t that some kind of danger?
HUDSON: Not necessarily, for a number of reasons that the Obama administration is doing its best to obscure. First of all, when advocates of cutting back Social Security lobbyists use scare tactics to talk about the debt, they talk about a $16 trillion super-total. But of this, about $4 trillion, is owed by the government to the Federal Reserve, and another $2.5 trillion is owed to the Social Security fund. So for the $6.5 trillion the government pays interest to itself. This interest credit is a bookkeeping accounting fiction. This is not really paying a penny interest than the government receives as revenue on another part of its budget. It is not paying interest to bondholders or into the economy. When people start by talking about $16 trillion, you know that they’re not being honest.

JAY: Is the argument they would give that when the Fed gives money to the banks, as you were talking about in the bailout, they do eventually get paid back, don’t they? And in a sense it doesn’t create more debt. That’s the argument they give, whereas these payments on Social Security …
HUDSON: That brings up the second point I want to make. Every government’s debt tends to grow steadily over time. The Federal Reserve has rarely reduced its debt to the United States Government apart from the World War I and II debt. The debt it holds does not involve banks, you’re quite right. The Federal Reserve and the Treasury can simply create money on their own computer keyboards, just like banks can do electronically. It doesn’t cost a penny for them to create the money to pay Social Security recipients. They could simply print greenbacks, to make a long story short.
The debt is never paid back, but becomes in effect part of the money supply. Over two hundred years ago, already in 1776, Adam Smith wrote that no government ever has repaid its debt. So the debt doesn’t have to be repaid. It’s not like a private-sector account book where, if you run into debt, you have to keep paying the banks more on your credit card and your bank loan. This is zero-interest money. You’ve had Bill Black and my other University of Missouri-Kansas City colleagues on your show explaining this.
When people refuse to acknowledge what universities teach in their money and banking courses, you know that they’re pulling a con job on you.

JAY: There’s two sides to this. There’s the side of the money the Fed just simply creates. And then there’s the part where the government borrows money from outside sources. They borrow money by selling T-bills. At the moment this borrowed money is costing the government practically nothing, but that could change at a point.
HUDSON: It could, in which case there would probably be a shift away from borrowing from the public to simply monetizing it, which is what the U.S. government has always done in a pinch, as have the British government and the Chinese government. Any government that has a central bank has the option of doing that. So this to pretend that the debts to the banks and the bondholders are the whole thing just avoids looking at the real overall budget situation.
But to pick up your point, it also assumes that, “Okay, we’re going to be paying the rich much more interest.” Remember, the bondholders – the 1% – own maybe 75 percent of all the bonds. So if the government pays them a lot more interest and doesn’t tax them more, this is a pure giveaway to the 1%.
So what they’re really saying, The New York Times and the others, is that we’re running a probability of giving a huge amount of money to the wealthiest 1% in the future. In case we indeed do have to pay them more, we have to screw the Social Security recipients, screw the Medicare recipients, screw Medicaid. We have to squeeze the 99 percent more to pay higher interest to the 1% that are the bondholders.

JAY: Now, President Obama in this budget proposal wants to raise taxes on the wealthy, he says. Anyone over making more than $1 million he wants to pay, I think, a minimum of 30 percent tax. Is that something?
HUDSON: Yes. It’s a fraud. It’s doubletalk. Rich people don’t make income if they help it. To paraphrase Leona Helmsley, income is for the little people. Rich people make capital gains.
So they fill out your tax returns, they don’t say that they’re earning income. They report capital gains, taxed at a much lower rate. So what Obama is doing is flimflam. The Congressional Budget Office has shown that the wealthy people get most of their rise in net worth by capital gains, not income. He’s not making a peep about that.

JAY: The other argument I guess you hear from Obama supporters is that he’s dealing with a Republican-controlled House. I think the New York Times headline of the coverage of this was President Obama’s budget meant to engage the Republicans. So this is more about the politics than about the economics.
HUDSON: When they say “engage the Republicans,” this means that Mr. Obama realizes that as a follower of Rubinomics – Robert Rubin at Citibank – that he’s going to do something that most Democrats don’t like, He’s advocating a policy that most voters don’t like. So he’s trying to blame it on the Republicans. He’s “engaging” them simply in order to put the blame on them.

JAY: Just quickly dig into this CPI chained cost of living. Why are people criticizing this, and what does it mean?
HUDSON: It’s not really a cost of living index. It’s a “cost of lower living standards” index. Yves Smith calls it the catfood index.
Here’s what it does. Suppose that you have to switch away from eating steak or eating meat or eating fish to eating canned tuna fish or canned beans. That’s considered a price reduction.
If the chained index is done “properly,” anti-labor economists can cut Social Security by 50 percent. Here’s how. If people stop taking cabs and begin to take buses, that’s considered a lower cost of living. Well, what if they buy a bicycle? All Obama has to say is, “Look, folks! If you really want to save money, get a bike.” That’s what Margaret Thatcher said. That was one of her campaign slogans: “Get a bike!” So all of a sudden, the transportation in the cost of living goes down to zero.
People pay between 25 percent and 40 percent of their income on rent. Let them live out on the street. Let them live in a homeless shelter [crosstalk]
JAY: Because the point of this chained ….
HUDSON: … about 15 percent of their income is spent on medical care. Let them do what George Bush said: Go to the emergency ward. That’s free. So the cost of living goes down!
If living standards are ground down and down because people are poor, then the government can say, “Because you’re getting poorer and poorer, your living standards have declined, so we don’t have to pay you so much to live.” This is no longer a price index. This is an index of declining living standards. Poverty will cascade downward, and so will the chained CPI. This gives new means to the working class being put in chains.

JAY: And that’s because the concept behind this chained CPI is that people are finding cheaper ways to do things, ways that supposedly are not being reflected in the current system.

HUDSON: That’s right. People are having to walk to work instead of taking buses. They’re having to eat tuna fish and canned beans instead of buying fresh food on the table. Of course they’re finding cheaper ways. We call that declining living standards.
The starting point for Obama’s budget “reform” is to find the path of least resistance in screwing Social Security recipients, how can we pay them less to pay our campaign contributors, the 1%,  more? They start by putting the class war back in business. They sugar-coat it by calling it a price index instead of a catfood index or declining living standards index. This is the politics of deception.
JAY: All right. Thanks for joining us, Michael.
HUDSON: Okay.
JAY: And thank you for joining us on The Real News Network.

Edited transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.
Former prime minister Margaret Thatcher has passed away, and of course around the world people are debating her legacy. Henry Kissinger said she was a great defender of Western interests. She’s known as the woman who stood her ground, the Iron Lady. I guess the question is: stood her ground for whom?
Now joining us to give his take on Margaret Thatcher is Michael Hudson. He’s a former Wall Street financial analyst. He’s a distinguished research professor of economics at the University of Missouri-Kansas City. His latest books are The Bubble and Beyond and Finance Capitalism and Its Discontents.
Thanks very much for joining us, Michael.
MICHAEL HUDSON, RESEARCH PROF., UMKC: Thank you very much, Paul.

JAY: So what’s your take on Margaret Thatcher’s place in history?
HUDSON: Her legacy wasn’t what she started out to do. She’s most famous for privatizing British industry, starting with British Telecom and introducing what she called “labor capitalism,” a term that she borrowed from her fellow free-market autocrat, General Pinochet in Chile.
When she became prime minister in 1979, most of the Conservative Party was against privatization. This was not part of the program she ran on. When I was in England, I saw the proposals by various Conservative Party members that were put to her, and it took about half a year for her to be convinced that privatization would help in her fairly simple objective. She wanted to break the labor unions, thinking then that would help the working class evolve into the middle class. She believed that fighting unions would help raise the working class into the middle class – as if unionized labor and governments that protected labor’s interest were responsible for the fact that one had to wait many months to get a telephone fixed. (One BT repairman once came to a London apartment I was staying in, and told me, “I can’t fix this phone. It’s broken!”)
Fighting unionization was supposed to lead to lower wages, and thus cut costs and re-industrialize England. What her fight achieved, of course, was the opposite. So she’s going to go down in history as a compendium of internal contradictions par excellence.
Britain’s labor unions were strongest in the large public utilities. The largest tangible capital investments in England – and every other country – were in this public infrastructure: the roads, real estate, bus lines, railroad and communications systems. Mrs. Thatcher believed the anti-government “free market” guff that if government regulation and planning were dismantled, the magic of the marketplace would raise productivity. Prices would decline.
There was no suspicion that privatized companies would simply keep the productivity gains as a financial surplus, to be paid in the form of exorbitant executive salaries, interest to bondholders and dividends to stockholders, creating capital gains for stockholders – who turned out to be the 1%, not the 99%.
The way in which she privatized British companies took the form of the biggest giveaway in England history. Privatization didn’t have to happen in quite this way. But her blind spot led her to leave bankers in control of the program – and she gave them whatever terms they asked for, with the sky being the limit. (That is indeed what they asked for – and found no government official trying to bargain them back down to “economic” rates. That, to Mrs. Thatcher, would have been government “interference” leading on the slippery slope to fascism, Hayek-style.)
So economic planning was centralized in the City of London, the nation’s financial district. Mrs. Thatcher presided over the giveaways in England that were the counterpart of the great American railway giveaways after the Civil War in this country. She started by privatizing British Telecom, then the bus lines and water, all on credit. This created a vast new market for British investment banks, first in underwriting, then in reaping first-day and first-week capital gains, and soon in lending at interest to buyers who saw public utilities as potential rent-extracting rights to place tollbooths throughout the entire British economy. So Mrs. Thatcher’s “free market” became a market free for predatory rent-seekers creating the largest set of special privileges since the Crown Corporations from1600 through 1720 – the commercial trading monopolies granted to royal favorites. So she was the prototype for Boris Yeltsin in Russia.
The problem facing Mrs. Thatcher, of course, was how to get voters to support privatization. After all, it was against what most voters believed, and even against what most of her own party believed. Former Prime Minister Harold Macmillan likened privatization to selling off the family silver. But she saw it as balancing the British budget until North Sea oil came online. And her ideological cover story – which she actually seems so stupid to have honestly believed – was that the private buyers would raise productivity, and reduce prices in keeping with these productivity gains. The concept of unearned income or economic rent was absent from her vocabulary. It was if her upbringing had given her a surgical lobotomy – which made her so powerful a useful idiot to Britain’s predatory financial class. When her obituary writers speak of her “decisiveness,” they mean her tunnel vision and absence of reflection.
Her insistence that it was possible for the working class to rise into the upper class was indeed personified by one family, the Gloags. Bus driver Gloag spent about £12,000 to buy a small bus line, which ultimately became Stagecoach. Bus lines weren’t making much money, but the company did have the bus terminal in the center of London. So what seemed to be a transport deal turned out to be a real estate killing on the land’s site value. The Gloags sold the bus terminal for a huge amount of money, which they spent on buying up other bus lines.
They “raised productivity” in a way that led the government to accuse the company of monopoly practices, abusing the monopoly it acquired over the transport system by raising the prices and the cost of British transportation. Unfortunately for most of Londoners, they now had to go outside the central city to catch a bus. Time schedules were scaled back, and service declined. But it made the bus driver’s daughter the richest lady in England next to the Queen. And to Mrs. Thatcher, productivity increased, because much less labor was employed to operate the transport service.

JAY: Michael, Margaret Thatcher was a contemporary of Ronald Reagan in developing neoliberal policies, as the term’s been coined. But it’s particularly the time of rising power for finance. What’s the role of Thatcher in this?
HUDSON: She turned over the largest organizations in England – gas, water, telephones and power – to investment bankers to underwrite. Normally they would underwrite a new company. They’d charge 3 percent of the amount of money they raised in an initial public offering (IPO). This payment was for projecting sales and profits, and presumably judging what a fair market price would be. But in this case the market was already there. No such market research was needed. People knew what British Telecom was, and what British Gas was.
Yet Mrs. Thatcher went along with giving the underwriters 3 percent of an enormous deal – the largest ever issued in Britain. To cap matters, she conspired with the underwriters to vastly underprice British Telecom – by so much that people (most of which were large investors) who bought at a low price quadrupled their money in a single week. This short-changed the government, by giving it less than a quarter of what its assets were worth. But Mrs. Thatcher wanted voters to think that they could get a free ride. She was creating an economy that was all about getting a free lunch. She hoped that voters would think that it was worth more to themselves by hving to pay much more for their water, much more for their phone service, much more for their bus fares and railroad fares, and to end up losing their job, just to make a few pounds quick profit in buying underpriced public utilities being sold off. So she basically thought that her supporters were unthinking, greedy free lunchers – who would fall for a giveaway to British bankers and financial speculators if they could get a few of the crumbs. That was her political program.
Underwriters made a killing by issuing BT stock and that of subsequent privatizations at a very low price. Favored customers allotted big shares made a windfall just like what would be occurring in the U.S. dot.com bubble in the late 1990s. The financial sector made a killing buying the biggest industries in England, the public utilities I cited above – water, gas and railroads. But the initial killing was outdone when the new managers raised the prices they charged for hitherto public services. They were privatized without monopoly price controls or other regulation.
The largest overall privatization was that of residential real estate. Tenants of council houses – people living on what in America would be called welfare – were given an opportunity to borrow and buy. The result was that vastly underpriced real estate became the highest-priced property in the West. A £20,000 apartment bought soon after Mrs. Thatcher became prime minister now sells for £350,000. Buyers made a killing.
But when the dust settled, employees who work in London no longer can afford to live there. So much of central London (low-rise by American urban standards) has been bought up by kleptocrats and foreigners that middle-class Brits have to live outside the city. Privatizing housing without taxing the land’s price gains by a windfall tax created a gigantic mortgage market for British banks.
Of course, they weren’t regulated either. The whole of England became a deregulated free-for-all. The largest mortgage lenders went bankrupt after 2008, led by Northern Rock and HBOS (the Bank of Scotland).

JAY: I was about to ask you about that. Recently the press has been filled with these reports by a collaboration of journalists around the world naming people and companies using tax havens. Quite a few are under British authority. What has Thatcher got to do with that?
HUDSON: That was part of her deregulation philosophy, along with her idea of untaxing property and wealth, and shifting the tax burden onto labor. By the late 1970s, English industry was on the rocks. It wasn’t competitive any more. British Labour Party Prime Minister James Callaghan tried to borrow money from the International Monetary Fund to invest in rebuilding industry, but was told by U.S. Treasury Secretary Bill Simon that the IMF doesn’t lend to rebuild industry. It lends money to governments to pay debts to bankers and bondholders. He said that England’s comparative advantage lay in the financial sector, as if it were a real “industry” like manufacturing
Margaret Thatcher embraced the idea that the way to build up Britain’s economy was to create a financial free market. There was no attempt to regulate the banks. So her policy became the progenitor of what flowered as Gordon Brown’s notorious “light touch.” It was a euphemism for “charge and take whatever you want. We won’t look.”
Deregulation and turning England into a tax haven attracted Russian kleptocrats and others to relocate in London. Somebody quipped that the other day that Russian billionaires are more visible in England now than in Russia. African dictators, drug dealers and tax dodgers from all over the world have moved their takings to London. So did Icesave, where it was looted. And when AIG went bankrupt in America, it was because of its London office. I think the same was the case with Lehman Brothers. The London office is where their unregulated derivatives trades were made.
So deregulating British banking led the international financial system a race to the bottom. Margaret Thatcher said, in effect, “We’re going to be the ground floor, we’re going to be the absolute bottom, deregulated, everything goes.” She opened the doors for what became a criminalized financial system that ended up turning high finance into gambling.
Labor and employment weren’t needed for her business plan. She didn’t need industry, or mining, because they employ labor. And banks don’t need labor or industry to place bets and speculate.
So Mrs. Thatcher felt that England could afford to put the class war in business. She oversaw a vast rise in unemployment. In the name of creating a more equal society of upward mobility, she made England more unequal and immobile than it’s been in a century.

JAY: What are some examples of that?
HUDSON: The degree to which England has become polarized between the very rich City of London (the financial district) and the average working class in Manchester, Birmingham and other formerly industrial other cities that are now part of England’s rust belt, much like in America. In Manchester, for instance, industrial buildings have been turned into gentrified apartment buildings.
The bottom line of what Mrs. Thatcher said was that finance and privatized real estate and public utilities can create an enormous jump in wealth without building up a domestic industrial base or even an employment base. So now you have widespread unemployment throughout England, and the economy is falling into austerity. As matters have turned out, what the “free marketers” promised would be an efficient, streamlined, low-priced economy has become the highest-priced economy in the world with an enormous financial and real estate overhead. Its retail sales are especially high-priced. Buying food in England costs much more than elsewhere in Europe. The telephones cost more, and nearly every kind of public utility that was privatized now costs much more, capped by railroad and bus service.

JAY: In the article you wrote on Counterpunch, Michael, you give the statistic that when Mrs. Thatcher came to power, one in seven children were living in poverty; when she left power, it was one in three.
HUDSON: Yes, she doubled the poverty rate. Yet the voters went along for a time. Her genius was her ability to convince them that even though they were losing their jobs and getting ground down in poverty, they somehow were benefiting. In effect, her slogan was, “Sorry you’ve lost your job. I hope you made a killing on the home you bought and in the stock market.”
She convinced the English public to make a tradeoff. They could make a quick windfall by buying a British Telecom and the various privatized water companies watch the price raise as their phone rates and water rates were raised. They could sell their house for twice what they paid for. And new buyers could multiply their investment ten times more. But making these short-term gains and ended up excluding wage workers from the privatized free-enterprise economy she created.

JAY: Alright. Thanks very much for joining us, Michael.
HUDSON: Thank you.
JAY: And thank you for joining us on The Real News Network.

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is “The Bubble and Beyond”.

This is from my book on privatization, written some 15 years ago, never published.

As in Chile, privatization in Britain was a victory for Chicago monetarism. This time it was implemented democratically. In fact, voters endorsed Margaret Thatcher’s selloff of public industries so strongly that by 1991, when she was replaced as prime minister by her own party’s John Major, only 35 percent of Britain’s voters supported the Labour Party – half the proportion registered in 1945. The Conservatives sold off public monopolies, used the proceeds to cut taxes, and put the privatized firms on a profit-making basis. Their stock prices rose sharply, making capital gains for investors whose ranks included millions of Britons who had been employees and/or customers of these enterprises.

Yet by 1997 the Conservatives were voted out of office by one of the largest margins in their history. What concerned voters were the results of privatization that Mrs. Thatcher had not warned them about. Prices did not decline proportionally to cost cuts and productivity gains. Many services were cut back, especially on the least utilized transport routes. The largest privatized bus company was charged with cut-throat monopoly practices. The water system broke down, while consumer charges leapt. Electricity prices were shifted against residential consumers in favor of large industrial users. Economic inequality widened as the industrial labor force shrunk by two million from 1979 to 1997, while wages stagnated in the face of soaring profits for the privatized companies. The tax cuts financed by their selloff turned out to benefit mainly the rich.

Opinion polls showed that voters had opposed privatization at the outset (as did the press and many Conservative back benchers), but the Conservatives pointed out that Tony Blair rode to victory in part by abandoning “Clause Four” of the Labour Party’s 1904 constitution, advocating state control over the means of production, distribution and exchange. Most voters wanted tighter regulation in the public interest, but not a return to state ownership. On the other hand, they feared the prospect of selling off the post office, the BBC and the London tube (subway) system.

Nearly everyone agreed that companies were run differently in private hands than was the case under public ownership, even when the same managers remained in charge. Privatization was praised by Mrs. Thatcher and her allies – and blamed by many others – for managing these companies to generate capital gains for stockholders rather than to serve broader social ends.

Many people did not believe that essential public-sector industries should be run as commercial gain-seeking enterprises. Among the norms of public service, making a profit certainly was not one of the yardsticks used by the bureaucracy put in charge of these companies. Public-sector labor unions aimed more at maintaining employment than at producing revenue for the state as owner. The purpose of taxes, after all, was to subsidize basic services to the population.

This attitude had long been shared by many Conservatives, as well as by Labour. When Benjamin Disraeli created the Conservative Party in its modern form in the mid-nineteenth century (replacing the old royalist Tory Party), his major ideological adversary was not socialism but the free-trade liberalism that led Britain to repeal its protectionist agricultural tariffs (the Corn Laws) in 1846. Indeed, as a novelist Disraeli sought to expose the horrors of unbridled laissez faire. In Sybil, or The Two Nations, written in 1845 (three years before the Communist Manifesto), he described the rich and the poor as constituting “two nations between whom there is no intercourse and no sympathy, and . . . who are not governed by the same laws.” His novel assigned the loftiest ideals to Sybil, the daughter of a factory worker, but placed his hopes in a morally regenerate aristocracy. And in due course, Disraeli’s social welfare legislation, especially the public health system introduced from 1874 to 1881 (he said that his motto was Sanitas sanitatum, “Health, all is health”), helped the Conservative Party evolve as a nationalist and sometimes “state socialist” party, especially after World War II under Harold Macmillan in the 1960s and even Edward Heath in the ‘70s.

But it was the Labour Party that pressed for nationalization of the major industries. Fabian socialists such as Sydney and Beatrice Webb, George Bernard Shaw and other wealthy opinion-makers typified the degree to which many of Britain’s leading upper-class intellectuals supported nationalization as a cure for the ills of industrial capitalism. Indeed, the aristocracy underwent a schooling in personal economic values that resembled those of ancient Greece and Rome in their disdain for the idea that one’s life should be devoted to so lowly a purpose as commercial gain-seeking.

Britain’s government was controlled about half of the postwar period by the British Labour Party, which in turn was controlled by the trade unions. This gave the unions more political power than in any other country. Conversely, the Labour Party’s strength was based on the unions. Most workers employed by the public utilities and other government enterprises belonged to the Transport and General Workers’ Union (TGWU). Although the number of individual party members was relatively small, all of the TGWU’s approximately one million members were deemed to belong simply by virtue of their union membership. The union’s general secretary cast their votes as a bloc at the Labour Party’s annual convention.

Trade unions were given broad privileges in 1906, subsequently restricted by the Trade Disputes Act of 1929 passed largely in retaliation against the 1926 general strike. This act made it mandatory for union members to opt in to the payment of the union’s political levy to the Labour Party. After World War II the rule was changed to give unions a right to opt out of paying the political levy. This had the ironic effect of placing the Labour party finances more firmly in the hands of the union leaders. At the Labour Party conferences these leaders voted on behalf of all their members who had paid the levy. The TGWU thus was placed in a position to cast one million of the party’s roughly six million votes.

Labour endorsed the nationalization of industry so as to serve the interests of workers. As noted above, Clause Four of its 1918 constitution (added in 1919 in the aftermath of World War I) called for the state to control the means of production, distribution and exchange. In 1945 the incoming Labour government nationalized the gas and electric utilities, as well as most transport lines that remained municipally or privately owned. Nearly all were run at a loss, which duly was covered by public subsidy.

World War II had been the great catalyst for faith in public ownership and national planning. Some four-fifths of Britain’s gross domestic product (GDP) was commandeered by the government. By the end of the 1940s most utilities and natural monopolies were in public ownership at the national or local level, or (as in the case of water) were held by public companies with restricted returns for the owners of their equity shares. The coal mines, gas and electric utilities, road transport and railways all were nationalized. The foundations and basic cost structure of Britain’s economy thus were shaped by these public utilities, public housing and socialized medicine, not to mention British Petroleum (BP) and, in time, the government’s North Sea oil holdings. And in due course the automotive, steel and aircraft sectors were rescued from collapse by being nationalized, henceforth to be run at heavy losses subsidized by taxpayers.

Clement Atlee’s Labour government of 1945-51 cited five reasons for nationalizing British industry. As Mrs. Thatcher’s Treasury Chancellor Nigel Lawson has summarized, the first reason was to improve industrial relations. In practice, he retorted, this meant caving in to the trade union leaders, especially inasmuch as a second objective of postwar nationalization was to ensure full employment. The effect was to inflate wage rates through make-work programs and featherbedding.

A third reason for nationalization was to maximize productivity gains, by removing absentee rentier owners from the scene. The actual result, pointed out the Thatcherites, was an uneconomic management of the labor force. Nationalization also had focused on regulating natural monopolies in the public-interest – that is, by politicians – by administering prices and providing service on a basis other than profit objectives. The monetarists would argue that straight profit objectives were more efficient.

A fifth argument for nationalization had been the strongest. It was intended to replace short-term profit maximization by wider national and social priorities. But governments tend to live just as much in the short run as do corporate managers. More to the point, politicians seek to win votes by placating labor on the eve of elections. “The nationalized industries,” argued Lawson, “so far from improving industrial relations, proved the source of the biggest threat to industrial peace – doubtless because of the combination of centralized union power and recourse to the bottomless public purse.” At least, this argument was more understandable in 1979 than it had been in 1949.

If it seemed that government enterprise could succeed where private management failed, the reason was to be found largely in its claim on the public purse. The losses run up by these enterprises were financed by income taxes whose rates for business and the upper brackets were among the world’s highest, as were inheritance taxes. Indeed, many considered Britain to have been turned into Europe’s most socialist economy after 1945. Yet the objective seemed not to be the provision of efficient service at world-class levels. Public housing, originally a showpiece, deteriorated into what some called “modernist trash,” while the telephone system remained archaic. Public bureaucracies came to be seen as personal baronies whose administrators made little attempt to apply business methods or cost accounting. Yet their book cost far exceeded the stock-market valuation of private companies.

Most Conservatives acquiesced in the idea of national planning as the government increased its share of the economy from 40 per cent to over 60 per cent by the late 1970s. As Mrs. Thatcher observed, “It was, after all, none other than Harold Macmillan who in 1938 proposed in his influential book The Middle Way to extend state control and planning over a wide range of production and services.” Most social legislation since World War II was bipartisan, including the new National Health Service and the National Insurance legislation of 1946. Running a public enterprise was prestigious for many members of the upper classes. And the government was willing to bail out industries when they went bankrupt, with full compensation to investors – something that the market could not have done.

Margaret Thatcher’s Monetarist World View

Mrs. Thatcher has described how her upbringing living over her father’s grocery store in the small town of Grantham shaped her impressions of how society worked. “There is no better course for understanding free-market economics than life in a corner shop.” It was an experience that inoculated her “against the conventional economic wisdom of post-war Britain,” that is, the faith in government planning and the disdain felt among the literati for entrepreneurial values. Hers was the world of “Methodism, the grocer’s shop, Rotary and all the serious, sober virtues cultivated and esteemed in that environment.”

This Babbitt-like view of the world did not prepare her to think about the economic impact of debt, a serious blind spot for nearly all monetarists. She confessed that her idea of debt management was based on balancing the family checkbook, as if this was a proper analogy for public finance and government control of the printing press and a central bank to create money at will. To Mrs. Thatcher a government deficit simply meant more debt, and hence more taxes to be paid. “Thrift was a virtue and profligacy a vice,” she wrote. Taxes were “a deterrent to work,” not the means by which vital public services were supplied. It was as if such services had no economic value. Income policies were epitomized by the undeserving poor living better on state subsidies in public council housing than hard-working families who struggled to pay their rent or meet their mortgage payments. This was a view reflecting middle class resentment against subsidized services extended to families lower on the economic scale.

One does not learn much about macroeconomics from a store. A shopkeeper buys what already has been produced; how it is made is not of much concern. In fact, Mrs. Thatcher’s world view was naturally akin to that of Chicago School monetarism. The focus was simply on how to undercut the prices of one’s competitors, preferably by cutting taxes and the costly social welfare schemes on which they were spent.

The ideological pedigree for the Chicago School’s narrow-minded economics was provided by Frederick Hayek and Milton Friedman. Hayek’s most famous book, The Road to Serfdom (1944), opposed any and all government planning in principle as leading inevitably to either fascist or Communist authoritarianism. When Keith Joseph gave Mrs. Thatcher a copy of this book she readily responded to his hard line. “Hayek saw that Nazism – national socialism – had its roots in nineteenth-century German social planning. He showed that intervention by the state in one area of the economy or society gave rise to almost irresistible pressures to extend planning further into other sectors. He alerted us to the profound, indeed revolutionary, implications of state planning for Western civilization as it had grown up over the centuries.” This would underlie her opposition to European unification under the Maastricht Treaty.

To most people the government appeared as the benign sponsor of the welfare state that emerged from World War II’s mobilization. But by the late 1970s the sclerosis of public industries threatened to make Britain economically ungovernable. In these circumstances the Chicago School’s anti-statism found an increasingly fertile intellectual ground.

It was natural for self-made people such as Margaret Thatcher to prefer a private-sector market economy to a state bureaucracy. Private enterprise beholden to shareholders hardly can afford patronage and cronyism. Of former Conservative Prime Minister Harold Macmillan’s broad and inclusive politics, she acknowledged disdainfully that “The traditional economic liberalism which constituted so important a part of my political make-up . . . was often alien and uncongenial to Conservatives from a more elevated social background.”

She and her supporters stood more in the tradition of the old Liberal Party, dressing up the ideas of Adam Smith in monetarist Chicago garb, seeing in government planning a road to serfdom at worst, and incompetence at best. She warned against the dangers of inflation spurred by government borrowing, but said little about private debt.

Mrs. Thatcher thus was ideologically harder than her pragmatic Conservative predecessor Edward Heath, and represented a break from her party’s traditions. She admired what the Chicago Boys had done in Chile, and would find kindred monetarist souls among Russian “reformists”. “Let us glory in our inequality,” she preached at one banquet, explaining that more inequality meant that more wealth was being created by “savers” at the top of the economic pyramid, presumably to trickle down via new direct investment. However, she recognized that such policies could be introduced in England only by an elected government. The task she set before herself was to win British voters to support her reforms voluntarily, for imposing them by armed force was out of the question.

It was taken as a matter of faith that financial gains would be invested in upgrading the enterprises once they were privatized, installing new machinery and hiring more labor to provide better service while increasing output at falling prices. Workers were invited to think of themselves as finance-capitalists-in-miniature, earning dividends and capital gains by investing their savings in the shares in these companies. This was the essence of Mrs. Thatcher’s “popular capitalism.” In her pursuit of these objectives the Iron Lady became Britain’s first prime minister to be elected for three consecutive terms, to retain this office for over ten consecutive years, and to have an “ism” named after her.

But first, she had to convince her fellow Conservatives. This became her major initial fight, within her own party.

How British Monetarism Planned the Neo-Conservative Takeover

No economic theory can be promoted successfully today without institutional sponsorship. In America, monetarist ideas were spread by policy institutes such as the Heritage Foundation, the Cato Institute and the American Enterprise Institute. Likewise in England, if the history of privatization is dominated by Margaret Thatcher, her victory was largely a product of British monetarism’s main policy institute, the Centre for Policy Studies (CPS), founded in 1974 by her mentor Keith Joseph (then a Member of Parliament). With Mrs. Thatcher as its President, the CPS used the economic philosophy of Frederick Hayek (the “father of monetarism”) and Milton Friedman to launch the “Thatcher Interlude” that culminated in 1979 with her election as Prime Minister.

Britain could claim the Austrian-born Hayek as one of its own. He had become a British citizen in 1938, and held the Tooke Chair in economics at London from 1931 to 1950. (Ironically, Thomas Tooke was the great anti-monetarist, a century and a half earlier, in the 1830s.) To help spread his political philosophy, he helped create the Institute of Economic Affairs in 1957, the Adam Smith Institute in 1977 (serving as its first chairman), and the Social Affairs Unit in 1980.

Hayek wanted to abandon all public regulatory structures. Followed by Friedman, he argued that all attempts by government to shape markets were doomed to failure. Planning itself was wrongheaded in principle. As Nigel Lawson summarized this philosophy: “Economic planning was both impossible and unnecessary. . . . The price mechanism . . . was a much more efficient means of transmitting consumer wants and needs than the vast bureaucracies of Whitehall and the nationalized industries.”

This view of idealism as serving to strengthen state power enabled the Conservatives to take the moral high ground, Lawson continued, “by elevating private actions above public direction and dismissing ‘social justice’ as both vague and arbitrary.” The only valid idealism was to destroy the state. This could best be done by cutting off the government’s financial taproot, the ability to create the money needed to finance its budget deficits. The alternative to government bureaucracy, Lawson concluded, was to create a new political ideal for capitalism: to turn “profit” and “capitalism” into words of praise; “planning,” “government” and “taxes” became the new terms of invective.

Hayek joined the Chicago economics faculty in 1950, two years after Friedman, who spent 1953-54 in England as a visiting Fulbright Lecturer at Cambridge. At that time, he reminisced (in Capitalism and Freedom), “Those of us who were profoundly worried by the danger to freedom and prosperity posed by the growth of government, the triumph of the welfare state and Keynesian ideas, made up a small minority and we were considered eccentric by the vast majority of our intellectual colleagues.” Monetarism was deemed eccentric because it saw in government only the power to tax and oppress, not to protect and support. (Herman Kahn’s wife, Jane, likes to tell the anecdote of how, Milton Friedman once replied to her when she asked whether social spending on needy children was not a type of public welfare that was well justified: “Mrs. Kahn, why do you want to subsidize the production of orphans.”) To the monetarists, all socially ameliorative spending appeared only as an economic distortion on the expenditure side, and as a burden on industry on the tax side of the tax-and-spend equation.

Mrs. Thatcher’s truculent Joan of Arc personality found a kindred soul in Alfred Sherman, CPS’s Director of Studies, whom she described as an ex-Communist who brought a “convert’s zeal” to the monetarist cause. Like so many former left-wingers, he seems never to have forgiven the working class for not following his early entreaties. And much like a spurned lover, he got his revenge as a Tory. But he retained from Marxism an awareness of economic theory’s political service as apologetics for one class or the other. He found in monetarism not so much an objective analysis of money and credit as a means of blaming inflation on government spending. Cutting off the government’s ability to run into debt would leave the power of private capital (“the market”) to take its place.

If Sherman was the ideological gadfly, Mrs. Thatcher was the master of political tactics. Her genius lay in seeing that public bureaucracies were ripe for the plucking, along with the Keynesian macroeconomic theory that served as their intellectual foundation. Most Britons believed that once a path was embarked upon, it could not be changed, to say nothing of being diametrically reversed. The denationalization of industry appeared politically impossible. Indeed, Labour governments believed they could bring one sector after another into the public domain. To Mrs. Thatcher this was the road to serfdom, and she sought to reverse the trend. She alone had the confidence to go on the offensive rather than passively decrying the trend towards larger public control of the economy. It was largely a result of her initiative that Britain, the nation with Europe’s strongest social democratic tradition and the most highly developed public sector, became the first to reverse what seemed initially to be an inexorable trend toward greater state control.

The Monetarist Attack on Full-Employment “Demand Management”

Mrs. Thatcher, Keith Joseph, Alfred Sherman and Nigel Lawson challenged the idea that economies could be managed by income policies aimed at achieving full employment. This objective, voiced by John Maynard Keynes in the 1930s in his General Theory, had become political orthodoxy throughout most of the world by the 1950s and ‘60s, and was endorsed both by Conservatives and Labour.

In America, the (“Full”) Employment Act of 1946 had replaced what Marx called the chronic “reserve army of the unemployed” by employment policies aimed at absorbing surplus labor through public spending. This policy met its Waterloo at the hands of Gardner Ackley of the Council of Economic Advisors and Robert McNamara, who tried to calculate just how much war America could afford, and indeed how much was needed to create “effective demand.”

In England, Mrs. Thatcher and her allies opposed Keynesian income policy on the ground that it supported wages (and hence, priced British goods out of world markets) simply to create “demand,” without regard for productivity. The achievement of “full-employment stability” was illusory, the monetarists accused, for it entailed monetary instability. Acting as the employer of last resort (or injecting enough “effective demand” to ensure full employment), governments created inflationary pressures by monetizing public debts. The ensuing inflation threatened bondholders and hence deterred their motivation to save, by reducing the purchasing power of their rentier income. The tacit assumption was that their “saving” would have funded new direct investment and employment rather than real estate or stock market speculation in assets already in place.

The major backers of monetarism duly became the rentier interests (banks, insurance companies and other institutional investors, as well as wealthy coupon clippers) who feared seeing the value of their bonds, loans and other claims on the economy’s wealth eroded by inflation. It was not hard for monetarists to show that their self-interest lay in backing an economic doctrine which depicted governments as being inherently inefficient, wasteful and/or corrupt, dominated by vested interests such as the labor unions. The Thatcherites argued that wherever public enterprise played a major role, it suffered from bureaucratic inefficiency and waste. Decision-making by entrenched constituencies (the labor unions in Britain, party members in the USSR and Argentina, and campaign contributors in the United States and Japan) led publicly owned companies to be managed uneconomically.

The way to stop this process was to turn off the monetary spigot which funded public spending. Contrary to Keynesian prescriptions, the monetarists argued, governments should limit their regulatory activity to control over the money supply, increasing it at a constant rate. They could do this only by not running into debt in the pursuit of full employment programs and other social spending. In sum, whereas Keynes had provided a rationale for government planning to sustain full employment, with an inflationary bias that he welcomed as leading to the “euthanasia of the rentier class,” monetarism took the side of creditors in urging fiscal austerity of the type imposed by the IMF on debtor countries.

Inverting Lenin’s view of governments as being the board of directors for the ruling class, the Thatcherites depicted government (at least Labour Governments when in power, which was about half the time under Britain’s two-party system) as the Board of Directors of the labor unions. They argued that industrialists could not manage in the face of unequal competition with the unions. Creditor-oriented monetarism thus merged with free-market economics of a particular kind. A Keynesian “market,” the Thatcherites accused, was very different from what an ideal market should be. The kind of competitive market that union leaders wanted was one of low unemployment conducive to wage-push inflation. For the Thatcherites, creating a “competitive market” and price stability became euphemisms for breaking trade union power.*

Creating a Populist Opposition to Public Spending

Monetarists recognized that in order to reduce taxes (without increasing the public debt), it was necessary to cut back public spending proportionally. This was, conveniently, part of their plan to scale down government in general. The path of least resistance was for politicians to create a backlash against government waste, and to reduce everyone’s taxes somewhat, while “simplifying” the fiscal system by shifting taxes away from wealth (especially in the finance, real estate and insurance sectors) onto consumers via sales taxes, excise taxes and the value-added tax (VAT).

The biggest problem faced by Mrs. Thatcher in pursuing this regressive fiscal policy was that most voters initially viewed the government as subsidizing essential public services, ensuring economic security and helping families in need. But voters also were taxpayers. Mrs.Thatcher played on their resentment against public subsidies to those who were less hard working (i.e., poorer) than themselves, seeking to attract voters to her cause through their perceptions of the existing system’s unfairness and visible inefficiencies. Although most came from wage-earning families and their natural sympathies lay with labor, she was able to denounce trade unions for their featherbedding and extortionate wage demands.

In sum, Mrs. Thatcher made no apology for fighting against tax-and-spend policies, trade unions and public ownership. What she challenged was nothing less than her society’s traditional value system. She appealed to the narrowest and most immediate self-interest of voters, not to their idealistic hopes. Her success is reflected in the fact that the 1980s became a decade in which income and property taxes were rolled back and governments began to be downsized not only in England but throughout the world.

Opposition to public spending – and the taxes to pay for it – was fanned by warnings about the dangers of inflation eroding the purchasing power of wages. What was not stressed was that the main source of global inflation was the United States, whose war in Southeast Asia had created a budget deficit and forced the world off gold. America quadrupled grain prices in 1971-72, and OPEC countries followed suit with oil prices. By the end of the 1970s the U.S. Federal Reserve raised interest rates to 20 percent in order to end the inflation by deterring bank lending. This plunged England and other countries into economic crises of their own. Future historians no doubt will find it remarkable that they sought to cope by curtailing their own budget deficits and money supply.

The monetarists viewed inflation as a domestic phenomenon that could be countered by cuts in public spending and general austerity. But their policies only made things worse, by collapsing employment and output. Falling tax revenues pushed government budgets even further into deficit, and rising interest rates increased rather than lowered prices. (Economists call this the Gibson Paradox.) High interest rates collapsed the stock and bond markets, leading to capital outflows and lower foreign-exchange rates. This increased the price of imports, pushing up prices accordingly. But monetarist politicians single-mindedly blamed the inflation on not following their austerity policies even more stringently and not cutting government spending by even more!

What the Thatcherites feared was not so much government as such, but the degree to which the trade union bureaucracy controlled the Labour Party. Like America, Britain was ruled by what was essentially a two party system. And when one party remained in office so long that its vested interests overplayed their hand, the other party was voted in, and typically tried to reverse what its predecessor had done. Labour was bound to come to power every five to eight years or so. Under Britain’s “pendulum politics,” the prospect was for it to act as the arm of the trade unions that made up the bulk of its constituency, and to re-nationalize companies that the Conservatives had denationalized.

At the Centre for Policy Studies, Keith Joseph stressed in a 1976 pamphlet, Monetarism is not Enough, that monetary deflation by itself could not solve Britain’s problems. Workers had to be laid off. But Labour’s featherbedding practices blocked the needed downsizing. Indeed, union power was strongest in government departments and public enterprises. To be run efficiently, these had to be shifted to non-union labor. This perception helped promote the privatization of key public industries and government operations.

Mrs. Thatcher’s Anti-Union Strategy

After reducing taxes on wealth and fighting inflation by cutting back government, the monetarist objective was nothing less than to destroy British trade union power. Mrs. Thatcher nurtured a popular reaction against the unions, choosing her battles carefully. Biding her time so as not to alienate public opinion, she waited for the unions to misplay – and then acted with tactics planned in advance both from a legal and public relations vantage point.

By the time her tenure as prime minister ended, Mrs. Thatcher had carried through her program, hinted at already in the late 1970s (see Thatcher 1995:424f.). The 1988 Employment Act gave union members the right not to join in strikes their unions called without holding a ballot. The 1990 act, she wrote, “concluded the long process of whittling away at the closed shop,” by forbidding unions from excluding non-union workers from being hired.

Already in the aftermath of the 1974 coal strike, Edward Heath’s government had scaled back union immunities from law suits making it a legal tort – that is, an actionable offense, punishable by fine – for unions to picket or boycott suppliers (or customers) of companies being struck. Monetary judgments henceforth could be levied against the unions.

Mrs. Thatcher also hit upon the strategy of insisting on union democracy as a ploy to counter hard-line union leaders. The traditional British procedure was for workers to vote for shop stewards (typically the most militant union members) to represent them in casting their votes for the union heads who in turn did the voting for strikes and also wielded power at the Labour Party’s annual convention. Mrs. Thatcher knew that it was much more difficult to frighten these activist shop stewards into submission than to intimidate the rank and file. Her idea accordingly was to insist that all major decisions, above all whether to strike, should to put to a full union vote in open secret-ballot elections. Without this reform, she wrote, “the rest of our programme for national recovery would be blocked. . . . Winning the next [1979] election, even by a large majority, would not be enough if the only basis for it was dissatisfaction with Labour’s performance in office since 1974. Therefore, far from avoiding the union issue – as so many of my colleagues wanted – we should seek to open up debate. Moreover, this debate was not something to fear: the unions were an increasing liability to Labour and correspondingly a political asset to us. With intelligence and courage we could turn on its head the inhibiting and often defeatist talk about ‘confrontation.’”

As one Conservative remarked, “What other right winger would ever have had the cleverness to trust the common sense of the ordinary union member so sincerely? The union bosses were put in an impossible position. As the self-proclaimed tribunes of the workers they could not refuse democracy. They tried to use the argument of the expense of ballots to avoid them, so Maggie said, ‘That’s alright; the government will pay.’ Love her or hate her, one has to admire the accuracy of her perception.”

The unions overplayed their hand in the Winter of Discontent, 1978/79, but the time was not yet ripe for a showdown. “From 1980 we pursued a ‘step-by-step’ programme of trade union reform,” Mrs. Thatcher later reminisced. The 1982 “Tebbit Acts” removed the traditional union “immunities from common law tort action for damages, except for ‘primary’ strikes sanctioned by a majority in secret ballot,” observes one of her advisors, Patrick Minford. This legal chess game set the stage for her to checkmate Arthur Scargill’s coal miners in 1983 (her counterpart to Ronald Reagan’s 1981 destruction of the Air Controllers’ Union), by making union funds subject to awards for damages.

In 1981, Mrs. Thatcher gave into the union rather than engage in a fight she felt she could not win in the public’s eye. She knew just how far she could go up against them, and her sense of timing enabled her to succeed. Her defeat of the 1984-85 miners’ strike (described in the next chapter) effectively cemented the new order. “In 1990, my last year as Prime Minister, the number of industrial stoppages was the lowest in any year since 1935.”

The decline in union power enabled the privatized companies and others to downsize their labor force. Between 1979 and 1986, union membership fell by three million persons. Two million industrial workers were put out of work, including over a million miners. “The new service industries, such as computer software and biotechnology,” Mrs. Thatcher wrote in 1995, “are in any case not easily unionized, and so not held back in the application of new techniques.”

A Conservative politician summed up matters: “The original purpose of privatization was to break up Trades Union Monopsony rather than manufacturer/utility Monopoly.” The politicians who joined Mrs. Thatcher’s inner circle focused on labor’s cost-push inflation, to the extent that British wage rates (and hence, product prices) were negotiated between strong-willed union leaders and (so Mrs. Thatcher claimed) weak-willed government bureaucrats.

The Conservatives depicted their warfare against the unions as being waged not against labor, but against adventurist opportunists using their constituencies for their own glory. Even communists such as Leon Trotsky had attacked craft unions such as America’s American Federation of Labor as representing particular layers of the labor force acting in their own narrow self-interest. Mrs. Thatcher subtly froze the union leaders out of the policy picture simply by ending the traditional ritual of beer and sandwiches in Downing Street. The trade union bosses found themselves cut off.

Mrs. Thatcher ended by excluding children and young adults under twenty-one from the minimum wage regulations, and finally abolished the laws outright. These transformations of the labor market, she concluded, “allowed management once more to manage and so ensured that investment was once again regarded as the first call on profits rather than the last.” But a double standard seems to have been at work. The first call on profits seemed to be for higher salaries and stock options for senior managers. She denounced high taxes for deterring their efforts and praised high salaries for motivating them, yet what seemed to motivate manual workers was poverty and the loss of job security. Her rather vindictive world view did not recognize falling real wages as deterring productivity gains; only falling profits and dividends for the well-to-do led to inefficiency in the monetarist world view.

In the process of privatizing the large public enterprises, Mrs. Thatcher seized labor’s pension funds, wiping out company liability for the pensions saved up by their employees. It took several years for the European Community to rule her act illegal. The money belonged to the workers, not to the buyers of these companies.

But just who were these buyers? Where did workers fit into the picture, via their personal shareholdings and those of their pension funds?

“Popular” or “Peoples’ Capitalism”

Mrs. Thatcher recognized that an anti-union policy by itself would not suffice; she had to give workers something in return. What was needed was to cast monetarism’s anti-labor philosophy in a more positive rhetoric. Her solution was “popular capitalism,” an elaboration of what Anthony Eden and other earlier Conservatives had called a property-owning democracy.

The idea of getting workers to think of themselves as property owners had long been voiced by Conservative politicians. It began with the idea of them owning their own homes, bought on mortgage. Mrs. Thatcher started the process with Council house sales. No less than £24 billion were sold off, larger than any single other public industry. But the privatization that really inaugurated “popular capitalism” was the sale of British Telephone in November 1984. The idea was nothing less than to win workers over to the cause of capitalism as an ideal, by turning them into stockholders in the economy’s commanding heights. This, she hoped, would shift their faith away from socialism in the future to capitalism in the present. “Privatization not only widens share ownership (desirable in itself),” claimed Lawson, “but increases employee share ownership, which previous privatizations show leads to further improved performance.” More politically to the point, giving property to citizens would create “a society with an inbuilt resistance to revolutionary change.”

Lawson hoped that workers would value their shareholdings more than they would resent their falling real wages. In any event, he added, “I give away few political secrets when I say that Governments are likely to be more concerned about the prospect of alienating a mass of individual shareholders” than they would be about offending a few dozen Conservative investment managers. Future Labour governments thus would have to hesitate before taking steps that would threaten the value of shares held by large numbers of workers.

Every attempt therefore was made to spread share ownership as widely as possible, for “the more widely the shares were spread, the more people had a personal stake in privatization, and were thus unlikely to support a Labour Party committed to re-nationalization. And if this forced Labour to abandon its commitment to re-nationalization, so much the better. For our objective was, so far as practically possible, to make the transfer of these businesses irreversible.” However, another Conservative politician has assured me that the small private investor “was never more than icing on the political cake.” In the end, it was the large campaign contributors who mattered after all, for their funding enabled the party to buy TV time and media space to attack Labour in the usual ways, which had little to do with the economic self-interest of workers as such.

Mrs. Thatcher’s ideal was for every employee and customer of British Gas, British Telephone and other major utilities to buy into them and thereby to acquire a stake in their efficient management. Workers who were not deemed redundant would find their wages supplemented by dividends (and capital gains) from the stocks they were able to buy with their savings. In good capitalist form they would become owners of the means of production, at least as minority shareholders. This prospect was supposed to gain popular support for breaking the trade unions, dismantling government protection of labor and withdrawing subsidies from public services. Politics became an exercize in the degree to which the perspective of labor’s economic self-interest could be foreshortened and sidetracked.

Lawson had proposed the term “people’s capitalism,” but Mrs. Thatcher felt that this sounded too much like the communist people’s republics, and preferred “popular capitalism.” This still sounded like General Pinochet’s “labor capitalism,” and indeed was a similar program of monetarist austerity, dressed up in populist rhetoric.

The attempt to make privatization irreversible shaped its tactics from the outset. In this respect its history in Britain is as much the story of political expediency as one of economic principles in the abstract. Mrs. Thatcher sought to protect the newly privatized status quo by endowing a coalition of beneficiaries who would form a bulwark against any future attempts by Labour to try to re-nationalize the enterprises being sold off. One constituency of “popular capitalism” was created by giving workers a stake in preserving the value of the shares they held in these enterprises. Another constituency consisted of the buyers (often the former managers) of the enterprises being sold off. Yet another was created by selling shares to foreign investors, so that any attempt to denationalize would have to confront not only British financial institutions and worker-shareholders, but American and other global diplomatic pressure. The strategy was to spread shareholding so widely that it could not be reversed.

This political strategy shaped the early privatizations. It led Lawson to offer shares at a fixed price rather than by auction, on the ground that small subscribers wanted to know just how much they would have to pay in order to be willing to buy. He later ruefully admitted that this political ploy led to an underwriting strategy that resulted in huge losses to the government (and unwarranted gains for the City financiers) as compared to what an open auction of shares would have yielded.

How Britain’s Public Enterprises were Strangled: The Needless Fight over the PSBR

The Thatcherites argued that private ownership would be inherently more efficient than government control, assuming that sound management depended on ownership alone. Lawson insisted that “you can no more make a State industry imitate private enterprise by telling it to follow textbook rules or to stimulate competitive prices, than you can make a mule into a zebra by painting stripes on its back. There is no equivalent in the State sector to the discipline of the share price or the ever-present threat of bankruptcy.” Only the prospect of economic gains would lead enterprises to cut costs, improve service and become more businesslike in general.

One economist (John Kay, 1988) pointed out that, “all State-owned corporations improved their productivity remarkably in the 1980s, whether they were privatized or not.” However, Lawton replied, “it was the process of preparing State enterprises for privatization . . . that initially enabled management to be strengthened and motivated, financial disciplines to be imposed and taken seriously, and costs to be cut as trade union attitudes changed.”

The real problem was that Britain’s Treasury refused to authorize the funds needed for investment as long as the enterprises remained in public hands. To stop the inflation that was distorting nearly all economies in the mid-1970s, monetarists had argued that it was necessary to cut budget deficits. After Britain’s 1976 foreign-exchange crisis, the IMF won Labour adherence to this principle under Dennis Healey. He succumbed to IMF austerity in order to get loans to support the value of sterling. The ensuing impoverishment of Britain contributed to Labour’s 1979 downfall. Rather than leaning against the monetarist wind, Labour itself blocked public industries from financing modernization. Raising the required funds would have increased the Public Sector Borrowing Requirement – the PSBR. Having little idea of how to make public enterprises function efficiently, Labour fatally undercut the viability of these enterprises by letting monetarists control Treasury policy.

Monetarists argued that the way to control inflation was to control the money supply. Friedman explained that this meant in practice the control the public debt. Monetarists accordingly made a bee-line for the Finance and Treasury ministries in every country. In Britain they were able to control the government through the PSBR, placing a stranglehold on public finances. This forced governments to choose between transferring assets to the public sector, or making do without capital investment and modernization.

The problem could have been cured by letting government departments operate as independent public agencies off the balance sheet, like America’s Tennesee Valley Authority (TVA) and other such entities. But the monetarist objective was not to make governments work better. Just the opposite: it was to claim that they could not work efficiently. Finance or Treasury departments in each country subject to IMF monetarist pressures made sure that this would be the case. This was the prelude in the 1970s, setting the stage for privatization in the ‘80s.

A double standard was at work. The private sector was assumed to be able to look after itself and not to run into debt imprudently. The financial sector accordingly was deregulated, and promptly created a crises of irresponsible lending. One pitfall was that the PSBR failed to distinguish between productive and unproductive public debt. The idea of productive borrowing outside of PSBR constraints was rejected as being merely a reformist or even left-wing rationale to increase public borrowing and thereby increase the power of government. The last thing Mrs Thatcher and her advisors really wanted to see was a reform that would enable public enterprises to be run more efficiently. In any event, public borrowing would not have generated revenue for directors, after labour’s wage levels had increased. Nor would it have generated the remarkable underwriting fees that resulted from privatization. The upshot was that British Telephone and its other monopolies needing technological revamping in the world of the 1980s could be modernized only by being privatized.

Privatization’s ultimate beneficiary was the City of London, the square mile of financial institutions that obtained the quickest benefits and turned the program into something rather unanticipated by Mrs. Thatcher and Mr. Lawson. The rentiers for their part seem to have perceived the Thatchers and Friedmans as pawns, an advance infantry of promoters wrapping austerity economics in populist garb – policies that otherwise would have been difficult (if not impossible) to sell to voters.

The irony was that most of Mrs. Thatcher’s friends and heroes were businessmen – manufacturers who made or dealt in products, not financial manipulators. But inevitably, her privatization policy led her to rely on the City financiers. Her autobiography and that of Nigel Lawson reflect their growing annoyance and even fury with the way in which the bank underwriters chosen to advise the government turned privatization into a vehicle to grow rich very fast. Mr. Lawson is scathing as to the the City institutions’ lack of competence, exceeded only by their greed (always pointing out how much more venal their global partners were, to be sure). But once the government had chosen these institutions as its partner, the die was cast. It was unable to find a way to control the underwriters, and feared to disengage.

To the investment bankers placed in charge of underwriting over £65 billion (over $105 billion) of enterprises, at fees of over three billion pounds during 1979-97, and probably at least as much in short-term trading gains, the monetarist politicians appeared out of Britain’s ideological woodwork as well-meaning fools, political front-persons presenting privatization – and hence, City underwriting fortunes – as “popular capitalism.” As far as the City financiers were concerned, their disdain for the City enabled them all the better to act as political spear-carriers for a policy that turned control of the British economy over to themselves. What Margaret Thatcher provided was a populist and even idealistic legitimization for their gains.

The Winter of Discontent, 1978/79

Mrs. Thatcher was lucky. Accident – and indeed, the weather – intervened to play a fateful role. Under normal conditions Britain is warmed by the Gulf Stream bringing tropical water across the Atlantic Ocean from the Caribbean. This creates a warm westerly breeze that keeps British winters free of the ice that normally exists at such northerly latitudes (Britain is as far north as Canada). But occasionally – in the winter of 1947, sixteen years later in 1963, and again sixteen years later in 1979 – the wind blows from the east, bringing cold air from Russia and central Europe. Starting in November 1978, Britain was subjected to sharply below-normal temperatures that persisted right up to election day, May 9, 1979.

This 1978/79 winter descended precisely at the time when British labor unions chose to go on strike to demand pay raises in an attempt keep up with inflation. Like the rest of the world, Britain was suffering from the inflation and high interest rates emanating from the U.S. economy under the hapless Carter presidency. As high prices spread throughout the world, the inflation ate into the purchasing power of wages. The Labour Party had cut its political wrists by subjecting Britain to IMF austerity in the face of this inflation, and stifling new investment and hiring by public enterprises by letting the PSBR put a stranglehold on their financing. The strikes were directed against these public enterprises, for as noted earlier it was here that unionization was strongest.

The British are not equipped to deal with long periods of severe weather even in normal times, given its rarity. As a result of the public-sector strikes, the roads remained unsalted and were not gritted. Few drivers had snow tires for their cars (expecting winters normally to be mild). Traffic along the M6 motorway around Birmingham and other Midlands districts slowed to a crawl, grinding Britain’s industrial heartland to a standstill.

This became known as England’s Winter of Discontent. It turned a majority of voters, who normally had voted for the Labour Party, to resent its alliance with the unions. As Mrs. Thatcher described the political situation, on December 12, 1978, “trade unions representing National Health Service and local authority workers rejected the 5 per cent pay limit and announced that they would strike in the New Year.”

The next three weeks brought heavy snow, gales and floods. Matters came to a head on Wednesday, January 3, when “the TGWU called the lorry drivers out on strike in pursuit of a 25 per cent pay rise. Some two million workers faced being laid off. Hospital patients, including terminally ill cancer patients, were denied treatment. Gravediggers went on strike in Liverpool. Refuse piled up in Leicester Square. . . . In short, Britain ground to a halt. What was more damaging even than this to the Labour Government, however, was that it had handed over the running of the country to local committees of trade unions.”

Mrs. Thatcher emphasized that Labour Prime Minister Callaghan “had based his whole political career on alliance with the trade union leaders. For him, if not for the country, it had been a winning formula. Now that the unions could no longer be appeased, he had no other policy in his locker. . . . The Government could not even decide whether to declare a State of Emergency.” Mrs. Thatcher for her part was not particularly eager to promote a government settlement with the unions; she preferred to mobilize public reaction against them. In fact, she worried that “The Labour Party might just be persuaded to agree to the negotiation of no-strike agreements in essential services, the payment by the taxpayer of the cost of secret ballots in trade unions and even a code of practice to end secondary picketing – though the last was doubtful. Equally, I was clear that if the Government did accept, we were honour-bound to keep our side of the bargain.” However, she made it a condition of support for the government that it should end the closed shop, thereby stripping unions of much of their power – something no Labour government would agreed to do.

On January 16 she opened the debate in the House of Commons by describing how the “transport of goods by road was widely disrupted, in many cases due to secondary picketing of firms and operators not involved in the actual disputes. British Rail had issued a brief statement: ‘There are no trains today.’ . . . many firms were being strangled, due to shortage of materials and inability to move finished goods. There was trouble at the ports, adding to the problems of exporters. At least 125,000 people had been laid off already and the figure was expected to reach a million by the end of the week. The food industry, in particular, was in a shambolic state, with growing shortages of basic supplies like edible oils, yeast, salt and sugar. And all this on top of a winter of strikes – strikes by tanker drivers, bakers, staff at old people’s homes and hospitals; strikes in the press and broadcasting, airports and car plants; a strike of grave diggers.”

She reported that Labour’s George Brown had complained to her that “the unions had been falling more and more under the control of left-wing militancy.” But Prime Minister Callaghan then urged that the government make further concessions to the unions, including “exemptions from the 5 per cent pay limit, tighter price controls and extension of the principle of ‘comparability,’ under which public sector workers could expect more money. All these were intended as inducements to the unions to sign up to a new pay policy. But he signally failed to address what everyone except the far Left considered the main problem, excessive trade union power.”

Recalling language that used to denounce weak-willed opposition to Hitler on the eve of World War II, she heaped scorn on Mr. Callaghan for “appeasing” the unions. Rather than fearing to alienate them, she urged her own party leaders to seize the opportunity to gain public favor by riding on wave of reaction against union over-reaching. British wages no longer were set by fair bargaining between workers and their employers, she claimed, but were negotiated by trade union leaders dictating terms to weak-willed government managers. The alternative, of course, was the kind of austerity dictated by IMF monetarists maintaining an employers’ market by imposing chronic under-employment and shifting enterprise out of the unionized public sector to newly privatized, non-unionized enterprises – precisely the kind of austerity that Keynesian income policies had sought to prevent.

Upon winning the general election, Mrs. Thatcher appointed loyal monetarists, who developed a more subtle alternative to the tight-money programs imposed by the IMF on hapless third world counties. A general monetary stringency would have lowered profits and stifled capital gains as well as wages. Britain’s monetarist strategy was to depress wage levels through “structural reform” or “structural adjustment.” The restructuring was achieved not by macroeconomic policies affecting the overall money supply and incomes, but by changing the legal framework and institutional structures within which markets operated. Union power was broken by changing the legal rules, while government economic power was dismantled by cutting taxes and selling off enterprises. The industries being privatized were subjected to much the same downsizing and asset stripping as private companies taken over by corporate raiders and/or leveraged buyouts in the 1980s.

How Monetarism Laid the Groundwork for Privatization

Ostensibly a theory of money and prices, monetarism became an ideology to attack government spending and organized labor. The theory’s guiding idea was that price levels could be determined by controlling the money supply – by the central bank managing the rate at which government deficits were monetized. Meanwhile, wage-push inflation could be countered by taking legal steps to break the power of unions to strike and to declare boycotts. The effect was to remove economic planning from the hands of government. The vacuum would be filled by global investment bankers. Efficient management was to take the form of maximizing stock-market gains, not the promotion of full employment and other non-market social welfare objectives.

Keynes had been a monetary theorist of a different stripe. He saw that money, in the sense of spending power, comprised effectively the entire credit superstructure. Any income-yielding asset could be collateralized as the basis for credit. Indeed, credit – and in effect, purchasing power – can be created simply by companies not paying their bills. These unpaid bills became assets on the books of their suppliers (“receivables” that could be financed through the banking system). In this respect the volume of credit and near-money is virtually synonymous with the economy’s overall volume of debt. This perception forms the basis for post-Keynesian “creditary” or “balance sheet” economics, a more comprehensive alternative to monetarist doctrine. (Gardiner 1993 provides a technical discussion.)

Monetarism reveals its political bias by singling out only public debt as the source of inflation, ignoring the mushrooming private debt. This one-sidedness has proved to be its Achilles Heel. Yet it was precisely this narrow anti-government focus that attracted Mrs. Thatcher and other libertarian politicians to monetarism in the first place.

Monetarism’s appeal is political and rhetorical, not based on sound economic evidence. (Its correlation of money and prices fail to acknowledge the arrow of causality, especially at the foreign-exchange margin. See Hudson 1992 for a detailed critique.) Controlling the public debt by reining in government can represent only part of a comprehensive system of monetary management, for in practice the money supply – the means of settling obligations – turns out to be nothing less than the overall credit supply. This in turn includes the economy’s “near-money” in the form of all marketable assets and debt instruments. Attempts to manage money, narrowly defined as government debt, are thus in vain.

The real reason why monetarists seek to control the Treasury or Finance Department and the central bank in every country is to achieve their political ends. From their position in these financial control centers, they put the brakes on government operations across the board, or promote other pet policies. Monetarist doctrine provides the ideological wrapping to present this control as a form of idealism and individualism.

Although privatization was not a centerpiece of Mrs. Thatcher’s original program, she placed members of her inner circle in charge of the financial ministries and the public enterprises first in line to be privatized, to set about preparing them for sale. In addition to helping the government budget, privatization would remove enterprises from control by the trade unions. And turning power over to privatized management would enable them to begin economizing by downsizing their labor force.

____

* Friedman did not join in this anti-labor invective. He blamed British managers for the “British disease” of stagflation (high inflation with slow growth). The nation’s industry had become hidebound rather than undertaking research in product innovation and marketing. In any event, he explained, no inflation could be cured without limiting growth in money supply, and hence government budget deficits, for the monetization of government debt formed the monetary base of “high-powered money.”

We typically honor the convention to refrain from speaking ill of the recently departed. But Margaret Thatcher probably would not object to an epitaph focusing on how her political legacy was to achieve her professed aim of “irreversibly” dismantling Britain’s public sector. Attacking central planning by government, she shifted it into much more centralized financial hands – the City of London, unopposed by any economic back bench of financial regulation and “free” of meaningful anti-monopoly price regulation.

Mrs. Thatcher transformed the character of British politics by heading a democratically elected Parliamentary government that permitted financial planners to carve up the public domain with popular consent. Like her actor contemporary Ronald Reagan, she narrated an appealing cover story that promised to help the economy recover. The reality, of course, was to raise Britain’s cost of living and doing business. But this zero-sum game turned the economy’s loss into a vast windfall for the Conservative Party’s constituency in Britain’s banking sector.

By underpricing her privatization of British Telephone and subsequent vast monopolies, she made it appear that customers would be the big gainers, rather than large financial institutions. And by giving underwriters a windfall 3% commission (formerly based on floating the stock of much smaller start-up companies), Mrs. Thatcher oversaw the start of Britain’s Great Polarization between the creditor 1% and the increasingly indebted 99%.

Attacking rent-seeking in government, she opened the floodgates to economic rent-seeking in its classical sense: land rent in real estate (with debt-inflated “capital” gains) to make British property so high-priced that employees who work in London must now live outside it, taking highly expensive privatized railroads to work. Privatization also created vast new opportunities for monopoly rent for privatized public utilities, along with predatory financial takings by increasingly predatory banking.

Finance has been the mother of monopolies ever since Dutch and other foreign creditors helped England incorporate the East India Company in 1600, the Bank of England in 1694, and other commercial monopolies culminating in the South Sea Company in the 1710s.

By time Mrs. Thatcher became Prime Minister in 1979, Britain had made over a century of enormous investment in public infrastructure. Financial managers eyed this commanding height as a set of potential monopolies to be turned into cash cows to enrich high finance. Mrs. Thatcher became the cheerleader for what became the greatest giveaway of the century as the City of London’s gain became the industrial economy’s loss. Britain’s lords of finance became the equivalent of America’s great railroad land barons of the 19th century, the ruling elite to preside over today’s descent into neoliberal austerity.

Her tenure as Prime Minister seemed to reprise Peter Seller’s role in Being There. She made good television precisely because her philosophy was stitched together in a sequence of sound bites that flattened complex social and economic relationships into a banal personal psychodrama. Mrs. Thatcher’s ability to sweep the broad financial and economic polarization and financial “free lunch” behind a curtain enabled her to distract attention from the consequences of what Harold Macmillan characterized as “selling off the family silver.” It was as if the economy was a middle-class grocer’s family trying to balance its checkbook along the lines of what its banker insisted were necessary in the face of wages being squeezed by rising prices for basic needs.

The ground for Mrs. Thatcher’s rule was prepared by the fact that England’s economy was as much a mess as the rest of the world by the time she took office. The 1979 Winter of Discontent saw a perfect storm unfold. Unable to restrain labor from timing strikes to cause maximum inconvenience to society at large, the British Labour Party felt little need to wait for Britain’s share of North Sea oil to come on stream. That windfall would subsidize a decade of dismantling what was left of British industry. Oil states do not need to be efficient. They do not need industry, or even employment.

Labour Prime Minister James Callaghan made a token attempt to address these issues by requesting an IMF loan in 1976 to finance tangible industrial re-investment as bridge financing until the UK’s North Sea oil could begin generating foreign exchange. But US Treasury Secretary Bill Simon read him the riot act. IMF and U.S. policy was to provide credit only to pay bondholders, not to build up the real economy. Britain would be advanced loans only if it reoriented its economy to let high finance do the planning.

The UK became the IMF’s best neoliberal poster child, establishing a comparative advantage in offshore finance in what ultimately would flower as Gordon Brown’s notorious Light Touch that brought about the banking collapses of 2008. In this sense her role was to serve as Britain’s version of Boris Yeltsin, sponsoring the carve-up of centuries of public investment.

Mrs. Thatcher stepped into the post of Prime Minister in 1979 just as the neoliberal ploy was getting underway. The “grocer’s daughter” depicted Britain’s problems as a result of uppity labor. Her view stuck a chord as labor leaders called a series of politically self-defeating strikes that disrupted daily life and made it even more of a struggle than usual for most voters. Britain’s economy had never been riper for a divide and conquer strategy.

The new twist was that the class war aimed at labor in its role of consumer and debtor, not as employee. England’s domestic industry took one beating after another as factories closed their doors throughout the country (with the most successful becoming gentrified real estate developments).

The Iron Lady was convinced she was rebuilding England’s economy, while in reality it was only getting richer from London’s outlaw banks. Throughout the world, the damage wrought by this financialized economy has been immense. By “liberating” national money from the constraints of taxing authorities, the Middle East stopped much of its projects for industrial development. After 1990 the Soviet bloc was deindustrialized to become an oil, gas and mining economy. And for Britain, trillions of dollars in global tax revenues that could have been used for industrial and social development were routed though London, where the UK has lived off the fees from this free-for-all. So despite Mrs. Thatcher’s admiration for Milton Friedman, famous for claiming that There Is No Such Thing As A Free Lunch, she made Britain’s economy all about obtaining a free lunch – eaten by the world’s financial managers who flocked to its shores.

How much did Lady Thatcher come to understand about a financial sector of which she never deliberately favored? She never expressed regret about how her policies paved the way for New Labour to take the next giant step in empowering the City of London’s financial complex that has un-policed the banks to catalyze one financial crash after the next, hollowing out Britain’s economy in the process.

When Mrs. Thatcher took power, 1 in 7 of the England’s children lived in poverty. By the end of her reforms that number had risen to 1 in 3. She polarized the country in a ‘divide & conquer’ strategy that foreshadowed that of Ronald Reagan and more recent American politicians such as Wisconsin Governor Scott Walker. The effect of her policy was to foreclose on the economic mobility into the middle class that ironically she believed her policies were promoting.

Pundits the world over are chirping about her role in “saving” Britain, not as indebting it – destroyed an economy in order to save it. Her rule was historic mainly by posing the conundrum that has shaped neoliberal politics since 1980: How can governments nurture and endow financial kleptocrats in the context of rule by popular consent?

This can be achieved only by violating the Prime Assumption of classical liberal political philosophy: voters must be sufficiently informed to understand the consequences of their actions. This means that governments must take a long-term perspective.

But finance always has lived in the short run, and nowhere in the world is banking more short-term than in Britain. Nobody better exemplified this narrow-minded perspective than Lady Thatcher. Her simplistic rhetoric helped inspire an inordinate share of simpletons conflating supposed common sense with wisdom.

Not altogether simple, perhaps, but simply opportunistic. As the uncredited patron saint of New Labour, Mrs. Thatcher became the intellectual force inspiring her successor and emulator Tony Blair to complete the transformation of British electoral politics to mobilize popular consent to permit the financial sector to privatize and carve up Britain’s public infrastructure into a set of monopolies. In so doing, the United Kingdom’s was transformed from a real economy of production to one that scavenged the world for rents through its offshore banks. In the end, not only was great damage inflicted on England, but on the entire world as capital fled developing countries for safe harbors in London’s banks. Meanwhile, governments throughout the world today are declaring “We’re broke,” as their oligarchs grow ever more rich.

Michael Hudson’s book summarizing his economic theories, “The Bubble and Beyond,” is available on Amazon. His latest book is Finance Capitalism and Its Discontents. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion, published by AK Press. He can be reached via his website, mh@michael-hudson.com

JEFFREY SOMMERS is an associate professor of political economy at the University of Wisconsin-Milwaukee, and is visiting faculty at the Stockholm School of Economics in Riga. He is co-editor of the forthcoming book The Contradictions of Austerity. In addition to CounterPunch he also publishes in The Financial Times, The Guardian, TruthOut and routinely appears as an expert on global television programs. He can be reached at: Jeffrey.sommers@fulbrightmail.org

As published in Counterpunch

Too Big to Fail
Public Banking Needed to Stop “Cannibalization” of the Economy, March 29, 2013.

Michael Hudson: As long as finance is left in private hands, you’re going to have austerity and America ending up looking like Greece and Ireland.

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.
There’s been a debate about what to do about banks that are too big to fail, too big to prosecute, and too big to regulate. The debate goes that the big banks should be broken up, and some people are suggesting that the only real solution is public banking – banks that are big in scale but have public interest mandates and are publicly owned.

Now weighing in on this debate and joining us in the studio is Michael Hudson. Michael was a Wall Street financial analyst, and he’s now a distinguished research professor of economics at the University of Missouri-Kansas City. His recent books are The Bubble and Beyond and Finance Capitalism and Its Discontents.

Thanks for joining us again.

MICHAEL HUDSON, RESEARCH PROF., UMKC: Thank you.

JAY: So what’s your take on breaking up the banks vs. public banking?

HUDSON: Well for one thing, in your very first question you left out the point that Elizabeth Warren has made earlier this week: too big to fail means too big to jail.

JAY: I said too big to prosecute, but yeah.

HUDSON: Okay, too big to jail. You heard Attorney General Eric Holder say last week that we can’t prosecute the banks, because they already are so insolvent that we would have to take them over if we fined them. They wouldn’t have any reserves left, after paying the fines proportional to the gains they made by their lawbreaking. We would have to make them into public banks, and that would be socialism.

The fact is that two hundred years ago, when the Industrial Revolution was taking off, bank reformers in England, the Saint-Simonians in France, the “state socialists” in Germany and central Europe all believed that industrial capitalism was going to industrialize and socialize banking in keeping with government and heavy industry in a three-way relationship.

Mr. Holder explained to the Senate Finance Committee just why the government was powerless to protect bank customers against financial fraud and theft in countering Senator Grassley’s questioning:

GRASSLEY: On the issue of bank prosecution, I’m concerned that we have a mentality of too-big-to-jail in the financial sector of spreading from fraud cases to terrorist financing and money laundering cases – and I cite HSBC. So I think we’re on a slippery slope.

HOLDER: The concern that you have raised is one that I, frankly, share. And I’m not talking about HSBC now. That (inaudible) be appropriate.

  But I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy. And I think that is a function of the fact that some of these institutions have become too large.
Source

It gets even worse than that. Television viewers were appalled when Assistant Attorney General Lanny Breuer was interviewed on Frontline and said that he lay awake at night worrying that if he prosecuted the banks, innocent workers – tellers, loan officers, etc. – as well as the innocent wives, children and families of crooked bankers would suffer, just because bank fraudsters stole hundreds of billions of dollars and threw victimized families into the street. He made it clear that his loyalty was to the predators and had dripping hate for the victims for being weak – and at the same time, lust to return to his high-paying job at law firms defending bankers against the Justice Department.

Regarding the massive multi-billion dollars that HSBC laundered for Mexican drug cartels, Breuer said: “Our goal is not to bring HSBC down. It’s not to cause a systemic effect on the economy.” So here we are throwing up to half the black males in America in jail for typically small-scale drug possession, but the capos at the top – the banks organizing the trade – are allowed to keep functioning. Because the reverse would be socialism.

The public response was so strong that the DoJ had to do something. So it said how much worse the “socialist” response would be. We’d be like Hitler’s Germany or Zimbabwe, and so forth. But that’s not the real antithesis. It’s between bank fraud and drug-dealing on the one hand, and public banking or “socialism” on the other. I can’t think of a better argument for socialism!

The idea by the Progressive Era in the early 20th century was that instead of banking being predatory as it had been for thousands of years, instead lending against real estate or to governments for war loans – or for petty consumer usury, foreclosing and putting people in debtors’ prisons – for the first time in history banks were going to make loans to finance direct investment in new means of production. The aim was to mobilize banking and savings to expand industry, to build factories and equipment that weren’t already there.

This is how Germany rose rapidly to industrial power with the Reichsbank, along with the rest of central Europe. Leading up to World War I, German banks worked with the German government almost as semi public entities – along with the military-industrial complex, to be sure. But at least you had banking taking industrial form.

World War I changed everything. You had a reversion to the English-Dutch-American kind of banking that was called merchant banking. Banks would make loans to ship goods that are already produced, or they’d make loans against real estate. So today you have 80 percent of bank loans in America and England and Scandinavia are all loans for real estate. So, essentially the function of the financial sector has been simply to load down the economy with debt without helping the economy grow.

What you really want is for banks, instead of loading the economy down with debt, to be able to finance economic growth instead of just eating into growth as an overhead.

Well, suppose that the government were to do what Sheila Bair, head of the FDIC, recommended her agency do in 2008. When Citibank went under with what looked like negative equity (and also Bank of America), she said that the FDIC was in the business of taking over banks, as it had just done with WaMu. They could have taken care of the insured depositors, and let the high rollers suffer – as is occurring with the Cyprus bail-in and as the European Central Bank has said it will treat future bank collapses there.

Ms. Bair said that this is not really socialism. It’s what the FDIC and other government agencies are supposed do. When a bank is insolvent, the government takes it over.

Now, imagine what America government, the public sector, could have done with Citibank and Bank of America. These were the two largest mortgage holders in America.

President Obama already had said that his policy was for the banks to write down the mortgages to what people can afford, so that the economy could take off again from a less debt-burdened level. Instead, Citibank refused to write down loans, and Bank of America bought Countrywide Financial – probably the worst offender – and refused to write the loans down. And so what you have now is 10 million Americans in the foreclosure process or already running up arrears as a lead-up to losing their homes. The banks have become the lead participants in a predatory process. So they have become the problem, not the solution. The solution would have been public banking aimed at helping the economy at large rather than bank officers, bondholders and stockholders.

JAY: Isn’t this inevitable? If you go back to the early 20th century when banks started lend money to create new means of production, you see how massive a need there is for this, with big industrialization and tens of thousands of workers in one factory. They need large amounts of capital. As banks become more and more powerful, don’t they then find that it starts to be more profitable to manipulate the stock market and fund speculation? You get this whole period up to the 1929-30 crash where so much banking is parasitic. And then the whole thing replays itself over and over again. Isn’t that inherent that as long as you have private banking become so powerful that it also will be parasitic?

HUDSON: The key word that you just said is “private banking.” So the answer so far, empirically speaking, is “Yes, that’s how it’s working out. That’s the logic of things.”

But it doesn’t have to be this way. If the government would have taken over Citibank it would not have done the kind of things that Citibank did. The government would not have used depositors’ money and borrowed money to gamble. It wouldn’t have gone down the casino capitalism route. It wouldn’t have played the derivatives market. It wouldn’t have made corporate takeover loans. None of these are productive from the vantage point of economic growth and raising productive powers and living standards. They would not be the proper behavior of a public bank.

Suppose the government ran a commercial bank. It would make loans for long-term purposes to serve the economy and help the economy grow. At least, that is what governments are supposed to do.

But that’s not what banks are supposed to do. Banks are supposed to make money. And unfortunately, they can make money most easily – as you point out – by being parasitic, not by being productive.

So if you want banking to play the productive role of financing infrastructure and general economic growth, the only way to do this is for the government to run the banks.

Some recognition of this has come from real estate lobbyists, mainly from Wall Street, saying, “Aha! We need a public-private partnership.” Unfortunately, the kind of partnership that Wall Street envisions is what you got in England under Margaret Thatcher and even worse, Tony Blair. It is an opportunity for the private sector to screw the public sector. That’s what happened earlier when France nationalized the banks a few decades ago. So there need to be reciprocal checks and balances to prevent banks from simply playing the government’s role like a puppeteer in a Punch and Judy show.

JAY: Yeah, the banks make the profit; the public takes the risk.

HUDSON: Yes, its role is to absorb the loss. So this won’t work very well. And it doesn’t really “socialize” the loss, because it’s the opposite of real socialism. It’s financial oligarchy.

A real public-private partnership would leave banks in the hands of the private sector, but behaving much like savings banks used to do – financing specified productive or socially desirable activities, not casino capitalism, corporate takeovers or predatory finance.

The last time that was tried was in the educational loans system, where the government underwrote the education loans made by the banks. And you see the problem now with the defaults there. You would find that in a vaster scale with a public-private partnership organized by Wall Street for its own benefit.

On a deeper level, the problem is that infrastructure shouldn’t be funded by banking. If you fund road building and bridge fixing with a private partnership, then you’re going to have to charge user fees for the use of bridges and charge money for access to the roads. This would threaten to turn America’s roads into toll roads, and turn the bridges into toll bridges. The effect would be to increase the cost of living, and thus increase the cost of doing business, all to squeeze out the revenue for the private investors who are permitted to put up tollbooths at key choke points or access points to these roads. This revenue would be used to pay the banks for the credit they create and lend out to finance the privatization of these roads and bridges. Financializing the economy along these lines would end up cannibalizing the industrial sector. That’s already happening. At the end of this process the U.S. economy would look like England did after Margaret Thatcher and Tony Blair’s New Labour Party crippled the economy with high infrastructure costs. This left Britain only with one pseudo-industry: rogue banking. Its leaders made a mint. They were deregulated, not prosecuted.

Instead of the cartoons that textbooks draw to describe banking under industrial capitalism, we have got something quite different. In the textbook fairy tale, the banker loans money to the industrialist to build a factory. Happy workers are coming in, and deposit their paychecks as savings to make yet more loans to expand the economy.

But what actually is happening today is that Wall Street organizes the sale of high-interest junk bonds to raise money for corporate raiders. The takeover artist buys a factory that’s already there, lays off half the labor force, works the remainder more intensively, takes the pension fund for himself, or uses the Employee Stock Ownership Plan (ESOP) to buy up the company’s stock, so as to raise the price at which he can exercise the stock options he gives himself.

He replaces defined pension benefits with a defined contribution plan, in which all the employees know is how much is docked from their paycheck every month, not what they are going to get after they retire. The role of this kind of “investment banking” is predatory. It makes money from debt-leveraged buyouts, takeover loans, and gambling on which way interest rates or currencies will move.

The effect of this non-industrial superstructure of credit and debt is to shrink employment, worsen working conditions, and downsize pension obligations. Wall Street economists call this “wealth creation,” by which they mean that wealth is being sucked up to the top 1% of the economic pyramid. Wwhen they talk about wealth creation, they mean the wealth to this 1 percent, not prosperity for the 99%.]

JAY: So the rest of the economy gets paralyzed.

HUDSON: As long as this kind of finance is left in private hands, you’re going to have austerity and America will end up looking like Greece and Ireland.

Imagine how different it would have been if the government would have taken over Citibank, Bank of America and other big banks, and announced that these banks henceforth would make loans and extend credit to our own economy to build bridges and roads. This is what China has done to grow, for instance. A government bank wouldn’t have to charge interest – and most important, it could write down loans when they grew too big to pay without pushing the economy into depression. A public bank would not have to pay such high executive salaries. That’s the alternative to permitting high finance to become the ripoff system it’s become today.

JAY: Thanks very much for joining us, Michael.
And thank you for joining us on The Real News Network.

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.

As the effects of the sequester agreement ripple through the American economy–massive cuts, that is, to social programs, and the military to some extent–one thing is clear: both sides–President Obama and the leadership of the Republican Party–seem to think that public debt is the biggest challenge facing the American economy. Well, our next guest begs to differ.

Now joining us in the studio is Michael Hudson. He was a Wall Street financial analyst, is now a distinguished research professor of economics at the University of Missouri-Kansas City. His recent books are The Bubble and Beyond and Finance Capitalism and Its Discontents.

Thanks for joining us again.

MICHAEL HUDSON, RESEARCH PROF., UMKC: Thank you very much.

JAY: So I’m reading your material, and clearly you don’t agree that public debt’s the issue. Why? And if not, what is?

HUDSON: Well, the one kind of debt that really isn’t an issue is public debt, because there’s a great difference between public and private debt. Governments can own the printing presses. No government can become insolvent as long as its debt is owed in its own currency. And not only has the U.S. public debt gone down as a proportion of GAP [sic] and national income; it actually is financed very largely by the Federal Reserve simply printing money.

The pretense in Washington is that when government debt goes up, it’s because you’re borrowing from people and somehow crowding out other markets, and if you don’t borrow from the banks, if you print your own money, that somehow that’s going to create hyperinflation.

JAY: Yeah. I mean, the contention–the argument would be you can’t keep doing this without any limits to it, ’cause at some point people don’t want your currency anymore.

HUDSON: The United States has been doing it without limit and has no limit for the last–since the financial crisis of 2008.

Now, there’s something very interesting. All of the people in Washington–and I just came from a conference down there–they’re all talking about the debt that’s owed to the Social Security people, recipients, to the Medicaid recipients. They’re talking about–and the debt owed to labor and to most of the population.

And yet for every half a trillion dollar deficit that the government has spent into the economy, it’s created twice as much, $1 trillion, in the form of giveaway to the banks.

Not a single Republican, not a single Democrat has talked about what has actually increased the government debt by $13 trillion since 2008. And that is the bailouts of the banks, taking a Freddie Mae [sic] and Freddie Mac onto the public balance sheet for $5.3 trillion to bail out the banks from their reckless mortgage loans, the more than $2 trillion in quantitative easing when the Federal Reserve has just created credit to give to the banks to buy their junk mortgages and cash for trash.

So somehow there’s an idea that creating a credit to give to the banking system for President Obama to say, we want the banks to get lending again and we want Americans to keep borrowing–. They want to re-inflate the private debt market, the real estate market back to its previous unaffordably high levels.

JAY: So the point you’re making is you’re saying it’s okay to, quote-unquote, print money as long as it’s going to the banks,–

HUDSON: Yes.

JAY: –but you can’t print money–the reason I’m going quote-unquote is you don’t really have to print it. It’s just, like, tapping into the–

HUDSON: It’s all on a computer keyboard now. They don’t even have [crosstalk]

JAY: –tapping at the keyboard. But they won’t create that same kind of money in order to get the real economy going.

HUDSON: Right. Now, it’s just amazing that the people who were talking about let’s get the government debt under control are only then following it by saying, so cut back Social Security and squeeze labor and cut back social spending. Not a single person is saying, cut back the giveaways to the bank; stop trying to reinflate the market. To the Obama administration and the Republicans they’re saying more private debt is the solution.

Well, in reality, the problem is private debt, not the government debt. And that’s because unlike government debt, private debts have to be repaid. And there are only two ways of resolving a private debt problem for an economy as a whole. Either you do the American way, which is foreclosure and essentially foreclose on the real estate, or you write down the debts to the ability that can be paid.

Now, in the past, when you had a financial crisis, the banks would have to liquify the loans. They take the loss on the loans. The debts would be written down to whatever the market could afford. That was the old market solution to the debt problem. But now the government is saying, we cannot have a market solution to the debt problem because our constituency, our largest campaign contributors, the banks, would lose, so we have to keep the debts in place, and in fact we have to have even more debt to reinflate the real estate market so that the banks won’t lose any money on the fact that they’ve lent much too much money that cannot be repaid.

So you have something very interesting. The largest form of debt in America is real estate debt by homeowners.

When I first went to work on Wall Street in 1961, everybody had to–there was a rule of thumb on Wall Street. If you were taking out a home mortgage, they would limit it: the mortgage payment couldn’t exceed 25 percent of your income. That was the rule of the thumb. The banker would ask: how much money do you make? And they’d say, okay, you can afford to pay 25 percent of that in debt. Well, then the banks began to make larger and larger loans.

So last year, Sheila Bair, the head of the Federal Deposit Insurance Corporation, said she recommended limiting the amount of mortgage debt service to 32 percent of the loans.

Well, just a few months ago, the federal housing agency of the government said, okay, the government will guarantee nine out of every ten mortgages in America are now guaranteed by the federal housing administration to the banks for up to 43 percent of the income of the borrower to be paid to the banks as mortgage service.

Now, just imagine what that does to a family. If you’re paying 43 percent of your income to the banks for your mortgage, if you’re paying–some people are paying 25 percent of their income for student loans. But forget student loans. Let’s say only 10 percent of your income, above that, goes for other bank loans, credit card loans; you have 15 percent of your salary taken out for Social Security; and then you have income tax. Then you’re only going to be able to spend about 20 percent of your salary on the goods and services you produce.

JAY: And then they wonder why there’s no demand in the economy.

HUDSON: That’s exactly the point. It’s all about demand in employment. And what the people who are talking about the debt situation in Washington are leaving out of account is the employment. How on earth are Americans going to buy what they produce if they have to pay all the money to the bankers, and the bankers are using this money not to buy goods and services themselves, they’re using the money to make yet more loans to try to get yet more interest, and it’s [crosstalk]

JAY: Yeah, I’m seeing in my mail now I’m getting all these do you want a new credit card ads, or envelopes are coming through again; TV ads for credit cards are in full steam again. So I guess now that the banks have gotten a lot of free money from the Fed, they’re going to maybe perhaps start another credit bubble to try to get things going.

HUDSON: Well, that’s the government–the government policy doesn’t call it a credit bubble this time. They call it reflating real estate, and they call it a fiscal responsibility of balancing the budget.

But fiscal responsibility for the government debt is irresponsible for the economy, ’cause if the government doesn’t run a debt, if the government doesn’t run a surplus, then it’s not going to be pushing money into the economy. And if the government doesn’t use this opportunity that we’re having now to run a deficit and to–not to tax the Social Security recipients (this just occurred in January), not to add to the tax withholding, if it does what the Republicans want and runs a surplus or balances the budget, then all of the growth in the economy will be left to commercial banks to finance. The growth of private debt will grow to even more than the current 75 to 80 percent of family income–.

JAY: That’s even assuming the private banks are willing to loan, because part of the problem is they don’t want to loan because they don’t trust the economy.

HUDSON: But as long as the government treats the entire loan system like student debt–the government is now saying to the banks, loan whatever you want to students. We don’t care if they can’t pay. We don’t care if your loan is reckless. We, the so-called tax payer, will pay. And it’s not the taxpayer, of course; it’s the Treasury that just creates the money to pay.

So, first of all, there’s a pretence that the taxpayer has to pay when the government runs a deficit. The taxpayers don’t pay for the deficit; the government simply prints the money. A private family can’t do that. If you run a deficit and you’re a family balance sheet–.

JAY: But hang on. A lot of the money they’re raising is through Treasury bills, which is a form of a loan.

HUDSON: Yes.

JAY: They’re not just–and there is a rising public debt, and they are paying interest. It’s very, very low right now, the interest the American government’s paying on its debt, but that could go up. So it’s not this isn’t without risk of at some point paying serious interest.

HUDSON: Well, there are three sources that a government can borrow from. They act as if–the only source they talk about is borrowing from the capital markets, from the banks and the bondholders. But the government can borrow from the Federal Reserve, no interest whatsoever, and simply create the money. That’s what it’s done for the $13 trillion of bailout that it’s given Wall Street.

JAY: But they seem to believe there needs to be limits to that; otherwise, people lose confidence in the dollar. That’s at least the logic they say. And then they go out and they–but they–and they are getting almost interest-free money now for T-bills, so they are borrowing it.

HUDSON: But it’s–you’re absolutely right. That’s just what they’re saying. And how can they say that people are losing faith in the dollar when the dollar has continued to go up and up and up against the euro, against the pound sterling, against other currencies that don’t have the printing press? The reason people are putting their money into Treasury bills, the reason the Treasury bills, if you buy them, only yield half a percent or a quarter percent now, is because other countries have faith that America has the printing press and can print the money. So it’s exactly the opposite of the Zimbabwe syndrome. People talk about Zimbabwe, but only Zimbabwe can print its own money or America can print its own money.

JAY: But there’s clearly got to be some limit to how much you can do that. Otherwise, give everybody $1 billion and, you know, life would be fine. There are limits to this.

HUDSON: Yes, of course there’s a limit. The limit is so far not being reached because the rest of the world is imposing the very kind of austerity that the Republicans are trying to force on America. The rest of the world is saying, we want to be fiscally responsible even at the cost of shrinking our economies. So their economies are falling apart, and the savers in their economies are sending their money into the United States. So the reality is the opposite of the rhetoric that’s being used by the politicians.

JAY: But the argument they would give you is that if you start printing too much money, then people will lose confidence and they won’t keep doing–they stop buying American T-bills and they won’t be sending money here. Right now it’s the safe haven for global money.

HUDSON: There is indeed one entity that has been producing too much money, way too much money, irresponsibly, and that’s the banking system that led to the credit crisis. It was–the money that has been inflating prices has been the commercial banks inflating real estate prices, inflating education prices, inflating prices for stocks and bonds that have just had a huge bubble. So the inflationary money creation is by the commercial banks, not by the government. And nobody’s talking about that. Of course they’ve reached the limit. But it’s the banks that are creating money.

And somehow people have believed that inflation is very good if what’s going up is the price of your home. But then when the price goes down, what’s really gone up has been your debt, and what people thought was an asset boom in net worth and wealth creation (as Alan Greenspan said), it turns out to be debt creation. And all–they’re left with a massive debt. And it’s the private debt that is the residue of the bubble economy that is now the big problem in overlaying the economy. And instead of trying to resolve that problem by writing down the debts to the ability to pay, by writing down housing debts to the real value of the house, so the current mortgage, or writing it down to the one-quarter of your income that used to be normal and is normal in other countries–by refusing to roll back the public debt and write it down, the government is pushing austerity here, just exactly as the pound is doing in Europe, as the Eurozone is doing.

So all you have to do is look at Greece, Spain, and Ireland, and you say, is that going to be America’s future under this kind of pretence that government debt’s bad, bank debt is good, run into more debt, that will save us? It’s as if they believe the Americans can borrow their way out of debt. That’s the current policy.

JAY: Thanks for joining us, Michael.

Student debt is the new growth zone for banking revenues. With no student bankruptcy permitted, this is akin to a low risk revenue stream for the financial industry, now second in size to mortgage debt.

Solution to Student Debt is to Get the Banks Out of the Education Business

Michael Hudson: Crippling student debt, which is also a drag on the whole economy, developed as governments pushed the burden of higher education costs onto students and pushed them into the arms of the banks -

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.

A recent New York Times editorial about the student debt says this:

“The Federal Reserve Bank of New York recently released a study showing just why many young people are beingstrangled by student loans. It found that 43 percent of 25-year-olds had student debt in 2012, an increase from 27 percent in 2004.”

Further on in the editorial, they say:

“According to the new study, student debt almost tripled between 2004 and 2012, and isapproaching $1 trillion, while the percentage of borrowers who were more than 90 days delinquent had risen to 17 percent, from 10 percent in 2004. In addition, student loan debt was the only kind of household debt that continued to rise through the Great Recession, and it is now the second largest aftermortgage debt.”

Further on:

“The Federal Reserve study estimates that nearly 18 percent of borrowers now have student loan debts of $25,000 to $50,000, and nearly 4 percent have balances greater than $100,000.”

Now joining us to talk about the underlying causes of the student debt, possible solutions to it, is MichaelHudson. He was a Wall Street financial analyst and is now a distinguished research professor of economics at the University of MissouriKansas City. His recent books are The Bubble and Beyond and Finance Capitalism and Its Discontents.

Thanks for joining us, Michael.

MICHAEL HUDSON, RESEARCH PROF., UMKC: Thank you, Paul.

JAY: So let’s get into the sort of underlying systemic reasons why there was so much student debt, and thenlet’s talk about what could be done about it.

HUDSON: Well, one reason there’s so much student debt is the educational system has been transformed in the last generation. When I went to school at the University of Chicago, it cost about $500 a semester for me to go there in the 1950s. Now it’s about $25,000 a semester.

JAY: Twenty-five thousand’s a deal compared to some schools.

HUDSON: To some schools. People had thought that getting a higher education was going to be their way into the middle class. But now it’s become a larger burden on them than the mortgagedebt, and especially now that the lower fifth of Americans can’t get mortgage debts. Student loans can absorb 25 or 30 percent of their income, as much as housing used to do.

So the problem is that education has been financialized. Just like roads are being turned into toll roads and sold off to Wall Street firms, you’ve had the school system basically become an appendage of the commercial banking system.

When The New York Times or Wall Street Journal talk about student debt, they write from two perspectives. One, how can politicians save the banks from losing money on the debt? The answer is, by tightening the screws on the debtors. Banks got the government to guarantee these loans, and now politicians say, “We’ve got to protect taxpayers and make these deadbeat students to pay.”

Today’s Wall Street Journal wrote that student loans are just another example of Obama’s socialism. But it’s certainly not socialism when you don’t have the state running the education system and providing the financing. It’s privatization and financialization. The past ten years have seen much less public support for education, less revenue sharing from the government, less state support, and so tuition rates have risen.

At the same time, you’ve had an increasing financialization of the organization of the schools. University presidents, their cronies and middle management with no-show jobs have proliferated. The top administrators, people like the newTreasury secretary, Jacob J. Lew, was at NYU and and there is now a big to-do over $900,000 salary (even more than the university president), essentially to make sweetheart deals with banks to make exorbitant student loans to finance the highest tuition rates in the country. Lew then got $700,000 in severance when he left voluntarily to cash out with an even-higher paying job at Citigroup.

This week New York University’s tenured faculty is holding a no-confidence vote in the president of the university, John Sexton, because they say that he turned a school into an adjunct of the bank to make a killing in government-guaranteed student loans.

In New York City, the second- and third-largest real estate owners were Columbia University and New York University. So in essence, New York University was a real estate company that got tax exemption on its holdings in exchange for holding classes in some of its universities. When New York University bought a spaghetti company some years ago, it tried to claim that this was part of the educational process and wanted tax exemption for its earnings. The case went to court and NYU wasn’t allowed to pull that trick.

Despite the fact that the university has raised the tuition sharply, this hasn’t been reflected in hiring quality professors. The university is run like a financial manager would run a company that’s been raided. It has steadily been replacing full-time tenured professors with part-timers, paid only a fraction of the full-time salary. Dr. Sexton said last week that NYU is in business to make money, basically, and if it can save money by hiring part-time professors at one-tenth the rate of tenured professors,it’s going to do it. This is happening across America.

The rising tuition has been used mainly to hire administrators. So many are cronies with no-show jobs that Sociology Professor Jeff Goodwin has led a faculty complaint to the New York State Attorney general accusing Dr. Sexton of paying “extravagant salaries.” He has written a New York Times op-ed (“The War in Washington Square,” March 21, 2013) pointing out that “Some experts believe there may even be something illegal in the way Dr. Sexton has rewarded them.”

So the question is, how are schools going to make the students pay for the education they need as a kind of union card to get a job in today’s world? In 2005 the credit-card companies and banks rewrote the bankruptcy law so that the government would guarantee student loans. This nurtured a vast $1 trillion market for the banks in making student loans. This market is now bigger than the banks’ credit card business. And at the same time, the Republicans in Congress – or the Democrats got the Republicans to pressure them to say – that if the Treasury is guaranteeing these loans, politicians have to make sure that the students who borrow cannot wipe out this loan by bankruptcy.

This is a radical distortion of the more humanitarian treatment of debtors for the past eight centuries. In America, and indeed normally in every country, people who go into debt that they can’t pay are allowed to wipe out the loan by declaring bankruptcy. But today’s students are graduating with a $200,000, $300,000 worth of student debt. Many are unable to get jobs in today’s debt-ridden economy, and are obliged to live at home with their parents. They cannot afford to marry and form new households.

JAY: In fact, there was a recent study that the majority of new jobs won’t even require a high school diploma, never mind a university education.

HUDSON: That’s right. But all the same, getting a university education is the entry price to the middle class. But instead of assuring entry, it’s become a road to debt peonage.

JAY: Okay. So if you look at the New York Times editorial I was quoting, when it comes to solutions, it’s a public-private partnership for refinancing. It’s not about breaking the chains between students and banks.

HUDSON: That’s right. The result is to raise the cost of living tremendously.

A hundred years ago everybody thought of education as a public service, much like roads and other basic utilities. The idea was to keep down the price of public services, so that you lower the cost of living. That lowers the cost of business, because companies don’t have to pay new employees so much that they have to pay for these free or subsidized public services. The idea was to make the economy more competitive.

When people are talking about de-industrialization of America, you look what an engineer, doctor, dentist or lawyer has to pay to get through school and see why American labor is being priced out of the global market. So much of theincome – 25 to 30 percent – goes to pay the student loan debt, and up to 43 percent now under government guarantees just for mortgage debt. After paying 15% FICA withholding for Social Security and Medicare, along with other income and sales taxes, you’ve earmarked about 70 percent of income even before people are able to try to buy the goods and services they produce. The income they have to pay the banks is causing debt deflation and shrinking markets, causing unemployment and de-industrialization.

So what the banks and their Washington politicians have done by insisting on tight credit standards for the debtors – by not letting them wipe out the debt through bankruptcy, and by not reducing the student loans to the real ability to repay – is contributing to depression.

The public sector no longer is running schools like a public utility. If they regulated them like an electric or gas company, they wouldn’t let the uppermanagement be taking more and more money. They wouldn’t let Mr. Lew, Dr. Sexton and their cronies siphon off tuition at the top, press down the professors,lower teaching standards and tell the students, in effect, that the university is not here to give you education as such, but to charge for the privilege of giving them a diploma to get a middle class job. They’re saying, “It.s going to cost you. Your money or your life.”

JAY: The demand that came out of the Quebec student strike last summer, with hundreds of thousands of people out in the streets, is a demand you can see in student movements in different parts of the world: that a university, as all education, should be a right, and there should be no tuition. Is that what it means when you’re saying education should be a public utility?

HUDSON: Yes, and that’s how it used to be 100 years ago. For instance, in New York City it now costs more money to get your child into kindergarten and grade school than it does to go to college in most universities throughout the whole country.

JAY: Private. Private. Private.

HUDSON: Private school. America originally was divided into squares for local school districts. Lewis HenryMorgan’s Ancient Society described how the American tax system shaped the nation’s geography by public education. Each city or school district financed its public schools by local property taxes. Higher taxes meant better (or at least, more expensive) schools.

The federal government sought to even things out by making national grants to localities. But now there’s been a disconnect between property taxes and education. Property owners object to paying taxes, and schools themselves don’t have to pay property taxes. The government is refusing to pay, and is pushing the cost of education onto the students. And because students haven’t yet got ajob, they’ve got to borrow the money.

This obviously is the opposite of socialism. It has turned the educational system into an adjunct of the banking system and the real estate system, just to make more money for a vehicle for banks to make money that is guaranteed. They’re guaranteed at a markup, making student loans their most profitable area of lending. That’s not really a compensation for risk, because the government bears it – and the students take a risk of not being able to find a job. The only risk that banks take is that they can’t give enough money to pay their pet politicians to guarantee to pay for the defaults that you mentioned at the beginning of this interview.

If you graduate and the economy’s shrinking and there are no jobs, of course you’re not going to be able to pay. Of course you’re going to live with your parents unless your parents give you a trust fund. And you’re not going to be able to buy a new apartment. The student loan debt is part of the overall financialproblem that’s depressing the economy right now.

JAY: Great. Thanks very much, Michael.

HUDSON: Thank you.

JAY: And thank you for joining us on The Real News Network.

End

Comments/ Discussion:

Don Casey thank you for that report. I would like more light shed on this. I was a student of university, and borrowed $8000,000 for my education in the early 90′s. Now that loan has been sold four times to different banks, and each time they notify me that they sold it they charge me with $1200 -$1500 in various fees. They say I now owe them $42.000. How does a $8000 loan go to over $40.000 so quickly? I gave the banks the finger a decade ago when I saw what was happening. Now I suspect my loan isowned by some super computer in Indonesia. It’s criminal what’s occurring out there, and no one does the real story on it.

Ashli Hilton same here- somehow mine has doubled!

F this College is a scam. I got a higher quality education at my high school than college. The plan is simple make debt slaves out of everyone, and lock theminto low wage service jobs. You will spend your whole life now paying back money you borrowed when you were 18 – 30 and unlike before you cannot use bankruptcy to eliminate this debt. It’s all BS.

Don Casey student loans are a criminal enterprise, retarding the lives of the young.

Don Casey P.S. Dr. Michael Hudson is absolutely right about his insinuation that a college degree is like pass to the middle class. The Banks know this, and play off this. They are scoundrels. The notion that you can’t declare bankruptcy on student loans (how draconian) reveals how unbalanced unfair this debt game is.

Flick Paid over $6K for an initial loan of $1.2K in ’74 from Citibank. Current balance owed – $5K+. Fed loan program over – now with some outfit called Aspire… 3rd or 4th vulture firm so far I believe middle manning me to death. Won’t tell what bank is behind them. It will never end. Lord help kids today.

TeeJae Yet another attempt to privatize everything public. The same is occurring in the K-12 system. State legislators across the country are defunding public education (using the corrupt standardized testing program as the tool) to the point of forcing districts to either desperately accept corporate sponsorship just to survive, or shut down and enabling private schools to pop up in their place. Switching gears, I’m curious to know where credit card debt falls in all of this. The article says mortgage debt is #1 and student loan debt is #2. Before the recession, the majority of people were living well beyond their means and racking up enormous credit card debt, and I can’t see how the recession would’ve changed that way of thinking. And when taking the population as a whole, since the recessionhit, it seems logical that there would be less people going to college and buying homes, and more people using their credit cards just to get by; hence, making credit card debt #1.

Melissa Schraiber Not only our student loans terrorizing graduates, but it’s not healthy for our economy. It actually puts less in our pockets and then the inability to purchase bigger ticket items like houses, cars, and delays marriage. And what most fail to realize, as I did, is that they should stay away from private loans. I learned the hard way as mentioned in my post http://www.fatwallet.com/blog/…. I hope this continues to come to light and students and parents of studentsunderstand this!

gregorylkruse: A very sobering report for a person who’s daughter is a senior and headed to college next year.

William: Michael Hudson is the best. Really appreciate his work. Any time the Real News can have him own it’s a great thing.

Abha Khabar: If you think Diana`s story is something,, 3 weaks-ago my aunts step daughter recieved a check for $8480 just sitting there a fifteen hour week from there house and their friend’s sister-in-law`s neighbour did this for nine months and recieved a check for over $8480 parttime from a mac. follow the guidelines on this address… snap11.comisthe link

Don Casey • a day ago: thank you for that report. I would like more light shed on this. I was a student of university, and borrowed $8000 for my education in the early 90′s. Now that loan has been sold four times to different banks, and each time they notify me that they sold it they charge me with $1200 -$1500 in various fees. They say I now owe them $42.000. How does a $8000 loan go to over $40.000 so quickly? I gave the banks the finger a decade ago when I saw what was happening. Now I suspect my loan is owned by some super computer in Indonesia. It’s criminal what’s occurring out there, and no one does the real story on it.

F this • a day ago: College is a scam. I got a higher quality education at my high school than college. The plan is simple make debt slaves out of everyone, and lock them into low wage service jobs. You will spend your whole life now paying back money you borrowed when you were 18 – 30 and unlike before you cannot use bankruptcy to eliminate this debt. It’s all BS.

Don Casey • a day ago: student loans are a criminal enterprise, retarding the lives of the young.

P.S. Dr. Michael Hudson is absolutely right about his insinuation that a collegedegree is like pass to the middle class. The Banks know this, and play off this. They are scoundrels. The notion that you can’t declare bankruptcy on student loans (how draconian) reveals how unbalanced unfair this debt game is.

Flick • a day ago

Paid over $6K for an initial loan of $1.2K in ’74 from Citibank. Current balanceowed – $5K+. Fed loan program over – now with some outfit called Aspire… 3rd or 4th vulture firm so far I believe middle manning me to death. Won’t tellwhat bank is behind them. It will never end. Lord help kids today.

TeeJae • a day ago: Yet another attempt to privatize everything public. The same is occurring in the K-12 system. State legislators across the country are defunding public education (using the corrupt standardized testing program as the tool) to the point of forcing districts to either desperately accept corporate sponsorship just to survive, or shut down and enabling private schools to pop up in their place. Switching gears, I’m curious to know where credit card debt falls in all of this. The article says mortgage debt is #1 and student loan debt is #2. Before the recession, the majority of people were living well beyond their means and racking up enormous credit card debt, and I can’t see how the recession would’ve changed that way of thinking. And whentaking the population as a whole, since the recession hit, it seems logicalthat there would be less people going to college and buying homes, and morepeople using their credit cards just to get by; hence, making credit card debt #1.

Melissa Schraiber • a day ago: Not only our student loans terrorizing graduates, but it’s not healthy for our economy. It actually puts less in our pockets and then the inability to purchase bigger ticket items like houses, cars, and delaysmarriage. And what most fail to realize, as I did, is that they should stayaway from private loans. I learned the hard way as mentioned in my post http://www.fatwallet.com/blog/…. I hope this continues to come to light and students and parents of studentsunderstand this!

gregorylkruse • a day ago: A very sobering report for a person who’s daughter is a senior and headed to college next year.

William • 3 hours ago: Michael Hudson is the best. Really appreciate his work. Any time the Real News can have him own it’s a great thing.