High Cost Economy

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Monopoly capitalism and models of resistance. This week, author Michael Hudson on Donald Trump’s fake economics. It’s all coming up on the Laura Flanders Show, the place where the people who say it can’t be done take a back seat to the people who are doing it. Welcome.

Infrastructure, we’re going to start spending on infrastructure big, said Donald Trump days before he unveiled his $1.5 trillion infrastructure budget proposed by his administration, but as economists have pointed out, Trump’s proposed budget requests only $200 billion in federal funds and slashes billions in transportation funding, billions more from water, energy. The rest of the funds comes, supposedly, from the private sector and states.

Well, last year I talked to economist Michael Hudson about this exact thing, infrastructure. That is our roads, bridges, all so on, being the so-called final frontier of the race to privatize. He is now back to revisit that conversation and take stock of where the economy is now a year into the Trump time.

Michael Hudson is a longtime Wall Street analyst, most recently the author of J is for Junk Economics, a Guide to Reality in an Age of Deception. He is leading a team of national income economists at the Democracy Collaborative in Washington, D.C. Michael, welcome back.

Michael Hudson: It’s good to be here, Laura.

Laura Flanders: Is this where you get to say the three most, well, I get to say the three most beautiful words in the English language, you were right?

Michael Hudson: Well, I forget what I was right about.

Laura Flanders: The infrastructure plan. It’s a shady scheme to privatize, that bit of infrastructure we have left.

Michael Hudson: I knew that it was going to be privatized, but nobody could have realized it would have been quite as awful as it is. When people think of infrastructure, you think of how America got rich. It got rich in the 19th century and early 20th century by making free roads, by really providing all of the costs that are the structure of the economy, so roads and sewers and railroads.

Laura Flanders: Free to us, free to the corporations, but at some cost to the people.
Michael Hudson: Right, well, the whole idea was to provide these at either no cost, like roads, or at a subsidized price. The whole idea that was taught in business schools in the 19th century was American can out compete other countries by lower the cost of doing business, lowing the cost of living, by providing free schooling, free roads, free, they didn’t use the word infrastructure, but free of all of the things that were monopolized in the medieval period.

What Trump has done is all of a sudden, instead of using infrastructure spending to make America the low cost economy, which is how we got rich enough to compete with England and Europe and undersell other countries, this plan is designed to make America so high cost economy that it actually ends any hope America had of ever exporting manufacturers or the things that Trump said that he was going to do.

Laura Flanders: What’s in it for him and his constituents?

Michael Hudson: What we call economic rent seeking, a free lunch, a give-away to the financial sector. The Trump model is the Indiana Toll Road or the Chicago parking meters that we talked about last time.

Laura Flanders: Privatized.

Michael Hudson: Yes, the private capital is going to come in and demand such a high rate of return that nobody really can use the Indiana Toll Road. Most people use the side roads that are free that take longer. They’re actually driving people away. This is infrastructure for the very, very rich, but if you actually have to work for a salary and make a living, you’re not going to be able to use the high cost toll roads any more than you’re able to use the educational system without going so deeply into debt that you have to earn enough to pay off the debt in order break even.

The infrastructure plan, Trump style, raises the price of everything that a social democracy is supposed to provide on a subsidized basis to make the economy more competitive. The infrastructure plan is to undercut American competitiveness and make sure that we can’t compete with countries that are more social democratic.

Laura Flanders: Why is the stock market in this country still going up?

Michael Hudson: Because it has nothing to do with the rest of the economy. There’s a disconnect. Finance is not the economy. The reason the stock market’s going up is very largely the result of the tax cut for the financial and corporate sector that Trump and the Republicans legislated. Right now, for instance, the stock market’s gone up basically because of three stocks, Amazon, Netflix, and the other IT stocks.

Laura Flanders: Google.

Michael Hudson: Yes. Now that, all of a sudden, they’re allowed to bring their money back to the United States, for instance, Google I think had $75 billion in account for it’s Ireland deposit in the US bank, now it can move it into the head office account-

Laura Flanders: To a tax-free offshore account.

Michael Hudson: … offshore account. But the offshore accounts aren’t really offshore. All that money was in America all along, but it was held on behalf of the offshore company deposited in the US banks. So there’s no increase in the dollars exchange rate, no effect at all. It was just pretending to be offshore. It was fictitiously offshore. Well, now one-third of all this money, almost a trillion dollars offshore is going to be spent on stock buy-backs. The corporate managers deciding the economy’s not going to grow. The actual economy’s been shrinking since 2008.

Laura Flanders: Let’s talk about these buy-backs for a second. The buy-back is when the CEO or the board or whoever it is decides we will buy our own stock to lift up the price.

Michael Hudson: Yes, and the reason they do that is that corporate management is based on how much you can increase the stock’s price on the illusion or fiction that somehow the stock market’s the economy, but when they use their money to buy back their stock, that means they’re not being part of the economy. They’re not going to use it to invest more. They’re not going to use it to hire more labor. They may use it to buy other companies, but they’re going to use it both for buy-backs and they’re going to use dividend payouts with the other third.

In the last five years, 92% of corporate earnings have been spent either on stock buy-backs or higher dividend payouts, not to invest in expansion (adding to GDP) or what people think of as real production, ie hiring.

Laura Flanders: Well, doesn’t the money that goes back to those shareholders get back into the economy somehow? Don’t they go spend it?

Michael Hudson: Sure, 80% of the shareholders are the 1%. So when you say shareholders, this is not you folks watching the program. This is mainly the 1%. The figures are all produced, so it’s an illusion that the people own the shares. The people are way up here.

Laura Flanders: Some people, a few persons.

Michael Hudson: Yes.

Laura Flanders: It’s confusing for people who might be trying to gather their information from the news because they have both Republicans saying the economy is good, we’re helping growth, look what Trump has done, and Democrats saying there’s growth, it’s Obama’s growth, it’s thanks to what we did when we were in office. There’s very few people saying what you’re saying, which is we’re not growing at all.

Michael Hudson: Well, last time, you remember, we talked about the difference between a host economy growing and the parasite growing. All the growth in America has been the financial sector.

Laura Flanders: Let me ask you to talk about one other thing that came to my attention this year, which was I went looking to see how much debt Americans were in. We haven’t heard much talk about sort of the indebtedness of the American family for a while. When I went to look, the statistics seem to suggest that there was more debt today than in the third quarter of 2008, which was right when everything went south.

Michael Hudson: That’s right, and not only has the debt gone up, but the arrears on this debt have all gone up. People aren’t paying the debt. The most notorious form of debt, of course, is the student debt. Student arrears are going up. Also, many people have bought cars, especially used cars.

Laura Flanders: Auto debt.

Michael Hudson: The auto debt is going up.

Laura Flanders: I found out that you could have-

Michael Hudson: Defaults are rising on that.

Laura Flanders: … subprime auto loans.

Michael Hudson: Subprime auto, that’s exactly right.

Laura Flanders: Why aren’t people screaming to high heaven? We all said we’re not going to let this happen again. We watched that happen. We said no way. There has been a slight shift in the mortgage market, now people are doing the same thing with cars and we’re all just silent?

Michael Hudson: That’s where the money is being made, the financial sector. The financial sector’s product is debt, so you could say we are producing. We’re just producing debt, we’re not producing goods and services, or what people actually need. We’re producing economic overhead, not really the economy. They confuse that with growth, and if you look at the national income accounts, it makes it appear as if the economy’s growing, but all that is finance, real estate, and insurance sector, and you could add the monopolies to that. It’s not the real economy and people’s living standards that are shrinking and shrinking.

We’ve been able to increase this debt because the interest rates have gone down very, very slightly, and we’re not asking people to pay off the debt. We’re not asking them to amortize it and get out of debt. They were just asking them to add on the added cost of living they have every month onto their credit card bill and the added cost of the education on. The debt is mushrooming and nobody’s asking about how to pay it off.

If they can sell all these bad debts to the German banks, like they did before, that will help. If they can sell it to the pension funds, that will help. The idea is for Wall Street to sell all these bad debts to pension funds and say you’ll make a high rate of return, and then you’ll be left holding the bag when it all collapses.

Laura Flanders: It’s interesting, because when it comes to government, we’re told government should behave like a responsible family and not get into debt, but when it comes to families, we say debt is just fine. Let’s go back to the government question for a second. We said that the market was doing well. It’s also had its dips in the last few months, and they’ve usually been explained, at least in the money media, that’s what we call it, it’s usually been explained as, well, there’s a fear of inflation, that the labor market is tight, that wages are going up, and that companies are afraid. How would you explain these fluctuations?

Michael Hudson: When you hear the word inflation, that means rising wages. First of all, there hasn’t been any inflation, there hasn’t been any rise in wages. There’s been a race to the bottom in terms of employment, in terms of the minimum wage. There is no chance of inflation because, as Alan Greenspan explained 10 years ago, workers are afraid to go on strike, afraid to protest, because if they fall behind in their payments to the electric companies or the phone bill, their credit card rates are going to go up from 13% to 29%. So labors cowed, their not going to really have any inflation.

The stock market’s going up because of low interest rates are enabling leverage buyouts to come in. People are borrowing money from the banks at 2% and buying a stock that yields 4%, and it’s all arbitrage.

Laura Flanders: There have been some dips.

Michael Hudson: Yes, it’s more a tremor. Like before you have the earthquake in California, there are a few tremors and then comes the big crest. What you got was a tremor, and then the Federal Reserve and Foreign Central Banks all came in and began buying Standard and Poor’s futures to bid up the market without buying the stock. You can just buy the futures and manipulate the stock market.

What the press isn’t talking about is a central bank manipulation of stock and bond prices to keep them up, the enormous purchases of corporate bonds by the European Central Banks, by the Federal Reserve. The role of central banks today is to support inflation of asset prices, of stock prices, bond, and real estate and to deflate the economy. They want to make sure that labor does not get any share of the added growth. That’s the basic strategy of neoliberalism, which is the new orthodoxy.

Laura Flanders: You and I have talked about this same thing for years. Is there anything new on the horizon or in this constellation of factors? Some people talk about Bitcoin and these other kinds of currencies. They were seen as radical or alternative at one point.

Michael Hudson: I don’t think so. It’s fictitious money. It’s tax avoidance. It’s really criminal money. The most liquid people in the world have always been criminals, because they don’t want to have their wealth where people can see it. They like privacy. When people talk about privacy and individualism, they’re probably dope dealers, arms merchants, and embezzlers. Those are the people who like privacy.

Laura Flanders: So that you can come back soon, and I hope it won’t be as long as a year, and I can tell you, you were right again, what’s your projection for what happens over the next few months?

Michael Hudson: The same as before, a slow shrinkage, a slow shrinkage. I just had lunch with an economist from Turkey, and he said, “We’re all waiting for the big crash.” Somebody’s going to make a wrong bet, and the whole thread will become unraveled, and it’ll be beyond the ability of central banks to support Wall Street. It’ll be another crash, another bailout, and that’s when the Republicans and the Democrats will come into agreement to say we’ve got to cut social security, we’ve got to cut Medicare, we’ve got to stop letting the parasites, the workers, exploit us creative capitalists.

Laura Flanders: Is that the point where, some of us, dance on the grave of capitalism as we’ve known it?

Michael Hudson: Or they’ll dance on their relatives’ graves as suicides rates go up.

Laura Flanders: I was looking for a post-capitalist scenario, Michael.

Michael Hudson: Well, a post-capitalist scenario was supposed to be an evolution into socialism. It was supposed to
be social democracy. It was supposed to be infrastructure. What we’re seeing now is the opposite, not only of socialism, but of everything that made capitalism productive for the first 100 or 200 years of its life. We are seeing the end of capitalism, but it doesn’t look like it’s evolving into socialism. It’s looking like it’s lapsing back into neo-feudalism.

Laura Flanders: I sometimes refer to it as philanthro-feudalism. We might get a few crumbs here and there.

Michael Hudson: A good term.

Laura Flanders: What should we be doing, people who are concerned about this, whatever they call their ideology or belief?

Michael Hudson: All we can do is explain to people what’s happening. You’re doing that on your show. It’s not what you read in the New York Times. All you can do is let people know what’s happening, so when the break comes, they will have some alternative, and that’s what we’re trying to do.

Laura Flanders: Hide your money, if you have any, under the mattress?

Michael Hudson: I don’t think so. Put it in treasury securities. You know the treasury is going to keep paying because there’s a flight into treasuries by all of Wall Street. Follow Wall Street, they’ve bailed out of the market. So have most investors. The investors are not in the stock market. The stock market is now almost entirely hedge funds. It’s not people with money. It’s not rich people, it’s not poor people, it’s not the middle class. It’s just all a fantasy of hedge fund and central bank maneuvering.

Laura Flanders: And it’s still a dominant voice in our money media. I’m glad you’re here. Thanks for coming on. Michael Hudson’s been our guest. You can find his past appearances at our website. Thanks for watching.