Wednesday, March 3, 2010

We have entered the most oppressive rentier epoch since feudal European times.

"We have entered the most oppressive rentier epoch since feudal European times." That's what Michael Hudson - one of just two dozen or so economists in the world worth listening to - wrote in an article in May of last year, Marginalist Panaceas to Today’s Structural Problems.

Hudson cuts through all the noise and gets directly to the heart of the problem we face – we have laws, policies, practices, and beliefs that value unearned income at the expense of earned income. The result is that the financial and credit system of the economy has generated more debt than the real economy has created the means to service that debt.
The main flaw embedded in our own economy is rising debt in excess of the ability to pay, which is part of a larger flaw – the financial free lunch that property and financial claims extract in excess of corresponding costs as measured in labor effort and an equitably shared tax burden (the classical theory of economic rent).


Unfortunately for us – and for reformers trying to rescue our post-Bubble economy – the history of economic thought has been suppressed to give the impression that today’s stripped-down, largely trivialized junk economics is the apex of Western social history. One would not realize from the present discussion that for the past few centuries a different canon of logic existed. Classical economists distinguished between earned income (wages and profits) and unearned income (land rent, monopoly rent and interest).

Hudson lists a number of proposed remedies, such as a Tobin tax on financial market transactions, and closing offshore banking centers – all of which we have advocated for strenuously - and notes that even if they were adopted, they actually fail to address the underlying problem. That sure made me sit up and pay attention!
. . . . most writers trot out the approved panaceas: federal regulation of derivatives (or even banning them altogether), a Tobin tax on securities transactions, closure of offshore banking centers and ending their tax-avoidance stratagems. But no one is going so far as to suggest attacking the root of the financial problem by removing the general tax deductibility of interest that has subsidized debt leveraging, taxing “capital” gains at the same rate as wages and profits, or closing the notorious tax loopholes for the finance, insurance and real estate (FIRE) sectors.

The latest panacea being offered to jump-start the economy is to rebuild America’s depleted infrastructure. Alas, Wall Street plans to do this Tony Blair-style, by public-private partnerships that incorporate enormous flows of interest payments into the price structure while providing underwriting and management fees to Wall Street. Falling employment and property prices have squeezed public finances so that new infrastructure investment will take the form of installing privatized tollbooths over the economy’s most critical access points such as roads and other hitherto public transportation, communications and clean water.
So, there’s a nice list of key structural reforms that are needed. Right now, none of these reforms are being discussed in “serious” circles - which tells you how utterly bankrupt our nation’s elites are - including Democrats.
1. Remove the tax deductibility of interest, and the generally favorable tax treatment of debt.
2. Tax capital gains at the same rate as wages and profits.
3. Close all other tax loopholes favoring the finance, insurance and real estate (FIRE) sectors.
4. Stop all privatization of public infrastructure.

And here's one more key structural reform: put Michael Hudson in charge of Treasury or the Federal Reserve. Then sit back and listen to Wall Street and the predators howl in agony.

Read Hudson's entire article.

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