Chris Hedges interview of Michael Hudson, author of Killing the Host—How Financial Parasites and Debt Destroy the Global Economy.
Michael Hudson is one of the best economists in the world. Not just because he is one of the few who actually knows about what used to be known as the American School of political economy, but he has also worked on Wall Street, and somehow came away with his soul intact. If you never read anything else on economics, you must at least read Hudson’s 1993 The Lost Tradition of Biblical Debt Cancellations (87 page pdf file).
Chris Hedges is a former New York Times correspondent who covered almost every region of the world at one time or another. In November 1989, Hedges was in East Germany, meeting with the leaders of the opposition to Communist rule, the night before the Wall came down. According to Robert Shetterly’s Americans Who Tell the Truth website,
In 2002, [Hedges] was part of a team of reporters for The New York Times who won a Pulitzer Prize for the paper’s coverage of global terrorism. That same year he won an Amnesty International Global Award for Human Rights Journalism.
In 2003, shortly after the war in Iraq began, Hedges was asked to give the commencement address at Rockford College in Rockford, Illinois. He told the graduating class “…we are embarking on an occupation that, if history is any guide, will be as damaging to our souls as it will be to our prestige, power and security.” ... As he spoke, several hundred members of the audience began jeering and booing. His microphone was cut twice. Two young men rushed the stage to try to prevent him from speaking and Hedges had to cut short his address. He was escorted off campus by security officials before the diplomas were awarded. This event made national news and he became a lightning rod not only for right wing pundits and commentators, but also mainstream newspapers. The Wall Street Journal ran an editorial which denounced his anti-war stance and the The New York Times issued a formal reprimand, forbidding Hedges to speak about the war. The reprimand condemned his remarks as undermining the paper’s impartiality. Hedges resigned shortly thereafter….Hedges has since emerged as one of the most prominent and most unrelenting critics of the American imperialist / corporatist state. Among the many books he has written is The Death of the Liberal Class (2010).
Michael Hudson and Chris Hedges: The Real World Cost of Turning Classical Economics Upside Down
[Note: where I have inserted my own comments, I have put them between brackets in bold, as in this sentence.]
HEDGES: I want to open this discussion by reading a passage from your book, which I admire very much, which I think gets to the core of what you discuss. You write, Adam Smith long ago remarked that profits often are highest in nations going fastest to ruin. There are many ways to create economic suicide on a national level. The major way through history has been through indebting the economy. Debt always expands to reach a point where it cannot be paid by a large swathe of the economy. This is the point where austerity is imposed and ownership of wealth polarizes between the one percent and the ninety-nine percent. Today is not the first time this has occurred in history. But it is the first time that running into debt has occurred deliberately [and even been] applauded. As if most debters can get rich by borrowing, not reduced to a condition of debt peonage.
So let’s start with classical economics, who certainly understood this. They were reacting of course to feudalism. And what happened to the study of economics so that it became gamed by ideologues?
HUDSON: Well, the essence of classical economics is to reform industrial capitalism, to streamline it, and to free the European economies from the legacy of feudalism. And the legacy of feudalism, where the landlords that were extracting land-rent, and living as a class that took income without producing anything. And the banks, which were not funding industry; the leading industrialists from James Watt, with his steam engine, to the railroads–.
HEDGES: From your book you make the point that banks almost never funded industry.
HUDSON: That’s the point. That they never had. And by the time you got to Marx, later in the 19th century, you had a whole discussion, largely in Germany, over how do we make banks do something they did not do under feudalism? Right now we’re having the economic surplus being drained by the landlords and drained by the bond holders.
Now, none of the classical economists could even imagine, how on earth can the feudal interests, these great vested interests that had all this money, actually fight back and succeed. They thought the future was going to belong to capital and labor. And around the late 19th century, certainly in America, you had people like John Bates Clark come out with a completely different theory.
[Bates was a professor of economics at Columbia University in the first quarter of the 20th century, who pioneered the amoral marginalist school of economics in opposition to the Veblenite Institutionalist school of economics. In an October 2012 book review of The Social Economics of Thorstein Veblen, Hudson explained that Clark and others created a
new mainstream emerged largely to counter the application of classical political economy by Progressive Era reformers advocating regulation, property taxation and other threats to the vested interests. The ideas of Simon Patten, John Commons and other institutionalists prompted a counter-reaction denying the classical concept of unearned income and wealth. Economics was decoupled from the reform process to justify the status quo – just the opposite policy of socialist regulation and progressive taxation.]HUDSON: The common denominator among all of the classical economists was the distinction between earned income and unearned income. And the unearned income was rent and interest. The earned income were wages and profits. Well, John Bates Clark came and said, there’s no such thing as unearned income. The landlord actually earns the money by taking all this effort to provide a house and land to renters, and the banks that provide credit. Their interest–every kind of income is, everybody earns their income. So everybody who accumulates wealth, by definition, according to his formulas, get rich by adding to what is now called gross domestic product.
[In his 2012 book review, Hudson wrote:
One cannot understand Veblen without understanding his Reform Era’s attempt to protect society against the predatory financial system busy organizing monopolies and protecting its major customers: absentee real estate investors, oil and mining companies, and industrial monopolies. Socialists and national strategists alike during the high tide of the Industrial Revolution expected the force of industrial technology to be strong enough to rationalize hitherto corrosive financial systems and subordinate them to serve the technological imperatives of industrial competition.][In the interview, Hudson condemns what national income accounting has become in two short sentences:]
...if you have a pharmaceutical company such that raises the rate of drug from $12 a shot to $200, that’s all of a sudden, their profits go up. Their increased price for the drug is created, is counted in the national income accounts, as if the economy is producing more.
So the issue is whether Goldman Sachs, Wall Street, predatory pharmaceutical firms, actually add a product or whether they’re just exploiting other people. And that’s why I called my book Parasitism, because the parasite, people think of the parasite as simply taking money, taking blood out of the host, or taking money out of the economy. But in nature, it’s much more complicated. The parasite can’t simply come in and take something. First of all, it needs to numb. It has an enzyme that numbs the host so the host doesn’t even realize the parasite’s there. And then the parasites have another enzyme that makes the host–it takes over the host’s brain. And it makes the host imagine that the parasite is part of the body, that actually part of itself, to be protected.
Well, that’s basically what Wall Street has done. It’s made, it depicts itself as part of the economy. Not as a wrapping around it. Not as external to it. But actually is the part that’s helping the body grow, and that actually is responsible for most of the growth, when in fact it’s the parasite that is taking over the growth. So the result is an inversion of classical economics. It turns Adam Smith upside down. It says what the classical economists said was unproductive, parasitism, actually is the real economy, and the parasites are labor and industry....
Just in the last two years, 92 percent of corporate profits in America have been spent either on buying back their own stock, or in paying out as dividends to raise the price of the stock.
HUDSON: About 15 years ago at Harvard, a professor called [Michael Jensen] said, the way to ensure that corporations that are run most efficiently is to make the managers increase the price of the stock. [Hudson is referring to the economic doctrine that the sole purpose of a corporation is to maximize shareholder value. The doctrine originated in a 1976 paper Jensen co-authored with William H. Meckling, entitled Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure (large pdf file), which Wikipedia notes is “one of the most widely cited economics papers of the last 40 years.” This doctrine was used as the justification for the mergers and acquisitions and leveraged buy-out mania of the 1970s and 1980s—which actually continues to this day. By the mid-1990s, USA companies were spending more on mergers and acquisitions than on either new capital equipment, or research and development. The doctrine also is used to justify outsourcing jobs, corporate downsizing, and some very blatant asset stripping. The devastation wreaked on the USA industrial base in the name of this doctrine is so massive, that even Forbes magazine—a paragon of hard core free market capitalism—was forced to admit, in November 2011, that shareholder value was “The Dumbest Idea in the World.”] So if you give the managers stock options, and you pay them not according to, you know, how much they’re producing or making the company bigger, or expanding production, but the price of the stock, then you’ll have the corporation run efficiently, financial style.
So the corporate managers find there are two ways that they can increase the price of the stock. The first thing is to cut back long-term investment, and use the money instead to buy their own stock. Just–and when you buy your own stock, that means you’re not putting the money into capital formation. You’re not building new factories. You’re not hiring more labor. You can actually increase the stock price by firing labor.
And failing to draw that distinction means that the host doesn’t realize that there is a parasite there. The host economy, the industrial economy, doesn’t realize what the industrialists realize from the 19th century: that if you want to be an efficient economy and be low-priced, and sell, under-sell competitors, you have to cut your price by having the public sector provide roads freely. Medical care freely. Education freely. If you charge for all of these then you get to the point that the economy is in, U.S. economy, is in today. Where if American workers, who work for factories, were to get all of their consumer goods for nothing. All of their food, transportation, clothing, furniture, everything for nothing, they still couldn’t compete with Asians or other producers, because they have to pay up to 40%, 43% of their income for rent or mortgage interests, 10% or more of their income for student loans, credit card debt, 15% of their paycheck is automatic withholding to pay social security, to cut taxes on the rich or to pay for medical care.
So Americans, you built into the economy all of this overhead. And there’s no distinction between growth and overhead, and it’s all made America so high-priced that we’re priced out of the market, regardless of what trade policy we have.
HUDSON: Well, we talk about an innovation economy as if that makes money. Let’s–suppose you have an innovation, and a company goes public. They go to Goldman Sachs and other companies, Wall Street investment banks, to underwrite the stock. They say, we’re going to issue the stock, say, at $40 a share. What’s considered a successful float is immediately Goldman and the others will go to their insiders, and they’ll say, you know, well, you’ll buy this stock, you’ll guarantee it’ll go up. A successful flotation doubles the price in one day, so that at the end of the day the stock’s selling for $80.
So basically you have the financial sector ending up with much more of the gains. And the name of the game if you’re on Wall Street isn’t profits. It’s capital gains. And that’s something that wasn’t even a part of classical economics. They didn’t anticipate that the price of assets would go up for any other reason than earning more money and capitalizing on income. And actually, what you have in the last 50 years, really since World War II, has been asset price inflation, that most families have, middle-class families, have gotten the wealth that they’ve got since 1945 not really by saving what they’ve earned by working, but by the price of their house going up. They’ve benefited by the price of the house. And they think that that’s somehow made them rich.
And the reason the price of the house has gone up is that a house is worth whatever a bank is going to lend against it. And if banks made easier and easier credit, lower down payments, then you’re going to have a financial bubble.
[In “How Corporate America Is Cannibalizing Itself” (Forbes, Nov. 18, 2015) , Steve Denning reported:
In a scathing report on the practice of stock buybacks, entitled “The Cannibalized Company,” Karen Brettell, David Gaffen and David Rohde show in detail how share buybacks are undermining capacity to innovate and grow the economy. “Many companies are…spending on share repurchases at a far faster pace than they are investing in long-term growth through research and development and other forms of capital spending…These financial maneuvers… cannibalize innovation, slow growth, worsen income inequality and harm U.S. competitiveness.”
The scale of the practice is breathtaking and the pace is increasing. Combined stock repurchases and dividends by U.S. public companies have now reached record levels. The study shows that overall spending by public companies on buybacks and dividends is for the first time greater than combined net income. In 2014, companies returned $885 billion to shareholders, as compared to the companies’ combined net income of $847 billion. (Emphasis mine.)]