Citizen Action Monitor

Screw the workers, enrich the billionaires — so goes America’s financialized, privatized capitalist economy

It wasn’t always this way. What happened? US professor of economics explains. —

No 2696 Posted by fw, January 2, 2021

In a recent one-and-a-half-hour videorecording of a conversation between US economist Michael Hudson and Brazilian journalist Pepe Escobar, Hudson opened with a ten-minute explanation of what happened in the US economy once jobs and manufacturing were offshored to China.  He proposed that even if China did not exist, the US economy has been so fundamentally changed that it would be almost impossible to return it to the  productive industrial economy it once was without materially changing the economic model it has become.

I open my repost of Hudson’s 10-minute overview with my summary account, focussing exclusively on  Hudson’s thoughts on how America’s financialized, privatized capitalist economy screws workers and rewards billionaires. In my summary brief, I omit Hudson’s comparison of America and China’s economies today.

MY SUMMARY

In the late 19th century, America had a mixed economy, an industrialized form of capitalism, that made the country rich. The government invested in education, infrastructure, transportation, and other social programs and services, provided at low cost to all citizens. What American business schools taught back then was very much like a form of “socialism.”

Over the past hundred years, America moved away from industrialized capitalism. And there’s no way that the nation can re-industrialize because American capitalism has been radically transformed – it’s now financialized and privatized.

Today, wealth in America is made mainly by creating capital gains. America no longer makes its own shoes; it doesn’t make its own nuts and bolts or fasteners, it doesn’t make industrial things anymore. The only way to make money from an industrial company these days is by buying and selling the company, not by helping it to increase production.

For example, notes Hudson, “New York City, where I live, used to be an industrial city; today the industrial buildings, the mercantile buildings have all been gentrified into high-priced real estate. Housing in the United States now absorbs about 40% of the average worker’s paycheck. In addition, 15% is taken off the top of paychecks for pensions, Social Security and for Medicare. And extra medical insurance takes more from the paycheck. Income taxes and sales taxes take about another 10%. On top of that, many may have student loans and bank debt. So basically, the American worker can only spend about one third of his or her income on buying the goods and services they produce. All the rest goes into the F*I*R*E sector — the finance, insurance, and real estate sector and other monopolies.”

In the last nine months, with the arrival of the coronavirus, the top 1% of the US economy grew by $1 trillion — a windfall for the 1%. The stock market is way up, the bond market is up, the real estate market is up, while the rest of the economy is going down, down, down.

Even if American workers met all their physical needs, their food, their clothing, all goods and services for nothing, they still couldn’t compete with foreign labor because of all of the rental costs that they now have to pay. Consider, for example, that 80% of American bank loans are mortgage loans to real estate. And the effect of loosening loan standards and increasing the market for real estate is to push up the cost of living, push up the cost of housing. So, Americans have to pay more and more money for their housing, whether they’re renters or they’re buyers, in which case the rent is for paying mortgage interest.

Bottom line, once jobs and manufacturing began to be offshored to China, the United States turned to seeking wealth in financial ways, and turned away from investing in industrial means of production of goods and services. Essentially, America now has what can be called a rent-seeking economy, not a productive economy.

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Below is my edited* repost of Michael Hudson’s 10-minute overview excerpted from the opening of the 1:36:42-long interview. The repost includes my added subtitles, text highlighting, and at the very bottom the embedded video of the conversation and closing Q&A session. Hudson’s remarks begin at the 3:45-minute mark and end at 13:42 minutes. (*My repost of Hudson’s remarks are edited to enhance readability, while being careful to retain Hudson’s meaning). Definition of key terms: Immediately below my repost, the following terms are defined: rentier; rentier capitalism; capital gains; and investment income

To read the original, complete transcript of the session and watch the video on the host’s website, click on the following linked title.

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A hard look at rent and rent-seeking with Michael Hudson and Pepe Escobar, hosted by The Saker, December 28, 2020 (1:36:42)

[Selected excerpts from the opening of the transcript]

Michael Hudson and Pepe Escobar discuss rent and rent-seeking activity — to be specific, unproductive economic activity, in the US and China…

At the beginning of the discussion, Michael summarizes what happened to the US economy once jobs and manufacturing were offshored to China

In the first 10 minutes, Michael Hudson gives an interview to explain what happened in the US economy once jobs and manufacturing were offshored, mainly to China.  He proposes that even if China did not exist, the US economy has been changed to the extent that it is almost impossible to change back to a productive economy without material changes in the economic model.

Outlining the ‘conflict of systems’ between the US and China, Michael explains the thinking behind the Pentagon’s paying of ‘protection money’ to fund oligarchies.  It is a ‘war between systems’, he explains, the thinking being:  “If only China did not export to us, we could reindustrialize.” … “It’s over,” he says, “because we’ve painted ourselves into such a debt corner.  So much money flows to the top 5% that there is no money for investment, no money for growth.

Hudson goes on to explain the concept of capitalism, how it was conceived to work against neo-liberalism, and how it has changed to systemic support for rentier economics.

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TRANSCRIPT OF OPENING REMARKS BY HUDSON

China is thriving, the West has reached the end of 75 years of expansion since 1945

I think you have to frame the whole issue that China is thriving, and the West has reached the end of the whole 75-year expansion it had since 1945.

There’s no way that America can re-industrialize because it is now financialized and privatized

There was an illusion that America is de-industrializing because of competition from China. And the reality is there is no way that America can re-industrialize and regain its export markets with the way that it’s organized today — financialized and privatized. [Even] if China didn’t exist you’d still have the rust belt rusting out. You’d still have American industry not being able to compete abroad simply because the cost structure is so high in the United States.

Today, America’s wealth is made mainly by making capital gains

Wealth is no longer made here by industrializing. It’s made financially, mainly by making capital gains. Rising prices for real estate or for stocks and for bonds.

“The stock market is way up, the bond market is up, the real estate market is up, while the rest of the economy is going down”

In the last nine months, since the coronavirus came here, the top 1% of the U S economy grew by $1 trillion. It’s been a windfall for the 1%. The stock market is way up, the bond market is up, the real estate market is up, while the rest of the economy is going down. Despite the tariffs that Trump put on, Chinese imports, trade with China is going up because we’re just not producing materials.

“The only way to make money off industrial companies is by buying and selling the company, not by making loans to the company to increase its production”

America doesn’t make its own shoes. It doesn’t make its own nuts and bolts or fasteners, it doesn’t make industrial things anymore. The only way to make money off an industrial company is by buying and selling the company, not by making loans to the company to increase its production. New York City, where I live, used to be an industrial city. Today the industrial buildings, the mercantile buildings have all been gentrified into high-priced real estate.

Because of all the rental costs American workers have to pay, they can’t compete with offshore labor

The result is that Americans have to pay so much money on education, rent and medical care that if they got all of their physical needs, their food, their clothing, all the goods and services for nothing, workers still couldn’t compete with foreign labor because of all of the rental costs that they have to pay.

Housing, pensions, Medicare, Social Security deductions, extra medical insurance, income and sales taxes, loan payments, etc., – all these costs leave little cash for goods and services

Housing in the United States now absorbs about 40% of the average worker’s paycheck. In addition, 15% is taken off the top of paychecks for pensions, Social Security and for Medicare. And extra medical insurance takes more from the paycheck. Income taxes and sales taxes take about another 10%. On top of that, many may have student loans and bank debt. So basically, the American worker can only spend about one third of his or her income on buying the goods and services they produce. All the rest goes into the F*I*R*E sector — the finance, insurance, and real estate sector and other monopolies.

America has become a rent-seeking economy, not a productive economy

Essentially, we have became what’s called a rent-seeking economy, not a productive economy. So, when people in Washington talk about American capitalism versus Chinese socialism, this is confusing the issue.

America’s “industrialized capitalism”, a “mixed economy”, has become “financialized capitalism”

What kind of capitalism are we talking about? America used to have industrialized capitalism in the 19th century. That’s how it got richer originally, but now it’s moved away from industrialized capitalism towards financialized capitalism.

It was a mixed economy, supported by government services and programs, that made America rich

And what that means is that the mixed economy that made America rich — where the government would invest in education and infrastructure and transportation, and provide these at low costs — freed employers from having to pay workers more to afford high financialized and privatized costs of living.

Over the past hundred years, America moved away from “industrialized capitalism”

All of this has been transformed over the last hundred years. And we’ve moved away from the ethic of what was industrialized capitalism. Before, the idea of capitalism in the 19th century – from Adam Smith to Ricardo, to John Stuart Mill to Marx – was very clear. Marx stated it quite clearly –

Capitalism was revolutionary: It was to get rid of the landlord class. It was to get rid of the rentier class. It was to get rid of the banking class, essentially, and just bear all the costs that were unnecessary for production, because how did England and America and Germany gain their markets?

“In early market-based capitalism, the government picked up a lot of the costs of the economy”

In early market-based capitalism, the government picked up a lot of the costs of the economy.

    • The government in America provided low-cost education, not student debt.
    • It provided transportation at subsidized prices.
    • It provided basic infrastructure at low cost. And so, government infrastructure was considered to be a fourth factor of production.

What late 19th century American business schools taught was “very much like socialism”

And if you read what the business schools in the late 19th century taught — like Simon Patten at the Wharton School — it’s very much like socialism. In fact, it’s very much like what China is doing. And in fact, in the last 30 or 40 years China is following pretty much the same way of getting rich that America followed.

Unlike America, China’s government funds basic infrastructure – education, transportation, urban centers…

China’s government funds basic infrastructure. It provides, low-cost education. It invests in high speed railroads and airports, in the building of cities. So, the government bears most of the costs and, which means employers don’t have to pay workers enough to pay a student loan debt. They don’t have to pay workers enough to pay enormous rent such as we have in the United States.  They don’t have to pay workers to save for a pension.

In China, banking is considered a public utility

And most of all the Chinese economy doesn’t really have to pay a banking class because banking is the most important public utility of all.  Banking is what China has kept in the hands of government. Chinese banks don’t lend for the same reasons that American banks lend.

80% of US bank loans are mortgage loans intended to increase the cost of living and housing

80% of American bank loans are mortgage loans to real estate and the effect of loosening loan standards and increasing the market for real estate is to push up the cost of living, push up the cost of housing. So, Americans have to pay more and more money for their housing, whether they’re renters or they’re buyers, in which case the rent is for paying mortgage interest.

China’s public banks create money to fund the means of production  

So, all of this cost structure has been built into the American economy. China’s been able pretty much, to avoid all of this, because its objective in banking is not to make a profit and interest, not to make capital gains and speculation. It creates money to fund actual means of production — to build factories, to build research and development, to build transportation facilities, and to build infrastructure. China gains wealth in the old-fashioned way — by actually by producing it. And whether you call China’s approach industrial capitalism, state capitalism, state socialism, or Marxism, it basically follows the same logic of real economics based on the real economy, not America’s financial overhead approach.  

Banks in America don’t make these kinds of loans. They only lend against collateral that’s already in place, because they won’t make a loan if it’s not backed by collateral. So, you have a diametrically opposite philosophy between the United States and China on how to develop. The United States gains wealth in financial ways, not by actually investing in means of production and producing goods and services.

China is operating as a real economy. America lives off of investments in China

So you have China operating as a real economy, increasing its production, becoming the workshop of the world as England used to be called. And America is trying to draw in foreign resources, live off of foreign resources, live by trying to make money by investing in the Chinese stock market — and now, by moving investment banks into China and making loans to China.

America has moved way beyond an industrialized capitalized society to a financialized capitalist society

So, you could say that America has gone way beyond an “industrialized capitalist” society, or, as some now call it, a “post-industrial capitalist” society. More correctly, you could call it the “neo-feudal” society, or the “neo-rentier capitalist” society, or you could call it the “debt peonage”* society. But to call it an “industrialized capitalist” society is a contradiction, when it is in fact a “financialized capitalist” society. [*a state of indebtedness that provides owners of capital with cheap labor]

And in that sense, there’s no rivalry between China and America. These are different systems going their own way.

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DEFINITION OF KEY TERMS

rentier – noun — a person living on income from property or investments. Origin: French, from rente meaning dividend

rentier capitalism — a term currently used to describe the belief in economic practices of monopolization of access to any kind of property (physical, financial, intellectual, etc.) and gaining significant amounts of profit without contribution to production in society

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Capital Gains vs. Investment Income: What’s the Difference?  Investopedia, July 20, 2020

Capital Gains

A capital gain is an increase in the value of a capital asset—either an investment or real estate—that gives it a higher value than the original purchase price. An investor does not have a capital gain until an investment is sold for a profit.

For example, let’s assume an investor has purchased 100 shares of stock in company ABC at $10 per share. The capital expenditure, therefore, is $10 x 100, or $1,000.

Now assume the value of each share increases to $20, making the total investment worth $2,000 ($20 x 100 = $2,000). If the investor sells the shares at market value, the total income is $2,000. The capital gain on this investment is then equal to the total income minus the initial capital ($2,000 – $1,000 = $1,000).

Investment Income

Individuals mostly earn net income through employment income, but investing in the financial markets can also yield additional income, called investment income. Some investment income is attributable to capital gains. However, the income that is not a result of capital gains refers to earned interest or dividends.

Unlike capital gains, the amount of return for these investments is not reliant on the initial capital expenditure. In the capital gains example, assume company ABC pays a dividend of $2 per share for each of the 100 shares that the investor purchased. If dividends are paid before the sale of shares, the investment income generated is $2 x 100, or $200.

Using a different example, a savings account totaling $5,000 with a 6% annual interest rate will generate investment income totaling $300 ($5,000 x 0.06 = $300) in its first year.

Special Considerations

One key difference between capital gains and other types of investment income is the rates at which they are taxed. Tax rates vary depending on the kind of investment, the amount of profit generated, and the length of time the investment is held.

Capital gains are classified as short-term if they are realized on an asset that was held for less than a year. In this case, short-term capital gains would be taxed as ordinary income for that tax year. Assets held for more than a year, before being sold, would be considered to be long-term capital gains upon sale.

The tax is calculated only on the net capital gains for that tax year. Net capital gains are determined by subtracting capital losses—income lost on an investment that was sold at less than what it was purchased for—from capital gains for the year. Most investors will pay a capital gains tax rate of less than 15%.

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WATCH THE VIDEO

A Hard Look at Rent and Rent Seeking with Michael Hudson & Pepe Escobar, posted on You Tube by The Henry George School of Social Science, December 17, 2020 (1:36:42)

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