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Michael Hudson and Chris Hedges: The Real World Cost of Turning Classical Economics Upside Down
Posted on March 23, 2016 by Yves Smith

Yves here. You are getting a big dose of Michael Hudson this week because he had interviews that were made weeks apart released in a tight timeframe. Several readers have already flagged this talk, and Hudson is in top form, and also covers a wide range of issues in a comparatively short time frame.

Today’s episode is from a teleSUR interview with Chris Hedges that focuses on one of Hudson’s favorite themes: the way that central messages of classical economics have been airbrushed out of the current economic orthodoxy, or worse, turned on their head. Classical economics was concerned with eradicating the vestiges of feudalism, which led to concerns about deadweight costs like rent extraction as well as distortions caused by monopolies and oligopolies. While it does not come up in this talk, another concern of classical economics was the productive use of lending. Classical economists favored usury ceilings because lenders otherwise would fund speculation (in those days, gambling by the rich) as opposed to funding commerce.

CHRIS HEDGES: Hi, I’m Chris Hedges. Welcome to Days of Revolt. Today in a two-part series we’re going to be discussing a great Ponzi scheme that not only defines not only the U.S. but the global economy, how we got there, in the first segment, and secondly, where we’re going. And with me to discuss this issue is the economist Michael Hudson, author of Killing the Host: How Financial Parasites and Debt Destroy the Global Economy, a professor of economics who worked for many years on Wall Street, where you don’t succeed if you don’t grasp Marx’s dictum that capitalism is about exploitation. And he is also, I should mention, the godson of Leon Trotsky. Welcome Michael.

MICHAEL HUDSON: Thank you. Good to be here.

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. 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.
Adam Smith was very much against colonialism because that lead to wars, because that led to public debt. And he said the solution to prevent this financial class of bond holders burdening down the economy by imposing more and more taxes on consumer goods every time they went to war was to finance wars on a pay-as-you-go basis. Instead of borrowing you’d tax the people then he thought that if everybody felt the burden of war, in the form of paying taxes, then they’d be against it. Well, it took all of the 19th century to fight for democracy and to extend the vote so that instead of the landlords controlling the parliament and the law making and the tax system through the House of Lords, you’d extend the vote to labor, to women, to everybody on the theory that society as a whole would vote in its self-interest, and that it would vote for the 99% and not for the 1%.

And so by the time Marx wrote in the 1870s he could already see what was happening in Germany, that the German banks were trying to make money, in conjunction with the government, by lending to heavy industry, largely to the military-industrial complex.

HEDGES: This was Bismark’s kind of social, I don’t know what we’d call it, it was a form of capitalist socialism.

HUDSON: They called it State Capitalism–.

HEDGES: State Capitalism.

HUDSON: And there was a long discussion by Engels, saying, wait a minute. State Socialism whereas State Capitalism isn’t what we mean by socialism. And there are two kinds of state-oriented–.

HEDGES: I’m going to interject I mean there was a kind of brilliance behind Bismarck’s policy because–.

HUDSON: –Sure.

HEDGES: –he created pension funds, he provided health benefits, and he directed banking towards industry; towards the industrialization of Germany, which as you point out, was very different in Britain and the United States.

HUDSON: Well, the German banking was so successful that by the time World War I broke out, there were discussions in the English journals saying, we’re worried that Germany and the Axis powers are going to win because their banks are more suited to fund industry, and without industry you can’t have really a military. Whereas the British banks only lend for foreign trade, they’d lend for speculation, and the stock market is a hit-and-run operation; they want a quick in-and-out to make the profits, whereas the German banks don’t insist that their clients pay as much dividends. The German banks own stocks as well as bonds, and there’s much more of a partnership.

And that’s what most of the 19th century imagined was going to happen. That the world was on the way to socializing banking. Towards moving capitalism beyond the feudal level and getting rid of the landlord class, getting rid of the rent, getting rid of interest and really it was going to be labor and capital, profits and wages, with the profits being reinvested in more capital and you’d have an expansion of technology. And around the early twentieth century, most futurists imagined that we’d be living in a leisure economy by now.

HEDGES: Including Karl Marx.

HUDSON: That’s right, yeah. Ten-hour work week. And to Marx, socialism was just the reformed state of capitalism at the time.

HEDGES: Isn’t what happened in large part because of the defeat of Germany in World War I? But also, because we took the understanding of economists like Adam Smith and maybe Keynes, and, I don’t know who you would blame for this, whether it’s [Ricard] or others, and we created a fictitious economic form or economic theory that erased rentier or rent-derived interest-derived capitalism and countered it as a productive force within the economy. Perhaps you can address that.

HUDSON: Well, here’s what happened. Marx sort of traumatized classical economics by taking the concepts of Adam Smith and John Stewart Mill and the others, and pushing them to the logical conclusion. He said that the progressive capitalism, people called Ricardian socialists like John Stewart Mill, said okay, we want to tax away the land or nationalize it, we want to have the government take over the heavy industry and build infrastructure to provide low-cost basic services. This was traumatizing the landlord class and the one percent. And they fought back.

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. The whole classical economics, what made Adam Smith and the physiocrats and John Stewart Mill.

HEDGES: Physiocrats are, you’ve tried to explain, are the French, these enlightened French economists.

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.

HEDGES: And I think one of the points you make in your book which I liked was that in almost all cases, those who had the capacity to make money parasitically off interest and rent had either, if you go back to the origins, looted and seized the land by force, or inherited it.

HUDSON: That’s correct. In other words, the unearned income. Well, the result of this sort of anti-classical revolution that you had just before World War I was that today almost all of the economic growth in the last decade has gone to the 1%. It’s gone to Wall Street, real estate–.

HEDGES: But you blame this on what you call junk economics.

HUDSON: Well, the junk economics is the anti-classical reaction.

HEDGES: And explain a little bit how, in essence, that’s a fictitious form of measuring the economy.

HUDSON: Well, suppose you have a crook, and you’re taking, you’re going to the bank. I went to a, a block away we had a Chase Manhattan bank, and I used to bank there. I took out money from the bank, and as I was going out, two pickpocket–one pushed me over and the other grabbed the money, and ran out. Just–I was ten feet from the teller. The guard stood there, and saw it, and actually asked for the money back. And said, look, I was robbed in your bank, right in front. And they said, well, you know, we don’t arm our guards because if they shot one of the people, the thief could sue us and we don’t want to do that. We’ll just give you money back.

Well, imagine if you count all of this crime, all the money that’s taken, as an addition to GDP. Because now the crook has provided the service of not pushing me down or not stabbing me. Or suppose somebody’s held up at an ATM machine, your money or your life. Okay, here’s the money. The crook has given you the choice of your life. In a way that’s how the gross national product accounts are put up. You have Wall Street extracting money from the economy. You have landlords extracting–.

HEDGES: And there–let’s go back. They’re extracting money from the economy by debt peonage. By raising–.

HUDSON: By not playing a productive role, basically.

HEDGES: Right. So it’s credit card interest, mortgage interest, car loans, student loans, that’s how they make their funds.

HUDSON: That’s right. So they don’t, money is not a factor of production. But in order to have access to credit, in order to get the money, in order to get an education, you have to pay the banks. And at New York University here, for instance, they have Citibank, I think Citibank people were on the board of directors at NYU. You get the students, when they come here, to start at the local bank. And once you are in a bank and have monthly funds taken out of your account for electric, utilities, or whatever, it’s very hard to change.

So basically you have what the classical economists called the rentier class. The class that lives on economic rents. Landlords, monopolists charging more, and the banks. So that 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 all of this presumed economic growth that has all been taken by the 1% in the last ten years, and people say the economy is growing. But the economy isn’t growing–.

HEDGES: Because it’s not reinvested.

HUDSON: That’s right. It’s not–it’s not production, it’s not consumption. The wealth of the 1% is obtained by essentially lending money to the 99% and then charging interest on it, and recycling this interest at an exponentially growing rate.

HEDGES: And why is it important, as I think you point out in your book, that economic theory counts this rentier income as productive income? Explain why that’s important.

HUDSON: If you’re a rentier, then you want to say that, hey, I earned my income by–.

HEDGES: We’re talking about Goldman Sachs, by the way.

HUDSON: Yeah, Goldman Sachs.

HEDGES: Is perfect.

HUDSON: Yes. The head of Goldman Sachs came out and said, Goldman Sachs workers are the most productive in the world. That’s why they’re paid what they are. And the concept of productivity in America is the income divided by the labor. So if you’re Goldman Sachs and you pay yourself $20 million a year in salary and bonuses, you’re considered to have added $20 million to GDP, and that’s enormously productive. So we’re talking with tautology. We’re talking with circular reasoning here.

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, that get in the way of what the parasite wants, which is to reproduce itself, not help the host, the labor and capital [inaud.].

HEDGES: And then the classical economists like Adam Smith were quite clear that unless that rentier income, you know, the money made by things like hedge funds, was heavily taxed, and put back into the economy, the economy would ultimately go into a kind of tailspin. And I think the example of that, which you point out in your book, is what’s happened in terms of large corporations with stock dividends and buybacks. And maybe you can explain that.

HUDSON: There’s an idea in sort of superficial textbooks and the public media that if companies make a large profit, that somehow they make it by being productive. And with–.

HEDGES: Which is still in textbooks, isn’t it?

HUDSON: Yes. And also that if a stock price goes up, you’re just capitalizing the profits. And the stock price reflects the productive role of the company. But that’s not what’s been happening in the last ten years. 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.

HEDGES: And explain why they do this.

HUDSON: About 15 years ago at Harvard, a professor called [Jemson] said, the way to ensure that corporations that are run most efficiently is to make the managers increase the price of the stock. 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.

HEDGES: [Inaud.] temporarily.

HUDSON: Temporarily. By using the income from the past just to buy the stock, fire the labor force if you can, work it more intensively. Pay it out as dividends. And that basically is the corporate raiders model. You use the money to pay off the junk bond holders at high interest. And of course, this gets the company in such trouble after a while, because there is no new investment, markets shrink, that you then go to the labor unions and say, gee, this company’s really near bankruptcy, and we don’t really want to have to fire you.

And the way that you can keep your job is if we just downgrade your pensions, and instead of giving you what we promised, the defined benefit pension, it’s a defined contribution. You know what you pay every month, but you don’t know what’s going to come out at all. So you wipe out the pension funds, push it on to the government, the pension benefit guarantee corporation, and all of a sudden you use the money you were going to pay for pensions to pay stock dividends. And then push it up, and then the whole thing turns down. And it’s hollowed out. And you shrink and you collapse. But by that time, the managers will all have left the company. They will have taken their bonuses and salaries and run.

HEDGES: I want to read this quote from your book, written by David Harvey, in A Brief History of Neoliberalism, and have you comment on it.

“The main substantive achievement of neoliberalism has been to redistribute rather than to generate wealth and income. Accumulation by dispossession. I mean the commodification and privatization of land, and the forceful expulsion of peasant populations, conversion of various forms of property rights, common collective state, et cetera, into exclusive, private property rights. Suppression of rights to the commons. Colonial, neocolonial, and the imperial processes of appropriation of assets, including natural resources. And usury. The national debt, and most devastating at all, the use of the credit system as a radical means of accumulation by dispossession. To this list of mechanisms, we may now add a raft of techniques such as the extraction of rents from patents, and intellectual property rights, and the diminuition or erasure of various forms of common property rights, such as state pensions, paid vacations, and access to education, healthcare, one through a generation or more of class struggle. The proposal to privatize all state pension rights, pioneered in Chile under the [dictatorship] is, for example, one of the cherished objectives of the Republicans in the US.”

This explains the kid of denouement, or the final end result where, which you speak about in your book, is in essence allowing what you call the rentier or the speculative class to cannibalize the entire society until it collapses.

HUDSON: Well, a property right is not a factor in production. Look at what happened in Chicago, the city where I grew up. Chicago didn’t want to have to raise the taxes on real estate, especially on all of the expensive commercial real estate there. So the budget ran up a deficit. They needed money to pay the bond holders. And so they sold off the parking rights to have meters, you know, along the curbs, for the Chicago streets. Well, the result is that they sold to Goldman Sachs 75 years of the right to put up parking meters. So now, the cost of living and doing business in Chicago was raised by having to pay off the parking meters. If Chicago is going to have a parade or something, and block off the traffic, Chicago has to pay Goldman Sachs what it would have made if there wouldn’t have been closed off for a parade. And all of a sudden it’s much more expensive to live in Chicago because of this.

But this added expense of having to pay parking rights to Goldman Sachs to pay out interest to its bond holders is countering this increase in GDP, because you’ve now created more product by charging more. If you sell off a road, a government or local road, and you put up a toll booth and make it into a toll road, all of a sudden GDP goes up. If you go to war abroad, and you spend more money on the military, the military-industrial complex, all this is countered as increased production. None of this is really part of the production system of the capital and labor building more and more factories, and producing more things that people need to live, and to do business. All of this is overhead. But there’s no distinction between wealth and overhead.

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.

HEDGES: And we should add that under this predatory form of economics you game the system. So you privatize pension funds, you force them into the stock market, an overinflated stock market. But because of the way companies are, go public, it’s the hedge fund managers who profit. And it’s those citizens whose retirement savings are tied to the stock market who lose. And maybe we can just conclude by talking about how the system is fixed, not only in terms of burdening the citizen with debt peonage, but by then forcing them into the market to fleece them again.

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.

HEDGES: They have the option to buy it before anyone else, knowing that by the end of the day it’ll be inflated, and then they sell it off.

HUDSON: That’s exactly right.

HEDGES: And so the pension funds come in and buy it at an inflated price, and then it goes back down.

HUDSON: It may go back down, or it may be that the company just was shortchanged from the very beginning. And here the important thing is that the Wall Street underwriting firm, and the speculators that come in, that it rounds up, get more in a single day than all the years it took to put the company together. The company gets 40%. These people get also $40. Other people get $40.

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. And so now, you have, indeed, real estate having gone up as high as it can, I don’t think it’ll take more than 40% of somebody’s income to buy it. But now, if you, imagine if you’re joining the labor force. You’re not going to be able to buy a house at today’s prices, putting down a little bit of your money, and then somehow end up getting rich just on the house investment. All of this money you pay the bank is now going to be subtracted from the amount of money that you have to spend on goods and services.

So we’ve turned the post-war economy that made America prosperous and rich, we’ve turned it inside out, and somehow the most people believe that you could get rich by going into debt to borrow something that’s going to rise in price. And you can’t get rich, ultimately, in going into debt. In the end, the creditors always win, and that’s why every society since Sumer and Babylonia have had to either cancel the debts, or you come to a society like Rome that didn’t cancel the debts, and then you have a dark age. Everything collapses.

HEDGES: And that’s the topic of our second discussion, which is where we’re headed. Thank you, Michael.

And thank you for watching Days of Revolt.

stolen from Naked Capitalism:


Michael Hudson on Debt Deflation, the Rentier Economy, and the Coming Financial Cold War
Posted on March 22, 2016 by Yves Smith

Michael Hudson has sent us the transcript of his newly-released interview with Justin Ritchie on
February 26 with XE Podcast; You can also listen to the podcast here.

Justin Ritchie: In your book, you draw this metaphor of parasites and global finance? Could you explain what you mean by this?

Michael Hudson: The financial sector today is decoupled from industrialization. Its main interface with industry is to provide credit to corporate raiders. Their objective is asset stripping, They use earnings to repay financial backers (usually junk-bond holders), not to increase production. The effect is to suck income from the company and from the economy to pay financial elites.

These elites play the role today that landlords played under feudalism. They levy interest and financial fees that are like a tax, to support what the classical economists called “unproductive activity.” That is what I mean by “parasitic.”

If loans are not used to finance production and increase the economic surplus, then interest has to be paid out of other income. It is what economists call a zero-sum activity. Such interest is a “transfer payment,” because it that does not play a directly productive function. Credit may be a precondition for production to take place, but it is not a factor of production as such.

The situation is most notorious in the international sphere, especially in loans to governments that already are running trade and balance-of-payments deficits. Power tends to pass into the hands of lenders, so they lose control – and become less democratic.

To return to my use of the word parasite, any exploitation or “free lunch” implies a host. In this respect finance is a form of war, domestically as well as internationally.

At least in nature, “smart” parasites may perform helpful functions, such as helping their host find food. But as the host weakens, the parasite lays eggs, which hatch and devour thehost, killing it. That is what predatory finance is doing to today’s economies. It’s stripping assets, not permitting growth or even letting the economy replenish itself.

The most important aspect of parasitism that I emphasize is the need of parasites to control the host’s brain. In nature, a parasite first dulls the host’s awareness that it is being attacked. Then, the free luncher produces enzymes that control the host’s brain and make it think that it should protect the parasite – that the outsider is part of its own body, even like a baby to be specially protected.

The financial sector does something similar by pretending to be part of the industrial production-and-consumption economy. The National Income and Product Accounts treat the interest, profits and other revenue that Wall Street extracts – along with that of the rentier sectors it backs (real estate landlordship, natural resource extraction and monopolies) – as if these activities add to Gross Domestic Product. The reality is that they are a subtrahend, a transfer payment from the “real” economy to the Finance, Insurance and Real Estate Sector. I therefore focus on this FIRE sector as the main form of economic overhead that financialized economies have to carry.

What this means in the most general economic terms is that finance and property ownership claims are not “factors of production.” They are external to the production process. But they extract income from the “real” economy.

They also extract property ownership. In the sphere of public infrastructure – roads, bridges and so forth – finance is moving into the foreclosure phase. Creditors are trying to privatize what remains in the public domains of debtor economies. Buyers of these assets – usually on credit – build interest and high monopoly rents into the prices they charge.

JR: What is your vision for the next few decades of the global economy?

MH: The financial overhead has grown so large that paying interest, amortization and fees shrinks the economy. So we are in for years of debt deflation. That means that people have to pay so much debt service for mortgages, credit cards, student loans, bank loans and other obligations that they have less to spend on goods and services. So markets shrink. New investment and employment fall off, and the economy is falls into a downward spiral.

My book therefore devotes a chapter to describing how debt deflation works. The result is a slow crash. The economy just gets poorer and poorer. More debtors default, and their property is transferred to creditors. This happens not only with homeowners who fall into arrears, but also corporations and even governments. Ireland and Greece are examples of the kind of future in store for us.

Financialized economies tend to polarize between creditors and debtors. This is the dynamic that Thomas Piketty leaves out of his book, but his statistics show that all growth in income and nearly all growth in wealth or net worth has accrued to the One Percent, almost nothing for the 99 Percent.

Basically, you can think of the economy as the One Percent getting the 99 Percent increasingly into debt, and siphoning off as interest payments and other financial charges whatever labor or business earns. The more a family earns, for instance, the more it can borrow to buy a nicer home in a better neighborhood – on mortgage. The rising price of housing ends up being paid to the bank – and over the course of a 30-year mortgage, the banker receives more in interest than the seller gets.

Economic polarization is also occurring between creditor and debtor nations. This is splitting the eurozone between Germany, France and the Netherlands in the creditor camp, against Greece, Spain, Portugal, Ireland and Italy (the PIIGS) falling deeper into debt, unemployment and austerity – followed by emigration and capital flight.

This domestic and international polarization will continue until there is a political fight to resist the creditors. Debtors will seek to cancel their debts. Creditors will try to collect, and the more they succeed, the more they will impoverish the economy.

Background?

JR: Let’s talk about your history, why did you become an economist?

MH: I started out wanting to be a musician – a composer and conductor. I wasn’t very good at either, but I was a very good interpreter, thanks to working with Oswald Jonas in Chicago studying the musical theories of Heinrich Schenker. I got my sense of aesthetics from music theory, and also the idea of modulation from one key to another. It is dissonance that drives music forward, to resolve in a higher key or overtone.

When I was introduced to economics by the father of a schoolmate, I found it as aesthetic as music, in the sense of a self-transforming dynamic through history by challenge and response or resolution. I went to work for banks on Wall Street, and was fortunate enough to learn about how central mortgage lending and real estate were for the economy. Then, I became Chase Manhattan’s balance-of-payments economist in 1964, and got entranced with tracing how the surplus was buried in the statistics – who got it, and what they used it for. Mainly the banks got it, and used it to make new loans.

I viewed the economy as modulating from one phase to the next. A good interpretation would explain history. But the way the economy worked was nothing like what I was taught in school getting my PhD in economics at New York University. So I must say, I enjoyed contrasting reality with what I now call Junk Economics.

In mainstream textbooks there is no exploitation. Even fraudulent banks, landlords and monopolists are reported as “earning” whatever they take – as if they are contributing to GDP. So I found the economics discipline ripe for a revolution.

JR: What is the difference between how economics is taught vs. what you learned in your job?

For starters, when I studied economics in the 1960s there was still an emphasis on the history of economic thought, and also on economic history. That’s gone now.

One can easily see why. Adam Smith, John Stuart Mill and other classical economists sought to free their societies from the legacy of feudalism: landlordism and predatory finance, as well as from the monopolies that bondholders had demanded that governments create as a means of paying their war debts.

Back in the 1960s, just like today, university courses did not give any training in actual statistics. My work on Wall Street involved National Income and Product Accounts and the balance-of-payments statistics published by the Commerce Department every three months, as well as IMF and Federal Reserve statistics. Academic courses didn’t even make reference to accounting – so there was no conceptualization of “money,” for instance, in terms of the liabilities side of the balance sheet.

New York University’s money and banking course was a travesty. It was about helicopters dropping money down – to be spent on goods and services, increasing prices. There was no understanding that the Federal Reserve’s helicopter only flies over Wall Street, or that banks create money on its own computers. It was not even recognized that banks lend to customers mainly to buy real estate, or speculate in stocks and bonds, or raid companies.

Economics is taught like English literature. Teachers explain the principle of “suspension of disbelief.” Readers of novels are supposed to accept the author’s characters and setting. In economics, students are told to accept just-pretend parallel universe assumptions, and then treat economic theory as a purely logical exercise, without any reference to the world.

The switch from fiction to reality occurs by taking the policy conclusions of these unrealistic assumptions as if they do apply to the real world: austerity, trickle-down economics shifting taxes off the wealthy, and treating government spending as “deadweight” even when it is on infrastructure.

The most fictitious assumption is that Wall Street and the FIRE sector add to output, rather than extracting revenue from the rest of the economy.

JR: What did you learn in your work on the US oil industry?

MH: For starters, I learned how the oil industry became tax-exempt. Not only by the notorious depletion allowance, but by offshoring profits in “flags of convenience” countries, in Liberia and Panama. These are not real countries. They do not have their own currency, but use U.S. dollars. And they don’t have an income tax.

The international oil companies sold crude oil at low prices from the Near East or Venezuela to Panamanian or Liberian companies – telling the producing countries that oil was not that profitable. These shipping affiliates owned tankers, and charged very high prices to refineries and distributors in Europe or the Americas. The prices were so high that these refineries and other “downstream” operations marketing gas to consumers did not show a profit either. So they didn’t have to pay European or U.S. taxes. Panama and Liberia had no income tax. So the global revenue of the oil companies was tax-free.

I also learned the difference between a branch and an affiliate. Oil wells and oil fields are treated as “branches,” meaning that their statistics are consolidated with the head office in the United States. This enabled the companies to take a depletion allowance for emptying out oil fields abroad as well as in the United States.

My statistics showed that the average dollar invested by the U.S. oil industry was returned to the United States via balance-of-payments flows in just 18 months. (This was not a profit rate, but a balance-of-payments flow.) That finding helped the oil industry get exempted from President Lyndon Johnson’s “voluntary” balance-of-payments controls imposed in 1965 when the Vietnam War accounted for the entire U.S. payments deficit. Gold was flowering out to France, Germany and other countries running payments surpluses.

The balance-of-payments accounting format I designed for this study led me to go to work for an accounting firm, Arthur Andersen, to look at the overall U.S. balance of payments. I found that the entire deficit was military spending abroad, not foreign aid or trade.

Junk Economics?

JR: Why do you think there is a disconnect between academic economic theory and the way that international trade and finance really works?

MH: The aim of academic trade theory is to tell students, “Look at the model, not at how nations actually develop.” So of all the branches of economic theory, trade theory is the most wrongheaded.

For lead nations, the objective of free trade theory is to persuade other countries not to protect their own markets. That means not developing in the way that Britain did under its mercantilist policies thatmade it the first home of the Industrial Revolution. It means not protecting domestic industry, as the United States and Germany did in order to catch up with British industry in the 19th century and overtake it in the early 20th century.

Trade theorists start with a conclusion: either free trade or (in times past) protectionism. Free trade theory as expounded by Paul Samuelson and others starts by telling students to assume a parallel universe – one that doesn’t really exist. The conclusion they start with is that free trade makes everyone’s income distribution between capital and labor similar. And because the world has a common price for raw materials and dollar credit, as well as for machinery, the similar proportions turn out to mean equality. All the subsequent assumptions are designed to lead to this unrealistic conclusion.

But if you start with the real world instead of academic assumptions, you see that the world economy is polarizing. Academic trade theory can’t explain this. In fact, it denies that today’s reality can be happening at all!

A major reason why the world is polarizing is because of financial dynamics between creditor and debtor economies. But trade theory starts by assuming a world of barter. Finally, when the transition from trade theory to international finance is made, the assumption is that countries running trade deficits can “stabilize” by imposing austerity, by lowering wages, wiping out pension funds and joining the class war against labor.

All these assumptions were repudiated already in the 18th century, when Britain sought to build up its empire by pursuing mercantilist policies. The protectionist American School of Economics in the 19th century put forth the Economy of High Wages doctrine to counter free-trade theory. None of this historical background appears in today’s mainstream textbooks. (I provide a historical survey in Trade, Development and Foreign Debt, new ed., 2002. That book summarizes my course in international trade and finance that I taught at the New School from 1969 to 1972.

In the 1920s, free-trade theory was used to insist that Germany could pay reparations far beyond its ability to earn foreign exchange. Keynes, Harold Moulton and other economists controverted that theory. In fact, already in 1844, John Stuart Mill described how paying foreign debts lowered the exchange rate. When that happens, what is lowered is basically wages. So what passes for today’s mainstream trade theory is basically an argument for reducing wages and fighting a class war against labor.

You can see this quite clearly in the eurozone, above all in the austerity imposed on Greece. The austerity programs that the IMF imposed on Third World debtors from the 1960s onward. It looks like a dress rehearsal to provide a cover story for the same kind of “equilibrium economics” we may see in the United States.

JR: Can the US pay its debts permanently? Does the amount of federal debt, $18 or $19 trillion even matter? Should we pay down the national debt?

MH: It is mainly anti-labor austerity advocates who urge balancing the budget, and even to run surpluses to pay down the national debt. The effect must be austerity.

A false parallel is drawn with private saving. Of course individuals should get out of debt by saving what they can. But governments are different. Governments create money and spend it into the economy by running budget deficits. The paper currency in your pocket is technically a government debt. It appears on the liabilities side of the public balance sheet.

When President Clinton ran a budget surplus in the late 1990s, that sucked revenue out of the U.S. economy. When governments do not run deficits, the economy is obliged to rely on banks – which charge interest for providing credit. Governments can create money on their own computers just as well. They can do this without having to pay bondholders or banks.

That is the essence of Modern Monetary Theory (MMT). It is elaborated mainly at the University of Missouri at Kansas City (UMKC), especially by Randy Wray – who has just published a number of books on money – and Stephanie Kelton, whom Bernie Sanders appointed as head of the Senate Democratic Budget Committee.

If the government were to pay off its debts permanently, there would be no money – except for what banks create. That has never been the case in history, going all the way back to ancient Mesopotamia. All money is a government debt, accepted in payment of taxes

This government money creation does not mean that governments can pay foreign debts. The danger comes when debts are owed in a foreign currency. Governments areunable to tax foreigners. Paying foreign debts puts downward pressure on exchange rates. This leads to crises, which often end by relinquishing political control to the IMF and foreign banks. They demand “conditionalities” in the form of anti-labor legislation and privatization.

In cases where national economies cannot pay foreign debts out of current balance-of-payments revenue, debts should be written down, not paid off. If they are not written down, you have the kind of austerity that is tearing Greece apart today.

JR: You say that mainstream economic theory and academic study is pro-creditor? Why is this the case?

MH: Thorstein Veblen pointed out that vested interests are the main endowers and backers of the higher learning in America. Hardly by surprise, they promote a bankers’-eye view of the world. Imperialists promote a similar self-serving worldview.

Economic theory, like history, is written by the winners. In today’s world that means the financial sector. They depict banks as playing a productive role, as if loans are made to help borrowers earn the money to pay interest and still keep something for themselves. The pretense is that banks finance industrial capital formation, not asset stripping.

What else would you expect banks to promote? The classical distinction between productive and unproductive (that is, extractive) loans is not taught. The result has been to turn mainstream economics as a public-relations advertisement for the status quo, which meanwhile becomes more and more inequitable and polarizes the economy.

JR: What can be learned by studying the history of economic thought? What did Adam Smith and the people in his era and those which followed him understand that would be useful to us now?

MH: If you read Adam Smith and subsequent classical economists, you see that their main concern was to distinguish between productive and unproductive economic activity. They wanted to isolate unproductive rentier income, and unproductive spending and credit.

To do this, they developed the labor theory of value to distinguish value from price – with “economic rent” being the excess of price over socially necessary costs of production. They wanted to free industrial capitalism from the legacy of feudalism: tax-like ground rent paid to a hereditary landed aristocracy. They also opposed the monopolies that bondholders had insisted that governments create to sell off to pay the public debt. That was why the East India Company and the South Sea Company were created with their special privileges.

Smith and his followers are applauded as the founding fathers of “free market” economics. But they defined free markets in a diametrically opposite way from today’s self-proclaimed neoliberals. Smith and other classical economists urged markets free from economic rent.

These classical reformers realized that progressive taxation to stop favoring rentiers required a government strong enough to take on society’s most powerful and entrenched vested interests. The 19th-century drive for Parliamentary reform in Britain aimed at enabling the House of Commons to override the House of Lords and tax the landlords. (This rule finally passed in 1910 after a constitutional crisis.) Now there has been a fight by creditors to nullify democratic politics, most notoriously in Greece.

Today’s neoliberals define free markets as those free for rent-seekers and predatory bankers from government regulation and taxes.

No wonder the history of economic thought has been stripped away from the curriculum. Reading the great classical economists would show how the Enlightenment’s reform program has been inverted. The world is now racing down a road to the Counter-Enlightenment, a neo-rentier economy that is bringing economic growth to a halt.

JR: Why does economic thought minimize the role of debt? I.e. I read Paul Krugman and he says the total amount of debt isn’t a problem, for example you can’t find the internet bust in GDP or the 1987 crash

MH: When economists speak of money, they neglect that all money and credit is debt. That is the essence of bookkeeping and accounting. There are always two sides to the balance sheet. And one party’s money or savings is another party’s debt.

Mainstream economic models describe a world that operates on barter, not on credit. The basic characteristic of credit and debt is that it bears interest. Any rate of interest can be thought of as a doubling time. Already in Babylonia c. 1900 BC, scribes were taught to calculate compound interest, and how long it took a sum to double (5 years) quadruple (10 years) or multiply 64 times (30 years). Martin Luther called usury Cacus, the monster that absorbs everything. And in Volume III of Capital and also his Theories of Surplus Value, Marx collected the classical writings about how debts mount up at interest by purely mathematical laws, without regard for the economy’s ability to pay.

The problem with debt is not only interest. Shylock’s loan against a pound of flesh was a zero-interest loan. When crops fail, farmers cannot even pay the principal. They then may lose their land, which is their livelihood. Forfeiture is a key part of the credit/debt dynamic. But the motto of mainstream neoliberal economics is, “If the eye offends thee, pluck it out.” Discussing the unpayability of debt is offensive to creditors.

Anyone who sets out to calculate the ability pay quickly recognizes that the overall volume of debts cannot be paid. Keynes that made point in the 1920s regarding Germany’s inability to pay reparations.

Needless to say, banks and bondholders do not want to promote any arguments explaining the limits to how much can be paid without pushing economies into depression. That is what my Killing the Host is about. It is the direction in which the eurozone is now going, and the United States also is suffering debt deflation.

Turning to the second part of your question, Krugman and others say that debt doesn’t matter because “we owe it to ourselves.” But the “we” who owe it are the 99 Percent; the people who are “ourselves” are the One Percent. So the 99 Percent Owe the One Percent. And they owe more and more,thanks to the “magic of compound interest.”

Krugman has a blind spot when it comes to understanding money. In his famous debate with Steve Keen, he denied that banks create money or credit. He insists that commercial banks only lend out deposits. But Keen and the Modern Monetary Theory (MMT) school show that loans create deposits, not the other way around. When a banker writes a loan on his computer keyboard, he creates a deposit as the counterpart.

Endogenous money is easily created electronically. That privilege enables banks to charge interest. Governments could just as easily create money on their own computers. Neoliberal privatizers want to block governments from doing this, so that economies will have to rely on commercial banks for the money and credit they need to grow.

The mathematics of compound interest means that economies can only pay their debts by creating a financial bubble – more and more credit to bid up asset prices for real estate, stocks and bonds, enabling banks to make larger loans. Today’s economies are obliged to develop into Ponzi schemes to keep going – until they collapse in a crash.

The models of the macroeconomy to forecast the future and to develop policy at institutions like the IMF, often consider finance and banking as just another sector of industry, like construction or manufacturing. How do these institutions consider their model of the financial sector?

The IMF acts as the collection agent for global bondholders. Its projections begin by assuming that all debts can be paid, if economies will cut wages and wiping out pension funds so as to pay banks and bondholders.

As long as creditors remain in control, they are quite willing to sacrifice the 99 Percent to pay the One Percent. When IMF “stabilization” programs end up destabilizing their hapless victims, mainstream media blame the collapse on the debtor country for not shedding enough blood to impose even more austerity.

Economists often define their discipline as “the allocation of scarce resources among competing ends.” But when resources or money really become scarce, economists call it a crisis and say that it’s a question for politicians, not their own department. Economic models are only marginal – meaning, small changes, not structural.

The only trend that does grow inexorably is that of debt. The more it grows, the more it slows the “real” economy of production and consumption. So something must give: either the economy, or creditor claims. And that does indeed change the structure of the economy. It is a political as well as an economic change.

Regarding the second part of your question – how creditor institutions model the financial sector – when they look at prices they only consider wages and consumer prices, not asset prices. Yet most bank credit is tied to asset prices, because loans are made to buy homes or commercial real estate, stocks or bonds, not bread and butter.

Not looking at what is obviously important requires a great effort of tunnel vision. But as Upton Sinclair noted, there are some jobs – like being a central banker, or a New York Times editorial writer – that require the applicant not to understand the topic they are assigned to study. Hence, you have Paul Krugman on money and banking, the IMF on economic stabilization, and Rubinomics politicians on bailing out the banks instead of saving the economy.

If I can add a technical answer: The IMF does not recognize that the “budget problem” – squeezing domestic currency out of the economy by taxing wages and industry – is quite different from the “transfer problem” of converting this money into foreign exchange. That distinction was the essence of the German reparations debate in the 1920s. It is a focus of my history of theories of Trade, Development and Foreign Debt.

Drawing this distinction shows why austerity programs do not help countries pay their foreign debt, but tears them apart and induces emigration and capital flight.

Does the Financial Sector Add to GDP?

MH: The financial sector is a rentier sector – external to the “real” economy of production and consumption, and therefore a form of overhead. As overhead, it should be a subtrahend from GDP.

JR: In the way that oil industry funded junk science on global warming denial, Wall Street funds and endows junk economics and equilibrium thinking?

MH: Falling on your face is a state of equilibrium. So is death – and each moment of dying. Equilibrium is simply a cross section in time. Water levels 20 or 30 feet higher would be another form of equilibrium. But to the oil industry, “equilibrium” means their earnings continuing to grow at the present rate, year after year. This involves selling more and more oil, even if this raises sea levels and floods continents. That is simply ignored as not relevant to earnings. By the time that flooding occurs, today’s executives will have taken their bonuses and capital gains and retired.

That kind of short-termism is the essence of junk economics. It is tunnel-visioned.

What also makes economics junky is assuming that any “disturbance” sets in motion countervailing forces that return the economy to its “original” state – as if this were stable, not moving down the road to debt peonage and similar economic polarization.

The reality is what systems analysts call positive feedback: When an economy gets out of balance, especially as a result of financial predators, the feedback and self-reinforcing tendencies push it further and further out of balance.

My trade theory book traced the history of economists who recognize this. Once a class or economy falls into debt, the debt overhead tends to grow steadily until it stifles market demand and subjects the economy to debt deflation. Income is sucked upward to the creditors, who then foreclose on the assets of debtors. This shrinks tax revenue, forcing public budgets into deficit. And when governments are indebted, they becomemore subject to pressure to privatization of public enterprise. Assets are turned over to monopolists, who further shrink the economy by predatory rent seeking.

An economy going bankrupt such as Greece and having to sell off its land, gas rights, ports and public utilities is “in equilibrium” at any given moment that its working-age population is emigrating, people are losing their pensions and suffering.

When economists treat depressions merely as self-curing “business downturns,” they are really saying that no government action is required from “outside” “the market” to rectify matters and put the economy back on track to prosperity. So equilibrium thinking is basically anti-government libertarian theory.

But when banks are subjected to “equilibrium” by writing down debts in keeping with the ability of borrowers to pay, Wall Street’s pet politicians and economic journalists call this a crisis and insist that the banks and bondholders must be saved or there will be a crisis. This is not a solution. It makes the problem worse and worse.

There is an alternative, of course. That is to understand the dynamics at work transforming economic and social structures. That’s what classical economics was about.

The post-classical revolution was marginalist. That means that economists only look at small changes, not structural changes. That is another way of saying that reforms are not necessary – because reforms change structures, not merely redistribute a little bit of income as a bandage.

What used to be “political economy” gave way to just plain “economics” by World War I. As it became increasingly abstract and mathematical, students who studied the subject because they wanted to make the world better were driven out, into other disciplines. That was my experience teaching at the New School already nearly half a century ago. The discipline has become much more tunnel-visioned since then.

Present State of Financial World?

JR: We see around the world something like 25% of all national debt is now has a yield priced in negative interest rates? What does this mean? Do you see this continuing?

MH: On the one hand, negative interest rates reflect a flight to security by investors. They worry that the debts can’t be paid and that there are going to be defaults.

They also see that the United States and Europe are in a state of debt deflation, where people and businesses have to pay banks instead of spending their income on goods and services. So markets shrink, sales and profits fall, and the stock market turns down.

This decline was offset by the Federal Reserve and the European Central Bank trying to re-inflate the Bubble Economy by Quantitative Easing – providing reserves to the banks in exchange for their portfolio of mortgages and other loans. Otherwise, the banks would have had to sell these loans in “the market” at falling prices.

In the name of saving “the market,” the Fed and ECB therefore overruled the market. Today, over 80 percent of U.S. home mortgages are guaranteed by the Federal Housing Authority. Banks won’t make loans without the government picking up the risk of non-payment. So bankers just pretend to be free market. That’s for their victims.

The “flight to security” is a move out of the stock and bond markets into government debt. Stocks and bonds may go down in price, some companies may go bankrupt, but national governments can always print the money to pay their bondholders. Investors are mainly concerned about keeping whatthey have – security of principal. They are willing to be paid less income in exchange for preserving what they have taken.

Here’s the corner that the economy has backed itself into. The solution to most problems creates new problems – blowback or backlash, which often turn out to be even bigger problems. Negative interest rates mean that pension funds cannot invest in securities that yield enough for them to pay what they have promised their contributors. Insurance companies can’t earn the money to pay their policyholders. So something has to give.

There will be breaks in the chain of payments. But the way Wall Street administrators at the Treasury and Fed plan the crisis is for small savers to lose out to the large institutional investors. So the bottom line that I see is a slow crash.

JR: Could there be a more symbiotic relationship with global financial institutions? For money to have value, doesn’t it need a functioning economy, rather than an entirely financialized one?

MH: Money is debt. It is a claim on some debtor. Government money is a claim by its holder on the government, settled by the government accepting it as payment for tax debts.

Being a claim on a debtor, money does not necessarily need a functioning economy. It can be part of a foreclosure process, transferring property to creditors. A financialized economy tends to strip the economy of money, by sucking up to the creditor One Percent on top. That is what happened in Rome, and the result was the Dark Age.

JR: In 2007/2008 we had a subprime crash and since 2014 we’ve had a commodities crash where oil prices are low, is this because of what’s going on in emerging market economies? Are emerging market economies and China the next subprime?

The current U.S. and Eurozone depression isn’t because of China. It’s because of domestic debt deflation. Commodity prices and consumer spending are falling, mainly because consumers have to pay most of their wages to the FIRE sector for rent or mortgage payments, student loans, bank and credit card debt, plus over 15 percent FICA wage withholding for Social Security and Medicare (actually, to enable the government to cut taxes on the higher income brackets), as well income and sales taxes. After all this is paid, consumers don’t have that much left to spend on commodities. So of course commodity prices are crashing.

Oil is a special case. Saudi Arabia is trying to drive U.S. fracking rivals out of business, while also hurting Russia. This lowers gas prices for U.S. and Eurozone consumers, but not by enough to spur economic recovery.

JR: You’ve written that we’re entering a financial cold war – the IMF and the US have been very strict on debt repayment for loans from debtor nations, but in Ukraine they’ve made an exception regarding Russia, could you discuss your recent writing on that?

MH: U.S. diplomats radically changed IMF lending rules as part of their economic sanctions imposed on Russia as result of the coup d’état by the Right Sector, Svoboda and their neo-Nazi allies in Kiev. The ease with which the U.S. changed these rules to support the military coup shows how the IMF is simply a tool of President Obama’s New Cold War policy. The aim was to enable the IMF to keep lending to the military junta even though Ukraine is in default of its $3 billion debt to Russia, even though it refuses to negotiate payment, and even though IMF money has been used to fund kleptocrats such as Kolomoisky to field his own army against Russian speakers in Donbas. Ukraine has no foreseeable means of paying off the IMF and other creditors, given its destruction of its export industry in the East. My articles on this are on my website, michael-hudson.com.

JR: Today’s economy has some truly amazing technology from companies like Apple, but Apple is also example of financial engineering, you outline this in your book, what financial innovations have been associated with the story of Apple’s stock?

MH: The main financial innovation by Apple has been to set up a branch office in Ireland and pretend that the money it makes in the Untied States and elsewhere is made in Ireland – which has only a 15 percent income-tax rate.

The problem is that if Apple remits this income back to the United States, it will have to pay U.S. income tax. It wants to avoid this – unless Wall Street can convince politicians to declare a “tax holiday” would let tax avoiders bring all their foreign money back to the United States “tax free.” That would be a tax amnesty only for the very wealthy, not for the 99 Percent.

This tax angle explains why Apple, almost the wealthiest company in the world, has been urged by activist shareholders to borrow. Why should the richest company have to go into debt?

The answer is that Apple can borrow from U.S. banks at a low interest rate to pay dividends on its stock, instead of paying these dividends by bringing its income back home and paying the taxes that are due.

It would seem to be an anomaly to borrow from banks and pay dividends. But that is the “cannibalism” stage of modern finance capitalism, U.S.-style. For the stock market as a whole, some 92 percent of earnings recently were used to pay dividends or for stock buybacks.

JR: What is the eventual outcome of all theses corporate buybacks to pump up share prices?

MH: The problem with a company using its revenue simply to buy its own shares to support their price (and hence, enable CEOs to increase their salaries and bonuses, and make more capital gains on their stock options) is that the price fillip is temporary. Last year saw the largest volume of U.S. stock buybacks on record. But since January 1, the market has fallen by about 20 percent. The debts that companies took on to buy stocks remain in place; and the earnings that companies used to buy these stocks are now gone.

Corporations did not use their income to invest in long-term expansion. The financial time frame always has been short-term. Projects with long-term paybacks are cut back, because CEOs and financial managers simply want to take their money and run. That is the financial mentality.

JR: What is the outcome of all theses corporate buybacks to pump up share prices?

MH: When the dust settles, companies financialized in this way are left as debt-leveraged shells. CEOs then go to their labor unions and threaten to declare bankruptcy if the unions don’t scale back their pension demands. So there is a deliberate tactic to force companies into debt for short-term earnings and stock-price gains in the short term, and a more intensive class war against present and past employees and pensioners as a longer-term policy.

JR: Why do business schools endorse of financialization? Reversing short-termism?

strong>MH: The financial sector is the major endower of business schools. They have become training grounds for Chief Financial Officers. At Harvard, Prof. Jensen reasoned that managers should aim at serving stockholders, not the company as such. The result was an “incentive” system tying management bonuses to the stock price. So naturally, CFOs used corporate earnings for stock buybacks and dividend payouts that provided a short-term jump in the stock price.

The ideological foundation of today’s business schools is that economic control should be shifted out of government hands into those of financial managers – that is, Wall Street. That is their idea of free enterprise. Its inevitable tendency is to end in more centralized planning by Wall Street than in Washington.

The aim of this financial planning is quite different from that of governments. As I wrote in Killing the Host: “The euro and the ECB were designed in a way that blocks government money creation for any purpose other than to support the banks and bondholders. … The financial sector takes over the role of economic planner, putting its technicians in charge of monetary and fiscal policy without democratic voice or referendums over debt and tax policies.”

Financial planning always has been short-term. That is why planning should not be consigned to banks and bondholders. Their mentality is extractive, and that ends up hit-and-run. What passes for mainstream financial analysis is simply to add up how much is owed and demand payment, not help the economy grow. To financial managers, economic prosperity and unemployment is an “externality” – that is, not part of the equation that they are concerned with.

Future?

JR: The story of Greece in recent years is relevant to our discussion because the political party Syriza took over with ideas that were traditionally representing the left? Does the body of traditional left ideas have the ability to solve some of the challenges regarding financial warfare?

MH: The left and former Social Democratic or Labour parties have dome to focus on political and cultural issues, not the economic policy that led to their original creation. What is lacking is a focus on rent theory and financial analysis. Part of the explanation probably is covert U.S. funding and sponsorship of Blair-type neoliberals.

The eurozone threatened Greece with domestic destabilization if it did not surrender to the Troika’s demands. Syriza’s leaders worried that the ensuing turmoil would bring a right-wing neo-Nazi group such as Golden Dawn into power, or a military dictatorship as a client oligarchy for U.S. and German neoliberals.

So the political choice today is much like the 1930s, when the global economy also broke down. The choice is between nationalism and populism on the right, or socialism reviving what used to be left-wing politics.

JR: Could there be a debt write down? Isn’t someone’s debts another person’s savings, i.e. pension funds, 401k, retirement funds?

MH: The problem is indeed that one party’s debt finds its counterpart in some other party’s savings. Not paying debts therefore involves annulling some other party’s financial claims on the debtor. What happens to the savings on the other side of the savings/debt balance sheet?

The political question is, who will lose first?

The answer is, the least politically protected. The end game is “Big fish eat little fish.” Pension funds are in the front line of sacrifice, while government bondholders are the most secure. Greek pensions already have been written down, and the savings of U.S. pension funds, Social Security and other social programs are the first to be annulled.

The only way to achieve a fair debt cancellation is to write down the debts of the wealthiest, not the most needy. That is the opposite of how matters are being resolved today. That is why southern Europe is being radicalized over the debt issue.

JR: Will financialized economies implode? Leaving the non-financialized ones?

strong>MH: The One Percent who hold most of the economy’s savings are quite willing to plunge society into depression to collect on their savings claims. Their greed is why we are in an economic war much like Rome’s Conflict of the Orders that shaped the Republic, and its century of civil war between creditors and debtors, 133-29 BC.

Argentina has been imploding, just as Third World debtors were obliged to do when they accepted IMF austerity programs and “conditionalities” for loans to keep their currencies from depreciating. To avoid being forced to adopt such self-defeating and anti-democratic policies, it looks like countries will have to move out of the U.S. and Eurozone orbit into that of the BRICS. That is why today’s financial crisis is leading to a New Cold War. It is as much financial as it is military.

JR: How would you advise a politician to restore prosperity in the future?

strong>MH: The problem is who to give advice to. Most politicians today – at least in the United States – are proxies for their campaign contributors. President Obama is basically a lobbyist for his Wall Street in the Democratic Party’s Robert Rubin gang. That kind of demagogue wouldn’t pay any attention to policies that I or other economists would make. Their job is not to make the economy better, but to defend their campaign contributors among the One Percent at the economy’s expense.

But when I go to China or Russia, here’s what I advise (without much success so far, I admit):

First, tax land rent and other economic rent. Make it the tax base. Otherwise, this rental value will end up being pledged to banks as interest on credit borrowed to buy rent-yielding assets.

Second, make banks into public utilities. Credit creation is like land or air: a monopoly created by society. As organs of public policy they would not play the derivatives casino, or make corporate takeover loans to raiders, or falsify mortgage documents.

Third, do not privatize basic utilities. Public ownership enables basic services to be provided at cost, on a subsidized basis, or freely. That will make the economy more competitive. The cost of upgrading public infrastructure can be defrayed by basing the tax system on economic rent, not wages.

JR: Does it have to be this way?

strong>MH: The Eurozone die is cast. Countries must withdraw from the euro so that governments can create their own money once again, and resist creditor demands to carve up and privatize their public domain.

For the United States, I don’t see a concerted alternative to neoliberalism squeezing more and more interest and rent out of the economy, making the present slump even deeper in debt.

JR: How won’t debts be paid?

strong>MH: There are two ways not to pay debts: either by annulling or repudiating them, or by foreclosure when creditors take or demand property in lieu of monetary payment.

The first way not to pay is to default or proclaim a Clean Slate. The most successful example in modern times is the German Economic Miracle – the Allied Monetary Reform of 1948. That cancelled Germany’s internal debts except for wages owed by employers, and minimum working balances.

The United States Government has fought against creation of an international court to adjudicate the ability of national economies to pay debts. If such a court is not created, the global economy will fracture. That is occurring in what looks like a New Cold War pitting the United States and its NATO satellites against the BRICS (China, Russia, South Africa, Brazil and India) along with Iran and other debtors.

The US preferred policy is for countries to sell off whatever is in their public domain when they lack the money to pay their debts. This is the “foreclosure” stage.

Short of these two ways of not paying debts, economies are submitting to debt deflation. That strips income from producers and consumers, businesses and governments to pay creditors. As the debtor economy weakens, the debt arrears mount up – often at rising interest rates to reflect the risk of non-payment as creditors realize that there is no “business as usual’ way in which the debts can be paid.

Debtor countries may postpone the inevitable by borrowing from the IMF or U.S. Treasury to buy out bondholders. This saves the latter from taking a loss – leaving the debtor country with debts that are even harder to annul, because they are to foreign governments and international institutions. That is why it is a very bad policy for countries to move from owing money to private bondholders to owing the IMF or European Central Bank, whose demands are unforgiving.

In the long term, debts won’t be paid in the way that Rome’s debts were not paid. The money economy itself was stripped, and the empire fell into a prolonged Dark Age. That is the fate that will befall the West if it continues to support the “rights” of creditors over the right of nations and economies to survive.

JR: Thanks again for speaking with us.
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This entry was posted in Banana republic, Banking industry, Credit markets, Doomsday scenarios, Economic fundamentals, Guest Post, Macroeconomic policy, Social policy, The destruction of the middle class, The dismal science on March 22, 2016 by Yves Smith.

Tissue Thin Pseudonym says:
March 6, 2016 at 9:49 pm

I got into it this evening with a Bernie supporter Facebook friend after she said:

IMO that’s exactly the problem – no coherent base. You just exemplified it by saying “the Dems need the blacks,” which is, well, kinda racist…. The way I see it, there are 3 main factions in the party right now. (1) CorpDem/Hollywood/GOP Lite – the Clintons, DWS, etc. (2) largely urban African Americans. (3) Liberal whites. And those 3 factions do not, at this time, have similar interests. (1) is all about money, privilege, the status quo. (2) is rightfully worried about urban issues, structural racism, for-profit incarceration, lousy schools, federal benefits. (3) worries about wealth inequality, jobs leaving the country, student debt, their kids not having the same chances they had, saving social security, maybe even universal health care. (1) is ready to pander to (2) to buy votes, but in the end won’t really do anything, and will sell out (3) in a minute to feather their own nests. To win, the party has traditionally needed (2) and (3), but at this rate, (1) is rapidly losing (3). No coherent socio economic base.

She really doesn’t see the problem with arguing that African Americans are just being duped into supporting Clinton.

From an objective view, the African American community as a whole, particularly the older ones, finds Clinton a more responsive and interactive person who can lay down specifics and will adjust her views. 30+ years of working closely with the black community, and being somewhat responsive to their concerns). Sanders is behaving like a lot of white politicians who show up in black communities looking for votes, and not following through…and he’s not aware he comes off that way.

Maybe there is something to that

Hilzoy's notion that a road back needs to be created is a tribute to her humanity, but in practice, we could build a 16 lane superhighway back to sanity, and it would not make one whit of difference.

http://www.pbs.org/newshour/rundown/trumps-ability-to-attract-evangelical-voters-confounds-analysts/

About Trump and evangelical voters. In order to work with people, you have to believe that they are going to be consistent about what they say and do. The above proves that this doesn't obtain with any on the religious right.

Krauthammer has a tedious piece about how evangelical voters are going to Trump because they want to be 'protected', which may or may not be true (but you are not going to lose very often betting against what Krauthammer says), but this is absolutely right

A more scripturally, spiritually flawed man than Trump would be hard to find. As several anti-Trump evangelical voices have argued, Christian witness cannot possibly support a thrice-married man with such an impressive list of the seven deadly sins.

The idea that the principles of the religious right are things that need to be acknowledged is just another one of those pieces of wisdom that has no basis in fact. A pity it took a person like Trump to show that was the case.

Posted by: liberal japonicus | March 07, 2016 at 04:35 AM

Reagan’s Cheshire Snarl
By John Dolan

ReaganAlbum

“I know these people in my goddamn blood!”

–Hunter S. Thompson’s Attorney

I’ve had Reagan all my life. In 1967, 13 years before the rest of you got President Reagan, he became governor of California. It was the terrarium in which Reagan’s tinkerers figured out how to stimulate the beasts in the tract houses to hatred and bathos, the tools with which they ruled and destroyed the nation.

Nixon usually gets the blame for that, but I’ve always found Nixon a rather sympathetic figure: wretched, ugly, and without much malice for either the forests or the ordinary American. Nixon didn’t even share the worship of “business” forced on us all in Reagan’s reign. Nixon’s dreams were old-fashioned Soviet machinations, full of maps and coups; he was willing enough to toss the rest of us a few bones if we’d let him play with his schemes undisturbed. And some of the bones he tossed us were rather significant. It was Nixon who created the EPA and OSHA. Reagan would have strangled both in the cradle.

Reagan did it often enough once he had power, in a thousand blunt, cruel mandates that no one ever mentions. The one I always remember is one of the more trivial: he vetoed the airbag requirement Carter planned to introduce for all 1980 cars sold in the US. Everyone who died in a head-on crash during the next decade can thank Reagan. And you know, they probably would thank him. There is no end to the groveling masochism of this nation where Reagan is concerned. All his victims love him. No wonder the checkers at Safeway wear nose rings; they belong to the world’s biggest submissive website, “Reagan’s Slaves: Real Submissives, Live 24/7.” Before Reagan they would have had decent blue-collar jobs—there really were such things back then—and bought a house of their own. Now they share garage apartments with the scum of the earth and are saving up for a car that runs.

That’s why it always shocks me when I see another manifestation of the consensus view that Nixon was the evil Republican. I just saw a Futurama episode with Nixon’s head in a jar, planning to take over the world. Reagan never gets that treatment; he’s a god.

reagan-shouting at blacks 1966c

I suppose it proves what I knew already: he was good at what he did. After all, if he really was the perfect evil spirit for this tribe, why should I be surprised or disgusted that we worship him? Like I once said to this Women’s Studies professor, “Why get upset at all this sexism? It’s your living; it’s like a marine biologist getting furious at all the salt water on the planet.”

But she was still mad—and she was goddamn well right to be mad. And I’m still sick every time I see headlines like the one I just caught: “Ronald Reagan: How Do GOP Candidates Measure Up?”

The sad thing is, they don’t really have to “measure up.” Reagan transformed this country; that much of what his adorers say is true. His successors only have to hit the same notes to make their zombie army move in the desired manner. Reagan and his stage managers did the difficult part, experimenting relentlessly until they found the notes that worked.

When you say “Reagan,” you’re using a synechdoche of the classic container-for-the-contained sort. Reagan was the face of a little clique who were the essence of California plutocracy. They took shares in him, the way poorer folk do in a racehorse, funded his campaigns, and stayed with him all the way to the presidency. They were remarkable only for their lack of any distinction. Perhaps the most typical was Holmes Tuttle, a car dealer who came from Oklahoma to get rich. He did, but not the way Bill Gates did. Tuttle was so dumb that he turned down a chance to have the first Volkswagen dealership in California because he was sure no American would ever buy a car made by our erstwhile enemies. Like many successful Californians of his generation, he got rich because he was there, on the spot while the population of California exploded, and the average income soared—and because he had the perfect pathology for a rising tide: unreflecting, smug self-confidence. Tuttle made his money in cars, then picked Reagan as his new product and marketed him like a Ford, using Reagan’s front-man status as a selling point: “[Wouldn’t] you rather have a candidate who is backed by very successful capitalists who have created dozens of companies and tens of thousands of jobs, people who know what it takes to attain success within our system?”

Reagan’s other backers were even less distinguished. There was Alfred Bloomingdale, who inherited his money and made the papers in his own right only by buying an underage prostitute, Vicky Morgan, making her his ponygirl, complete with saddle, then dumping her when she was of boring legal age. Bloomingdale died before the palimony suit, but his wife fought to the end not to give the wretched girl a cent. Vicky Morgan was eventually beaten to death with a baseball bat; Bloomingdale was mourned by all of Reagan’s America.

bloomingdale kinky tastes-9

Bedtime for Bloomingdale’s slave: One day she’s making Reagan look bad (above)… The next day, Jesus pinch-hits one for the Gipper (below)

bloomingdale morgan clubbed to death3

Then there was Charles Wick, Reagan’s communications guy, the man who taught the Great Communicator how to communicate. Reagan made Wick director of the US Information Agency, but before that, he’d made his bones as a “very successful capitalist” by producing one film: Snow White and the Three Stooges.

The most grotesque of Reagan’s owners was Joseph Coors, an outright lunatic whose family money is behind nearly every sleazy fascist initiative in recent US history. Coors was Reagan’s mentor on campus radicalism. Coors even had his own hilarious stint on the Board of Regents of the University of Colorado, doing his best to destroy that institution before he realized that it was better to work through the camera-ready Reagan. He made sure Reagan’s hatred of the public universities never let up, but stepped back to let the group refine its techniques for stirring bile among the sullen majority.

It’s tempting sometimes to think what one grenade, detonated at one of this “kitchen cabinet’s” meetings, could have done to change history. California could have been, was on the verge of becoming, something truly extraordinary. It’s no accident that Philip K. Dick’s Martian colonists in their hovels choose to dream of San Francisco in the mid-1960s, out of all the fantasylands they could visit. All the worst of America seemed to be melting away. The South of evil memory: melting away, not without blood and horror, but melting, doomed. The mean, stupid bullies’ world of jocks and losers to which all American children were violently introduced at an early age–melting away in a warmer and more humorous pantheon of possible identities. The dullards’ worship of Coolidge’s “business,” melting away in contemptuous laughter.

reagan 1968 angry attack bleeding heart students7

It’s easy to see now that this was a delusion, the absurd dream of a tiny fraction of rich kids and middle-class brains. There was another world out there, a thousand times bigger and ferociously devoted to the old hatreds. I grew up in that other world. Actually, I grew up on the border, literally, between those two Californias that Reagan would soon set at each others’ throats: a place called Pleasant Hill, California, 13 miles east of Berkeley, but across the hills, the other side of Caldecott Tunnel. The hot, tract-home side—Reagan’s side. I could cross over; every summer the summer school took us to the Berkeley Folk Festival to listen vaguely to cleaned-up songs about murdered maidens but mainly to look at those magnificent hippie girls, who were in my little mind a complete refutation of the politics, aesthetics and in fact the entire culture of the Reagan side.

But that was once a year. The rest of the time, we were Reaganites before Reagan. You have to realize that in the mid-sixties, what is now called “the Right” was hopelessly confused about what was going on. There really was a sort of silent majority, because no one could figure out to say what it wanted to say in public. What it wanted to say, what I heard every time we watched the news, was simple: “Kill them!” But before Reagan, no one knew how to say that out loud.

It was the students who gave Reagan’s managers their chance. Nobody remembers now how insanely those students were hated by the people out on the hot, sullen side of the California divide. To understand where that hate came from, you have to pan back a little. Reagan’s “Greatest Generation” (which they certainly were not, but that’s another story) created the G.I. Bill, enfranchising a huge number of veterans who would never have dreamed of doing something like going to college if the state hadn’t waved money in their faces while they were being demobilized. In America, higher education had been something for rich kids—rich boys, in the beginning, slowly expanding to include some rich girls as well. Everyone else was supposed to go to work, and count themselves lucky if they found a job.

The G.I. Bill made college a normal option, for a huge chunk of families who weren’t particularly rich. And soon, like many perks that once marked the aristocracy, it became something desirable, then something almost required of those who were striving. My father’s family was one of those. They grew up, ten kids, in a house about the size of your garage in the slums of Jersey City. The war freed them from that claustrophobic Irish-Catholic ghetto and they strove successfully—most of them, anyway. Our failed outpost in the California suburbs was the exception. It wasn’t easy for educated white people to fail completely in California in the post-war years, but we managed it. And still we gave our allegiance to Reagan’s counterrevolution, his long war to destroy the government initiatives that had given all our successful uncles their chance. In fact, our poverty contributed to the virulence of our resentment of those students, those lucky swarms of Berkeley kids who mouthed off and didn’t have to work.

reagan 1969 bayonets berkeley4

Their world was at once too tempting and too sinful for us, but to most of the other families on our street, it was simply alien, offensive for suggesting that there could or should be a gentler, more literate world. I had a foot in both worlds, and my parents, though fiercely reactionary, were gentle with their children, devoted to our education. So we ended up going to those colleges. But no one else from that neighborhood did. The only way you’ll ever understand how Reagan came to rule is if you actually remember his people. These are some who lived on my street:

My friend Kenny Tamblyn, three houses down: his dad was a welder at the refinery, used to beat Kenny with a belt when he came home in a bad mood. Mr. Tamblyn was pure white and wanted you to know it, too—he was from Oklahoma—but he had these slitty eyes, looked like a cross between a Mongol and an Orc. Liked to shoot things.

The Hansens, up the street with the pickup. Also worked at the refinery, but Mr. Tamblyn didn’t deign to know him; some guild snobbery I never understood. Mr. Hansen was loud and fat and stupid even by local standards. A few years on, he had Wallace signs all over his tiny lawn, but in the mid-60s he settled for threatening to shoot our dog when we walked it past his place. Two sons, roughly my age, sullen, silent, special ed. His wife was rarely allowed out of the house. She was tiny, less than five feet, and I think retarded, with a severe speech impediment. When she escaped and wandered down Belle Avenue, she’d babble about Jesus. (That’s another big, big change since Reagan’s time: it was eccentric, embarrassing, to talk about God in California before Reagan took over.)

The Mastranos at the corner had one son. He was killed in their garage by a DEA agent. Supposedly he was going for a gun. He didn’t own any guns. No one objected; it was clear to everyone that somehow or other he had it coming. His mother went insane.

reagan 1969 riot berkeley 50 hurt2

My brother’s friend Brian, one of the smartest and most delightful little kids I knew. He and my brother met at one of those gifted summer schools. We used to make “civilizations” out of mud and scraps by the creek. But Brian’s dad, who worked at the gas station, would come home pissed off and scream down to the creek, telling Brian to get his butt in there. Once Brian was inside…yeah, you guessed it. With a belt. We tried to walk away fast so we wouldn’t hear Brian screaming.

Brian, IQ or no IQ, was not going to UC Berkeley or anyplace else. None of those kids were going to Berkeley. None of their parents wanted them to. Some of those parents were sick monsters like Brian’s dad, or my friend Calvin’s dad, who once interrupted Calvin’s sleepover birthday party to chase Calvin around the yard with the inevitable belt. Most of the others were just standard human issue: mean, dumb, resentful. They didn’t want the fanciful pre-Raphaelite hippie enclave of Berkeley to exist. That it should not merely exist but talk back to their appointed masters, the real-estate developers and car dealers who were the anointed of California, provoked these people to insane rage.

They weren’t poor. You have to remember that. Reagan would see to it that their kids were poor, but their generation was coasting happily on the well-paid, for-life blue-collar jobs that were plentiful back then. Most of them had far more money than we did, as well as virtually free medical care through “Kaiser.” They were willing to give all that up in the name of what was nearest their hearts: a world in which all public discourse was bland and epideictic, and privilege was restricted to those who were restrained enough to keep it secret. It was the cracking open of American discourse, with the “Free Speech” profanity, people talking about sex, and parading their pleasures on the streets of San Francisco, that made them murderously angry. That rage was even stronger than their hatred of black people. Although Reagan used coded and not-so-coded race triggers in his speeches (“welfare bums” was a favorite of his, as was “militants”), it was the hatred of those students, who were overwhelmingly white and middle-class, that made the people of the inland tracts love him.

reagan 1970 forces students pay win2

And it was that gloating, taunting exhibition of pleasures properly reserved for the back rooms of the elite that drove the inlanders craziest. That was the one thing that made my parents, gentle and erudite people in many ways, make common cause with their neighbors, whom they were in the habit of dismissing as noising, self-indulgent Protestants in most contexts. I’ll always remember my mother’s first day in a writing class at Diablo Valley College, the local community college. She came home in a daze and said, “This woman in my class…one of these hippie women..read her ‘poem’ [you could hear the quotes around the word as she spoke]…and do you know how this ‘poem’ began?”

My brothers and I grunted cautiously. We weren’t sure whose side we were on in this one. In fact, I didn’t come down on the inland side until the local hippie girls made it clear I was not a potential consort.

My mother said, “This is her ‘poem’:

‘My husband’s ass

Is the most beautiful ass

In the world.’”

Silence reigned in our family room. That word “ass,” spoken—twice!—for the first time inside our house, made us all a little dizzy. You could hear the linebreaks, too, and budding poet that I was, I thought, “Maybe she should’ve put the second ‘ass’ on a line by itself.” Then, in one of the sudden switch-flips you do at 12, I imagined, very vividly, tearing out the tongue of the woman who had recited that poem in front of my mother. My brothers were already running from the room, making “la la la” noises so they wouldn’t have to hear whatever else my mother had experienced in class.

I suppose we were a rather high-strung family. Catholics were, in those days. The only people who remind me of them now are the Muslims.

What cemented my allegiance once and for all to that doomed, absurd code was the fact that somehow in the cornucopia of 1960s California, we were completely bankrupt, utter failures.

Disloyalty was not an option as it was for rich kids. If your parents have made it, you can sneer; when the family narrative is an endless replay of disastrous failure, defecting to the comfy and victorious is unthinkable. My parents voted for Reagan, largely on the strength of that poem and a few news shots of Berkeley women dancing to rock with their tops off. I’m sure everyone on Belle Avenue voted the same way, mostly because Wallace wasn’t running in California yet.

But in their case it made sense. Most of them were brutal and illiterate. We weren’t. We were the kind of family who most needed the public sector Reagan set about destroying: penniless, hyperliterate and ambitious. My brothers and I spent most of our free time at the wonderful library near our house. Last time I checked it was open for about 15 hours a week. We gloried in the art and music classes that were soon to be dropped by the public schools. We loved the forests, the one point we grudgingly shared with the VW Bus crowd that voted liberal. And when I applied for college and was turned down by the expensive private schools, Berkeley, center of Belle Avenue’s hatred, accepted me, gave me a chance for a decent education.

It was the public universities like Berkeley that were Reagan’s special target. He didn’t have any interest in starving Stanford, even if he’d had the power; Stanford was for the rich, and only very belatedly joined the student revolt. It was the public universities, above all the Berkeley campus, that he and his public hated. One of Reagan’s famous lines from the time makes clear the basis of that hate: “Education is a privilege, not a right.” Education, at university level, had always been a “privilege” in the United States. In fact, it was the mark of privilege, a sign of belonging to the upper class. After WW II, that changed, and at least in public universities in a few states like California, there really was something like admission on merit. There was no tuition at public universities—imagine, you could get a degree from UC Berkeley without paying a dollar in tuition, if you were good enough. UC official history page evokes that time with something like disbelief in its timeline: “1960 – The California Master Plan for Higher Education affirmed that UC should remain tuitionfree (a widely held view at the time)…”

reagan 1970 angry calls students pigs3

Yes, “a widely held view at the time,” but that was going to change, thanks to people like our neighbors on Belle Avenue. They hated the notion that kids no better than their own (or so they believed) were daring to ape the rich by getting respected university degrees—and worse still, they lacked the patronizing discretion of the truly privileged who’d preceded them. The people on my street never resented the really rich. What they hated was middle-class people having pleasure, having sex without punishment, ease without the grasshopper’s winter comeuppance.

Reagan plugged that hate into his owners’ agent and, with an assist from Prop 13, managed to destroy everything that was best about the state: the park system, the libraries, the protected shorelines, forests and rivers. He was just in time; when he took power, coastal California was reaching critical mass. There was a moment, as Hunter Thompson says in Fear and Loathing, when it seemed that whole littoral would just lift up, a reversal of the earthquake the inlanders were praying to sink it, and float away from the dead mass of the continent. Reagan came to fix that.

His method was simple: Reagan was the first to talk straight-out hate. Strange as it seems now, nobody was talking hate then, in public. In the living rooms, over dinner, oh yeah! Every house on our street. But not on the air, not yet. Reagan showed the way. This was Reagan 1.0, the California-only issue. This version had not yet learned his second great innovation: the smile. This early Reagan was angry, as Mark Ames discovered in a search of archived stories from the 1960s. The headlines of those stories would shock fans of the later “amiable” Reagan: “Angry Reagan Shouts Back at Heckling Students”; “Reagan Prepared to Attack Militant Student Leaders”; “Reagan Explains Angry Words.”

reagan-wallace ticket 1975a

Rage at the students not only got Reagan elected, it powered his entire career. He took that show on the road in 1969, delivering a major speech reviling insolent student protestors in DC just before the Vietnam Moratorium demonstrations. As a reporter noted at the time, this was Reagan’s chance to impress the national Republican cadre, which was finally experiencing the sort of student infestation Reagan had been battling for years: “It is an opportunity for [Reagan] to test in a national forum whether his militant stand on California’s campuses…has support among the great middle class nationwide as well as in his own state.”

Of course that’s reporter-speak. They knew by then it would work. If hatred could work in California in the sixties, did anybody really doubt it would work in Missouri? Winning the governorship of California was the hard part, as Nixon found in 1962. From there to the presidency was all downhill for a hate man. All you have to do is start your campaign in Mississippi, as Reagan did in 1979—because in a countrywide election, “blacks” played better than “students.”

There’s another, far stranger, California political story that proves decisively how far you could get by smacking down students: the strange career of S. I. Hayakawa. Until 1968 Hayakawa was an academic wacko, one of those bypassed relics whose office at the end of the corridor is avoided by all. He had pursued a number of bizarre crusades, including one against replacing alphabet prefixes on phone numbers with digits, and by the mid-sixties was marking time, waiting for retirement at the undistinguished CSU-San Francisco. Then his history of rightwing nuttiness lifted him to fame: in 1968 Reagan appointed him president of the university, and a few months later Hayakawa was on the front page of every newspaper in the country, pulling the speaker wires off a student loudspeaker van during a demonstration.

U1615492

Ten years later Hayakawa was a US senator from California, solely on the strength of that one photo. Belle Avenue had long memories, at least for hate.

Ronald Reagan rose to power much faster. He was sworn in as governor at a few minutes to midnight on January 3, 1967. He was such a hick nutcase that when his astrologer told him that would be the most auspicious moment, Reagan insisted on it, placating the sucker reporters with the usual garbage about wanting to get to work undoing his democrat predecessor’s big-gov’t boondoggles. They all bought it. I never heard a word about Reagan and “his wizened co-star” Nancy’s astrological and UFO creepiness until the late 80s, and no one cared even then.

By that time, Reagan 2.0 had been in power for some time, relying on a lesson learned the hard way during his governorship: use the hate to get in power, but if you want to stay there, you need that Colgate smile they coached you on in Hollywood. This was the smiling Reagan that amnesiac America chooses to recall, the nice grandpa nobody ever had.

But that’s not the Reagan who vivisected my home state. It was his snarl they loved in those days. And even after he learned to smile, the snarl was there, a Cheshire snarl that stayed when the smile faded. Reagan was by that time defined more by a wink than a smile. The wink said to his vast, vile constituency that the smile was simply the best face to wear while the malign enterprise proceeded apace. Like Limbaugh’s little jokes about himself as “a harmless puffball,” Reagan’s smile was meant to be seen through. It was useful for the undecided suckers, because it distinguished him from the other Phalangist contenders, who could not, no matter how long they were coached, stop looking like they were smiling over some hideous memory.

It was a wonderful smile. It suited America right down to the ground: part gloat, part taunt, part utter void. By the time Reagan went to DC, he no longer had to do the grunt work of stoking all that hate. His techniques worked so incredibly well that a whole army of little hate commissars was on the air, all day, every day, keeping Belle Avenue pissed off and stupid. And over all of them presided that terrible smile, at once a taunt, a gloat, and a claim of complete innocence, or at least amnesia.