Hudson/Wolff on Debt and Recession
Michael Hudson and Richard Wolff discuss the theatrics of the debt debate in Washington and why debt does matter
PAUL JAY: Welcome to The Real News Network. I’m Paul Jay in Washington. A lot of economic news this week, mostly in Washington. The debate is about how to lessen the deficit, how to reduce the debt. And the debate’s not very much focused on how to lessen or reduce long-term or short-term unemployment. Other news this week: Icelandic people said, we ain’t interested in paying off debts that were incurred to bail out banks. Standard & Poor’s told the American people and the global investor community they may lower American sovereign debt rating from AAA to something less than that, maybe, in two years [incompr.] mostly some–to put some fuel on the fire of the debt debate in Washington. And the American people had something to say in polling, in several polling. Most Americans, apparently, over 70 percent said the way to solve the debt and deficit crisis is to raise taxes on the rich–not something that’s being talked very much about in Washington. Now joining us to give their views on this economic news and their insight into what’s going on, into this debt debate, is, first of all, Michael Hudson. He’s a former Wall Street economist, a distinguished research professor at the University of Missouri-Kansas City. He’s the author of many books, including Super Imperialism: The Economic Strategy of American Empire. And joining us from New York City is Richard Wolff. He’s professor of economics emeritus at the University of Massachusetts, Amherst. He’s currently a professor, a visiting professor in the Graduate Program in International Affairs at the New School university in New York City. Thank you both for joining us.
RICHARD WOLFF, PROF. OF ECONOMICS, NEW SCHOOL UNIV.: Thank you very much for the opportunity.
JAY: So, Richard, you kick us off. What do you make of all this?
WOLFF: Well, I think in one way it’s a debate that is merely theater–Republicans and Democrats using the deficit problem to pander to those people they think are their core voters; Republicans pretending to be interested in cutting the deficit, even though they aren’t actually. And Democrats are protecting against cuts in the interests of something they call economic development, and no one quite understands what that’s about, either. But they rehash their conventional roles, using the headlines as simply another opportunity.
JAY: Now, you wrote a piece, Richard, recently talking about Keynesians. There’s a Keynesian critique of, certainly, the Republicans, and also of Obama, and the argument kind of goes that debt really isn’t a big problem. What’s your take on that?
WOLFF: I think that’s a little bit ingenuous of my Keynesian friends. I do understand what they’re after. They recognize more than the Republicans do how desperate the private capitalist economy in the United States now is and how desperately important it is to shore it up with every conceivable kind of government support, and that costs a lot of money. Since they’re unwilling to go after the wealthy and the corporations to pay the money that helps to save them, they prefer to borrow it. And so what the Keynesians do is they urge the government to spend and spend and spend, and they urge everyone to pretend that borrowing it is an okay way to go. The problem is if you keep borrowing, you have to pay interest on that, and that becomes an expense of the government, and you have to someday pay it back, or at least that has to be the pretense you support. And after a while, folks will not continue to lend to a government that borrows as insanely as this one has. And we already see this in Greece, in Portugal, in Hungary. It’s becoming a bigger and bigger issue. And the United States, as the world’s biggest debtor country to begin with, is hardly in a position to act as if it doesn’t matter when it borrows money on this scale.
JAY: Michael, what do you make of that?
MICHAEL HUDSON, RESEARCH PROF., UNIV. OF MISSOURI: Well, there are Keynesians and there are Keynesians. Many of us call ourselves post-Keynesians at the University of Missouri in Kansas City. We’re basically associated with Hyman Minsky and his views. Of course that matters. Of course when you have one quarter of American real estate in negative equity, 10 million foreclosures on homeowners, of course that matters. Of course corporate debt matters. What is fictitious in this argument is the pretense that the government actually has to borrow money. The government has just printed $13 trillion out of thin air on computer keyboards. It didn’t borrow any money. The Treasury created the money, gave it to the Federal Reserve. So in that sense we see that the debate is on lines as if the economy were the way it used to exist 100 years ago. The government–some government deficit is necessary in every country in order to supply purchasing power and reasons to grow. The problem is: what are you going to create the debt for? The government at present is creating debt to cut taxes on the rich, is creating debt to give away to the banks to compensate for the losses they’ve made on irresponsible loans. Debt is not being created to employ people. It’s not being created to build infrastructure. It’s not being created to increase the economy. It’s purely parasitic debt. And that is why the rating agencies essentially said, we’re lobbyists for the financial sector, we want to encourage parasitic debt. And essentially they’re acting just as corruptly as they did earlier in the week when they told Iceland that they would downgrade its debts if it did not pay money that it did not owe, to bail out Gordon Brown, to bail out the crooked banks. And the rating agencies acted the same way for decades. I work with Dennis Kucinich, for instance, and in Cleveland, when he was mayor, the rating agencies went to him and said, if you don’t sell off the electric companies to our cronies, borrowing money from the banks that have promised us credit rating business, we’re going to downgrade the rating of Cleveland. We’ll make you governor if you go along with us and give away to the financial sector the utilities. Dennis said no, Cleveland was downgraded, and the electric utility was kept in the public domain, and he saved hundreds of millions of dollars for Clevelanders. And the result was they sent him to Congress. So the rating agencies should be looked at as lobbyists and politically committed, essentially, to their clients, not as honest brokers at all. Nor should the Obama administration or the Republican critics be looked at as anything more than acting on behalf of their campaign contributors.
JAY: Richard, the Keynesians would argue that if you stimulate the economy, whether it’s by debt or–I think they actually prefer the Treasury, the Fed doing it directly than incurring debt, in other words, just doing it by essentially creating money. But either way, the Keynesian argument goes that if you create more employment, then eventually the economy gets going, more people pay taxes, the debt then gets paid down, rather than having to pay interest on it forever. I mean, you don’t think that’s correct?
WOLFF: No, because what the government does, either by cutting taxes or by spending more money, and doing that by borrowing, the question, as Michael Hudson correctly says, is: what is that money used for? If what is going on is corporations taking the money the government gives them and helps them with and using it to create jobs overseas, then it’s not going to help the American economy very much. If they use the money they get from the government (which, by the way, is the case) to lend it back to the government, i.e., to buy the growing amounts of Treasury debt, then we have a really wonderful circular process in which the government gives money to the corporations, who lend it back to the government because it’s better for the corporations to loan money to the government than to be taxed by the government in the first place. And so we have a kind of crazy situation in which the idea of Keynesian economics, that government spending would generate economic growth, is in fact not happening. Most of that money is going to purposes that corporations decide on that have little or nothing to do with growth in the United States, which is in a way why Standard & Poor, like other rating companies, are looking at an economy whose debt is growing at roughly 10 percent a year with current deficits, while its output of goods and services is growing at 2.5 percent. It doesn’t take a genius to understand that if your debts are growing four times faster than the wealth you have with which in the end to pay off those debts, you’re in trouble.
JAY: Now, if you look at the polling I mentioned, over 70 percent of Americans say the way to get rid of the debt or pay down the debt is to tax the rich, you can see the problem here is that even if you model what, say, a stimulus program might do and might have good results–in other words, if you create so many jobs, if you do use the money in a more way to benefit the real economy, you can model it; you just can’t pass it, because when you have such concentration of ownership, you have such concentration of political power. So you actually can’t pass those models. So what do you make of this sort of disconnect between what over 70 percent of Americans are saying and the debate that’s going on in Washington, Michael?
HUDSON: Well, there’s only one poll that the administration listens to, and that’s the poll in dollars from their campaign contributors. You can look at policy as like a Chinese menu: column A and column B. Column A is what people want. Column B is what the campaign contributors want. And so the government will take a policy from column B, what the campaign contributors want, cutting taxes on the rich, giving money away to the banks and letting them operate the Ponzi scheme that Professor Wolff has described. Column B is making people richer. So you call giving money away to the banks making people richer, and it really doesn’t make people richer unless you can convince everybody that they’re going to win the lottery, which is what the current administration is trying to promise.
JAY: So just to wrap things up, Richard, what should people be demanding of their politicians? What kind of policies do you think they should be asking for?
WOLFF: I think the issue here is a kind of class war, but not the way people think about it. If you go back to the 1950s and ’60s in the United States, you will discover two things, that the proportion of the government’s revenue coming from corporations, as opposed to individuals, was much, much higher than it is today. If you go back to the ’50s and ’60s, you’ll also discover that individuals, particularly the richest amongst us, had to pay much, much higher income tax rates than they do today. For example, 91 percent was the top rate in the 1950s and ’60s. For everyone who earned over $100,000, every dollar over $100,000, that person had to give Uncle Sam 91 cents and kept only 9 cents. The rate today is 35 percent. That is the biggest conceivable tax cut imaginable. So over the last 50 years, we’ve shifted the burden of taxes from corporations to individuals, and among individuals from the richest to the rest of us. We don’t–that’s a class war. That’s a class war that’s been fought for 40 years in this country, and which the middle and lower classes have consistently lost. You don’t have to be a revolutionary. You just have to suggest here that you should go back to what we used to have in the ’50s and ’60s in the way of a fair tax system. And I might remind people that in the ’50s and ’60s, with those higher tax rates, we had a faster rate of growth in the United States than we have today, and we had far lower unemployment than we have today. We ought to do that just to undo the class war that the middle and lower income groups have lost. And then we would be able to put a major dent in our so-called deficit and have a fairer tax system at the same time. I think if people understood these numbers, these simple numbers, the polling results you just cited would be even more lopsided than they are now in favor of a very different way of operating the government.
JAY: Michael, and I’ll–just a wrap-up question to you. President Obama’s speech on the issue of deficit reduction had a little bit or some talk about taxing the rich and taxing the wealthy. In places like Huffington Post you saw commentators say, oh, there’s the Obama we’ve been waiting for. How real is this? What do you make of his speech and his [crosstalk]
HUDSON: [incompr.] election. It’s not a process for 2012. It’s not really Mr. Obama versus the Republicans. There is a good cop, bad cop system, where the Democrats put in a Republican Wall Street policy, and the Republicans deliberately put in a crazy to run, and Obama can say, look, I’m not a crazy, vote for me, while he puts in the Wall Street policy. Now, Professor, you just mentioned the class war. The class war’s very different today than it used to be, as I’m sure you agree. It used to be between employers and employed–and workers. Now it’s financial. And the financial class war we’re talking about between creditors and debtors, between Wall Street and the real economy, doesn’t–cuts across all the left-wing and the right-wing part of the spectrum, and neither part of the political spectrum or the old class warrior theorists have come to terms with the fact that we’re in a completely different economy that nobody 50 years ago imagined could have happened. Nobody imagined Wall Street to be taking over the political process the way it has, even [incompr.] cost to the industrial economy. So not only are workers losing, not only are consumers losing, but industry’s being wound down and essentially cannibalized and financialized. That’s why the economy’s shrinking. And the government is trying to slash taxes to give the illusion, like a Ponzi scheme, that somehow there’s enough money to make the system work. But it doesn’t work, because it’s asset stripping, and when the assets are stripped, there won’t be any more money and the economy will plunge very sharply.
JAY: Thank you both for joining us. And thank you for joining us on The Real News Network.
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