Thursday, May 1, 2014

The 1% and Piketty?

Jessica Desvarieux of The Real News Network interviewed Michael Hudson, distinguished research professor of economics at the University of Missouri-Kansas City and author of The Bubble and Beyond and Finance Capitalism and Its Discontents. Michael discussed Thomas Piketty's new book, Capital in the Twenty-First Century. Here is the transcript of the interview below:
DESVARIEUX: So, Michael, this week we’re going to be talking about the very popular book by French economist Thomas Piketty. It’s a 700-page book that takes on the topic of income inequality. Why do you think so many people are talking about this book? What’s in it that has people buzzing?

HUDSON: Statistics. It shows that wealth inequality is actually much wider than income inequality, because if you earn income, you have to pay taxes on it, and rich people, the 1 percent, don’t like to pay taxes, so they basically expense most of their income. They expense it as interest, they expense it as depreciation. There are all sorts of expenses. But he shows statistically in almost every country not only that income and wealth are getting wider and wider apart, the 1 percent versus the rest of the economy–but it’s not just the 10 percent of the population that’s richer than the bottom half or the bottom 20 percent; it’s the 1 percent that has the vast majority of the wealth and controls the world’s stock markets of the bond markets. And since 1980 there’s been quite a turnaround. And the 1 percent have bought government as if government were sort of like a factory that you can make profits on. And you can get much more profits by buying a government than you can ever get by buying a property or real estate. And so what we’ve been turning into is an oligarchy.

Well, a lot of people saw this, but what Piketty did was show that in every country since 1980, since Reagan and Margaret Thatcher had the whole neoliberal revolution, the revolution that’s now being supported by the U.S. government, by the eurozone, by the International Monetary Fund and the World Bank, that all of this neoliberalism and so-called free markets is really just a property grab by the rich. And he shows that given this grab, you’re not going to be able to get more equality as long as all of this wealth that’s accumulating at the very top among the 1 percent is inherited and passed down and grows and grows. And so, basically, he’s described the symptoms of what’s wrong. And people are very glad that at least he’s described the symptoms that everybody knew but nobody had spent the three or four years that it took to make all of the charts charts that he’s made.

DESVARIEUX: So it also sounds like he’s focused on the 1 percent specifically. What about the 99 percent? What do you think is missing in Piketty’s argument?

HUDSON: Well, the one percent have got rich by holding the 99 percent in debt. Basically, you have an economy where governments and businesses, homeowners, credit card users, and people getting an education all have to run into student debt, mortgage debt, credit card debt, government debt, corporate debt, all to the 1 percent. So the 1 percent wouldn’t be making all of this income and concentrating all this wealth if they didn’t hold the bottom 99 percent in debt to itself. So you have a polarity. You wouldn’t have the 1 percent getting rich if they weren’t–if it wasn’t in an exploitative way, making the 99 percent more dependent on them.

Now, if the 1 percent made their money–you know, they call themselves job creators as if they’re creating the prosperity, but they’re not creating the prosperity, because what they’re getting is interest and economic rent much more than profits. They’re getting rich in an exploitative way, not in a productive way that helps the economy grow and raises living standards.

DESVARIEUX: What are some of the solutions that Piketty proposes?

HUDSON: Well, the first solution he proposes is that the people are–all this wealth at the top is being inherited. And since the Reagan and Thatcher revolution, they’ve got rid of inheritance tax. The 1 percent says, think of the small families that want to give a little bit of property to their children; let’s not tax them. And by the way, let’s make us completely tax-free for all of our billions of dollars, just so the middle-class families can maybe end up with their house or so. So they’ve hidden behind the middle-class to, really, abolish the effective inheritance tax. And so this wealth is being inherited to grow and grow. So the first thing he wants is an inheritance tax.

The second thing he wants is more problematic. He said, well, maybe there can be a world tax on wealth, because after all, the rich families in America hold their money offshore or in Swiss banks or in the Caribbean. So he wants a general wealth tax. And that’s what he’s been criticized for, because he hasn’t really gone to the root of what is creating this polarization.

DESVARIEUX: And, also, how would you even implement something like that, Michael?

HUDSON: Well, that’s why the neoliberal’s love Piketty. That’s why Krugman loves Piketty. You can’t implement it. So he’s produced a book without any solution, and the free enterprise boys like that. The 1 percent don’t mind being criticized as long as there’s no solution to their problem. And that’s what the critics have come out saying: wait a minute, there are a lot of solutions. For one thing, some kind of wealth is better than others. You don’t want to tax people building factories and improving living standards like the one percent pretend that they do, but what you do want to tax is unearned income, economic rent, capital gains. Right now, the capital gains tax, most people, rich people, make their money not buy earning income; the naked on capital gains, on stock markets going up, on bond prices going up, on all of the asset prices that the Federal Reserve’s qualitative easing has been just flooding the market with. So the first thing to do is to raise the capital gains rates much higher, closer to 100 percent, because that’s unearned. These are inflationary gains. Right now, the economy’s all about capital gains, so if you make $1 million like–as Warren Buffett said, he makes hundreds of millions of dollars. He pays a lower tax rate than his secretary. So the tax system is all wrong.

What Piketty does not suggest is getting rid of regressive taxes like the FICA wage withholding that everybody has to pay that’s now more than 15 percent of their paycheck. This is a regressive tax. That should be gotten rid of.

But most of all, he doesn’t talk about the whole restructuring that’s part and parcel of this neoliberal revolution to privatization. He doesn’t criticize privatization. And most of this increased wealth by the 1 percent since 1980 is all taken–a result of privatizing the public domain–public utilities, things that–100 years ago everybody expected banking to be a public utility, roads, railroads, public transport, telephone systems, broadcasting systems. Now that these are being monopolized, the rich are getting their money by monopoly rents.

And the solution isn’t simply to let the rich exploit the 99 percent by raising the prices you pay for your cable, for fridges, for transportation; it’s to take–to deprivatize these assets, to put them back in the public domain, so that you can provide basic services to people at a very low price instead of at an extortionate price that’s all meant to pay the 1 percent that basically has been foreclosing on governments and grabbing the public domain.
And Piketty quotes the French novelists, in English, of the 19th century and points out why is it that novelists understand the problem that’s happening in the economy more than economists. Economists all talked about the economy becoming more equal. But if you read Balzac, he said that the origin of almost every great family fortune is a great theft, often undiscovered, and people think it’s just a part of nature. And it’s thievery and theft, as Bill Black, who’s often on your show, also points out every week: you have essentially the decriminalization of fraud.
And what really pays is crime. And it’s the criminals that have risen most rapidly into the 1 percent. It’s the Wall Street bankers who’ve been doing the junk mortgages and engaging in the kind of fraud that we’ve been hearing about on Wall Street. This is not what Piketty discusses. He doesn’t say, throw the clerks in jail; he doesn’t say, have government regulatory agencies to prevent this kind of exploitation; he doesn’t say, reimpose anti-monopoly regulations to prevent monopoly profits from enriching the one percent; he doesn’t say, take all of these public utilities that Margaret Thatcher privatized in England and Ronald Reagan did in America and put them back in the public domain so that they can provide basic services to people at cost. All of this is a different topic from his book.

DESVARIEUX: Alright. Michael Hudson, thank you so much for joining us on The Real News.
HUDSON: Okay.

DESVARIEUX: And thank you for joining us on The Real News Network.
I've already discussed Thomas Piketty and whether capitalism has failed the world. Whether or not you agree with him, Michael Hudson is an intellectual tour de force. He's the type of guy the University of Chicago economists despise because he exposes what a fraud neoliberal economics truly is. But Michael also exposes the Paul Krugmans of this world for being even bigger frauds because despite their heavily liberal bias, they seem to accept inequality as a fact of life and that absolutely nothing can be done about it. This is intellectually dishonest and pure nonsense.

I recently covered Michael Hudson's article, P is for Ponzi, where I wrote:
What we are witnessing now is the end phase of financial capitalism. I touched upon it when I went over New Jersey's Pensiongate. You have a bunch of rich and powerful hedge fund and private equity managers contributing to their favorite Democratic and Republican candidates in order to secure more money to manage from public pension funds relying on useless investment consultants shoving them into alternative investments. These pension funds are all praying for an alternatives miracle that will never happen. It's great for Wall Street, which effectively carries a license to steal, but not great for Main Street.

Let me be blunt. I love America and think it's the best country in the world. My grandfather fought with the U.S. Army in WWI and my grandmother (in Crete) received a pension from them even after he died. The U.S. has always been and will remain the tail that wags the global economy. But U.S politicians have to get their collective heads out of their asses and start implementing real reforms on their healthcare and pension systems, including reforms on governance that will bolster public pension plans. One U.S. politician who gets it is Senator Bernie Sanders of Vermont. He's a bit too leftist and cooky for my taste but he brings up many excellent points and regularly tweets on income inequality. Here is one of his tweets which caught my eye (click on image):


And a lot of these rich hedge fund managers are collecting huge fees for delivering mediocre performance. They have basically become large, lazy asset gatherers profiting from dumb public pension funds paying alpha fees for beta or sub beta performance.
Last week, the media reported America's middle class is no longer the world's richest. Canada now boasts the world's most affluent middle class:
In 1980, the American rich and middle class and most of the poor had higher incomes than their counterparts almost anywhere in the world. But incomes for the middle class and poor in the United States have since been growing more slowly than elsewhere. Why? Among the reasons: This country has lost its once-wide lead in educational attainment. Other countries have increased their workers’ skill levels more quickly, helping create well-paying jobs. The United States also tolerates more inequality: The minimum wage is lower here. Executives make more money. The government redistributes less of it. By 2010, the poor in several other countries had pulled ahead. And Canada’s median income had reached a virtual tie with that of the United States. Since 2010, other data suggest Canada has moved ahead.
But even though Canada's middle class is the world's richest, it has its anxieties too and if my dire outlook for the Canadian economy materializes, there will be even more anxiety in the decade ahead.

This week Statistics Canada released a study showing the gap between the earnings of a college or university degree graduate and what someone with a high school diploma makes is narrowing:
According to the data agency, high school grads are making wage gains, while the earnings of holders of a post-secondary school degree are staying flat — and in the case of young men, even decreasing.

The federal agency's analysis of data compares earnings for the two groups in two different time periods — in 2000 to 2002, and then between 2010 and 2012.

The results were counter-intuitive, in that education didn't lead to greater wage gains, at least in the short term.

Between those two periods, men aged 20 to 34 whose highest level of education was a high school diploma saw their salaries increase by nine per cent. Women in the same group saw a rise of 11 per cent.

"In contrast, the average real hourly wages of young male bachelor's degree holders was unchanged, while those of young female bachelor's degree holders increased by five per cent," Statistics Canada said.

Data points like that suggest young workers are being misled, some experts said Monday. "The numbers reveal that what we thought was the standard track to a middle-class life — the university degree — maybe isn't all it's cracked up to be," public policy professor Ken Coates said in an interview.

'If you follow the swarm you're just going to walk over the cliff.'- Professor Ken Coates

Coates said the educational system and parents value university educations almost at all cost, but that's not in keeping with economics realities.

"We overemphasize the so-called knowledge economy, but the reality is we have not yet produced very many of those jobs and what we have is a natural resource economy that's propping up the rest, and a service industry tagging along behind it," Coates said.

Indeed, the numbers appear to suggest that Alberta's oil boom may be skewing the data by driving up demand for unskilled labour.

"Increases in economic activity fuelled by the oil boom of the 2000s ― which raised demand for less educated workers to a greater extent than it did for more educated ones ― accounted for roughly one-fifth of the narrowing wage differentials among young men and young women," the data agency said.

Coates said the real lesson to be gleaned from the numbers is not that the fate of those with just a high school diploma is getting better, but rather that the fate of those who blindly pursue more schooling is stagnating.

"If you follow the swarm you're just going to walk over the cliff," Coates said. "When we keep focusing on what the economy looked like in 1980, we are doing a very poor service to young people coming out of high school."
Of course, post-secondary degree holders still earned more than  their lesser-educated peers, but not by as much as during the previous period, Statistics Canada data shows. Canada needs to implement an education system similar to that in Germany which emphasizes trade schools for many people who want to learn an employable skill and don't want a university degree.

Now, back to Piketty and the 1%. In my last comment, I discussed why public pension funds are hiding details in private equity, and stated the following:
I've already covered bogus private equity fees as well as CalPERS' legal battle with blogger Yves Smith of Naked Capitalism. It seems like large public pension funds are public as long as it suits their needs, or more likely, those of their big and powerful private equity partners who basically run the show via the political back channels.

Commenting on this latest pathetic display of withholding information from the public, Yves Smith of Naked Capitalism says NY Teachers' exhibits Stockholm Syndrome:

Readers may find it hard to grasp how successful the private equity industry has been in brainwashing investors, particularly large public pension funds. Investors who ought to have clout by virtue of their individual and collective bargaining power instead cower at the mere suggestion of taking steps that might inconvenience the private equity funds in which they invest.
Poor Yves, despite the name of her blog, she still doesn't get what capitalism is all about. Even Thomas Piketty, whose popular book on how capitalism has failed the world, doesn't get it. Two guys that do get it are Shimshon Bichler and Jonathan Nitzan who just published their latest, The Enlightened Capitalist, a letter answering the critique of a large asset manager.

Capitalism, my dear readers, isn't about openness, fairness, transparency and meritocracy. Capitalism is all about crisis, sabotage, secrecy and how the elite can screw the unsuspecting masses using any means necessary, ensuring inequality which they require to thrive. 

The pension Ponzi is all about how a few powerful hedge funds and private equity funds can ensure their growth by capturing a larger slice of that big, fat public pension pie. They use all sorts of slick marketing, talk up the virtues of diversification and absolute returns, but for the most part, it's all hogwash, all part of Wall Street's secret pension swindle.
It's ironic that Bridgewater, the world's biggest hedge fund, recently warned on the dire outlook for pensions as they and a few other elite hedge funds and private equity funds have been the chief beneficiaries of the new asset allocation tipping point.

Importantly, while 60 Minutes focuses on how the U.S. stock market is rigged, it's ignoring the real wolves on Wall Street and how they legally rape large public pension funds praying for an alternatives miracle that will never happen.

The alternative investment industry will counteract that they have better alignment of interests than traditional mutual funds and asset gatherers, which is true, but the reality is they're gouging public pension funds who for some strange reason are all jumping on the bandwagon, completely clueless of the risks they're taking and how for the most part, all they're doing is enriching an elite group of hedge funds and private equity funds.

In fact, nobody discusses how pensions are actually contributing to inequality, enriching alternative investment fund managers who are collecting 2 & 20 in fees even if they deliver lousy performance. Some of these managers deserve their wealth but most don't. They're nothing but glorified asset gatherers who have literally conned pensions into believing all sorts of hyped up nonsense. And now that consultants have entered the game, they too are benefiting from the alternatives orgy gripping institutional investors.

There is lots of food for thought in this comment. Some of you will agree and others will disagree. My objective is to make you critically reflect and where we're heading and who is really benefiting from pensions' shift into alternative investments.

Below, Jessica Desvarieux of The Real News Network interviews Michael Hudson. Also, Erin Ade of Boom Bust interviews economist James Galbraith, an expert in macroeconomics and a critic of inequality. Listen carefully to both these economists, they actually understand the problem and offer real solutions for curbing excessive income and wealth inequality.

Also, Thomas Piketty (Paris School of Economics) discussed his new book, Capital in the Twenty-First Century at The Graduate Center at the City University of New York. Joseph Stiglitz (Columbia University), Paul Krugman (Princeton University), and Steven Durlauf (University of Wisconsin--Madison) participated in a panel moderated by LIS Senior Scholar Branko Milanovic. The event was introduced by LIS Director Janet Gornick, professor of political science and sociology at the Graduate Center. Watch the event below, it's an excellent discussion.