Fiscal Cliff Trojan?
JAY: Now we are going to begin. And we are told that we’re about to go over the cliff, a fiscal cliff, and we need to have massive reform to entitlement programs, Social Security, and others. Now joining us to discuss the crisis (we are told) is Michael Hudson.
Michael was a Wall Street financial analyst and is now a distinguished research professor of economics at the University of Missouri–Kansas City. His new book is The Bubble and Beyond. Thanks for joining us, Michael.
MICHAEL HUDSON, RESEARCH PROF., UMKC: Thank you very much, Paul.
JAY: So are we going off the cliff?
HUDSON: Well, there isn’t any cliff to go off, but for people who believe that a crisis is an opportunity, in order to get the opportunity to shift the taxes more onto the middle class, they have to call it a crisis. Of course, there’s no crisis at all.
JAY: Okay. Well, they say there is, ’cause they say there’s going to be these automatic massive cuts to the military and there’s going to be these massive cuts to social programs and such. And so what is the reality of that?
HUDSON: Well, because of the way that Mr. Obama worked with the Republicans to negotiate a crisis preplanned in advance, yes, indeed, by the end of the year there would be a reversal of the Bush tax cuts for the richest Americans. There would be, ostensibly, a cutback. That would last, I think, about one day, from December 31 to the time the new Congress meets. So they’d hardly skip a beat before they then set to making whatever the new deal would be.
The whole idea is to make it appear as if there’s a crisis, to make it appear as if Obama has to give in to the Republicans to essentially become what Mitt Romney would have become if he would have been elected. So Obama’s playing the role of Romney lite in saying, we’ve got to cut taxes on the rich, and the only way we can balance the budget if we give it to my campaign contributors, Wall Street, is to shift the taxes much more onto the working class. We have to take more out of their paycheques on the FICA withholding, and we have to raise the retirement age and cut the benefits to Social Security.
So what he’s saying is we’ve given $13 trillion of new debt in giveaway to the banks since September 2008, but we can’t create a single penny to reimburse the Social Security contributors for the money that they have actually contributed. We can only create fictitious money for our campaign contributors, not the voters.
JAY: Okay. So explain that a little more, ’cause that’s such an important point, that if in fact Social Security is in some kind of mod which some are claiming is unsustainable, a lot of that has to do with the money that was taken out of it not to give people Social Security.
HUDSON: Well, here’s the question of what does it mean to be sustainable. How were we able to fight World War II or the $3 trillion Iraq War without taxing? The answer is the Federal Reserve simply creates the money.
Now, right now the Social Security Administration has saved an enormous amount and—of extra, withholding from paycheques over and above what was needed to pay out Social Security. And this money was used, essentially, as tax cuts for the rich. So by taxing the wage earners more, President George Bush was able to slash—and before him Clinton, and before him his father, were able to slash tax rates for the higher tax brackets.
And essentially what people call the Social Security fund is really a tax shift. You don’t want to call it a tax on the poor, but it’s not for Social Security. Not a penny of that has been spent on Social Security. Every single penny of the Social Security Trust Fund has been collected extra [incompr.] as a tax that falls on wage earners that are higher than the taxes that the wealthiest people paid, higher than the tax that George Romney pays [sic], higher than the tax that Warren Buffett pays. And all this—as George W. Bush said, you know, the Social Security Trust Fund really doesn’t exist at all. It’s just an IOU. And these funds are nonmarketable Treasury securities.
And as people begin to retire and run down the fund, what happens is the Treasury simply spends down its balance at the Federal Reserve, and the Federal Reserve does exactly what it did when it took on the $13 trillion bailout of Wall Street. It just prints the money. There’s no need to tax the money to pay Social Security. The government simply spends it into the economy. That’s what central banks do. That’s what the Bank of England does. It’s what the Federal Reserve does. So why is it that the Federal Reserve and the Treasury can create all this money to pay Wall Street, and they can’t create a penny for Social Security?
JAY: So what’s the real objective here?
HUDSON: It’s almost comical.
JAY: So what’s the real objective in Social Security reform? ‘Cause there’s obvious other ways to be cutting the debt if cutting the debt is such a big deal. But the targeting of Social Security—what’s the real objective here?
HUDSON: It’s to put the class war back in business. It’s to essentially say, well, we only want to spend money on the 1 percent; we don’t want to spend any money on the 99 percent. The 99 percent’s role is to pay taxes; the 1 percent’s role is to get these taxes in the form of bailouts, subsidies, special spending like rebuilding all of the beach homes and rebuilding all of the private beaches in New Jersey—not the public beaches, but the private beaches and the private homes and, essentially, the 1 percent. It’s a giveaway.
JAY: But part of the issue here seems to be, from the Republicans, the push to privatize. And there are now some Democrats that are apparently making similar murmurs about sort of privatizing light and that. What’s behind this move to privatize?
HUDSON: The idea is the same one that had pension capital—pension fund capitalism in the 1950s. From the time that General Motors started its pension funds, there’s been a tidal wave of pension fund contributions into the stock market. That created a stock market boom in the ’50s, in the ’60s, into the ’70s. And I discuss that in my book The Bubble and Beyond.
But now the pension funds are all being downsized. How are you going to create a pension fund, a stock market boom? The idea of privatizing Social Security is to give Wall Street the biggest clientele that it’s got in history. It will be the biggest giveaway in history to Wall Street.
And not only will they push this money into the stock market while more people are paying in, pushing into a stock market boom, but at the same time, the Wall Street banks like Citicorp and Bank of America can treat its customers like counterparties.
They can gouge them on fees. They can then stick them into stocks that they then all of a sudden—the day will come when more people begin to retire than pay into the plan, and at that point, the stock markets are going to begin to go down. Then all of a sudden the Wall Street speculators can dump the stocks, pull their money out, and leave the Social Security retirees holding an empty bag, and the government’ll say, well, that’s the madness of crowds.
And it’s not the madness of crowds. It’s a Wall Street scam. And that scam has been put in place by an enormously well subsidized propaganda campaign to convince people that it’s necessary for them to become suckers for the Wall Street money managers.Wow! Love listening to Michael Hudson cut through the nonsense and tell it like it is. The so-called fiscal cliff was indeed manufactured to shift more of the burden of the crisis onto ordinary people.
JAY: Now, is there any sense or evidence that Obama or Biden are going to compromise with this? In the election campaign, I thought they were both pretty clear they’re against the voucher system, which is sort of the form or model of privatization that the Republicans are advocating.
HUDSON: I think the voucher system you’re talking about is for Medicare and for Medicaid, not Social Security. So what are we talking about now? Social Security [crosstalk]
JAY: Yes, I’m sorry. Not voucher, but to create Social Security as a private fund that people can invest. And I thought Obama and Biden said they would not support that.
HUDSON: Yeah, I think that’s correct. This is a Republican plan. I don’t think it’s the Democratic plan to support privatization. When the Republicans say look at Chile, that’s a wonderful thing to do. Every single pension plan put in by Pinochet’s party at gunpoint in the 1970s, every one was looted by the employers and by the banks and went bankrupt by the end of the 1970s. That’s why the Chilean voters threw out the party and voted for the socialists, who were against doing this. So all you have to do is look at Chile.
But of course the Republicans are looking at Chile and say, my god, we can put all of the private money into the pension funds to be Social Security funds to be invested, and then we can steal it all, we can steal trillions of dollars, we can get richer than we’ve ever dreamed of if we can only have the right to steal. And that’s what this is. The—what the—talking about Social Security reform is theft, and that’s what it should be called, theft.
JAY: Alright. Thanks very much for joining us, Michael.
HUDSON: Thank you very much.
JAY: And thank you for joining us on The Real News Network.
Friends and familiy ask me all the time what I think about the fiscal cliff. There is no fiscal cliff. It's another artificial crisis perpetrated by the Wall Street propaganda machine to shift more taxes on the 99% while the 1% get more corporate handouts.
And Michael is right, the United States has gone over the pension cliff and the future of most US public pension plans looks just as bleak as it does in Greece. As pensions are being squeezed and downsized, the financial industry will push hard to privatize Social Security, allowing banks, mutual funds, insurance companies, hedge funds and private equity funds to find new sources of revenue growth.
Unlike Michael, I don't think privatizing Social Security is necessarily a terrible idea. In 2001, Mark Sarney and Amy Preneta of the Social Security Administration wrote an interesting paper, The Canada Pension Plan’s Experience with Investing Its Portfolio in Equities, focusing on the governance of funds managing the CPP and QPP.
Therein lies the key, if you don't get the governance right, don't bother privatizing Social Security. And in my opinion, most US public pension plans have not gotten the governance of their plans right so nothing leads me to believe that they'll get the privatization of Social Security right. It's going to end up being another cash cow for the financial services industry.
In Canada, we have gotten the governance right. There is still a lot of room for improvement but by and large, we have done a much better job than what they've done down south. Of course, some people rightly ask, did we really need to create CPPIB, PSPIB and other large public pensions funds and plans? Why not just leave the money in non-marketable government bonds?
My answer is yes, we are much better off diversifying sources of returns away from one asset class into multiple asset classes, including private equity, real estate, infrastructure and hedge funds. Has it been a perfect ride? Hell no but leaving the money in Canadian government bonds -- even though they've performed exceptionally well since inception of CPPIB and PSPIB -- is not a prudent long-term strategy for sustaining retirement security.
Below, Paul Jay's interview with Michael Hudson, discussing the fiscal cliff Trojan. And Tavis Smiley, host of "Tavis Smiley" on PBS, tells CNN's Piers Morgan that the fiscal cliff is "just the masquerading of austerity," and President Obama can't cave in on this debate. Too late, he already has, the script was written for him a long time ago by his large financial donors.