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Renegade Economists Podcast 213

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Author Christopher Ketcham hits the forces of Monopoly Capitalism with an overview of how the market system became a host for greed.

www.realestate4ransom.com

Host Karl Fitzgerald: out of the 25 largest cities in America, New York is the most unequal for income distribution. If it were a nation it would come in at the 15th worst amongst 134 countries ranked by extremes of wealth and poverty – a banana republic without the death squads – so writes today’s special guest Christopher Ketcham. He’s a regular writer in Orion magazine.

Yes, today’s special guest is Christopher Ketcham – the next up and comer behind Matt Taibbi in terms of investigative journalism within the world of monopoly capitalism we are enduring. He writes for Vanity Fair, Harpers and GQ and is currently writing a book about secession movements in the north east of the (United) States. He really rose to prominence with an article called The Reign of the 1%’ers that buzzed around the internet in the lead up to Occupy Wall Street and thereafter and he’s also got another couple of killers called “The New Dog in Town” and the “Curse of Bigness”. I encourage you to find them on the Orion website.

I started off by asking Christopher about the writing process and what is the most rewarding facet of it?

C.K: I tend to prefer hate mail because then you know you’ve actually woken people up and sparked a nerve and done some sort of trouble making out there. I mean this article for Orion – the Reign of the One Percenters was written almost entirely for my daughter who’s 16 and for whom, I think the, future is quite bleak given the current situation – given the control that the 1%, the very rich, the oligarchy has over her fate, and my fate and the fate of the political economy. So the satisfaction I had in that article was really just writing a down and dirty polemic against the oligarchy.

And the article opens with her – she and I are taking this tour through the Wall Street area back in the summer of 2010 and I just decided “alright Leah (her name is Leah) – Leah lets take a tour and look at the various institutions of socio-pathology that really run this city”. So we walked by the AIG building, the Goldman Sachs building, or at least its ancillary headquarters in the Wall St area because you know a lot of these big corporations, these big investor banking firms have moved out. There not based entirely in Wall Street. They’re up in the Avenue of the Americas, they’re in New Jersey but there is still enough concentration down there. For example Bank of New York Mellon at 1 Wall St., Duetsche Bank at 60 Wall St., so we took the big tour and, walked by the NYSE, walked by the Federal Reserve where the criminality starts. I was trying to give her a sense as a 15 year old, I was trying to give her a sense of who really runs New York and who is behind the money power that really runs things in this country and, you know, generally, world wide.

K.F: and did she have a filter that she could empathise with what you were discussing. Did she study economics or history or any of those frontiers at school?

C.K: not really – the best part was that we started coming up with all sorts of really venomous invective for the various characters we were seeing. We were just engaged in open satire of the Wall Streeter’s who we were observing, the almost charactertures of wealth and privilege. So it was more a matter of satire and fun than of deep learning – if you will. But she has in her school studied the French revolution, the Russian revolution and the American revolution and understood that where there’s too much wealth concentrated in too few hands that you will have the people rising up and guillotining the very rich.

K.F: its amazing though that during a time when everyone’s after the elusive dollar it seems that very few are studying it (economics) as part of the syllabus at high school and I just wonder whether maybe out of this growing association with inequality there will be a pushback at high school for more kids to study some form of economics that is based on reality.

C.K: well the whole field of economics, what’s called neo-classical economics today is based on un-reality. It is based on the idea that there is no free lunch in any economic system. That for example the financier, the hedge funder, the usurious banker all contribute to society in some fashion, some productive fashion, whereas classical economists – old school progressive economists – throughout late 18th century and throughout the 19th century understood that there were all kinds of free lunch to be had in capitalism and the point of a progressive society was to enact laws that prevented those people from parasitically benefiting from society or from the capitalist system.

So what we have today is we have an economics curriculum in the high schools and in universities – more in universities than in high schools – that basically teaches that parasitism is A ok – parasitism is the way to go. And that’s why you have all those business schools, the major business schools in the United States, producing all these kids who want to go straight to Wall Street to make a billion bucks doing nothing. Basically,you know, pressing a couple of buttons and enjoying incredible profits while actually adding no productivity to society or producing no real goods or services.

K.F: And in Christopher Ketcham’s landmark article – the Reign of the One Percenters he writes “the 1%’er in his Wall Street tower creates value by tapping on keyboards and punching in algorithms. He makes money playing with money – manipulating abstractions. He manufactures and chases after financial bubbles and then pricks them. He speculates on mortgages, car loans, credit card debt, the price of gas that keeps the real economy moving, the price of food that keeps the labor pool alive, always hedging his bets so that he comes out ahead whether society wins or loses.” And that was a killer line for me – I said, right, I’ve got to get this man on the show. So let’s go back to the interview with Christopher Ketcham.

C.K: so if we were to adjust, to transform the way economics was taught I think it would go a long way towards changing the viewpoint of the younger generations in terms of how they see Wall Street, how they see big capital, big corporations, etcetera, etcetera.

K.F: and so much of this modern era is talking as if we have reached new levels of economic discovery and what you’re really telling us there is that 100 years ago our forefathers knew a lot more and were keeping an eye on what you have termed as the Gilded Age. Could you perhaps take us a step back in time to that era and what was learnt in the 1800s?

C.K: well what happened after the civil war in the United States is that there had been enormous increases in government spending and enormous expansion of the industrial plant – infrastructure was expanded – and at the same time you had the failure of the regulatory apparatus to keep up with technological increases or technological innovations and innovations in finance and banking. So the industrial infrastructure and the transportation infrastructure of the United States was captured by monopoly corporations.

Corporations themselves were under the law given all the rights and privileges of the citizen, under the fiction of corporate personhood, and so you had this monopoly power of big money over the political economy of the United States which accrued more and more wealth into the hands of the few who were then able to determine economic policy from top to bottom in the United States. Corporations were acting as states, as governments, as private governments that were liberated from public government. So the Gilded Age was really about the hijacking of the country by private corporations and by the very wealthy.

So what happened in response? The progressive era rises up. You have the populist movement in response. You have the campaign for the mayoralty of New York by Henry George in 1886 who was one of the earliest of the progressive voices. You have the Populist party of 1892 and 1896 vying for the presidency as a 3rd party. You have all of these populist, progressive movements rising up saying “no – we have to reign in the power of the monopolist, reign in the power of the corporation, reign in the power of the very few – the oligarchy – and free the market place so that it will be a level playing field. So that we can all compete freely” and they called this radical republicanism; they called it democratic capitalism.

This lead to some amelioration of the problems of corporatism – the graduated income tax for example. The corporate regulatory apparatus was put in place with the interstate commerce commission, and with various anti-trust acts – the Sherman anti-trust act, the Clayton anti-trust act, etc, etc, and this was all through the period let’s say, 1890 – 1914/1920.

You have huge, aggressive, disruptive labor movements rising up with the Industrial Workers of the World, with the Congress of Industrial Organizations in the 1920s and the 1930s that seek to basically say “alright big, corporate America we’re going to disrupt your operations until you play fair”. And so these disruptions lead to the reforms of the New Deal – you have social security put in place, you have all sorts of systems put in place to protect the citizen against the depredations of corporations.

And then what happens? Well you have a period between 1945 and roughly 1975 where the country is the most equal its ever been. The incomes equal out, more or less, the very rich are heavily taxed. There is still a growing and continuing trend during that period towards increasing size in corporations, towards corporatism – the marriage of big government and big corporate power – but there are regulations in place that prevent corporations from going whole hog and just becoming savagely predatory in the market place.

All that ends with the election of Ronald Reagan in 1980 when you have the beginning of a long period of deregulation which basically means that the government steps into the marketplace and regulates the marketplace to benefit corporations against the interests of the citizenry. And this is a period, and rather this is a trend that continues irrespective of Republican or Democratic administrations. It begins with Ronald Reagan but it really accelerates under Bill Clinton – the great traitor to the Democratic Party, well to the old school, democratic, populist, roots – the populist, labor roots of the Democratic Party.

Bill Clinton was the corporate whore par excellence in the Democratic Party. Under Bill Clinton there were more mergers than ever in the history of the country. That is you had larger and larger corporations establishing larger and larger monopoly control over markets and the political economy. You had skyrocketing income inequality that begins under Bill Clinton and then of course the trend continues apace under George Bush, George W. Bush and now under Barrack Obama. So we are now in a new Gilded Age in a sense that we have returned, we have regressed to the point we have lost a 100 years of political, economic, progressive thought in action. That is we have dismantled all of those various apparatuses that had been put in place by the progressive movement to reign in the power of private, corporate governments.

K.F: and so what are some of the frontiers of monopoly you are seeing develop now? Where are the so called entrepreneurs pushing this control of independence, that’s essentially what’s been locked up is our ability to look after ourselves and our community on each and every front and we’re told that this monopolistic power is a good thing. Are there any new developments that are things people should be looking out for? We’ve seen our DNA’s start to be privatized – we’ve got all sorts of issues going on with electro magnetic spectrum, and pharmaceutical buy-ups of indigenous plants around the world are going full steam ahead. I just wonder over there in America, are there any new whisperings about that we should be looking out for?

C.K: Google. Google is one of the most dangerous monopolists out there because Google is increasingly securing its place as the gatekeeper and possibly the toll keeper for the internet. I mean when people go on the internet where do they go? They go to Google.

Google becomes an informational gateway and just take the monopoly that I think is developing in email … in email systems like Gmail for example. At OWS I’ll go around, I’ll be interviewing people and I’ll ask “so what’s your email?” and I’d say that 75-85% of all the people – these activists, these protestors – radical dissidents who are operating at OWS and participating in the marches etc, etc – they’re all on Gmail. Well, Gmail, it’s known that you have no privacy on Gmail and Google can read your email, can read the contents of your email at anytime.

The emails that you write and receive through Gmail are all in the end the property of Google. They sit in the Cloud in some remote computing location and you don’t actually download them to a computer where you can hold on to them and consider them yours, consider them your private data. So that’s an interesting monopoly that’s developing.

Amazon is also a huge monopolistic power on the internet which is exercising nefarious power over the marketplace and then all the various elements that you mentioned earlier whether it be GMO’s, whether it be crops, whether it be seeds, the patenting of genes, you name it, corporatism has run amuck.

Corporatism is a wild, rabid, predatory creature that is savaging the planet with its bloody jaws and something has to be done.

K.F: do you think following this extended recession/ depressionary period – will property bubbles be seen as a dangerous thing or are they just going to run onto the next bubble as can be imagined with these poor economic policies. Are they trying to enforce this lost decade? Is this what you’re seeing? Because from down here in Australia we’re still doing okay in our economy but were seeing all of these bail-outs as policies extending the recessionary forces and to think that austerity is the way forward I just don’t know how much pain they’re trying to inflict on the 99%.

C.K: well the way forward is to destroy the banks. The way forward is a debt jubilee. The way forward is to end the control of private institutions over money supply. The way forward is to create public banking systems to control our currency through the public – not through debt backed money. And barring that, barring a truly revolutionary transformation of our monetary system, we will continue to have bubbles because that is all we produce now in the west. We produce bubbles and that is how our economy survives. It survives entirely on leveraged investments … that then drive up asset prices… and so then you have more people leveraging themselves in order to buy more assets. So this is what you saw in the internet bubble of the late 1990s, that’s what you saw in the bubble that followed – the housing bubble of 2001-2008, so we will be seeking as many bubbles as possible.

You don’t know how many people I’ve talked to that say housing prices have to go back up – …. they have to go back up as “it’s the only way I’ll survive, all my money is tied up in property – all my money is tied up in the idea.” And these are people are good old Americans – middle class Americans – who invested in housing and considered it to be their means of retirement.

They say “I need this house to go up in value in order for me to survive”. Well for it to go up in value to the extent that they want, to the extent that they need to survive, they need another bubble, they need another housing bubble. So everyone’s implicated. Everyone’s tied up in this monstrous system. And the only way to end the monstrous system is for a calamitous transformation of that system and that would be very bad. That would be chaotic. And yet sometime you’ve got to have some chaos in society. Sometime you’ve got to have upheaval. We need upheaval. We need a revolution. We need this monstrous system to be destroyed in order to move forward.

K.F: so I dare say you’ve got some veggies growing in your back garden?

C.K: nah man. I mean I’ve got a couple of guns. I’ve got a bunch of guns. You have veggies growing in the garden? I’ve got a couple of veggies. I’ve got garlic – some garlic to keep away the vampires.

K.F: well it’s a massive, massive decade or so we’ve got coming up because were just really dealing with peak debt here and peak oil, peak demographics, climate refugees – its all coming our way. Do you think that just reforming the public banking system is enough though? We’re talking huge systemic change here.

C.K: its just one element …. that would have to happen. Because, look, in a system where money is backed by debt, that means you have to have constant growth in order to pay off the interest accrued on that debt. So you borrow 10 bucks. The 10 bucks is brought into the money supply at an interest rate of 2 or 3% or whatever. So the actual money that must be paid back compounds. And you have to continue to grow and grow and grow. That is you have to have this constant growth economy. A constant growth economy implies constant use of resources – increasingly scarce resources.

What we have today is an economy that is both delusional and suicidal. Delusional in the expectations that it can grow forever and suicidal in that we know it can’t grow forever and yet we continually say we need to grow – we want to grow. So you’re also talking about a societal transformation. A transformation which people are no longer engaged in the consumerist hallucination: no longer sickened with affluenza – with this desire for unabated and unhinged affluence. You know, the continual amassing of possessions that you really don’t need.

Then you’re also talking about a transformation of massive brainwashing and propaganda systems inherent in Madison Avenue in the promotion and publicity relation complexes which are all dedicated to deceitfully… basically lying to people in tricking them in to buying things they don’t need – selling sugar water to children. These are sick, demented, degraded, degenerate industries – I don’t see them going away anytime soon. So again were talking about transformations …that maybe are so quixotic, so idealistic to consider that they will never happen.

One of the guys that I got to know at OWS over weeks and weeks of just going there every night and just hanging there and talking to people was a guy called Jeff Smith – formerly in advertising – totally a clean cut dude. Here’s a guy who spent 15 years, as he put it, “selling sugar water to children” and repenting of it and finding now that he had worked for as he put it – quote – the most evil industries. So now he’s down at OWS fomenting disruption and marches and helping to organize the media working groups – so called – that engage in outreach with people like me. So you have the entire spectrum down at OWS in Zucotti Park in Lower Manhattan.

K.F: were talking to Christopher Ketcham, author of Reign of the One Percenters, and Christopher, in closing, can you tell us in about the next level of development for the OWS movement. What has been happening down there? We’re seeing that there’s plenty of goodwill still continuing – meetings going on in various public buildings around the city. But what are you feeling is going to happen once this winter is over in the north?

C.K: well, you know, November 15 rolled around and the park was raided and many people were assaulted and pepper sprayed. It was a bloody scene. It was violent and there was some talk that that was the end of it. That OWS with the scattering of the encampment at Zuccoti Park that that would also be the scattering of the movement. But in fact it rebounded astonishingly. Two days later, on November 17, OWS organized with a labor coalition the largest march it has ever organized to date – 32,000 people marched through lower Manhattan and across the Brooklyn Bridge.

Forty labor representatives in protest of the violent crackdowns of police in New York and elsewhere across the United States were arrested. Now that hasn’t happened since the 1930s. Labor has not come out in a cross-trade coalition to support each other – to support a political movement. That is to support radical political change. So you got a labor coalition coming together with OWS.

OWS now has an office and its got a central core of organizers. Its got lots of support. They’ve got lots of money. They have got their encampments that are still surviving and fighting off the police all over this country whether it be in LA or in Oakland where there’s been a lot of violence.

So you know the movement is not over. And in a sense the destruction of Zuccoti Park, which had become the symbolic centre of the movement, handed to OWS the moral high ground. And, so in a sense, it was a tactical error of huge proportions on behalf of the Bloomberg administration. So I see the movement growing. I see it building coalitions. I see it turning into I’m not sure what, but it will have some sort of effect on the 2012 elections.

K.F: and what would you say to Australian listeners in respect of the northern hemisphere at the moment?

C.K: I would say that the enemy is in NYC and the enemy is the 1% and they’ve got to be taken down – peacefully. That’s what I would say. And the 1% is everywhere.

The 1% is a global elite that want to steal, and plunder, and privatize and sequester the wealth and resources of this planet unto themselves and I think we have to band together, worldwide, and stop it. Stop it so that the world, the planetary commons can be shared among all and so that we can have some sort of dignified survival in the future, you know, as a race – as a human race: as homo sapiens. That’s my message.

Adam Schwab wrote up our fourth report on speculative vacancies in Crikey yesterday.

Shortage or glut? Feast or famine? The question of whether Australia is suffering a housing shortage continues to be hotly disputed, with the real estate and construction lobbies arguing a desperate shortage exists, while other independent bodies, such as Prosper Australia, disputing the notion of a shortage.

The housing glut argument is led by Earthsharing Australia, which last year produced a report suggesting that the vacancy rate in Melbourne (until recently, one of Australia’s hottest property markets) was about 5%. In fashionable suburbs, such as East Melbourne or the Docklands, vacancy rates exceeded 8%. Earthsharing’s report, which was based on water statistics provided by City West Water and Yarra Valley Water, suggested that more than 60,000 properties lay vacant in Melbourne — substantially more than the reported vacancy report suggested by the real estate lobby.

While not a perfect measure, there is a degree of commonsense to Earthsharing’s report. Rather than attempt to guess whether there is a housing shortage based on economic assumptions, the group simply checked whether to see water was being used in a property — it is not unreasonable to suggest that if no water is being used for a length of time, the property is unoccupied.

That view was contrasted by a report released by the National Housing Supply Council, which echoed the sentiments of construction groups and claimed Australia was in the midst of a housing shortage. In fact, according to the council, the shortage actually increased by 28,200 to 186,800 during 2011. Even worse, the alleged shortage is forecast to widen to 640,000 within 20 years.

The National Supply Council is a strange beast — formed by the federal government in 2008, the organisation is a strange mix of academia, property developers and the even respected Saul Eslake. Included in the council are Mark Hunter (CEO of Stockland Residential), Nigel Satterley (property developer and BRW Rich List member), Ruth Spielman (executive officer, National Growth Areas Alliance) and Simon Norris (Clarendon Homes Queensland).

The council’s rationale for deeming a housing shortage is worth considering further. That is because rather than look at actual demand for housing, the council uses “underlying” demand. This leads to strange results.

Last year, the population of Australia increased by 320,000 — this was through a combination of immigration and births (less deaths). This figure is sourced from the ABS, so we can assume it is about a correct a figure as we can locate. According to the council’s report, there were 131,000 dwellings added last year (this figure is lower than what other sources claim, but we’ll accept it).

The council’s own report noted that there are 8.7 million households in Australia — with a population of 22.4 million, that means there are 2.6 people per household. Using fairly simple arithmetic, that means with 2.6 people per dwelling, and 131,000 new dwellings, enough housing was built last year for 340,000 people.

But wait, the population only increased by 320,000 people — that means, despite the council’s claims, there is a surplus of housing being built (even with dwelling construction being less than forecast). This appears to contradict the council’s finding that the shortage increased in 2011.

The council claimed that “on the demand side, at any given point in time underlying demand may not feed through directly into effective (actual) demand” — basically, what that appears to mean is that while there isn’t really a shortage, it will make some assumptions that allow a shortage to appear.

Later, the council noted that “the level of underlying demand is driven mostly by migration and other demographic factors”. Essentially, it appears the council is claiming that demand may increase in coming years (even though immigration levels are falling, rather than increasing), and that is why a shortage exists. The fact that a surplus of housing was built last year is disregarded.

More mysteriously, the Supply Council also claimed that “there were about 8.7 million households in Australia in June 2010. The number of households is projected to be 12 million by 2030, representing a net increase of nearly 3.3 million households between 2010 and 2030″.

This alarming forecast again doesn’t appear matched by recent facts.

Based on household numbers, the council is predicting an Australian population of 31.2 million in 19 years. That’s an increase of 9 million from the current level. The problem? That would require Australia’s population to increase by 473,000 per year — 42% more than the population increased in 2011. In fact, that’s a higher population growth rate than Australia has ever recorded. The claim is more difficult to justify given that Australia’s population growth and migration is slowing after spiking in 2008 and 2009 (see table below).

House prices haven’t increased because of increased demand from migrants outstripping dwelling construction — rather, prices have risen because bank lending has created false demand. Supply factors have played little, if any role in the recent house price growth. As soon as bank lending is restricted (and this is happening already), it is likely the illusion of a supply shortage will disappear. Just like what happened in Japan in the 1990s, or California and Ireland after the recent financial crises.

A clip taken from our film Real Estate 4 Ransom.

For those visitors from this weekend’s Domain article, feel free to read this or this. Listen here.

Renegade Economists 206

Listen to the podcast weekly, broadcast from the almighty 3CR.

Broadcast Oct, 26th, 2011

K.F: Let’s have a chat with Yanis Tziligakis. He’s a New York based academic – he’s got a bachelors, a masters, and a phd in the field of physics – he’s now realized he’s got to get his head around economics and he’s headstrong into it, in the last 3 years doing some really good stuff on creative commons. We started off talking about Jeffrey Sachs’ new book. He was off to see his speech earlier today. Sachs’ new book is called the Price of Civilization. Anyway let’s get into this right now.

Can you give us a broad brush overview of the Greek economy? How much money do they owe? What’s the next tranche of debt they’re struggling to gain finance for at present? Set the scene for us.

Y.T: the level of the Greek debt is about €350 billion but of course that’s sensitive to the interest rates. Now Greece got about €110 billion bailout from the European Union and this is channeled- it’s been given to Greece in installments so this is exactly what the current problem was because Greece is supposed to be fulfilling certain obligations for each installment to be handed to it. Now as you can understand the problem lies in that those expectations that the Greek economy has to be fulfilling every time the new installment comes due to be paid out is that they are unrealistic. Or let me put it they are overly optimistic.

The Greek government thinks that they can target their deficit by austerity but at the same time losing track of their income – the tax revenues keep shrinking because of the austerity. It seems to me that the battle of tax evasion which is the main affliction of the Greek economy, if not of most of the economies around the world, that’s the battle that is impossible to win without international cooperation and that’s what Greece is lacking right now.

K.F: How do people evade their taxes in Greece? We hear a lot of stories of corruption going on there but tell us some of the stories you’ve heard of how the social contract in Greece is somewhat different to most countries, where only fools pay their taxes.

Y.T: I think the problem of tax evasion is not a moral problem. I’m against this corruption nuance that’s been passed around and I don’t think tax evasion is a corrupt act. I think it’s an act that makes economic sense. It basically shows that the citizens do not trust to give their money to the state. So, actually the Greek citizens have withdrawn their trust from the Greek government way before the markets sniffed something iffy in the Greek economy. Now it’s sort of a vicious circle of merry-go-round.

Greeks are very entrepreneurial people. 80% of the work force are entrepreneurs and only 20% are public servants so that’s another defamation that Greece has been afflicted with that it’s a country of an overgrown public sector – overgrown, overpaid and basically an inefficient public sector . That’s not actually true.

Greece is actually on the bottom tier of the European Union as far as size of public sector workforce and the size of its salaries that are devoted to the public sector. So the tax evasion has a very interesting nuance that actually nobody has picked up yet. The nuance is this – if the Greeks were simply tax evading, Greece wouldn’t have a problem because Greece would have been shrinking its economy and the cost of living in Greece would be going down if the Greeks were simply exporting their money overseas but that’s not really what is happening in Greece.

The money gets evaded to offshore tax havens and mattressed to places like Switzerland, the Caymans – Greeks are champions in offshoring – and the money comes back to the country untaxed – inflating real estate prices – which affects the overall cost of living and the cost of doing business. So that’s how Greece gets doubly hurt by tax evasion.

K.F: Tell us about the size of the Greek property bubble through the 2000s – how high did it grow?

Y.T: Greece’s real estate index inflated from the years 1993 to about 2008 – it inflated about 225%. So Greece has wealth – but it is under the mattress we call “slow turnover yielding capital”. That is called, in common parlance, real estate. Now the tragic-comic aspect to this is that offshore companies hold the bulk of this real estate and they artificially make Greece expensive for its own citizens.

K.F: Phenomenal – and then the property tax system in Greece has the curse of taxing the improvements like it does in so many other countries, so I hear there are lots of unfinished houses with steel turrets poking out of the roof as if the house isn’t really finished (only finished houses pay property taxes on the improvements). Is that one of the common sights around Athens and so forth?

Y.T: The common sight in Athens – but I haven’t visited for a few years – but a number I’m going to give you, Karl, is that a few months ago they had about 200,000 vacant properties – lets say available for sale or rent – I mean that’s an amazing supply of housing, however, the ratio of wages and pensions to rent has been constantly decreasing. In other words it becomes more and more unbearable to come up with the everyday living expenses especially for people who are getting unemployed and especially for pensioners.

Everybody’s talking about unemployment relief and extra relief to the pensioners but nobody can see that an immediate relief, which would be of no cost to the budget of the government, is by taxing rents and thus forcing them (house prices) down.

Another impact of the high rents is also on Greek businesses. About 1000 Greek businesses outsourced themselves – like they leave the country to go across the border – it’s a similar situation between the United States and Mexico. Its almost like it reaches the realm of the tragic-comic in Greece because it looks like Greeks keep shooting their own feet but they don’t seem to realize they are doing that. And it’s tragic for all these Greek companies that Greece is too expensive for them but Bulgaria isn’t. That’s the effect of high rents of an inflated real estate market which affects both workers and businessmen – it affects both labor and capital.

K.F: What taxation – what capturing of economic rents is there in Greece?

Y.T: Right now even though I had predicted and I had been fighting with my fellow Greeks because Greece is a country where 80% of the people have land. It’s not a country where the people are renters. I mean it’s not like the United States where the land belongs to a few people – a few moguls. In Greece almost everybody has some kind of property. So people know the value of their land and it’s hard for them to realize that this economic factor of production needs to be targeted. They don’t understand that land is a passive factor so if you invest in it you hurt the productive aspects of the economy. Greeks don’t seem to realize that.

However, the government realized it recently so they have actually tried to impose a real estate tax which they’re going to collect through the utility bill because that way they hope that they will be able to pinch everybody and nobody can avoid paying their utility bill so that’s the way they think that this tax is going to be imposed. Now as you said before this real estate tax is faulty, economically, in the sense that it punishes improvements on the land but it doesn’t punish speculation on the land values.

K.F: we’ve certainly got some topsy-turvy economic policies filtering around the world and no doubt the Jeffrey Sachs of the world will be continuing on this misinformation that we should be taxing our food and we should be cutting the public service and cutting the wages rather than ensuring that the precious resources we own are used efficiently and the naturally rising value of this earth is recycled back to the people, through the government, rather than all these taxes that just go mad.

So lots of rioting – there’s obviously some passion on the streets as we love Greek people for but what are the N.G.O’s, the resistance – are they actually looking at serious economic policy or is there still too much pain and hurt on the streets for people to be looking at alternative policies?
Y.T: I’m not sure – besides the Communist Party who has a very clear and ironclad ideology – which still doesn’t sound to me very clear on how it can be implemented. It’s one thing to say “support the workers” and another thing how are you going to provide the funds to support the workers in a climate where the businesses that employ the workers leave the country. So besides that I don’t see a very clear and well thought out plan on how to tackle the economic inconsistencies in Greece.

As soon as the government announced this extra real estate tax everybody attacked it. They think that boosting the real estate market is the way that the Greek economy should be going. However, they fail to see that that is actually what doomed the Greek economy. We had a 225% rise in the real estate and yet we are down in the dumps. So I don’t think there’s a clear understanding, even among Greek politicians. Even though I’m not a fan of the PASOK party, or George Papandreou, it sounds to me that he is the more likely to come up with the right economic solution.

As far as the conservative party, it sounds to me like its going to be a Greek version of the American Republican- the American G.O.P. party. So I’m not really hopeful if the conservative party takes the lead of the country – I’m not very hopeful about that.

But the people need to be on the street. The people need to protest not only about the economic demise of the country which is the result of an elite proportion of the population and that is something that the media don’t pay their due justice – their fair justice. They engage in a carpet criticism of the entire Greek people which almost borderlines racial slurring instead of targeting the true culprits which is an economic elite of 5 or 10% of the population.

An indicator that this is the case is that nobody, even from the Europeans, bother about the € 80 billion outflux of Greek savings to Swiss and other European banks last year. They almost put the country to the brink of revolution just for almost a billion dollars discrepancy in the reduction of the deficit this past October. However they don’t seem to bother about the €80 billion of savings that fled from the Greek banks to other European banks. It looks like some people do benefit from the panic by instilling panic into the minds and the psyche of the Greek people. So the Greek people need to think better of who their allies are and who aren’t.

Karl, the last point I want to make is that Andrea Merkel spoke yesterday in a very different and clear tone. She said very clearly that she wants to get her hands on the Greek real estate – on the Greek land, on the Greek natural resources; and solar power- that’s the key for the future. Greece has 50% more sunshine than Germany and yet is 80% behind Germany in taking advantage of that. The Germans want to take a piece of the Greek sun and that’s what this debt crisis is all about.

K.F: Whoa, that is a mad point to finish off with Yanis – thank you very much for joining us here on the Renegade Economists.

Thanks to Paolo Rosa for the pic

David Smiley

David Smiley is the author of Crumbling Foundations and Third World Intervention – A New Analysis

Revolutions usually start with the violent toppling of some hated figurehead, for example the French Louis XV, the Russian Tsar or some recent Middle Eastern despot. Revolutions usually finish in confusion. This is because, after the smoke and confusion of battle, a hastily patched up government may have given little thought about what comes next. And so, unless the underlying causes of revolution are carefully examined, then important opportunities for reform may be lost, and the revolution may not be successful.

In these articles I will examine a number of revolutions, look at some of the opportunities that were lost, and draw some conclusions. But first, how do we define revolutions?

Classical Marxists saw revolution as the violent anti-capitalist uprising of an urban proletariat. But the urban poor in Paris and St. Petersburg had fled there from rapacious rural landlords, then to be fleeced by rapacious urban landlords. Even today, in the slums of Rio or Mumbai, most of the proletariat would identify the oppressor with the rent collecting slumlord or protection racketeer round the corner rather than some conceptual capitalist. Marx would not have recognised today’s slum dwellers, without factories, workshops and work, without capitalist bosses, in a muddle of informal and criminal activities far beyond class mobilisation. Finally, since I wish to include some revolutions that have been non-violent, or simply evolutionary, I will therefore take revolution to mean any major socio-economic transition.

I must start with a few simplifying assumptions. I will test each of these against a number of revolutions. Where these assumptions do not fit I must explain why. Here, then, are my preliminary assumptions. Revolutions occur when relative deprivation becomes intolerable and some window of opportunity opens. Whether violent or non-violent, the focus on a king, a dictator or an occupying power prevents clear thinking about the powerful agencies that prop up this figurehead.

In a country sliding towards revolution, one of these agencies may control capital assets, collecting monopoly rents. A contemporary example is the Egyptian military. Another agency, a network of absentee landlords and slumlords, collects the land rent. Contemporary examples can be found in Kolkata, Mumbai or in any Latin American city. And a third agency controls the extraction of natural resources, collecting resource rents. Contemporary examples include the Saudi royal family and, at the time of writing, Colonel Gadaffi. Finally, there may be an external agency, an occupying power or a transnational corporation, often in collusion with one of the other agencies in order to share out the rents. So, when the king has been toppled, reforms that do not understand the power of these agencies may be quite inappropriate and the revolution is therefore unsuccessful.

A major object of these articles is to identify, for each case study, non-violent alternatives that could have avoided the huge costs suffered.

In part one I will analyse three classical revolutions, the French, Russian, and the Chinese up to the death of Mao Zedong. In part two I will examine four non-violent revolutions: an evolutionary one called the Industrial Revolution, the coercive but peaceful creation of the Asian Tigers, the spontaneous one that followed the death of Mao, and one called the bourgeois revolution in India. In part three I will trace recent evolutionary revolutions that are experimenting with something that is itself revolutionary, the use of social media.

PART ONE
The French revolution arose from the relative deprivation of the working class under a wealthy land-owning class. The focus was the monarchy, symbolised by the opulence of the Palace of Versailles. The method was very violent, the removal by the guillotine of royalty and large numbers of the aristocracy. But did it reduce the power of the military? No, within six years Napoleon was dispersing a Paris mob “with a whiff of grapeshot” and, in another nine years, he had declared himself emperor. Did it reduce the power of the landowning elite? No, they soon returned to the building of luxurious chateaux. But though the collusion with outside powers continued it was mostly over strategic marriages, those “dynastic squabbles over real estate”.

The importance of natural resources had to await the industrial revolution. So, what reforms followed the French revolution, and what opportunities were missed? The reforms included a secular constitution and the adoption of some of Thomas Paine’s Rights of Man. What opportunities were missed? For an oppressive agrarian society the opportunities lost essentially concern land reform. With very few exceptions, which we will examine later, land redistribution from rich to poor has been violent, or condemned as property expropriation and therefore legally defeated.

I believe the French revolution missed two opportunities which were both non-violent and legal. One opportunity had been explained by the French Physiocrats, who had developed the first ever econometric model, the Tableaux Economique, which had hinted at the taxation of land rent. But in the revolutionary rough and tumble the Physiocrats had been forgotten. The second opportunity came with the publication of Thomas Paine’s Agrarian Justice, in which he argued the need to match land rights with land taxation obligations. But by then, the French, and also the Americans, had thought, incorrectly, that Paine’s earlier book, the Rights of Man, had said it all. It had not.

In summary, the French revolution seems to conform to my assumptions. Was it successful? The net benefit has been debated ever since, but there is little doubt that it incurred a huge opportunity cost in ignoring the Physiocrats, and Paine’s Agrarian Justice.

The Russian revolution arose in a similar way, with a wealthy land-owning aristocracy owing allegiance, in this case to the Tsar. The focus was therefore the Tsar, symbolised by the palaces of St Petersburg. Peter the Great, in a fit of pique over an unsuccessful palace revolt in Moscow, and with the income from his own immense landed estates behind him, had then ordered the construction of a new capital in a freezing Baltic swamp. In an insane attempt to rival Versailles and Venice, the building of St Petersburg cost the lives of 150,000 serfs and bankrupted the economy.

In 1861 the emancipation of the serfs made little difference to their fortunes since land ownership, and hence rights to collect whatever rents they wished, remained concentrated in the nobility. Under Marxist leadership the revolutionary method was, and continued to be, very violent. Capital assets, land and natural resources were nationalised. Already low production incentives were raised only by extreme coercion. Under Stalin massive assassinations and failed economic plans cost something like 30 million lives.

After further huge costs from the Second World War and the Cold War, Russia started to lose its way.

What then, were the opportunities forfeited by Russian communism? Tolstoy had already recommended land reform, and the implications of Ricardo’s law of rent was not lost on Engels whose Communist Manifesto started with “The collection of all land rent for public purposes.” This was never implemented and, when Russian communism finally imploded and property rights were suddenly up for grabs, an American Georgist economist collected 30 signatures, three from Nobel Prize winners, for a letter to Gorbachev advocating what was essentially the collection of all land rent for public purposes. But by then the Commissars had already morphed into capitalists and it was all too late.

The Chinese revolution also arose from poverty and extreme deprivation caused by the feudal system. But this was made worse by the Japanese invasion which overlapped with the Chinese civil war. After the Japanese were defeated and Mao Zedong’s won the civil war, his revolutionary method consisted of two land reforms and a disastrous industrial experiment. The method employed in the first land reform was the slaughter of ten million landlords. Thus liberated, the peasantry were easily driven into collectives and communes, the largely unsuccessful second land reform. The industrial Great Leap Forward then led to mass starvation and the cost of 35 million lives.

Locked into Marxist ideology and being economically illiterate, Mao was quite unaware of the opportunities of other reforms. After his death, occurred China’s third land reform, perhaps the most successful revolution in human history, the subject of the next article.

PART TWO
The industrial revolution, though it possessed the classical revolutionary ingredients, British dispossessions labelled The Great Hunger in Ireland, the Highland clearances in Scotland, and the Enclosures Acts in England, generated no major uprising. I include it here to compare its opportunity costs with those of violent revolution. Its method included rural dispossession that fed surplus labour into overcrowded factory towns, exploitation of the resulting cheap labour, private capital industrial investment, the extraction of raw material from colonies, and profits from the slave trade.

The short term outcomes were poverty, starvation and mass migrations to America and the British colonies. But the long term outcome was a leap in industrial efficiency in which Adam Smith’s optimism defeated Thomas Malthus’ pessimism. The industrial revolution evolved across Europe and to North America, creating what we now call the “West”, a combination of competitive and monopoly capitalism, an imperialism that once owned more than half the world, and now a neo-imperialism called the Washington Consensus.

The old feudal class system put its money in factories and, in the 20th century, evolved, into a system of agricultural support that rewards landowners at the expense of taxpayers and the third world farmers which the scheme bankrupts. The opportunities forfeited by this laissez-faire system, already labelled capitalism, would by then have included communism. But the socialisation of the means of production would probably have been as unsuccessful as it was to be in Russia, China, Cambodia and North Korea.

However, having seen how the expropriation of peasant land created a factory underclass and an urban upper class of landlords and factory owners, Engels in 1848 published, along with Marx, the Communist Manifesto. Item one advocated “the collection of all land rent for public purposes”. This revolutionary idea was developed into Henry George’s Progress and Poverty. Though the idea found its way into local government revenue systems, it was never fully implemented. This reform could have raised incomes, reduced inequality, and avoided the recent Great Financial Crisis.

The creation of the Asian Tigers was a response, by General MacArthur, to instructions to stop the spread of communism into South East Asia after World War 2. Given absolute power to do so, he recognised the link between feudalism and poverty. So, his focus was on feudal landlords. His method was non-violent, agrarian land redistribution, from the rich to the poor, in Japan, South Korea and Taiwan. The results were spectacular.

Feudal class relations were replaced by egalitarian family farms, and the sudden leap in production incentives carried economic growth from zero to eight percent per annum.

“In all three of Asia’s biggest successes – Japan, South Korea and Taiwan – the groundwork for both fast growth and the income equality that eased the social strains of development was laid by a radical land reform.” (Economist, 29 June, 1991, p. 16.).

But there are two large opportunity costs of land redistribution that become obvious as a country urbanises, as I will examine in the case of China.

First, land redistribution is inappropriate to cities. Second, as urban migration responds to industrialisation, they leave behind assets of falling value but must pay high rents in the cities to those who were there first. Rural poverty migrates to urban poverty.

The third China land reform arose in the inter-regnum after Mao died in 1976. Deng Xiaoping recorded that “Almost immediately, and perhaps spontaneously, the peasants began to divide up the land themselves and grow food as they thought fit instead of following state directives.”

Then, in 1978 Deng Xiaoping was smart enough to claim this as his Household Responsibility System. Later, Deng admitted that “What took us completely by surprise was the development of township and rural industries” as the peasants invested surplus and turned capitalist.

By the mid-1990s, over half of China’s industrial output came from these rural enterprises that operated outside the planned economy. Was there an opportunity lost to Deng? This third land reform, in one of the most egalitarian countries in the world, was non-violent and led to an unprecedented and almost continuous economic growth of ten percent per annum. What more could he want?

But after three decades of prosperity China now faces corruption and social unrest resulting in 15 million urban migrants a year. And the vibrant underlying economy must still carry inefficient state-owned industries and a largely unnecessary political bureaucracy. To keep ahead of popular uprisings, China’s domestic policy must be continued high economic growth while trampling on human rights. But to achieve this it needs natural resources it does not have. Therefore, China’s foreign policy must be to control or obtain these resources as ruthlessly as necessary, from anywhere, anyhow, controlling water from Tibet, food from Africa and energy from Australia.

Paralleling that of the Washington Consensus, China’s new foreign policy has now been labelled the Beijing Consensus. To get these it must provide money, guns, bribes, political leverage, anything, to any state, good, bad or ugly, that is rich in oil, gas, coal, minerals and steel.

There is one opportunity still overlooked. Engels called it “The collection of land rent for public purposes” but communism ignored it to its peril. George called it the “Single tax” but the West also ignored it.

PART THREE
India’s bourgeois revolution. Robert Stern in Changing India: Bourgeois Revolution on the Subcontinent attributes India’s economic takeoff to the effects of capitalism and parliamentary democracy. That he calls it “change from the middle upward”, one that is bypassing the poor, is well illustrated by this quote from World Hunger by Lappe and Collins

“The buyers are a motley group, some connected with land through family ties, some altogether new to agriculture. A few have unemployed rupees acquired through undeclared earnings, and most of them look upon farming as a tax haven, which it is, and as a source of earning tax-free supplementary income.”

The medical doctor from Jullundar who turned part time farmer is sitting pretty. The 15 acres he purchased four years ago have tripled in value. To listen to him, he is farming ‘for the good of the country’. His only vexation is whether or not he will succeed in buying another ten acres he has his eyes on – and what a disappointed man he will be if they escape him. As we watched him supervise the threshing, he was anything but a gentleman farmer.”

What, then, are the opportunity costs of this bourgeois revolution? Marxism has failed in Kerala, been abolished in West Bengal, and discredited elsewhere in the world.

Since India’s economic takeoff has benefited mostly the landowning class, we must look to land reform. But every attempt at rural land redistribution in India has been defeated by people powerful enough to legislate around it. Meanwhile urban slumlords extract rent, even from those squatting on footpaths and railway sidings.

This leaves land value taxation as the only way out of poverty while, at the same time, increasing economic efficiency.

Conclusions
Our preliminary assumptions closely fit the case studies so far, encouraging me to look at other world regions in a later article. For example, I grew up in South America and extensive studies since then suggest for me the relevance of my assumptions to that region. For Sub-Saharan Africa I would add bureaucratic rents to those of capital, land and natural resources before proceeding. In a previous article I hinted at Georgist solutions to the problems in the Middle East and North Africa.

Though my assumptions closely resemble the agencies propping up kings and dictators in that region, events are still unfolding. Therefore, it is too early to know what effective reforms, if any, will follow the toppling of the tyrants. But I am sure, without tax reform, they will carry large opportunity costs.

So, when do revolutions succeed? When the tyrant is toppled? Or when the power behind the tyrant is reformed? The more diffuse the power, as with feudal, caste, oligopoly and reciprocity systems, then the less effective is legislation, and the more effective are financial incentives. Economists always reach for taxation when they want to change behaviour to achieve social objectives.

Our second Melbourne screening of Real Estate 4 Ransom will be a huge day.
We hope you can join us.

2.15pm – Melbourne’s Magic Money Walk
3.30pm – Federal Greens MP Adam Bandt introduces the film.
4.10pm – Co-Directors Karl Fitzgerald & Gavin Emmanuel Q & A
4.30pm – Drinks downstairs

Melbourne’s Magic Money Walk

Co-Director Karl Fitzgerald will head a walk through Melbourne’s real estate hot spots, describing how the interplay between community, government and creativity adds millions of dollars in magic money to the lucky few.

Why have certain shops turned over? Why have some been for sale/ rent forever? What are the stories behind developments during Melbourne’s recent apartment supply blitz. Speculative vacancies anyone?

The free 45 min walk will end up at ACMI cinemas to see Real Estate 4 Ransom the film.

Meet at the Roundabout near Victoria markets on the corner of Queen and Franklin st, call 0433255721 if you get lost.

Federal Greens MP Adam Bandt will introduce the film. What hope is there for affordable housing?
See the trailer.
Or Collect the Ransom.
Buy your tickets to the film for $10.

Renegade Economists

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Michael Hudson was recently interviewed for our 200th show, following his visit to President Medvedev’s Global Policy Forum. The interview has gone viral following a link from Naked Capitalism and Michael’s popular site.

Listen here

Transcription

Karl Fitzgerald: Michael Hudson, our old friend here on the Renegade Economists, from the University of Missouri in Kansas City, has just returned from Russia speaking at the Global Policy Forum. Michael, tell us about the GPF.

MH: well that’s organized by President Medvedev more or less as an anti-Davos. Whereas the Davos invites many of the financial people to figure out how to run the West further into debt the subject of this forum was Russian poverty and how to overcome the fact that in the last 20 years the neo-liberal program that promised that Russia and the rest of the soviet republics would get rich has simply driven them all into debt and impoverished them.

KF: And so 30 years on from glasnost there must be quite some sense of concern about where the Russian economy has ended up.

MH: there certainly is. It’s been losing not only capital flight of $25 billion a year to the west but its people have been emigrating and President Putin, now Prime Minister Putin, has said that the demographic effect of just privatizing Russian real estate, and industry and following western advice has lost maybe 30 million Russians from what the normal demographic growth would be to 2050. So the effect of neo-liberal financial policy has been more devastating to Russia than WW2.

KF: 30 million people have gone due to neo-liberal policies?

MH: that’s right. The birth rate has fallen, life spans are shortening, and this is throughout the former Soviet Union. People of working age are emigrating. Instead of getting rid of the old Stalinist bureaucracy the neo-liberals simply privatized it and the result of course is corruption. Now public officials that used to be in charge of handing out public policies and administering them- not very efficiently its true – simply say give us a bribe or we won’t work.

In Latvia, for instance, people who go to doctors are expected to pay the doctors under the table in a little white envelope…but most notorious of all is the real estate debt they’ve taken on. What’s unique is that, just imagine, 20 years ago when there was the revolution that turned over power to Yeltsin in Russia and broke up the Soviet Union there wasn’t any debt at all. Families had all been living in their homes without paying rent and getting a free public education, public services were free and employers provided lunch, vacations and pensions, cultural and all of these connections were pulled up. And all of a sudden instead of just turning over the property to the people who lived in the homes and the businesses that used the offices the government said, okay, we are going to put it all up for sale and let the banks, usually the foreign banks, lend you the money, to buy it.

And the result was the biggest real estate bubble in the world in the mid 90’s and this is what started the whole real estate bubble- certainly what catalyzed it in the west because all of a sudden Russians, Latvians, Estonians and other people had to take on a lifetime of debt in order to get the homes that they’d been living in and not be thrown out on the street. So essentially they were told your money or your life – that’s neo- liberalism.

KF: And they’ve turned over from quite a stable society to one based on volatility, and oil price volatility. The after effects of the 2008 meltdown must have shocked a lot of people in the Russian government. What was the talk along those lines – what were people thinking about?

MH: Very little because they’d already in 1991 dismantled their industry. They were told that the way to get rich was to become a raw materials exporter or what the American protectionists and the bible called “hewers of wood and drawers of water”. So Russia simply dismantled its industry. The west said, oh, you’re not competitive and what the Russians didn’t realize is that all of this was very self serving to the west. The West, especially the American planners- the Harvard boys that went over said, well, we really don’t want is for Russia ever to be a military threat. We’d like to conquer it, to break it up, let’s now just slam them at the end of the cold war.

So without an industrial, manufacturing base there can’t really be much of a military. So the first thing they did was say – get rid of your manufacturing, get rid of your engineering, begin charging for your schooling, close down the schools – you don’t need engineers all you really need to do is make a hole in the ground.

But none of this export revenue from the hole in the ground should really be turned over to the state – we want to make sure that you only tax labor and tax business, but don’t tax natural resources – let it all be privatized. And so Russia thought, gee this sounds like a funny way to get rich but that’s what they did. And so they followed the Harvard advice to give away the oil, the nickel companies, the mineral resources, and that’s how they got the money to begin sending it all to the west. There wasn’t any Russian money to buy these companies because the IMF and World Bank wiped out Russian savers with a hyper inflation by getting rid of all the capital controls and letting the rouble float. So it was just one bad advice after another and now the Russians realize they’ve been taken.

And they’re trying to figure out how on earth do we get out of this mess following the West’s advice. They thought, and the Baltics thought, that they were been told how to develop in the way that the West did. Neo-liberalism is the exact opposite of how Britain and the United States, Germany, Japan, and now China, got rich by progressive taxation, and having public infrastructure provided at much lower cost than privatized infrastructure and a resource fund tax, basically a land tax which is how Europe and America – states and localities – have been financed all throughout their history.

KF: So what was the sentiment at this GPF? Was there much discussion along those lines or are they tinkering at the edges with Tobin taxes and the like?

MH: Mostly tinkering at the edges. For instance Paul Krugman was invited and most of the focus was on the US and western financial meltdown. And he pointed out that while the problem of the post 2008 bubble was caused by private sector banking -the financial bubble – the solution is focusing on fiscal policy and particularly cutbacks in social security, Medicare and social spending and so the government’s response to the crisis that the banks have caused is to reduce living standards for labor all the more by taxing labor. There was no discussion by the Americans or by anybody that there was another fiscal policy that would have prevented the bubble in the first place, namely taxing the land and taxing real estate, and having a resource rent tax that wouldn’t have left all of this free lunch income available to be pledged to the banks and paid out as interest.

KF: I just can’t understand this austerity mentality that’s going on. Have Western economies lost the understanding of the multiplier effect? Can you explain to us what the multiplier effect is and why it’s no longer relevant under today’s neo liberal agenda?

MH: The basic idea is that if there is a decline in purchasing power – what we’re in right now in the West is debt deflation – people have to pay so much more money every month to pay their mortgage debt, their bank debt, their education loans and other bank loans, that they don’t have enough money to spend on goods and services. Now without spending on what labor produces – the goods and services – the businesses are not going to employ more labor to produce goods and services and they’re not going to invest in capital.

So the idea is if there’s a shortfall in the demand for goods and services the government should step in and run a budget deficit to rebuild the infrastructure because that’s what governments have always provided – roads and everything – in order to keep the economy solvent. But the bankers and the neo-liberals don’t want this.

When you have a poverty imposed on a country decade after decade, somebody is benefiting from all this and people are saying isn’t it too bad that economies are getting poor. Well it’s not too bad at all if you’re a banker because now these countries like Greece and Ireland are broke and now the bankers get to go to them and say, well, you have to finance your government spending not by government running a deficit – but sell us your real estate, sell us your mines.

So the bankers of the European central bank have gone to Greece and said in order for us not to plunge you into anarchy and just destroy your banking system you have to sell us your prime tourist land, ports, water and sewer systems so we can begin to charge people for water and sewers – you have to sell us your roads so that we can put up toll booths, but most of all give us your land, give us the Parthenon and if you don’t we will wreck your economy.

So what most people think is a policy mistake isn’t a mistake at all by the bankers. This is where they say foreclosure time has arrived and we’re going to get rich. This is where we put on the squeeze and the effect of finance under these conditions is very much like a military invasion but it’s a military attack without anybody losing their life except for the people who commit suicide, who die early and emigrate for the whole thing. So people don’t realize that the poverty for the many and the austerity is how the wealthy 1% of the population gets to clean up.

KF: surely though in Russia they’ve seen these huge property bubbles in Moscow, they’ve seen the oligarchs fly around the world buying up soccer teams all over the place and on the other side they’ve got their lead ice hockey team die in a plane crash and the average person on the street is not even surprised that planes fall out of the sky like anybody’s business over there. So how much can the people in Russia handle before they get really serious about looking at deep seated economic reform?

MH: nobody knows. There are the oligarchs and while Russia is known for the fact that much of the population is in poverty the fact is that they’ve created an awful lot of billionaires, almost more than anywhere else by giving them all of the land, resources, oil and the gas. So all the billionaires do what they do in other countries. They pretty much control the government and they’ve convinced the government to stop providing schooling and to close down many of the schools, especially in engineering, and they control the media so people really aren’t discussing the kind of thing that we’re discussing here.

That came out pretty clearly. The head of the economics section of the Academy of Sciences did ask me to write up most of these ideas to put them into discussion but the discussion has been almost entirely censored by the neo-liberal advisers who they brought over, ever since Jeffrey Sachs and the Harvard boys all came over and said don’t follow any advice but ours – there was a choice and they don’t realize in Russia that there was a choice.

For instance in 1991 my friend Ted Gwartney went over to St Petersburg in Moscow and offered to make a land map for them and said, look, if you make a land map and the price of real estate goes up, if the rental value of these homes goes up this should be your tax base and you’ll have the money to continue to spend on infrastructure – you won’t have to tax your labor and you can make your industry into a world competitive force.

Well he was told by the World Bank that’s not our plan. Our plan is to have a flat tax – to tax labor, not to tax land and resources because we want the West to buy up these resources. We want to buy it all and we don’t want to be taxed. We want the Russians to pay the tax and then we want all of their skilled labor to go to the West and that will cripple them. Russia’s poverty is the West’s benefit in this case and the result was that Russia became the world’s leading stock market from 1994 to 1997 and made enormous fortunes for Wall Street speculators while essentially emptying out Russian capital, labor, industry and the same thing happened in the Baltics.

KF: and now we have David Cameron in Russia spruiking up the support for Russia to join the WTO.

MH: I can’t understand that. Nobody discussed that in policy. We just talked about how Russia could overcome the poverty that it’s in and what they could do.

KF: so it’s interesting what’s happening on the world trade frontier we’re seeing this new age of protectionism becoming more and more prevalent with currency devaluation and recently the Swiss franc had a cap placed on it. Of course the Chinese Reminibi has always been undervalued there to assist their exports. What you are seeing now that America has all sorts of public-private contracts written in where there’s local procurement policies in place where you to buy a certain amount of steel from a local manufacturer for example.

MF: that’s been the case for the last 100 years. America has always been the most protectionist country in the world. This is where the theory of protectionism was really refined in the second half of the 19th century and when the WTO and international trade agreements – the GATT- were being formed after WW2 the US grandfathered in its protectionism. It said we’re going to have free trade except for countries that already have agricultural price supports and other subsidies – they get to continue what they’re doing and so America has always been the most protectionist country in the world and that’s what I wrote about in (my books) “Global Fracture” and “Super Imperialism”.

KF: Well so many countries are looking to protect their own backyard because of the short electoral cycle, because of the failure of these neo-liberal policies to deliver the so called wealth bonus for everyone and now the story keeps growing – let’s blame the banks for it was all to do with their corrupt lendings. Well I was very interested the other week to see the FHFA lawsuits against 17 banks in America been launched, and it was stated that Goldman Sachs were employing property valuers or appraisers who would overstate the value of the land that they were lending against and I was just wondering – you say you worked with a few land valuers, Ted Gwartney you mentioned – how they have been incorporated into this giant bubble ponzi scheme we are stuck within?

MH: the financial sector in America basically has become a criminalized sector. My colleague at the University of Missouri, Kansas City, Professor Bill Black, calls it a crimino-genic environment. He was one of the heads of the Federal Savings and Loans Bank board back in the 1980’s when the Savings and Loans were going bust on crooked loans to real estate and he points out at that time 2000 executives were sent to jail for financial fraud. In this bubble nobody has been sent to jail not even the big perpetrators such as Angelo Mizzello of Countrywide and the reason is that the banks bought immunity from politics by backing politicians who agreed not to regulate – not to do anything about the financial fraud that the FBI itself warned about. Basically you’re going to have criminals going to where all the money is – you know – where the wealth is.

The economy’s richest sector isn’t industry – it’s actually real estate – and the largest element of real estate is land. So most of the criminals all said here’s where all the money is, here’s where we can get rich in real estate lending. So in America they had no documentation loans so in other words the banks said we have got to begin … here’s this huge market and we make money making loans – let’s fuel a real estate bubble. They fueled it by easier and easier loan terms.

In the past in America a local bank would make a loan to somebody they knew – families that put 30% down and they would pay off with their income and the bank would use this income to pay part of it out as interest to depositors. Well in the last 15 to 20 years banks have begun to package them and sell them to other people. So the crookedness and the fraud took place in having mortgages way above the property value at a very high interest rate and then selling them to pension funds, to German banks, and to foreigners and essentially selling them property for much more than it was actually worth.

For instance the FBI found that 80% of the mortgage loans in these packages were fraudulent and in the worst of the liar’s loans – the AAA rated packages- the average actual price of the property in America happened to be the same value as in Ireland – 22 cents on the dollar. In other words 4/5 of these loans were just way beyond the value. Well that’s why all of a sudden, now that the banks are no longer fueling property by credit – and they’ve withdrawn their loans – that’s why property prices have fallen by about 30% in America and you walk down the street and there are “For Sale” signs everywhere and there are empty shops in the big shopping streets.

KF: so I just want to get this straight. Are you saying that it’s the packaging up of mortgages and on-selling them in these exploding interest type mortgages was that what caused the great recession that we are in now in or was there a deeper part?

MH: well the deeper cause is the fact there was a real estate bubble to begin with and the reason people wanted to take out mortgages now was that they thought that we had better buy a home now before the price rises even further and they didn’t realize that the reason prices were rising were because the banks were making easier and easier credit. They thought that homes were worth what the rental value was or what people could afford to pay when actually what a home is worth is whatever a bank is going to lend against it. So if somebody goes out to buy a home they’re bidding against other people for the same house and the winner is the person who can get the biggest bank loan and that’s the person who says I’m going to pledge all the rental value to the bank so the bank gets all the rent as if it were the landlord.

So three years ago, for the first time in American history, the average home equity relative to bank loan fell below 50%. And now, just 3 years later, for the USA as a whole, homeowners own only 1/3 of their home, 2/3 are owned by the banks and that it is despite the fact that about 20% of homes are owned without any mortgage at all- free and clear.

It’s basically a financial bubble that is based on what the banks can squeeze out of people who are trying to buy houses on credit and the price of credit – the debt service – absorbs all of the rental value. So in the past people used to criticize landlords for squeezing workers living standards but now that you’ve democratized land ownership it’s the banks that are doing the squeezing. But obviously there has to be the rental value there and in America about 40% of a blue collar worker’s income goes to pay for housing. Now that’s an enormous percentage. You don’t have a bank bubble in Germany so that there you only have 20% of income going to pay labor. So you talked about protectionism and trade earlier and people think, gee. German labor must be highly productive so that it can afford to undersell everyone else although the reality is that German labor doesn’t have to pay as much of a mortgage as American labor so of course Germany can undersell Americans using the same technology.

KF: what I’m trying to get at though is because the tax system penalizes us for working and rewards speculation in property, surely, that has given the big heads up to the powers that be to invest in real estate, to speculate, in that area and that’s what has forced the land prices up so high that its forced all these people to become sub-prime mortgagees – you know they wouldn’t have had that home credit stress if the price of land was lower due to the tax system but you’re saying, listen, that its only due to what the banks can lend. Isn’t that secondary?

MH: now wait a minute – there’s a connection between the two. By not taxing land the government has left all of this rental value free to be pledged to the banks. People think that land tax actually increases the overall burden of homeowners and workers but its just the opposite. If this rental value that’s been pledged to the banks as mortgage interest were taxed then the banks wouldn’t be able to capitalize the rent into a large mortgage loan. Housing prices would be much lower if we had the old fashion land tax like we used to have and also by taxing the land you wouldn’t have to have all of these heavy taxes that are put on labor. For instance in Latvia in 2 weeks they’re having a national election. In Latvia there’s a set of flat taxes on employment that add up to 59% of the wage budget and there’s only a 1% tax on the value of property. So here you have money going into real estate which is untaxed – people will borrow against it – and instead of the government getting this rental value which is created by nature and by the community building roads and infrastructure the banks get it and the government has turn to somewhere else to tax – namely on to employment.

KF: I’m pleased you clarified that Michael because a lot of people blame the 70’s recession and stagflation period on the oil bubble but few remember there was a monstrous land price bubble that happened back then. I’m seeing that this era we’re going through now, we’re going to blame the wrong thing – we’re going to say listen it was the banks and all of their dodgy lending strategies that caused this whereas really to look right at the root cause it would be fairer to say, look, it’s the land problem and we’ve got to tax the right things.

MH: the banks lending strategies are part and parcel of fiscal policy. Financial reform and fiscal reform are two sides of the same coin because banks lend against whatever the tax collector doesn’t collect. If you don’t tax a free lunch then it gets pledged to the banks just like when the Russians gave away their oil and gas, the kleptocrats borrowed, mainly from the west, to buy these things, so that the government didn’t get the revenue. There’s a tradeoff between either taxes or interest but one way or another somebody’s going to pay the rental value of the mines, of homes, and of office buildings – of all of these things – so the whole economy is turned from a real estate toll booth into a financial toll booth.

KF: so essentially you’re seeing that the world economy is going to splutter along for another 5 or so years in this recessionary mode with everyone on the edge of our seats worrying about share markets?

MH: it will continue to shrink. Nobody can see how industrial profits can grow if they’re not able to sell. In America 40% of recorded corporate profits are made by the banks. Now when that happens – these are not factories, these are not employment figures – I think the Bank of America said yesterday that it’s firing 30,000 people – the banks are downsizing because the economy is all loaned up – there’s no one else they’re going to make loans to. The economy is shrinking steadily, I think, over the next 5 years, and it will continue to shrink as far as the eye can see until people write down the debts and change the tax policy.

Additional ‘un-published’ commentary:

KF: Michael Hudson – fantastic to have you on the show. On a finishing note, 1/3 of Australia’s corporate profits just announced this profit reporting season were from the mining sector.

MH: uh ha – well that means that all of these profits could have been taken by the government which used to own all the sub-soil wealth and that means that money that used to be paid in taxes, so that they wouldn’t have to tax employment, instead is been paid out to the financial sector and in fact when I met with the central bankers down in Australia in 2009 they said Australia doesn’t need any industry, it doesn’t even need employment, all it really needs is to make money off the mines’ mineral exports – to make holes in the ground. So I’m not sure what the Australian’s are hoping to get out of all this.

KF: yeah well we’re just a giant quarry, a quarry economy that seems to be what’s happening around the world and quite interesting to see that in Brazil that they’re talking about a 4% royalty on iron ore rates – just 4% – and of course the ‘poor’ miners there are screaming about it. You beat your head against a wall wondering how much easy money these guys have to make before they realize how some of this commonwealth should be paid back to the government.

MH: well that’s what we call wealth addiction. Their demands are infinite and they are willing to sacrifice billions of dollars in the economy just to make 10 or 20 dollars more for themselves. That’s the financial mentality.

KF: Michael I hear you’ve been writing a book. What topics are you covering?

MH: well I’m putting together most of my economic essays and the economic model that has described all of this. I’m explaining that there are two approaches to the economy. One is the sort of neo-liberal free trade approach that’s taught almost censorialy today in the text books and the other is the classical economics approach that made a distinction between earned income and unearned income, between the rentiers getting a free lunch and the industrial economy. And I’ve been publishing this for about 20 years. So I’m putting it all into more or less a history of economic thought and application to today’s bubble economy to explain it all.

KF: fantastic Michael – we’ll keep an eye on michael-hudson.com for more on that.

Renegade Economists Show 199

Celebrating 4 years on air. Subscribe now.

Global activist Polly Higgins discusses the legal moves to protect the environment from corporate entities.

Listen here

Her websites are:
Trees Have Rights Too
Eradicating Ecocide – the book
Polly Higgins

Polly is currently touring Australia.

Following the interview we discuss our new documentary Real Estate 4 Ransom, the new screening dates and return fire to some minor criticisms from the recent film review by the Age property writer Chris Vedelago.

One day I will discuss royal libertarians.

If you are an online campaigner and would like to help with the film, I’d love to hear from you.

And I owned all the land,
How much would I charge you for your first night’s rent?

That was the statement Red Symons of ABC breakfast radio ran as a lead in to our 6.45am discussion this morning. It is also the opening line in the film, attempting to settle those who blame banking and the money system for everything.

Listen to the interview with Red promoting our debut documentary Real Estate 4 Ransom.

Tickets are available at ACMI for the preview screening of Real Estate 4 Ransom this Wednesday at 7pm. A short Q & A will follow with myself and Co-Director Gavin Emmanuel.

Check our R4R facebook group or twitter for more.

As written up in The Age today, p5:

Speculators ‘locking up’ empty dwellings that could be homes

Michelle Griffin

PROPERTY speculators have locked up 46,220 empty homes in metropolitan Melbourne, the housing campaign group Earthsharing Australia says.

In a documentary soon to be released, Real Estate 4 Ransom, the group says that 4.95 per cent of the city’s potential housing stock is unoccupied, double the rental vacancy rate of 2.4 per cent published last week by the Real Estate Institute of Victoria.

While the institute calculated the volume of available rentals by taking a sample from 45,000 tenancies on the books of its member estate agencies, Earthsharing used water-meter data supplied by City West Water and Yarra Valley Water to determine which residentially zoned properties were empty.

Dwellings using less than 50 litres a day for six consecutive months were deemed vacant. At the height of the drought in 2008, average household daily water use in suburbs with stage three restrictions was about 140 to 160 litres a day.

The group’s Speculative Vacancy Report says that in Docklands, almost a quarter of residential properties there, 23.32 per cent, are vacant. The official vacancy rate for Docklands is 3.62 per cent.

Other established suburbs with many empty homes, according to the report, include East Melbourne (18.64 per cent), Carlton (11.51 per cent) and Essendon North (13.07 per cent).

A spokesman for the Tenants Union of Victoria, Toby Archer, said he regularly heard from tenants who reported that houses sat empty for more than a year after they were evicted by new landlords.

“The report highlights that there may be more houses potentially available to renters than the indicators developed by the REIV,” Mr Archer said.

Earthsharing director Karl Fitzgerald admits that properties with no water usage could include vacant blocks, derelict houses and even homes with water tanks.

But he says the estimates may be conservative, considering apartment blocks or townhouses could be built on many blocks.

“Local councils always overvalue the house and undervalue the land,” Mr Fitzgerald said. “It gives a huge economic incentive for the owner to smash the house down. You could spend $5000 to fix the holes in the wall and make it fit for tenants, but for many property investors, the main thing is to sell this property. The land is the valuable thing.”

To fund the $50,000 documentary about land banking and tax reform, Earthsharing drew on funds realised when it sold off two properties at the height of the boom in 2008, an office building in Hardware Lane in the city and a commercial property in Coburg.

“I used to be really embarrassed [by the properties]; we’ve got to put [them] to use,” Mr Fitzgerald said, adding that the documentary was ultimately an argument in favour of the Henry Review’s proposals for land tax.