The aim of classical economics was to tax unearned income, not wages and profits. The tax burden was to fall on the landlord class first and foremost, then on monopolists and bankers. The result was to be a circular flow in which taxes would be paid mainly out of rent and other unearned income. The government would spend this revenue on infrastructure, schools and other productive investment to help make the economy more competitive. Socialism was seen as a program to create a more efficient capitalist economy along these lines.

I’m Bonnie Faulkner. Today on Guns and Butter, Dr. Michael Hudson. Today’s show: The Vocabulary of Economic Deception. Dr. Hudson is a financial economist and historian. He is President of the Institute for the Study of Long-Term Economic Trends, a Wall Street financial analyst and distinguished Research Professor of Economics at the University of Missouri, Kansas City. His 1972 book Super-Imperialism: The Economic Strategy of American Empire is a critique of how the United States exploited foreign economies through the IMF and World Bank. His latest books are, Killing the Host: How Financial Parasites and Debt Destroy the Global Economy and J Is for Junk Economics – A Guide to Reality in an Age of Deception. Today we discuss J is for Junk Economics, an A to Z guide that describes how the world economy really works, and who the winners and losers really are. We cover contemporary terms that are misleading or poorly understood, as well as many important concepts that have been abandoned – many on purpose – from the long history of political economy.

BONNIE FAULKNER: Dr. Michael Hudson, welcome to Guns and Butter again.

MICHAEL HUDSON: It’s good to be back, Bonnie.

BONNIE FAULKNER: You write that your recent book, J Is for Junk Economics, a dictionary and accompanying essays,was drafted more than a decade ago for a book to have been entitled The Fictitious Economy. You tried several times without success to find a publisher. Why wouldn’t publishers at the time take on your book?

MICHAEL HUDSON: Most publishers like to commission books that are like the last one that sold well. Ten years ago, people wanted to read about how the economy was doing just fine. I was called Dr. Doom, which did very well for me in the 1970s when I was talking about the economy running into debt. But they wanted upbeat books. If I were to talk about how the economy is polarizing and getting poorer, they wanted me to explain how readers could make a million dollars off people getting more strapped as the economy polarizes. I didn’t want to write a book about how to get rich by riding the neoliberal wave dismantling of the economy. I wanted to create an alternative.

If I wanted to ride the wave of getting rich by taking on more debt, I would have stayed on Wall Street. I wanted to explain how the way in which the economy seemed to be getting richer was actually impoverishing it. We are in a new Gilded Age masked by a vocabulary used by the media via television and papers like The New York Times that are euphemizing what was happening.

A euphemism is a rhetorical trick to make a bad phenomenon look good. If a landlord gets rich by gentrifying a neighborhood by exploiting tenants and forcing them out, that’s called wealth creation if property values and rents rise. If you can distract people to celebrate wealth and splendor at the top of the economic pyramid, people will be less focused on how the economy is functioning for the bottom 99%.

BONNIE FAULKNER: Can you describe the format of J Is for Junk Economics – A Guide to Reality in an Age of Deception as an A-to-Z dictionary with additional essays? It seems to me that this format makes a good reference book that can be picked up and read at any point.

MICHAEL HUDSON: That’s what I intended. I wrote it as a companion volume to my outline of economic theory, Killing the Host, which was about how the financial sector has taken over the economy in a parasitic way. I saw the vocabulary problem and also how to solve it: If people have a clear set of economic concepts, basically those of classical economics – value, price and rent – the words almost automatically organize themselves into a worldview. A realistic vocabulary and understanding of what words mean will enable its users to put them together to form an inter-connected system.

I wanted to show how junk economics uses euphemisms and what Orwell called Doublethink to confuse people about how the economy works. I also wanted to show that what’s called think tanks are really lobbying institutions to do the same thing that advertisers for toothpaste companies and consumer product companies do: They try to portray their product – in this case, neoliberal economics, dismantling protection of the environment, dismantling consumer protection and stopping of prosecution of financial fraud – as “wealth creation” instead of impoverishment and austerity for the economy at large. So basically, my book reviews the economic vocabulary and language people use to perceive reality.

When I was in college sixty years ago, they were still teaching the linguistic ideas of Benjamin Lee Whorf. His idea was that language affects how people perceive reality. Different cultures and linguistic groups have different modes of expression. I found that if I was going to a concert and speaking German, I would be saying something substantially different than if I were speaking English.

Viewing the economic vocabulary as propaganda, I saw that we can understand how the words you hear as largely propaganda words. They’ve changed the meaning to the opposite of what the classical economists meant. But if you untangle the reversal of meaning and juxtapose a more functional vocabulary you can better understand what’s actually happening.

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BONNIE FAULKNER: You write that “the terms rentier and usury that played so central a role in past centuries now sound anachronistic and have been replaced with more positive Orwellian doublethink,” which is what you’ve begun to explain. In fact, your book J is for Junk – A Guide to Reality in an Age of Deception is all about the depredation of vocabulary to hide reality, particularly the state of the economy. Just as history is written by the victors, you point out that economic vocabulary is defined by today’s victors, the rentier financial class. How is this deception accomplished?

MICHAEL HUDSON: It’s been accomplished in a number of ways. The first and most brutal way was simply to stop teaching the history of economic thought. When I went to school 60 years ago, every graduate economics student had to study the history of economic thought. You’d get Adam Smith, Ricardo and John Stuart Mill, Marx and Veblen. Their analysis had a common denominator: a focus on unearned income, which they called rent. Classical economics distinguished between productive and unproductive activity, and hence between wealth and overhead. The traditional landlord class inherited its wealth from ancestors who conquered the land by military force. These hereditary landlords extract rent, but don’t do anything to create a product. They don’t produce output. The same is true of other recipients of rent. Accordingly, the word used through the 19^th century was rentier. It’s a French word. In French, a rente was income from a government bond. A rentier was a coupon clipper, and the rent was interest. Today in German, a Rentner is a retiree receiving pension income. The common denominator is a regular payment stipulated in advance, as distinct from industrial profit.

The classical economists had in common a description of rent and interest as something that a truly free market would get rid of. From Adam Smith and John Stuart Mill down to Marx and the socialists, a free market was one that was free of a parasitic overclass that got income without doing work. They got money by purely exploitative means, by charging rent that doesn’t really have to be paid; by charging interest; by charging monopoly rent for basic infrastructure services and public utilities that a well-organized government should provide freely to people instead of letting monopolists put up toll booths on roads and for technology and patent rights simply to extract wealth. The focus of economics until World War I was the contrast between production and extraction.

An economic fight ensued and the parasites won. The first thing rentiers – the financial class and monopolists, a.k.a. the 1% – did was to say, “We’ve got to stop teaching the history of economic thought so that people don’t even have a memory that there is any such a thing as economic rent as unearned income or the various policies proposed to minimize it. We have to take the slogan of the socialist reformers – a free market – and redefine it as a free market is one free from government – that is, from “socialism” – not free from landlords, bankers and monopolists.” They turned the vocabulary upside down to mean the opposite. But in order to promote this deceptive vocabulary they had to erase all memory of the fact that these words originally meant the opposite.

BONNIE FAULKNER: How has economic history been rewritten by redefining the meaning of words? What is an example of this? For instance, what does the word “reform” mean now as opposed to what reform used to mean?

MICHAEL HUDSON: Reform used to mean something social democratic. It meant getting rid of special privileges, getting rid of monopolies and protecting labor and consumers. It meant controlling the prices that monopolies could charge, and regulating the economy to prevent fraud or exploitation – and most of all, to prevent unearned income or tax it away.

In today’s neoliberal vocabulary, “reform” means getting rid of socialism. Reform means stripping away protection or labor and even of industry. It means deregulating the economy, getting rid of any kind of price controls, consumer protection or environmental protection. It means creating a lawless economy where the 1% are in control, without public checks and balances. So reform today means getting rid of all of the reforms that were promoted in the 19^th and early-20^th century. The Nobel Economics Prize reflects this neoliberal (that is, faux-liberal) travesty of “free markets.”

BONNIE FAULKNER: What were the real reforms of the progressive era?

MICHAEL HUDSON: To begin with, you had unions to protect labor. You had limitations on the workweek and the workday, how much work people had to do to earn a living wage. There were safety protections. There was protection of the quality of food, and of consumer safety to prevent dangerous products. There was anti-trust regulation to prevent price gouging by monopolies. The New Deal took basic monopolies of public service such as roads and communications systems out of the hands of monopolists and make them public. Instead of using a road or the phone system to exploit users by charging whatever the market would bear, basic needs were provided at the lowest possible costs, or even freely in the case of schools, so that the economy would have a low cost of living and hence a low business overhead.

The guiding idea of reform was to get rid of socially unnecessary income. If landlords were going to charge rent for properties that they did nothing to improve, but merely raise the rents whenever cities built more transportation or more parks or better schools, this rent would be taxed away.

The income tax was a basic reform back in 1913. Only 1% of America’s population had to pay the tax. Most were tax-free, because the aim was to tax the rentiers who lived off their bond or stock holdings, real estate or monopolies. The solution was simply to tax the wealthiest 1% or 2% instead of labor or industry, that is, the companies that actually produced something. This tax philosophy helped make America the most productive, lowest-cost and competitive yet also the most equal economy in the world at that time.

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This focus on real industry has gradually been undermined. Today, if you’re a real estate speculator, monopolist, bankster or financial fraudster, your idea of reform is to get rid of laws that protect consumers, tenants, homebuyers and the public at large. You campaign for “consumer choice,” as if protection is “interference” with the choice to be poisoned, cheated or otherwise exploited. You deregulate laws designed to protect the atmosphere, free air and water. If you’re a coal or oil company, your idea of reform is to get rid of the Clean Air Act, as the Trump administration has been doing.

The counterpart to junk science is junk economics. It is a lobbying effort to defend the idea of a world without any laws or regulations against the wealthy, only against the debtors and the poor, only against consumers for the “theft” of downloading music or stealing somebody’s patented songs or drug monopoly privilege. This turns inside out the classical philosophy of fairness.

BONNIE FAULKNER: According to 19^th-century classical economists, what is fictitious capital, and why is this distinction no longer being made by economists?

MICHAEL HUDSON: That’s a wonderful question. Today the term “fictitious capital” is usually associated with Marx, but it was used by many people in the 19^th century, even by right-wing libertarians such as Henry George.

Fictitious capital referred to purely extractive claims for income, as distinct from profits and wages earned from tangible means of production. Real capital referred to factories, machinery and tools, things that were used to produce output, as well as education, research and public infrastructure. But an ownership privilege like a title to land and other real estate, a patent or the monopoly privilege to charge whatever the market will bear for a restricted patent, without reference to actual production costs, does not add anything to production. It is purely extractive, yielding economic rent, not profits on real capital investment.

BONNIE FAULKNER: You say that by the late-19^th century, “reform movements were gaining the upper hand, that nearly everyone saw industrial capitalism evolving into what was widely called socialism.” How would you describe the socialism that classical economists like Mill or Marx envisioned?

MICHAEL HUDSON: They all called themselves socialists. There were many kinds of socialism in the late 19^th century. Christians promoted Christian socialism, and anarchists promoted an individualistic socialism. Mill was called a Ricardian socialist. The common denominator among socialists was their recognition that the industrial capitalism of their day was a transitory stage burdened by the remnants of feudalism, headed by the landlord class whose hereditary rule was a legacy of the medieval military invasions of England, France, Germany and the rest of Europe. This was the class that controlled the upper house of government, e.g., Britain’s Lordships. For socialists, the guiding idea was to run factories and operate land and provide public services for the economy at large to grow instead of imposing austerity and letting the rentier classes exploit the rest of the economy and concentrate income, political control and tax policy in their own hands.

Until World War I, socialism was popular because most people saw industrial capitalism as evolving. Politics was in motion. The term “capitalism,” by the way, was coined by Werner Sombart, not Marx. But classical political economy culminated in Marx. He looked at society’s broad laws of motion to see where they were leading.

The socialist idea was not only that of Marx but also of American business school professors like Simon Patten of the WhartonSchool. He said that the kind of economy that would dominate the world’s future was one that was the most efficient in preventing monopoly and preventing or taxing away absentee land rent so that almost all income would be paid as wages and profits, not rent or interest or monopoly rents.

The business classes in the United States, Germany and even in England were in favor of reform – that is, anti-rentier reform. They recognized that only a strong government would have the political power to tax away or regulate parasitic economic rent by the wealthiest classes at that time, in the late 19^th and early 20^th century. This economic and political cleanup of the rentiers stemmed very largely from the ideological battle that occurred in England after the Napoleonic Wars were over in 1815. Ricardo, representing the banking class, argued against Reverend Malthus, the population theorist who also was a spokesman for the landlord class. Malthus urged agricultural protectionism for landlords, so that they would get more and more rent from their land as grain prices were kept high. Ricardo argued that high food prices to support rents for the agricultural landlords would mean high labor costs for industrial employers. And if you have high labor costs then England cannot be the industrial workshop of the world. In order for England to become the industrial supreme power, it needed to overcome the power of its landlord class. Instead of protecting it, England decided to protect its industrial capital by repealing its protectionist Corn Laws in 1846. (I describe its strategy in my history of theories of Trade, Development and Foreign Debt.)

At that time England’s banking class was still a carryover from Europe’s Medieval period. Christianity had banned the charging of interest, so banks were able to make their money by combining their loans with a foreign exchange charge, called agio. Banks even Ricardo’s day in the early 19^th century made most of their money by financing foreign trade and charging foreign exchange fees. If your listeners they have ever tried to change money at the airport, they will know what a big rake-off the change booths take.

Later in the 19^th century, bankers began to shift their lending away from international trade financing to real estate as home ownership became democratized. Home owners became their own landlords – but on mortgage credit.

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Today we’re no longer in the situation that existed in England 200 years ago. Almost two-thirds of the American families own their homes. In Scandinavia and much of Europe, 80% are homeowners. They don’t pay rent to landlords. Instead, they pay their income as interest to the mortgage lenders. That’s because hardly anyone has enough money to buy a few-hundred-thousand-dollar home with the cash in their pocket. They have to borrow the money. The income that used to be paid as rent to a landlord is now paid as interest to the mortgage banker. So you have a similar kind of exploitation today that you had two centuries ago, with the major difference that the banking and financial class has replaced the landlord class.

Already by the late-19^th century, socialists were advocating that money and credit don’t have to take the form of gold and silver. Governments can create their own money. That’s what the United States did in the Civil War with its greenbacks. It simply printed the money – and gave it value by making it acceptable for payment of taxes. In addition to the doctrine that land and basic infrastructure should be owned by the public sector – that is, by governments – banking was seen as a public utility. Credit was to be created for productive purposes, not for rent-extracting activities or financial speculation. Land would be fully taxed so that instead of labor or even most industry paying an income tax, rentiers would pay tax on wealth that took the form of rent-extracting privileges.

The aim of classical economics was to tax unearned income, not wages and profits. The tax burden was to fall on the landlord class first and foremost, then on monopolists and bankers. The result was to bea circular flow in which taxes would be paid mainly out of rent and other unearned income, and the government would spend this revenue on infrastructure, schools and other productive investment to help make the economy more competitive. Socialism was seen as a program to create a more efficient capitalist economy along these lines, until the word was hijacked by the Russian Revolution after World War I. The Soviet Union became a travesty of Marxism and the word socialism.

BONNIE FAULKNER: You write that: “Today’s anti-classical vocabulary redefines free markets as ones that are free for rent extractors and that rent and interest reflect their recipients’ contribution to wealth, not their privileges to extract economic rent from the economy.” How do you differentiate between productive and extractive sectors, and how is it that the extractive sectors, essentially Finance, Insurance and Real Estate (FIRE), actually burden the economy?

MICHAEL HUDSON: If you’re a real estate owner, you want lower property taxes so that as the economy grows and people are able to pay more rent, or when a land site in a neighborhood becomes more valuable because the government builds a new subway – like New York City’s Second Avenue line – real estate prices rise to reflect the property’s higher income that is not taxed.

New York landlords all along the subway line raised rents. That meant that their real estate had a “capital” gain reflecting the higher rent roll. Individual owners fortunate enough to own a condo or a townhouse near the stations became more wealthy – while new renters or buyers had to pay much more than before. None of this price rise created more living space or other output (although today’s post-classical GDP figures pretend that it did!). It simply meant that instead of recapturing the $10 billion the government spent on this subway extension by taxing the increased land valuations all along the subway route, New York’s income and real estate taxes have been raised for everybody, to pay interest on the bonds issued to finance the subway’s construction. So the city’s cost of living and doing business rises – while the Upper East Side landlords have received a free lunch.

Creating that kind of real estate “fictitious wealth” is a capitalization of unearned income – unearned because the Upper East Side landlords didn’t do anything themselves to increase the value of their property. The City raised rental values by making the sites more desirable when it built the subway extension.

The same logic applies to insurance. When President Obama passed the basically Republican Obamacare law advocated by the pharmaceutical and health management sectors, the cost of medical care went way up in the United States. It was organized so as to be a giveaway to the healthcare and pharmaceutical monopolies.

None of this increased payment for medical care increases its quality. In fact, the more that’s paid for medical care, the more the service declines, because it is paid to health insurance companies that try to legally fight against consumers. The effect is predatory, not productive.

Finally, you have the financial part of the FIRE sector. Finance has accounted for almost all of the growth in U.S. GDP in the ten years since the Lehman Brothers crisis and the Obama bailout in 2008. The biggest banks at that time were insolvent as a result of bad loans and outright financial fraud. But the government created $4.3 trillion of reserves to bail out Citigroup, Wells Fargo and Bank of America, with Goldman Sachs thrown in, despite the fact that their fraudulent junk mortgage loans were predatory, not productive credit that actually increased wealth in the form of productive power. There’s a growing understanding that the financial sector has become so dysfunctional that it is a deadweight on the economy, burdening it with increasing debt charges –student loans are an example – instead of actually helping the economy grow.

BONNIE FAULKNER: So just to reiterate, what is the classical distinction between earned and unearned income?

MICHAEL HUDSON: This distinction is based on classical value and price theory. Price is what people have to pay. The margin of price over and above real cost value is called economic rent. A product’s value is its actual, necessary costs of production: the cost of labor, raw materials and machinery, and other elements of what it costs to tangibly produce it. Rent and financial charges are the product of special privileges that have been privatized and now financialized.

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Classical value theory isolated this economic rent as unearned income. It was the aim of society either to prevent it from occurring in the first place, by anti-monopoly regulation or by public land ownership, or to tax it away in cases where you can’t help it going up. For instance, it’s natural for neighborhoods to become more valuable and high-priced over time as the economy gets richer. But it doesn’t cost more to construct buildings there, and rents keep going up and up and up on buildings that were put up 100 years ago. This increased rent does not reflect any new cost of production. It’s a free lunch.

Neoliberals, most notoriously the University of Chicago’s Milton Friedman at, kept insisting that “There’s no such thing as a free lunch.” But that’s exactly what most of the wealth and income of the richest 1% is. It’s the result of running the economy primarily to siphon off a rentier free lunch. Of course, its recipients try to distract public attention from this face and tell national income and Gross Domestic Product statisticians to pretend that they actually earn their income wealth, not merely transfer income from the rest of the economy into their hands as creditors, monopolists and landlords. The leading Wall Street firm Goldman Sachs said so notoriously a few years ago that “Our partners are the most productive in the country because look at how much we’re paid.” But they don’t really earn their wealth in the classical sense of earning by performing a productive economic service. The economy would get along much better without Goldman Sachs and indeed the banking and financial system or the health insurance system being run the way they are, and without real estate the being untaxed in the way that it is.

BONNIE FAULKNER: I noticed that you used the term “rent” for unearned income. Is rent the same as profit, or not?

MICHAEL HUDSON: It’s not at all the same. Profit is earned by investing in a means of production to make useful goods and services. Classical economists viewed profit as an element of cost if you’re going to have a privately owned economy – and most socialists have accepted private ownership, although in a system regulated so as to benefit society as a whole. If you make a profit by a productive act acting within this system, you’ve earned it by being productive.

Economic rent is different. It is not earned by actively building means of production, conducting research or development. It’s passive income. When pharmaceutical companies earn rent, it’s simply for charging much more for the drugs they sell than it actually costs to produce them. This is especially the case when the government has borne the research and development cost of the drugs and simply assigns the rent-yielding patent privilege to the pharmaceutical companies. So rent is something over and above the profit necessary to induce the activity that these companies actually perform. Profits are why investors produce more. Rent is not necessary. If you got rid of it, you wouldn’t discourage production, because it’s purely an overhead charge, whereas profits are a production charge in a capitalist economy.

BONNIE FAULKNER: Well, thank you for that distinction between rent and profit. That’s a very important thing to understand.

MICHAEL HUDSON: I describe it more clearly in my book, which includes the appropriate classical quotations.

BONNIE FAULKNER: You point out that interest and rent are reported as “earnings,” as if bankers and landlords produce gross domestic product (GDP) in the form of credit and ownership services. How do you think interest and rent should be reported?

MICHAEL HUDSON: They should be classified interest and rent. But the rentier classes have taken over the National Income and Product Accounts (NIPA) to depict their takings as actual production of a service, not as overhead or a transfer payment, that is, not as parasitic extraction of other peoples’ earnings.

For instance, suppose you have a credit card and you miss a payment, or miss a payment on a student loan, electric bill or your rent. The credit card company will use this as an excuse to raise your interest charge from 11% to 29%. The national income account treat this rise to 29% as providing a “financial service.” The so-called service is simply charging a penalty rate. The pretense is that everything that a bank charges – higher interest or penalties – is by definition providing a service, not simply extracting money from cardholders, transferring income from them to itself.

Classical economists would have subtracted this financial rake-off from output, counting it as overhead. After all, it simply adds to the cost of living and doing business. Instead, the most recent statisticians have added this financial income to the Gross National Product instead of subtracting it, as the classical economists would have done – or simply not counted it, as was the case a generation ago.

Most reporters and the financial press don’t get into the nitty-gritty of these national accounts, so they don’t realize how lobbyists have intervened in recent years to turn them into propaganda flattering bankers and property owners. Today’s “reformed” GDP format pretends that the economy has been going up since 2008. A more realistic description would show that it is shrinking for 95 percent of the population, being eaten away by the wealthiest 5% extracting more rentier income and imposing austerity.

If you look at the national balance sheet of assets and liabilities, the economy is becoming more debt-ridden. As student debt and mortgage debt go up, and penalty fees, arrears and defaults are rising. The long rise in home ownership rates is being reversed, and rents are rising, while people also have to pay more for medical care and other basic needs. Academic economists depict this as “consumer choice” or “demand,” as if it is all a voluntary choice of “the market.” The GDP accounting format has been modified to make it appear that the economy is getting richer. This statistical sleight-of-hand is achieved by counting the takings of the rentier 1% as a product, not a cost borne by the economy at large. What really should be shown is a loss – land and monopoly rent, interest and penalties is in fact so large a “product” that the economy seems to be growing. But most of that growth is unreal.

BONNIE FAULKNER: How does government fiscal policy, taxation and expenditure influence the economy?

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MICHAEL HUDSON: That’s what Modern Monetary Theory (MMT) is all about. When governments run a budget deficit, they pump money into the economy. For Keynesians the money goes into the real economy in ways that employ labor. For neoliberals, quantitative easing is spent directly into the financial sector, and is used to finance the purchase of real estate, stocks and bonds, supporting the valuation of wealth owned mainly by the One Percent. The effect is to make housing more expensive, and also the price of buying a retirement income. Having to take on larger mortgage debt to buy a house and spend less each month in order to save for one’s pension is not really “wealth creation,” unless your perspective is that of the One Percent increasing its power over the 99%.

At least the United States is able to run deficits and avoid the kind of unemployment and austerity that Europe is imposing on itself and especially on Greece and Italy. I think in one of our talks on this show explained the problem that Europe is suffering. Under the constitution of the Eurozone, its member countries are not allowed to run a budget deficit of more than 3%. Most actually aim at extracting a surplus from the economy (as distinct from producing a surplus for the economy). That means that the government doesn’t spend money into the economy. People and businesses are obliged to get their money from the banks. That requires them to pay more interest. All Europe is on the road to looking like Greece– debt-strapped economies that are kept artificially alive by the government creating reserves to give to the banks and bail out bond markets, not spending into economies to help them recover.

The ability to create debt by writing a bank loan that creates a deposit is a legal privilege. There’s no reason why governments cannot do this themselves. Instead of borrowing from private creditors to finance their budget deficits, governments can create their own money – without burdening budgets with interest charges. Credit creation has little cost of production, and therefore does not require interest charges to cover this cost. The interest is a form of monopoly rent to privatized privilege.

Classical economists saw the proper role of government as being to create social infrastructure and upgrade living standards and productivity for their labor force. Governments should build roads to minimize the cost of transportation, not private companies creating toll roads to maximize the cost by building in financial charges, real estate and management charges to what users have to pay. Government should be in charge of providing public health insurance, not private companies that charge extortionate prices and whatever the market will bear for their drugs. It’s the government that should run prisons, not private companies that use prisoners as cheap labor to make a profit and advocate that more people get arrested so to make more of a profit from their incarceration.

The great question is, what is the government going to spend money on, and how can it spend money into the economy in a way that helps growth? Imagine if this trillion dollars a year that’s spent on arms and military – in California and the districts of the key congressmen on the budget committee – were spent on building roads, schools, transportation and subsidizing medical care. The country could become a utopia. Instead, the rentier classes have hijacked the government, taking over its money creation and taxing power to spend on themselves, not to help the economy at large produce more or raise living standards. Special interests have captured the regulatory agencies to make them serve rent extractors, not protect the economy from them.

BONNIE FAULKNER: Interest is tax-deductible, whereas profit is taxable. Does the tax deductibility of interest have a major impact on the economy?

MICHAEL HUDSON: Yes, because tax deductibility encourages companies to raise money by going into debt. This tax deductibility of interest catalyzed the corporate raiding movement of the 1980s. It was based on debt leveraging.

Suppose a company makes $100 million a year in profit and pays this out to its stockholders as dividends. In the 1980s this profit was taxed at about 50%, so you could only pay $50 million to the stockholders. Then as today, they were the wealthiest layer of the population. Drexel Burnham and other Wall Street firms sought out corporate raiders as clients and offered to lend them enough money to buy companies out, by buying out their stockholders. Stocks were replaced by bonds. That enabled companies to pay out twice as much income as interest than they had been paying as dividends. When they bought out target companies with debt, a company could pay all $100 million of its income as interest instead of only $50 million as dividends on stock.

So the wealthiest classes in the United States and other countries decided that they could get more from own bonds than stocks anymore. Government revenue declined by the added amount paid to financial investors as a result of this tax subsidy for debt.

The advantage of issuing stocks is that when business conditions turn down and profits fall, companies can cut back their dividend. But if they have committed to pay this $100 million to bondholders, when their earnings go down they may face insolvency.

The result was a wave of bankruptcy since the 1980s as companies became more debt-pyramided. Also companies heads went to the labor unions and threatened to declare bankruptcy and wipe out their pension funds, if their leaders did not agree to change these funds and replace the guaranteed retirement pension that were promised for a defined contribution plan. All they know is what they have to pay in every month. Retirees will only get whatever is left when they reach pension age. The equity economy shift into a debt economy has enriched the wealthy financial class at the top, while hurting employees.

Most statistical trends turned around in 1980 for almost every country as this shift occurred. Indebting companies has made them more fragile and also higher-cost, because now they have to factor in the price of interest payments to the bondholders and corporate raiders who’ve taken them over.

BONNIE FAULKNER: Do you think that changes should be made to the tax deductibility of interest?

MICHAEL HUDSON: Sure. If interest were to be taxed, that would leave less incentive for companies to keep on adding debt. It would deter corporate raiding. It is a precondition for companies being run to minimize their cost of production and to serve their labor force and their customers more. For homebuyers, removing the tax-deductibility of interest would leave less “free” rent to be pledged to banks for mortgages, and hence would reduce the size of bank loans that bid up housing prices.

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I think that interest and rents should be taxed, not wages and legitimate profits. The FICA wage withholding now absorbs almost 16% of most wage-earning income for Social Security and Medicare. But wealthy people don’t have to pay any contribution on what they make over than about $ $116,000 a year. They don’t have to pay any FICA contribution on their capital gains, which is how most fortunes are made. The rentiers’ idea of a free market is to make labor pay for all of the Social Security and Medicare – and then to give so much to Wall Street that they can say, “Oh, there’s no more money. The system’s short, so we have to wipe out Social Security,” just as so many companies have wiped out the pension commitments. As George W. Bush said, tere’s not really any money in the Social Security accounts. Its tax on the lower income brackets was all used to cut taxes on the higher income and wealth brackets. The economy has been turned into a grab bag for the rich.

BONNIE FAULKNER: What about monetary policy, interest rates and the money supply? Who controls monetary policy, and how does it affect the economy?

MICHAEL HUDSON: The biggest banks put their lobbyists in charge of the Federal Reserve, which was created in 1913 to take monetary policy out of the hands of the Treasury in Washington and put it in the hands of Wall Street. That made the Fed a lobbyist for its members, the commercial banking system. It’s run to control the money supply – in practice, the debt supply – in a way that steers money into the banks. That’s why not a single banker was jailed for committing the junk mortgage scams and other frauds that caused the crash. The Fed has turned the banking system into a predatory monopoly instead of the public service that it was once supposed to be.

Monetary policy is really debt policy, because money is debt on the liabilities side of the balance sheet. The question is, what kind of debt is the economy going to have, and what happens when it exceeds the ability to be paid? How is the government going to provide the economy with money, and what will it do to keep debts line with the ability to be paid? Will money and credit be provided to build more factories and product more output, to rebuild American manufacturing and infrastructure? Or, are you going to leave credit and debt creation to the banks, to make larger loans for people to buy homes at rising prices reflecting the increasingly highly leveraged and outright reckless credit creation?

Monetary policy is debt policy, and on balance most debts are owed by the bottom 90% to the wealthiest 10%. So monetary policy becomes an exercise in how the 10% can extract more and more interest, rent and capital gains from the economy – all the while making money by impoverishing the economy, not helping most people prosper.

BONNIE FAULKNER: The economy is always being planned by someone or some force, be it Wall Street, the government or whatever. It’s not the result of natural law, as you point out in your book. It seems like a lot of people think that the economy should somehow run itself without interference. Could you explain how this is an absurd idea?

MICHAEL HUDSON: It’s an example of rhetoric overcoming people’s common sense. Every economy since the Stone Age has been planned. Even in the stone age people had to plan when to plant the crops, when to harvest them, how much seed you had to keep over for the next year. You had to operate on credit during the crop year to get beer and rent draft animals. Somebody’s in charge of every economy.

So when people talk about an unplanned economy, they mean no government planning. They mean that planning should be taken out of the hands of government and put in the hands of the 1%. That is what they mean by a “free market.” They pretend that if the 1% control the economy it’s not really a planned economy anymore, because it’s not planned by government, officials serving the public interest. It’s planned by Wall Street. So the question is, really, who’s going to plan the American economy? Is it going to be the government of elected officials, or is it going to be Wall Street? Wall Street will euphemize its central planning by saying this is a free market – meaning it’s free of government regulation, especially over the financial sector and the mining companies and other monopolies that are its major clients.

BONNIE FAULKNER: You emphasize the difference between the study of 19^th-century classical political economy and modern-day economics. How and when and why did political economy become “economics”?

MICHAEL HUDSON: If you look at the books that almost everybody wrote in the 19^th century, they called it political economy because economics is political. And conversely, economics is what politics has always been about. Who’s getting what? Or as Lenin said, who-whom? It’s about how society makes decisions about who’s going to get rich and how they are going to do it. Are they going to get wealthy by acting productively, or parasitically? Eeverything economic turns out to be political.

The economy’s new central planners on Wall Street pretend that what they’re doing is not political. Cutting taxes on themselves is depicted as a law of nature. But they deny that this is politics, as if there’s nothing anyone can do about it. Margaret Thatcher’s refrain was “There is no alternative” (TINA). That is the numbing political sedative injected into today’s economic discussion.

The aim is to make people think that there is no alternative because if they’re getting poorer, if they’re losing their home by defaulting on a junk mortgage of if they have to pay so much on the student loan so that they can’t afford to buy a home, or if they find that the only kind of job they can get driving an Uber car, it’s all their fault. It’s as if that’s just nature, not the way the economy has been malstructured.

The role of neoliberalism is to make people think that they are powerless in the face of “the market,” as if markets are not socially and politically structured. The 1% have hired lobbyists and subsidized business schools so as to shape markets in their own interest. Their aim is to control the economy and call it “nature.” Their patter talk is that poverty is natural for short-sighted “deplorables,” not the result of the predatory neoliberal takeover since 1980 and their capture of the Justice Department so that none of the bank fraudsters go to jail.

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BONNIE FAULKNER: In your chapter on the letter M – of course, we have chapters from A to Z – in your chapter on M, you have an entry for Hyman Minsky, an economist who pioneered Modern Monetary Theory and explained the three stages of the financial cycle in terms of rising debt leveraging. What is debt leveraging, and how does it lead to a crisis?

MICHAEL HUDSON: Debt leveraging means buying an asset on credit. Lending for home ownership in the United States is the leading example. From the 1940s to the 1960s, if you took out a mortgage, the banker would look at your income and calculate that the mortgage on the house you buy shouldn’t absorb more than 25% of your income. The idea was that this would leave enough income to pay the interest charge and amortize – that is, pay off – the mortgage 30 years later, near the end of your working life. Minsky called this first credit stage the hedge stage, meaning that banks had hedged their bets within limits that enabled the economy to carry and pay off its debts.

In the second credit stage, banks lent more and loosened their lending standards so that mortgages would absorb much more than 25% of the borrower’s income. At a certain point, people could not afford to amortize, that is to pay off the mortgage. All they could do was to pay the interest charge. By the 1980s, the federal government was lending up to almost 40% of the borrower’s income, writing mortgages without any amortization taking place. The mortgage payment simply carried the existing homeowner’s debt. Banks in fact didn’t want to ever be repaid. They wanted to go on collecting interest on as much debt as possible.

Finally, Minsky said, the Ponzi stage occurred when the homeowner didn’t even have enough money to pay the interest charge, but had to borrow the interest. So this was how Third World countries had gotten through the 1970s and the early 1980s. The government of, let’s say Mexico or Brazil or Argentina, would say, well, we don’t have the dollars to pay the debt, and the banks would say, we’ll just add the interest onto the debt. Same thing with a credit card or a mortgage. The mortgage homeowner would say, I don’t have enough money to pay the mortgage, and the bank would say, well, just take out a larger mortgage; we’ll just lend you the money to pay the interest.

That’s the Ponzi stage and it was named after Carlo Ponzi and his Ponzi scheme – paying early buyers out of income paid into the scheme by new entrants. That’s the stage that the economy entered around 2007-08. It became a search for the proverbial “greater fool” willing to borrow to buy overpriced real estate. That caused the crash, and we’re still in the post-crash austerity interim (before yet a deeper debt writeoff or new bailout). The debts have been left in place, not written down. If you have a credit card and have to pay a monthly balance but lack enough to pay down your debt, your balance will keep going up every month, adding the interest charge onto the debt balance.

Any volume of debt tends to grow at compound interest. The result is an exponential growth that doubles the debt in little time. Any rate of interest is a doubling time. If debt keeps doubling and redoubling, it’s carrying charges are going to crowd out the other expenses in your budget. You’ll have to pay more money to the banks for student loans, credit card debts, auto loans and mortgage debt, leaving less to spend on goods and services. That’s why the economy is shrinking right now. That’s why people today aren’t able to do what their parents were able to do 50 years ago – buy a home they can live in by paying a quarter of their income.

BONNIE FAULKNER: Dr. Michael Hudson, thank you so very much.

MICHAEL HUDSON: Well, it’s good to be here as always, Bonnie.

I’ve been speaking with Dr. Michael Hudson. Today’s show has been: The Vocabulary of Economic Deception. Dr. Hudson is a financial economist and historian. He is President of the Institute for the Study of Long-Term Economic Trends, a Wall Street financial analyst and Distinguished Research Professor of Economics at the University of Missouri, Kansas City. His 1972 book Super-Imperialism: The Economic Strategy of American Empire is a critique of how the United States exploited foreign economies through the IMF and World Bank. He is also author of Trade, Development and Foreign Debt, among many others. His latest books are Killing the Host: How Financial Parasites and Debt Destroy the Global Economy and J Is for Junk Economics: A Guide to Reality in an Age of Deception. Dr. Hudson acts as an economic advisor to governments worldwide on finance and tax law. Visit his website at michael-hudson.com. That’s michael-hudson.com.

Guns and Butter is produced by Bonnie Faulkner, Yarrow Mahko and Tony Rango. Visit us at gunsandbutter.org to listen to past programs, comment on shows, or join our email list to receive our newsletter that includes recent shows and updates. Email us at [email protected]. Follow us on Twitter at gandbradio.