In a recent interview, economist Michael Hudson discusses the detrimental effects of debt within our current economic framework. He highlights how classical economists’ warnings about borrowing and rent-seeking behaviors have been largely ignored in today’s mainstream economic discourse. This dialogue serves as an engaging introduction to Hudson’s perspectives, which merit wider dissemination.
Published by R. C. J. Cranstoun
CRANSTOUN: The central theme of this issue is “What is to be done?” But before we address that, we must understand the underlying dynamics at play. In the context of the United States, how has creditor power influenced the domestic economy since the 2008 crisis?
HUDSON: The fundamental output of the banking sector is debt creation. Since the mortgage crisis in 2008, the vast majority of wealth generated in the United States has been concentrated among the top ten percent, particularly the top one percent. This wealth accumulation has largely stemmed from pushing the broader economy into deeper debt. Consequently, the economy is now burdened with excessive debt.
We have hit the peak of a debt accumulation trend that began post-1945. Back then, most regions had minimal personal debt due to the war’s constraints on borrowing. Each business cycle recovery since then has commenced from increasingly elevated debt levels. By 2008, which marked the onset of the junk mortgage crisis, the system was already at its breaking point.
What could be done in the United States? Historically, when faced with economic crashes, debts and creditor claims were often canceled. However, banks resisted such measures during this crisis. When President Obama assumed office in 2009, he essentially represented Wall Street interests. His presidency was backed by figures like Robert Rubin, former Treasury Secretary under Clinton, who had supported his nomination.
Obama campaigned on the promise of tackling widespread mortgage fraud and aimed to rectify the issues surrounding junk mortgages and inflated reporting. His administration proposed a plan where mortgages would be recalibrated to reflect current market values, which would lower monthly payments for borrowers.
However, banks opposed this plan. Instead of allowing the failing banks to collapse, Obama sought to bail them out. He engaged in a struggle with the Federal Deposit Insurance Corporation, where Sheila Bair argued that the most corrupt banks, like Citibank, had engaged in fraudulent activities and should face closure. She advocated for debt write-downs.
In contrast, Obama appointed Tim Geithner, a Rubin ally, as Treasury Secretary. The result was that mortgage debts would not be reduced; banks would receive bailouts instead. This led to one of the largest bank bailouts in U.S. history.
Despite this, banks continued to grapple with negative equity as both the real estate and stock markets plummeted. The question remained: how could the U.S. prevent the typical fallout of financial calamities where wealthy creditors who lent irresponsibly would incur losses?
The Federal Reserve’s solution between 2009 and 2022 was to inject the banking system with low-interest funds. This resulted in a decline in interest rates on government and private debt, dropping from over 5% to 0.1%.
As a consequence, Obama catalyzed the most significant bond market surge in U.S. history; as interest rates decreased, the value of bonds, mortgages, and other high-interest credit claims soared. Essentially, the U.S. economy morphed into a Ponzi scheme. The Federal Reserve’s logic was: recognizing defaults exist, we will provide debtors with additional funds to cover their debts, preventing them from defaulting. If defaults were prevented, banks wouldn’t need to write down the problematic loans.
CRANSTOUN: The classical political economy makes a distinction between industrial profit and economic rent. Why is understanding this distinction crucial when examining the clash between Western finance capitalism and China’s economic model?
HUDSON: The goal of industrial capitalism in the early 19th century, championed by economists like David Ricardo and John Stuart Mill, was for Britain to become the world’s manufacturing hub.
To achieve this, industrialists, particularly banker David Ricardo, sought ways to reduce operational costs, enabling them to outcompete rivals in countries like France. A key element was lowering labor costs.
Allowing land-holding aristocrats to uphold the Corn Laws—protectionist tariffs established after the Napoleonic Wars—would deter low-cost food imports. This would force Britain to pay higher wages to afford more expensive domestic food, making it less competitive globally with nations that had lower food prices.
Ricardo argued that without importing cheap food, Britain would struggle to maintain its competitive edge. He understood that Britain’s primary economic engine was trade financing, and thus, a self-sufficient economy would not benefit trade or industrial profits.
Ricardo’s solution was to eliminate the restrictions imposed by the Corn Laws. His thought was further developed by contemporaries such as James Mill and John Stuart Mill, who noted that landlords profit without labor, simply reaping the benefits of economic rent and increasing food prices. They claimed that industrial capitalism must liberate itself from feudal legacies, including monopolistic rents that inflate costs.
The essence of industrial capitalism was to lower business costs and living expenses to expand potential for profits. Ricardo stressed that if economies weren’t freed from the grip of landlords and monopolists, economic rents would proliferate, leading to diminished profitability and halting industrial investment.
This principle was foundational to classical political economy, endorsed by both socialists and liberals. As the United States underwent industrialization, there was recognition that government must intervene in public infrastructure to thwart monopolistic rents, effectively shifting towards a mixed economy.
This can be traced in historical documents and by influential thinkers, highlighting that the collaboration between industrialists and the government was aimed at ensuring competitive industrialism free from burdensome rents. The idea was to tax land rents generated by public improvements, rather than taxing labor or industry, thereby fostering a low-cost economy.
In Britain, advocates like Benjamin Disraeli pushed for low-cost healthcare, indicating a collective desire to see effective governance reduce land rents and economic inefficiencies. By the onset of World War I, tensions arose when Parliament tried to pass a land tax as part of social reforms, but resistance from the landowning elite led to political gridlock.
Consequently, a trajectory began towards a federal income tax system modeled after the U.S. income tax enacted in 1913, which initially impacted only a small fraction of the population. However, the unification of real estate and finance began to undermine classical economics, promoting the idea that rents were justifiable returns rather than unearned income.
This perspective claims that payments made to landlords, bankers, and monopolists shouldn’t be construed as part of production costs; therefore, they should not factor into economic calculations. This view starkly contrasts the principles embraced in China, where real productivity dominates the economic narrative.
In comparing GDP figures, a significant portion of American production falls into the “services” category, dominated by unproductive expenditures such as interest and rents. Conversely, nations prioritizing public welfare initiatives minimize such overheads.
China’s approach aligns with the essential philosophy advocated by historical protectionists: to minimize independent landlord influence, allowing the state to manage land value and resources effectively. This strategy represents a significant ideological threat to Western powers, reminiscent of fears surrounding the rise of Communism in the early 20th century.
The intellectual battle against the concept of economic rent has transformed conventional economic wisdom. Classical economists envisioned a market free from such rents. However, the counter-revolution, driven by the Austrian school and others, redefined all income as earned, erasing distinctions that were foundational in classical economics.
In contemporary academia, historical economic theory has been overshadowed by mathematical models reinforcing the status quo. As nations attempt to cultivate alternatives to the Western capitalist framework, they face persistent challenges stemming from a global financial system rooted in privatized debt dynamics.
During a meeting between Donald Trump and President Xi, the contrasting economic ideologies became evident, showcasing the dichotomy between finance capitalism in the U.S. and China’s industrial socialism.
Land rent is a universal economic factor, yielding value due to location and public investment. The pressing question remains: should governments reclaim this location value or allow private landlords to profit from community assets that were often created through public initiatives?
Failure to tax unearned income results in high overall economic costs. The U.K. has seen a decline in industrial activity, aligning with Ricardo’s warnings about unchecked rentier class influence.
CRANSTOUN: Given how eloquently the classical tradition addresses rent, what led to its gradual exclusion from mainstream economics?
HUDSON: An intellectual counter-revolution fundamentally altered economic thought. Rentier interests pushed back against classical perspectives.
According to classical economics, banks merely create money and charge interest without contributing to production. The Austrian school contended that banks undertake a process of abstention, suggesting that creditors sacrifice current consumption for future benefits. This notion trivializes the reality that wealth holders rarely defer consumption.
Debate frameworks from earlier centuries revealed concerns over national debt and foreign liabilities. Political figures recognized that loans fueling foreign debt deprive nations of potential reinvestment into their economies, creating systemic vulnerabilities.
Fast forward to modern economies, and the burden of creditors increasingly outweighs the capacity to stimulate production, as rising debt service obligations limit consumer spending and economic growth.
The dynamics often lead to unsustainable debt levels where payments encompass not just principal and interest, but also surging rates linked to rising costs of goods and services. A significant portion of consumer earnings gets siphoned away into debt servicing, resulting in shrinking markets and subsequent crashes.
Many consumer debts, such as credit card and student loans, are escalating, propelled by mounting financial pressures across demographics. In this climate, individuals will prioritize their basic needs over servicing onerous debts.
The rising costs of energy, vital for both homes and businesses, only intensify these pressures, suggesting that a tipping point may be on the horizon.
Despite apparent stock market resilience and low interest rates, historical patterns indicate that normalcy is often disrupted by financial crises.
CRANSTOUN: The question of debt isn’t new; can you elaborate on the traditional concept of debt jubilees in ancient Mesopotamia and their intended role?
HUDSON: Throughout history, particularly in Sumer and Babylonia, rulers would initiate their reigns with debt cancellations. The region experienced rapid growth in various economic aspects, including the establishment of complex systems of money and land ownership.
Early economies functioned mainly on credit, with agricultural families racking up debts throughout the crop cycle. If disaster struck—be it floods or drought—it would burden these families further, risking their livelihoods and land ownership.
Hammurabi’s laws addressed these challenges, stipulating that nature-induced hardships exempted individuals from repaying debts, thereby preventing the rise of a landlord class. Debtors would often flee or turn to new rulers offering debt relief.
The commonality of debt cancellation was reflected in the practices seen in the Jewish tradition upon their return to Judea, aligning with the Jubilee year discussed in biblical texts.
CRANSTOUN: You’ve linked this tradition to early Christianity’s emphasis on debt relief. What transpired when Christianity merged with the Roman institutional framework?
HUDSON: Documentation detailing the intricate political landscape of Judea between the fifth century B.C. and Jesus’ time remains sparse, largely due to material limitations. However, it’s evident a conflict arose between the affluent creditor class and burgeoning debtor movements.
In the Gospel of Luke, Jesus declares his purpose is to fulfill debt remission as foretold in Isaiah, indicating a broader social movement advocating for economic justice.
With the advent of Christianity as the state religion in Rome, tensions became palpable. Compromises formed as certain Christian factions sought alignment with Roman interests, often at the expense of traditional debt-relief principles.
Figures like Augustine attempted to reinterpret the core messages of Christianity, transforming calls for economic justice into moral discussions that sidelined the original emphasis on debt relief.
Additionally, cultural translations of biblical texts suffered from misunderstandings about the socio-economic contexts, neglecting the inherent connections between sin and debt.
Today, the historical struggle against creditor power endures, with ongoing conflicts evident within modern economies, particularly as nations seek to prevent oligarchies from destabilizing their societies.
The strong opposition from creditor interests continues, aiming to maintain dominance over economic paradigms while grassroots movements strive for systemic change.
CRANSTOUN: Presently, the geopolitical implications of debt and resource control run deep—what role does Iran play in this complex landscape?
HUDSON: The current situation with Iran escalates tension, as they assert control over their resources as a means of protest against historical injustices. Their decision to charge reparations is a response to previous aggressions, illustrating a shift in their geopolitical stance.
The U.S. has historically maintained control over global oil resources, using strategic leverage to influence foreign policy. Recent actions against countries like Russia and Venezuela underline a broader attempt to consolidate power while undermining competitors.
Iran warns that any hostilities could echo profoundly, potentially disrupting oil supplies and triggering global economic downturns, amidst rising tension within the region.
The international ramifications extend to countries grappling with rising commodity prices amid existing debt burdens. Many are left to choose between servicing debts and preserving economic stability.
With ongoing challenges in the Global South, the inability to eradicate systemic debt suggests we are on a collision course with broader economic crises.
The self-isolation of the West, exacerbated by attempts to impose sanctions, puts traditional markets at risk of stagnation against the backdrop of emerging economies in the East.
CRANSTOUN: Returning to the pressing question: What constructive steps could be taken to rejuvenate productive capacity in the West amidst continuing economic turmoil?
HUDSON: To reignite growth within the U.S. and Europe, a wholesale debt write-down is imperative. Graduates burdened by student debts are unable to thrive in today’s economic landscape, threatening overall economic welfare.
Industrial growth cannot flourish when workers are encumbered by exorbitant living costs. If labor needs to cover debts and rising rents, wages will inevitably have to climb, diminishing competitiveness.
To facilitate growth, the government must deprivatize essential services and rein in monopolistic rent-seeking behaviors. This includes revisiting the taxation of land rents to prevent unearned income from accumulating among property owners.
Ultimately, achieving a stable and thriving economy necessitates public investments in key sectors, aligning with principles espoused by historical thinkers like John Stuart Mill.
CRANSTOUN: The situation seems dire; while solutions exist, implementing them appears politically daunting.
HUDSON: Indeed, that’s the landscape we face.
