All posts by Bryan Kavanagh

I'm a real estate valuer who worked in the Australian Taxation Office (ATO) and Commonwealth Bank of Australia (CBA) before co-founding a private valuation practice, Westlink Consulting. I discovered that we leave too much publicly-generated land rent to be privately capitalised by banks and individuals into land price bubbles. This generates repetitive recessions and depressions. These need to be avoided by capturing more revenue from land values to free up wages and household debt.

TRUMP? HOW?

Central banking, rigged capitalism, land speculation, income tax and neoclassical economics have compromised democracy, stunted progress, perverted the course of human destiny and compromised the future of this planet. ” – Ross Ashcroft

Here’s how! Watch with comprehension!

VIDA’S CONTRIBUTION

Vida Goldstein

Australians owe an enormous debt of gratitude to Vida Goldstein for her tireless work in improving the lot of women through universal suffrage. Not only did the group she led achieve universal suffrage in Australia–well before the better-known Emmeline Pankhurst did in the UK–but it opened the way for women to be elected to parliament. In this achievement, Australia led the New Zealand movement.

Although Vida Goldstein was belatedly honored by the naming of a Victorian seat of federal parliament in her name, to this day her whole-hearted commitment to world-leading socio-economic reform remains largely unacknowledged.

Goldstein’s primary goal was woman’s suffrage, of course. It is less well known that she also shared Henry George’s idea that land can never be ‘private property’. Land was humanity’s common inheritance.

The following article provides Vida Goldstein’s views on ‘Socialism’.

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The West Australian, Friday May 25, 1906

Socialism from a woman’s point of view

Address by Miss Vida Goldstein

Miss Vida Goldstein, the Victorian lady-suffragist at present visiting this State, fulfilled her desire to address a Perth audience on “Socialism” last night in St. George’s Hall. The audience, which was a good one, mainly consisted of ladies but there was a goodly sprinkling of men. Mr. R.H. Hall, president of the A.N.A., occupied the chair.

Miss Goldstein said she felt particularly interested in so many women coming to hear what she termed “a fair and impartial consideration of socialism,” especially as in the Eastern States an attempt was being made to enlist the aid of women in the anti-socialistic movement.

No one could, with a mind above paltry and selfish consideration, be other than a supporter of the movement in favour of altering the present social system. She had seen herself too much misery to be other than a supporter of some alteration. Socialism was in ethics an economic problem. The system, as held by some in its application to marriage and religion, was apart. There were anti-socialists in those ranks as well. The simple fact was that the present social condition must be altered.

She briefly cited the views of writers and thinkers with respect to the misery that existed today. It did not follow that because most of her quotations were based on old-world conditions that they were applicable only to the old world. Some urged that the conditions were altogether different in Australia, where life was freer and wages better. But those who said this only looked at life from the attic window. Let them go and see the misery in Australia, and they would agree with her that a change was required even in this new world.

It was said Australia was a working paradise. Let them look at facts on pounds, shillings and pence lines and take a man with a wife and five children earning 37s. 6d. a week, which it was said was a living wage. A list of bare living expenses she had compiled showed that he would really require £2 18s. 6d., and at that he would have to be a non-smoker and non-drinker. In the absence of this wage he must always be in debt and want and become a burden to the State. That was how it worked out in New South Wales, and she did not think her case had been overstated. (Hear, hear!)

Socialists contended that this would be remedied if property and the means of production were divided amongst the people. It was said that, if so, equality would result whether men were workers or not. That was not so. Under the system he who would not work could not eat. Every care was being taken to develop scientifically the vegetable and animal life of the world. But man was a lawless part of the world, and the individualists had attained a position which had become intolerable in every country. Could anyone conceive of the God-made law of supply and demand shutting out millions of tons of food and clothing, from starving and shivering millions. The God-made law meant equal supply and equal demand. The world’s law was really the devil’s law. (Hear, hear!)

The working man had all down the ages, been taught to work in support of others. Now, as the result of legislation, he was a voter and a legislator in fact. Of course, those who disliked restriction upon capital objected to the reforms these legislators had introduced and carried into law. But the conditions of the people had demanded them. In America capitalists poured fortunes into their pockets from the efforts of little children seven and eight years of age. That was sufficient to condemn capitalism root and branch. (Applause.)

The socialistic efforts in Australia had to some extent obviated the existence here of the American crime. But she could give some heart-rending accounts of the existence of hundreds she had personally met in Victoria and New South Wales and to whom the few laws already passed did not apply. Adulteration, which was the result of competition, also condemned capitalism. Anti-socialists put adulteration down to the great demand of the people for cheaper goods. It was the dealer who created this taste, in his desire to compete, to the detriment of his fellow-dealer. And so the people, believing they were getting the same article, and being enticed to buy it at a cheaper rate than before, bought adulterated goods. Dishonesty was an essential part of present-day commercialism. (Hear, hear!)

Trusts were a form of co-operation for the benefit of the capitalist; socialism was a form of co-operation for the benefit of the worker. (A Male Voice: “Oh !”) Collectivism, she had no doubt, would come in the form of public ownership of utilities and then the bigger industries, and she believed land would be the first of the former. In this connection she was glad to see that in Western Australia they had made greater strides than had been the case in other States.

As things were, the landowner sat down and watched his labourers increasing the value of his property, and year by year he raised the rent. Railways came, and he raised the rent. Towns grew up around, and once more the rent went up. But still he sat down.

Anti-socialists had made an attempt, said Miss Goldstein, to hoodwink the women into joining their ranks by pointing to the abolition of the marriage tie and religion. Quotations had in support been taken from articles written in Victoria and Queensland socialist organs. By themselves they were blasphemous and scurrilous, but taken as a whole they simply preached against the growing “churchianity” of the Church. (Hear, hear!)

The ethics of Christianity and the ethics of socialism were the same. Socialism, in fact, had its foundation in the Sermon on the Mount. Then what about the sanctity of the home and the abolition of the marriage tie? What about it now, in a system which allowed a double standard of morality in men and women, and even encouraged it in the divorce court, which allowed it in the giving away of daughters to titled roues; which allowed ten people of different sexes to sleep in one room? Would they like to go back to the old conditions when a man could sell his wife? That had been changed. Then followed other conditions; but women were still always held in bondage. But, with still further economic changes, women had begun to win independence, but so far only a little independence. She thought nothing was more degrading than for a woman to have to marry for a home. Love should be the sole reason. (Applause.)

Surely, those with a brain to think, eyes to see, and a mind to reason must realise that the capitalist system must cease and a co-operative system prevail in its place. She urged all women not to take any notice of the old interpretation of natural laws that would be dangled before them. Let them read and look for themselves. She fully believed that socialism would be the next development in society. There would be failures, no doubt, but out of these a success would evolve. The final socialism must rest firmly on the principle of love of God and love of man. Everybody would have equal opportunities with everybody else, till the final consummation came—a grand brotherhood of man. (Applause.)

A discussion followed Miss Goldstein’s address.

Financialization’s Sponsorship of Rentier Capitalism

by Michael Hudson

            The 19th century’s industrial capitalism has evolved into a finance capitalism that has bifurcated the economy between the slumping “real” economy of goods and services, production and consumption sector on the one hand, and the rent-extracting Financial, Insurance and Real Estate (FIRE) sector that now accounts for most of the increase in wealth and GDP.

This rapidly mutating finance capitalism has changed in major ways since Rudolf Hilferding wrote Finance Capital in 1910, Keynes wrote his General Theory in 1936, and even since Hyman Minsky and his followers have pioneered Modern Monetary Theory (MMT) since the 1980s – the decade that also saw Thatcherism in Britain and Reaganomics in the United States introduce a new era of deregulation privatization and untaxing of the wealthiest income and wealth brackets. The financial sector has sponsored privatization as a vast exercise in rent-seeking, turning the various forms of economic rent into interest and capitalizing this revenue as “capital” gains.

The largest asset in nearly every economy is real estate, and most of its land and price gains are now paid out as mortgage interest. Banks therefore now receive the land rents that a distinct landlord class collected until the early 20th century. Real estate investors and speculators buy properties on credit, paying their rental income to the banks so as to take their return in the form of rising real estate prices – “capital” gains, capitalizing the rising rental value into yet new debt-financed sales.

In much the same way, monopoly rent opportunities, sponsored by the financial sector as the “mother of trusts,” are bought and sold on credit, and deregulation increases their rents and hence asset valuations.

To view the economy from finance capital’s vantage point, it is necessary to add “capital gains” to national income and GDP statistics, creating a measure of Total Returns. This consolidation of income and capital gains explains why the objective of finance capitalism has shifted toward inflating asset prices for real estate, stocks and bonds. That is how fortunes are made these days, and how some people become billionaires. Asset-price gains far outweigh profits, interest and even the growth in GDP. In today’s world, large fortunes and even most of the wealth and net worth of the middle class reflect the increase price of housing, other real estate and financial securities, not by saving out of wages and profits.

Figure 1. Cumulative total returns: the sum of GDP, equities, bonds, land values and depreciation, 1950-2018 (nominal, $bn)

Source: Federal Reserve’s Flow of Funds.

Figure 2: Asset price gains as multiples of  growth in GDP, 1950-2018

Figure 3: Asset price gains as multiples of  growth in GDP, 1950-2018

Asset-price inflation for the economy’s real estate, stocks and bonds are fueled by the central banks of North America and Europe, and accrue to the wealthiest 10 percent of the population – and indeed, mainly to the One Percent, the mega-rich class. This concentrated distribution of wealth and the3 income it generates shows that central bank policy and also tax policy has shifted away from producing broadly-based economic growth and living standards for the population at large – the 99 Percent – to benefit an emerging financial oligarchy.

The financialized business plan is to “create wealth” by debt leveraging of rent-extraction privileges on credit, creating a heavier and heavier debt burden that ends up imposing debt deflation and financial austerity, stifling the economy and bringing the financialization policy to an end. Rents are not really “earned” income. They are transfer payments that do not have any cost of production except that of monopoly power, landlordship and other privileged ownership of sectors that enable owners to squeeze land rent, other natural resource rent, monopoly rent, and financial interest and asset-price gains. The rising role of these economic rents (relative to profits, wages and GDP has occurred to a narrow rentier layer of the population. The result has been a transition from an economy based on rising production and rising living standards to an extractive economy where wealth is gained mainly by transfer payments – economic rents with no quid pro quo – and a widening gap between creditors and wealth-holders relative to indebted debtors obliged to pay rising economic rents for their basic needs.

Although claiming to base its “free market” ideology on Adam Smith and his classical economic successors, this policy reverses the basic thrust of classical political economy and its hope to free markets from unearned income in the form of economic rent. Instead of taxing land rents and the rising price of real estate (landlords whom John Stuart Mill described as collecting rents and rising land-price gains “in their sleep”), today’s tax policies favor rent-seeking instead of wages and profits earned through production of goods and services.

Figure 11. Land Value compared to GDP Trends: 1945-2015

To quantify this distributional characteristic of rentier capitalism, it is necessary to isolate the FIRE sector from the rest of the private sector, because economic rents and financial returns are imposed externally onto the circular flow of payments between production and consumption.

1.  Finance capitalism is the mother of monopoly “rentier” capitalism

            If high finance is the mother of monopolies and trusts, then the financial sector has become the organizer and central planner of monopoly capitalism. Stated the other way around, monopoly capitalism is basically a financial phenomenon – and politically an oligarchic phenomenon, gaining control of government tax policy, law-making and regulatory agencies (“regulatory capture”) to defend this takeover. Its claim is that dismantling public regulation and taxation of wealth produces a free market.

The past century, and especially the post-1980 decades, has seen an emerging oligarchy siphoning off land rent, mineral and other natural resource rent, monopoly rent, and predatory financial interest charges, fees and penalties, while increasing the political power and price of its wealth relative to the interest-paying and rent-paying tributary economy below it.

All this is the diametric opposite of what 19th-century political economists called a free market – namely, one free from a privileged class collecting unearned income. A century ago these rents were expected to be wound down by governments taking ownership and management of sectors prone to rent-seeking: land and natural resources, and natural monopolies, including banking. To the classical economists, a free market was one free from rentier income, by either taxing it away, by regulating it with anti-monopoly legislation, or by direct public ownership of inherently or potentially rent-yielding assets such as land, natural resources and essential infrastructure for communications and other basic needs.

But finance capitalism responded by sponsoring an intellectual revolution against this classical economic doctrine. Instead of government agencies serving as the economy’s major planning power, an even more centralized planning has passed to the banking and financial center. And in contrast to classical economics, the financial rentier idea of “free markets” is to give tax preference to rent-seeking instead of to wages, consumer spending and industrial profits.

2. Financialization is primarily a rent-seeking phenomenon

            Textbook models depict banks as directing savings of labor and businesses into the most sustainable and hence profitable investment. The loan proceeds are assumed to be invested in increasing production and employment. But that is not what occurs in reality.

            About 80 percent of bank lending in the United States and Britain is for real estate. The effect is to inflate access prices for housing and office space on credit. Owning homes and property rising in price rise has become a main objective of bank borrowers. And inasmuch as banks lend mainly for rent-yielding sectors, “capital” gains are achieved mainly by debt leveraging as speculators, absentee buyers and corporate raiders seek to ride the wave of asset-price inflation.

Financial revenue is counted as royalty income, taxed at very low rates (15 percent in the United States). Absentee real estate owners are permitted to pretend that their buildings are steadily depreciating and losing value, for which they are given a fictitious tax credit. Along with the tax treatment of interest as a necessary cost of production (instead of a cost of transferring ownership of assets already in place), the effect has been to make the real estate sector basically tax-exempt for over half a century. The primary financial return – “capital gains” for financial and other rent-yielding assets – is given the most preferential tax treatment of all, and often is not taxed.

            Ricardian rent played no role in Keynes’s General Theory. It did in Marx’s Capital, especially Volumes II and III, but Marx expected industrial capitalism to free itself from landlordship and other rent-seeking. By the early 20th century, his followers did focus on the emergence of finance capitalism, but did not retain the classical focus on economic rent as the unearned excess of prices over socially necessary cost of production. At issue was what kind of market would be shaped by public tax and regulatory policy.

Any analysis of today’s economic crisis needs to re-integrate rent theory with national income theory by reviving the distinction between income earned for producing real goods and services (created by labor and fixed capital) and payments to rentiers for real estate (including natural resource rents, head by oil and gas, and mining), interest and related financial fees, and monopoly rents. Rent has become the main income objective of the FIRE sector, and the key to asset-price increases.

3. Privatization has greatly increased rent-seeking and the cost of living since 1980

            The past four decades have seen many sectors privatized that a century ago were expected to be public in character. The major organizers of these privatizations has been the financial sector, seeing the opportunity to capitalize economic rents into a market for bank loans and underwriting bond and stock issues. The leading privatizations over the past four decades include health insurance, education, housing, communications and other natural infrastructure monopolies, and privatized monopolies headed by banking.

            Health care now accounts for 18 percent of U.S. GDP. This ratio is far in excess of the ratio found in countries with public care. In addition to raising the cost of living and doing business, medical and hospital debt has become the largest cause of personal bankruptcy in the United States.

The need to rely on employer health plans has deterred labor’s ability to bargain for higher wages. Indeed, it even and creates a fear among employees to complain about working conditions. To make matters worse, the higher medical-insurance charges for men and women as they grow older have led to age discrimination against women over 35 years of age and men over 49 years, creating a bifurcated job market. Despite the general rise in life expectancy, rising unemployment is forcing the elderly and even the middle-aged into minimum-wage jobs. The result is that life expectancy for the non-wealthy is declining in the United States.

            Education for many centuries in many countries was a free public service, and continues to be from Germany to China. Admittance typically is based on the ability and talent to pass entrance exams. But it has been financialized in the United States, where the cost of higher education (and even kindergarten and secondary school education) has risen nearly a hundred-fold over the past half century for the most high-ranking schools.

The rising cost of education has created a two-tiered economy between those whose parents can pay for college (and the equally expensive kindergarten to high-school education at prestigious schools that are the main feeders to the major U.S. universities), and those who must borrow. The latter graduate with debt service so high that it blocks them from qualifying for mortgage loans to buy their own homes, deterring marriage rates.

The largest universities have boards of directors heavily weighted by financial-sector managers (in addition to being major real estate investors in their localities). Treating universities as financial profit centers has led to these boards seeking to increase their endowment and financial or real estate wealth. Toward this end almost all the rise in academic employment has been for deans and business managers. Payments for the professors who actually do the teaching have been slashed by appointing part-time adjunct professors instead of full-time academics.

U.S. student debt of $1.6 trillion now substantially exceeds credit-card debt ($1.2 trillion), and student debt arrears have now (2019) reached 27 percent. Student debtors are barred by law from declaring bankruptcy to wipe out this debt, which is now owed to the government, with banks and financial institutions collecting fees on loan origination and payment collection. The government could forgive these debts without imposing losses on private-sector creditors. A student debt amnesty would not add to the budget deficit.

Why then is this economic wedge kept on the books? The answer seems to be mainly to sustain the financialization of higher education and the resulting class stratification. Hardly by surprise, public health care and a student-debt amnesty have become the two major political issues in America’s 2020 presidential election. This political reaction against neoliberal financialization makes the U.S. economy the most extreme example of debt overhead acting as an economically polarizing dynamic.

            Housing and real estate. A home or other property is worth however much a bank will lend against it. Some 80 percent of bank credit in the United States and Britain is to the real estate sector, which is the largest division of any modern bank. Markets for mortgage credit have long been catalyzed by expectations by bank customers that real estate prices will continue to appreciate much faster than incomes or other prices.

As the volume of loanable funds has increased exponentially, banks have expanded the real estate market by lowering their credit standards. By 2008, however, real estate price inflation reached its mathematical limit. Banks raised the ratio of loan-to-value (from 70 percent to 100 percent and even more in the United States), and lowered the ratio of mortgage debt service to income (from 25 percent to nearly zero). They also lowered the amortization rate from 30-year self-amortizing mortgages in the decades after World War II to zero-amortization and even zero-interest mortgages by 2008.

Rental costs in the United States have risen as a result of the foreclosures on a reported 10 million families in the wake of the 2008 junk-mortgage crisis, reducing the U.S. home ownership rate by about a tenth, from nearly 68 percent in 2008 to 62 percent in 2019. Private equity firms such as Blackstone bought tens of thousands of foreclosed homes at distress sales as families were forced into the rental market, increasing rents much more rapidly than other consumer prices (except for education and health insurance as noted above).

            Communications and other natural infrastructure monopolies. The financial sector has led the neoliberal lobbying effort to shift phone systems, cable systems, the internet and information technology out of the public sector into private corporate hands. Regulatory capture, mergers and acquisitions have led to prices for phone systems, cable connections and other basic infrastructure to rise much faster than consumer prices for non-monopolized sectors, making them a favorite object of financial speculation and debt leveraging.

            Banking has remained private, not taken into the public domain as was widely expected in the late 19th century. Commercial banks create endogenous credit without needing prior deposits. In other words, “loans create deposits” much more than the other way around. This credit is extended against collateral, and has focused on financing the purchase of real estate and financial securities. This credit creation raises asset prices by creating more and more debt relative to asset values. The problem is that relatively little credit has been created to finance new factories, plant and equipment or other fixed capital to expand production, employment and GDP.

            As an extension of this financialization, pension funding in the United States and other neoliberal economies has become financialized instead of being organized on a pay-as-you-go basis. Corporations and individuals pre-fund their retirement by saving via the banking and financial sector – despite that sector’s effect on stifling the economy instead of being productive.

The original logic was that such saving would help finance economic growth and income out of which to pay pensions. But as the financial sector’s focus has shifted to generating asset-price gains by debt leveraging, the effect has been to weigh down economic growth by debt deflation. As a result, the U.S. economy is now burdened with underfunded corporate and public-sector pension plans, threatening corporate bankruptcy and local state and municipal insolvency. This is a harbinger of the economic austerity to come as the long posts-World War II upswing hits its financial ceiling.

Crime has evolved from brute force to white-collar fraud. Its lobbyists have declared it part of the “free market” when conducted by the elites on a sufficiently large scale. This principle gave free reign to criminogenic bank fraud by 2008, and the financial perpetrators were declared Too Big To Jail (TBTJ), being deemed so structurally important that the economy would crash if the frauds were punished, the banks fined declared insolvent and restitution made to their defrauded borrowers.

This criminalization of the banking and financial sector has been facilitated by the privatization of law enforcement, reflecting the fact that government itself has become privatized. The Supreme Court’s ruling in the Citizens United lawsuit permitted U.S. election campaigns to be privately funded, paving the way for a political transition from democracy to oligarchy. Regulatory capture by the economy’s leading rent-extraction sectors has been accompanied by non-enforcement of anti-monopoly legislation and a financial takeover blocking prosecution of financial and related white-collar crime such as corporate looting and asset stripping.

These developments have been overseen by the shift of central banking from Washington to Wall Street since the Federal Reserve was founded in 1914. Along with the Comptroller of the currency and U.S. Treasury, public management agencies have been captured by the financial sector’s managers and lobbyists. The Federal Reserve responded to the “Great Contraction” since 2008 by creating $4.6 trillion in Quantitative Easing to pump into the banking system, which was redefined to include stock brokerage and other financial intermediaries so as to qualify them for bailout support as an alternative to bankruptcy as the system they created collapsed.

The broad oligarchic aim was to support and re-inflate asset prices for real estate, stocks and bonds, by driving down interest rates. A fraction of this sum could have been used to wipe out bad loans to victims of junk-mortgage fraud and bank lending to NINJAs (No Income, No Jobs and No Assets). But instead of reviving the production-and-consumption economy. central bank credit following a Zero Interest-Rate Policy (ZIRP), increasing the economy’s debt overhead and access prices for housing and the cost of purchasing securities or annuities to provide a fixed and secure retirement income.

Although creating financial arbitrage opportunities by using low-priced public credit to support real estate, bond and stock prices, the zero interest-rate policy threatens to bankrupt private-sector pension plans and sectors relying on fixed income such as insurance companies. Pension plans, home ownership thus become major victims of the bailout, reflecting the financial sector’s downside as the economy’s central planner, serving its own, increasingly narrow interests at the expense of the rest of the economy.

            As the key sectors cited above have become privatized and financialized, they have led the transition from industrial capitalism to finance “rentier” capitalism. The economic effect is deflationary, by siphoning off the disposable personal income available to spend on “real” goods and services produced by labor and fixed capital. Wage-earners are obliged to pay “off the top” of their paychecks for health insurance, housing (mortgage service or rents), education loans and other personal debts, and their monthly privatized utility bill.

            An incidental effect of building these rentier costs of living and doing business into the economy is on international trade (discussed below). Privatized and financialized rent-seeking economies are much higher-cost than “mixed” economies whose governments provide public health care, education, housing, bank credit and basic infrastructure at cost or on a subsidized basis.

4. Debt overhead has become the main cause of today’s consumer-price deflation, not the solution to revive the economy as Keynes believed in the 1930s. Writing in the depth of the Great Depression, Keynes saw a revival of bank lending as the path of least resistance and hence major solution to the inadequate consumer and business spending. Lending was supposed to fuel new capital investment and employment as a deus ex machina.

But under today’s finance capitalism, decoupling bank credit from tangible capital investment and consumer spending on goods and services has been largely for borrowing merely to transfer ownership of real estate, stocks and bonds, not to increased fixed capital investment. Rising debt service and outlays for economic rent have led to debt deflation and financialized austerity, not expanded production and rising living standards.

Financial management of corporations is different from industrial management. Around the same time that Keynes was writing, in 1932, Adolf Berle and Gardner Means published The Modern Corporation and Private Property. They thought that they had found a new evolutionary trend of industrial capitalism. But that trend has been industrialized. Instead of the Berle-Means thesis that corporate management was separating ownership from direct management, corporate planning has been turned over to financial planners, whose aim is to make profits by increasing stock prices (“shareholder capitalism”). Increasing stock prices has transformed the aim of industrial corporations to serve financial objectives – and in the process, shifting from long-term product planning and marketing to short-term financial engineering.

The financial business plan thus does not aim at using credit creation to fund tangible capital investment to expand production and employment. Rather, it is to manage corporate industry to create financial gains, above all by using after-tax income for stock buybacks to increase stock prices, and by paying out more income as dividends to raise stock prices. Companies are going into debt (at low interest rates) in order to buy back their own stock, whose dividend yield exceeds the interest charge. The income-tax system encourages this arbitrage, which has led to rising debt/equity ratios in the United States.

The resulting capital gains for corporate stocks and bonds do not reflect an increase in fixed capital formation, but debt-leveraged asset-price inflation. Corporate income and balance sheets also may be enhanced by using the threat of bankruptcy to roll back pension obligations to employees, by shifting from defined-benefit to defined-contribution plans.

The upshot is that the financial sector’s gains are achieved increasingly by asset stripping, downsizing and bleeding instead of being used for tangible capital investment to expand production and employment. The result is a widening disconnect between rising financialized wealth (stock, bond and real estate prices) on the one hand, and tangible capital investment and rising living standards on the other.

5. There are two market systems: one for the “real economy” and one for financial and real estate assets. The problem is largely that the economy’s rentier sector and the creation of capital gains by debt-leveraged credit (instead of saving out of corporate profits) are not part of the goods-and-service economy of production and consumption. Much of what seems to be economic activity associated with production (GDP) actually is associated with transferring asset ownership or raising asset prices, and hence with the FIRE sector. To explain today’s economic polarization and stagnation in the “real” economy, it therefore is necessary to isolate that financialized sector from the rest of the private sector actually involved in production and consumption.

It also would help to isolate monopoly rent-seeking, but existing national income statistics count all business revenue as “earnings,” rejecting the classical concept of economic rent. The logic seems to be that if they do not report economic rent ass a distinct category of revenue, there will be no empirical evidence that it exists. Cash flow taken by the real estate sector, for instance, excludes the “depreciation” tax credit that absentee owners (but not home owners) are allowed to charge as a tax deductible “expense” to pretend that their buildings are deteriorating and their property losing value – as if landlords do not already charge the expense of repairing and maintaining their buildings (or pay fines if they fail to do so).

It is the same with capital gains. The source of private-sector net worth has shifted away from wages and profits (or GDP growth) to financially engineered capital gains. Also, government budget deficits and Quantitative Easing by central banks are spent on supporting asset prices, not necessarily used for new fixed capital investment and employment.

The financialized economy’s gains may well go hand in hand with the “real” economy’s shrinkage and austerity. Most obviously, asset-price inflation may go hand in hand with wage and price deflation in the “real” goods-producing sector. For instance, increased mortgage credit created and lent to bid up housing prices increases the access cost of housing to new buyers, leaving less to spend on goods and services. Likewise, Quantitative Easing to pump credit into the economy and lower interest rates requires higher pension set-asides for financialized pension plans (in contrast to pay-as-you-go plans). Money and credit (as well as budget deficits and central bank credit) used to finance asset-price inflation involves many activities reported as GTDP, despite being extractive rather than productive.

            For instance, the U.S. National Income and Product Accounts report late fees and penalties on credit-card holders and other debtors as “financial services,” not as a subtrahend from GDP adding to the cost of living. Also treated as an addition to GDP is the rise in “imputed homeowners’ rent,” defined as what homeowners estimate that they would have to pay themselves if they rented their homes instead of owning them. The rising cost of housing is added to GDP as if the economy actually were producing more housing value, not merely inflating the cost of obtaining a home to live in. The implication is that asset-price inflation is real wealth creation.

Figure 15. Imputed financial services and imputed owner-occupier rents as percent of GDP

6. The financialization phenomenon can be formalized in a set of equations. For starters,

Nominal GDP

minus  FIRE

minus  Monopoly rent-seeking

equals “Real” GDP

plus    “Capital” gains

                        real estate

                        bonds

                        stocks

equals Total Returns

Unfortunately, the National Income and Product Accounts (NIPA) and national balance sheets (such as the U.S. Federal Reserve’s Table Z, Balance Sheet of the U.S. economy) do not permit a logical stock-flow reconciliation. This prevents a view of the economy from the Total Returns vantage point that private investors use. It is that vantage point that now dominates U.S. financial and fiscal policy.

7. Substantial international variation exists in debt and rentier income ratios. Germany shows little sign of debt deflation. Wages and disposable incomes have both risen, in contrast to the financialized U.S., British and other neoliberalized economies. This paper’s analysis helps explain Germany’s (and also China’s) competitive industrial advantage as a result of being less financialized and retaining more of a symbiosis between public and private sectors, especially for health care, education, housing and the basic public infrastructure cited earlier.

            The traditional theory of international trade and investment implies that technologically advanced economies with the highest labor productivity would dominate the global economy. But as the former leading nations – first Britain and then the United States under Thatcher and Chicago-School Reaganomics – have been financialized, they have turned into rentier economies pricing their labor and capital out of world markets. A realistic analysis of the comparative costs of living and doing business needs to take account not only of direct costs of production and labor and capital productivity, but also of the overhead built into the basic living costs of wage-earners and similar rent and financial costs to the business sector.

            Such an analysis explains the increase in U.S. protectionism against less privatized and financialized economies. The problem is that that the economy cannot be re-industrialized as long as it leaves the existing pro-rentier tax policy and debt overhead in place.

The moral is that finance capitalism threatens to grind industrial capitalism to a halt. To the extent that it spreads from the United States and Britain to other countries, it is not because of its economic efficiency reducing the cost of living and doing business, but because of its ability to create capital gains for a rentier elite as financial sector clients. What is transmitted is not a more efficient economy with rising living standards, but a class war against labor sponsored by governments internationally.

Figure 9: Change in rentier deductions, as percent of income:

8. To explain how domestic and international wealth is increased and distributed, a more functional system of National Income and Product Accounts is needed to distinguish “real” saving from financialization, and rentier income (fictitious earnings) from wages and profits. The increase in wealth – as measured financially by the rising market valuation of real estate, bonds and stocks – far exceeds “current saving” out of wages and corporate profits.

            The old Keynesian identity of S = I is long out of date (if in fact it ever was appropriate). It implies that savings – and hence, wealth – are made out of wages and profits, not credit creation and capital gains. It also implies that savings are cycled into the “real” economy as productive investment, if not “hoarded” outside of the bank-credit system.  But most wealth is acquired by the market price of assets is being bid up from credit creation, inducing arbitrage speculation to raise their prices and from corporate stock buybacks, not because people refrain from consuming to accumulate “Keynesian” savings. What is saved by households and businesses does not take the form of new fixed capital investment but the purchase of financial securities and assets already in place. The result is saving without new direct investment.

            A corollary is that credit creation, Quantitative Easing and running government budget deficits do not necessarily increase consumer spending and fixed capital formation. Central banks since 2008 have acted to block that tendency by Quantitative Easing programs to drive down interest rates to virtually zero (or even negative rates). But the credit infusion ($4.6 trillion in the United States, and almost as large an infusion from the European Central Bank) has not been to revive the “real” economy. It may be absorbed by the financial sector, which has become an economic overhead, external to the real” economy production, not part of the circular flow of production and consumption.

9. Gross saving rates may remain high, while net saving turns negative. The decline in net U.S. saving rates simply means that the savings of the financial sector as creditor are lent out to the rest of the public sector. The idea that debt doesn’t matter because “we owe the debt to ourselves” leaves out of account that the “we” are the 99 Percent in the “real” goods-and-service producing economy, while the “ourselves” are the One Percent in the FIRE sector. The National Income and Product Accounts conflate creditors and debtors together, as if the financial and rentier sectors were a necessary part of the “real” economy of production and consumption.  Distinguishing between the financial sector as creditor and he indebted “real” economy explains why the financial and allied rentier sectors have added to economic instability. Throughout history the mathematics of compound interest have increased the volume of credit and debt exponentially faster than the “real” economy’s ability to pay

Conclusion

            The post-2008 financialization has created a new stage of finance capitalism. In contrast to the industrial capitalism’s dynamic of economic growth based on reinvesting profits to expand production and employment, finance capitalism is promoting a rentier sector that transfers income and asset ownership to the wealthiest layer of the population, while increasing the cost of living and production.

            Two hundred years ago David Ricardo warned that the Armageddon of industrial capitalism in a closed economy would occur as a result in rising land rents as population growth forced recourse to the least fertile soils. That would raise the marginal production cost of food crops, requiring employers to raise labor’s wages – while this revenue was paid increasingly to landlords. Ricardo advocated free trade as the solution to the land-rent problem, enabling Britain to import low-priced food in exchange for its manufactures. A long political battle was fought from 1815 until repeal of the Corn Laws, Britain’s agricultural tariffs in from 1846 to 1849.

The political fight to counter rentier income today threatens to be much more complicated. Two centuries ago, Britain’s banking and financial sector (for which Ricardo was the major Parliamentary lobbyist) saw its major profit opportunities to lie in free trade, at the expense of Britain’s landlord class. Today, banking and real estate have allied themselves with monopolies and trusts to fight against the classical economic reforms that aimed to bring market pricing in line with “real” value, defined as the necessary costs of production. Instead of advocating that economies be freed from economic rent transferred to the dominant economic and political class, today’s neoliberal mainstream has become the protector of rent-seeking and its financialization.

            As matters have turned out, finance capitalism’s rentier Armageddon is resulting from the financialization of real estate and other basic needs, whose rents are paid to the investors who have bought rent-yielding assets on credit. Can such economies succeed in competing with those which minimize rent seeking? Apart from losing the prospective economic competition with mixed public/private economies, the economic polarization between creditors and debtors, rent recipients and rent-payers, the One Percent and the 99 Percent, may either prevent the promise of classical industrial capitalism evolving into social democracy, or require a revival of reforms to free economies and markets from socially and economically corrosive rentier overhead.

            The alternative is for financialized rentier economies to end up looking like Greece or Latvia, imposing austerity leading to shorter life spans, an emigration of labor and capital flight as their logical “final” stage. At the end of this road lies a new Dark Age.

Mortgage debt as percentage of residential real estate values, 1945-2018


Composition of real estate ebitda, 1930-2015

FIXING INEQUALITY

by James Webster

If you want to address inequality, income is a major factor.

Apart from state subsidies, the main sources of income are wages, business profits and location – and location often takes quite a big part of business profits (just speak to a tenant in a shopping centre).

Anyone theoretically can make an effort to increase their wages and, with endeavour, business profits – however, land and location are rather different – income from location goes to the owners. Those that own land, especially in good locations, have rather an advantage, they get income (either through capital gain or actual rent) that does not go to wage earners and business owners; often a significant part of what would be a business’s profit actually goes to the owners of location, and as we have heard housing rents can sometimes exceed 90% of a person’s income (for people on Newstart).

Inequality of opportunity can therefore be starkly traced back to inequality of ownership of land, or more specifically to the benefits of land. Unless that is addressed, efforts to reduce inequality of opportunity will go nowhere.

Added to that, there is a theory that is summed up as ‘Land takes the gains’ – meaning that any real improvements in general wage incomes, productivity, infrastructure, viz, any societal good will always inflate land values. What this means is that all the best endeavours to fix anything else (including increasing Newstart) without addressing land income distribution will simply result in land values or rents going up, soaking up the best endeavours to progress.