[Peace-discuss] Obama's Greatest Betrayal

[C. G. Estabrook]

   November 15, 2010
   The Coming Sell-Out to the Super Rich and What It Means for the Rest of Us
   By MICHAEL HUDSON

Now that President Obama is almost celebrating his bipartisan willingness to
renew the tax cuts for the super-rich enacted under George Bush ten years ago,
it is time for Democrats to ask themselves how strongly they are willing to
oppose an administration that looks like Bush-Cheney III. Is this what they
expected by  Obama’s promise to rise above partisan politics – by ruling on
behalf of Wall Street, now that it is the major campaign backer of both parties?

It is a reflection of how one-sided today’s class war has become that Warren
Buffet has quipped that “his” side is winning without a real fight being waged.
No gauntlet has been thrown down over the trial balloon that the president and
his advisor David Axelrod have sent up over the past two weeks to extend the
Bush tax cuts for the wealthiest 2 per cent for “just” two more years. For all
practical purposes the euphemism “two years” means forever – at least, long
enough to let the super-rich siphon off enough more money to bankroll enough
more Republicans to be elected to make the tax cuts permanent.

Obama seems to be campaigning for his own defeat! Thanks largely to the $13
trillion Wall Street bailout – while keeping the debt overhead in place for
America’s “bottom 98 per cent” – this happy 2 per cent of the population now
receives an estimated three quarters (~75 per cent) of the returns to wealth
(interest, dividends, rent and capital gains). This is nearly double what it
received a generation ago. The rest of the population is being squeezed, and
foreclosures are rising.

Baudelaire quipped that the devil wins at the point where he manages to convince
the world that he doesn’t exist. Today’s financial elites will win the class war
at the point where voters believe it doesn’t exist – and believe that  Obama is
trying to help them rather than shepherd them into debt peonage as the economy
settles into debt deflation.

We are dealing with shameless demagogy. The financial End Time has arrived, but
  Obama’s happy-talk pretends that “two years” will get us through the current
debt-induced depression. The Republican plan is to make more Congressional and
Senate gains in 2012 as Obama’s former supporters “vote with their backsides”
and stay home, as they did earlier this month. So “two years” means forever in
politician-talk. Why vote for a politician who promises “change” but is merely
an exclamation mark for the Bush-Cheney policies from Afghanistan and Iraq to
Wall Street’s Democratic Leadership Council on the party’s right wing? One of
its leaders, after all, was  Obama’s Senate mentor, Joe Lieberman.

The second pretense is that cutting taxes for the super-rich is necessary to win
Republican support for including the middle class in the tax cuts. It is as if
the Democrats never won a plurality in Congress. (One remembers George W. Bush
with his mere 50+ per cent, pushing forward his extremist policies on the logic
that: “I’ve got capital, and I’m using it.” What he had, of course, was
Democratic Leadership Committee support.) It’s all “to create jobs,” headed by
employment of shipyard workers building yachts for the nouveau riches and
foreclosing on the ten million Americans whose mortgage payments have fallen
into arrears. It sounds Keynesian – or at least, reminiscent of Thomas Robert
Malthus’s claim (as lobbyist for Britain’s landed aristocracy) that landlords
would use their rent income to hire footmen, carriage-makers and butlers to keep
the economy going.

It gets worse.  Obama’s “Bush” tax cut is only Part I of a one-two punch to
shift taxes onto wage earners. Congressional economists estimate that extending
the tax cuts to the top 2 per cent will cost $700 to $750 billion over the next
decade or so. “How are we going to go out and borrow $700 billion?”  Obama asked
Steve Kroft in his Sixty Minutes interview on CBS last week.

It was a rhetorical question. The President has appointed a bipartisan
commission (right-wingers on both sides of the aisle) to “cure” the federal
budget deficit by cutting back social spending – to pay yet more bailouts to the
economy’s financial wreckers. The National Commission on Fiscal Responsibility
and Reform might better be called the New Class War Commission to Scale Back
Social Security and Medicare Payments to Labor in Order to Leave more Tax
Revenue Available to Give Away to the Super-Rich. A longer title than the
Deficit-Reduction Commission used by media friendlies, but sometimes it takes
more words to get to the heart of matters.

The political axiom at work is “Big fish eat little fish.” There’s not enough
tax money to continue swelling the fortunes of the super-rich pretending to save
enough to pay the pensions and related social support that North American and
European employees have been promised. Something must give – and the rich have
shown themselves sufficiently foresighted to seize the initiative. For a preview
of what’s in line for the United States, watch neoliberal Europe’s fight against
the middle and working class in Greece, Ireland and Latvia; or better yet,
Pinochet’s Chile, whose privatized Social Security accounts were quickly wiped
out in the late 1970s by the kleptocracy advised by the Chicago Boys, to whose
monetarist double-think  Obama’s appointee Ben Bernanke has just re-pledged his
loyalty.

What is needed to put  Obama’s sell-out in perspective is the pro-Wall Street
advisors he has chosen – not only Larry Summers, Tim Geithner and Ben Bernanke,
but by stacking his Deficit Reduction Commission with outspoken advocates of
cutting back Social Security, Medicare and other social spending. Their ploy is
to frighten the public with a nightmare of $1 trillion deficit to pay retirement
income over the next half century – as if the Treasury and Fed have not just
given Wall Street $13 trillion in bailouts without blinking an eye. President
Obama’s $750 billion tax giveaway to the wealthiest 2 per cent is mere icing on
the cake that the rich will be eating when the bread lines get too long.

To put matters in perspective, bear in mind that interest on the public debt
(that Reagan-Bush quadrupled and Bush-Obama redoubled) soon will amount to $1
trillion annually. This is tribute levied on labor – increasing the economy’s
cost of living and doing business – paid for losing the fight for economic
reform and replacing progressive taxation with regressive neoliberal tax policy.
As for military spending in the Near East, Asia and other regions responsible
for much of the U.S. balance-of-payments deficit, Congress will always rise to
the occasion and defer to whatever foreign threat is conjured up requiring new
armed force.

It’s all junk economics. Running a budget deficit is how modern governments
inject the credit and purchasing power needed by economies to grow. When
governments run surpluses, as they did under Bill Clinton (1993-2000), credit
must be created by banks. And the problem with bank credit is that most is lent,
at interest, against collateral already in place. The effect is to inflate real
estate and stock market prices. This creates capital gains – which the
“original” 1913 U.S. income tax treated as normal income, but which today are
taxed at only 15 per cent (when they are collected at all, which is rarely in
the case of commercial real estate). So today’s tax system subsidizes the
inflation of debt-leveraged financial and real estate bubbles.

The giveaway: the Commission’s position on tax deductibility for mortgage interest

The Obama “Regressive Tax” commission spills the beans with its proposal to
remove the tax subsidy for high housing prices financed by mortgage debt. The
proposal moves only against homeowners – “the middle class” – not absentee
owners, commercial real estate investors, corporate raiders or other prime bank
customers.

The IRS permits mortgage interest to be tax-deductible on the pretense that it
is a necessary cost of doing business. In reality it is a subsidy for debt
leveraging. This tax bias for debt rather than equity investment (using one’s
own money) is largely responsible for loading down the U.S. economy with debt.
It encourages corporate raiding with junk bonds, thereby adding interest to the
cost of doing business. This subsidy for debt leveraging also is the
government’s largest giveaway to the banks, while causing the debt deflation
that is locking the economy into depression – violating every precept of the
classical drive for “free markets” in the 19th-century. (A “free market” meant
freedom from extractive rentier income, leading toward what Keynes gently called
“euthanasia of the rentier.” The Obama Commission endows rentiers atop the
economy with a tax system to bolster their power, not check it – while shrinking
the economy below them.)

Table 7.11 of the National Income and Product Accounts (NIPA) reports that total
monetary interest paid in the U.S. economy amounted to $3,240 billion in 2009.
Homeowners paid just under a sixth of this amount ($572 billion) on the homes
they occupied.  Obama’s commission estimates that removing the tax credit on
this interest would yield the Treasury $131 billion in 2012.

There is in fact a good logic for stopping this tax credit. The
mortgage-interest tax deduction does not really save homeowners money. It is a
shortsighted illusion. What the government gives to “the homeowner” on one hand
is passed on to the mortgage banker by “the market” process that leads bidders
for property to pledge the net available rental value to the banks in order to
obtain a loan to buy the home (or an office building, or an entire industrial
company, for that matter.) “Equilibrium” is achieved at the point where whatever
rental value the tax collector relinquishes becomes available to be capitalized
into bank loans.

This means that what appears at first as “helping homeowner” afford to pay
mortgages turns out merely to enable them to afford to pay more interest to
their bankers. The tax giveaway uses homebuyers as “throughputs” to transfer tax
favoritism to the banks.

It gets worse. By removing the traditional tax on real estate, state, local and
federal governments need to tax labor and industry more, by transforming the
property tax onto income and sales taxes. For banks, this is transmuting tax
revenue into gold – into interest. And as for the home-owning middle class, it
now has to pay the former property tax to the banker as interest, and also to
pay the new taxes on income and sales that are levied to make up for the tax shift.

I support removing the tax favoritism for debt leveraging. The problem with the
Deficit Commission is that it does not extend this reform to the rest of the
economy – to the commercial real estate sector, and to the corporate sector.

The argument is made that “The rich create jobs.” After all, somebody has to
build the yachts. What is missing is the more general principle: Wealth and
income inequality destroy job creation. This is because beyond the wealthy soon
reach a limit on how much they can consume. They spend their money buying
financial securities – mainly bonds, which end up indebting the economy. And the
debt overhead is what is pushing today’s economy into deepening depression.

Since the 1980s, corporate raiders have borrowed high-interest “junk bond”
credit to take over companies and make money by stripping assets, cutting back
long-term investment, research and development, and paying out depreciation
credit to their financiers. Financially parasitized companies use corporate
income to buy back their stock to support its price – and hence, the value of
stock options that financial managers give themselves – and borrow yet more
money for stock buybacks or simply to pay out as dividends. When the process has
run its course, they threaten their work force with bankruptcy that will wipe
out its pension benefits if employees do not agree to “downsize” their claims
and replace defined-benefit plans with defined-contribution plans (in which all
that employees know is how much they pay in each month, not what they will get
in the end). By the time this point has been reached, the financial managers
have paid themselves outsized salaries and bonuses, and cashed in their stock
options – all subsidized by the government’s favorable tax treatment of debt
leveraging.

The attempted raids on McDonalds and other companies in recent years provide
object lessons in this destructive financial policy of “shareholder activists.”
Yet  Obama’s Deficit Reduction Commission is restricting its removal of tax
favoritism for debt leveraging only for middle class homeowners, not for the
financial sector across the board. What makes this particularly absurd is that
two thirds of homeowners do not even itemize their deductions. The fiscal loss
resulting from tax deductibility of interest stems mainly from commercial investors.

If the argument is correct (and I think it is) that permitting interest to be
tax deductible merely “frees” more revenue to pay interest to banks – to
capitalize into yet higher loans – then why isn’t this principle even more
applicable to the Donald Trumps and other absentee owners who seek always to use
“other peoples’ money” rather than their own? In practice, the “money” turns out
to be bank credit whose cost to the banks is now under 1 per cent. The
financial-fiscal system is siphoning off rental value from commercial real
estate investment, increasing the price of rental properties, commercial real
estate, and indeed, industry and agriculture.

Alas, the Obama administration has backed the Geithner-Bernanke policy that “the
economy” cannot recover without saving the debt overhead. The reality is that it
is the debt overhead that is destroying the economy. So we are dealing with the
irreconcilable fact that the Obama position threatens to lower living standards
from 10 per cent to 20 per cent over the coming few years – making the United
States look more like Greece, Ireland and Latvia than what was promised in the
last presidential election.

Something has to give politically if the economy is to change course. More to
the point, what has to give is favoritism for Wall Street at the expense of the
economy at large. What has made the U.S. economy uncompetitive is primarily the
degree to which debt service has been built into the cost of living and doing
business. Post-classical “junk economics” treats interest and fees as payment
for the “service” for providing credit. But interest (like economic rent and
monopoly price extraction) is a transfer payment to bankers with the privilege
of credit creation. The beneficiaries of providing tax favoritism for debt are
the super-rich at the top of the economic pyramid – the 2 per cent whom  Obama’s
tax giveaway will benefit by over $700 billion.

If the present direction of tax “reform” is not reversed,  Obama will shed
crocodile tears for the middle class as he sponsors the Deficit Reduction
Commission’s program of cutting back Social Security and revenue sharing to save
states and cities from defaulting on their pensions. One third of U.S. real
estate already is reported to have sunk into negative equity, squeezing state
and local tax collection, forcing a choice to be made between bankruptcy, debt
default, or shifting the losses onto the shoulders of labor, off those of the
wealthy creditor layer of the economy responsible for loading it down with debt.

Critics of the Obama-Bush agenda recall how America’s Gilded Age of the late
19th century was an era of economic polarization and class war. At that time the
Democratic leader William Jennings Bryan accused Wall Street and Eastern
creditors of crucifying the American economy on a cross of gold. Restoration of
gold at its pre-Civil War price led to a financial war in the form of debt
deflation as falling prices and incomes received by farmers and wage labor made
the burden of paying their mortgage debts heavier. The Income Tax law of 1913
sought to rectify this by only falling on the wealthiest 1 per cent of the
population – the only ones obliged to file tax returns. Capital gains were taxed
at normal rates. Most of the tax burden therefore felon finance, insurance and
real estate (FIRE) sector

The vested interests have spent a century fighting back. They now see victory
within reach, by perpetuating the Bush tax cuts for the wealthiest 2 per cent,
phasing out of the estate tax on wealth, the tax shift off property onto labor
income and consumer sales, and slashing public spending on anything except more
bailouts and subsidies for the emerging financial oligarchy that has become
Obama’s “bipartisan” constituency.

What we need is a Futures Commission to forecast just what will the rich do with
the victory they have won. As administered by President Obama and his designated
appointees Tim Geithner and Ben Bernanke, their policy is financially and
fiscally unsustainable. Providing tax incentives for debt leveraging – for most
of the population to go into debt to the rich, whose taxes are all but abolished
– is shrinking the economy. This will lead to even deeper financial crises,
employer defaults and fiscal insolvency at the state, local and federal levels.
Future presidents will call for new bailouts, using a strategy much like going
to military war. A financial war requires an emergency to rush through Congress,
as occurred in 2008-09.  Obama’s appointees are turning the U.S. economy into a
Permanent Emergency, a Perpetual Ponzi Scheme requiring injections of more and
more Quantitative Easing to to rescue “the economy” (Obama’s euphemism for
creditors at the top of the economic pyramid) from being pushed into insolvency.
  Bernanke’s helicopter flies only over Wall Street. It does not drop monetary
relief on the population at large.

[Michael Hudson is a former Wall Street economist. A Distinguished Research
Professor at University of Missouri, Kansas City (UMKC), he is the author of
many books, including Super Imperialism: The Economic Strategy of American
Empire (new ed., Pluto Press, 2002) and Trade, Development and Foreign Debt: A
History of Theories of Polarization v. Convergence in the World Economy. He can
be reached via his website, <mh at michael-hudson.com>]