Michael Hudson is a Distinguished Research Professor of Economics at the University of Missouri, Kansas City. He is the author of many books, including The Bubble and Beyond, and Finance Capitalism and its Discontents, Killing the Host- How Financial Parasites and Debt Destroy the Global Economy, and most recently J is for Junk Economics: A Survivor’s Guide to Economic Vocabulary in an Age of Deception.
GREGORY WILPERT: The year 2017 is turning out to be another banner year for the centralization of capital, that is, according to an article in the Financial Times this week, “Global mergers and acquisitions exceeds three trillion dollars for the fourth straight year.” The article goes on to point out the following: Faced with the prospect of Amazon’s entry into the pharmacy business, the US’s biggest drugstore chain, CVS Health, agreed to acquire health insurer, Aetna for about $69 billion. Encroachment by Facebook and Netflix into sports, media and film production led Rupert Murdoch to sell most of his 21st Century Fox empire to Disney in a $66 billion deal.
The US remained the most active region for mergers and acquisitions with $1.4 trillion in deals. The numbers of US deals struck in 2017 combined climbed above 12,400 for a record figure. The largest deal in 2017 has yet to be resolved as Broadcom pursues a hostile $130 billion bid for rival chip maker, Qualcomm. Joining me to analyze the causes and consequences of this massive centralization of capital in 2017 is Michael Hudson. Michael is a distinguished Research Professor of Economics at the University of Missouri/Kansas City. He’s author of several books. The most recent among them is J is for Junk Economics. Welcome back, Michael.
MICHAEL HUDSON: Good to be back here.
GREGORY WILPERT: So, what at heart is causing all of this frenetic activity for companies to gobble up one another and thereby creating and ever greater centralization of capital?
MICHAEL HUDSON: It’s part of the neoliberal strategy to inflate the wealth of the 1%, basically by inflating the stock market and the real estate and the bond prices. Central banks are pursuing quantitative easing that offers money at almost zero interest rates. At the same time, you have the tax system’s giveaways to the FIRE sector, capped by deregulatory policies that are encouraging mergers and acquisitions by dismantling the antitrust legislation that has been in place since the New Deal.
The tax giveaways in the Republican tax law two weeks ago enables companies that have kept hundreds of billions of their earnings tax-free in offshore banking enclaves and tax avoidance centers to now shift them to their head office accounts. (Most were kept in U.S. dollars all along, but in the name of “false flag of convenience” companies.) All this tax-avoidance money that has been accumulating since 2004 can now be replaced in the name of the head companies instead of their just-pretend foreign affiliates in these tax avoidance centers.
So the companies are going to be very cash-rich. They’ve anticipated most of this and you can look at these mergers and acquisitions as part of an arbitrage operation. If a hedge fund, a bank or large corporation can borrow at 1%, they can buy stocks that are yielding 10% or even more – or, for that matter, even less. They can get an arbitrage difference between the 1% they pay and the stocks whose dividends pay a higher rate of return, 5, 6, 7, 8, or 9%.
When you buy enough stocks to give you control of a target company, that’s called mergers and acquisitions or corporate raiding. Hedge funds have been doing this, as well as corporate financial managers. With borrowed money you can take over or raid a foreign company too. So, you’re having a monopolistic consolidation process that’s pushed up the market, because in order to buy a company or arrange a merger, you have to offer more than the going stock-market price. You have to convince existing holders of a stock to sell out to you by paying them more than they’d otherwise get.
But suppose you’re a company that doesn’t want to be bought out. Suppose you’re a corporation trying to defend yourself from this merger and acquisition movement. In that case, you do is what they’ve done since the 1980s: You take a poison pill, using your earnings to buy your own stock. Some companies even borrow to buy up their own stock, or they simply increase their dividend payouts so much that it pushes up the stock and leaves nothing in the corporate treasury to be raided by these raiders.
The upshot is that on the part of attackers and defenders alike, you have a process that bids up stock prices. Since the vast majority of stocks are owned by the 1%, and certainly by the 10%, the effect is to increase the wealth of the 1 to 10% in comparison to the wages the bottom 99% get. That basically is the financial and fiscal war in a nutshell.
GREGORY WILPERT: Just a quick question. You’re saying that low interest rates and quantitative easing are among the key factors here. But aren’t those policies also good for the bottom 90%? After all, it keeps interest rates low for ordinary borrowers, such as people who have mortgages or credit cards to pay off, and also helps keep unemployment low. What would be the alternatives if you don’t want to cause unemployment to go up by raising interest rates?
MICHAEL HUDSON: Why on earth would the 1% want to help the 99%? No, it hasn’t helped them at all. If you’re a member of the 99%, you don’t get to borrow at 1%. Banks and hedge funds get to borrow at 1%. If you’re a credit card customer, you’re paying the same credit card rate as you’re always paying. And if you miss a payment, even to a utility company, your rate still goes up to 29% or whatever. And if the bank won’t lend to you, you still have to pay 50% or 100% or 500% to the payday loan people backed by JPMorgan Chase and other Wall Street banks as major customers. So no, the 99% have not benefited from quantitative easing. Quantitative easing is to benefit the financial sector, which means basically the 1%, not benefit the rest of the economy.
We’re living in a world that’s divided into two economies: the economy of the 1%, and the economy of the bottom 99%. I guess you could be more “centrist” and say the top 10% versus the bottom 90%. But there’s definitely a stratification at work here.
GREGORY WILPERT: The Financial Times quotes analysts who say that they expect mergers and acquisitions to accelerate even more in 2018. You touched on this when you mentioned the Republican tax reform. So would you basically agree that M&A will accelerate? What are some of the underlying causes for a further continuation of this process of centralization?
MICHAEL HUDSON: There are two underlying causes. For one thing, now that the Republicans are in power in the United States – and I don’t think it would matter if Hillary’s Democrats were in power – they’re not enforcing the antitrust regulations. What deterred a lot of mergers and acquisitions in the past was the threat of creating a monopoly, so the antitrust laws prevented you. But now they’re saying, you can make a monopoly, but make sure the 99% pay through the nose. You can make a monopoly and charge the 99% higher monopolized prices.
So, what you’re having is a rentier revolution. The aim of the 1% isn’t to make money by profits by employing labor. It’s to make economic rent. It’s to make monopoly rent, land rent and financial rent.
For instance, if you end internet neutrality and permit mergers of the big information technology corporations, that’s a form of rent seeking. It’s part of today’s political revolution.
Another part of the tax law that is going to encourage the mergers and acquisition is the 100% depreciation write-off. Usually if a company makes a capital investment in a building, railroad or airplane, it gets a credit to recover this capital expense. You only pay income tax on profits (the return on capital), not on the return of capital.
Under the new law, however, instead of taking maybe 5% of the cost of this capital investment in an airplane, railroad, truck or building for a year, you can take 100% of it off as tax deductible – up to 100%, in any given year. This makes many corporations tax exempt altogether. Suppose you’re a company that simply lives on rent, or that makes a profit but isn’t investing much. As we all know, corporate investment is scaled way back because corporations aren’t using their earnings to invest. They’re using 92% of their revenue for stock buybacks or for dividend payouts in the last five years.
But now, all of a sudden, companies can use these earnings to buy a capital-spending company, like a railroad, trucking company, or an airline that’s going to buy airplanes. You can merge with this company. All of a sudden they get tax exemption on all of their other income that they earn, because it’s such a huge gusher of tax write-offs from the immediate 100% depreciation.
The pretense of Donald Trump was, “Oh, this is going to encourage capital investment.” But the neoliberal objective is not to make any real capital investment at all, not to employ any more labor at all, but to buy something that the tax law counts as an investment. We don’t know whether they’re going to include research and development in this, or market research. We don’t really know how widely and broadly they’re going to define this capital investment write-off.
The other point I mentioned is the ability to bring corporate tax-avoidance money from the accounts of offshore banking enclaves to the head office. That is going to be a flood of cash even greater than the quantitative easing at 1%. The result will be a free-for-all as companies try to absorb as many other companies as they can, especially capital-intensive companies like in the transport industry.
GREGORY WILPERT: So, as the centralization effect continues. What effect do you see this having on politics, that is, how do you expect people to react at the voting booths? And then, since the Republican Party probably won’t do anything, since they’re the ones who perpetrated this particular latest change in the tax law, what do you expect the Democratic Party to do if they were to come into power?
MICHAEL HUDSON: My answer may seem counterintuitive. I think the Republican tax law is so bad that it almost guarantees a Republican victory, precisely because it’s so bad. The seeming irony is that it’s so bad that it enables the Democratic Party to think, “A-ha, all we have to do is be the lesser evil. We can now kick out all the supporters of Bernie Sanders, kick out anyone who supports Elizabeth Warren. We can declare war on the pro-labor part of the Democratic Party. The Republican Party is the party of the 1%, but we can be the party of the 10%, while pretending that we’re against the 99%.”
If the Democratic leaders keep trying to convert Republicans instead of holding the traditional Democratic constituency, there’s going to be a bloodbath in the Democratic Party as the Hillary supporters fight against the Bernie supporters, fight against labor, against unionization, and against consumers. That’s basically the Democratic program. It is going to end up fracturing the Democratic Party.
I can’t believe that Bernie and Elizabeth and the others are going to stand by and let the Democratic Party be captured by the donor class that controls it now. I think there’s going to be a bloodbath that is probably going to take more than four years.
My hope is that the Democratic party will indeed split, and that the donor class will go where it belongs – with the rest of the Republican Party. This will leave a rump party to become a new social-democratic party, either a democratic socialist party or something like the British Labour Party became when it threw off the Tony Blair neoliberals. That’s what it looks like will have to happen in America. The lesser evil policy of the Democrats isn’t going to wash as a campaign simply against the Trump tax giveaway.
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