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The Transition from Industrial Capitalism to a Financialized Bubble Economy

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  • Michael Hudson

Abstract

For the past decade, the U.S. economy has been driven not by industrial investment but by a real estate bubble. Although the United States may seem to be the leading example of industrial capitalism, its economy is no longer based mainly on investing in capital goods to employ labor to produce output to sell at a profit. The largest sector remains real estate, whose cash flow (EBITDA, or earnings before interest, taxes, depreciation, and amortization) accounts for over a quarter of national income. Financially, mortgages account for 70 percent of the U.S. economy’s interest payments, reflecting the fact that real estate is the financial system’s major customer. As the economy’s largest asset category, real estate generates most of the economy’s capital gains. The gains are the aim of real investors, as the real estate sector normally operates without declaring any profit. Investors agree to pay their net rental income to their mortgage banker, hoping to sell the property at a capital gain (mainly a land-price gain). The tax system encourages this debt pyramiding. Interest and depreciation absorb most of the cash flow, leaving no income tax due for most of the post-1945 period. States and localities have shifted their tax base off property onto labor via income and sales taxes. Most important, capital gains are taxed at a much lower rate than are current earnings. Investors do not have to pay any capital gains tax at all as long as they invest their gains in the purchase of new property. This tax favoritism toward real estate—and behind it, toward bankers as mortgage lenders—has spurred a shift in U.S. investment away from industry and toward speculation, mainly in real estate but also in the stock and bond markets. A postindustrial economy is thus largely a financialized economy that carries its debt burden by borrowing against capital gains to pay the interest and taxes falling due.

Suggested Citation

  • Michael Hudson, 2010. "The Transition from Industrial Capitalism to a Financialized Bubble Economy," Economics Working Paper Archive wp_627, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_627
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    Cited by:

    1. repec:taf:eurpls:v:26:y:2018:i:1:p:94-114 is not listed on IDEAS
    2. Ewa Karwowski & Mimoza Shabani & Engelbert Stockhammer, 2016. "Financialisation: Dimensions and determinants. A cross-country study," Working Papers PKWP1619, Post Keynesian Economics Society (PKES).

    More about this item

    Keywords

    Real Estate; Financialization; Capital Gains; Land Rent; Land Value; National Income Accounting; Bubble Economy;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • N2 - Economic History - - Financial Markets and Institutions

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