China, Public Money and the Future Beyond Financialization
Date: 20 October 2026
Speakers: Michael Hudson and Einar Tangen
Moderator: Nika Dubrovsky
NIKA DUBROVSKY
Hello everybody. My name is Nika Dubrovsky, and this is the David Graeber Institute. Today we are continuing our series of conversations, 'The Economy at the End of the World', with Michael Hudson. So today we have a new guest. I am very grateful to Einar Tangen, who is joining us, and I hope that will allow us to talk about China in more detail. China was a constant subject of our conversations as it presents to the world a new angle on the idea of what money and debt are, how money can be a public utility and not a commodity, but Einar has a practical understanding of how the details of that concept are actually unfolding on the ground. And now the floor goes to Michael Hudson.
MICHAEL HUDSON
Well, Nika, you'd asked us to discuss the central theme of all of our talks, which is debt, and money is debt. And I think the focus that Einar and I will be talking about is what makes the Chinese economy so different from that of Western civilization. And the fact that in the West, the creation of money is done by private central banks, providing the money to commercial banks. And commercial banks lend against assets, against real estate and corporate stocks and bonds as collateral. And the purpose of lending, making these loans is to make either profits, or not so much profits, but capital gains. And almost all of the wealth in the West, especially since 2008 with the junk mortgage and bank fraud crisis, has been created by credit creation, by the banks flooding the economy with money to bid up the prices of real estate, to lend to private capital, to buy corporations in a wave of corporate takeovers by private capital, essentially to take over companies and loot them as fast as possible, to make money by financial engineering, not by using the gains that the corporate industry makes to increase production, increase productivity, and expand the economy.
Well, things are very different in China. After the revolution, it didn't have a financial class anymore, because there was a socialist revolution. And so China had really no option but to do pretty much what Russia had done after its revolution. It had to create its own money. Well, that's exactly what Western governments did in emergency situations. America financed the Revolutionary War with Continental currency, the Continentals, paper money issued by Congress. America again financed the Civil War by the Greenbacks, printing money. In World War I, a lot of observers said, well, World War I is going to have to end in just a few months because the governments will run out of money. But the governments printed the money to finance World War I. Same thing with World War II. But in peacetime, governments stopped doing this, and they left money to the private sector that wants to make money financially, money from money.
That's not the aim of China's government. Its aim was, how do we make the real economy grow ? How do we provide the money and the credit to actually be invested in new means of production, and quite apart from financing current production, to finance the research and development that we have to develop to make it commercially applicable until such time as we can turn it over and make it available to private companies to commercialize it and make profits on it. So China does not have a financialized sector that makes money purely financially first. Most of the Chinese Central Committee are science and technology graduates, and they're saying, what do we need to provide credit for ? Well, just as Lenin said, communism is electrification. And the whole early Soviet development plan was by Russia providing, creating the credit to electrify Russia. China provided the credit to develop all of its basically public enterprises.
In the West, especially since the 1980s, the natural monopolies like transportation, communications, even education and healthcare have all been privatized and financialized. And they've been run to make a profit and to use these profits for stock buybacks and to pay out as dividends to increase the stock prices to make money by capital gains, finance capital gains for stocks and bonds. That's not the objective in China. Their objective is indeed to enable private entrepreneurs who are creative and good businessmen to get rich to a point, not the point that Jack Ma was able to do when he was told, "That's too much," but up to a point. And so China's means of development is to use finance as a means of developing their real economy. So just as President Xi said, "Houses are for living in, not to make a profit," meaning a capital gain. He could have said that finance is to finance tangible production and increase productivity and living standards and prosperity, not to do what it does in the West, which is to create a financialized class that gets all of the increase in wealth.
And if you look at what's happened since 1980 in America, the distribution of wealth for fifty percent of Americans has been absolutely flat. But almost all of the wealth increase has accrued to the top ten percent of the population, mainly in the finance, insurance and real estate sector and monopolies, such as information technology or natural resource monopolies like oil. So you have a completely different economic structure in China than you have in the West. And the result is that basically the objective of all this in China was to avoid the kind of debt deflation, the debt overhead that you have in the United States that's increased the cost of living by all of the debt service that wage earners have to pay for their education debt, their credit card debt, just to break even, their automobile debt, their student loan debt, their medical debts. The debt overhead of American labor is so high that it can't afford to compete with foreign labor. And the mortgage debt that America has has increased the price of housing so much that the price of housing prices American labor out of the market. And the same is true of Western Europe.
So the debt overhead, the financialization of the Western economies has been preventing them from competing with the Asian economies, especially China, which has tried to create credit without running into debt. In America, the financial fortunes of the wealthiest ten percent find their counterpart in the debt of American families, mortgage debtors, corporations that have been driven into debt, government debt. China's been trying to avoid that. Maybe for the rest of the [conversation], you know, what I'd like Einar to talk about is what is the character of China's debt and what are its debt problems and are they similar to those of the West or how are they different?
EINAR TANGEN
Well, Michael, it is a pleasure to share a podcast with you and I want to thank Nika for having me on. Let's take it one question at a time. What would you like to know first?
MICHAEL HUDSON
Well, I was hoping you would pick what you think is most important, but we know that China has a real estate debt problem now. Do you want to comment on how that developed and how it's dealing with it?
EINAR TANGEN
Okay. For anybody who is not familiar with China, you have to understand I came to China in 2000 to talk a little bit about municipal bonds. And I was extremely surprised that in China, they really didn't have a legal system. They didn't have an insurance system. None of the things that we take for granted in a sophisticated modern economy. They were very interested to learn, and that was the impression that I got when I arrived here: this desire to work, to work hard in order to do something. They were very entrepreneurial. I saw hundreds of thousands of migrant workers who would come in from the fields and they were happy, very happy to be earning a living in the cities. Why ? Because in a lot of the places that they lived, it was very, very difficult. They were farmers, small farmers. They didn't have the infrastructure to move their produce to faraway markets, so they only had local markets.
So the entire economy was almost on a subsistence basis, and part of that was due to the communist government itself. I think you put a very nice gloss on it, but the fact is that revolutionaries are not always the best administrators. And the Chinese government had to learn as they went along. There were mistakes. The Great Leap Forward was not a great leap forward. They did follow the Russian model, but it didn't really work that well for them. But, you know, all of that changed with Deng Xiaoping. He came along. He was somebody who was part of the Red Revolution. He was involved in the Long March. You know, this historic march where they basically were losing battles but retreating. But they were covered by the people.
And this is something that you have to understand before I get into all of these other issues. The reason the Communist government became the government of China is because they wanted fairness. They wanted to walk away or get away from the rentier economy, which existed at that time. This is a situation that was feudal in nature. You had the royals, they had plenty of money and they were living off the fat of the land. And then you had this middle structure of landlords who, because they had capital, could increase their wealth. And basically they owned everything and you basically paid, you either worked for them or you paid them rent. So, China rejected that. The people went with the communists because they said that we will do away with that system. Now, doing away with the system was easier said than done. I mean, there were a lot of people who died as a result of that. There are still, to this day, some hard feelings about that. But if you talk to people rationally, they say, well, overall, it was a necessary change. They feel bad for the relatives who suffered. They feel bad for the relatives who suffered during the Cultural Revolution.
But what happened in 1979 is very, very important because you have somebody, as I said, Deng Xiaoping, who was a logistics person. He was in charge of making sure that the army, as it was fleeing or as it was fighting, had enough food and munitions and things like that. So he's a very detailed person. He understood that economies, everything runs on organization and they have to have planning. And without that, if you fail to plan, you're planning to fail. He was also, during the Long March, responsible for putting out the daily news. And people will be surprised to know that he would stay up at night and print up the daily news that would be sent out and given to all the people on the Long March so that they could stay united, understand the situation and understand what they were fighting for and going forward. So he was not a capitalist in any sense. He was somebody who understood how systems worked and the necessity of how you motivated people.
In 1979, he had this idea to take advantage of something that a group of people were doing up to that point. It was a system. It was a communist system and everyone was supposed to contribute, especially the farmers. So they had a quota that they had to meet. But meeting the quota didn't result in anything good for them. They just had to meet it. Once they met it, they would get a ration. It wasn't a tremendously good one. And that's what they had to live on. Deng realized that if China was going to move forward, it needed to use the power of human ingenuity, human desire. And part of that is, unfortunately, our desire to do better, to have more. So he tapped into that. And he invented these phrases to replace what had been said up until that point.
When Mao talked, he talked about the workers' socialist paradise. He said that in the long term, in the near future, we will realize a better life. And he talked in terms of ideological things. And that kept people together. It was great for the revolution. But it was very difficult for ordinary people who are just more concerned about what's in their pocket and what's in their stomach than, let us say, ideological concerns. So Deng came along and he said, look, we've changed the narrative. Instead of a socialist worker's paradise, he started talking about white cat, black cat, it doesn't matter as long as they catch mice. He talked about crossing the river by feeling the stones. Up until that point, Mao had talked about the certainty of what would happen if the communist revolution was to mature and that there would be this kind of nirvana of workers paradise that would come about. Deng was less certain about it; he just says there's a river we have to cross and the only way to do it is to feel our way along, so very pragmatic. And he adopted a system where he says, well, if you fill your quota, and this is to the farmers, everything you have after your quota, you can sell. So he tapped into this very natural human emotion and he says, well, if I can do that, I can make money. China moved within a few years from a really very, very desperate situation in terms of food to actually starting to have excess food.
And this was completely new. This idea that you could tap into this and create more. Was this a capitalist economy ? No. What they were doing is trying to get people's idea of having a better life. And this is very important as I go along. So he started along this path. He also started this idea, we have to learn. We are not where we need to be as a nation. We have to start understanding things, especially about international commerce, and particularly, how do we build a better society ? How do we build a society where people have aspirations and do it ? Everybody in the West says, the only way you can do that is a liberal democratic capitalism, and if you adopt these simple ideas, everything will work its way out. Well, you know that's nonsense. You can see quite clearly in Europe, in America, and even in Japan, all these promises of representative democracy don't work. What we're talking about is, excuse me, is there something wrong?
NIKA DUBROVSKY
No, I just wanted to interfere in the way that Yeah, asking the question, more practical, about the loans and real estate, because how in all of this society I'm myself in China now. And it looks so prosperous, you know, like you're talking about history and how it's all emerged, but now I am here in Shanghai and everything is blooming, but Michael Hudson is talking about real estate crisis and loans and how, like, China, after all these years of difficult development, has come to that point. So what exactly are the Chinese doing ? How, like, the mechanics of the Chinese economy is actually working. And you've been living twenty years in China, you know all the details.
EINAR TANGEN
In my long-winded way, I was kind of getting there. Okay, so I will speed up. People ask about real estate. When people started accumulating excess capital, they had savings. They had two options in China. One, they could put it in the bank, very, very low interest rates, or they could put it into real estate. And the real estate sector bloomed because it was the primary source. In fact, even today, seventy percent of all personal wealth is in real estate. But the problem was real estate was going up and up. The median house price was way beyond the median income. So you're confronted with a situation where although there's a huge percentage of people who own their houses, they were the grandparents and parents. Why did they own the houses ? Because the largest wealth transfer in modern history happened when the communist government started allowing people who had work units, right ? And the work units were either factories or farms and they basically started allocating these units to the workers that were where they were living. They said, "Oh, you get to buy your house or your apartment," and people said, "Okay," and it was very reasonable and they could afford it, so they bought them. Now, for instance, in Beijing, the little house that you occupied, when you bought it for maybe, you know, fifty thousand renminbi is now worth a million to three million renminbi. So that was a huge accumulation.
So real estate became a safe investment. What the Chinese government realizes is that median house prices and median income have to be somewhere in the same universe. Otherwise, you have a situation where young people cannot possibly afford to have their own house. Also, it's very unproductive. You have people pouring money into empty houses, because I know people who have fourteen, fifteen apartments. And I said, oh, are you renting them out ? And they said, no, I'm not renting them out. I just bought them because, you know, this is my savings plan. And I'm going to, you know, if I want to when I need to, I will sell one and I'll take the profits and I'll live off them. So, that's where we were probably about eight years ago. And the Chinese government said, look, this has to stop. So they pierced the bubble, the real estate bubble, which was going to explode one way or another. Because, you know, literally people couldn't afford to live in the houses. And people were just accumulating these real estate non-productive assets because they're empty. And they weren't putting it into a productive, real economy. And I think, Michael, you'd agree with me, it's the real economy, the things that produce things, factories, bridges, things like this, where you have a real investment that has a real return, whether it's long-term or short. This was just useless capital.
And this is the battle that China is fighting today. They have to figure out a way in which they can reduce the price or keep the price of real estate stable, while counting on inflation and then also increases in disposable income to kind of erase it. Why are they keeping ? Why aren't they just saying, oh, well, let's depreciate it. Let's let people sell things off. Well, people would be very, very unhappy to lose money. And then there are those that have just bought houses and they would be in a situation where their house was underwater. Why would they pay the mortgage if the house is worth less than what they paid for ? They would lose their down payment. And in addition to that, they would feel ill-used.
So the solution, as I said, was to use inflation and disposable income to erode the values, to bring it down to closer to the median income. So that's what you have here today. It's one of the reasons that the Chinese economy doesn't go "boom, boom." But when you have a booming economy, in the West we accept that there's a cycle of boom and bust. China doesn't. They don't believe that people should be deprived of their savings simply because they made a wrong investment. This goes to something that I hope people will take away from this broadcast. And that is that in the West, if you pay taxes, they assume that you know basically a library full of information about the tax code, tax laws themselves, the cases and everything that goes into it. And you have to kind of guess or hire very expensive people to figure out either loopholes or what you should do.
But in China, if you're paying taxes, basically they assume you know nothing and that the government is there to help you find any deductions that you might be entitled to. And I know, from some personal experience. So you have a very different attitude towards not only the economy, but how the government works. Is the government working for you or are you working for the government ? And this is an important distinction that people don't realize. They say it is a communist. Okay, communist, what does that mean ? I always ask people, you say it's a communist government. What does that mean ? I said, well, somebody's telling everybody what to do. I said, who ? At one point four billion people, there's one person telling everyone what to do, and across all areas, from garbage collection, to economic policy, to foreign policy. One person is doing all that. They look at you and they say, well, I don't know. It's communist. And that's where it stops. And this is the problem that we have in the world today, is that there's no intellectual curiosity.
You have to understand that China has a system. Having one point four billion people, they look at it as a responsibility, not as a milk cow from which they can take more and more money. So Nika, when you come here and you start looking at the real estate prices and how things are burgeoning, and these incredible buildings and things like that that you see around, it looks very prosperous. But China is not perfect. There are lots of warts. The only difference that I see between China and the world that Michael described is that they see problems and they try to figure out how to solve them. And once they think they have a solution, they try to implement it. And that's what we're talking about in terms of making sure that the bubble didn't burst, that people who had worked hard for the money weren't left out. They didn't make as much profit as they anticipated, but they didn't lose their capital. And that's the most important part of it. And this is what governments should do. They should intercede to make sure that they're protecting their people, not a certain segment of the people who want to make a lot of money, but the regular people who work hard and are just trying to save and have a good life for themselves and their children.
NIKA DUBROVSKY
Interesting that when we were talking about the children's book, about the calendar, Michael was talking about how Mesopotamian kings were allowed every seven years to make a clean slate and thus say all their debts cancelled. So they were kind of brutal in a way to cut off the aristocrats.
MICHAEL HUDSON
I want to put what Einar has said in comparison with what's happened in the West. That's the best way to, I think, approach what you're interested in. The rise in real estate prices is common to all countries, not only China, but the West. And if you look back at the whole development of classical economics, Adam Smith, through John Stuart Mill, to Marx, David Ricardo. The whole aim of industrial capitalism was: how are we going to make Britain the workshop of the world ? How are we going to make an industrial economy competitive with other economies ? It was to get rid of the carryover of feudalism. And in Europe, this meant the hereditary landlord class. And of course, China got rid of its landlord class with its revolution.
And yet the problem that China has is very similar to the problem that Britain and industrial countries and the United States all face. How do we prevent real estate prices from rising and increasing the price of housing when it's not the cost of constructing buildings, it's not the value of the building, in terms of the cost of production, but it's the rent of the location. As economies become more prosperous, people use the first indication of status—where they live. To become a homeowner in the United States, in Europe, is the definition of joining the middle class. You own your own home. You have that. And almost all of the wealth of white people in the United States at least has been the increase in the price of their homes over time, because of the increasing land value, not the cost of buildings, but the increasing site value. Well, Europe had a response to all this, the response by John Stuart Mill, Marx, all the British Liberal Party that governed British politics throughout the nineteenth century was, well, instead of paying a landlord class, as in Europe, we're going to use this rising rent of location, the rental value, the site value as the tax base. And you can simply tax away, you make a land map. And as the real estate prices go up for well-situated housing or commercial property, and this is usually housing that's near transportation, near a subway, or a bus stop, or a railway stop, or near a park, or near schools, or near public amenities. As the price of this real estate goes up, without the cost going up, you tax it away because it's unearned capital gain, it's unearned income.
That's what Mill's whole book on Principles of Political Economy, with Some of Their Applications to Social Philosophy was on. That's what Marx wrote volumes two and three of Capital all about. How do you socialize this rent ? And the answer was the rent tax. In America, you had Henry George, and in China, you had Sun Yat-sen. Saying, well, we've got to make land tax the basis of the public budget, the government budget, instead of letting landlords get all of the gain for all of this. Well, China doesn't have an absentee landlord class. It didn't create it for that. It created housing for the people. But still, the price has gone up. China could have avoided all of this problem by doing exactly what industrial capitalism had done and had proposed in the West, that is, tax away the land. And that way, if the increase in the rents would be taxed away, these rents wouldn't be used for what they're actually used for in Europe and the United States.
In the United States, when all of a sudden there's a new subway line or a railway line or a new public utility, the price of housing or co-ops or buildings, property goes up. And the beneficiaries may be the landowners or they may be the homeowners, or the condominium owners. It's a free lunch. And in America, cities run into debt, as we did here in New York City, to rebuild a subway line along Second Avenue to provide better transportation for people living on the Upper East Side. Well, as soon as the subway line began to be built, real estate prices went up because now people didn't have to walk a half a mile to the subway every morning to get to work or to travel around. Well, however, the banks in America fought against this idea of taxing the land rent. They said, we don't want the land's rent to be collected by the state, by the government, that would indeed keep down land prices, but we want the rents to be paid to us. And as the rents go up, that will enable new homebuyers to take out a mortgage and all of this rising rental value of the land will be built into the price of housing. And so this is how we bankers in the financial sector are going to make most of our money.
In America and Britain and some European countries, eighty percent of bank loans are to real estate. Most of the rising price of this real estate, I don't want to say value, is that the price of the real estate has gone up, not because of the increased cost of production, but solely because of the idea of buying access to a location. You're buying a location. You're not really buying land, but you're buying a location to build something on that is near public utility. All of this goes up. And all of this development has become the whole foundation of the banking systems, interest income, and essentially business in the United States and Britain. In the United States in the 1920s, Thorstein Veblen, the great American economist, wrote about how every small town, even large cities, is a real estate promotion project. And you get the banks and civic boosters trying, taking a position: let's buy the rights to a whole neighborhood and then build it all up and get the public sector to build subway lines, or parks, or somehow provide bus transportation, improve the neighborhood, and we'll make a huge capital gain. That's how most fortunes have been made in the United States, easy real estate fortunes.
Now, China wanted to avoid this, but it didn't avoid it by taking the policy of taxing away this increase in land prices, and that's part of the problem. And one of the reasons is that it wanted to use this temptation of buying property, buying housing, to increase in price as a means of helping local cities and towns finance their own local budgets. And a decision was made by China. Well, you know, let's just let individual businessmen compete with each other to see who has the best solution, the best technology, the most efficient production. Let's let cities and towns compete. And so let's see how they finance themselves. The one thing that Chinese cities and towns had as their source of potential wealth was the land. And they financed their civic development by leasing this land to developers to build buildings. Well, the developers then went to banks who borrowed, obtained money from ultimately the People's Bank of China to lend the money to build the buildings.
And from China's point of view, we're creating value, not as a rent yielding property, but because there's the value of the building. So all this overbuilding that you've seen that all of a sudden led to the failure of Evergrande was a result of cost value. The buildings cost money to build, but they didn't have a market price because neither the banks nor the developers took responsibility for saying, if we build a building here, is there going to be a market ? There was just an assumption that if you build it, there's going to be people coming. There was no concept of making a land price map, like what you do in the United States, and making a whole map of what determines the shape of what people will pay for real estate, for their homes, for their office buildings and all this. So this is the one thing that was lacking in China, which is also lacking in the United States and the West, but at least the West had an original industrial capitalist solution. If you're going to be an industrial competitor with other countries, you want low prices for real estate so that employers don't have to pay their labor force enough money to pay high rents and high prices and mortgages for the homes that they get. That was the whole plan of industrial capitalism. And it's the one element of classical political economy that China did not develop. And I think that's what I'm now saying is the root of the problem that China is now trying to solve, by saying, what are we going to do with the fact that banks have made loans to real estate developers that can't pay?
Well, they have two choices. One is, well, let the banks go bankrupt, go bust. Well, of course, you don't want to hurt the depositors for that. You don't want to hurt innocent people. But you don't want people to get a free ride from all of the growth that there's already been. So China has resolution teams going all over the country to say, how are we going to resolve the real estate overpricing in particular areas to bring it down ? But none of these teams have translated this whole overall effort into—do we want to tax real estate ? Well, China knows that its financial system, its credit system, unlike America, doesn't rest on taxation. China doesn't have to tax wealth from a wealthy class to spend money by the government. It can simply create the money. But because of that, it hasn't thought, well, maybe some taxes are a good idea.
And in the West, in classical economics, certainly for Marx, the basics of fiscal government financing would have been—you tax economic rent, you don't tax labor because that'll raise the cost of living. You don't want to tax profits because that will make it less profitable, and [you want them] to be available to invest in new capital formation and building new factories to employ more labor. You want to tax real estate and natural monopolies and you need a rent tax. That concept of focusing on economic rent, the excess of market price over cost value, was the key of all classical economics, from Adam Smith, to Ricardo, to John Stuart Mill, and especially to Marx. That's what has been left out of account both in the Soviet Union, I think, and in China. That's the one element I think that has to be added to their repertory of public policies.
EINAR TANGEN
Is there a question for me?
MICHAEL HUDSON
Yes. Yes. What do you think of that?
EINAR TANGEN
Well, let me put it to you, Michael. I don't know. Have you ever served on the Board of Zoning Appeals, run a district, run a city's finances ? I'm going to say no, based on what you said. All right, I've done all of those things. There's different perspectives depending on what you look at. Now, I agree with you that China is trying to have a real estate tax. They're having real difficulties because they front-loaded what they were getting. So when they leased this land to a developer, the developer would pay a huge amount of money. In some cases, it would be ninety percent of the cost. Ten percent of the cost was only for construction. Ninety percent was getting the land itself. And they over speculated. And you talked about Evergrande and all these groups. But they were just greedy. They were borrowing money to do projects on paper that they were never going to get actually complete, or if they did they were going to be so expensive no one would actually buy them.
But when you start talking about revenues, every municipality has to have revenue. Why ? Well, the roads don't repair themselves, sewer water has to be taken care of. You have all the things that go into the necessities of social living. You have education. So there has to be some sort of tax structure. The question is, who's bearing what ? And I agree with you. The Western system has tended to put the burden on the working man, as opposed to the rentiers who are out there. But China is going down that road. It's not clear when they're going to do it. I've seen a number of head fakes where they said, OK, we're going to do this. And then the public outcry is so huge that they retreat. And for anybody who's watching, this should be a clue to you that the Chinese government is not a dictatorial system that just simply implements policies because they want to, and everyone's supposed to obey. The largest consumer of any kind of survey information in China is the government itself.
So when you start talking about municipal plans, the question is, how do you make it fair in proportion ? And this is what China is struggling right now for. The proposals that I've heard, they're going to put it up fairly high taxes, and also dependent things. Because a house in Beijing, a very basic house, could cost two, three million renminbi, which is, you know, you divide basically by seven to get dollars, it's quite a bit of money. That same amount of money would buy you a mansion out in the countryside, maybe ten times the size of it. So you have to have some sort of proportionality. And they're trying to figure out a way to do that while exempting people like old or aged pensioners who cannot possibly pay the tax, and who feel that when they bought the property, they front-loaded their tax liability, the amount of money that would go into the municipal share.
The problem was that in a lot of cities, because their promotion depends on economic development, what they did is they squandered the money that they got, and they put it into projects. They even borrowed money as special purpose vehicles which the Chinese government is trying to unwind right now, because these guys, they didn't know business, they were cadres. They'd come up through the party system. They worked in the government. But they were not business people. And sometimes, or many times, they got basically talked into schemes. Sometimes they were even related to real estate or whatever. And sometimes there was corruption involved. And the Chinese government has moved to take care of that.
How it actually turns out, I'm not as certain as you are as to what is going to happen. But there has to be money for the municipality. What makes sense is to have a wealth tax on land above a certain amount. And that depends on the area and the normative values of that area so that it's fair. You don't want some old age pensioner who's just living in their home hit with a tax bill that's going to force them to sell it. Where are they going to live ? There's a humanistic element that the Chinese government is always looking at. That's why they got rid of extreme poverty. So when you start talking about how it's done, it's a very complex matrix. It's not just about the rentier class, it's about the needs of society. You have the basic essentials that individuals need, and you have the essentials that are necessary for humans to live together, whether it's water, electricity, gas, education, opportunity, roads, communication, you name it. Those are actually essential. And then the last economy, of course, is choice. I went to a factory many, many years ago, and it was huge. It was like six football fields, and they produced one thing, white T-shirts. I looked at these white T-shirts, and they had two different qualities, and I said, well, who buys these ? They said, well, actually, we sell them to a big brand in Italy. We sell all these for one U.S. dollar apiece, but they're sent to Italy and they silkscreen on a logo and they send it back to China and it's a hundred dollars. I said, aren't you tempted to do something like this yourself ? He said, we don't understand it. But my point is, I could get the same t-shirt for one dollar or one hundred dollars. That's a choice. Do I like the brand enough to pay a hundred dollars ? Do I want to advertise that I have this brand ? And this was something that the Chinese government looked at, and they said, this branding is fine to the extent that it helps a company make money. They also saw what you saw, and that this is not a real economy. This is a choice economy, and it's going to be open to a lot of competition.
So when I start talking about the two essentials, individual needs, societal needs, and then choice, how do you balance them all ? What should pay for what ? My argument was, when I ran districts, when I ran cities, finances. I shouldn't say finances. I ran what was called a debt commission. What we did was determine how we borrowed money, what was the most efficient way to keep it cheap, that type of thing. But it all related to what were the city's needs. We were also very involved in life costing. If you put in a long pipe, or a water system, or a sewer system, you know, a twenty-foot pipe, it would last somewhere around fifty years. If you put in a short pipe, it costs more, but it would last a hundred years. So we were always trying to tell people you should invest a little bit more now to save a lot more, I mean a lot more in the future. But politics being what it was, politicians would skimp and say, well, we can't afford it. Let's go the other way. And I tell them, and they say, you're crazy.
But this goes to the essentials, how the government is supposed to make the tough decisions, not the easy ones. And unfortunately, democracy sometimes leads them to, we politicians, to always make the easy decisions so they can get reelected. This is part of the problem that's going on. So to bring it all back to what you said, China has a system which is centrally planned. Now, when I say centrally planned, I hope people watching this understand that it's not somebody making all the decisions. What it means is that there is input from the very bottom to the very top. So if somebody has an idea, it doesn't matter if they're at the bottom or the top, it has to go through the system. And you're talking about millions of man hours, because every single entity down to below the village level, what they call a unit, has to look at this and issue a report on whether this can be done and what would be involved. And then it has to go all the way up from the unit, to village, to a minor city, major city, province, and then to the central government. And they have to look at it. They have to harmonize it, not only with this plan, but every other plan that they have. And then they come out with a master plan. They say, this is what we think works. And of course, it doesn't always work the way they thought. So what do they do ? They adjust. And I think that's terrific. You're never going to get it right all the time. But the difference between what China does and what most countries do is that when they see a problem, they try to figure it out and try to solve it.
So when you start talking about municipal finance and things like that, they're in the process of doing that. They're trying to find the right balance. What they do is they try it in a small area to see how it works, basically a pilot project. And then they refine it based on what's happening in that pilot project. And then they roll it out to a few other areas because China is vast, one point four billion people, a little smaller than the total size of the US with all its possessions and very, very, very different cultural and geographic landscape. And they try to figure out if it's working and they keep adjusting. And then when they feel confident that this can be rolled out nationally, that's what they do. So that's the process right now that China is going through, trying to figure out exactly how it can fund its municipalities, and at the same time, prevent these guys who want promotion from doing unwanted things, basically squandering money, because they don't really know about business and they can be easily talked into things by fast-speaking individuals who said, oh, this is a sure thing. They have to kind of curtail that. And that's what you see now. They have now passed a law that said, if you start a project, it follows you for the rest of its life and yours. So if you say, oh, I had this great idea, fish farms for everybody, but it turns out there are a lot of questions involved, the fish farm didn't work, because you didn't investigate the local conditions. There wasn't enough water. That is going to impact your future. So it puts a lot of incentive on these guys to figure out if they're going to do something, that it is something that in fact is going to work well and that's going to help the community as opposed to hurt it. So moving it beyond the individual's benefit.
So a long-winded way of saying that municipal finance is necessary. We have things that have to be done. The government has to make tough decisions, and those tough decisions have to be related to humans if there's going to be any kind of fairness and sustainability.
MICHAEL HUDSON
You've described the political process quite clearly. That's how I understand that. I want to take off from a point that you made about the price of a house in central Beijing being ten times how much a similar house would be on the outskirts. That's, I think, the key difference. Why should a house in Beijing be more than a house in the countryside ? Suppose you would have what I had proposed, a rent tax. Suppose both of these houses cost exactly the same to build for the actual capital expenditure. You could have the price of these houses being exactly the same, but the rent tax would be ten times as high in Beijing as it would be in the outskirts. That means that the price of housing would not go up, but if the Beijing homeowner earned enough money, as he's doing now, to live in a much more expensive, preferable location to the outskirts, then he could afford to pay the increased rental value of this land. The site value goes to the tax instead of to, let's say, a mortgage banker, if he had to borrow the money to buy all of this.
So the idea is that the high rent housing wouldn't mean more debt. It wouldn't mean mortgage debt that has capitalized this rent into a higher price, which is why housing prices have gone up now. Right now, suppose this Beijing homeowner bought his home ten or twenty years ago. All of a sudden, there's a huge price gain that he's had. Well, this price gain is sort of a free lunch, but this free lunch for the happy owner who now has a more valuable home, means a higher cost of access to a new buyer for all of this. That's the problem that is confronting China. And I'm not sure that when they're talking about different tests, you know, let's see how these different alternatives work. I'm not sure that this has even played a role because I've had a lot of discussions with policymakers in China and in Hong Kong. And I think they've told me that, as you point out, the politicians are subject to public opinion and the vested interests that exist even in China. And I was told, especially in Hong Kong, where you have huge real estate billionaires, that before the absorption of Hong Kong into the mainland, there was pressure from the Communist Party of Beijing not to really apply this kind of tax in Hong Kong. And I'm sure the same kind of pressure occurs in China because, as you've said, so many Chinese homeowners now have a vested interest in preserving this increase in the price of their homes, the free lunch economy. At least it's not financialized yet in the bank credit, but it's been a free lunch, basically.
EINAR TANGEN
Well, investment is a bit of a free lunch. And as they say, it's a bit of a gamble. If you had put money into Microsoft, you know, thirty years ago, you'd be doing pretty well today. I don't know if you can say to people, because you made the right decision, I'm going to tax you. What if they made a decision to buy a house and it wasn't, you know, they overpaid for it and it doesn't go up, it goes down. Then they have a loss. Are you going to cover that ? And this is where I think Deng Xiaoping came in. He wanted people to basically gamble on themselves, to say that yeah I can produce more and I can save and then with that savings I can create a better life for myself. The number one means of saving for lower- and lower-middle-class people is a home. It becomes the sink. I ran an organization in Milwaukee that dealt with this. And what we would do is, you know, we'd say these people were poor. We're going to fix up the house. But we wouldn't buy them one house. We'd buy them a duplex. And the reason why was because the duplex would produce income. They'd live on one side and on the other side they could rent it out. And part of that rental fee would go into a sinking fund to make sure that if after five years the heater or the water boiler or the roof needed repairs, they could do it. Because we've seen way too many times how individuals who have bought a single family house, because they did not have much income, they were very fragile, kind of like, you know, the forty percent of Americans who don't have four hundred dollars in a bank account to take care of themselves in case of an emergency. So we didn't want a situation where they would fail simply because, you know, the planning wasn't there. And that was very successful. We saw people who went and they not only bought one duplex, but after a few years they'd buy another duplex, not with our help, we didn't fund them or anything like that. They went to a bank, they showed that they were able to get stable rents and things like that and they went forward.
But this is the nature of wealth creation for the common man. You know, if you're an industrialist, you make money the way you described it. You go out there, you have money, you can make money, if you have money. But for the average person, the number one piece of wealth that they have is their home, so I'm very reticent to say you can't do that. But I look at it from the other angle. When the ability to access wealth is blocked, because you can't afford to buy a basic home, then you have a problem, a big societal problem, because you're pushing these people outside the system. They have no hope. When they have no hope and they're restricted to renting, yeah, they're going to be taken advantage of. I mean, in America right now, you have these large conglomerates who buy up homes and multifamilies, whatever they can get their hands on, with the theory that they're going to be oligarchs within either local or regional markets and basically control rents, extract value as opposed to compete for it. And this I see as more of a problem than trying to make sure that allowing people to make money through the increased appreciation of their home. If it's a commercial piece of property, well, you can cover it with capital gains. You know, okay, I bought it for a million and I sold it for ten. Okay. Unfortunately, in the U.S., we've created loopholes where you can roll it over into something else and basically defer taxes forever as long as you keep buying bigger entities. But if you do in fact sell it and you don't qualify for these things, I object to those loopholes personally. There's no reason. All they do is make richer people rich.
But this idea that I'm going to take away all of your value I don't think is a good incentive. This is going back to, I think, the Mao era as opposed to the Deng Xiaoping era. And so they look at these things and they try to balance them. They don't want people to think that real estate is toxic because it's, as I said, a basic wealth builder, but they don't want it to be the sole source of people's investment because if you're buying a piece of property that no one lives in, it's basically dead money. It's not helping anybody because you're buying it on speculation and other people are buying it from you on speculation. And this is the definition of financialization. It's a game of musical chairs and everyone wonders when the music's going to stop and how many seats will be left.
MICHAEL HUDSON
Well, that's the whole point. What kind of wealth are you trying to access and how is such wealth gained ? I'm trying to take gambling out of the equation. And if the rental value of a property goes down, you'd simply reduce the rent tax. There wouldn't be insolvency. All of a sudden, if you're an absentee owner, the rents won't cover the bank debt that you've borrowed to buy this property, hoping it would go up. You just lower the rent tax for the owner. I want to discourage absentee ownership so that houses would be for living, not as an investment. I'm trying to prevent getting wealthy by buying a house, hoping that the rent of location will make it more valuable.
EINAR TANGEN
No, I understand that. And I understand, I mean, I took a district that was sixty million when we started, ten years later, seven hundred and twenty million. But I deliberately tried to raise the values. And part of that was the city of Milwaukee was turning into a dead hole at night. You could literally go on the main street of Milwaukee, Wisconsin Avenue, and you could shoot a shotgun in almost any direction after about six or seven o'clock at night. So what you had was a huge amount of real estate and investment that was basically dead for ten hours a day when people weren't there. And I said, well, there's a district that is, you know, on the three rivers near the lake front that have these historic buildings. This could be more. We could get people to live down here and therefore start utilizing this dead real estate more efficiently.
My point being that urban renewal changes, I don't think that they necessarily have to lack value. There has to be an incentive for people to invest money. Based on what you said, no one would invest in the real estate market. I can tell you that right now. If you're saying that the government is going to take away your profit, why would I invest ? I'll go invest in something else where I can make profit, where you're not going to take it away from me.
MICHAEL HUDSON
Well, that's the point. You want people to invest in something to make a profit, not a rent price gain. Making a capital gain, a financial rent gain, is not the same as making a profit by creating a more—
EINAR TANGEN
What would you do with industrial profits ? What would you do with industrial land ? All right, this isn't for our homeowners. This is—
MICHAEL HUDSON
No, you're quite right. Of course you'd change—
EINAR TANGEN
Commercial. Well, is commercial and industrial property and things like that, factories, are you going to apply the same rules ? Or is this just for residential?
MICHAEL HUDSON
Yeah.
EINAR TANGEN
Okay. All right. But I'm just saying that there's a careful balance between incentives and people's natural desire to better themselves, all right, and to increase their capital. You just call it a free lunch. Well, I don't know any bigger free lunch than the free lunch that is being given to the top, you know, ten percent of Americans. They have capital, and therefore they're able to, you know, make more capital. There's no difference between that and feudal society. You control everything, and therefore, you know, any increase comes to you. Any decrease, you beat it out of your peasants. I think there has to be a way in which ordinary people can, in fact, benefit from decisions about where they buy their homes, where they live. I mean, if I live on a lake, should it be the same value as somebody who lives next to a blank wall ? Under your system, it would. And I'm just saying that things are different and you can't apply this rule that I'm going to make everything equal. Frankly, I don't think it would work because you'd have a situation where, look at Central Park. Everyone in the world would say, I want to live in Central Park. And if it's the same amount of money as living in the Bronx, right ? Well, I don't want to live in the Bronx. Who's going to buy in the Bronx ? In essence, you would be saying that I'm going to tax heavily on this area surrounding the park. So that's going to make people not want to live there. And then people don't want to live in the Bronx or whatever area, if the Bronx is now gentrified, I understand, but in some areas which are "less desirable."
I think there is room for the market on a small level. But at the top level, you need to have policies that are looking out for the people and to the macro intent. And that's where I agree with your idea that you don't want free lunches going to the wealthy, but you don't want to block those who aren't wealthy from accumulating some.
MICHAEL HUDSON
Well, yeah, the great question is how are you going to gain wealth ? And in the West, the great Western fortunes are made by taking on debt. And the question is whether you want... certainly China would not want wealth to be gained by taking on debt and gambling. But that's how all the biggest fortunes in the West are made.
EINAR TANGEN
Well, but truthfully, in China, the way that they encouraged a lot of industries, including, I think, is that they made borrowing available to especially companies and areas of interest. China would not have developed anything that it has. I mean, China has a grid system, an electrical grid system that is almost ninety-eight percent efficient versus what we have in the U.S. where depending on the location, you lose about ten percent every thirty or forty miles. All right. So I mean, if they hadn't put those incentives in, I mean, EVs, they, you know, it's state capitalism and there's a lot of criticism in the West. They say, oh, we don't do it. Well, I always, I look at them and I say, oh, so Boeing, how's that work ? The military, agriculture, right ? And the same questions go to Europe. State capitalism is a dirty word when somebody else does it and they do it well, as opposed to if you do it and you're just "propping up," in many cases, very wealthy.
I mean, look at Donald Trump. Here's a guy who said, oh, I gave billions and billions to the farmers because I took away their markets in China. Well, guess what ? About ninety percent of those billions and billions went to large agricultural companies. They did not go to individual farmers, the people who were going bankrupt because he took away their markets. And that's still happening today. This is a perfect example of the excesses of government. They're not trying to help people. They're trying to help the people who elect them, and the people who elect them are the ones who give them the money. This is the problem in the US. China doesn't have that system. They have elections, but there's no money involved. They're generally at the very local level, very low level, and those people then choose other people who choose other people eventually to get to the top. It's a different system, wouldn't work in the United States, wouldn't work in Europe. I'm just saying that they developed a system that works for them and it balances this issue about personal gain versus societal needs, and I think there is a balance there and part of it I do think is cultural. I don't think the US and China or Europe or South America or Africa, they work on the same value system. They value slightly differently and you have to take the system that works for you.
And this is one of the things that I really like about what China has been saying about, you know, civilizational values, respect countries for what they are. I mean, you tell me the country that's pure. Countries were cobbled together by accidents of birth or devious people who put these countries together so that they could weaken them so they could take advantage of them.
MICHAEL HUDSON
You're right. It's all about balance and that comes down to judgment and that's all in the details.
EINAR TANGEN
Absolutely. But how would you arrange those details ? Tell me. I mean, I understand and I agree with you. The rentier class is just an extension of feudal colonialism. But how would you, what kind of details would you, work in America ? We're both Americans. I struggle with this, because I've been involved inside the system. I was also a real estate developer, very minor, very minor. I built some parking structures and things like that. I didn't do it for personal gain. The parking structures were actually there to provide a revenue source and also much needed parking in a historic district where they didn't anticipate parking back in those days, car parking. So it was needed, but I also said, well, this is going to be an income source for the district so that we can lessen the amount of dues that are being paid by landlords in order to support the districts, make it better. There was an investment. I had to sit down each year with a group of people who own the majority of real estate in the district and convince them that what they were doing was an investment. But if I hadn't been able to do that, the government said, oh, I'm going to come in and take all of the money. They would have no incentive to do it. In fact, they wouldn't be landlords. They would have done something else. So it was a really careful balance.
MICHAEL HUDSON
Okay, I think we've gone way over time, so...
EINAR TANGEN
Well, right. Michael, a real pleasure. Thank you for having me. Sorry I got so long-winded. But I'm kind of responding to you, Michael, because you pose very interesting paradigms. I struggle to respond to them.
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