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For the past decade, the US 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 US 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 US 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.