Rethinking the Economy

In an American Prospect article, Robert Kuttner reviews an interesting book by Yochai Benkler, “the pioneering expert on the economics of collaborative networks as facilitated by the Internet,” called The Penguin and the Leviathan on: How Cooperation Triumphs over Self-Interest:

[the book] uses examples as diverse as Zipcar, Wikipedia, open-source software, and Chicago’s community policing to contend that cooperative systems often outperform the competitive and hierarchical ones of free-market theory….

Reviewing reams of experimental studies…, Benkler finds that the economic paradigm misconceives human nature: “In practically no human society examined under controlled conditions have the majority of people consistently behaved selfishly.” We’ve all behaved reciprocally or done altruistic things, he writes, “because we knew intuitively that they were simply the right thing to do.” Happily, Benkler adds, “the Internet has allowed social, nonmarket behavior to move from the periphery of the industrial economy to the very core of the global, networked information economy.”…

For Benkler, the Leviathan of his title refers to both the bureaucratic state and the internally authoritarian corporation. The superior alternative to both is collaborative enterprise, symbolized by Tux the Penguin, the mascot and logo of Linux open-source software.

Kuttner points out that although “Benkler’s parallel universe [is] immensely appealing,” Benkler is way too optimistic that “the sheer logic of collaborative enterprise will transform the distribution of political power.” There’s nothing inevitable about it.

The ground rules of commerce can foster or strangle more collaborative forms of enterprise—and these rules are fruits of political power….

Long before its debut on the Internet, we’ve seen this movie. Half a century ago, America was far friendlier to credit unions, mutual insurance companies, nonprofit building-and-loan societies, farmer and worker cooperatives, and nonprofit hospitals and health plans. In the 1970s, authors were writing hopeful articles and books about worker-owned firms. This sector, which once accounted for a much larger share of American commerce, has mostly been bought out or crowded out by conventional business thanks to changes in rules promoted by economic elites. For example, Blue Cross in most states converted from nonprofit to for-profit because its executives saw a chance to make a buck and had sufficient influence on state governments to get the necessary permission. All the big mutual insurance companies save State Farm have likewise become stock companies. This is less about efficiency than profit and power to set the rules….

Political decisions will create the regulatory framework that allows the collaborative model to flourish or founder.

Although Benkler may be Pollyannish — and may not take seriously enough the critical role of the state (hello? Creating the Internet?) — it sounds like his book points to a lot of good hard evidence about the economic power of cooperation. Definitely something that any serious economic framework should figure out how to incorporate.

I just discovered a useful, entertaining site: the Cry Wolf Project. Here’s what they’re trying to do:

Throughout American history virtually every legislative initiative for progressive reform has been achieved only after bitter struggle by citizens, workers and advocates demanding fundamental rights and protections. In each case, they were met with claims that the proposal will “kill jobs,” generate a stifling government bureaucracy, or curtail economic growth.

The Cry Wolf Project is a network of advocates, researchers and scholars dedicated to demonstrating that, in fact, conservatives and business groups are only “crying wolf” to delay, prevent and weaken important and common sense regulations that save lives, clean our environment and make our families more secure.

In addition to a blog that tags & bags wolf criers, the site slices and dices wolf cry quotes by who said them and by topic. My favorite so far: from Alan Greenspan:

“[It is a] collectivist [myth that business people] would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings….It is in the self-interest of every businessman to have a reputation for honest dealings and a quality product.”

-Alan Greenspan, writing in Ayn Rand’s Objectivist newsletter.
01/01/1963

Definitely worth checking out.

Via Michael Lind, a great 1924 quote from Andrew Mellon, who was according to Wikipedia the “the third highest income tax payer in the US behind only John D. Rockefeller and Henry Ford” in the 1920s:

The fairness of taxing more lightly income from wages, salaries or from investments is beyond question. In the first case, the income is uncertain and limited in duration; sickness or death destroys it and old age diminishes it; in the other, the source of income continues; the income may be disposed of during a man’s life and it descends to his heirs.

Surely we can afford to make a distinction between the people whose only capital is their mental and physical energy and the people whose income is derived from investments. Such a distinction would mean much to millions of American workers and would be an added inspiration to the man who must provide a competence during his few productive years to care for himself and his family when his earnings capacity is at an end.

My how times have changed.

Every once in a while I’ll read a snarky post by a liberal/lefty finance blogger saying that Gretchen Morgenstern, the famous New York Times finance reporter, doesn’t really know what she’s talking about. Most of the time they don’t give enough detail for me to understand what they’re talking about — especially since I don’t read or write about Finance often enough to be fluent in financese (that portion of my brain is already filled up with the useless geeky details from my day job of managing software projects). Yesterday, the very sharp Felix Salmon gave us a nice example.

Gretchen Morgenstern wrote a piece on the fall of MF Global, which she blamed in part on credit default swaps (CDS). The International Swaps and Derivatives Association media.comment blog smacked back:

MF’s European sovereign debt holdings were just that, bond positions financed via repo transactions. Repos, of course, are NOT OTC derivatives. (They’re also not listed derivatives.) They are basic tools of corporate finance commonly used to finance cash bond positions.

We would have thought that, with a little checking, this point would be pretty obvious to one and all.

Salmon replied:

Obviously, ISDA wins this particular argument: it’s right, and the NYT is wrong. But don’t hold your breath waiting for a correction: Morgenson is one of those reporters who sees CDS beneath every rock, and even blamed CDS for Greece’s fiscal problems — twice. Neither of those columns received a correction.

In the Greece case, Morgenson saw CDS when she was actually looking at currency swaps, which are at least derivatives. In the MF Global case, she’s seeing CDS when she was actually looking at bog-standard repos, which aren’t derivatives at all.

But here’s the thing: the really annoying part of this episode is not that Morgenson is wrong. It’s that with a little bit of honesty and a little less derivaphobia, she might actually be on to something.
Here’s Morgenson: [Read more →]

A biblical Jubilee for clearing or reducing some mortgage debt? That’s the kind of radical idea you’d expect in a magazine like the Nation. But as William Greider points out in a recent Nation, more and more folks squarely in the middle are coming to the conclusion that if we don’t start radically cutting back on the principal many homeowners, whose mortgages now far outstrip the actual value of their homes, the housing market may never really recover.

Take Stephen Roach, the Morgan Stanley analyst who made headlines this summer when he floated the idea:

“Some form of debt forgiveness would be a clear positive,” Roach told me. “Debt forgiveness is a big deal when so many Americans are underwater and unable to keep up with their payments. Writing off debts would help them build up their savings. The saving rate is up, but not nearly enough. With debt reduction, people would feel less reluctant to spend money on new things. If you can do that, then companies will feel more confident about future demand, less reluctant about hiring more workers.”

Roach thinks the executive branch can engineer dramatic debt reduction with or without the approval of Congress. Fannie and Freddie together hold something like $1.5 trillion in housing loans or mortgage-backed securities. The Federal Reserve has nearly another trillion on its balance sheet. As owners, they could unilaterally grant new, more realistic terms to stressed borrowers. “Government can do this by simply telling Fannie Mae and Freddie Mac to take a write-down on their outstanding loans,” Roach explains. “Then the government can put pressure on the banks to do the same thing. The banks will resist, but they have to go along if the government is forceful enough.”

The Fed can likewise become a major influence for debt reduction, Roach says. Conservative traditionalists would naturally be appalled if the Fed directly aided the real economy of consumers and producers, but that objection was nullified by the financial crisis, when the central bank pumped hundreds of billions into nonbank corporations like AIG and General Electric.

If the Federal Reserve is reluctant to modify mortgages, says Roach, it can easily fund the process indirectly by creating new money and buying bonds issued by Fannie and Freddie, just as the Fed purchases Treasury bonds. “The Fed can assist by buying Fannie and Freddie bonds with the emphasis on reducing principal for the borrowers,” Roach explains. “It would be like ‘quantitative easing’ aimed at debt reduction,” a reference to the Fed’s purchases of mortgage-backed securities, Treasury notes and other assets to stimulate recovery.

Another mainstream financial analyst makes a similar case:

Laurie Goodman, the Amherst Securities housing-finance expert, assured the Senate Banking Committee in September that debt reduction is readily doable in the financial and real estate industries. “We actually know exactly what it takes to create a successful modification: reduce principal, give the borrower substantial payment relief and modify the borrower in the early stages of delinquency,” she said.

To illustrate, Goodman suggests that a bank or mortgage servicer could reduce an underwater mortgage from $150,000 to $115,000 with a “shared appreciation” agreement. The homeowner would no longer be underwater and would gain some positive equity. If the property is sold in the future, any appreciation in its market value must be shared with the lender. She pointed out that a major mortgage servicer, Ocwen Financial, is already doing such deals. The creditor will get
25 percent of any future market gain. In many cases, that sounds like a better deal for the lender than holding on to the bad mortgage and eventually getting nothing.

“I would like to think principal reduction would be a mandatory part of the government’s modification program,” Goodman said. “The Treasury has not let it happen.”

And as Felix Salmon notes, even some seriously “red-in-tooth-and-claw capitalists” are starting to argue it’s inevitable:

Now comes word that Greg Lippmann, of all people — one of the big winners of the subprime bust, and a man who became extraordinarily wealthy playing in the mortgage CDS market — is thinking along similar lines himself.

“Principal reductions are necessary to help ameliorate the housing crisis,” Lippmann, chief investment officer for New York-based hedge fund LibreMax Capital LLC, said in an Oct. 31 letter to investors obtained by Bloomberg News. The step will also lower losses on loans underlying mortgage bonds, he said.

In other words, Lippmann sees what’s pretty obvious — principal reductions are not only helpful but necessary if the housing mess is going to clear. The question isn’t whether they’re going to happen, it’s how they’re going to happen.

Politically, of course making this happen would be very difficult. But then again, back during the summer nobody was predicting a populist grassroots explosion either.

Organizing guru and President of the Applied Research Center Rinke Sen has an interesting take on the differences and relationship between long-term progressive organizations and a movement like Occupy Wall Street:

I have spent hours, weeks, months in discussions about how to recognize a movement—and whether anything we’ve done on all the issues you’ve mentioned counts. Suddenly, there are thousands of people taking some action, inspired by each other and seemingly not organized by anybody, and the conversation shifts to how we can harness the energy that has been released in that moment. Embedded in these discussions is an implicit assumption that one can build a movement in much the same way that one builds organizations: methodically, over the long term, with lots of structure so that people can join and find a path to leadership. I think this assumption is fundamentally wrong.

Organizations and movements are certainly related. Organizing builds infrastructure for a movement, and sometimes trains a movement’s leaders. The simplified movement stories we read today—how Rosa Parks sat down one day ‘cause she was too tired to move to the back of the bus, for example—are pretty much fantasy. Rosa Parks was a devoted member of the NAACP for 20 years before that day. She had put in her time recruiting members, registering people to vote, supporting legal efforts and plotting change. Before Mrs. Parks refused to move, others had, too, just as there were desegregation sit-ins at Southern lunch counters before the Greensboro Five sat down at Woolworth’s. Some of those sit-ins even had some success, but they didn’t spark spontaneous mass action, and only a real history buff or someone who was involved will bother to dig up their memory. Sometimes it’s useful to think of this period as the “pre-movement” stage. This is all the stuff that Gandhi did in South Africa years before the Salt Marches in India; all the work to protect gay people before Stonewall; everything we’re doing right now on our way to a new immigration system.

There does turn out to be a time that a cause, identified with a particular tactic, activates people to an extent previously unseen. So many factors feed into that moment. Some elements are tangible and we can try to influence them, like media pick up of the action, or a simple tactical design that eases replication. But some of these elements are intangible. We can’t predict them and we can’t control for them. They are comprised of some magical combination of an angry-enough constituency, a large-enough break in the system of repression so that what is underground can rise up, and the presence of creative leadership. When these factors are present, we might have a movement moment. Thus, organizers have to be prepared for such a moment to hit at any time. I wish I knew how to call it years in advance, but I’ve never really met anyone who could. The best we can do is open our eyes when it’s right on top of us.

This is the moment when conflict can arise between a new movement and the established organizations that created the pre-movement infrastructure, because this is when the differences between enabling movements and building organizations becomes clear. Movements are decentralized; organizations are centralized. Movements are spontaneous; organizations have strategies and plans, not to mention members and funders. These first two characteristics make movements go fast, while organizations can be slooow. Movements and organizations both want change, but organizations have the added goal of building for the long term, of perpetuating themselves. That goal can make organizations reluctant to embrace movements, even on the issues they’ve worked on forever, and can in turn can feed contempt for established organizations among movements.

We need both kinds of activity. There are things that the NAACP can do because it’s 100 years old, and there are things it can’t do for that very same reason. There are things Occupy Wall Street can do because it is nimble and unknown, but there are things it can’t do for that same reason. A good relationship between social justice organizations and movements requires reorientation from both.

Organizations can speed up by shifting some of their priorities. They can drop the notion that we must get all those occupiers or marchers or queer public smoochers to join their groups. They can be willing to share their planning and tactical skills even for an effort that they do not control and for which they will not likely get credit. In a movement moment, the imperatives of organization building can be set aside, and we might even recognize that not every organization has to live forever to make a great contribution. Organizers are used to hunkering down for marathons, but movement moments require sprinting. As a collective body, we must prepare to run full out.

For their part, movements can slow down enough to make sure they don’t exclude important perspectives in the rush to action. They can do their homework so that they know who John Lewis is when he wants to speak to them. They can adopt enough structure to protect people within the movement who could be abused by people with more power. They can refrain from blaming the current situation on the organizers who “failed” to make change earlier. More than anything else, social justice organizations and movements have to support each other, because the opposition will do its best to divide them by punishing the new movement, by pressuring the established groups to withhold support, even by making some concessions to one or the other.

Lately I’ve been remembering a quote by Omowale Satterwhite, a former board member of the Applied Research Center, which publishes Colorlines.com. During one meeting, long before an Obama presidency, Omowale said that our organization had to be ready for anything. People might not care so much about race now, he said, but that could change at any moment. He had observed from the fight against South African apartheid that “you never know how close you are to freedom.” We can’t set the timer for a movement moment, but we can act correctly when the clock strikes now.

If you want to learn more about her perspective on organizing, check out her book, Stir It Up: Lessons in Community Organizing and Advocacy.

If you aren’t just fired up about how quickly Occupy Wall Street is taking off and you’re still worried about the lack of specific, winnable demands, 2 suggestions:

1) Borrow a teddy bear and hug it out.

2) If that doesn’t work, check out Investing in Chicago Communities: A Jobs Fund for a Future That Works. This report, put out by Stand Up Chicago! and the Chicago Political Economy Group just before today’s large Occupy Chicago rally, lays out a plan for starting to make Chicago work again for the 99%:

Under the plan, 40,000 jobs would be created by adding a $.25 per contract speculation fee to be collected from traders who engage in speculation on Chicago’s two main exchanges: the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE). This fee would create $1.4 billion in annual revenue.

“This is a tax whose time has come,” said William Barclay, an adjunct professor at UIC’s Liautaud Graduate School of Business and a board member of the Illinois Finance Authority, who pointed out that the UK and Hong Kong have similar transaction taxes in place….

“The so-called ‘job creators’ are not creating jobs but rather collecting interest on $1.6 trillion in cash that is not being invested in the real economy,” said Baiman [Director of Budget and Policy Analysis at the Center for Tax and Budget Accountability].

“If you play with something that doesn’t belong to you and you break it, you have to pay for it,” said Barclay. “The same investment banks that caused the jobs crisis are now thriving — but they’re not hiring workers. So our jobs plan is looking for these financial institutions — these big gamblers — to pay for what they broke.

Smart work, and just the beginning of many policy geek conversations about what we could fight for. So print it out or download it, and bring it along to read at your local Occupy event!

Another good sign for Occupy Wall Street’s future: a new group called “Occupy the Hood.”

Founded by Malik Rhasaan, 39 of Queens, N.Y., and Ife Johari Uhuru, 35, based in Detroit, @OccupyTheHood has close to 3,500 followers on Twitter, the growing support of notable figures and a cadre of volunteers devoted to getting the word out about the cause of the protests to African Americans and Latinos.

Rhasaan told Loop 21, Occupy The Hood has six core volunteers, but he’s already seen “Occupy The Hood” carried by people he’s never met

Like many others, he was initially just curious about the protests.

“It was a news story and I’ve always been interested in what’s going on in our country,” Rhassan said via phone from the protests, where a police officer had asked him to move along. “I was just going down and really, just being nosy to see how honest it was. I realized there was a solid movement but that there weren’t enough black and Latinos.”

@OccupytheHood is Rhassan’s first Twitter account, and since he created it he has linked with thousands of followers, including Cornel West. He said he wants to use the account “as a springboard to address other things, whether it be crime or health issues in our communities. But we in the inner-city doesn’t know how this pertains to us. We don’t tie our issues to Wall Street.”

It’s depressing and infuriating that in 2011, our side still doesn’t take diversity & racism seriously enough that a group like Occupy the Hood was needed. But the fact that this early in Occupy Wall Street’s history two guys who are not, as far as I can tell, hard-core professional organizers could make something like this happen so quickly is an encouraging indicator of where this movement/happening might go.

When Occupy Wall Street started, my first reaction was an uncharitable “meh.” Not publicly – I don’t publicly criticize fledgling organizing unless I think it’s actively doing harm. But the whole scene felt like the bad old days, when I was involved in in the dysfunctional, ultimately self-destructive parts of 80s & 90s Bay Area politics.

After a few days, I switched to Doug Henwood’s position:

I’m not here to disparage Occupy Wall Street; I admire the tenacity and nerve of the occupiers, and hope it grows. But I’m both curious and frustrated by the inability of the organizers, whoever they are exactly, or the participants, an endlessly shifting population, to say clearly and succinctly why they’re there. Yes, I know that certain liberals are using that to malign the protesters. I’m not. I desperately hope that something comes of this. But there’s a serious problem with this speechlessness.…

Occupiers: I love you, I’m glad you’re there, the people I talked to were inspiring—but you really have to move beyond this. Neoliberalism couldn’t ask for a less threatening kind of dissent.

But in the last few days, as the protesters have repeatedly shown solidarity for striking union workers and as Occupy Wall Street has spread to other cities, Mr. Curmudgeon has completely left the building. In an interview with Ezra Klein, organizing guru Stephen Lerner nicely captures where I’ve ended up:

EK: One criticism of the protests has been that they don’t really have any demands, that there’s not a clear and achievable vision of what success looks like, nor of how to achieve it. Do you worry these efforts will just burn themselves out?

SL: I think that’s an interesting question. I don’t know the answer because we’re in uncharted waters as a country. But it’s important to realize it’s not the only thing happening. There are lots of people with concrete demands about principal reduction and closing corporate loopholes. We haven’t had a shortage of demands and solutions. We’ve had a shortage of mass movements that are courageous and heroic and driven by a sense of right and wrong. So if we can get more and more people into the streets and activism, that will give more force and energy to the demands.

I have no idea if Occupy Wall Street is going to be the beginning of “the Movement.” But even if it isn’t, this many people getting up on their feet and saying, “I’m mad as hell, I’m not to take it anymore – and I’m not going to go away” is a very good thing.

A few months agoI heard a young Egyptian activist explain how Tahir Square occurred. Tahir Square, he said, wasn’t the start of something. It was the culmination of years of many different organizing efforts, some of which succeeded, some of which failed miserably. So maybe Occupy Wall St won’t end up being Tahir Square. But maybe it’s the next step on the road.

Or to paraphrase an old joke: how do you get to Tahir Square? Organize, organize, organize.

One of the reasons why most folks in the US eat lots of dairy, meat, and junk food instead of organic, locally grown fruits and vegetables is because it’s a lot cheaper – the government subsidizes the cost of meat, dairy, and junk food. What if we flipped those subsidies around? Michael Pollan says it might not make as much of a difference as you’d think.

Though crop subsidies certainly helped to make corn (and its boon companion, soy) the mainstay of our food system, eliminating those subsidies might not by itself be enough to topple king corn. Decades of crop breeding, advances in farm machinery and the building of a rural infrastructure all devoted to these crops means a Midwestern farmer can produce a bumper crop of corn with just a couple months of work while at the same time holding down another job. Growing anything else would mean a lot more time and work in the fields, and at this point that farmer probably depends on the other source of income.

As for subsidizing vegetables, that, too, is trickier than it seems. Subsidies tend to result in surpluses, which in the case of grain is fine: you can store surplus corn or soy in a silo for years. Try doing that with broccoli. In the case of “specialty crops” — the U.S.D.A.’s term for crops you can actually eat — we would be better off subsidizing demand rather than supply: giving vouchers to the poor to buy fresh produce, say, or incentives to retailers to lower prices in the produce section.

So then what do we do if we want to make organic, locally grown fruits & vegetables affordable?

This is the $64,000 question. There are certainly steps the government can take to make healthful food somewhat less expensive: underwrite farmers’ transition to organic and other kinds of sustainable agriculture; support the renaissance in local meat production by making it easier to build and run small slaughterhouses; use crop subsidies to reward farmers for diversifying their fields and growing real food rather than “commodity crops” like corn and soy; enforce federal antitrust laws to break up the big meatpackers and seed companies.

But these measures will never make high-quality food as cheap as industrial food, some of which will only get more expensive if we take the steps needed to civilize feedlots, clean up water and protect farmworkers from exploitation. Faux populists in the food industry battle such measures on the grounds they want to keep food prices low for the poor. But the institution of slavery kept crop prices low, too — at a cost we ultimately decided was too great for a democratic society to pay. (Come to think of it, slavery still exists in parts of the food system, according to reports out of Florida.) Cheap food has become a pillar of our low-wage economy, one reason Americans have managed to stay afloat as their wages have declined since the 1970s. In the end, if we want healthful and conscientiously produced food for everyone, we’re simply going to have to pay people enough so that they can afford to buy it.

I don’t know enough about the economics of food to know if he’s right. But even if he is, I think we could do better than “we’re simply going to have to pay people enough.” I bet a smart Agro economist could figure out a way to subsidize vegetables that didn’t result in massive surpluses. And there’s an awful lot we could do on the demand side on a large scale if we wanted to.

For example, when I used to work in downtown DC, due to government subsidies my employer automatically added $50 a month to my Metro card, which basically made going to & from work by mass transit free. What if we are to create something similar for organic, locally grown fruits & vegetables? We already have Health Savings Accounts that subsidize you by not taxing money you put into the account. Why not Food Health Savings Accounts where the government would put in a certain amount every month into your account? If it’s set up like a debit card, the way my HSA is, it shouldn’t be rocket science to make it work well for consumers, grocery stores, and farmers (assuming we also tackled the “food desert” problem in poor neighborhoods).

But Michael Pollan is right about one thing: figuring out how to Stack the Odds in favor of healthier diets will definitely take some work.