What's different about the New Economy?

While there is no one definition for the “new economy”, most folks working in this field would probably agree on a few basic elements that distinguish this economic approach from the current dominant economic model.  I’ve attempted to summarize those below.

Six Elements of Emerging New Economies, Contrasted with the Dominant Economy

1) New economies are more just, work better for people.

The dominant economy has used tax, trade and patent policy to greatly favor huge corporations and the very wealthy over small businesses and working people, leading to extreme levels of wealth concentration at the top alongside stagnant wages for working and middle class people, and growing poverty.  The very wealthy pay lower taxes on much of their income than do teachers and truck drivers; giant corporations pay an effective tax rate that is 6 – 8% less than what small businesses pay.  Trade policy grants corporations the right to sue nations, states and communities over health and environmental protections. You can’t make this stuff up.

In the new economy, small businesses and family farms create more jobs per dollar of sales; by purchasing from other local businesses, they create ‘economic multipliers’ that add much more value to the local economy than do chains and big boxes.  New corporate forms, such as the Benefit Corporation, which commits a business to positive social and environmental outcomes as well as financial profit, are also emerging in the new economy, with over 1000 nationwide.  Some localities have begun to use Community Benefit Agreements to hold big corporations legally accountable for the promises they make.  These and many other creative measures ensure that economies work for people, not the other way around.

2) New economies are more diverse, less dependent on outside corporations, foreign markets.

The dominant economy rests on two core assumptions:  that prosperity requires endless growth, and that jobs and income for the many ‘trickle down’ from the top, so long as taxes on this group are low.  In actuality, the record of the past 60 years demonstrates unequivocally that lower taxes on the wealthiest and on the biggest companies have not made for a bigger economic pie; and economic wealth, rather than trickling down has been sucked up from working people, community banks and small businesses.  There are many reasons for this, but one of them is the subsidies we provide to big boxes and big business, averaging over $100 billion per year.  The results?  Several studies have shown how communities with a diverse array of local businesses are stronger economically and socially, with better incomes, higher employment, and lower rates of poverty, incarceration, health problems and substandard housing, than those dependent upon a few big employers.

In the new economy, small to mid-size businesses take hold that build on the assets of their place, including music, art and culture, farms, forests and fisheries, the outdoors, historic downtowns and more.  Local business associations, like the Business Alliance for Local Living Economies (BALLE) help strengthen these local enterprises and increase the connections between consumers and producers.  Instead of spending millions of dollars to entice a big box chain, resources are redirected to homegrown businesses and entrepreneurs, making for more resilient economies and communities.

3) New economies build broadly-based prosperity, real wealth from the bottom up.

The five biggest Wall Street financial institutions own more than twice the capital of all the community banks in the nation combined.  Yet these mega banks direct very little of their resources towards local prosperity:  The community banks, with just half the assets, provide more than twice as much lending to local businesses.  Big banks, especially since the overturning of the Glass-Stegall Act, concentrate on generating high returns for the biggest, wealthiest investors, often through the use of derivatives and other means that don’t produce tangible wealth.

In the new economy, capital is refocused towards small to mid-sized businesses, towards infrastructure that enables farmers and entrepreneurs to add value to their products, and towards technologies and businesses that meet real needs, such as affordable, green housing, renovated buildings and revitalized downtown business districts, and regenerative farm and food enterprises.  Cooperatives, Employee Stock Ownership options, community land trusts and community-owned energy systems are among the means used to broaden prosperity, while increasing the productivity of businesses.

4) New economies fit within the ecosystem, recognizing limits rather than depending upon endless growth.

The dominant economy both depends upon endless growth and assumes that it is possible forever into the future.  Yet serious limits confront us, from enormous declines in groundwater reserves, to an 80% reduction in productive land per capita, worldwide.  And of course, there’s climate change and the consequences of too much carbon in our atmosphere – drought, floods and severe weather, sea level rise and more.  In spite of these increasingly serious problems, the dominant economy fights all environmental regulation and assumes that technology and ‘the market’ will fix things.

In the new economy, our places, our ecosystems are understood to have limits, but also to present new and better ways of meeting needs and creating work.  From organic farms and restorative fishery systems to super energy efficient building systems and solar and wind power companies, the new economy is spawning products and services that meet people’s needs with far less impact on the environment.  Complementing that is a growing emphasis on urban and community design that makes our towns and cities more walkable, more bike-able and more enjoyable.

5) New economies focus more on meeting real needs, fostering innovation in the process.

The dominant economy has been enormously productive and has made countless products much more affordable for ordinary folks, from cars to computers.  However over the last thirty years or so, it has also become increasingly dependent upon what is called financialization, that is a focus on money and monetary products as a central part of the economy and the policy guiding it.  This has led to what David Korten calls “phantom wealth”, where trillions of dollars of ‘assets’ are traded on Wall Street, making a small group of people spectacularly rich, while real assets – bridges, roads, high speed rail, rural health clinics, waterways and agricultural lands – are neglected and fall into decline.

In the new economy, there is a strong focus on addressing real needs and doing so in a way that helps people and communities to become more self-reliant.

Business incubators and accelerators help local firms be more competitive, more innovative.  Poor communities, from Detroit and Buffalo to Appalachia and the Southeast launch community gardens, urban farms, and ‘green development zones’.  New techniques and systems enable farms to simultaneously increase their productivity while pulling excess carbon from the atmosphere. Businesses put people to work in reclamation of disturbed land, urban brownfields and energy efficient housing.  Lower income people gain access to healthier foods through mobile markets and farmers market EBT initiatives.  In the new economy, the driving question shifts from “Where are the jobs?” to “What work needs to be done?”

6) New economies cultivate citizens, not just consumers.

The dominant economy is now a consumer economy, fundamentally dependent upon more and more people buying more and more stuff.  At the same time, the belief in private, market-based solutions to a whole host of societal problems – from prisons to public schools – has become increasingly commonplace.  Alongside both of these developments is the reality of widespread cynicism, even disgust with politics and government.  Taken together, these trends have convinced many people to give up on civic, political or even neighborhood engagement, believing that their opportunities as well as their responsibilities play out almost entirely as consumers.  

The new economy welcomes the creative force of the marketplace and encourages people to use their dollars to support businesses that reflect their values.  But it recognizes that this is not enough; that in order to have an economy that works well for all people, and that is sustainable into the lives of our grandchildren and beyond, we also need a vibrant democracy and honest public debate.  Many new economies are therefore emerging alongside community based media, arts and theater that give voice to folks from all walks of life.  The revival of public squares, parks and community centers has facilitated both new commerce and broader public participation.  The work of Policy Link and other organizations is helping to find ways to revitalize communities economically without falling into the trap of gentrification and even greater racial segregation.

*Originally published at BottomUpEconomy.org

Wall Street and the New Economy

I’m going to throw out 2 numbers and ask you to keep them in mind: 2 Trillion; and 3.7.

When I first studied economics more than 30 years ago, the textbooks said that businesses and economic activity were comprised of 3 basic ingredients: land, labor and capital.  Land, what folks like Paul Hawken now call “natural capital”, represented the raw materials needed to make things.  This work of making things was presumably done by people, that is, labor.  And capital, the third component was understood to be the machines, equipment, and technology which increased the productivity of both land and labor, along with the financial investment which sustained it.  Thirty years ago, most economists were certainly not friends of land or labor, but they did at least understand that both were essential to a healthy economy.

But all of that has changed.  First, we shifted from an economy based primarily on manufacturing goods to one based on providing services.  Now this is not altogether bad, as many services are useful, even essential to a healthy world.  But this transition to a service economy, particularly in an increasingly globalized world, accelerated our estrangement from the land, both its wonders and its limits.  Of course we all still used stuff – food, wood, oil, steel, computers, appliances – in fact, more than ever.  It’s just that we weren’t growing or making those things ourselves anymore, preferring to outsource and offshore these functions.  With those basic, life-sustaining things now largely taken for granted, we could focus more on the services and amenities that seemed to make life more convenient, more comfortable.

The service economy soon gave way to the so-called information or “knowledge” economy.  This is the notion that economies based on things, or even tangible services have been replaced by an economy based on ideas.  So strong was – and is – this belief in a “knowledge” economy, that the old notions of land and labor, even capital in the tangible sense, became passé. George Gilder, a frequent writer and cheerleader for this new economy said “We have seen the overthrow of the tyranny of matter… our ability to create wealth is not bound by physical limits, but by our ability to come up with new ideas.  In other words it’s unlimited.”

But ideas of course are abstractions. You can’t eat them or heat your home with them. They don’t filter the impurities out of water, or sequester carbon.  To believe in a “no limits” economy, is to believe that we can live from abstraction, what James Howard Kunstler calls the “fictitious economy.”  It shouldn’t surprise us then, that the final stage of this economic paradigm is the global financial services sector, where “wealth” became completely estranged from, even antagonistic to productive activity; where liabilities – things like risky mortgages, or the energy speculations of Enron, or even bets as to when sick people will die – could be “repackaged”, and, voila, stock values sore.  In such an economy, sickness and predation become more valuable than health and self-reliance.

And that brings me back to my numbers.

In 2008, Wall Street lost $2 Trillion in just a few weeks.  That’s nearly $20,000 for every household in this country.  If there really was that much wealth to go around, we’d all be doing pretty well.  But it isn’t real. And because that wealth was fictitious, we are still struggling to recover from the economic bust of six years past.

What is real is the 3.7 acres of productive land per person that remains on our planet.  A century ago we had 14 acres per person.  Now it’s 3.7. That land, including the soils, grasslands and prairies, wetlands and forests, is the true foundation of our wealth.  Whether our job comes from farming or manufacturing, the service sector, or banking and finance, we all depend upon a productive landscape to meet our most essential needs.  If accelerating climate change and the Wall Street debacle have taught us anything it should be that we’d better target our capital and use our labor to restore this shrinking base of land and build communities of modest, but real wealth.

*Originally published at BottomUpEconomy.org

Is there an Alternative to Trickle Down Economics?

There are at least four key components of what I’m calling a “bottom up economy”:   Focusing on the assets and strengths of your community; developing infrastructure to support and build upon these assets; fostering local ownership of businesses and capital; and building entrepreneurial networks that increase the competitiveness and impact of local businesses.    Before we examine how public policy can help communities develop each of these elements of a bottom up economy, it is fair to ask, “Why bother?  What is wrong with traditional, top down economic strategies?”

Most of our economic policy and practices over the past thirty years have been top down, or “trickle down” in nature, based upon this belief:  If we free up a small group of job creators at the top – wealthy investors and large corporations – they will create wealth which will trickle down to the rest of us.  This has been the driver of our economic, fiscal and labor policy since Ronald Reagan was president.  Trickle down economics did create wealth, but there were two problems with it:  First, much of it has been based upon financial speculation, rather than real wealth.  As stock market “bubbles” and so-called derivatives both demonstrate, Wall Street can create a lot of “wealth” that has little real value or base of productive assets.   We’re talking here about the difference between the house that someone owns – a tangible asset – and the value of the debt on their home, repackaged with the debt and risk of thousands of other aspiring home owners as a tradeable commodity, known as a derivative.  One is real, providing shelter, warmth, pleasure (usually…).  The other exists purely in the mind and can rise or fall in value dramatically, overnight.  And that is exactly what happened to trillions of dollars of Wall Street “wealth” in 2007 and 2008.

The other fundamental problem with trickle down economics is that the promised prosperity never trickled down.  In fact, it has been quite the opposite, as income and wealth have moved up, not down, from working folks and the middle class to the rich.  From the end of World War II until the mid 1970’s, the benefits of economic growth were widely distributed, with Americans in the bottom and middle of the economic spectrum seeing more gains than those at the top.  However from 1980 on, we’ve seen those gains stagnate or decline, as the vast majority of new income and wealth has gone to people at the very top.  Rather than widely shared prosperity, we’ve become the most unequal country of all the advanced nations of the world.  The most unequal.

The problem with this inequality, this concentration of wealth goes beyond the question of fairness or justice.  In fact it is quite costly to our nation, as Joseph Stigletz (The Price of Inequality, WW Norton, 2012) and Richard Wilkinson (The Spirit Level:  Why Greater Equality Makes Societies Stronger, Bloomsbury Press, 2010)point out in separate books.  Stigletz demonstrates that economic inequality leads to lower overall economic output and less productivity, not more.  Wilkinson looks at a host of quality of life indicators, including life expectancy, obesity and health, educational attainment, teen pregnancy, substance abuse, crime rates and others.  He finds that the more unequal the society, the worse they do in nearly every one of these areas.   This mirrors a study, done by Thomas Lyson of Cornell University, of 200 rural counties across the country which found that those with one or two large companies dominating their economy were worse off in terms of health, economic and social indicators than the counties with a broad base of small to mid-sized businesses.

Every one of these problems is costly, both in terms of taxpayer dollars and the well- being of people.  Trickle down economic strategies haven’t solved these problems; they have made them worse.  It is time for fresh thinking about how to create jobs, to broaden the base of wealth, to lift people out of poverty and to increase the resilience of households and communities.  Fresh thinking based on successful, real world examples emerging across this nation.