Poverty and Welfare

The last three and a half decades or so, the period witnessing the advent and dominance of neoliberalism, has been characterized by heated political rhetoric denouncing the size and utility of the American welfare state. Ironically however, while President Ronald Reagan asserted that government was the cause of, not the solution to, the nation’s problems and President Bill Clinton declared that the era of big government was over, both executives governed during times of net welfare state expansion. Still, their rhetoric decrying the welfare state was coupled with significant cuts to entitlement spending on welfare recipients who were not well mobilized politically. Specifically, efforts aimed at reducing the size and scope of the welfare state were, and continue to be, highly uneven, with large public programs explicitly designed to benefit the elderly population persisting relatively unscathed (though Social Security has become fair game as of late) and continual scrutinization and reduction in income support to the non-elderly, generally poor, population.

The trend toward a systematic, though selective, attack on certain welfare programs over the course of the past 30 odd years, is exemplified by the celebrated 1996 bipartisan Personal Responsibility and Work Opportunity Act, which (by both eliminating the AFDC program [Aid to Families with Dependent Children] in favor of the more strict TANF program [Temporary Assistance to Needy Families] and introducing a variety of other welfare reforms) drastically reduced the number of recipients of federal anti-poverty aid from 12,320,970 in 1996 to 2,847,520 in 2008 while simultaneously encouraging a significant spike in Food Stamp recipients (especially after the 2007 Financial Crisis). Furthermore, most of the jobs (characterized by long hours, menial work and low, government subsidized, pay) provided through TANF’s “work for welfare” initiative tend to act as poverty traps, rather than springboards for social mobility. Anti-welfare initiatives, like 1996’s welfare reform, only serve to mask and/or exacerbate poverty, especially among women, children and minorities. Alternatively, the drastic reduction in poverty, from 19% in the early 1960s to the historic low of 11.1% by the close of that decade, during President Lyndon B. Johnson’s “War on Poverty” indicate that strong welfare policies can yield measurable dividends with regard to helping those in need. Subsequent cuts to the policies and programs implemented during that era, especially during and after the 1980s, witnessed a resurgence of more widespread and persistent poverty, culminating in a 15% rate in 2012.

A strong welfare state is a vital component of a functioning state capitalist society. Contrary to popular belief on the right, the problem isn’t that poor Americans are trapped in poverty by disincentives to work resulting from the welfare programs available to some of them. Rather it is the capitalist economic system, along with America’s unique history of racism, that inherently creates some economic winners and a great many losers. By both disproportionately prioritizing capital over labor and enforcing and perpetuating the concentration of that capital among a narrow sliver of the population, the capitalist system (along with the state that serves it) necessarily yields economic stratification and a centralization of wealth and power among an elite minority. For these reasons, government policies designed to correct these social failures by redistributing wealth (through progressive taxation, welfare programs and other means) actually protect the capitalist system both by helping the poorer masses to acquire purchasing power and buy goods (thereby driving the broader economy) and by safeguarding elite holders of concentrated private power and wealth from popular resentment. When such programs and policies are reduced or eliminated, as they have been relentlessly in the United States in recent decades, the poor suffer, the economy slows and society is destabilized.

Source(s): 1) Marc Allen Eisner, The American Political Economy: Institutional Evolution of Market and State [Second Edition], (New York, New York: Routledge, 2014).
2) John Halpin, “50 Years After LBJ’s War on Poverty: A Study of American Attitudes About Work, Economic Opportunity, and the Social Safety Net” Center for American Progress (2014): accessed June 28, 2014, http://americanprogress.org/issues/poverty/report/2014/01/07/81702/50-years-after-lbjs-war-on-poverty/
3) The United States Census Bureau “Poverty: Highlights” (2013): accessed June 28, 2014, https://www.census.gov/hhes/www/poverty/about/overview/

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Labor and Immigration

Conventional wisdom suggests that immigration into the United States only makes life more difficult for the working-class people already there. For instance, the American Federation of Labor (AFL) argued in the earlier 20th century that high levels of workers migrating into the United States swells the labor pool (thereby lowering the cost of labor and wages), provides employers with strikebreakers (thereby weakening unions’ bargaining power) and ultimately leads to unemployment among American workers already in the U.S. After merging with the Congress of Industrial Organizations (CIO), the new AFL-CIO took a more inclusive position with respect to immigration, generally viewing immigrants as valuable potential union members (the CIO having been composed of more ethnically diverse, unskilled workers). Still, in as recently as 2005, there was a major fracture within the labor movement over the issue of immigration policy between the AFL-CIO and the new Change to Win Federation (composed of the Service Employees International Union [SEIU] and the Union of Needletrades, Industrial and Textile Employees [UNITE]). The latter group included many recent immigrants to the U.S. and was doubtful of the AFL-CIO’s commitment to issues related to immigration. Though the two sides mended in 2007, their split is indicative of the continued perception among many unionized American workers that new immigrants are their inherent rivals.

But this perception is wrongheaded and unhelpful considering the context in which American private sector labor unions now find themselves. With a litany of factors (including but not limited to neoliberal globalization, a political/legal offensive from the business class, technological innovation and internal union corruption) cascading together to diminish private-sector union membership and power by the close of the twentieth century, labor in the U.S. is near death (Only 6.7% of the private sector workforce was unionized in 2013.). The negative implications of this trend on American democracy are already manifest: with private sector labor unions historically serving as the primary means by which to politically advance the interests of the working-class, their marginalization has resulted in the shrinking of this class’s (the majority of Americans’) influence in the political process. It is no coincidence that the waning political power of private sector labor unions has paralleled the resurgence of the political domination of the super wealthy.

For this and other reasons, it is clear that American labor will need to find a new source of strength if it is to survive into the 21st century. That source is immigration. By utilizing what influence it retains, labor must work to ensure that immigration reform both eliminates the features of the current immigration regime which undermine its interests and establishes a new set of norms that are beneficial to both native and immigrant workers in the U.S. In shaping immigration reform in this way, private sector unions will find in new immigrant workers their saving grace, rather than their death blow. Given the fact that globalization (but NAFTA in particular) has made increased migration from Mexico to the U.S. a reality, unions need to face the reality of the immigration situation and embrace this strategy.

The deficiencies of the current immigration regime in the United States fulfill many of the fears that American union members have regarding the effects of immigration. Specifically, because the boarder is militarized and undocumented workers are criminalized and often deported, many of these migrants choose to remain hidden and illegal. This exposes them to under-the-table exploitation by employers (for fear of being fired or reported to the government) and renders them unable to assert their economic rights and protect (let alone advance) their collective interests, thereby lowering the cost of their employment (and thus of unskilled labor more broadly). The depressed price of unskilled labor resulting from the exploitation of migrant workers illustrates the degree to which the native working class’s well-being is dependent upon the level of empowerment of undocumented immigrant workers. Specifically, the AFL-CIO warns that if current and future undocumented workers aren’t given “adequate incentive to ‘come out of the shadows’ to adjust their status, we will continue to have a large pool of unauthorized workers whom employers will continue to exploit in order to drive down wages and other standards, to the detriment of all workers”. Since the status quo encourages this state of affairs, labor must take action and work to reshape the immigration regime in the U.S.

In terms of shaping future policy, labor should compel the government to place decision-making power regarding accepted annual levels of legal work-based immigration into the United States in the hands of an independent commission rather than those of the arbitrary and political U.S. congress, where it is now. Additionally, labor must not allow the government to implement a new indentured or guest worker program. Such policies, heavily favored by business, only serve to deny migrant workers their economic rights and resultantly lower the cost of unskilled labor, further eroding wages in the U.S. Furthermore, such programs reflect a fundamentally immoral vision of the American dream, one in which dehumanized migrants, deprived of the important rights guaranteed by American citizenship, are free to openly, but temporarily, engage in largely unprotected wage slavery in the U.S. By adopting such initiatives, the state would essentially be sanctioning and codifying the most detrimental aspects of the current immigration regime, at least all the aspects that run counter to labor’s interests.

Instead of fighting over the scraps of America’s largely post-industrial economy, immigrant and native workers should unite and focus their antagonism on the business class which seeks continually to craft policy designed to maximally exploit both groups. Specifically, immigrant workers may opt to unionize and thus revitalize the American labor movement writ-large once their economic rights are secured. That can only happen once migrants are able to live openly and work on the same playing-field as employees already in the U.S. Helping these potential Americans realize this eventual goal should be the aim of any activities on the part of labor with respect to attempting to shape immigration reform.

Source(s): 1) Philip M. Dine, “State of the Unions: How Labor Can Strengthen the Middle Class, Improve Our Economy, and Regain Political Influence” (New York, NY: McGraw Hill, 2008).
2) Amanda Becker, “U.S. union membership steady at 11.3 percent in 2013: Labor Department” Reuters (2014): accessed June 24, 2014 http://www.reuters.com/article/2014/01/24/us-usa-labor-membership-idUSBREA0N1MQ20140124
3) AFL-CIO and Change to Win, “The Labor Movement’s Principles for Comprehensive Immigration Reform” (2006): accessed June 24, 2014 http://www.aflcio.org/content/download/60511/854621/UnityFrameworkAug2009.pdf

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Budget Battles

Regarding the federal budget, most contemporary analysts, pundits, policy makers and politicians (with the exception of a generally marginalized few on the left) tend to stress the need to address projected balance of payment problems associated with long-term assumptions about the federal debt and deficit. Specifically, in a 2011 report, the Congressional Budget Office contended, in an extended baseline scenario, that federal debt will remain at or above 70% of GDP from 2012 through 2085 and that, when accounting for a number of expected policy changes in the future, this percentage will climb to 200 by 2027. Furthermore, the report asserts that this prediction is undesirable due to a consensus among some economists that high levels of debt negatively impact the economy, namely because of diminished private investment and higher interest rates. In response to this, and similar predictions, many within and outside the government, from members of the Tea Party to officials in the Obama White House, have argued that government austerity, in the form of across the board reductions in entitlement spending and/or increases in revenue through tax reform, will be necessary if the government is to maintain solvency in the long run.

Although tax policy (specifically a dominant regressive taxation regime that has consistently implemented policy designed to maintain low levels of taxation on the most wealthy Americans with the expectation that their savings will yield economic growth that offsets losses to revenue, a policy regime which has failed utterly and completely), the largest defense budget in the world (with roughly $2,000 per person spent on defense in 2012) and two expensive wars in Iraq and Afghanistan are each major contributors to this problem, cuts to entitlement programs (namely Medicare and Social Security) are continually viewed by many as the most effective way to deliver deficit reduction. For example, of the $5 trillion reduction in projected ten-year deficits achieved since 2010, 77% of the cuts were achieved through slashing public spending, with only 23% due to revenue increases. Clearly, these kinds of deficit reduction initiates have a disproportionately adverse impact the working-class, poor and elderly people who rely on the financial security afforded by public programs like Social Security and Medicare. At a time of anemic growth and continued economic hardship for most Americans, with the top 1% of income earners receiving 95% of the income gains since the the end of the Great Recession, these kinds of austerity policies will undoubtably drive more struggling people into poverty and exacerbate the plight of those already there.

That said, it is important to specifically address the long-term solvency of Medicare and Social Security, as those two programs are most often cited by policy makers as in need of cutting. In the case of Social Security, which (far from being insolvent) added $95 billion to its surplus in 2011, a simple increase in the program’s payroll tax cap (I.e. the upper threshold on which a wage earner’s Social Security tax may be imposed), from its current $113,000 to $250,000, would guarantee the program’s solvency for the foreseeable future. Put another way, whereas 90% of wages were covered by the Social Security tax during the Reagan presidency, only 83% of incomes currently contribute Those with high incomes are only compelled to give a maximum of $113,000 out of their income; often times, this figure doesn’t meet the actual required percentage of their income that those earners would owe to the Social Security trust fund without the payroll tax cap that is currently in place. This loss of revenue is the root cause of any long-term solvency issue related to Social Security. By correcting this shortfall and returning to a 1980s level payroll tax cap, the tax funding Social Security would apply to around $200,000 of wages. Because this would amount to a tax hike on high income earners however, the practical viability of this solution being implemented, let alone even considered, seems tenuous at best. This is the case because the regressive taxation regime, though a failure in practice, continues to inform policy making among many American elites. Still, since 61% of Social Security recipients relied on the program as their primary source of income in 2011, this solution seems like the most effective way to both keep seniors and their families, who would presumably shoulder the often substantial financial burden of their elders’ care in the absence of a strong Social Security program, out of poverty and ensure the solvency of program. Current initiatives by Senators Elizabeth Warren, Bernie Sanders and others, aimed at raising the Social Security payroll tax cap should be supported by all working class, poor and elderly citizens.

With respect to Medicare, the primary cause of concern regarding the program’s long-term solvency is increasingly high health care costs, rather than deficiencies in the program itself. That being the case, the experiences of other advanced industrialized countries (like the U.K., a country whose economy is arguably the most similar to the U.S.) indicate that the most effective way to control heath care costs would be to introduce a single-payer health insurance system. Specifically, the single-payer system proposed in the House bill HR 676 (the Expanded and Improved Medicare for All Act, introduced by Rep. John Conyers Jr., D-Mich.), would save an estimated $592 billion annually by reducing the administrative waste associated with the private insurance industry ($476 billion) and cutting pharmaceutical prices to European levels ($116 billion). At the very least, the U.S. government could introduce an affordable public insurance plan to compete with oligopolistic private insurers; this has been done in Canada and has yielded beneficial results there. Still, the American private health insurance industry, though it yields the same or worse outcomes (at a much greater cost) than all other healthcare systems in the advanced industrial world, is among the most influential of special interests in American politics and dictates most healthcare policy in Washington D.C. (I.e. the Affordable Care Act, a.k.a. Obamacare). As a result, solutions like the one provided in HR 676 are generally not discussed in a serious manner among American elites

Worth noting in this broad discussion of the debt and deficit and their respective impacts on the economy are a number of developments which have recently taken place in academia regarding the study of this issue. Specifically, the claim that high levels of public debt inherently adversely impact a country’s economic growth, a central theme of the aforementioned CBO report stressing the need for government austerity, has been shown to be faulty, most notably by University of Michigan economics professor Miles Kimball and University of Michigan undergraduate student Yichuan Wang in their takedown of the pro-austerity work of Carmen Reinhart and Kenneth Rogoff “Growth in a Time of Debt” (a work frequently cited by debt hawks in America and Europe). On the contrary, the work of University of Massachusetts professor Arindrajit Dube stresses that, if anything, it’s slow growth that causes higher debt. That being the case, it’s clear that austerity measures, which inhibit economic growth, actually fuel the accumulation of debt.

The horrific results of the austerity measures implemented throughout Europe in the wake of the Great Recession should come as no surprise considering the fact that the same neoliberal policies (the privatization of government services and industries, drastic reductions in government spending [other than defense spending] and the elimination of all trade protectionism) that are currently being forced on that region and strongly advocated for by most members of the American elite, directly mirror the development plans that the International Monetary Fund inflicted on the post-colonial Third World throughout the 20th century. Never mind the fact that the United States and most of the other major advanced industrial countries ignored, and in many cases continue to disregard, most of these principles (advancing along a generally state capitalist model of development during their own periods of industrialization [I.e. subsides for industries, high levels of government technological research and development, strong social welfare programs and tariffs designed to protected American goods and services at the expense of the Third World]). The same austerity based policies that retarded the economic development of the global south and impoverished entire continents in the post colonial period are now being brought home to dismantle the Keynesian welfare state. These initiatives, which seriously endanger the viability of state capitalism, should be seen for what they are: naked class warfare from the top down.

Source(s): 1) “Fiscal Facts: The CBO Long-Term Budget Outlook” The Pew Charitable (2011): accessed June 18, 2014, http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Fact_Sheets/Economic_Policy/CBO-Long-Term-Budget-Outlook.pdf
2) Thomas L. Hungerford, “Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945,” Congressional Research Service (2012): accessed June 18, 2014, http://graphics8.nytimes.com/news/business/0915taxesandeconomy.pdf
3) Sarah Wolfe, “Global Military Spending Set To Rise In 2014” NPR (2014): accessed June 18, 2014, http://www.npr.org/blogs/parallels/2014/02/12/275885249/global-military-spending-set-to-rise-in-2014
4) “Deficits and Projections” Center on Budget and Policy Priorities: accessed June 18, 2014, http://centeronbudget.org/research/index.cfm?fa=topic&id=121
5) Mathew Yglesias, “95 Percent of Recovery Income Gains Have Gone to the Top 1 Percent” Slate (2013): accessed June 18, 2014, http://www.slate.com/blogs/moneybox/2013/09/10/one_percent_recovery_95_percent_of_gains_have_gone_to_the_top_one_percent.html
6) David Cay Johnston, “Social Security is not going broke” Reuters (2012): accessed June 18, 2014, http://blogs.reuters.com/david-cay-johnston/2012/05/04/social-security-is-not-going-broke/
7) “Fast Facts and Figures: About Social Security, 2013” Social Security Administration (2013): accessed June 18, 2014, http://www.ssa.gov/policy/docs/chartbooks/fast_facts/2013/fast_facts13.pdf
8) “Single Payer System Cost?” Physicians For a National Healthcare System (2013): accessed June 18, 2014. http://www.pnhp.org/facts/single-payer-system-cost
9) Sarah Kliff, “Five ways the American health care system is literally the worst” Vox (2014): accessed June 18, 2014, http://www.vox.com/2014/6/16/5812898/five-ways-the-american-health-care-system-is-literally-the-worst
10) Miles Kimball and Yichuan Wang, “After crunching Reinhart and Rogoff’s data, we’ve concluded that high debt does not slow growth” Quartz (2013): accessed June 18, 2014, http://qz.com/88781/after-crunching-reinhart-and-rogoffs-data-weve-concluded-that-high-debt-does-not-cause-low-growth/?oref=dbamerica
11) Arindrajit Dube, “A Note on Debt, Growth and Causality” (2013): accessed June 18, 2014, https://dl.dropboxusercontent.com/u/15038936/RR%20Timepath/Dube_Growth_Debt_Causation.pdf

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Regulation and Finance

The Public-Interest Theory of government regulation paints public regulations on private enterprise as responses to market failures. These failures come in multiple forms: industries defined by natural monopolies (I.e. utilities), industries which carry external costs not recognized by the market (I.e. effects of pollution), industries defined by an asymmetrical distribution of information between producers (and/or their owners) and consumers (I.e. pharmaceuticals), etc. Given the fact that these imperfections are inherent to the market, the existence of public regulations on private enterprise is a necessary component of a functioning capitalist society. That said, it is important to ensure that such regulations are appropriately tailored and do, in fact, protect the public welfare from market failures.

In discussing regulation, it is constructive to examine an instance of regulatory failure. The regulation of American finance in recent decades provides just such an example. Rather than protecting the public welfare, ill-tailored or insufficient government regulation of finance in the U.S. helped to bring about the catastrophic Great Recession of 2008. However, though wrong-headed regulation was a major contributing factor to the emergence of the crisis, there were at least two other causes as well: 1) structural changes to the American economy, and 2) the unintended consequences of certain public policies. In the former case, American households became particularly vulnerable to a financial collapse due to their assumption of so much debt by 2008, this increasing assumption of debt likely itself the result of diminishing wages due to a growing disjunction between labor productivity growth and pay. With respect to the unforeseen consequences of public policy, the crisis was, in part at least, the unintended consequence of bipartisan initiatives aimed at using public policy to create greater levels of homeownership that in turn helped created a massive bubble in the housing market.

Those points made, the regulatory failures of the U.S. government with respect to American finance in recent history deserve special attention. Specifically the expectation among most firms that they could engage in highly profitable, but dangerously risky, transactions with the assurance that the government would socialize any downside risk to their investments (I.e. moral hazard) that prevailed among financiers as a result of numerous past actions of the government (but mostly Alan Greenspan’s FED during the Savings and Loans Crisis of 1989, and other events) lead them to engage in excessively risky and predatory behavior. Additionally, the government’s continued refusal to regulate credit-default swaps/derivatives (financial assets often infected with unseen subprime mortgages) and GSE portfolios (government sponsored and backed lending assistance and assets), as well as the growing interdependence between commercial and investment assets (caused in large part by the repeal of Glass-Steagall in 1999) and incompetent and/or perversely incentivized financial rating-agency practices, helped to cause and exacerbate the Great Recession. These factors cascaded together to create a perfect storm of financial regulatory failure in the U.S. that subsequently infected the highly globalized economy when the housing bubble finally burst in the late 2000s.

The Great Recession is a prime example of the necessity for well-tailored and biting regulation. Unfortunately, the general sense of complacency among American elites created by the largely impotent regulatory reform enacted since the crisis, as well as the fulfillment (in most cases) of financiers’ expectation that the government would ultimately bail them out in the event that their bad behavior brought about a crisis (even as most of the average citizens negatively impacted by the crash are still un or underemployed, kicked out of their foreclosed home, and still heavily indebted), has only served to lay the groundwork for a worse financial catastrophe in the future.

Source: Marc Allen Eisner, The American Political Economy: Institutional Evolution of Market and State [Second Edition], (New York, New York: Routledge, 2014).

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the Political Dimension of Income Inequality

Despite record levels of productivity among American workers (as well as increases in their work hours, the introduction of women into the labor force and a steadily rising cost of living), income gains among the ultra-rich have vastly outpaced those among the merely affluent, working-class and poor in the past thirty odd years. This reality stands in marked contrast to the social mobility and economic trends that characterized the immediate post-WWII decades, in which American income growth was relatively rapid and remarkably egalitarian. This unequal reality is the result of a multitude of factors: globalization, financialization, technological innovation, the demise of private sector unions, the abandonment of labor by a significant segment of the Democratic Party, etc.

However, in Unequal Democracy, Larry Bartels argues that an important factor concerning income inequality lay in government policy choices, specifically the differences in politics and priorities between Democratic and Republican administrations. Controlling for alternative variables, Bartels demonstrates, among other things, that under Republican presidential administrations, real income growth for the lower and middle class has both consistently lagged well behind the income growth rate for the rich and been significantly lower than the income gains for those groups under Democratic presidential administrations. Furthermore, Bartels strikingly shows, again controlling for alternative variables, that while continuous Democratic political control would have produced an essentially constant level of income inequality over the past three decades, complete Republican political dominance during this same period would have brought about even worse income inequality than the U.S. has now. Based on this research, Bartels ultimately argues that income inequality is a distinctly, if not totally, partisan issue. Given the fact that post-Keynsian neoliberal ideology, first broadly popularized in the United States by Republican president Ronald Reagan (though later embraced by leading “New” Democrats like Bill Clinton) has generally dominated government policy for the past 30 odd years, it should come as a surprise to no one that the U.S.’s economic growth has been so grossly uneven as of late.

Still, it’s troubling that Republicans keep getting elected despite the fact that they consistently deliver worse economic outcomes for most Americans than their Democratic counterparts. In seeking to understand Republicans’ continued political success, Bartels explores two factors: class and values. In the case of the former factor, Bartels challenges the conventional wisdom that class, as a political classification, has lost its utility in America. On the contrary, he argues that economic issues remain centrally important to constituents, especially those voters at the losing end of the “free market.” In the case of values, Bartels explains that while American elites have generally become more conservative in recent decades, the effect of this change hasn’t significantly trickled down to the values of the working-class and poor. The most politically pertinent “value” afflicting the minds of voters seems to be racism, with voters in the Solid South consistently electorally favoring candidates who either explicitly or subtly denigrate causes that are perceived to be unfairly helping minorities, specifically blacks (i.e. anti-welfare, anti-handout etc.). These candidates are generally Republican.

Income inequality is a vitally important issue. The central theme of “the American Story” is one of opportunity for all and social mobility among those who work hard. Though the truth of this theme has always been rightly and hotly debated (even in the comparatively egalitarian period from the 1940s to the early 1970s), it is vital to American elites that the U.S.’s general population continue to view this notion as true. If a republican state capitalist society (like the U.S.)’s citizenry begin to view their respective economic classes as rigid permanent stations from which they largely have no hope of advancing, then the justification for the perpetuation of that society’s economic system becomes endangered. In the more immediate sense, the depressed wages, eroding social mobility, and lowered living standards that characterize current economic trends yield low consumer demand, which in turn retards growth and worsens general economic prospects even further.

Source: Larry Bartels, Unequal Democracy: the Political Economy of the New Gilded Age (Princetown, New Jersey: Princetown University Press, 2008).

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the Mondargon Story

What started as a 600 member educational parents association in 1941 in the city of Mondragon in the semi-autonomous Basque region of Spain, has by today evolved into an expansive network of worker cooperatives worth 33.3 million Euros and employing 85,000 people internationally. The Mondragon Cooperative Complex is famous for its success, growth, and longevity. By 2009, its educational centers had enrolled 8,567 students, it’s Caja Laboral (a bank) had administered 18.6 billion euros in assets, and its number of research and development technology centers had grown to 12. Furthermore, its growth in the past 20 years has been exponential: it’s Caja’s holdings grew by almost ten times, industrial and international sales grew by almost six times, retail sales grew more than twenty-fold, and employment more than tripled.

Modragon’s success is attributable to aspects of its structural design and several of its practices. For one thing, Mondragon was able to achieve a large scale by growing a network of primary (industrial and retail) and secondary (finance/business development, education/training, research/development) worker cooperatives. Importantly, secondary firms, like the Caja Laboral, facilitated the growth and functioning of its more labor intensive primary firms. When a firm in the Mondragon group reaches a certain size, a spinoff worker cooperative is created, thereby keeping firms self manageable without hindering growth. Finally, similar worker cooperatives are divided into groups of firms that are able to formulate norms of governance, pool risk and resources, and enhance worker owner mobility between firms.

Mondragon also worked to create a highly independent, and thus resilient, local economy. By pursuing a policy of import-replacement, wherein firms produce goods and services that would otherwise be imported into the region, local communities under the Mondragon network and within their worker cooperative groups have been able to form complex, interdependent localized economic units that are relatively shielded from global economic turmoil and competition. In addition, while most economies at the national and local level focused on specialization throughout most of the 20th century, with resulting fragile monoculture economies and subsequent post-industrial outsourcing and downsizing in the face of global competition (Detroit and the auto-industry), Mondragon has consistently focused on diversification and differentiation. As a result, the Mondragon network has experienced sustained growth while retaining flexibility and jobs.

Source: Nicholas Iuviene and Amy Stitely and Lorlene Hoyt, “Sustainable Economic Democracy: Worker Cooperatives for the 21st Century,” Regenerating Local Economies: Environment, Equity and Entrepreneurship in America’s Post Industrial Cities, MIT Community Innovators Lab (2010): accessed May 2, 2014, http://web.mit.edu/colab/pdf/papers/Sustainable_Economic_Democracy.pdf.

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the Worker Cooperative

Given that the prevalence of the traditional “shareholder” business model (characterized by a perverse incentive structure resulting from hierarchical management and external ownership), coupled with the trend toward neoliberal globalization, is a primary cause of several debilitating ills (i.e. un and underemployment, downsizing, outsourcing, etc.) currently afflicting the “developed” world (I.e. the United States, Canada, and Western Europe), economists are compelled to examine the viability of alternative firm types in a contemporary capitalist context. One such alternative is the worker cooperative business model. The term worker cooperative refers to generally for-profit businesses that are jointly-owned and democratically controlled by the firms’ employees. Such businesses expand economic democracy without rejecting the market and de-emphasis the aspects of private economic activity that prioritize short-term profit-maximization. Many argue that the worker cooperative business model both promotes jobs and businesses that are more economically sustainable than those delivered by traditional firm types and encourages more egalitarian wages among a firm’s worker owners.

Data show that worker cooperatives are either more or as productive as traditional firm types. Any increase in productivity among worker cooperatives is likely attributable to the increased rights to the returns of such firms among their employee owners. By expanding employees’ stakes in firm outcomes, worker cooperatives enhance the incentives among these individuals to improve their performances. The result is greater employee morale and cohesion and a better intra-firm flow of information. Importantly, some note that the size of an employee’s right to the returns of their firm is significant. Specifically, the larger an employee’s material stake in firm outcomes, the greater the increase in firm productivity. For that reason, when firm profit sharing and employee ownership is limited, productivity is only excepted to be marginally enhanced.

Worker cooperatives generally retain greater survivability rates and longevity than traditional firm types. Specifically, firms that are 100% owned by their employees, worker cooperatives, are only 33.5% as likely to fail or face a merger/acquisition as other firms. By directly linking ownership to employment, worker cooperatives greatly reduce the incentive among worker owners to make business decisions that are profitable in the short term at the expensive of long term firm health. Additionally, the increased productivity and intra-firm investments in employee training that define worker cooperatives facilitate greater firm sustainability.

Wages tend to increase as employees’ share of ownership in their businesses grows, with worker cooperatives generally showing the strongest wages. When additional costs on firm profitability associated with traditional firm types, like CEO compensation, are eliminated in worker cooperatives, a more egalitarian distribution of wages usually results. Additionally, research indicates that employee benefits are stronger in worker cooperatives than traditional firm types, with some worker owned grocery stores even providing healthcare coverage to part time employees. The realignment of business priorities in worker cooperatives naturally results in an increased focus on firm labor over capital, with obviously beneficial results for employees.

Because worker cooperatives involve employees in the decision making process, such firms generally tighten their belts and weather short term hardships more nimbly and less painfully than traditional firm models. Specifically, worker cooperatives are more likely to adjust wages when faced with adverse economic situations than lay off employees as this would involve firing themselves. These temporary pay cuts are collectively agreed to with the understanding that recouping compensation will be achieved through future profits. Importantly, research also indicated that worker cooperatives showed a greater tendency to maintain, and strikingly sometimes increase, employment levels during economic recessions. The Great Recession, specifically, was weathered by worker cooperatives much more successfully than traditional firm types in France, Italy, and Spain.

Enhanced employee agency, brought about through self management, strengthens job satisfaction and limits quitting. While self management comes with increased responsibilities among worker owners, the benefits of this change seem to outweigh the negatives, with such firms encouraging greater employee owner independence and value. With the prioritization and heightened value of labor in worker cooperatives, such firms generally devote more resources to the education of their employees than traditional firms (they must as these employees are or will become owners as well). Greater skill accumulation and worker value results from this renewed focus, ultimately hampering the general economic trend towards labor commodification.

Yet for all that, worker cooperatives face a number of potential challenges. For one thing, some scholars warn that a free rider problem can potentially arise when an individual’s reward is pegged to their group’s performance. They specifically fear that employee owners won’t fully apply themselves to their work if their assumption is that they will be paid, regardless of their effort, according to the productivity of their firm. Additionally, these scholars stress that as the size of worker cooperatives increases, the incentive to work hard individually could decrease. These negative assumptions, purely abstract and theoretical in nature, don’t take into account the realities of intra-firm horizontal, or peer, monitoring in the workplace and the aforementioned measurable productivity gains, resulting from heightened morale and cohesion, that have been observed among really existing firms that utilize cooperative ownership and management.

Some scholars suggest that the heightened financial risk associated with the ownership of a business is to great for individual workers to shoulder. Whereas traditional business owners, generally comparatively wealthy, can often afford to experience business failure, some contend that such occurrences could be crippling to less well off worker owners. This worry overlooks, or undervalues, the fact that risk is highly divided among worker owners, thereby assuaging some of the risk involved in potential failure. Furthermore, high levels of unemployment in the modern economy indicate that job loss for an employee in a traditional firm can be just as crippling.

Surely the most problematic challenge facing worker cooperatives lay in the potentially challenging need to acquire, at least initial, financing. Start-up costs in particular are difficult to muster from potential worker owners themselves and wealthy outside investors have little reason to inject funding into a potential business that they can’t profit from. Worker cooperatives will likely need to rely on external loans in order to form a business. Inter-cooperative lending (cooperative networks with internal banking) and publicly financed loans are some ways to address this challenge.

Source: Georgeanne M. Artz and Younjun Kim, “Business Ownership by Workers: Are Worker Cooperatives a Viable Option?” Iowa State University, Department of Economics (2011): accessed May 2, 2014, http://www.econ.iastate.edu/research/working-papers/p14575.

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