Stephen Laniel’s Unspecified Bunker

(Attention conservation notice: 1300 words starting with historical shocks in the price of coffee, and veering over into some thoughts on protecting ourselves from uncontrollable risk.)

There’s an interesting little article in the New Statesman, critically reviewing a book entitled Starbucked. Starbucked seems mostly unconcerned about poor coffee farmers, says the review, even though they’ve historically suffered through price collapses that left them desolate. The U.S. government instituted coffee price supports during the Cold War to keep the poor folks on our side, but the end of the Soviet Union said goodbye to all that.

One might reasonably ask how price booms and busts of this sort can happen in a free market, but it occurs to me that maybe it’s built into the process. Suppose coffee prices rise to some tantalizingly high level — because bad weather killed a lot of coffee trees, say. I, as a coffee farmer, expand my plantation: I plant more trees, maybe buy more land, hire more help, and so forth. Workers take time to train and trees take time to grow. By the time they’ve borne fruit, J. Random Webpage suggests that six years will have passed.

Unfortunately, over those intervening six years, lots of other coffee farms have planted more trees. There is now a glut. Prices plummet. Farms go out of business. Other farmers decide to plant their crop of choice (coca, maybe) on the new land that they’ve acquired. So now a lot of coffee trees have disappeared. Hence supply goes down. Demand is as high as it’s even been, so we’re back out of equilibrium. Prices rise, and we’re back to where we started.

This is all nicely self-correcting, but in the meantime a lot of people have lost their shirts and a lot of families have gone without food. A basic respect for one’s fellow-man would make one howl in outrage. No one has misbehaved here: the market is not punishing those who’ve taken unnecessary risks. Rather, the market has punished people for doing what the market tells them they ought to do — namely plant when prices are high and pick another line of work when prices are low. Microeconomic actors have been subjected to macroeconomic forces over which they have no control. I think Michael Pollan says somewhere in The Omnivore’s Dilemma that all agricultural products are inherently ripe for price supports, and that pure free-market allocation for agricultural products just doesn’t work; this may be why.

In the longer term, you’d hope for people to realize the pattern they’re in: don’t invest too much capital ahead of time, knowing as they do that it’ll take six years to reap the reward. Larger institutions surely get the message here: banks are probably all too aware of the risks in coffee planting; they may well deny startup capital to small farmers. Conglomerates that can pool their risk — by planting coffee when it’s dear and other crops when it’s cheap — will probably pull ahead here.

The booms and busts of coffee prices, though (right, courtesy of the International Coffee Association), suggest that a great quantity of the world’s coffee may well be produced by smallholders. If it were an oligopoly, I’d expect less variability.

With that much risk involved in planting coffee, I suspect that a lot of people who would be great coffee farmers forego it and do something else altogether. When you have to keep your family in food, you’ll avoid high-risk, high-reward options in favor of low-risk, moderate-reward ones. If the poor were more risk-tolerant, they might be able to bootstrap themselves out of poverty. If they were protected from certain kinds of unavoidable risk — crop failure, macroeconomic collapse — people might stay in the jobs for which they’re best suited, rather than having to take second-best jobs that are safe bets.

This is essentially the guiding insight behind Samuel Bowles’s and Herbert Gintis’s essay “Efficient Redistribution: New Rules for Markets, States and Communities,” in Recasting Egalitarianism. Poor workers are risk-averse for the reasons mentioned, whereas wealthier people are assumed to be more risk-tolerant. With some economic protection beneath them against uncontrollable risks, poor workers may take the first step up out of poverty.

Bowles and Gintis’s novel contribution is to suggest that this risk-protection happen via asset redistribution rather than income redistribution — giving them houses and machinery rather than a guaranteed income, for instance. The great virtue of private property is that it connects costs and benefits with actions: if I own a house, it’s now in my financial interest to help keep my community safe; that same feeling of responsibility does not attach to renters. Likewise: workers in employee-owned firms may have more of an incentive to work hard and catch their coworkers slacking than do workers in traditional hierarchies. (Neither Bowles and Gintis, nor any of their 15 respondents, checked whether firms granting stock options performed better than those that didn’t. Not sure why, other than that poor people tend not to get stock options.) Asset redistribution, in a word, is more economically efficient than income redistribution. Hence it’s more likely to be politically palatable than is income redistribution via taxation. (A whole host of questions will naturally arise for you here, among them: isn’t there a cost associated with taking assets from one group and giving them to another? I’m skipping over these in the interest of brevity, but you can be sure that Recasting Egalitarianism addresses them.)

After Bowles and Gintis’s leadoff essay, we find any number of responses from any number of angles — though, sadly, nearly all of those angles are from the left. One would have enjoyed seeing someone like Greg Mankiw throwing in a more conservative position. As it stands, the essay collection sometimes sounds like 5-year-olds arguing over whether they’d rather have a pony ridden by a magical fairy princess, or a unicorn with a chocolate fountain spilling forth from her horn. Only with more jargon. And with endless academic tones. In all honesty I couldn’t stand most of the book.

I did love the two Bowles and Gintis essays, however: the opening one, and the wrapping-up response to their critics. The latter is in many ways just a restatement (or possibly prestatement — I’ve not checked the dates) of their essay “Is Equality Passé? Homo Reciprocans and the Future of Egalitarian Politics.” Humans, says Bowles and Gintis, may well be wired to give certain kinds of help to their fellow-men and not give other kinds. We want to insulate people from uncontrollable risks, but we don’t want to insure their bad behavior. We want to punish people if they abuse our generosity. And we want to forgive them fairly quickly if they correct their errors. This is the recipe for a just society. More to the point, it may be the only recipe that’s consistent with some innate ethical norms that we all carry.

The message from Recasting Egalitarianism is that asset equality makes good economic sense. The message from The Conscience of a Liberal is that economic equality reduces political extremism. And the message from The Great Risk Shift is that without a radically amplified “insurance society,” we’re going to return to the bad old days before the New Deal. Equality, for lack of a better word, is good. Equality is right; equality works.

Hopefully liberals are back in the business of taming the market’s outrages.

([mag: New Statesman] article on coffee via Crooked Timber. Pointer to Recasting Egalitarianism via Cosma Shalizi’s del.icio.us feed.)

I’ve been ordering cheap used books off Amazon recently — mostly books I’ve read before and loved, and which really ought to be on my bookshelf. That’s how I came to buy a copy of Joan Didion’s Political Fictions and After Henry. Recall that Didion started her writing career as an acerbic depressive watching the spirit of the 1960’s decay into Altamont. Over the next 20 years, she evolved into writing about the political “process,” using that word as icily as she could: the “process” is the fake little dance that the power brokers go through, mostly for each other, ostensibly with us in mind. Clearly, though, they’ve failed at bringing the rest of us into line: most of us don’t vote, and many of us think that we’re asked every four years to vote for the lesser of two evils. This is because they’ve choreographed the dance for themselves, not for us. Political coverage is orchestrated entirely by the politicians, using the media as their willing tool. As Didion puts it in “Eyes on the Prize”:

Such reduction of political language to coded messages, to “middle class” and “reward for work,” to safe children and Sister Souljah, has much to do with why large numbers of Americans report finding politics deeply silly.

(hyperlink mine, obviously)

It’s really valuable to read “Eyes on the Prize” soon after Krugman’s The Conscience of a Liberal. Krugman has been fighting hard since at least the 2000 campaign to convince us that there really is a difference between the Republicans and the Democrats: contra Nader, they are not an indistinguishable blob called “The Republicrats.” Krugman argues this very persuasively, and I think he’s right: the essence of the Republican party, at least since the 1930’s, has been racism, jingoism, and defense of big business at the expense of labor. The fight against unions at times has found protective cover under Red-baiting.

All of that is true, but it’s easy to forget while reading Krugman: what we’ve seen before our very eyes since Bush took office is a Democratic Party that has resolutely refused to stand up for anything. Reading Didion puts our milquetoast party in its proper historical context: since at least 1980, the Party has been trying as hard as it can to cater to Reagan Democrats. You grew disenchanted with the Democrats in the 70’s and 80’s when it looked like law and order were breaking down? Well, come back to us, because we’ll use all the right codewords to suggest that we feel your pain.

And yet this plainly loses the Party elections. Americans want a party that stands for something; the Democrats have shown them no spine. Clintonian “triangulation” and the Sister Souljah show were natural for a party that first fought off Jesse Jackson, then Jerry Brown. When you’re scared of standing for something, and you think the American people will be scared of forceful liberals, you’ll end up with a Dick Morris campaign.

The actual business of governing, says Didion, isn’t even what the major parties are after anymore. Rather, they’re in the business of running elections. Whatever they need to say to win, they’ll say; what they’ll do when they get into office is secondary, if not tertiary. (I believe Didion made the same point about film and music production: doing the deal is primary, the actual film or album much further down the list.) But clearly that hasn’t worked for them, as Mondale, Dukakis, and Kerry can attest. Somehow a series of loser strategists has both stripped them of novel ideas in an attempt to co-opt Republicans, and yet still lost them votes. Which is a brilliant trick.

This all does fit with Krugman, up to a point. He’s unwilling, though, in his columns or his books, to say much that attacks the Democrats. In The Conscience of a Liberal, he places much of the blame for the nation’s rightward shift on the decline of unions. They’ve lost power, he says, because of outright illegal firings and because the Republicans looked the other way. He doesn’t blame the Democrats for abandoning what used to be their core constituencies, namely the poor, minorities, and unionized labor. These should be their core constituencies, anyway, if it’s in fact true that a) the Republicans are the party of the Rich And Greedy, and b) that Democrats are light years away from the Republicans. Krugman points out all the times when Republicans use phrases like “states’ rights” that their audience knows are disguised racial slurs. He’s less willing to point out Clinton’s co-opting of Republican codewords. He’s perfectly silent on the Democrats’ running away from Jesse Jackson, for fear that Jackson would destroy the Democrats’ chances in the election. The Democrats destroyed their chances quite skillfully even without Jackson, thanks. Wouldn’t it be better to lose elections standing on our feet rather than on our knees?

Much of what Didion says about earlier elections carries over — spine-chillingly — to today. Everyone stands for “change,” for instance; everyone says he or she is looking to change a system that only works for the people inside of it. Democrats sought this “change” in earlier elections from a narrow subset of voters (Reagan Democrats) who do not represent the electorate as a whole, and surely don’t represent the Democrats’ erstwhile biggest supporters. To put it quickly: the Democrats have focus-grouped themselves to death. Focus groups may be fine, if they clue you in to how the population is feeling, but

1. Your focus group needs to be a random sample.
2. Wouldn’t it be better to decide what you stand for first, then bring those stands to the American public and let them decide whether you’re worth voting for?

Which brings me to Obama. I hope he’s not the bland paste that comes out of focus groups; I hope he really does have the power to bring out the best in Americans and motivate us to attain what Bill Clinton never could. To do this, he has to stand for something: “unity” is not enough if it’s unity around repackaged Republican talking points.

I’m fairly certain of the following: if Obama is elected and turns out to do nothing, or Clinton is elected and gives us more of the same, or for that matter if McCain is elected and brings us Bush v. 2, a lot of Americans who thought they saw hope in politics will realize that the whole ugly edifice just needs to disappear. A lot of us will tune out: we’ll realize that all the talk of “change” is just that: talk.

I hope I’m wrong. I donated $125 to Obama the other day. I hope he makes us proud.

What follows is as brief a synopsis as I can come up with for The Conscience of a Liberal. Still, it’s 1500 words long. That says a lot about Krugman, and about my wordiness.

At the close of the Hoover administration, it was clear that a Democrat would be elected to the presidency. It was by no means clear, though, that we’d get FDR and the New Deal. Out of catastrophe we got protection for the unemployed, for the elderly, and for the poor; and got job relief. The going was hard, but FDR did it. As he said in his speech at Madison Square Garden on the eve of the 1936 election, after the first four years of his administration:

We had to struggle with the old enemies of peace—business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.

They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob.

Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me—and I welcome their hatred.

(There’s a recording of FDR delivering the speech, embedded within that last link. Give it a listen. It’s a remarkable speech, and the wind builds in FDR’s sails as he goes along.)

Stop and ponder that excerpt for a moment, if you please. Just try to envision the hell that Obama or Clinton would bring down on themselves if they spoke like FDR. Labeling them “Communist” would be the least of their worries. The military-industrial complex, about which Eisenhower warned us, would never stand for the phrase “war profiteering.” The candidate would be crushed before his or her next speech.

For a few years the forces of reaction tried desperately to roll back the New Deal. Out of that we got McCarthyism, whose purpose wasn’t to root out Communists but rather to reverse the New Deal. As Richard Hofstadter put it:

What I believe is important, however, to anyone who hopes to understand the impulse behind American anti-intellectualism is that this grievance against intellectuals as ideologues goes far beyond any reproaches based on actual Communism or fellow-traveling  . . .  The truth is that the right-winger needs his Communists badly, and is pathetically reluctant to give them up. The real function of the Great Inquisition of the 1950’s was not anything so simply rational as to turn up spies or prevent espionage (for which the police agencies presumably are adequate) or even to expose actual Communists, but to discharge resentments and frustrations, to punish, to satisfy enmities whose roots lay elsewhere than in the Communist issue itself.  . . .  McCarthy’s bullying was welcomed because it satisfied a craving for revenge and a desire to discredit the type of leadership the New Deal had made prominent.

Had the Great Inquisition been directed only against Communists, it would have tried to be more precise and discriminating in its search for them: in fact, its leading practitioners seemed to care little for the difference between a Communist and a unicorn.

McCarthy lost. The Republicans made their peace with the New Deal after beating up on Truman for a while (Korea and all that). Out of this accommodation came Eisenhower. The New Deal was by now far too popular to overthrow, so Republicans and Democrats came together for 30 years or so. They really were “Republicrats” in that interval — parties without many essential differences on policy. There was even a marriage of convenience between Northern Democrats, who supported greater rights for blacks, and Southern Democrats who obviously didn’t. But the South derived a lot of benefit from the New Deal (read especially volume 1 of Robert Caro’s LBJ bio, on the electrification of rural Texas), so they clung to the party. It didn’t hurt that the South had always been Democrats, since Republicans had been the party of Lincoln.

The New Deal, and especially the tax policies that went along with it, led to greater income equality than the U.S. had seen in half a century. Political moderation went along with economic leveling.

But the legacy of slavery tore apart the Democratic party. LBJ’s signing of the Civil Rights and Voting Rights Acts was the death knell. The Dixiecrats had enough. They split off and became Republicans. The GOP exploited this. Republicans became more and more extreme, using all the codewords of race (”states’ rights” and so forth) to disguise what they were really after. Today the GOP is dominated by two wings: the businessmen, who wish for more immigration (cheaper labor) and lower taxes; and the rural, conservative Christian wing that is afraid of blacks and immigrants.

The GOP is corrupt and has become the party of cronyism. This cronyism is at its worst in the Iraq War: we elected people who explicitly wish to destroy government, so we shouldn’t expect that they’d put their hearts into governing. They especially wouldn’t be able to run a war. Wars call for shared sacrifice and for increased taxes, two things that Republicans are loath to defend. The GOP’s utter failure in the Iraq War will cut out one of its fundamental pillars, namely that it’s strong on defense. Its constant accusations that Democrats are the party of taxing and spending should have died long ago.

The weakness of unions plays a crucial role in all of this. Republicans gutted unions in the 70’s and 80’s, starting with Goldwater. It didn’t have to happen this way, and contrary to popular belief it has nothing to do with a postindustrial economy: European nations, and Canada, have by and large maintained their unions’ strengths; only the U.S. and Britain — dominated by Reagan and Thatcher — have lost significant union membership, because conservatives looked the other way while companies illegally fired union-organizing employees.

Hence Democrats find themselves poised at a crucial moment. With all the momentum and much of the power, they could reinstate the New Deal. They could succeed where Truman and Nixon failed, and institute national health insurance. In so doing, they could prove to Americans that government can work. We know that national health insurance can work, because it does work in every other advanced industrialized nation. With health care successful, we could reclaim a progressive nation and finally take the country back from the reactionaries. And we could re-empower unions, giving power back to the people and taking it away from the robber barons.

So it should be obvious: the Republicans will not have this. They know that single-payer health insurance will work. They know that allowing it to succeed — which it would, left to its own devices — would spell the end of movement conservatism. The fight over health insurance means substantially more than it may appear at first glance. The GOP will stop at nothing to destroy it. The 2008 presidential campaign may turn out to be the dirtiest, ugliest, most straightforwardly fraudulent campaign we’ve ever seen.

All of these are Krugman’s observations. In this book he is essentially the anti-Obama. Compromise with the GOP, says Krugman, is impossible. It was impossible during the New Deal, and it’s impossible now. We won then because the public overwhelmingly wanted what FDR offered. We will win now — if we fight like hell — because universal health insurance is what the public wants. We cannot compromise with those who seek the destruction of all we stand for. As Kissinger put it in A World Restored (and Krugman quoted in The Great Unraveling):

For powers long accustomed to tranquility and without experience with disaster, this is a hard lesson to come by. Lulled by a period of stability which had seemed permanent, they find it nearly impossible to take at face value the assertion of the revolutionary power that it means to smash the existing framework. The defenders of the status quo therefore tend to begin by treating the revolutionary power as if its protestations were merely tactical; as if it really accepted the existing legitimacy but overstated its case for bargaining purposes; as if it were motivated by specific grievances to be assuaged by limited concessions. Those who warn against the danger in time are considered alarmists; those who counsel adaptation to circumstance are considered balanced and sane, for they have all the good “reasons” on their side: the arguments accepted as valid in the existing framework. Appeasement, where it is not a device to gain time, is the result of an inability to come to grips with a policy of unlimited objectives.

But it is the essence of a revolutionary power that it possesses the courage of its convictions, that it is willing, indeed eager, to push its principles to their ultimate conclusion.

Krugman has long asserted that the Bush administration is, in Kissinger’s sense, a revolutionary power, and that the public’s mistake is to believe it amenable to Democratic reason.

The question is whether Democrats have the leadership to bring us what we deserve.

One of the big questions in The Conscience of a Liberal is: what changed between the 1950’s and now, such that income inequality has increased so drastically? One of the answers is that unions have become substantially weaker, but then there’s also the question of how CEO pay grew so remarkably.

There’s an interesting point in Krugman’s answer. Let’s first try the free-market answer, which Krugman rejects. The idea here would be that there’s a market for CEOs, and that CEOs will go to whoever values them the most. So in some sense the CEOs are “worth” several hundred million dollars.

A more plausible answer rests on the fact that CEOs control their boards of directors, who decide what their salaries are. And then there’s a social norm: CEOs used to keep their salaries in check, out of fear that the public — and their unions — would grow outraged.

That leaves, in part, a social-norm question: why is the public less outraged than it used to be?

What I find interesting about this is that it actually gives insight into market pricing more generally. How, for instance, did it happen that it became perfectly sensible to charge $4 for a cup of coffee? Sure, it’s espresso, and there’s some milk, and a bit of labor time, but it’s still a cup of coffee. And 30 years ago, it would have been considered ridiculous to charge that much. Once Starbucks set the standard, coffeeshops nationwide followed.

Shifting the question to social norms is possibly more vague than relying on supply and demand, but it’s likely to be more fulfilling and deeper in the long run. For one thing, depending on what you mean by “free market,” you’ll still need to answer the question of why prices change. The Econ 101 assumption about the free market is that there are infinitely many sellers and infinitely many buyers, so that no one seller or buyer has any appreciable impact on the price of the good. If that’s the case, then how do prices ever change? Why does inflation happen? (Credit Sam Bowles’s magisterial microeconomics textbook for that realization.) You’re obligated, then, to weaken the price-taking assumption. You need to explain how prices change. You can maybe look for external shocks, like a drought in South America that kills lots of coffee trees. But does that really explain why a cup of coffee is now consistently in the $4 range? The marginal cost of the inputs (coffee beans, milk, coffeeshop employees) has almost surely not risen that much. Something has changed, and “social norms” seems as good a label as any for that something.

This may lead to more particularity than to high theory, which may not be a bad thing. If you want to explain high CEO pay, you need to hunt down the norms and institutions governing that pay. Unions will be part of that story. Unions will not be a part of the coffee-price story; for that you’ll maybe need to look at the spillover effects of marquis brands, like Starbucks, onto nearby coffeeshops. Burying your nose in the details of the world seems like a valuable pursuit.

Note also that the Starbucks story, and many others, will turn out to be stories about trademark law, and more generally monopolistic competition. No company wants to be competing in a market for undifferentiated commodities; all companies want to segment their brand such that they pretty well own the market. Coke and Pepsi advertise mercilessly to make you think that there’s a big difference between their products. So do Post Raisin Bran and Kellogg’s Raisin Bran. The last thing these companies want is to be competing in a market for “Cola-flavored soda water” or “raisin-spiked bran flakes.” The fewer practical competitors they have, the more they can charge.

Part of the story that we should have been told in Econ 101, but weren’t, is that all the companies that are ostensibly fighting it out to sell commodity widgets are fighting tooth and nail, at the same time, to make you think that Company X’s widget is different from Company Y’s, and to encourage you to develop a brand preference for Company X’s.

Setting prices for products is a substantially more interesting process than Econ 101 ever allowed. I hope that focusing on norms and institutions helps give a richer story to price-formation, and helps draw in people from a lot of other disciplines (psychology, sociology) who wouldn’t have realized that their takes on the world could inform an economic picture.