This Changes Everything (part 3)

April 19, 2017

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A key question in the political debate over energy is whether governments should have a strong energy policy at all. The conservative answer is essentially no. Government should not “pick winners and losers,” but remain neutral toward different energy sources and let the market decide. It is the “invisible hand” of the market that is most rational and fair. If fossil fuels are what sell, then we should continue extracting them.

Naomi Klein, on the other hand, sees our heavy reliance on environmentally dangerous sources of energy as a massive market failure. Fossil fuels are both more profitable for producers and cheaper for consumers than they should be, because market participants are not paying the full environmental cost. The planet, not the market, will dole out the consequences, including heavy costs for poor people who never got the benefits of high consumption. In this case, the market outcomes are neither rational nor just. Klein doesn’t say it in exactly these words, but the root of the problem is capitalism’s propensity to privatize benefits while socializing costs.

That is the basic argument for strong public policies–local, national and international–to facilitate a transition to cleaner energy as soon as possible.

Democratic resistance

Since the fossil fuel industry has accumulated enormous economic and political power, the only solution Klein sees is a massive democratic resistance movement. She sees such a movement emerging as the conflict between private interests and the public interest becomes clearer.

The fossil fuel industry is on a collision course with the climate, since it is planning to extract and burn far more carbon than scientists say the atmosphere can safely absorb. The valuation of fossil fuel companies on the stock market is based on the future profits projected on the basis of those plans, so they have strong incentive to keep going.

What really encourages resistance is that extractors are “pushing relentlessly into countless new territories, regardless of the impact on the local ecology (in particular, local water systems), as well as the fact that many of the industrial activities in question have neither been adequately tested nor regulated, yet have already shown themselves to be extraordinarily accident-prone.”

Resistance is growing especially in the Pacific Northwest, led especially by “resurgent Indigenous Nations, farmers, and fishers whose livelihoods depend on clean water and soil, and a great many relative newcomers who have chosen to live in that part of the world because of its natural beauty.”  For many people, climate change is still a somewhat abstract notion, but a threat to the local water supply is not.

And what could be more democratic than a popular demand for clean water? “Having the ability to defend one’s community’s water source from danger seems to a great many people like the very essence of self-determination.”

Of course, the success of a broad environmental movement remains to be seen. Truly transformative social movements are historically rare. Klein cites the example of anti-discrimination movements that achieved only partial victories. The movement for African American rights succeeded in outlawing the most obvious forms of discrimination. But it has not achieved the “massive investment in jobs, schools, and decent homes” that would be needed to eliminate the large racial gap in wealth and income. On the other hand, the labor movement of the 1930s achieved more substantial economic gains. In that instance, the crisis of the Great Depression shifted popular opinion dramatically to the left, producing the New Deal wave of progressive legislation. The climate crisis may require a political change of that magnitude.

Global responsibility

What makes the challenge of climate change so daunting is that it requires developed countries not only to curb their own fossil fuel emissions but to help poorer countries curb theirs. Klein believes that this is a matter of both economic necessity and moral justice.

“Developed countries, which represent less than 20 percent of the world’s population, have emitted almost 70 percent of all the greenhouse gas pollution that is now destabilizing the climate.” The richer countries not only have a history of appropriating other peoples land, labor and resources (especially through slavery and colonialism), but they have also appropriated the sky, “gobbling up most of our shared atmosphere’s capacity to safely absorb carbon.”

That puts developing countries in a real bind. They are told that they must limit their fossil fuel emissions just when they are starting to industrialize. But the cheapest and easiest way for them to develop is to use the most readily available sources of energy, without bearing the costs of environmental protection or innovative technologies.

They cannot break this deadlock without help, and that help can only come from those countries and corporations that grew wealthy, in large part, as a result of those illegitimate appropriations….With many of the biggest pools of untapped carbon on lands controlled by some of the poorest people on the planet, and with emissions rising most rapidly in what were, until recently, some of the poorest parts of the world, there is simply no credible way forward that does not involve redressing the real roots of poverty.

The United Nations Framework Convention on Climate Change (1992) recognized this when it asserted a principle of “common but differentiated responsibilities.” The nations of the world are all in this together, but the countries that have gotten the richest on fossil fuels have a special responsibility to switch to cleaner energy, as well as to help finance that transition in poorer countries.

One reason why emissions are falling in the United States (although not enough) but rising in poorer countries is that we have offshored so much manufacturing, especially to countries with weak environmental policies. The system is very profitable, but it complicates efforts to combat global warming.

In Klein’s view, the solution is not just for richer countries to contract their economies, while poorer countries expand theirs on the same old fossil-fuel model. That would just redistribute emissions, not reduce them. The challenge is for all countries, rich and poor alike, to agree to develop differently.

What kind of populism?

In a previous post, I mentioned Klein’s point about bad timing: Climate change became an issue just “at the peak of free market, end-of-history triumphalism.” She is hopeful, however, that other social problems such as growing inequality have helped discredit that ideology. If so, conservative politicians may be losing some of their cultural legitimacy, and a progressive counter-revolution may be in the making.

In this context, what should we make of Donald Trump’s “populism”, which arrived on the scene after Klein’s book was written? It is a little different than mainstream conservatism, since it encourages some government interventions in markets, especially restrictions on global free trade to protect US. manufacturing. (What exactly those restrictions would be is not clear.) When it comes to energy, it is worse than conservatism, since it is not so much energy neutral as pro-fossil fuel. Our new EPA Administrator is Scott Pruitt, who as Attorney General of Oklahoma consistently represented the interests of fossil-fuel companies. Our Secretary of State is Rex Tillerson, the former CEO of Exxon-Mobil. Neither Trump nor Pruitt has accepted the scientific consensus on climate change.

Trump seems obsessed with jobs in coal mining and pipeline construction. He has not shown much interest in creating new kinds of jobs or training workers to perform them.  Klein, on the other hand, points to the economic potential of clean energy. One study she summarizes is from the Canadian Centre for Policy Alternatives:

[I]f $5 billion is spent on a pipeline, it produces mostly short-term construction jobs, big private sector profits, and heavy public costs for future environmental damage. But if $5 billion is spent on public transit, building retrofits, and renewable energy, economies can gain, at the very least, three times as many jobs in the short term, while simultaneously helping to reduce the chances of catastrophic warming in the long term.

Trump’s brand of populism is a reactionary one favoring traditional industries and jobs. But the very fact that many of his supporters are disillusioned with establishment conservatism may create some room for a more progressive populism favoring a more innovative and sustainable economy. Whether public opinion will shift in that direction in time is hard to say. If history is any guide, the old economy may have to show even more signs of failure before people will turn to something new.


This Changes Everything (part 2)

April 18, 2017

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Naomi Klein’s book is a plea for strong action to combat climate change. On the one hand, she argues that renewable energy technologies “have become radically more efficient and affordable, making a full transition to the power they provide both technologically and economically feasible within the next few decades.” On the other hand, she sees methods of fossil fuel extraction becoming more and more dangerous. Natural gas is a popular alternative to coal, but fracking threatens water supplies, and gas obtained by fracking emits methane at a rate 30% higher than conventional gas. Public policy should focus on curbing fossil fuels and developing cleaner alternatives, both as quickly as possible.

Much of the book is a critique of more limited solutions that require fewer changes to our way of life. They treat climate change as “a narrow technical problem with no end of profitable solutions within the market system….” Change your lightbulbs and buy a different kind of cleaning liquid, and we’ll be fine.

Wishful thinking

Klein is rather disappointed in the environmental movement, which she says has failed to live up to its initial promise. Back in the 1970s, twenty-three federal environmental laws were passed, including the Clean Air Act, the Clean Water Act, the Wilderness Act, the Endangered Species Act and the Toxic Substances Act. But this legislative progress largely ground to a halt when the changing political climate brought Ronald Reagan to the White House. With free-market capitalism once again the reigning ideology, many of the new environmental groups tried to work within the system rather than challenging it. Many relied on donations from the same fossil-fuel companies that were also pushing environmental deregulation, and some even made their own investments in the fossil-fuel industry. Their reluctance to challenge the economic power structure forced them “to place their hopes in solutions–whether miracle products, or carbon markets, or ‘bridge fuels’–that are either so weak or so high-risk that entrusting them with our collective safety constitutes what can only be described as magical thinking.”

In the negotiations leading up to the Kyoto Protocol (1997), the United States insisted that emissions reduction be accomplished through “cap-and-trade” rather than direct emissions limits. Under cap-and-trade:

[P]rojects that were employing practices that claimed to be keeping carbon out of the atmosphere—whether by planting trees that sequester carbon, or by producing low carbon energy, or by upgrading a dirty factory to lower its emissions—could qualify for carbon credits. These credits could be purchased by polluters and used to offset their own emissions.

Ironically, even this market-based solution was too radical to be ratified by Congress, but it was adopted in other countries, notably the European Union.

In theory, the emissions in the atmosphere could come out the same whether a polluting company reduced its own emissions or paid someone else to reduce theirs. The problem was that it was too easy to game the system. The alleged reductions that qualified for credits were sometimes illusory. Companies were accused of adopting dirty methods of production so that they could then earn credits for eliminating them. “Even conservative sources estimate that between 1/3 and 2/3 of carbon credits bought into the [European Union’s Emissions Trading System] ‘do not represent real carbon reductions.'”

In the following decade, the cap-and-trade bills introduced by President Obama came out of the US Climate Action Partnership, a coalition of environmental groups and large polluting companies. The bills would have given energy companies “free allowances” covering 90 percent of their existing emissions, so the most they would have to do to keep right on polluting was to buy credits to offset the other 10 percent. But again, even that plan was too radical to pass Congress.

Fixing the earth or fixing ourselves?

Klein is especially critical of technological fixes that promise to counteract the greenhouse effect of whatever emissions industry fails to control. One that has received a lot of attention is Solar Radiation Management, which would attempt to limit the amount of sunlight that reaches the earth. We might spray large amounts of sulfate into the stratosphere, with an effect similar to major volcanic eruptions that have been known to reduce global temperatures in the past. Among the objections Klein cites:

  • It could create a permanent haze over the earth, eliminating blue skies and interfering with astronomy
  • It could impede the production of solar energy
  • It would not address the underlying causes of climate change
  • It would not deal with other effects of climate change, such as increased carbon in the oceans, with detrimental effects on marine life and the aquatic food chain
  • Once started, it would have to be continued indefinitely; otherwise, “all the warming that you had artificially suppressed by putting up that virtual sunshade would hit the planet’s surface in one single tidal wave of heat, with no time for gradual adaptation.”

Apart from the scientific details, Klein questions the conception of humanity and nature that underlies proposals of this kind. We would be tinkering with the entire planet as if it were a machine that we could fine tune. The greatest danger is that the earth would “go wild in ways we cannot imagine,” since we don’t understand the whole biosphere well enough to know in advance what it would do. In the words of MIT microbiologist Sallie Chisholm:

“Proponents of research on geoengineering simply keep ignoring the fact that the biosphere is a player (not just a responder) in whatever we do, and its trajectory cannot be predicted. It is a living breathing collection of organisms (mostly microorganisms) that are evolving every second—a ‘self-organizing, complex, adaptive system’ (the strict term). These types of systems have emergent properties that simply cannot be predicted. We all know this! Yet proponents of geoengineering research leave that out of the discussion.”

Klein’s reference to complexity theory in this context suggests to me that environmentalism is part of a paradigm shift that has been taking shape for some time. The machine metaphor for understanding natural systems is under attack, and a more creative model of reality is emerging. (See especially the writings of complex system theorist Stuart Kauffman.) Our relationship to nature is coming to be seen more as a creative partnership and less as a dominance hierarchy.  As a sociologist of gender, I notice the same theme of partnership vs. dominance running through the study of gender relationships. That connection makes sense. In Western patriarchal culture, nature has been conceived as feminine and controllable, while mankind has been conceived as masculine and controlling. Klein also develops a parallel between women’s fertility and the fertility of the earth, both of which have been objects of male regulation. It is this entire worldview that is now being challenged.

Klein sums it up well when she says, “The earth is not our prisoner, our patient, our machine, or, indeed, our monster [i.e., our Frankenstein monster to get back under control]. It is our entire world. And the solution to global warming is not to fix the world, it is to fix ourselves.”

Continued


This Changes Everything

April 17, 2017

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Naomi Klein. This Changes Everything: Capitalism vs. the Climate. New York: Simon & Schuster, 2014

Journalist Naomi Klein spent five years delving deeply into the problem of climate change and what it may mean for our capitalist way of life. She concludes that up until now the world has been failing to tackle the problem effectively, and that’s mainly because the necessary steps “fundamentally conflict with deregulated capitalism, the reigning ideology for the entire period we have been struggling to find a way out of this crisis.”

The first part of her statement is widely accepted, at least among scientists and most world leaders. The 2009 climate summit in Copenhagen set a goal of limiting average global temperature to no more than 2 degrees Celsius above what it was when countries first turned to coal to power the industrial revolution. That would require the richer countries to reduce their carbon emissions “in the neighborhood of 8-10 percent a year.” So far that isn’t happening. According to the EPA, US carbon emissions dropped only 2.9% between 2014 and 2015, and only 11.7% over the ten-year period from 2005 to 2015. In the world as a whole, that drop was offset by increased emissions from developing countries.

Much more controversy surrounds the question of what to do about it. Many people hope for a technological fix that could solve the problem with minimal impact on our habits of production and consumption. Economic conservatives want to limit changes to what can occur through market mechanisms such as consumer demand for greener products, while minimizing the role of government regulation. Liberals are willing to entertain government measures like a carbon tax, but are suspicious of calls for a more radical economic transformation.

Klein is willing to think more radically, since she regards climate change as a real game changer. It poses  a massive threat; it is happening rapidly; and it forces us to rethink how we have related to nature and organized our economic lives.

[T]he real reason we are failing to rise to the climate moment is because the actions required directly challenge our reigning economic paradigm (deregulated capitalism combined with public austerity), the stories on which Western cultures are founded (that we stand apart from nature and can outsmart its limits), as well as many of the activities that form our identities and define our communities (shopping, living virtually, shopping some more).

No doubt people prefer little problems with little solutions to big problems requiring big solutions. That makes Klein’s book a tough sell. Nevertheless, it’s worth reading, just in case she may be right.

The “greatest market failure”

The roots of the climate problem lie deeper than capitalism, in the relationship to nature that Klein calls “extractivism”.  She defines this as “a nonreciprocal, dominance-based relationship with the earth, one purely of taking. It is the opposite of stewardship….” Both Western religion and Western science conceived nature as a subordinate thing to be used for the benefit of spiritually or mentally superior humanity. Although these ideas preceded industrial capitalism, “the ability to harness the power of coal to power factories and ships is what, more than any single other factor, enabled these dangerous ideas to conquer the world.” The expansion of production and consumption in the modern market economy was built on the foundation of fossil fuel extraction.

Implicit in the notion of the “free market” was the freedom to dominate nature. (Klein also sees domination in the relationship of capital to labor and rich countries to poor countries, a point I’ll return to later.) As long as producers and consumers of fossil fuels “pay nothing for the privilege of treating our shared atmosphere as a free waste dump,” the “invisible hand” of the market fails to channel self-interest toward the general good. Since the true cost of burning fossil fuels is not factored in when calculating corporate profits or consumer prices, neither producers nor consumers have enough incentive to change their behavior. That’s especially true if much of the environmental damage they are causing hasn’t happened yet or is happening somewhere else on the planet. Klein quotes the Stern Review on the Economics of Climate Change when it calls that problem “the greatest market failure the world has ever seen.”

Part One of Klein’s book is called “Bad Timing.” The world was starting to hear about scientific evidence of global warming in the 1980s, around the same time that “neoliberal” economic policies were on the ascendancy. Those policies aimed to use low taxes and deregulation to free up private capital while restricting public action. After the collapse of the Soviet Union, conservatives declared the historical struggle among economic ideologies over and free-market capitalism the winner. A grand market failure was not something they wished to consider, let alone correct. “A belief system that vilifies collective action and declares war on all corporate regulation and all things public simply cannot be reconciled with a problem that demands collective action on an unprecedented scale and a dramatic reining in of the market forces that are largely responsible for creating and deepening the crisis.”

That is why the debate over climate change is so deeply polarizing. For social critics, the climate issue is the most powerful argument against deregulated capitalism. And for precisely that reason, the defenders of that retrograde brand of capitalism have strong motives to deny or minimize the problem.

Global climate and global trade

Another bit of bad timing is that the era of global climate agreements is also the era of global free-trade agreements, and the two have conflicting goals. Klein describes Ontario’s Green Energy and Green Economy Act, which Al Gore praised as the “single best green energy [program] on the North American continent.” In order to promote renewable energy and give manufacturers of materials like solar panels incentives to come to Ontario, it included a requirement that a certain percentage of materials be locally sourced. However, the World Trade Organization ruled that this “protectionist” provision violated the terms of the North American Free Trade Agreement. Global free-trade pacts have stronger enforcement mechanisms than international agreements to reduce carbon emissions, so “trade trumps climate.”

Global free trade contributes to climate problems in other ways. China has become “a free trader’s dream…and a climate nightmare.” Corporations feeling burdened by environmental regulations or high labor costs can offshore their manufacturing operations to developing countries. There costs can be contained by low environmental and labor standards, which go together in a package deal. “The same logic that is willing to work laborers to the bone for pennies a day will burn mountains of dirty coal while spending next to nothing on pollution controls because it’s the cheapest way to produce.” That is certainly a capitalist logic, at least in one form. Producing cheap goods for export is not the only way to compete in the global marketplace, but it is an obvious way for a poor country wishing to industrialize quickly.

The resulting loss of manufacturing jobs in countries like the United States puts pressure on less educated workers to hold onto jobs in the fossil fuel industry if they have them, and to oppose environmental regulations that threaten those jobs. (Instead of working to raise environmental standards internationally, President Trump proposes to lower them domestically, protecting coal jobs by joining the global race to the bottom.) Another downside is that the goods imported from overseas that could have been produced at home have to be shipped, another big contributor to fossil fuel emissions.

Managing the economic transition

Klein maintains that running the economy on renewable energy is becoming technically feasible, but the private sector will not make the transition fast enough on its own. The profits from using fossil fuels are too great, and the profits from large-scale investments in solar or wind power are too uncertain. She sees an expanded role for governments and community cooperatives in fighting carbon emissions and promoting cleaner alternatives.

Some fossil fuel production can be curbed through carbon taxes that reflect the true cost to society of that production. Government can also charge higher royalty rates for oil, gas, and coal extraction. These additional revenues can then be devoted to investing in the “post-fossil fuel future, as well as to helping communities and workers adapt to these new realities.” Some forms of production are so irrational from an environmental perspective that they need to be banned outright. In order to get at the least accessible coil, oil and gas, companies are “blasting the bedrock of our continents, pumping our water with toxins, lopping off mountaintops, scraping off boreal forests, endangering the deep ocean, and scrambling to exploit the melting Arctic.”

Until the day comes–if it ever does–when renewables can provide as much energy as fossil fuels do now, we will need to reduce energy consumption. Here too, Klein believes that private self-interested decisions will have to be supplemented by new public policies. For example:

That means cheap public transit and clean light rail accessible to all; affordable, energy-efficient housing along those transit lines; cities planned for high-density living; bike lanes in which riders aren’t asked to risk their lives to get to work; land management that discourages sprawl and encourages local, low-energy forms of agriculture; urban design that clusters essential services like schools and health care along transit routes and in pedestrian-friendly areas….

Although she is a critic of contemporary capitalism, Klein is not as radical as some authors I have read. She does not call for an end to capitalism as such, or an end to economic growth altogether. That would be a problem especially for the less developed countries, which contain a majority of the world’s people and are counting on economic growth to lift millions out of poverty. She summarizes what she does hope for in a section called “Growing the Caring Economy, Shrinking the Careless One”:

Obviously a huge number of jobs would be created in the sectors that are part of the green transition—in mass transit, renewable energy, weatherization, and ecosystem restoration. And those sectors that are not governed by the drive for increased yearly profit (the public sector, co-ops, local businesses, nonprofits) would expand their share of overall economic activity, as would those sectors with minimal ecological impact (such as the caregiving professions…).

The richer countries, which are farther along in the transition to a service economy, might center their lives less around acquiring–and powering–material things. But they could be compensated by living lives richer in human relationships and services. (I wouldn’t be the first sociologist to suggest that modern urbanites and suburbanites sacrificed a degree of human community in their rush toward material prosperity.) Meanwhile the locus of material progress could shift more to the poorer countries. But higher standards of environmental protection would need to spread everywhere.

Continued

 

 

 


Glass House (part 3)

April 6, 2017

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The “1% economy”

Brian Alexander’s book Glass House is subtitled “The 1% Economy and the Shattering of the All-American Town.” Alexander is a journalist, not a macroeconomist, and he doesn’t attempt much analysis of the economy as a whole. Nevertheless, he seems sure that the brand of capitalism we have been practicing lately is largely responsible for Lancaster’s decline.

Alexander suggests that owners and investors have more than one route to profit: “You can increase profits by building value through research and development, creating new products, investing in plants and equipment. But that takes time….Instead, you can also increase company profit by making the same products with the same sales volumes, but cutting expenses.” Which route is chosen dramatically affects people’s lives: “If you were the target company employee, or a small town where that company was located, you might prefer to add value through investment in people, machines, and research and development, for a long-term benefit.”

I didn’t see anywhere in the book where Alexander explained how this choice is affected by the general nature of the “1% economy,” but I’ll offer a few thoughts. Two features of the 21st-century US economy thus far are extreme economic inequality and sluggish economic growth. (Some would say the two are related, although the relationship may not be simple.) The wealthy minority have a lot of capital available to invest. But very weak income growth for the majority limits their ability to spend on new products. Under those conditions, it is not surprising that a lot of capital would go to buy existing enterprises rather than create new ones; nor is it surprising that cost-cutting rather than expansion of production would be a favored route to profit. If this strategy works to make the 1% richer despite hollowing out the middle class, that only reinforces the inequality and sluggish growth, creating a vicious cycle.

Ideological responses

The workers and townspeople who are the victims of economic decline have little knowledge of macroeconomics or high finance. Without understanding the underlying causes, they react to the symptoms they see–the wage concessions, the layoffs, the family instability, the reduced commitment to work, the drug problem and the crime. They try to interpret what they see within a traditional belief system linking hard work, self-reliance, economic success and strong families. If more people are failing, well, that must be due to some mysterious decline in personal responsibility and achievement.

Like many Midwestern small towns, Lancaster, Ohio had always been at least moderately conservative. But as economic conditions deteriorated, “A significant faction within Lancaster lost its moderate conservatism. Stoked by cable news, internet videos, and right-wing politicians, they insisted that most of Lancaster’s problems had to be the natural product of an over-generous social service system that coddled lazy, irresponsible people.” Few stopped to consider what work ethic the high-flying financiers were living by when they made millions off of other people’s misfortunes.

Dependency on government was increasing in two ways: direct assistance through programs like food stamps and Medicaid (whose expansion under Obamacare Ohio chose to implement), and reliance on public money to create jobs. “Medicaid and Medicare supplied over 60 percent of the hospital’s income. The public schools were the second-largest employer in town.” Glass-maker Anchor Hocking had dropped to third. But the increasing dependency was accompanied by denial or resentment.

A certain kind of racism was entangled with popular attitudes toward the needy, but Alexander is careful to qualify it. It was more complicated than a simple prejudice against people who looked and acted different. It was more the resentment of struggling whites against any suggestion that people of color deserved more help than they did, or the idea that one group should have to bear the costs of some other group’s failures. It was easier to direct hostility across racial lines than to identify the shadowy financial interests and economic forces that were really responsible for their problems. “Somebody, they thought, was screwing them out of the good-life lottery. Somebody was screwing them. It just wasn’t who they thought.”

Political fallout

The political leaders of Lancaster and many of its higher-income residents were Republicans. Alexander describes them as having an anti-tax philosophy that kept them from raising the money to maintain the town’s infrastructure and institutions. They also had a “pro-business bias [that] blinded them to how Newell and Cerberus [new owners of the glass company] picked their pockets.”

The blue-collar workers of Lancaster were more likely to vote Democratic, if they voted at all. But they were turned off by the Party’s preoccupation with the rights of minorities like African Americans and gay people.

In 2012, Fairfield County, where Lancaster was located, voted 57% for Romney, although Ohio went narrowly for Obama. In 2016, the county went 60% for Trump, helping turn the state red again.  The great irony here is that by voting for Romney and Trump, the people of Lancaster were casting their lot with the kind of financial wheelers and dealers Alexander holds responsible for the town’s decline.

Donald Trump promised the downwardly mobile workers of towns like Lancaster to “make America great again.” What those workers couldn’t acknowledge was that “buccaneering free-market finance” had done so much to undermine that greatness. It was so much easier to blame “sin, laziness, scientists, immigrants, unions, and any number of other enemies of the American Way.” Trump cleverly combined populist anger with right-wing conservatism. The good manufacturing jobs would come back if the government would defend the borders, make tougher trade deals with other countries, and lighten the tax and regulatory burden on business. Trump shared Romney’s admiration for the wealthy as the job creators. What was missing from his critique was any suggestion that they might be investing the country’s wealth unwisely.

Alexander does not discuss the 2016 election, but I think he would agree that it does not portend a reversal of fortunes for towns like Lancaster. What I fear it does is add a layer of political exploitation to the economic exploitation that has already occurred.


Glass House (part 2)

April 5, 2017

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Yesterday I gave an overview of Brian Alexander’s Glass House, his story of the economic decline of Lancaster, Ohio. Today I will fill in some of the details about the decline of its principal employer, the Anchor Hocking glass company.

First, a word of caution. The financial wheeling and dealing that helped bring down Anchor Hocking is very complicated and sometimes shrouded in secrecy. Alexander is not an economist or CPA, so he has to rely primarily on the stories told by his informants to make sense of it all. What he does have going for him is that he is a good journalist, he digs deep into the information available to him, and he knows the town of Lancaster well, having grown up there himself. Ultimately, we cannot know what would have happened to businesses like Anchor Hocking if they hadn’t been targeted by other companies as sources of quick profits. However, I think Alexander makes a pretty good case that the leveraged buyouts and revolving door of owners did more harm than good.

Newell

The first company to acquire Anchor Hocking in a leveraged buyout (in 1987) was Newell Corporation, a maker of household goods like window shades and hardware. The good news is that Newell’s management “introduced a few needed modern efficiencies and systems that Anchor Hocking had neglected–like data and accounting techniques, order tracking, customer service methods.” They succeeded for a time in making Anchor Hocking more profitable. On the downside, they sold off some parts of the company and eliminated an important segment of Lancaster’s leadership by bringing in outside executives who didn’t reside in the town. They persuaded local authorities to take money away from public schools in order to finance tax breaks. They were also harder on workers, eliminating training opportunities and quickly firing those who didn’t hit performance targets.

The larger problem was that Newell was becoming financially overextended because of its continuing acquisitions. Its merger with Rubbermaid in 1999 “nearly killed the company,” because Rubbermaid was in such bad shape and the deal left Newell with such a debt burden. Newell no longer wanted to put any money into Anchor Hocking for maintenance or improvements. It sold off the company in 2004, one year after getting the tax breaks from the town.

Cerberus

Anchor Hocking’s next owner was the private equity firm Cerberus. Its business was buying and selling companies, not manufacturing as such.  Here things get a little complicated. Cerberus formed a new company, Global Home Products Investors, LLC, to buy Anchor Hocking and two other businesses from Newell. Global Home Products borrowed most of the money it needed to make the buys, meaning that it and not Cerberus bore the cost of the acquisitions. To make things more confusing, it borrowed a lot of the money from a Cerberus affiliate, so that Cerberus made money by lending to GHP, its own creation. That also meant that “Anchor’s cash flow wound up supporting the structure of Global Home Products [and ultimately Cerberus], and because of that it starved.”

Anchor was still profitable, but GHP’s need to get money out without putting much in soon began to hurt the company. Maintenance was neglected; quality suffered; cash flow deteriorated; and the retirement plan was underfunded. After a while Anchor Hocking wasn’t even paying some of its suppliers. In 2007, after only two years in business, Global Home Products filed for bankruptcy. The bankruptcy proceedings were contentious, but in the end GHP’s lenders got paid, while the pension plan lost millions and retirees lost medical benefits.

“Meanwhile, Cerberus continued to thrive. As of mid-2016, Cerberus was one of the largest private equity firms in the world, with more than $30 billion under management, and [founder and manager] Stephen Feinberg was named as one of Donald Trump’s key economic advisers.” Trump, of course, also knows something about continuing to thrive while taking his acquisitions into bankruptcy.

Monomoy

As a result of GHP’s bankruptcy, Anchor Hocking was sold at auction to the sole bidder, Monomoy Capital Partners. That was an investment fund controlled by the private equity firm Monomoy. As with the Cerberus deal, the purchase was made with mostly borrowed money. The deal was structured so that the debt was incurred by Anchor Hocking rather than by Monomoy.

Monomoy’s intention was to manage Anchor Hocking for a couple of years and then sell it at a profit. Most of what Monomoy did “followed the standard private equity playbook: jawbone the unions, cut costs even at the price of damaging longer-term success, do a sale-leaseback of real property assets, take whatever public money you can get from communities eager to save their industries…and collect fees.” The sale-leaseback occurred when Monomoy sold Anchor Hocking’s distribution center for a quick $23 million, a “shortcut to make the company look profitable, though at the price of a twenty-year lease.”

Before Monomoy could sell Anchor Hocking, the financial crisis intervened, discouraging lending and putting a chill on leveraged buyouts.  Still stuck with a company it didn’t want to keep, Monomoy took cash out in 2009 by resorting to a “dividend recapitalization.” “Monomoy had Anchor Hocking borrow $45 million. Anchor then paid Monomoy Capital Partners, LP, $30.5 million as a dividend.”

In 2012, Monomoy merged Anchor Hocking with Oneida, another troubled company that it owned, naming the combined company EveryWare Global. In 2013, Monomoy sold a minority share of EveryWare Global to a special purpose acquisition company controlled by the Clinton hedge fund. Most of the money for this purchase was also borrowed, and that too became part of EveryWare’s debt. At this point, “EveryWare Global was drowning in over $400 million in liabilities. It possessed just over $100 million in total assets.”

As the excessive debt strained EveryWare’s cash flow, Monomoy threatened to shut down Anchor Hocking unless the union agreed to a deal: Monomoy would give the company a cash infusion of $20 million, but the workers would accept lower wages, an end to company contributions to retirement plans, and higher insurance premiums. The unions accepted the ultimatum in the summer of 2014. Despite those concessions, EveryWare declared bankruptcy in 2015. This time, the lenders took over the company. They appointed a “turnaround board” of bankers and other glass industry outsiders to fix up the company for sale, like a rundown house.

The losses were hardly distributed evenly. Alexander concludes:

From the standpoint of a private equity firm, it was a success. Like a lucky old lady hitting a slot in Reno, Monomoy put a little money in and pulled a wagonload of money out.
….
Monomoy sent what was left of Lancaster’s once-grand, 110-year-old employer into bankruptcy court while it made off with millions and the employees walked their wages and benefits backwards in time. Lancaster’s social contract had been smashed into mean little shards by the slow-motion terrorism of pirate capitalism.

Continued