The Failure of Market Solutions and the Green New Deal – Pt 2

Alyssa Battistoni – 

As I argued in Part I of this post, we need to rethink not only the scope of state intervention in the economy, but what exactly the economy is. Instead of focusing on the industrial manufacturing “inside” the economy and trying to clean up the externalities that inevitably spill out, we need an economic policy that takes seriously the social and ecological functions that have been treated as external to the economy altogether. That is to say—we can no longer think of things like social and ecological wellbeing as “post-material” concerns or something to address as a “justice” bonus after we’ve gotten the economy growing again. Rather, these things are fundamental to how the economy works. So how far does “industrial policy” extend, and what would it mean with respect to social reproduction and ecological reproduction, from care work to carbon sequestration? And what in turn does this mean for the future of state action?

Climate discourse frequently moves almost seamlessly between the language of the “Green New Deal” and the call for “wartime mobilization.” World War II, this argument goes, is an example of undertaking rapid economic transformation in the face of emergency. As Bill McKibben writes, “Turning out more solar panels and wind turbines may not sound like warfare, but it’s exactly what won World War II: not just massive invasions and pitched tank battles and ferocious aerial bombardments, but the wholesale industrial retooling that was needed to build weapons and supply troops on a previously unprecedented scale.” To move away from fossil fuels, we need to “build a hell of a lot of factories to turn out thousands of acres of solar panels, and wind turbines the length of football fields, and millions and millions of electric cars and buses.” We do need to build a lot of solar panels and other clean energy technologies. But that’s a short-term transition strategy—not a model for a new economy. After the war, the expanded productive capacity was redeployed again, towards mass production of consumer goods for the benefit of private capital, with serious environmental consequences. But the emphasis on building factories also fits uneasily with the New Deal analogy.

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The Failure of Market Solutions and the Green New Deal – Pt 1

Alyssa Battistoni – 

market failures.jpgFor the three decades that climate change has been a political issue, it has been understood primarily as an instance of severe “market failure”: as the 2006 Stern Review on the Economics of Climate Change explains, “greenhouse gas emissions are externalities and represent the biggest market failure the world has seen.” In other words, carbon emissions do not have a direct price, meaning that emissions send no market signals and are not included in economic decision-making. The most prominent solutions to climate change have followed this model, recommending a carbon tax or other economic measures by which to “internalize the externality” of greenhouse gas emissions—to account for the social and environmental costs of carbon. Pricing carbon is supposed to make fossil fuels more expensive, ostensibly creating incentives for innovation in clean energy and other green technologies, and in turn prompting a shift towards their use.

In this first of two posts, I’ll explain how this model developed, and what kind of intervention the Green New Deal represents. In short, the scale of transformation called for implies a far more robust role for the state, going beyond mere market corrections to more substantial intervention in the economy. I’m not convinced, however, that the current framing of the Green New Deal is steeped in a vision of the old economy, and doesn’t address necessary support for social and ecological reproduction. (I’ll elaborate that critique in my second post.)

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Against the Economic Pie: How “Redistribution” Limits Political Economic Analysis

Martha T. McCluskey –


What gets lost when we describe social or environmental justice as redistribution?   This retrenches a fundamental binary—maximization versus distribution—in which maximizing logically comes first. By initially producing a bigger “economic pie,” law will be able to provide more generous slices to those who currently receive too little.

The term “re-distribution” makes explicit the hierarchical, temporal ordering of this binary. As part of a framing dualism, the term leads us to imagine that law sets up an essential baseline distribution, which afterward may be modified to advance contingent and secondary concerns about fairness, equality, or a healthy and stable environment. This presumed secondary and supplemental position leads to the common conclusion that these justice-oriented goals are best addressed not by substantive legal change disrupting the baseline order, but instead through a second-order, ancillary process of government taxation and spending.

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The Impact and Malleability of Money Design

Christine Desan –

9780674970953Mehrsa Baradaran’s book teaches us that money has a color, an arresting proposition to fans and foes of capitalism alike.   As she points out, economic orthodoxy posits that the transactional medium is itself a formal instrument:  money expresses but does not affect the value of the substances it measures.  Critics of that orthodoxy agree even as they bemoan the results:  money denies through its very impersonality the social substrate of exchange.  Against that commonsense, Baradaran directs us to consider how the institutions of money creation in the United States – commercial banks – have systemically originated money in white hands over decades.  That is, considering money as a process – asking how value is packaged into the everyday units we call dollars and injected into circulation – reveals that we have designed a market that is racially discriminatory in its very medium.

Baradaran challenges us to recognize how much determinations about money’s design matter.  That proposition is particularly striking because they are also remarkably malleable:  altering the institutions that deliver credit in money can change the way people and groups relate to one another.  I want to underscore Baradaran’s argument about the practice of black banking by exploring an alternative vision.  Only when the monetary project of the agrarian populists failed did Americans settle on the exclusionary system that Baradaran describes.  The contrast suggests that designing money is shaping community; it can bring people together or set them at each other’s throats.

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Racial Myths, Market Myths, and the Policy Roots of Predatory Lending in 1970s Chicago

Beryl Satter – 

9780674970953In The Color of Money and in the opening post of this Symposium, Mehrsa Baradaran challenges the notion that markets exist outside of political power. What she shows for credit policy, I have shown for housing policy, particularly in my book, Family Properties: How the Struggle over Race and Real Estate Transformed Chicago and Urban America.  Here I’d like to discuss a shocking example of governmental policies shaping “markets,” or, rather, supporting investors to extract wealth from segregated black communities: the Housing and Urban Development (HUD) Act of 1968.

In 1968, after rebellions following Martin Luther King, Jr.’s assassination finally focused Congressional attention, two laws were passed to address the problem of “the ghetto.”  First, the Fair Housing Act prohibited racial discrimination in the advertising, rental or sale of housing.  It included no significant enforcement mechanism.  Its solution to “ghetto” problems was to give those wealthy enough to move out the chance to do so.  “Fair housing does not promise to end the ghetto,” one senator admitted, but simply enables “those who have the resources to escape the… suffocating…inner cities of America.”

In contrast, the HUD Act attempted to address conditions within “suffocating… inner cities.” It created mortgage subsidy programs to help “lower income families in acquiring homeownership.”  It also reversed the workings of an earlier federal program that many felt had created ghettoes in the first place – the Federal Housing Administration (FHA)’s insured mortgage program.  Starting in the mid-1930s, FHA-insured mortgages had been denied to black or racially changing urban neighborhoods, thereby encouraging conventional lenders to similarly “redline,” or refuse to issue mortgages, in such areas.  In a major reversal, HUD specified that FHA-insured mortgage loans would be made in “older, declining urban areas.” Such areas need only be “reasonably viable” to qualify for FHA-insured loans.

The newly redirected FHA-insured mortgages were meant to spur the “resources…of private enterprise” to address the housing needs of “low income families.”  The HUD programs never acknowledged that racial segregation was unjust or even problematic.  Instead, they were built on the assumption that lending to blacks and Latinos was inherently risky. Those who needed protection were lenders, not borrowers.  HUD programs cosseted lenders active in what were euphemistically referred to as “certain neighborhoods”— that is, black, Latino, and racially changing ones — in ways so extreme that they damaged the very communities they were ostensibly created to help.

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Black Proprietorship and Crises of Value

Shirley E. Thompson –

9780674970953By shedding historical light on the development and practices of black banking, Mehrsa Baradaran’s excellent and thought-provoking The Color of Money demystifies some fundamental free market myths and strongly cautions against the widespread faith, among policymakers and activists alike, in banking as a means of overcoming long-entrenched and worsening racial disparities in wealth. In this response, I suggest that the history of black banking, even for its many failures, holds a unique perspective on property and its contradictions of value. It also contains a deep lesson about how economic strategies generate and are reinforced by affective practices—and how racist economic laws rested on public feelings of their own. The personal and the structural are closely interlinked.

From the debacle of the Freedmen’s Bank, to the rise of black-owned banks under Jim Crow, to the promotion of “empowerment zones” in more recent times, economically isolated black communities have consistently been urged to engage in “capitalism without capital.” Because black banks were cordoned off from their mainstream peer institutions, Baradaran shows, they could not effectively tap into the money multiplier effect, the means by which a bank stood on the good credit, financial security, and proprietor status of its patrons and generated value by lending its deposits through the system more broadly. Because black people did not own large stores of property, any wealth accumulated by black banks swiftly left black control as it sought greater prospects elsewhere: “once in the banking system,” Baradaran writes, “money flows towards more money.”

It is difficult to overstate the policy implications of Baradaran’s work. The story she tells of the institutional segregation and siphoning off of black wealth disarms the widely held premise that black poverty derives from some sort of cultural deficiency or a lack of personal financial literacy. By exposing the lure of “for-us, by-us” banking and “community empowerment” as “a decoy,” “an empty promise,” and a faulty basis for banking legislation and activism, she paves the way for a bolder vision and more creative experimentation in attempting to remedy a seemingly intractable racial inequality. Indeed, proposals such Darrick Hamilton’s and William A. Darity Jr.’s endorsement of “baby bonds” and Baradaran’s own call for the return of postal banking flow from such an understanding of the structural impact of racism on US political economy.

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Symposium: The Color of Money & Racial Capitalism

Mehrsa Baradaran –

9780674970953When I started research on the project that became The Color of Money, I wanted to write a book about racial disparities in access to credit. When I started digging into the history, I started to realize that there was a much bigger story here, one that undermined one of the most basic neoliberal myths about the free market. This history of black banks and the economy of segregation reveals how inextricably financial markets are tied to racial exploitation, and how the dominant economy can continue to extract from racially subordinated groups through “color-blind” market mechanisms.

I hope that the upcoming symposium on The Color of Money will help connect the historical work to contemporary law, building on LPE’s commitment to understanding and reversing the many structures of racial capitalism.

In particular, I try to debunk three market myths in the book:

  1. That money, markets, and trade exist outside the realm of political power
  2. That inequality is a natural byproduct of market forces rather than being created by the state
  3. And that people left outside of the structures of power can overcome their exclusion through local institutions or self-help

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The Erosion of Public Control Over Public Utilities

Sandeep Vaheesan –

Cable Electricity Electrical Energy DistributionSince the 1970s, Congress and federal agencies have replaced regulator-established rates with market-derived pricing in many sectors of the U.S. economy. Electricity and natural gas are two such industries. Congress and the Federal Energy Regulatory Commission (FERC) have abolished regulated rates and instituted market-based pricing in a part of the electricity and gas supply chains. (At a simplified level, both industries have three segments: production, transmission, and distribution. Policymakers generally still treat the transmission and distribution functions as monopolistic.)

These legislative and regulatory decisions are premised on the belief that markets are superior to direct public control of rates and other terms of service. While this process is often described as “deregulation,” the term is a misnomer. This industrial restructuring is a transfer of discretionary authority from public bodies to private actors. Instead of structuring competitive markets in this new environment, the federal courts have defended private market power and helped scale back all public control of sellers and traders of electricity and gas. A case before the First Circuit (in which my Open Markets Institute colleagues and I filed an amicus brief in support of the plaintiffs) illustrates this theme.

In Breiding v. Eversource Energy, New England residents have accused two large utilities of violating antitrust and consumer protection laws by creating an artificial shortage of gas and engineering a chain of events that dramatically drove up the cost of electricity. The district court dismissed the plaintiffs’ complaint and expanded a judicial doctrine intended to protect the integrity of regulator-set rates to also insulate market-based prices from private lawsuits. This decision, which is consistent with rulings by other courts, grants gas producers, power generators, and traders the freedom to engage in exclusionary and other unfair practices. In electricity and gas, the net effect of legislative, regulatory, and judicial choices over the past 40 years has been a dramatic erosion of public control over public utilities.

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Central Banking and Finance—The Franchise View

Robert Hockett & Saule Omarova—

It is common to claim that finance is about ‘credit-intermediation,’ a matter of channeling funds from virtuous savers to needful end-users. The picture behind this assertion is that of a gargantuan broker—the financial system as ‘go-between.’ But modern financial systems are much more about credit-generation than intermediation. We need a new metaphor.

In our view, a modern financial system is best modeled as a public-private franchise arrangement. The franchisor is the sovereign public, acting through its central bank or monetary authority. The franchised good is the monetized full faith and credit of the sovereign—its ‘money.’ And the franchisees are those private sector institutions that are licensed by the public to dispense, in the form of spendable credit, the franchised good.

Like any good franchisor, a public acting through its central bank works to maintain the ‘quality’ of the good that its franchisees distribute. In the contemporary ‘developed’ world, the quality in question has been understood primarily in terms of over-issuance.

The central bank’s task has been understood, that is to say, in modulatory terms, the primary objective being to prevent consumer and, in some enlightened jurisdictions, asset price inflations and hyperinflations. Allocative decisions, for their part, are thought best left to the market, on the putative ground that the public’s ‘picking winners and losers’ is apt to be ‘politically arbitrary’ rather than ‘financially sound.’

Two conceptual errors, one of them partly corrected since 2008, seem to have hampered the ‘quality control’ efficacy of many central banks and monetary authorities in the pre-2008 period.

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Against the Economic Pie: How Economic “Maximizing” Skews Legal Analysis

Martha T. McCluskey –

Should law maximize or divide the “economic pie”? Law students learn that smart thinking begins by asking this question. But this question skews legal analysis against a political economy perspective. It implicitly presumes a hierarchy where an abstract idea of economic gain normally stands above and beyond political and moral concerns, bigger in size and first in order.

Economic-Pie.jpgA recent New York Times commentary by pundit Thomas L. Friedman exemplifies the ideological work of this binary. Friedman contrasts the “redivide-the-pie” political left with various “grow-the-pie” political visions grounded in what he presents as the more realistic understanding that private economic power, not egalitarian democracy, is the foundation of good jobs and general prosperity. Similarly, legal academics often use terms like “economic efficiency” or “economic welfare” to define the optimal legal order as a matter of maximizing economic gain aside from fairness or the well-being of particular persons. For example, students learn to use efficiency to rationalize tort law limits on corporate liability for consumers’ injuries from risky products, or to justify contract law rules upholding agreements that produce harsh or exploitative results.

This first of two posts on this framing question challenges the implicit spatial metaphor embedded in the distinction between maximizing and dividing the economic pie. By definition, the whole is always greater than any particular part. We skip over many hard and important questions when we imagine the societal “whole” as a maximum “pie,” that can then be sliced and distributed for particular interests. The efficiency-distribution binary distorts legal analysis in three ways. First, the image of “maximizing” emphasizes quantity, rather than quality; second, it presumes economic gains normally and objectively expand rather than tightens the boundaries of prosperity and well-being; and third, it represents gain as a sum of separable parts, rather than as an interdependent system.

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