Here comes the next bank bailout

This morning I found a cute little article about a very non-cute topic. It turns out the FDIC’s bank insurance fund dropped 20% in the 2nd quarter, to a rather alarming balance of $10.4 billion. What the article failed to mention is that since the 2nd quarter ended in June, banks have been dropping like flies – 19 in July and 12 in the first three weeks of August. Sometimes four or five per week.

I haven’t done the math about what all of these failures have cost the fund (and for some reason the FDIC doesn’t make that information easy to find). But two recent failures have done significant damage on their own: Colonial Bank cost $2.8 billion, and Guaranty Bank cost $3 billion. Unless I’m missing something, 10.4 minus 2.8  minus 3 equals a measly $4.6 billon left. Those two failures alone drained more than half of the fund. The other 29 failures were each much smaller, but presumably added up to some actual money.

The fund’s balance first showed up in the news almost exactly a year ago, when it was reported that the failure of IndyMac had sunk the fund to an alarmingly-low $45.2 billion, which was only 1.01% of what it is supposed to cover, and below the legally-required level of 1.15%. Ahh, those were the good old days. N0w, we are below 1/10 of the legal requirement, and also within one large failure of the fund going totally dry.

Why is nobody talking about this? Are they worried about runs on the banks? Are they trying to get health reform passed before launching into the next round of bank bailouts?

Actually, it may be that they’ve set it up so that the problem can be taken care of under the public radar. I found a great little resource with visual graphs of the bank failures and fund levels. It helpfully reports that the fund is being replenished through such bold moves as a 0.05% fee, and ”Congress has raised the FDIC’s line of credit from $30 billion to $100 billion — with the option of going to $500 billion through 2010.” What a relief! The problem is solved, and we can simply loan money to the banks while they repackage toxic assets and sell them back to us in the exact same way they got us into this mess. What could go wrong?

My reason for writing this is not to cause alarm about your specific bank account. Indeed, it looks like the government is willing to extend nearly unlimited credit to its uncreditworthy friends in the banking industry, even when they can’t make enough money selling disguised toxic assets.  The general trends are not good: the list of “troubled” banks jumped from 305 to 416, and nearly 30% lost money last quarter.

Most banks are still in pretty decent shape, but as a whole the “free market” model of banking is dead, dead, dead. The only way this parasitic zombie system is still alive is through sucking taxpayers’ blood. Unfortunately the bugger has tapped an artery, so we can’t just yank it off or we’ll be in worse shape than before. (And yes, I know zombies prefer brains)

However, we should all stop doing new business with banks until their deposits dwindle and their insurance funds rise to a point that is not so severely out of whack. Some banks will fail, but that is simply because they were running ponzi schemes and need to fail. Don’t worry, Congress will foot the bill and you’ll get your deposits back.

Instead, we should put new deposits in credit unions. which are generally in good shape. The National Credit Union Association just reported that credit unions saw increases in memberships, assets and savings levels. I’ve even heard of one credit union struggling to loan out all the money that it has (sorry, can’t name it, but call around and maybe you’ll find it).

I’ve said it before, and I’ll say it again: It is not a coincidence that credit unions are doing well.

Credit unions may not be the groovy co-ops of yore, and they do not always maintain the strongest democratic practices. But while banks were coming up with progessively more creative and dangerous ways to profit, credit unions generally stuck to the basics of meeting their members’ needs in ways that they must report to those members. It made a huge difference, and as a result, no federal money has been needed to bail out any credit unions. Some credit unions are a little wobbly (you can ask for their figures and find out!), but generally they are doing well, and collectively they are taking care of their own problems.

Some banks were also prudent, but collectively the private banking system has all but failed. Whether you want government out of finance, or want better security, or just don’t want to entrust your money to a banking industry that has shown itself to be untrustworthy, credit unions are the best place for you money.

No more giant carrots!

I went downtown for an early dose of Ted this morning, and got an wake-up call about the danger of incentives, those carrots and sticks that supposedly make the world go round but actually are an affront to nature.

I have been aware of this Ted thing for a while; people give “the talk of their lives” on all sorts of topics for 18 minutes or less, but just last week I got hooked in a little. Our first talk was a short bit on the brains and genes of psycho killers – a nice cheery start to my day.

Then we heard from Janine Benyus about the importance of biomimicry, or learning design from nature. She pointed out numerous examples of how plants and animals solve problems, and what we can learn from them, and pitched a great web site at www.asknature.org. Its search function asks the question “How would nature…?” I plugged in “organize an economy” and got quite a few leads on my pet topic. I look forward to a bunch of reading on bees and ants and altruistic white-fronted bee eaters.

Finally, Daniel Pink told of a cognitive experiment that measured the impact of incentives on problem solving; it is called the candle problem. It requires the subject to find an obscure solution, to use creativity, to think outside the box. And it turns out that providing incentives for people to solve the problem quickly actually slows them down.

I’ve occasionally commented on the injustice of giving bonuses to some of the same people who nearly destroyed our entire economy last year. But as Pink pointed out, our entire system of bonuses and perks is actually counterproductive. This has been scientifically proven beyond much doubt, most clearly and ironically through a study commissioned by the U.S. Federal Reserve Bank. This paper “observed that high reward levels can have detrimental effects on performance.”

Incentives work reasonably well for simple mechanical activities, but once even “rudimentary” cognition is required, rewards focus the mind at the expense of peripheral vision, which is where the flash of insight is born. It seems that the more complex the problem and the more incentive is offered, the greater the disruption to the creative abilities needed to solve the problem.

Bringing Benyus back into the picture, nature doesn’t have huge incentives. Leaders of a social group do sometimes get the best hunk of gnu, but they never get their own private herd (with lesser members doing the work of managing and harvesting from it). Some rewards certainly motivate animals to do specific complex actions in laboratory settings, but our unique nature (and tendency to live outside of laboratories) limits what we can learn from this.

Still, we’ve all been trained to respond to the little treats, so some evidence is in order that we can be trained otherwise. Pink provided several examples, the most striking of which is the battle of models that played out over the development of the world’s leading online encyclopedia: Microsoft assembled a well-managed team of well-paid professional writers to create Encarta, which I have never used nor been aware of anyone using (and which – get this – will be discontinued on Halloween!). Meanwhile, Wikipedia just sort of happened through a loose network of autonomous volunteers writers, and is utterly without competition.

The skewed system of rewards is not only rewarding the wrong things, but it is limiting our collective ability to solve complex problems. I recently noticed an alarming sign of this in the return of the collateralized debt obligation (CDO). Some overly-focused genius realized that the easiest way to get rid of all the toxic assets left over from bundling and slicing mortgages is to bundle and slice them all over again, magically yielding top-grade investments from crap.

We need to kill the bonus monster or it is going to eat us. We need NEW ideas, not bigger and yummier carrots.

Our survival depends on our ability to stop focusing our brightest minds (and our dimmest ones) on what’s in it for them. This is especially true in times when lack of previously expected compensation is not simply the absence of a good thing; it can also involve collection agencies, foreclosure notices, hunger, poor health, and general humiliation.

One of the best ways I know to do this is through employee ownership and control. Profit is allocated based mostly on hours worked, freeing workers from the need to be clever while giving them the space to be clever. Depending on management structure there may still be day-to-day hierarchy, but the managers at least know that they answer to a board made up of elected workers. The usual concept of boss breaks down, along with the need to please outside “investors” who often have no real investment in the company’s long-term survival.

In particular, the Mondragon cooperatives of Spain’s Basque country have placed relatively strict limits on executive compensation – no more than six times that of the lowest-paid new hire – and also created an elaborate system of profit sharing so that none of the 150+ cooperatives pay wages more than 110% or less than 90% of the overall average. They have never laid anyone off, and have had only a handful of business failures. Even during Spain’s grueling recession, the Mondragon cooperatives remained stable and avoided layoffs by reassigning workers as needed.

Meanwhile in the U.S., the severe overuse of incentives has badly warped our ability to work together, and created a problem that must be addressed quickly before it causes further damage to our wobbly economy and society. If we really want to practice biomimicry, we should look deeply at what animals do in groups. It sure doesn’t look like what we’ve been doing. I’m sure that whenever some group of critters started letting an elite eat all the best bits of wildebeest while others starved, natural selection nipped that in the bud. We’re smart enough to elude nature for a while, but it will eventually catch us too.

Healthcare debate feels pointless

I never wanted to be stuck in the middle of this argument. When I started blogging about the co-op plan, I thought it would be a flash in the pan and then I would be able to get back to happier topics like rural transit and local food distribution.

My very favorite thing about cooperatives is that they provide a way for people who share a need and vision to work together, rather than wasting their energy trying to convince those who just don’t want to be convinced. I believe that this is why the ideal structure for a society’s healthcare system would be based on numerous cooperatives, with government playing a minimal oversight role: Rather than constantly fighting in Congress over what services should or shouldn’t be included (and to which sort of family members), we could simply organize with those who share our basic values.

I’ll admit to some bias toward cooperatives, but a key part of my work as a co-op development advisor is to know when a co-op isn’t likely to work. And the more I look at the healthcare reform mess, the more discouraged I become. This discouragement is not from any shortcoming of the co-op model – indeed, I keep finding evidence that co-ops are more likely to succeed than the public plan – but because the overall quality of the debate has bogged down in orthodoxy and bias.

Here’s what finally pushed me over the edge: On Thursday, Jacob Hacker released a heavily-footnoted 16-page paper (with Yale’s name on it!) which dismissed co-ops as the worst possible option, worse than a badly-designed public plan. A co-op plan, he said, is “ugly” and  ”does not merit consideration.” Having considered this very option for a couple of months, I beg to differ.

Hacker has extensive knowledge of healthcare and he raises some good points, but he has made two severe errors in his haste to dismiss the co-op plan, which remains mostly unchanged since the plan was first mentioned in June.

First, he recycled his unsupported “backup, benchmark, and backstop” objections, which he first cooked up two months ago. At the time, I debunked his attempt to prove a negative with a specific real-world example of cooperatives doing each of the things he said they could not do. I called my critique to his attention, we exchanged a few emails, and I looked forward to seeing how he addressed them in his next writing on the subject.

Unfortunately, it is as though the dialogue never happened, and he once again falsely claims that co-ops cannot do things that they have already done and continue to do.

Second, Hacker erroneously cites Sen. Jay Rockefeller as an authority on health cooperatives:

As Senator Jay Rockefeller, a member of the Finance Committee, has concluded after extensive review of the issue: “What I have to worry about is, are co-ops going to be effective taking on these gigantic insurance companies? And from everything I know from people who represent them, the answer is a flat ‘no.’”

What’s especially interesting about this statement is the date of the source from which Hacker quoted – August 2, which is four days after Rockefeller sent a list of eleven questions about co-ops to the GAO, and three days before the deadline he gave them to respond. His questions were very elementary in nature, including this whopper:  “What is the federal regulatory structure for cooperative business arrangements generally?”

At the time he was quoted, Sen. Rockefeller had not completed anything like an “extensive review” and in his letter he essentially admitted his almost-total ignorance of the subject.  What’s more, his statement came three days before the National Cooperative Business Association sent him a very patient eleven-page response to another list of 18(!) questions he had sent them. This list included the shockingly basic ”What is the formal definition of a cooperative?” which is easily available through the internet.

This was a very odd time for Rockefeller to brag about ”everything” he knew, and shows that he is more interested in posturing than in learning about the issue. Rockefeller is a politician and not an expert, and frankly didn’t have any idea what he was talking about. This is like someone claiming to be a surgeon asking you where is your liver. You would be wise to run screaming from the room before letting Dr. Rockefeller come near.

Unfortunately, Hacker missed this, and misused Rockefeller’s words to cast legitimacy on his own weak claim.

It seems that many people have just decided that co-ops are a bad idea, and don’t seem to have any interest in figuring out if they are the least bad idea available. Hacker at least has a good understanding of the industry, but it is troubling that he would publish a report that provides more ammunition for people who just want the co-op plan to go away. I expect better from a paper with Yale University’s name attached to it.

The success of a national campaign of co-op development ultimately depends on the willingness of people to become members. A cooperative approach may still be adopted, and if so it may still succeed; but it will be an uphill battle because of the unsupported and sometimes false claims of supposed experts like Hacker and Rockefeller.

I’m just a peasant with neither a Senate seat nor Yale’s backing. But when people who should know better are making unsupported and false claims, I have to say something even if it doesn’t seem to make any difference.

Sustainable rural transit

Gas is creeping back up above $3.00/gallon, and this is bad news for everyone. But nobody feels the pain as much as people living in lightly-populated rural areas. When businesses shut down, it means that people must drive for dozens of miles to find basic goods like groceries, or even to work at minimum-wage jobs. Cuts in urban bus routes make it difficult to get around the city, but cuts in rural transit can make reliable movement impossible.

Gas prices are not as bad as they were last year, so this is no longer in the news. But the overall level of economic trouble makes the rural transportation crisis more dire. We are not far from seeing full-blown collapse of rural economies, which has already begun in some areas. City folks may be tempted to write this off as a consequence of country folks’ decision to live in the middle of nowhere, but this issue will affect us all. Even setting aside our reliance on the agricultural and resource-based economies, rural collapse will drive people into already-struggling cities. 

Communities off the Interstate highway system have seen a relentless drop in the availability of long-haul train and bus options, and increasingly must rely on small regional carriers. These work reasonably well for getting to the nearest major towns, but moving around beyond that is difficult. Schedules may not be available online, and do not always coordinate. Changing buses may require layovers lasting hours or overnight. There are exceptions like the Olympic Peninsula in Washington State, but most of the country is totally reliant on automobiles.

Fortunately for some rural residents in Wyoming, Montana and Idaho, the Yellowstone Business Alliance is exploring a transit cooperative to link at least 27 counties in the three states. They are currently conducting a feasibility study, which should be complete at the end of the year, after which a pilot will be launched.

Their highest priorities are closing service gaps and coordinating transfers, but the co-op is also envisioned as a broker and ticketing agent throughout the region. Marketing and purchase of equipment and services could also be addressed. Finally, this organization could provide a boost to efforts aimed at resuming two Amtrak routes through the area; by more effectively delivering people to potential train stops, they will create a market for train travel.

Setting up a business in three states is complicated enough, but the three states in question are each served by a different provider of cooperative development assistance. The Northwest Cooperative Development Center, the Montana Cooperative Development Center, and the Rocky Mountain Farmers Union CDC have recognized the importance of this project demands working across boundaries. They have leveraged their relationships, built through the CooperationWorks! network, and launched a joint project. This bodes well for the prospects for interstate development of healthcare cooperatives, should that become the chosen model for expansion of coverage.

Transit alone will not solve the economic troubles facing rural America. But if this cooperative succeeds, the Greater Yellowstone region will at least maintain and improve its residents abilities to move around the region. Without that, there’s little hope of a sustainable economy for any of us.

Escape from the Beltway

There are two debates on healthcare reform: The first debate is on the merits of various proposals, and how they will impact people outside of the notorious Beltway. The second debate is about motivations of the individuals and organizations pushing for those various proposals, often spiked with questionable polling data. This is primarily a political battle generating more heat than light.

The first debate is confusing enough, with the House and Senate having cooked up three conflicting proposals before leaving town for a summer break of often hostile meetings with constituents. It is quite impossible to tell where they now stand on many of the issues, although many have made absolute statements for or against the public plan. Some have also drawn lines in the sand regarding cooperatives, even though very little is known about what the Senate Finance Committee has in mind, and some congressional leaders have displayed little knowledge of the concept.

The second debate has been outright baffling, even to people who live and breathe national politics. This debate seems to be primarily about what is politically possible, rather than what is most likely to have the best results.

Motivations and agendas are important, as they provide a filter through which we should run arguments. But that filter is not the point, and the importance of bias detection is not the whole story. We should not lose sight of the pros and cons in a thicket of shifting and hidden motivations. Just because someone promotes a solution for hidden or corrupt reasons, it does not follow that the solution is a bad one. And just because many people have the best of intentions and no conflict of interest, it does not mean that they have a good idea.

Similarly, popular ideas are not necessarily good ones (think of Prohibition, red scares,  and pet rocks) even if we could figure out what is popular. The most recent poll (NBC Aug 15-17) shows that support for the public plan has slipped from 46% to 43%. This is hardly conclusive, but more useful than the previous poll (Fox Aug 11-12), which leads with a totally vague question: “Based on what you know about the health care reform legislation being considered right now, do you favor or oppose the plan?” There are several different contradictory proposals in play, any one of which might be in the mind of the respondent. No wonder 16% answered “unsure.”

Too much of Washington’s decision-making is based on counting votes. People can argue about what’s behind each others’ arguments or what “the people” want until the cows come home. But the real question is what will (hopefully) work best. We should be looking at the merits of the proposals.

Nobody knows how this will turn out. Some months from now, Congress will probably agree on something and President Obama will probably sign it, but anyone who says they can tell you what comes after that is making stuff up.

Government programs, cooperatives, and the private sector all have mixed records in dealing with health care, so the best we can do is look at the track record of each: how well have they addressed the problem in the past, and how well do they seem to learn from mistakes. We should work toward a solutions that are flexible, transparent, and responsive.

What worries me most about the public plan is that it will potentially never leave the political arena. The constant comings and goings of politicians and their various loyalties will mean that the whole thing could be in constant flux. De-funding will probably be a regular threat. Whenever Congress changes hands, there could be a shift in what services are available to whom. An effective plan could also simply be gutted by politicians who are mostly beholden to various medical industries; 1/6 of our economy is health-related, so presumably 1/6 of the campaign dollars available are also health-related.

There is no guarantee that co-ops would be immune from this, and the high degree of government involvement in their creation would be very dangerous. There have been cases where various profiteers have undermined or even killed co-ops despite their internal democratic processes; if the co-op plan is adopted, the members and their board(s) will have to be eternally vigilant.

However, we can at least hope that moving the long-term battle out of the Beltway will do some good for the long-term stability of reform. And taking the system out of politicians’ hands improves the chances that the plan will focus on what works, rather than what has the votes.

Corruption is everywhere

DailyKos blogger BenGoshi points out a very interesting “co-op litigation” web site assembled to help members of electric co-ops network around their respective legal struggles with their cooperatives.

This raises a point that has often been deployed to argue against cooperative-based health care reform: Co-ops are not perfect. They sometimes become big and unresponsive, especially after the founding generation passes on. That is exactly what happened with electric cooperatives, which were mostly organized during the first half of the 20th century.

The thing to remember is that there is no perfect system. Anything we do is going to get messed up, and what we need is a system of accountability through which people can organize to draw the system back toward its ideals.

BenGoshi makes three mistakes that must be corrected.

First, he uses a few anecdotes from one industry to smear an entire form of business that counts nearly half of Americans as members and provides services in all parts of our economy. The co-op litigation site lists only seven open cases, and says,

We don’t represent that these are all the Coops involved in litigation nor do we claim that the assertions in the pleadings are all true and correct. They are, however, a matter of the public record.

For perspective, remember that the country has some 900 electric co-ops serving 42 million members. Perhaps they missed a few, and perhaps some of the cases are without merit. But in any case, this clearing house suggests that fewer than one percent of the nation’s electric co-ops are currently involved in litigation. Ideally, internal democratic appeal structures would prevent the need for litigation, but as I acknowledged at the start, co-ops aren’t perfect.

This brings us to BenGoshi’s second mistake. He compares co-ops to perfection, when he should be comparing them to other real alternatives. I don’t happen to know how many lawsuits are underway against various public and private providers of health care, but I would guess that it is more than 1%. This site lists nine active cases related to Medicare alone.

The third mistake is that whatever the shortcomings of electric co-ops today, they utterly transformed this nation. They provide power to 75 percent of our landmass. Without them, it might have been decades (or forever) before the for-profit providers of electricity would reach the unprofitable and unserved rural areas where 90 percent of Americans lived in the mid-30s. Perhaps the government could have created a national public utility; but then – as now – it was rather preoccupied with staving off economic collapse. The same sort of market failure is underway. In the Depression people lacked electricity, and now they lack health coverage.

Maybe it is true that two generations from now the healthcare co-ops will no longer respond to their members, and will be occasionally taken to court. But that is simply not an argument against using them to address the market failure we currently face. There is lots of room for debate about whether a public plan or a co-op plan will best meet the need, and I hope we can have that debate with less focus on the flaws of each option.

Death of a cooperative

Humboldt Creamery, an 80 year-old organic milk producers cooperative, has been bought in a bankruptcy auction, and will now be folded into a major California milk producer. It is the end of an era.

This story first developed last spring, when the co-op’s CEO left town with the books in severe disarray and the business bankrupt. They put up a good fight in trying to keep cooperative ownership, but ultimately ran out of options; a community as small and remote as Ferndale (pop. 1382 in 2000, 260 miles north of San Francisco) just didn’t have sufficient equity to preserve local ownership, especially after a previous drive to increase community investment ended badly (an FBI investigation continues and legal objections have been raised).

Fortunately for them, the organic business is lucrative enough that an outside investor was found. Unfortunately, this continues a trend of consolidation in the industry. The good news is that the employees will still have their jobs and the farmers will still have a nearby creamery to which they can take their milk – at least, they will for now. Once control passes to outside investors, there is nothing stopping the new owners from consolidating operations closer to their center of gravity in central California (350 mostly curvy miles away). The plant in Humboldt is not especially well located, and might also be somewhat obsolete. Worse, Foster Farms has been on an expansion kick lately, which means that they are probably a bit over-extended and might need to cut costs at some point.

I don’t blame the members of Humboldt for any decisions they made. They were up against a wall and probably had no viable choice but to demutualize and liquidate the co-op. However, they may have only bought themselves some time, as past history suggests the Ferndale plant will close.

I hope I’m wrong (and admittedly, I’m just guessing here) but it isn’t far fetched to imagine a scenario like what has happened even in the most lucrative times. Foster Farms certainly has a history of looting their acquisitions: they changed their brand name after absorbing and closing Sacramento’s Crystal Creamery. So there’s nothing stopping Foster from making “Humboldt” milk in Stanislaus County (or Mexico, for that matter). They’ll follow the dollars.

Meanwhile, outside the healthcare bigtop…

The past week saw an increasingly disturbing trend of disruptions at events related to healthcare reform. It got to the point that today’s news included a mention that President Obama’s town hall meeting was NOT disrupted (it went on to note that Sen Arlen Specter was booed and then caught up in a shouting match at his own meeting). Egad.

The focus of these conflicts seems to be around what the government is and isn’t going to do, and it seems to be due to misinformation about “death panels” and people being forced to quit their insurance and take a policy from the government.  Misinformation is bad, and when it is used to manipulate people into disrupting civil discourse, it is really bad. Of course, it is also really good copy, so the media has been all over it.

Meanwhile, a couple of events passed mostly without notice, which shed light on a possible compromise – the controversial “co-op plan.” Specifically, the National Cooperative Business Association produced a letter and a webinar that can contribute greatly to the general level of knowledge on the subject. They should be commended for their contribution to the debate.

These are not a conclusive case for the co-op plan, mind you. NCBA seems to share my cautious assessment of a proposed cooperative development initiative that would be unprecedented in its size, speed, and degree of government involvment (in this country, at least). But they have still assembled a significant body of evidence that cooperatives are worth considering.

Two weeks ago, Senator Jay Rockefeller (R-WV) wrote a letter to the GAO, posing a long but important list of questions that he wanted answered within a week. It was a heckuva list, and I got the sense that he wasn’t seriously expecting a reply, so much as venting his uncertainty through an intimidating pile of rhetorical questions.

I’m not aware of a response from the letter’s recipient, but NCBA took the bait and sent an 11-page response, addressing each of his concerns (except for those for which it was unable to find answers due to lack of specialized research or difficulty in contacting people involved with some co-ops that haven’t survived). The letter shows that the cooperative movement can get things done quickly. I suspect that someone worked over the weekend to produce this summary, which is indispensible to an informed opinion on the matter.

Just in case the folks at NCBA weren’t already busy enough answering the GAO’s mail, they also hosted a webinar on the subject, a recording of which is now available for download. I suspect most people won’t be up for an hour of education, so I’ll share some of the main points.

After a general introduction to cooperatives from NCBA President/CEO Paul Hazen, we heard from Donna Zimmerman, a VP at  HealthPartners, which insures 1.25 million members in Minnesota and Wisconsin; they employ 10,000 people at 84 locations, including 3 hospitals (one of which has a trauma unit).  What stood out to me was her description of the ways in which HealthPartners’ leadership is accountable to its members: At their annual meeting, they have an open mike in which any member can ask questions of the board or management.

The other panelist was Bill Oemichen; he is president and CEO of the Cooperative Network, which is a co-op federation for the same states in which HealthPartners is based. Its members are 600 cooperatives in all industries, with a total of 6.3 million members. Several of these members are in the health care field.

I was particularly intrigued by Oemichen’s presentation, because it challenged one of the main objections to having a decentralized co-op plan (that is, organizing on the state level rather than a single nationally-based cooperative): One of the biggest challenges to any cooperative will be the need for economies of scale. On the one hand, rapid growth can destabilize any cooperative and especially new ones. On the other hand, without reaching a certain size the co-ops will not be competitive in a rather cutthroat market.

State-based cooperatives will have greater challenges achieving economies of scale, but somehow Wisconsin is home to several operating in different parts of the state. One of these - Cooperative Health Choices -  is just being launched to serve the northwestern part of the state, which is both a HealthPartners service area and mostly rural. If a rural part of a state can start a co-op when there is already another huge co-op serving that region (and that is still an “if” since they are just setting up shop) then there is really no reason to doubt that any state could support its own cooperative, provided that there is adequate support for its creation.

Another objection raised about co-ops is that they’ll take too long to work. However, Oemichen said that the introduction of a cooperative to a market has tended to result in immediate improvements throughout the market – even those who stick with their old insurers have often found their service improved and their premiums lowered. Farmers’ Health Cooperative has had noticeable results in a short time, holding premium increases to below eight percent in its first year. This is especially noteworthy because farmers were often refused access to insurance before they organized a co-op. FHC’s success was recently confirmed by an independent survey: In under two years of operation, and with a relatively tiny membership of 2500 high-risk members, more than two-thirds reported improved benefits, generally with reduced or stable costs.

These examples show that small healthcare cooperatives can compete, even at a level approximately 1/10 the size Senator Conrad is suggesting will be needed, and 1/5000 the size envisioned for the overall co-op plan.

None of this removes the challenge of organizing co-ops for every state. It is also essential to remember that Wisconsin has a long history of cooperative organizing; its success is unlikely to be duplicated in, say, Delaware or Nevada.

I still lean toward the national approach (or perhaps several large regions, each including at least one state with a strong cooperative sector) but the evidence from Wisconsin suggests that the state-level approach might also have some legs.

And if we do take a national approach, the break-even point might be much closer than we think.

The Rust Belt shines

I just returned from the Eastern Conference for Workplace Democracy, a gathering of about 150 brave souls doing good work. I’m very inspired, although somewhat scatterbrained from all the new leads and ideas.

Without getting into much detail, I had an excellent time in Pittsburgh. It is a beautiful (although gritty) city, with an amazing history, amazing geography, and amazing architecture. It had a rough couple of decades, but seems to be bouncing back quite nicely. One of the more intriguing developments is a local trend of repurposing big old buildings, such as the Mattress Factory art gallery and the Church Brewpub. They also have crazy sandwiches. I could go on and on, but I would rather zoom out a bit and discuss some of the cooperative projects that I learned about during my time among people who are creating a democratic economy out of the ruins of industrial capitalism.

My own city of Sacramento is currently in the early stages of what seems to be a similar collapse, in which its main industries (government, real estate, agribusiness) are coming under increasing downward pressure. There are some flailing efforts to attract new industry, such as a Nestle bottled water plant that will convert tap water bought at $0.00016 per pint into bottles sold for roughly 10,000 times that. The equivalent of 150 households’ water will be privatized; that is not a huge amount, but we don’t have any to spare for this nonsense. This is against a backdrop of a nearby river running dry due to groundwater depletion, agricultural water deliveries entirely cut off in some parts of the valley, and orchards cut down or left to die. Orchards! 

But hey, at least we’ll (supposedly) get 40 jobs! I hope that we can learn our own lesson quickly, and not spend too much time giving away our scarce assets in this insane race to the bottom. 

One way to preserve jobs so we don’t have to beg outsiders to come bail us out is to explore is worker ownership. And this is where we get back to the Rust Belt and the lessons it has already started to learn.

In suburban Toledo, a manufacturing plant is reopening under employee ownership (you don’t hear that news much lately!). Maumee Authority Stamping, Inc. was formerly a captive supplier of large parts to the Ford Motor Co. Its 800,000 s.f. plant was shut down in 2007. The employees immediately formed a committee to buy the facility and re-open it. They discovered that an employee-owned company could break even operating below 50% of plant capacity, suggesting that the shutdown was probably more related to the early stages of a contraction in Ford’s operations (which at least helped that company avoid the need for a bailout) than to any inherent overcapacity in the industrial sector.

The Ohio Employee Ownership Center helped develop a plan for reopening Maumee. The plan relied on outside investors, but each of the employees will invest $16,000 through accumulation of shares. Because Ford took the customer book, Maumee will have to rebuild their client base. Early indications are that they have a good chance of this. They have already resumed operations at the plant with 50 employees, and will scale up operations as orders warrant. (source: Owners at Work magazine, p. 6-8)

This is great news for a one-off effort, but we are starting to see an extremely interesting systemic development in Cleveland. It seems that a large chunk of the city’s leadership has caught the cooperative bug, and there is widespread support for an initiative to systematically develop worker-owned cooperatives in an underserved neighborhood called University Circle.

Evergreen Cooperative Laundry is a new, green, $6 million facility that is owned by its workers, most of whom live nearby in a neighborhood where unemployment tops 30%. Once the co-op opens next month, its six employees will earn $15/hr and up cleaning linens for businesses including the hospitals involved in the initiative. More importantly, workers will start to accumulate equity investments in the business, perhaps $65,000 per person in less than a decade. If things go well, there may soon be as many as 50 employees.

And that’s not all. Already, Ohio Cooperative Solar is envisioned as the largest solar power generator in the Midwest. It will lease rooftop space from community institutions, who will also buy its power. Further down the line is a major urban farming enterprise, which will grow millions of heads of lettuce and bunches of basil through hydroponics.

So what’s gotten into Cleveland? One word: Mondragon. Last October, while the rest of us were watching the economy unravel, the Cleveland Foundation sponsored a study trip to the Basque region of Spain, which is home to one of the world’s greatest (although imperfect) expressions of cooperative economics. In the 1950s, the region was devastated by war, but through worker ownership they built a system that made it through a brutal decade-long national recession without ever laying anyone off. Whenever an enterprise failed, its worker-owners were retrained and moved to another enterprise.

To make sure that the laundry is not an isolated success, Cleveland has also borrowed a page from the Mondragon playbook on finance. They are creating a cooperative development fund that will grow through the continual contribution of at least 10% of member cooperatives’ pre-tax profits.

There is always the chance that this effort will fail due to a worsening economy. Co-ops do not have to continually feed outside investors, but they are still businesses that must at least break even to survive. But on the whole, I’ve got a much better feeling about Cleveland’s innovative approach than Sacramento’s same-old, same-old. Rather than giving away our resources to companies like Nestle, we need to save the jobs we already have.

Process point on health reform

Over at the Daily Kos blogsite, mcjoan has brought up an excellent point: The process by which the Senate Finance Committee is approaching its work is deeply flawed. She and I may disagree on the merits of the “co-op plan” that they favor, but we share a couple of serious process concerns that have been raised by Sen. Jay Rockefeller (D-WV).

First, Rockefeller and most other committee members have been shut out of the discussion, which currently involved only six members. The other 19 members are hopefully getting more information than the public (which has so far seen only a mid-June leak of a first-draft outline), but they’ve been excluded to the point that some are  making noises about ousting committee chair Baucus. That is a sign of a degraded process for decision-making, which will make later work more difficult.

Another concern is that the gang of six appears to be pushing forward in the absence of reliable data on what impact a co-op plan is likely to have.

I don’t believe that we can really tell the future from the past, because a nationally coordinated, government capitalized cooperative development initiative is very different than the regionally concentrated grassroots initiatives started in the 1930s and 1940s. Nevertheless, we need to know everything we can about what has worked and what hasn’t. Otherwise, we risk repeating the mistakes of those co-ops that have failed. And we cannot afford to do that.

Fortunately, Sen. Rockefeller has contacted the GAO to request any information they can provide. I’m anxiously awaiting their response, and will appreciate any hot tips about that information when it comes.

When we are tackling such an enormous and important issue, we need to do it well. If a co-op plan is going to succeed, it will rely on the goodwill of enough people to become members and make it viable. If the plan is rammed through somehow, it will reduce the likelihood of its success.