By Norman G. Kurland, Dawn K. Brohawn and Michael D. Greaney
Center for Economic and Social Justice
Response to USDA’s “Rural Development Overview”
Presented at the U.S. Department of Agriculture – Senior Policy Retreat
May 5-7, 1994
“But if we are to retain freedom, then we can only do so by keeping the determining mass of the citizens the possessors of property with personal control over it, as individuals or as families. For property is the necessary condition of economic freedom in the full sense of that term. He that has not property is under economic servitude to him who has property, whether the possessor of it be another individual or the State.”
Good practice follows sound theory. Successful managers and problem-solvers always start with a paradigm, a conceptual framework with widely accepted assumptions that they can turn to for analyzing and solving everyday problems.
Good ideas work. If the paradigm is defective, a solution will not work, at least not for long.
Many are beginning to ask whether the modern welfare state is out of date. They are questioning whether income security can be guaranteed by the state-a unique social invention which was never intended to be an efficient producer of goods and services or a generator of income for its citizens. What the state does well and was designed for is to ensure that all citizens can enjoy equal justice and to lift unjust social barriers to equal opportunity, not necessarily equal results, for all.
Clearly the Marxist paradigm has been discredited with the breakdown of the economy in the former Soviet Union. Increasingly the Keynesian paradigm has proven to be inadequate in being able to predict the future condition of any economy or to guarantee income security for most of the citizens within a welfare state guided by Keynesian principles. And the laissez-faire or neoclassical school of economics has engendered economic policies in which productive assets become ever more concentrated in fewer and fewer hands, and the gap between the rich and the poor becomes wider and wider. The issue of concentrated capital ownership is simply not a central question in the neoclassical paradigm (or, for that matter, the Keynesian paradigm).
A new paradigm based on the expansion of equity ownership opportunities for working and poor people is beginning to emerge around the world. This paradigm envisions a private, free market economy that genuinely empowers every citizen. Rather than redistributing the present economic pie or relying on trickle-down economics, this new paradigm offers ways to ensure that all citizens become owners of the new wealth created by a more sustainable economic expansion.
The focus of the new paradigm is on proven approaches to empowering poor and working citizens, without increasing government spending or transferring existing wealth from others. The new paradigm challenges all policymakers to move beyond the traditional left vs. right debate. It offers new means for improving the quality of life for citizens who are largely left out of the mainstream of our economy.
For the last several years there has been much glib rhetoric on the subject of “empowerment.” There is, however, little talk about economic empowerment. Our paper will focus primarily on the issue of economic empowerment and how those at the bottom of the social ladder can begin to enjoy effective economic empowerment.
In a society where all power is supposed to rest with the people, economic sovereignty must start at the individual and family level. Since power follows property, property must be spread broadly. The best antidote to concentrated power and monopolies is to empower all citizens through decentralized ownership of all of society’s productive enterprises. Only then can those who run government and other social institutions be held accountable to the people. Such a society would be comprised of highly autonomous, interdependent people capable of associating with other “sovereign” individuals for their mutual interests. Genuine economic democratization is thus the ultimate check on the potential abuse of state power, as well as on abuses of fundamental human rights by the majority against highly vulnerable minority groups and individuals.
What is common to all of the world’s economies today is that the average worker and his family have little or no chance to escape from the worker-for-hire system, assuming he or she is not trapped in an even more dehumanizing situation-dependency on charity or redistributive welfare plans. In a worker-for-hire system a worker is powerless and defenseless against advancing technology and those who control his job and income level.
The primary social means to bring about expanded ownership of productive assets involves the democratization of productive, self-liquidating credit, which like the secret ballot in politics, is a uniquely “social” good. Most Americans are becoming increasingly aware that we have an overly consumption-oriented economy, where it is far easier for the average citizen to obtain credit for non-productive purposes than to acquire productive property.
Many third world debtor nations have fallen into the same trap, incurring huge burdens of debt and spending the loan proceeds on projects that do not generate revenue to repay the loans. Consumer credit and other non-productive forms of credit entrap workers and nations into dependency on those who own and control capital.
One way to allow workers to transcend the limited opportunities offered by the worker-for-hire system is to redirect society’s uses of credit from non-productive and consumer purchases, toward enabling working people to acquire on credit ownership shares in productive enterprises, thereby raising their status to that of co-owners. Productive capital assets, under professional management, are expected to pay for themselves out of future profits, and thus are inherently better credit risks.
By making productive credit available on a truly democratic basis, society moves people toward economic self-sufficiency and independence. Hence, if we are genuinely committed to economic empowerment, the new paradigm of expanded capital ownership demands that we find all reasonable methods of democratizing productive credit so that all citizens can begin to accumulate assets as a basis for their own “economic empowerment.”
From 1960 to 1993, the population on farms dropped from 15.6 million to less than 5 million. As a result, farm people now make up no more than one-tenth of the rural population (“Rural Development Overview,” p. 8), and the rural population itself is now roughly 25% of the entire U.S. population, with another 25% living in urban areas, and 50% of Americans living in the suburbs (p. 3). Rural population has been declining as a percentage of the country’s total population, almost since the founding of the republic (p. 4). In 1920, the urban population exceeded the rural population for the first time. And now, in 1990, only 25% of the population make up rural America.
In 1890, 39.3% of the American people lived on farms. By 1990, only 3.9 million Americans lived on farms, just 1.5% of the total population. While the number of farms has declined, the size of farms has grown from an average farm of 137 acres in 1890 to 461 acres in 1991.
The biggest force for change is evident in the statistics that between 1940 and 1989 agricultural production as measured by output per hour of farm work increased by approximately 1,300%. Also relevant is that rural Americans are more likely to be poor than their urban relatives, and the gap is getting wider. For example, 36% of all rural children live near or below the poverty levels. In urban areas, this figure is 29%.
Another major factor relates to the type of work done by farm families. Off-farm work has substantially raised the income level of these families (“The 1995 Farm Bill,” p.9). In 1991, the average farm operator household income was about $36,000, 95% of the average level for all U.S. households. This is a surprisingly high figure.
On average, however, only $4,400 of total farm household income came from farming. As noted, “Sixty-nine percent of all farm households operate farms with gross farm sales of less than $40,000. These families depend almost exclusively on off-farm income, primarily earnings from a non-farm job, for their family living. These small farms, which produce relatively little of today’s food and fiber, are simply too small to provide a net income sufficient to support a family, even when commodity prices or support payment rates were relatively high” (“The 1995 Farm Bill,” p. 12).
In the “Rural Development Overview,” the author, Karl N. Stauber, suggests seven critical forces that are driving the condition of rural communities. He lists: metropolitan influences, globalization, transportation and communications technology, economic restructuring, workforce quality, shifts in intergovernmental relations, and national macroeconomic policy. He suggests that “none of these forces are fully controllable by local communities; some are beyond the influence of rural areas” (p. 4)
We would agree that these forces are affecting rural development. But we also believe that the Department of Agriculture has an opportunity to begin to affect national macroeconomic policy in such a way that rural America can become a model for rapid rates of private sector growth which other areas of the country can begin to emulate. This will require that the USDA’s vision of the future be bold enough to embrace all Americans, while demonstrating in key rural regions that with certain macroeconomic changes, rural America can become the leading growth area for all of America.
In addition to these significant statistics illustrating the condition of rural America today, we would like to offer some other important figures which will illustrate some of the points we intend to pose, including the need for a new expanded ownership thrust within fundamental macroeconomic reforms:
As of 1983, the top 1% of Americans owned over 58.4% of all individually held corporate stock. (This includes stock owned directly or through mutual funds, but excludes pension plan assets.) The top 10% of Americans own about 89.8% of the nation’s individually owned corporate equity.
The annual new capital formation in all sectors of the American economy, as of November 1992, consisted of:
New plant and equipment $565.4 billion
Non-residential construction $126.2 billion
Public construction $122.2 billion
Residential buildings $193.3 billion
Total $1.007 trillion
This amounts to nearly $4,000 per man, woman and child in America. If this growth capital is financed in traditional ways, these new assets will flow largely to the same tiny percentage of the population in whose hands most of today’s productive capital is concentrated. If financed through “Capital Homestead” (i.e., ownership-broadening) vehicles described in the Appendix 4, America’s growing need for new and more productive capital assets could provide a significant annual increment of income-producing assets for each citizen in America, or $240,000 in newly created assets for a family of three over a period of 20 years.
Another point to emphasize here is that capital breeds capital. Thus, the rich must necessarily become richer through traditional methods of financing capital for the private sector, methods which exclude most Americans from the effective means to share in the growing overall capital pie.
In contrast, most Americans owe more than they own. The average American today is obligated with a $43,000 slice of America’s total debt of over $11 trillion, most of which represents consumer debt and nonproductive borrowing by government for wars, expanded public bureaucracies, subsidized jobs and welfare.
Before commenting on the various proposals presented in “The Rural Development Overview,” we wish to recognize the author of this section, Karl N. Stauber, for his taking on such a monumental and challenging task as developing a new vision for rural America as it faces shrinking support from urban and suburban America. He is clearly striving to think in a comprehensive and coordinated way, and is to be commended for a strong devotion to market-oriented solutions-a departure from traditional policies followed for many decades.
After describing the different phases of development in rural America-the “settlement” phase, the “storehouse” phase, the “poverty alleviation” phase, and today the “playground” phase-the writer asks a very important question. Given the fact that over 50% of the U.S. population is now located in suburban areas and only 25% in rural areas, “Why should we invest precious public resources in rural America?”
The analyst says that the “playground” policies may offer a partial answer, but they do not offer much hope for rural America. It is our contention that this is the wrong question. The real question is, “Why should rural America invest in itself?” Or put another way, how can the development of rural America-whose existing savings pools are clearly limited-be financed in ways that sever its dependency on the financial resources of urban and suburban America, or foreign pools of accumulated savings?
As we will argue in this paper, the nation as a whole may indeed have to invest for a period during a phase-out of the present dependency situation in which rural America today finds itself. But even more important, rural America now has an opportunity to challenge itself before the rest of America, and say, “help us for a 3-5 year period at current, or even declining, levels of support, after which date we will consider to be a sunset date for further subsidies.” During that 3-5 year period, rural America can begin to adopt much more dynamic private sector growth programs which would bring not only growth but widespread opportunities for all workers and poor citizens to accumulate assets and share in the profits of development of a new rural America.
Then rural America could say, “give us a chance to build this model of a new economy and if it works for us, then you, suburban and urban America, can follow our example.”
The first of the basic assumptions presented is that “the for-profit economy-the marketplace-is, and should be, the dominant force in rural development. Whenever possible, we should rely on the marketplace to direct and support rural development. Government should not subsidize people and communities to do what the marketplace can do better.” We agree completely with this first assumption, but we would turn to one of the recommendations for fundamental change supported in the section on the 1995 Farm Bill (p. 27). This option for fundamental change would support the phase-out of farm price and income support programs. It also recognizes that several years might be needed to bring such programs down to zero subsidies and zero support, and that this phase-out would cause hardship for many farmers, even thrusting some of them into bankruptcy.
However, this is a very realistic recommendation on the part of USDA, both for political reasons (because of demographic changes and the shift of political power to the suburbs) and also because any economy should be able to support itself. To the extent that an economy turns away from market principles, it does so to the detriment of U.S. consumers and consumers of U.S. farm products abroad. And this phase-out would place America on the highest possible negotiating grounds when GATT, NAFTA and other U.S. world trade partnerships move toward a zero-subsidy future.
The Farm Bill section also recognizes that in eliminating these programs over time, there would have to be a phase-in of new programs to insure against losses from natural disasters, and to compensate producers for responsibilities they assume for environmental stewardship.
The second assumption is that rural communities in the market place-not national programs-will decide whether areas prosper or decline. We totally agree that as long as the playing field is level and all of the basic ingredients for growth are equally accessible to rural areas, this assumption will hold true. However, we believe there is another barrier to equal opportunity, more critical than either unequal political weight or even unequal economic power. This discussant will be offering some suggestions on ways of equalizing access to one of the most important ingredients for rapid private sector growth-that is, access to low-cost, productive credit that is unsubsidized and not dependent on existing sources of savings. This point will be covered in our discussions of long-term solutions.
The third assumption deals with historic patterns of discrimination as an important cause of poverty. It is true that competition and the marketplace have rarely overcome such problems and that governmental action is needed to insure that those who are traditionally disadvantaged have the same opportunity to compete in the marketplace as those who are most advantaged. The point we will make is that the equalization of access to governmentally manufactured or “social” goods such as money and productive credit through local banks, and the equalization of opportunities to working and poor citizens for investment in highly feasible projects, would constitute a preferential option for those who are most disadvantaged.
Heretofore that opportunity (i.e., access to large aggregates of commercial bank credit) was exclusively available to a small elite of the total U.S. population. By equalizing the opportunity for poor and working citizens to acquire low-cost credit (on the same basis as the top 1% of Americans who today own over 50% of all individually-owned U.S. corporate shares), this would have a major compensating effect in terms of helping disadvantaged families to overcome past discrimination. While by itself it may not be sufficient to totally compensate for the damage of past discrimination, this new opportunity and means for self-sufficiency would put people on an equal footing in terms of access to credit that previously had not been available to them.
With a new “social contract” for working and poor rural citizens that enabled them to supplement systematically their current incomes with income from growth profits, the presently low market wage rates in rural areas could become a magnet for new investment and provide rural areas with a virtually permanent comparative economic advantage over areas where fixed labor costs are higher.
The fourth assumption deals with the relationship between community development and economic development. We found it a very strange point to talk about clean water and waste treatment facilities as an issue of community development; on the other hand, we have to recognize the incredible need for this in many rural areas and recognize that certain basic services such as water, waste, health care, education and transportation are so essential to individuals, families and children being able to develop, that in this case the marketplace may not provide a solution. Therefore available resources from taxpayers from other parts of the country may be necessary to help subsidize these basic services, at least until the new economy envisioned in this new rural development policy gets underway and becomes self-sustaining.
The fifth assumption also deals with community development, but makes comments that are somewhat disturbing to this reader. While this reader has been a long-time advocate of locally controlled institutions having resources at their command for developing leadership and non-governmental, non-profit community programs, he has serious concerns about having either non-profit or governmental organizations managing and owning assets as critical elements of community development. While it is not stated explicitly, the assumption as presented here leaves it open to some of the methods of developing income-producing assets on a non-profit basis. At best, these methods have been good for housing development (which is a form of consumer good) but have had a rather poor record in terms of being able to compete effectively in the global marketplace.
Hence, we think this particular point needs further discussion. We will cover this in our discussion on the difference between the community development corporation (which is an instrument that has been used since the 1960s for management and ownership of assets) and a new for-profit counterpart called the community investment corporation (CIC), in which the same objectives are carried out in a for-profit way, with the residents of the area becoming stockholders of a locally based real estate development corporation and receiving as additional income profits of the CIC to supplement their income from other sources.
The sixth assumption deals with the budget deficit and its impact on the financing of the needs of rural America. Here the author proposes that there be a targeting to those areas where opportunity is declining or stagnant, particularly the 500 persistent poverty counties and regions of shrinking population and job opportunities, such as the Mississippi Delta or Great Plains regions. This is a debatable point. The question is where best to target scarce or shrinking resources. If a vision can be developed that will produce as quickly as can be implemented a rapid growth program based on the comparative economic advantages of all rural areas, including those in which opportunities are most lacking, it would be a wise investment to develop that vision and get it underway as quickly as possible, rather than continuing to put band-aids over wounds that seem to be hemorrhaging.
The seventh assumption deals with environmental quality. Here again the assumption seems to place rural areas in a condition dependent on the support of suburban voters. We would agree that the Department should try to gather as many resources as it can to help raise environmental quality in poverty-impacted rural areas, but we believe the most sound approach is a long-term approach based on a vision of a self-sustaining rural economy that will be capable of competing vigorously in the global marketplace. Such growth will produce what some call a “growth dividend” necessary for covering the costs of environmental quality, plus education, health and other primary social needs.
Let us keep in mind that development will produce pollution and environmental distortions. Yet we can also define pollution as “potentially valuable resources that are simply out of place.” Technology exists or can be created to minimize the problems of environmental abuse, but it should be introduced in ways that conform to market initiatives and market incentives. And ultimately the costs of environmental damage should be borne by the customers who buy the products from the polluting enterprise. This is another way of describing what economists call “internalizing the externalities.” No one should be victimized by progress. For those who benefit from progress, justice demands that they pay the full costs of their benefits.
USDA is to be commended for a very well-articulated vision of its future role, that “the new role of the federal government in rural development should be to assist communities, based on inclusive development initiatives, to become more competitive in a world marketplace, through creating sustainable economic opportunities for all residents” (p. 7). Also commendable, this section then points out three priorities for its development efforts: 1) the reduction of long-term poverty in the 500 poorest rural counties; 2) increased viability of rural communities in the declining, sparsely settled regions such as the Great Plains; and 3) assistance for those parts of rural America who are experiencing short-term difficulty from rapid structural change due to shifts in public policy, the international marketplace and natural disasters. No one can argue with these as priorities.
What we found here was something new that has not been emphasized by other federal agencies. That is, in paragraph two there is discussion not only of stimulating business enterprises that can provide employment, but also “ownership opportunities” throughout rural America. This is the central theme behind this discussant’s presentation and behind the programs of the Center for Economic and Social Justice which he represents.
Proposal 1-Regional Initiatives recommends four major regional initiatives: 1) the Delta Initiative, 2) the Great Plains Initiative, 3) the Indian Reservation Initiative, and 4) the Colonias Initiative. We support all of these initiatives but recognize that there will be continuing difficulties in implementing the Indian Reservation Initiative because of the continuing tension on the concept of sovereignty-not between the United States’ and tribal sovereignty, but between tribal sovereignty and individual sovereignty of the individual member of a particular reservation tribe.
The main thesis of the American Constitution, that sovereignty begins with the individual, will constantly be at odds with any program in which collective ownership and collective economic power is concentrated in a political leadership who may or may not be accountable economically to individual members of the tribe. There are valid historic fears that individual ownership of land and other property (or even of businesses) would leave Indian-owned businesses vulnerable to speculators and sophisticated outsiders who would eventually take over the ownership of Indian lands and Indian businesses.
We believe that this concern can be addressed through various devices such as employee stock ownership plans (ESOPs), community investment corporations (CICs), and other vehicles in which ownership of assets can be owned jointly-but with all the rights of private property, except the right to sell on an individual basis, flowing to individuals as beneficiaries of a legal trust or as members of a shareholders’ association. Thus, democratic safeguards can be built into the decision-making process regarding the entering into joint ventures with outsiders or the sale of assets to outsiders. For example, some employee-owned companies design their ESOP to require former employees to sell their shares back to the company or ESOP for cash at an annually appraised fair market price whenever their employment terminates.
Proposal 2-New Financing for Rural Infrastructure deals with known, available resources from existing savings pools that can be allocated for the purpose of infrastructure financing, in an amount estimated between $59 billion and $141 billion. Considering the limited nature of existing savings pools, the recommendations seem to be intelligent and feasible. It makes sense to coordinate among the six different Federal agencies now providing funds for rural water and sewer. The concept of securitization and selling of qualifying loans through the secondary market also makes sense. Lastly, while it seems somewhat optimistic that sufficient funds would be available by the year 2000 in order to provide all communities and all households with some kind of water and sewer treatment, we would support such a concept if the resources could be available under today’s budgetary restrictions.
One problem we have is that if an adequate blueprint for private sector growth could be developed for various areas, the $1 trillion in USDA’s estimates of needed infrastructure financing would be part of that overall growth program and would be included in whatever financing is necessary. Again, we will offer some long-term solutions that would cover both infrastructure and economic development project funding that are not available through existing savings pools.
Proposal 3-Clean Water and Wastewater, Goals 2000 – A Faucet in Every Home. While it is disconcerting to learn that there may be as many as 1 million households in America without clean, hot and cold running water, and proper plumbing facilities, and that most of the 57,000 community water treatment facilities in rural areas are out of compliance with current Environmental Protection Agency regulations for safe drinking water, the thrust of this proposal is clearly a good one. On the other hand, it is also discouraging to learn that no needs assessment has been developed to show the scope of the drinking water problem at present. Clearly this is a matter that should receive top priority by USDA and the Administration. Again, funding is a crucial question, whether the funds proposed in this section would be adequate to meet the needs. Clearly this is speculative, given the fact that no one knows precisely what the scope of the problem is. However, the long-term solution we would propose would in fact provide an alternate means of solving the financing problem of providing a faucet with clean water in every home.
This proposal raises the question of whether we are putting the cart before the horse and whether in fact we have confidence that the market system can provide adequate private financing for the information superhighway, given favorable conditions for investment. Clearly, as described in this proposal, there would be an important federal role. The question is whether or not the federal government will attempt to use taxpayer funding for developing an information superhighway. If that is the case, in our view, rural areas will be getting the short end of the stick. As an alternative for providing access to the information superhighway and access to the information technology that is needed for rural areas to develop effectively in the marketplace, we again are reminded of the importance of developing a viable, long-term plan of structural reforms and new macroeconomic policies which will stimulate rapid rates of private sector growth in rural America linked to broadened ownership opportunities. In our view, this is the only realistic way to meet the enormous financial needs that are required to allow rural areas to effectively compete in their economic development strategies.
Proposal 5-Partnerships for Rural Community Development. Having worked 30 years ago in developing the initial strategies and policies for community action programs for the War on Poverty, the discussant finds this section somewhat déja vu. Community Development Corporations have had some measurable impact in developing housing, and to some extent in generating neighborhood retail and industrial spaces (e.g., Bedford-Stuyvesant Restoration Corporation). To use this approach as a major component in a new vision of rural America’s future, however, is making a mountain out of a molehill.
It is important to realize that while well-intentioned, the Community Development Corporation approach was doomed from the outset. It attempted to blend non-profit legal vehicles and non-profit objectives with profit-making goals, while competing with companies with more effective means to compete in the global marketplace. There have been many stories of the incredible abuses that have taken place through the CDCs. If no one has the courage to state the facts about this situation, we hope that this criticism will encourage others to take a much closer look at the CDC as a viable approach to developing a private sector in rural areas.
But we are not here merely to criticize. We will offer an alternative that will meet all the objectives that the CDC intended, but would substitute a for-profit corporation, not unlike the Rouse Corporation which built the planned community of Columbia, Maryland, or the Reston Corporation which similarly developed Reston, Virginia. Under our Community Investment Corporation (CIC) alternative, shares of CIC stock could be “earned” by the residents of the area. This would allow profits from real estate development and the appreciated land values that take place through development, to accrue to families residing in the areas covered by the CIC, rather than flowing exclusively to outside speculators and investors seeking new “tax shelters” granted by the U.S. Treasury.
The Community Investment Corporation would not own operating enterprises; it would be strictly a real estate, planning and development corporation vital for determining infrastructural needs as well as setting aside certain areas for industrial, commercial and residential development. This is not the place to go into detail on the CIC. Other papers are available that amplify this concept. (See Appendix 3.)
Proposal 6-Entrepreneurial Development and Microlending. This proposal discusses various initiatives to develop entrepreneurial talent in low-income rural areas. It should be emphasized that entrepreneurs surface when opportunities begin to develop. Without opportunities, there are no entrepreneurs. Also, a case can be made (with examples to support this point) that a single entrepreneur is not as powerful over the long-haul as a group of entrepreneurial workers working together in an employee-owned company to meet their common objectives.
Microlending approaches such as in the Grameen Bank model developed in Bangladesh may be useful for getting unemployed and poor people credit to start businesses of their own. This is a step in the right direction toward a national policy for encouraging widespread distribution of equity ownership and asset-based alternatives to dehumanizing welfare systems or dead-end jobs subsidized by the taxpayers.
There have been some excellent models of expanded capital ownership which have emerged from developing countries, offering new approaches for America’s own private sector rural development. One such model is described in a case study on the Alexandria Tire Company ESOP in Egypt (see pages 247-258 of Curing World Poverty: The New Role of Property). This model demonstrates how new joint ventures with multinational companies (in this case, Pirelli Tire of Italy) can be created in poor and developing areas, bringing to new worker-owned companies state-of-the-art technology, management systems, financing and access to global markets, along with a “new labor deal” for workers based on equity participation, profit sharing and participatory management.
Proposal 7-Sustainable Rural Development Zones. This is a very admirable proposal to combine environmental responsibility with economic opportunity. The author recognizes that in many areas people’s need for job incomes has often been in conflict with the interests of the scientific community and the environmentalist community. The recommendation here is to use the Empowerment Zone/Enterprise Community initiative as a way in which sustainable rural development zones can be created. We totally agree with the objectives that economic development should not be at the expense of a quality environment. The two not only can but should go together.
On the other hand, we believe that bringing together various interest groups within a community in which economic development is to take place, so that all of the citizens will have a vested property stake in the outcome as CIC shareholders, will give these disparate groups at least one point of common reference besides being residents of the same general area. Hence, in the Community Investment Corporation, issues of planning environmental controls would be part of planning the building the new economy in the area, and all points of view could be taken into account. In addition the CIC approach could address how to finance rapid rates of growth which are necessary to make these areas into viable economic areas while at the same time to avoid damaging non-replenishible natural resources. Good stewardship and good economics can go hand-in-hand.
Proposal 8-Marketing Sustainable Rural America. Proposal 8 is an attempt to reconcile the conflict between those supporting traditional methods of agriculture and those seeking alternative agriculture. This is a good proposal, mainly because it concedes that market forces can be very useful in financing organic agricultural products and other produce that might come from alternative agricultural development. The concept of developing a new Alternative Agriculture Development Service, as a branch of the proposed Rural Business and Cooperative Development Service within USDA, will obviously enhance movement in this direction. Diversity can only help America in improving the overall quality of life as well as linking America’s agricultural sector to the growing demands of suburban America for organic products.
Proposal 9-Reinventing Federal Rural Development Policy. This particular proposal focuses in on the enormous complexity and overlap among rural development programs at the Federal level. It ties in directly with the Clinton Administration’s Reinventing Government initiatives, which make a good deal of sense in terms of improving the quality of services and programs delivered through the public sector. As taxpayers and non-government employees, we could only support this kind of initiative.
Proposal 10-Addressing the Needs of Rural Homelessness. Certainly one of the most shameful things for people living in the affluent Washington Metropolitan Area is the enormous amount of homelessness evident in the streets of this city. As this proposal points out, there is an incredible amount of homelessness throughout rural areas. This proposal offers a five-step initiative in finding ways to begin to meet this need.
No one can quarrel with the need for improving housing for all Americans. This is a question of resources and clearly present budget deficits have diminished taxpayer funding available for meeting the needs of the homeless. How should we address this problem? “Take whatever money is available and do the best we can” is the short-run answer. The long-run answer is to begin to get America, and particular the rural areas with which we are concerned here today, growing rapidly without inflation in ways that offer marketable goods and services to the global marketplace. We can no longer simply “service” one another at the local level.
A viable growth area also has to be able to add value and export something to the world, and from that it can increase its levels of income, jobs and ownership opportunities. Our answer to homelessness is to use the various mechanisms designed in what we call the “Capital Homestead Act” to help bring about sustained and vigorous growth in the economy which will provide the incomes by which people can afford to rent, buy and repair their own homes. Everything else is simply going to depend on redistribution, subject to all of the political and social limitations that history has clearly taught us, when people’s incomes are dependent on charity or governmental redistribution programs.
Proposal 11-Marketing and Manufacturing Networks. Here is a proposal in which USDA would use taxpayer funding to generate networks of enterprises in rural areas in order for them to help market their commodities. The major problem with this is that the free enterprise system, when it is operating vigorously, has little difficulty marketing whatever it can produce. Marketing is one of America’s great strengths. The problem is finding customers with adequate incomes. Consequently, it is crucial that we launch as soon as possible a national growth strategy (i.e., the Capital Homestead Act) which would generate new sources of income from ownership linked together with the new capital formation necessary to sustain a high tech, globally competitive types of enterprises.
This can be done in rural areas if we combine the natural comparative economic advantages of these low income rural areas (i.e., lower market wage rates) with high technology, access to markets, access to financing, access to experienced management talent, and access to the kinds of incentives that would encourage the creation of joint ventures, but structured in ways that the bulk of the ownership, assets and profits would remain in the hands of workers and poor people living in these rural areas.
Proposal 12-Office of New Opportunities. This seems to be a proposal aimed at providing support services to the 1.5 million farmworkers in America and small family farms, minority farmers, limited equity farmers, and new farmers. We would support this initiative, because we recognize the great value the USDA has provided through its extension services and research programs for helping to raise the level of American agriculture to the enviable position that it enjoys today in world markets. USDA should continue to be a source of information for all people who are directly or indirectly linked in with agriculture.
ESOP Promotion. The USDA should help promote employee stock ownership plans (ESOPs) in the financing of enterprises through USDA loan facilities and direct loan programs. (The ESOP is described in Appendix 2, “What is an ESOP?”) ESOP offers a method by which all employees of a company, most of whom live “from paycheck-to-paycheck,” can gain access to credit to acquire shares in their companies whenever existing shares are sold or new shares must be offered to help finance the expansion programs of the companies for which they work.
Congress has already provided some major incentives for companies to adopt ESOPs, but the lack of adequate pools of credit for promoting ESOPs can stifle the adoption of ESOPs. Control over credit can largely determine the patterns of investment by business enterprises. By conditioning a major portion of USDA’s loans to be made through ESOP and other expanded ownership devices, USDA will not only be promoting expanded productiveness in the private sector and higher motivation among worker-shareholders, but will also be playing a central role in the democratization of future ownership opportunities in the American economy.
Community Investment Corporations (CICs). Much could be done to encourage CICs as alternatives to the non-profit Community Development Corporations (CDCs) in the selection criterion for the rural empowerment/enterprise zones. USDA should take affirmative action in spreading knowledge regarding the advantages and techniques of implementing Community Investment Corporations so that the profits from real estate development resulting from the USDA’s rural development initiatives can become, to the largest possible extent, a supplemental income for poor and working families in the areas targeted for development.
Promotion of Consumer Stock Ownership Plans (CSOPs). In all situations where private utilities or telecommunication companies are being introduced into rural areas, the USDA should encourage primarily through its loan programs and secondarily through its technical assistance programs, that a portion of the financing required for such “natural monopolies” be financed through CSOPs. These devices would enable customers to acquire shares on credit repayable through patronage refunds and dividends.
After channeling profits to the company’s ESOP and CSOP to pay for such shares, future dividends would enable workers to increase their family incomes from profits. Utility customers would be able to reduce the overall cost of their service, from dividends and patronage refunds received through their CSOP shares. In many respects, a CSOP is much like a consumer coop, except that the ESOP/CSOP allows for a combination of ownership using a standard corporate form.
Phase-out of Price Supports and Income Subsidies for Farmers in Rural Areas. As noted above in the paper, CESJ would recommend a 2-5 year period to phase out the subsidy programs and substitute expanded ownership initiatives, targeting on the four regions recommended by the USDA development professionals.
Capital Diffusion Reinsurance Fund. CDRFs offer a substitute for traditional collateralization requirements for enabling poor and working rural residents to acquire equity ownership in viable companies. A fuller discussion of the CDRF and the collateralization problem is developed in an article by Syracuse law professor Robert Ashford in the book Curing World Poverty: The New Role of Property, pp. 115-117. The main point here is that people who have no savings have no collateral to offer lending institutions and are thereby automatically disqualified from receiving significant productive credit loans. Professor Ashford points out that collateralization is required to insure lenders against the risk of default, in an amount over and above the productive assets that might be acquired with the loan.
As the Ashford article points out, private insurers should be encouraged to come forward to offer loan default insurance for covering at least a portion of the principal loan to ESOPs, CICs, CSOPs and other mechanisms. This would enable poor and working citizens to acquire equity shares in productive enterprises which would be repayable with the future profits of the enterprises themselves. But the fact that the beneficiaries have no savings means that commercial banks and other private lenders do not have an adequate incentive to provide loans to ESOPs and other expanded ownership mechanisms.
Ashford makes a very sound case that if the government could provide a capital diffusion reinsurance fund, this would encourage the private insurers to come forward with commercial insurance to cover the risk of loan defaults. This would provide the equivalent of collateral, which a poor person or small business is almost always lacking. CESJ would recommend that USDA explore ways in which some of its loan funds could be placed in reserve for the development of a capital diffusion reinsurance fund for the targeted rural development areas. This would have a very significant multiplier effect in attracting private sector loans. USDA should also examine the extent to which existing programs can be used for this purpose. It might also seek a provision in the 1995 Farm Bill to request from Congress sufficient reserves to establish a capital diffusion reinsurance fund.
CESJ strongly recommends that the Federal Government’s exposure to risk under the proposed CDRF be limited to the reserves actually invested by the government in getting the CDRF underway and making it attractive to the insurance industry. The balance of CDRF’s capitalization would be funded by the reinsurance premiums paid by the commercial insurers that provide loan default insurance to banks lending to ESOPs, CICs, CSOPs, cooperatives, etc. This limitation on government exposure to risk would be radically different from most government-sponsored insurance funds (e.g., the FDIC and S&L insurance) where the “full faith and credit of the United States” provides unlimited backing to whatever losses are incurred under the insurance scheme.
Integrated Farmer and Worker-owned Agribusinesses. USDA should support limited experiments and demonstrations of methods which enable small farmers and landless rural workers to become shareholders in professionally managed agribusinesses serving global markets and provide income sources through jobs and ownership opportunities for non-farm families in rural communities.
The key for small farmers and workers without savings to acquire shares in competitive enterprises is to provide them with access to productive credit for purchasing these shares, using the funds (1) to restructure existing farming operations, (2) to attract top management and joint ventures with world-class agribusinesses, and (3) paying for the shares out of future profits, rather than reduced consumption incomes. The risk of default on share acquisition loans for people with little or no assets would be secured by the assets and credit-worthiness of the enterprises, future profits and dividends, corporate guarantees from strategic alliance partners, and a loan default reinsurance fund designed to attract lenders and insurers of share acquisition loans.
We would recommend that USDA establish one or more viable demonstration agribusinesses within which small farmers and landless workers can participate in majority ownership and profit sharing to supplement their present incomes. To provide support for these demonstrations, USDA’s Rural Development Administration could supply credit and technical assistance as the “magnet” for identifying successful national and multinational agribusinesses (such as ConAgra) which might be willing to enter into joint ventures, strategic alliances or management, technology transfer, training and marketing contracts with small farmers and farm organizations. Such assistance would also help achieve crop diversification and rural development linked to the broadened capital ownership objective.
Other steps USDA could take to promote these integrated agribusiness demonstrations would include:
1. Analyzing existing legal, policy, political, labor and other barriers and disincentives to achieving expanded ownership objectives in rural areas, and developing specific reforms to be proposed aimed at overcoming these barriers and disincentives.
2. Using the combination of (i) USDA commitment of support and assistance, (ii) the commitment of prestige and other inputs from interested agribusinesses to the proposed demonstration projects and to rural development generally, and (iii) specific proposals for market-oriented policy reforms, to persuade prime movers in government, banking and business how these demonstration projects can further the interests of all parties, and to gain their commitment to changes needed to remove legal and other roadblocks to the demonstration projects.
3. Identify groups of small farmers and associations of farm workers who might be willing to support the project and contribute their land, tools and services to help make the proposed agribusiness succeed, including by adopting more desirable farming practices.
4. Offer participating land owners an opportunity to lease their property (at attractive rates geared to the projected higher profits of the proposed agribusiness) as an alternative to selling their land to the agribusiness and as a way to secure their family incomes during the transition to large-scale diversified farming.
5. Offer small farmers and rural workers a “new social contract” with the new agribusinesses that hire them, based on sharing of majority ownership and the opportunity to supplement their low market wage rates with equity shares acquired with non-recourse bank credit, profit sharing, productivity bonuses and dividends, plus financial information and management controls available to them as shareholders.
Expanding Local Bank Credit Through the Federal Reserve’s Discount Mechanism (Section 13 of the Federal Reserve Act). Several of the articles in the book Curing World Poverty address the question of revitalizing the original discount mechanism of the Federal Reserve as a means for expanding local bank credit for “eligible paper.” When the Federal Reserve was first formed, basic control over the money supply was through the discount window. Where a local area was deficient in its accumulated savings, the discount window would “create money, supported by private sector assets in industry, commerce and agriculture,” so that sufficient liquidity would always be available for the expansion of the local economy. The discount mechanism is the essence of central banking and should be restored as a means by which areas that today are dependent on outside savings pools can use the discount window in such a way that the allocation of credit is not done by the government or the Federal Reserve, but by local commercial banks that are members of the Federal Reserve System.
Unfortunately when the U.S. moved into war-time mobilization in World War I, the general use of the discount mechanism was effectively terminated and the control of the money supply shifted to the open markets committee of the Federal Reserve System. In other words, instead of private sector assets being encouraged by the Federal Reserve System, the Federal Reserve turned exclusively to the purchase and sale of Treasury paper to finance the war effort. The Federal Reserve has been on this track since World War I. As a consequence, the U.S. currency, in fact, has no assets behind it. Instead, Treasury paper, or liabilities, stands behind U.S. currency.
We recommend strongly that this discount mechanism be opened as a way of increasing the volume of credit for facilitating private sector growth in rural areas. The discount rate could be set under present laws at a rate to reflect the actual servicing costs of administering this system, probably 1% or less. At such a discount rate, member banks would still have their normal mark-up of 2% or so, which would bring prime rates down to roughly 3% for stimulating development initiatives in rural areas.
Many at USDA will remember that in 1979, when the tractorcade left Washington, D.C., their last stop was to surround the Federal Reserve with 450 tractors. The farmers were requesting that the Federal Reserve seriously consider the reopening of its discount mechanism for helping to meet the onerous debt burdens of farmers who had to borrow at extremely high interest rates, just at the time that the grain trade with Russia was suddenly terminated because of the war in Afghanistan. Clearly, farmers understand that the Federal Reserve could be doing a much better job in terms of generating low-cost credit for rural development.
While CESJ recognizes that USDA cannot recommend changes to the Federal Reserve, we would recommend that USDA use its good offices within the Administration to seek Administration support for a study of a reopening of the discount mechanism for stimulating growth in rural America.
The main difference between our approach to the discount mechanism and the traditional uses, is that we would encourage that the definition of “eligibility” for access to the discount window be limited to loan paper from ESOPs, CICs, CSOPs, farmer cooperatives and other vehicles that guarantee broadened ownership of the assets acquired with such credit. It should be noted that any funding made available through the Federal Reserve discount mechanism would be off-budget and would not be subject to the constraints of budget deficits, since no taxpayer dollars would be involved and no taxpayer subsidies would be used to keep interest rates low. Interest rates would reflect the normal costs of borrowing money, including the risk of default.
It should also be pointed out that the risk premium which is included in all interest rates could be converted into an actual insurance premium. In that way banks making loans to ESOPs, CSOPs, coops and other expanded ownership vehicles could use that portion of the interest rate as a premium payment, thus pooling such funds through commercial insurance that would spread the risk of default, perhaps up to 80% of outstanding loan principal. Clearly, if this concept begins to show promise in the targeted rural areas, the rest of America, including urban and suburban areas, would also begin demanding availability of this mechanism.
In no way would the discount mechanism be inflationary, since all increased currency and expanded bank loans would be supported by expanded productive assets in the economy. This paper is not the appropriate vehicle for going into all the principles, logic and techniques of the Federal Reserve’s discount mechanism for broadening ownership. However, for those interested in delving deeper into the subject, we recommend that they read Curing World Poverty: The New Role of Property, pages 21-34, 99-149, 166-167, 274-275, and 278.
A National Program of Infrastructural Changes to Encourage Private Sector Growth Linked to Expanded Capital Ownership.
The Capital Homestead program is described in articles contained in the book Curing World Poverty (pages 146-148 and 275-279), and in Appendix 4, “CESJ’s Third Way: America’s True Legacy to the New Republics.
While the “Third Way” article addressed the problems of the former Soviet Union, the reader will easily understand that the same reforms could apply to today’s American economy and offer a comprehensive package of reforms tailored to meet the needs of rural America or even the four target areas being considered by USDA.
Naturally, CESJ would not expect USDA to advocate such a program for all citizens, but we believe USDA could lead the way for shaping a program so that every rural citizen, particularly in areas targeted as part of USDA’s “four region” experimental initiatives (Mississippi Delta, Great Plains, Indian Reservations, and Colonias).
Basically, the proposed “Capital Homestead” legislative initiatives would open up to all Americans an opportunity to share more equitably in the American growth frontier-a frontier with unlimited boundaries because of continuing technological advances. In a nutshell, the Capital Homestead program would enable every citizen to accumulate the industrial equivalent of 160 acres of land, tax-free. Such a Capital Homestead stake would be capable of generating an income from capital sufficient to provide people an adequate and secure source of income, immune from the impact on family income security if the breadwinner dies or becomes permanently disabled and unable to provide labor inputs into the economy.
As an owner of income-producing capital, the family would not become dependent on charity or the welfare system once they have accumulated an amount equivalent in economic terms to the 160 acres of land. In 1976, then Congressman Bill Frenzel, a Republican member of the House Ways and Means Committee, set this amount at $500,000 per person, certainly more than enough to meet the needs of most families. This was part of what Frenzel called the Accelerated Capital Formation Act, which was one of the bipartisan initiatives in support of ESOPs in the mid-1970s.
USDA Advocacy of the Linkage Between Broadened Ownership and Empowerment. USDA could begin to advocate as part of its mission to improve the acceptability and understanding of broadened ownership objectives as missing components in current empowerment strategies.
Formation of Leadership Advisory Groups to USDA. USDA should take steps to form blue ribbon groups of agribusiness leaders, farm organization leaders, leaders of cooperatives and labor unions, and regional planners, to operate on a bipartisan basis to help design alternative blueprints for the future of targeted development regions. These blueprints, in turn, should be made available to residents in the area to discuss and improve upon, through for-profit vehicles like Community Investment Corporations which are broadly owned and controlled by local residents.
Area-wide Growth Strategies. USDA should develop area-wide growth strategies based on ownership assumptions. Rather than assuming that today’s growth rates are adequate or that faster growth rates would automatically be inflationary, it would be useful to examine one of America’s most dynamic periods of growth, the period of rapid industrialization from 1865 to 1895.
This growth model was described in great detail in The Formation of Capital, a book by Harold Moulton, former President of Brookings Institution during the mid-1930s. Moulton pointed out that where adequate savings were not available to meet the physical potential for growth, expanded bank credit using the discount mechanism was a crucial answer. He also noted that forcing potential investors to reduce their consumption incomes to become owners would work against the feasibility of the capital investment itself, in that consumer purchasing dollars to buy the end products would thereby be diminished unnecessarily. Moulton was clearly an early advocate of the use of productive credit to stimulate growth to its full potential.
How to produce innovation and change in America with full citizen participation will be a critical challenge facing USDA planners and policymakers. Many bold and imaginative plans have been produced for physically restructuring our society to make it more livable and inspiring for everyone. The introduction of life-enhancing physical designs and new technologies offers considerable promise that we may finally realize the ambitious goal of equal social and economic opportunity for every citizen, a goal to which our nation has been committed from its inception. But the frustrating gap between rational physical planning and effective social action has remained unbridged.
An effective, long-range rural development and economic empowerment program also involves the planning of physical structures and infrastructure. But equally and perhaps more important it involves planning the “invisible structures,” the network of property rights and other legal and economic relationships between people and things, people and institutions, and people and people. In the final analysis, these infinitely varied relationships will determine the quality of life in the world of today and tomorrow. Certain correctable flaws in designing our “invisible structures,” are the hidden reasons for society’s failure to achieve its fullest technological potential.
If it is to be politically unifying and supportive of free market, private property, limited government principles, a new thrust in rural development policy, we believe, should reflect broad citizen participation in capital ownership. Expanded private incomes from new ownership shares in an expanding future economy is the logical missing link for effective social action.
A Capital Homestead program could offer an enormous challenge and new opportunities for our major corporations and farm and labor organizations, with the aid of government, to seize the initiative in organizing and implementing orderly social change. It could offer a new theme within USDA’s leadership vision and new solutions for transcending the differences among the warring factions of today’s society and uniting them once again in a common cause.