A Proposed Ithaca response to the Covid-19 Recession
Waves of infection will be significantly outlasted by the economic impacts of the novel coronavirus. While most are thinking about short-term measures, some of us must prepare for the long haul and build long-term community resilience.
You can watch or listen to this blog post here:
Dealing with the stress and mental stain caused by social distancing and the immense uncertainty of the situation, the likelihood of a the healthcare snafu, and the urgency to facilitate emergency basic needs provisions due to Covid-19 are (relatively) short-term concerns, which are absolutely necessary to think about and work within. So I’m extremely glad that many people are taking this quite seriously and organizing around it.
But a few people need to be thinking about how to brace ourselves for the marathon struggle, the economic situation that our community is now in, together, in for the long term.
For nerdy systemic thinkers like me, it’s apparent that we’re already speeding into a multi-year recession and Ithaca has a special situation that provides quite the crisis, but also quite the opportunity.
Here’s a website with some great data visualizations of our economy, and it shows the makeup of Ithaca’s workforce:
This includes 10.9% of the population in retail, 9.4% in accommodation and food service, 4.12% in leisure and hospitality.
Which means almost quarter (%24.42) of the local economy is already taking a severe hit or will have their income completely annihilated for at least a few weeks. [In the video I misspoke and said 4.3 were in leisure and hospitality, making my spoken total off, as well.] Plus an additional 42.7% are in in educational services, so they are now mostly at home. In terms of individuals, this is about 8,000 people who aren’t in work right now — and that’s the opportunity. The opportunity is to channel our now-free time and energy into building up resilience and remaking our economy so that we can thrive while the globalized economy disintegrates.
There’s a deeper issue, too. Recessions happen when spending or some form of credit or lending suddenly drops off.
This shock, wherever it occurs, then dries up the financial resources that would normally flow to other sectors of the economy. Once those other sectors start seeing their incomes drop because no one has income to spend, they start reigning in their spending, too. You can see why this is a problem — everyone’s income is someone else’s spending, so when everyone spends less, then everyone has less income.
So those 8000 Ithacans with no income — well, they can’t spend with the other Ithacans as much as they could in the past since they don’t have income. And once those other Ithacans start seeing their income dwindle, then they slash spending and hours and everything else. But stay calm… keep listening.
Quite simply, the economy behaves like a system of flow — like water — and if the rains or snowmelt which normally pumps water into the system initially simply stop occurring, then the whole ecosystem dries up. In Ithaca, that rain and snowmelt comes primarily from the colleges and from tourism — both of which will not be present in the months to come.
Given the current trajectory, there simply is not enough money in the system to keep things from drying up. Again, stay chill, and keep listening.
So then, the most commonly-considered solution or hope is to have some kind of bailout or stimulus from the federal government, which will pump water to the mountaintops to allow it to flow down and through the economy– this is a deus ex machina solution; a supplication from a government that continues to fail us so I don’t have much faith in this. Not only that, but as long as people are out of work, there will need to be an ongoing stimulus to the poorest people for months — something that pretty much never happens anywhere.
Another likely “solution” is the massive issuance of debt through low-interest and higher-interest credit. The Fed cut interest rates, which makes it easier for banks and financial institutions to make money off loans. Lowering interest rates basically makes it more profitable for banks to offer credit to people — so we’ll definitely see that happening as banks offer loans and credit cards to tide people over for the time being. Of course this is not a real solution — it’s a method for banks to make money off people’s pain, or Disaster Capitalism as Naomi Klein calls it. To pay back these loans, the banks require interest, thereby further draining a locality of the money that’s already scarce to begin with during a recession. So again, not a real solution.
The vast majority economists in charge of economic policy can only think in these two ways — stimulus packages and interest rates. They aren’t very creative and they tend to cause future problems with all “solutions” they come up with, so these will be the economic proposals that get the most airtime from people who tell each other they’re smart and important while perpetuating the crisis in the months to come.
But there’s a completely different type of solution, one that economists rarely think about, but which does have historical precedent. It has to do with something called the velocity of money.
See, even though the economy is kinda like a water system, it not exactly the same. One key difference is that the same drop of water — a monetary unit, like a single dollar — can be reused over and over and over by different entities without drying up. The rate at which a drop (dollar) gets reused is called the velocity of money. The more quickly the drop or dollar moves from person to person, the higher the velocity of money — and a high velocity of money is often an indicator of a strong economy. I’m including a handy little video to explain the velocity of money:
So one clever way to counter recessions is by incentivizing people to spend money at a faster rate — there’s less money in the system so people have to spend the money that does exist more quickly — almost right as soon as they get the money.
Of course, the psychology of crisis creates exactly the opposite effect. An uncertain future makes people want to hoard what they think they’ll need — think about what’s happening with toilet paper and hand sanitizer, but also with money.
So that thing that has historical precedent is something called demurrage — which is basically a deterioration rate or half-life on the value of a currency unit. The idea behind demurrage is that if you don’t spend your dollar after a month, let’s say, it deteriorates and only becomes worth 90 cents. Then perhaps after another month, it loses another 10% and becomes 81 cents… and so on. If you do spend it, then perhaps it does not deteriorate for the person receiving it.
There are a few ways to design a demurrage currency, and although it might make a lot of sense to do this digitally, one of the most-cited success story is in Austria, in the town of Worgl, where in 1932 and ’33, when the mayor deployed a solution, described the monetary economist Bernard Lietaer here:
“Instead of spending the 40,000 schillings on starting the first of his long list of projects, he decided to put the money on deposit with a local savings bank as a guarantee for issuing Wörgl’s own 40,000 schilling’s worth of stamp scrip [which is what this type of currency is called]. He then used the stamp scrip to pay for his first project. Because a stamp needed to be applied each month (at 1% of face value), everybody who was paid with the stamp scrip made sure he or she was spending it quickly, automatically providing work for others. When people had run out of ideas of what to spend their stamp scrip on, they even decided to pay their taxes, early.
Wörgl was the first town in Austria which effectively managed to redress the extreme levels of unemployment.”
He goes on to say:
“The bulk of the work was provided by the circulation of the stamp scrip after the first people contracted by the mayor spent it. In fact, every one of the schillings in stamp scrip created between 12 and 14 times more employment than the normal schillings circulating in parallel. The anti-hoarding device proved extremely effective as a spontaneous work-generating device.”
This is a clever solution because it counters the incentive to hoard money by destroying the ability to hoard money through the currency’s architecture itself. This type of currency is designed to incentivize the spending of money.
I’ve worked with three community currencies and all of them languished or failed, which might not sound like a good thing. But I mention this because they all languished and failed perhaps because my bosses literally never listened to anything I told them, despite having hired me because I’d studied community currencies quite intensely and really knew my shit. I gave up dealing with currencies because I felt like they were too often operated by people who were very idealistic and intelligent — but who also did not respond to feedback or the behavioral psychology and needs of actual people and businesses. But now I’m returning to this currency stuff because Ithaca needs a solution that’s kind of like a currency…
Kind of. What I’m thinking of is a little bit different.
Specifically, it has to do with the local conditions in and around Ithaca. It’s fascinating and fortunate timing that this crisis has begun right as the farming season is beginning, and it’s also very lucky that people here are familiar with the idea of the CSA. (CSA stands for Community Supported Agriculture, for those unfamiliar with it, and involves prepaying and pre-committing to a certain portion of a farm’s seasonal harvest.)
See the CSA is already a community finance mechanism — if you think about it, it’s a 0% interest loan to a farmer to fund their operations for the season… only instead of paying back the loan in dollars, the farmer pays it back in produce. So think about this: in a local economy where there simply is not enough money in the system, there is a different way to do a CSA.
Farms and actually any type of grower — including people doing homesteading or just growing veggies in their yards — well they can pre-sell tradable gift certificates to their produce. Instead of having a the same person have a claim to a CSA box each week, that person gets gift certificates, redeemable in farm produce — but they can give (or sell) those gift certificates to friends, family, or people that they need to pay but don’t have enough US dollars to pay with.
It’s sort of like produce-backed currency. By produce-backed, I mean that the tradable gift certificates have obvious, concrete value that anyone can redeem in veggies, fruit, milk, or whatever else.
The elegance of this type of solution is that it has multiple components. Not only does it incentivize people to grow produce and to have the funding to buy supplies and spend time doing it, but this augments the monetary supply, too. See, when you pay for a CSA, your US Dollars go to the farmer, who can then spend that currency. But you can’t transfer your CSA.
But let’s say each week’s CSA is worth $30. So under this system maybe you get sets of six $5-dollar bills that are redeemable in that farm’s produce, but they expire at a certain point in the season if they aren’t spent. Maybe you get $120 of these units that expire at the end of June, another $120 that expire at the end of July, and so on. And you can trade these units with anyone.
Can you see what that does?
Not only does the farmer get to use those US dollars, but the tradable produce-backed bills are also still in circulation. Every dollar paid to the farmer through this type of program would be multiplied by two for a certain duration of time — one would be a US Dollar, and the other would be the bill that has a claim on produce, still circulating in the local economy.
At the end of the month or the season, they’d expire, but until then, the local monetary supply is augmented by additional currency — only it would be backed by real wealth, which is food. This benefits everyone in the community because money is less scarce in the community.
The fact that they expire at different weeks is the demurrage component. There’s a disincentive to incentive to hoard these produce-backed units — you either have to go to the farm to pick up produce, or you have to trade it to someone who will, otherwise the bills would lose their value.
So I’m not just an idealist or brilliant person who came up with this component, either. This is yet another concept that’s been implemented and has worked in the past, and a new economics think tank I worked for in the past had, before I worked there, helped create something called the Berkshire Farm Preserve Note program. This took place in Western Massachusetts in the 1990s, when two farms issued notes before the season began, in trade-able denominations, which could be redeemed in farm produce during the season.
As I mentioned at the start of this [video], there are probably about 8000 people who aren’t working right now. Well, Ithaca being Ithaca, there are a lot of people who are capable of producing food, even in their backyards. Every bit of locally-produced food that’s consumed will offset the money flowing out of Ithaca and into the regions that we’d normally import food from. This is an additional benefit, also known as Import Replacement or Import Substitution, which helps regions or nations stop hemorrhaging their wealth and instead, allow it to flow within the locality for a while.
Also important, you may have already realized that this type of solution is not limited to just farms and food. Any local producer can theoretically issue trade-able, transferable gift certificates in small denominations, redeemable in its own products and services. I think Autumn Leaves used to do that, and maybe still does. In fact, in regards to the Berkshire Farm Preserve Notes — a deli in the same region also issued notes in a very similar manner at that same time.
Of course there are some landmines you have to avoid while doing this, and there are lots of wrong ways to issue these things so if you’re interested in knowing about that stuff, please reach out to me.
That’s all for now, but there’s a lot more to come.
