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Archive for February, 2011

In economic thought, those that advocate for free markets often speak in terms of the “rational actor”. That presumes that those purchasers with disbursable assets consider their personal or strategic needs and analyze and rationally choose their best option (delaying purchase, or choice of product/service/supplier). And, it assumes that providers of goods and service, analyze their options and rationally choose their optimal strategies.

There are many real life qualifications to that assumption, of free and rational actors. One is that there are fewer and fewer individuals with net disbursable wealth. MANY are under water currently, insolvent.

Options must be comparable to decide. Some organizations and individuals include multiple considerations in their rational decisions more than others. Most still include single criteria, prospective cash flow, money.

The components of economic decisions are changing.

In the modern world, there are many factors that make choosing “sustainable” options the rational one, both for individual decisions and for public policy to facilitate. There is finite physical land, requiring land use planning. There are finite phyiscal limits to key materials, compelling an emphasis on recycling over consumption. There are finite physical limits to the environment’s ability to assimilate toxins, compelling emphasis on reducing the introduction of toxins into the biosphere.

One variable factor that currently promises to affect supplier decisions (siting of manufacturing and distribution) and consumer decisions, is the price of oil and all fossil fuels. With the degree of agricultural land that is used for methanol derived from corn and sugar cane, the price of corn and then all grains is also now directly tied, on the demand side, to the price of oil.

For any product that is transported, the cost of getting that product to the end user, considering the whole value/supply chain, firms will need to consider the siting of manufacturing and distributing centers more intently. The cost of transportation may become so severe, especially for bulky products, that the global industrial value/supply chain may experience severe pressures and actual competition from decentrally sited manufacturing and distribution over the current trend of centralization of manufacturing and distribution.

My area of experience is in the food industry. I worked as a financial controller for a cereal manufacturer for 9 years. The cost of materials for our products was between 40 and 50% of our total costs. Labor 15%, equipment  5%, supporting organizational overhead and marketing, 25%, profit 5%. (Really rough numbers).

Materials were grain, sweeteners, oils, nuts/fruit. Grain is a particularly bulky product. No grain originates in east, maybe a small amount of corn. Most grains require relatively dry conditions (wheat, oats). Grain land specialized for mix of rain patterns and large expanses of land suitable for “industrial” agriculture. Corn requires moderate moisture. Rice requires a great deal.

Grains are bulky. A pound of wheat takes up a great deal more volume than a pound of steel. A pound of milled wheat takes up even more volume. A pound of milled oats for example, that in 2007 cost .16/pound for the oats themselves, cost .13/pound to transport. Unmilled grains are less bulky and can be economically transported by train, then milled decentrally and shipped their last bulky mile by truck.

The first shift will be a shift to utilization of trains over trucks for transport. At some point though, manufacturers will rationally shift to decentralized modular siting of manufacturing rather than central. The sourcing of original materials regionally will be impossible for food. The most that will happen with food is that the subsequent processing will be decentralized. Using grains as an example, wheat will still be grown in the northern midwest, but the milling and subsequent processing will occur closer to consumers.

Another demographic shift that is possible to occur is a population migration west, nearer to the source of grain, and now with the acknowledgement of the persistent winds throughout the midwest, to the source of inexpensive electricity.

Among consumers, the cost of gasoline will hopefully motivate employees to seek work closer to home. If manufacturers decentralize their manufacturing regionally, then there will be more work available regionally.

What happens if manufacturers and consumers do not shift to a regional focus?

Considering the analysis of four-fold multiplying factors adding up to wasteful fossil fuel usage (technology, utilization, population, siting), eliminating one prominent factor that has a great impact on average per capita fossil fuel consumption (siting), will greatly hinder society’s progress towards the 80% reduction in fossil fuel consumption necessary for climate stability (at least free from our intervention), and reducing total social costs of products/services.

The first consequence is decline in the cumulative net worth in society, then borrowing against homes, then potential widespread defaults on housing, credit card and trade debt. Same as a couple years ago.

In all cases, the cost of food will rise. The cost of home heating fuel will rise. The cost of electricity will rise. The cost of transportation fuel will rise. The cost of materials that require large inputs of energy will rise.

The savings rate will decline (further, how is that possible?).

Regionalism will ameliorate those cost increases somewhat. When it sinks in that the new cost structure is permanent, the shifts in siting of manufacturing, residence, land use policies, will start to occur. They will lag, even if firms are able to anticipate. And, as manufacturing or distribution siting takes years, if not decades, to implement, we’ll be behind the rational curve for a while.

Now is a good time to do a deep energy retrofit of one’s home. Contractors are not that busy, eager to do work even below rate. Materials costs are not as stressed as they will be shortly.

While the affect of fuel prices on transportation is significant, families tend to spend 2-3 times on home heating that they do on transportation. It is also a good time to buy down on the size of one’s home.  It is a good time to “buy down” in a car though as well.

Better that we anticipate.

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I met last week with a friend who was formerly a regional economic planner and data analyst.

He described to me that the data to identify the degree of value addition that occurs in regions, whether very local regions or macro-regions were being collected by the federal and other governments, and were available for assessment.

I haven’t figured out how to get that information, so I get to speculate.

There is in fact a multiplier effect.

There are only two ways that value-addition applies.

  1. Inter-regional trade – Exports. Value addition occurs locally/regionally and is exported to another region. Value addition flows out, cash flows in. In society as whole, the balance of trade is net zero, a zero sum. One region has a trade surplus, while others have trade deficits.
  2. Intra-regional trade – Value addition that occurs within a region. A restaurant provides cooked food for the residents of its town. A massage therapist gives a massage to a resident.

Any region that has a trade deficit has to make it up somewhere, so that there is a net influx of wealth into the community. That can happen by intra-regional trade, but only if certain conditions are met.

The net inflow or outflow of wealth into a community is affected ultimately by the total value addition that occurs locally/regionally, the sum total of inter-regional value addition and intra-regional value addition.

The multiplier effect occurs to the extent that individuals that receive income, spend it locally/regionally and on goods and services that have a high proportion of local value addition in their costs.

It results in net compensation into the region.

If the combination of export value addition and local spending on local value addition is significant, then the community increases its wealth. If not, then it becomes indebted.

From my neighbor’s massage practice, 80%+ of her costs are intra-regional. If she spends her income (the 80%) on average of services that derive 80% of their income intra-regionally (locally), then an additional 64% of the original income is spent locally. The next person spends 51.2% locally.

At 80% of costs spent locally, it results in approximately 4 times as much wealth each year realized locally. A real rising tide.

70% of costs spent locally results in 3-fold wealth increase. 60% of costs spent locally results in 1.5-fold wealth increase.  At 50%, wealth stays stable. At 40%, 2/3 of the wealth stays local, requiring exports to account for 1/3 of the community’s compensation to retain its wealth. At 30%, 43% of the wealth stays local, requiring more than 50% to come from exported value addition.

Of my spending:

  • Professional – 70% local
  • Food – probably 20% local value added (and that is mostly the % of local employment compensation at chain groceries. Even if I shopped at the local food coop, the percentage would be only slightly higher)
  • Housing – Probably 60% local, and that is only because I borrowed my mortgage from a local bank that services its own loans. Fuel is remote. Insurance remote. Taxes local. Utilities remote.
  • Transportation – Probably 10% local – markup on gas and some repairs.
  • Telephone – Probably 5% local.
  • Entertainment – Probably 20% local.
  • Health – 50% local. (Insurance is remote, but pays a local medical group.)
  • Education – 60% local at GCC, 10% local for my kids college remote

If I assess the same spending from a regional perspective, New England for example, it is much higher percentage that is  intra-regional. And, if public policy and creative entrepreneurship encourages regional enterprise, regional manufacturers, regional logistics, regional retail, then a higher percentage of my income will stay close to home, generating more universal prosperity than if I bought through the global supply chain.

The multiplier effect affects the global economy as well. The more  spending that is on activities that are labor-intensive, generate more wealth through the system. But, the global economy is horribly skewed. Some regions export enormously while others export nearly nothing. Some communities make up for it with vibrant intra-regional trade. Others have little.

In all cases, enterprise serving the global economy is largely capital intensive, and NOT labor intensive. Of the cost of computers, power plants, autos, a very high percentage is on equipment. (Yes, someone contributed labor in the design and construction of the equipment, but it was once. One contribution of labor, many extractions of payment, a one to many relationship.) Profitable. Productive by the view of the single firm, of competitors competing only on price.

Consider a town like Orange, MA. There are manufacturers there, so there is some value addition that comes into town from inter-regional trade, but for the most part local people don’t spend their money locally. They save the small amount and buy a mass produced product from overseas at Walmart. They save some money compared to a regional department store (doesn’t exist), but they create very little wealth in their community. If they spent on goods and services that could be made locally/regionally (education, health, culture, repairs, local food), then the community would bootstrap. Even if the value addition started using a self-help credit system or local currency, banks would soon be lending money even into a primarily intra-regional system.

Buying local versus buying global makes that big a difference to a community, that and savings on the expenses that typically exhaust out of a community. In my example, that is fuel, global food, national banking – rather than regional/local, privately owned transportation, anything high tech.

The best way to save money, keep the money circulating locally, is to SHARE the ownership and use of products and services only able to be acquired by inter-regional trade, and happily enjoying and spending on intra-regional trade (within one’s budget).

The local/regional emphasis literally lifts all boats. The global approach transfers the water that would otherwise lift all boats.

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What is sustainability?

As a definition, I like the one articulated by the 1987 Brundtland Report, “Meeting the needs of the present generation without compromising the ability of future generations to meet their needs.

My own definition:

https://rwitty.wordpress.com/2009/10/12/sustainable-societyeconomy-definitions/

In the few cases where I’ve been engaged to conduct “sustainability audits” for small companies, the criteria for their inquiry included input/process/output analysis on water usage, carbon footprint, recycling, solid waste disposal, etc.  They also included social metrics like compliance with “living wage” guidelines, non-discrimination compliance, assessments of employee satisfaction, assessments of stakeholder relations.

Although the food businesses cited interest in the local food movement (“100 mile diet”), none incorporated an assessment of LOCUS, or participated in LOCUS disclosures on their products.

LOCUS is a product disclosure that defines the geographic average site of value addition for a product or service, and the degree of variance from that geographic average. LOCUS is stated in latitude and longitude. As a product disclosure, a small map of North America is printed with a green area identifying where a product can be sold to comply with “100-mile” diet (LOCUS within 100 miles, with less than 100 mile variance), and in blue with “500-mile” compliance.

Retailers and manufacturers may also be assessed for their organizational LOCUS compliance/excellence. A bronze level retailer makes 25% of its revenues in the blue zone. A silver level retailer makes 50% of its revenues in the blue zone. And a gold level retailer makes 75% of it revenues from blue zone products/services.

Similar guidelines apply to manufacturers and producers.

Although there is no definitive research conducted, or even possible, a very very small percentage of food purchased at groceries in the country, comply with either metric.

If the site of value addition (LOCUS) is not disclosed, then those that desire to eat locally won’t know if they are in fact. (I have some ultra-orthodox Jewish friends – and family – that are very conscientious about only eating kosher food. They are religious about it.)

If the LOCUS of products and services is disclosed, then there will be a means for consumers to include that consideration in their purchasing decisions. If not, and there is no governmental emphasis on regional economic development and balance, and no consumer preference possible, then we will experience an increasingly global marketplace, with all of its negative consequences.

  • Maldistribution of income/purchasing power
  • Vulnerability to unavailability of key goods due to political instability and supply chain disruptions
  • Inflation due to very likely long-term increases in transportation costs

Regionally healthy and balanced economies are important.

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Local Food

Some friends have organized a local food gathering next week in Holyoke. If you can go, go.

I’ve worked in the food business a few times in my life, as an alfalfa sprouter in Ossining, NY serving the New York area, as the bookkeeper for a prominent food cooperative in Washington, DC, as a landscaper/urban garden developer in Portland, OR, and as controller of a granola manufacturer in Western Massachusetts.

There is a lot of confusion about what is local food, and if and why it is important at all.

Like all products that we use, there is something real, even intimate, about knowing the person who grew and/or cooked food that you are eating. Buying direct from a farmer is a wonderful experience. Eating a home-cooked meal, or a skillful aesthetically prepared meal is a treat.

But, and it is a big but, most of the food that we eat, that people eat, is NOT close to its source. Most of the food that we eat is industrial food. Anyone that eats grains or any commercial meats, or produce from a supermarket (especially now that it is nobody’s in-season, except for some very unique greenhouse operations), is eating food that has a long and wasteful industrial supply chain.

With the way that we settle, its got to be that way. In New York, a very very very small proportion of food originates within 10 miles of where it is consumed, even at 50 miles, the measure is very very small proportion. At 200 miles, maybe it reaches very small proportion. (only one “very”).

Those of us that are interested in local food tend NOT to desire that New Yorkers migrate en masse out of the city, towards where we live.

As much as the Connecticut River valley supports unique access to local agriculture, to local food, it cannot support New England. It doesn’t even try. Some large % of Connecticut River valley land is taken up by sprawl suburban tract homes and conveniently flatland industrial uses. Some other large % of Connecticut River valley land is used for tobacco, not food.

So, even out of our regional potential to feed maybe 1/10th of the regional population, we feed maybe 1/100th of our regional food needs regionally. Two dozen sweet corn a year, vegetables for a month, maybe a couple meals of free-range chickens or beef, is not much.

Why does it matter?

  • Cost – To transport a pound of grain 2000 miles costs around .18/pound, only 500 miles maybe .11/pound. Out of a pound of oats that costs 1.20/pound retail, close to a quarter of that is transportation costs. And, as the both the cost of oil for the transportation, the cost of the oil for fertilizer, and the competition of grain land for ethanol production, the cost of all grains will be increasing for a while.
  • Community – Its a very different experience to know where your food comes from than to buy industrial food anonymously. I can thank the farmer. I can thank the soil, the sun, knowing it in its place.
  • Community independance – Our relationships with other communities, regions, nations, becomes strained when we are dependant. Relationships between communities and the markets, that can be respectful, fair commerce, becomes exploited with our dependance. In the American market system, everyone is dependant, so the system is maintained and ensured. We are all equally dependant on the railroads, truck, industrial farming corporations, oil supply chain, corrupt public policy, misuse of land, soil depletion, agricultural runoff.

Quaint doesn’t cut it. The most that we can say is with a great deal of self-righteous vanity “I’m personally independant of the rat race.” Maybe trust-babies can say that. Its another very very very….. few.

Can we grow grain in the Connecticut River Valley? Likely not much. Its too wet. The land is not open enough to support big combines, and there is not the supporting processing, market, distribution infrastructure regionally.

Vegetable protein? (soybeans largely). The valley is also not well suited for soybean production. The growing season is sufficient but with no room for error. And, there is not the supporting infrastructure to do so.

Meat protein? That is more possible, and animals don’t need bottom land to graze on. But, meat production in the country is very industrial, unhealthily so (cruelly to the animals, unhealthy to workers and consumers). Hopefully, we will NEVER create an industrial meat production industry in the Valley. Free range beef and poultry is a possibility, but free range meats have lower yeilds per acre than industrial. To radically increase the acreage dedicated to meat would compete for acreage for other purposes. (I’d be happy if it competed with tobacco, but not so happy if it competed with vegetables or corn.)

Limited grain, limited protein. We are NOT the breadbasket that we thought. There are just too many of us living here. We can go quaint and boutiquey (living in Montague, or Leyden), but we can’t support our population. We’d have to compromise our values to do so, go semi-industrial if not fully industrial.

We might be the vegetable breadbasket of New England though. And, our farmers might make a good living growing berries, fruits, vegetables, sweet corn. And, we can certainly be the gourmet meat breadbasket.

I guess you’ve got to do what you can.

Its an example of my “engineered life” observation.Its the world in which we live. The second definition of “sustainable”.

https://rwitty.wordpress.com/2010/07/21/my-initiation-into-the-engineered-life/

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