Democracy In Power: A conversation with Sandeep Vaheesan, part II

The Hill Heat Book Club, with Jordan Haedtler.

This is part II of my interview with Sandeep Vaheesan, author of Democracy In Power: A History of the Electrification of the United States. In Part I, Sandeep and I discussed the landscape for American power production at the height of the Great Depression, just prior to the election of FDR in 1932. In this portion of the conversation, we discuss how the New Deal Power agenda ended up laying the groundwork for World War II mobilization.

HILL HEAT: You’re picking up on exactly the the era that I wanted to dive into more, which is [FDR’s] recognition that electricity was now a public necessity. It sort of ends up, I think, kind of inadvertently serving as the bridge between the New Deal and the World War Two mobilization, and the body that kind of services that bridge is the Reconstruction Finance Corporation (RFC).

And so I wonder if you could just shed more light on what the RFC was and, and how it played that role of electrifying rural parts of the country, and then ultimately scaling up war mobilization.

VAHEESAN: So I can talk both about the RFC and the Rural Electrification Administration (REA). Maybe I’ll start with the RFC. So the RFC was actually a public lending agency that was set up during the Hoover administration. And it was set up to, in a sense, compensate for the shrinkage of the private money supply following the crash of 1929. And the collapse of banking institutions, the resulting risk aversion of private finance.

So the RFC was created to extend credit to businesses, farmers, I believe even some state and local agencies. So the RFC steps in to the vacuum left by private finance. And there’s a big fight over who should the RFC be prioritizing, with conservative interests saying like they should be focusing on mainly funding businesses, they shouldn’t be extending credit to households or farmers. Common debate, they support public support for large institutions, disfavor public support for small institutions.

The RFC is playing an important role in the new Electrification Administration (REA) to extend low cost credit to rural electrification projects, basically construction of distribution lines into the countryside to serve farmers and other rural residents. And the RFC plays an important role then and subsequently once the REA is made permanent by Congress in funding the REA. The RFC extends credit to the REA.

The REA in turn lends that out to rural electrification projects, which are mainly done by rural electric cooperatives, which are a new largely untested institution. We can talk a little bit more about that. And so you have this public financing body playing a really critical role in the power sector and really American society at large. And there were people saying, “Well, if the RFC is doing all this, do we actually need to restore Wall Street to its old glory?”

And this is where you see Roosevelt’s basic conservatism come through, where he views the RFC as kind of this exceptional institution. It’s a crisis institution. He wants to restore Wall Street, not to its old kind of razzle dazzle status, but as a responsible part of the banking sector. And he says, “No, we don’t want a permanent system of public financing. This is very much an interim measure.”

And so the New Dealers enact a number of reforms to restructure Wall Street, put their basic business on sounder financial footing, and not restore them to their old glory, but to make them the central part of the American financial and banking system again. So you can imagine an alternate history where the RFC becomes what Wall Street used to be, where we have a public finance institution allocating and channeling credit into different parts of the economy. But that wasn’t the path pursued by Roosevelt.

HH: It seems like the only exception that Roosevelt made, ultimately, was for anything that would support the war effort.

VAHEESAN: Yeah, public power is instrumental to the war effort, both in terms of supporting the direct American participation, but then also supporting the efforts of allied nations like the United Kingdom and the Soviet Union. And there are multiple themes I’ll discuss here.

The first is during World War I, power proved to be a critical constraint on American production. The US joins the war in 1917 and quickly realizes there isn’t enough power generation capacity to manufacture all the arms that are needed to fight the war in Europe. And certain upgrades are made to the power system, so more transmission lines are built to allow for the movement of power from, for example, the Midwest to the East, or the mountains to the West Coast. But there’s a recognition that, okay, the power sector proved to be rather fragile during World War I. If there’s a global conflict again, we don’t wanna be in that same position.

And so in the 1930s, there’s an interesting debate between public and private power people. Private power is saying, “Why are we building all this new power generation capacity? We’re in the midst of a depression. We already have surplus. Why do you wanna build more?” Possibly to compete against us unfairly as they saw it. You know, the federal government could sell power for less than for-profit utilities generally could. They said, “This is really stupid. We have too much of everything right now. Let’s not compound our existing problems.”

And the public power camp countered, “Well, first we have millions of people out of work. Power projects, building large dams is very labor intensive. Why don’t we put people back to work to build the Hoover Dam, to build the Grand Coulee Dam?”

So there’s a clear short-term benefit here. But second, they also said, “We think there’s actually a significant untapped market for power among residential households, both in cities and the countryside.”

So their basic idea was that the demand for power is elastic. If we can lower the rates on power, people will actually use more power, whether it’s in farm operations or whether it’s at home. So they might buy a refrigerator. They might buy a washing machine. They’ll actually purchase the appliances that at the time only wealthy people had.

So they said, “This capacity will actually be used, just have a more medium to long-term view of things.” And third, public power figures like David Lilienthal, who’s one of the first directors of the TVA, and James Delma Ross, or J.D. Ross, who’s the first administrator of the Bonneville Power Administration in the Pacific Northwest said, “If there is a global conflict, which we believe is likely, we will need all this electricity to support war industries, whether it’s manufacturing tanks or planes or making things like aluminum.”

Aluminum production is a very electricity-intensive industry. So they said, “Let’s have a longer time horizon. Let’s not look at just the here and now. Let’s look at how things might be, how the world might look in five years. What [private power proponents are] dismissing as surplus power generation capacity might actually prove to be essential in prosecuting war.”

And they were right. They were completely right.

And so you actually saw this happen starting in the late 1930s where aluminum manufacturers started setting up plants in the Tennessee Valley and the Columbia River Basin, because there was abundant low-cost electricity to turn aluminum or bauxite into aluminum. So you quickly realize the value of having all this abundant power. It’s necessary to support war industries.

HH: The reason I’m dwelling so much on this is that, I think that it’s clear from the history of financial and corporate power in the United States, the one thing there’s always money for is war.

And I noticed that in your closing chapters, you really dig deeply into corporate charter power and some important principles about money creation before you get into laying out your vision for public power for the entire country. So I wonder if you could just explain why you did that.

VAHEESAN: Yeah, so my purpose in writing chapter eight was to step back a bit and remind readers that the economy is not a force of nature, economic arrangements aren’t inevitable, they’re the product of countless legal, and in my view, fundamentally political choices.

And it’s critical to make that point because otherwise, the conventional wisdom is the economy is a thing that exists, the state can try to improve economic outcomes, but it really shouldn’t because the economy exists apart from the state. And oftentimes, when it interferes with firms and markets, it makes things worse.

And my point in chapter eight is, no, this is all state activity, it’s state action all the way down. So something as fundamental as property rights are created, defined, and enforced by the state. There’s no such thing as property, whether we’re talking about land or copyrights or patents, in the absence of some coercive force, which is ordinarily a government.

Same with contracts. Contracts require state action to be enforced. Let’s say I own a small grocery store, and I agree to purchase 100 cartons of eggs every week for the next year. And the egg supplier after a month says, “Actually, you know what, the price you agreed to pay us is not high enough, we can actually take the eggs that we promised you and sell them to someone else for a higher price, we’re going to stop delivering those eggs to you, look elsewhere.”

In the absence of state power, I would be out of luck. I would simply have to grin and bear it and find another source of eggs. But contracts are enforceable, I can go to court, I can sue the egg supplier and say, “This person breached their contract to me, they should either be made to deliver the eggs they promised to deliver or pay me damages for the greater price I’ll probably have to pay to acquire eggs from an alternative supplier.”

So there’s state action right there. Property and contract, they’re not things that exist in nature. They require state power. And the corporation is an interesting creature because in contemporary discourse, we just take businesses for granted. Most businesses, especially large businesses or corporations, we use the term private sector, as opposed to the public sector. But if you look at corporations, they have all sorts of privileges that only the state can grant them. So they have limited liability. If a corporation pollutes the local river and makes people sick, those people could sue the corporation. But typically, they cannot sue the shareholders, the shareholders are protected, the most they can lose is their initial investment in the corporation. So limited liability is a very powerful privilege. You can name several other privileges that corporations can have. And these are privileges that only the state can create.

And last but not least, because it’s so fundamental in my book, I should talk about the state’s role in creating money.

I think so much of elite economics discourse as well as common conversation around money is built on a series of myths, the main one being that money is somehow in short supply, that money is scarce. But if you look at how money is created in the United States, it’s created by the federal government. I mean, just look at a note. It says Federal Reserve note. It comes from the government. Banks are an important source of money, but they are also chartered institutions given the special power to create money. So ultimately, all the dollars that exist can be traced back to some form of state action. And so we shouldn’t think of money as a scarce in any way.

The idea that the federal government can run out of money is about as ridiculous as saying the NFL could run out of points. So the question for us is, how do we use money? Is money created and directed to promote broad public ends? Is it used to help all of us, or is it used to enrich and empower an elite few? And unfortunately today, money is used very much in the latter fashion.

And I think a lot of the discourse is a way of kind of mystifying money. So money is not scarce. What is scarce is labor. Production capacity is scarce. Like, those are the constraints we really need to be worried about. John Maynard Keynes had a famous line: “If we can do it, we can afford it.”

So, we should be looking at resources rather than how much bills are in circulation. That’s not what’s preventing us from doing big things. And so I think chapter eight was my attempt to say, “Let’s realize this is all state-constructed, state-directed activity at some level. And the question for us as members of a small-d democratic republic is, why do we accept the status quo? Why don’t we use the state power to make life better, more secure, more prosperous, more free for all of us?”

HH: Right. And I think that why that was such a helpful construct to me is that you end up laying out principles rather than a preferred government structure for how public power should be generated. And I took from your book that the reason why you did that is that these debates over public power versus other models are still raging. And it seems unlikely that we’re going to come to a complete consensus over what the right approach is.

And you also make clear that although investor-owned utilities have the worst track record on decarbonization, there are flaws with municipal-owned utilities and co-ops and so on as well. So, could you just elaborate on the importance of principles rather than structures?

VAHEESAN: In the penultimate chapter of the book, I didn’t attempt to lay out a detailed blueprint on how public power could be expanded and perfected. Rather, I laid out some principles, some important features of any truly public power institution.

And the reason I did that is really public power, in one sense, is very well established. About one in four customers in the United States gets their power either from a publicly owned or cooperative utility. So in some ways, public power already exists on a large scale. But in terms of political salience, there aren’t too many people who are strongly supporting public power, calling for an expansion of public power.

In some respects, public power as an institution is conservative, but growing public power is radical.

So instead of going deep into the weeds and saying, “This is exactly how a public power institution or institution should look like,” I said, “Here are some important principles that should be followed if we’re serious about expanding public power.”

And I mainly focus on two areas. I focused on good governance. We want these institutions to be genuinely democratic, accountable to the communities that they serve. And second, they should be fully committed to decarbonization, because as you say, right now it’s very much a mixed bag. Some publicly owned utilities are taking climate change very seriously. Others are not, and effectively saying, “You know, our rates are low, our reliability is very good. We don’t wanna be distracted by climate issues. Our customers don’t care about that. Don’t make us go down this path where we risk affordability and reliability.”

And when we’re talking about cooperatives, cooperatives as a class are actually more carbon intensive than even investor-owned utilities. And it’s because they are concentrated in rural and outer suburban areas where many of their customers are fairly conservative and they want to keep the lights on. They want the power to be cheap. They’re not necessarily convinced that climate change is a serious issue. And oftentimes these institutions themselves are controlled by conservative older members of their communities, people who’ve been working at these institutions for many years and don’t wanna get distracted by climate.

I wrote this book very much as a supporter of public and cooperative power, but I also wanted to give people an honest assessment of where things stand. This was not meant to be “Rah rah, public power is perfect, we just need to do more of it.”

Rather, I said, “This is a good model in some ways, but there have been real problems in practice.” I talked about cooperatives that have not had elections in years or decades. You have a self-perpetuating board. You in some cases have self-dealing and corruption where board members or managers are enriching themselves at the expense of the cooperative. And I said, “Building on this history, how might we expand and perfect these models going forward?”

Next: Electric power and democracy in the present day.