Last week, I had the opportunity to spend a day with economist and author Michael Shuman. Shuman, for those of you who aren’t familiar with his work, is probably our nation’s foremost authority on the importance of cultivating, supporting and investing in local businesses. The stated purpose of his visit to Ann Arbor, which was coordinated by the Washtenaw County Office of Community & Economic Development, was to discuss the various mechanisms which are evolving for regular folks, like you and me, to invest in the small, local companies that we love, patronize and would like to have a financial stake in. As much of what Shuman said was material that I’ve written about here in the past, after having heard him speak on other occasions, I’ve decided to limit my coverage to the 16 things which Shuman said that struck me the hardest. Here they are, in no particular order.
1. The economic development policy of Michigan, according to Shuman, has “gone off the rails.” This, he says, is not an indictment of any particular political party, as both the Democrats and the Republicans, according to him, promote a failed “attraction and retention” approach, which has little or nothing to do with nurturing the small, local companies that are the overwhelming creators of jobs and prosperity in this country. Instead, our various economic development organizations focus primarily on luring big businesses to leave the states where they currently reside, by offering tax abatements and other short-sighted incentives, and bribe those big businesses that are already in-state to stay. A more successful strategy, he argues, would be to implement policies that maximize local ownership, increase regional self-reliance, and reward adherence to the so-called triple bottom line (the understanding that environmental and societal costs should be factored in, along with profitability, when assessing a business’s value). In further exploring the triple bottom line concept, Shuman says that it’s already appreciated by most people that decisions aren’t just motivated by price. It’s about value, he says. If it were just about price, Starbucks wouldn’t exist. They, however, attract people for a reason. When thinking about local business, we need to keep that in mind. We need to reframe the value proposition, and demonstrate how other factors need to be taken into consideration. Until not so long ago, he says, people in many companies couldn’t purchase long-life, energy-efficient light bulbs, as they were more expensive. There was no way, according to Shuman, to factor in the life of the bulb when making a purchasing decision. That, however, has changed. And, as we move forward, other things will be factored in as well.
2. The evidence, according to Shuman, shows that “local busineses are more reliable and efficient users of public money.” Shuman, in making this case, references an assessment that was done of the tax abatements given to entities doing business in Lane County, Oregon. 95% of all abatement dollars, during the specific period of time that he studied, were given to six non-local businesses. Three of these companies, after receiving their abatements, promptly moved their facilities to Asia. And, of those remaining, two never delivered the jobs that they promised. (Speaking of which, does anyone remember how many jobs Google said they’d bring to Ann Arbor when they got their abatement half a dozen years ago?) But, while only one of the six investments in businesses headquartered out-of-state actually brought about significant job creation, the 5% of incentives that went to businesses rooted in the community were actually quite successful. And, those jobs which were created cost the tax-payers a great deal less. Whereas it had taken over $60,000 in abatements to create each job with an out-of-state business, a new job was created with every $2,000 invested in a local business. (I plan to ask Michael for a link to the study.)
3. Local businesses recirculate dollars in their communities. An analysis of bookstores in Austin showed that, of every $100 spent in a locally-owned store (Book People), $45 were circulated back into the community, whereas only $13 made its way back into the community when $100 was spent at the nearby corporate chain store (Borders). Local companies, as Shuman was quick to point out, hire local accountants, advertise in local papers, pay dividends to local owners, and give more to local charities, among other things. You would be hard pressed, said Shuman, to find an example of a non-local business making a more significant impact than its locally-owned competitor. And there are now dozens of academic papers that prove this to be the case. A recent study in the Harvard Business Review, according to Shuman, found that the highest per capita job groth rates in the United States are in those communities with the highest density of locally-owned businesses. And it’s not just job creation where these communities excel. Academic studies have also shown that, when you have well-established, healthy, local business ecosystems, you also tend to have smart growth, tourism, more entrepreneurial behavior, better public health, more civil society, and increased political participation. (Of course, it could be that these other factors lead to more robust local business ecosystems, or that all of these positive outcomes have more to do with the relative wealth of a community than the percentage of stores that are locally-owned, but we’ll leave the “correlation v. causation” discussion for another time. For the time being, I just think it’s interesting to note that these indicators of community health all seem to correspond with increased local business ownership.)
4. There’s more opportunity for local businesses with the costs of fuel going up. Our economy has, over the past several decades, been shifting from one that manufactured and sold goods, to one in which most people are working in the service sector. (It is, after all, harder to outsource service sector jobs to China and India.) Now, however, the pendulum is swinging back. With the price of oil rising, local companies are starting to be able to compete in the area of manufactured goods, ranging from paper products to building materials. We need to acknowledge this opportunity, and start looking for opportunities to substitute locally produced goods for ones that are currently being shipped across the world, and trucked across the country, at great expense to the environment.
5. If you were to ask anyone, “Would you rather have full employment with high environmental and labor standards, or full employment with low standards?” they would say that they would rather have full employment with higher standards, says Shuman. The problem is, people think that there has to be a trade-off. They don’t think full employment is possible in a world where the environment is respected and labor rights are protected. They’ve been convinced that we can’t have both simultaneously. We need to demonstrate that it’s possible, and that triple bottom line thinking doesn’t have to negatively impact the economy.
6. The big problem is that we don’t have a way to capitalize local businesses that have the potential to grow and create jobs. We know that small businesses (businesses with fewer than 500 employees) are the ones with the real potential to create jobs, and transform our communities, but, as of right now, there’s now way for us to help them grow, and participate in their success. America is an extremely rich country. Collectively, the people of the United States currently have $150 trillion in wealth. The problem is, almost all of it, that isn’t in real estate and other tangible assets, is invested in large companies. It’s incredibly easy to invest in public companies and mutual funds. We don’t, however, have a mechanism by which to invest in the companies in our communities, unless we’re extremely wealthy, in which case we’re considered “accredited investors” under securities law. (The SEC operates under the assumption that the rich, unlike the rest of us, are capable of making informed decisions. Shuman calls the current system “securities apartheid.”)
7. In 2009, Shuman proposed that a slight change be made to the existing system. He recommended a $100 exemption, arguing that unaccredited investors should be given some small degree of freedom to invest outside of the established securities system. His colleagues liked the idea, and a letter writing campaign was initiated. The Securities and Exchange Commission, however, did nothing. They sat on the idea until, one an a half years later, when the head of the SEC was called before Congress and asked, by Representative Darrell Issa, what innovative measures they could put in place to get the unemployment rate back below 9%. And, in the resulting conversation, Shuman’s proposal was brought up. Ultimately, the House committee unanimously voted to enact the legislation, but with a $10,000 exemption. This then went to the Senate, where it was whittled down to $2,000. (People that make less than $100,000 a year, can invest $2,000, or 5% of their income, annually. People making over $100,000, can invest in 10% of their incomes.) And, in April 2012, it was signed into law by President Obama. (If you’re interested, I discussed this legislation at some length not too long ago with author Amy Cortese.) The SEC is now working to get the rules, regulations and infrastructure in place, and the hope is that, in the next few months, we’ll have a system where unaccredited investors will be able to invest in specific companies through online middlemen. (Intermediaries are required by law, but the SEC is still debating what role they will play, what kind of licensing they will need, etc.)
8. Move Your Money campaigns, aimed a getting people to transfer their accounts from big banks to local ones, are great, says Shuman, as big banks neither care about, or invest in, our communities, but funds invested in banks are “just a drop in the bucket.” We need to get at the over $30 trillion currently invested in securities, says Shuman. We need to start the process of slowly chipping away at it, taking advantage of the few opportunities that currently exist, and pushing for more. “We are on the verge of a huge change in capital markets,” says Shuman. “What happens when the first trillion goes from Wall Street to Main Street? People will take notice.”
9. Shuman suggests that we immediately do two things as a community. Together, he says, these two things would likely only cost us about $20,000. And, if we did them, we’d be infinitely better off than every other community in the United States. First, he suggests that we create a passive web listing of every local business investment opportunity there is. Second, he says that we should strike a deal with a local accountant to help implement a self-directed IRA initiative. If we could gather 1,000 individuals, all willing to pay $100 a year to have someone manage a self-dircted IRA, he suspects that we could find an accountant willing to drop his/her rates to accommodate us. And, once we have this mechanism, we could begin moving our savings from investments in the S&P 500, into our own communities. (Self-directed IRAs are currently legal under SEC rules.) The accountant would just have to do the administrative work of facilitating the investments in these local companies. And, as he says, this could happen immediately. (He said that, if we wanted, we could also consider implementing a community portal, like those being rolled out by Mission Markets. As the new crowdfunding legislation still hasn’t been rolled out, Mission Markets can’t facilitate equity deals, but they can facilitate debt deals, connecting local businesses to those in the community who have money to lend. The equity piece will follow, when the terms of the legislation are announced.)
10. As local banks are the ones investing in our communities, we need to make sure that all of our local governmental entities are investing their cash reserves in local banks. (You’ll be happy to know that I’ve already started looking into this, and hope to have a report soon.)
11. Foundations, by law, have to give away 5% our more of their assets each year. The other 95% of their holdings, however, can be invested anywhere. What would happen, Shuman asks, if our local foundations began investing in local businesses, instead of in the big securities, which are systematically destroying our communities? And, he says, they can legally do this now. This would be a powerful mechanism for immediate change.
12. This isn’t about investing in start-ups, he says. No, he would focus on companies that are between three and five years old, that are poised for growth. They’re the ones that need the crowfunding, and they’re the ones that could really create jobs. And this grassroots funding could keep local companies local. Shuman offers the example of Tom’s of Maine, saying that, if they’d been able to capitalize their growth themselves, they wouldn’t have had to sell to Colgate-Palmolive, and they could have stayed in Maine, and grown.
13. Here’s how he thinks it will likely play out… This will all start with Direct Public Offerings (DPOs), with individuals buying equity in small companies though crowdfunding portals. Then, people will need a place to buy and sell stock, and local stock exchanges will emerge. Then, once there are exchanges to provide liquidity, we’ll see portfolios develop, and open-ended mutual funds. And, ultimately, we’ll see pension funds moving their money over. The path, he thinks, is relatively clear… It will likely take ten years, he says, and there will be setbacks along the way. There will be crowdfunding scams, and many portals will crash and burn, but, by 2015, a few good websites will have emerged, and we’ll be on our way.
14. This is politically doable. The fact that we need to end corporate welfare, and stop stacking the deck against our local companies, is one of those rare things that both libertarians an progressives can agree on.
15. Local businesses can outperform Wall Street. Regardless of what people may tell you, the S&P, over the past 140 years, according to Shuman, has an average rate of return of 2.6% annually. At that rate, you’d be better off putting your money in the bank, says Shuman. He then notes that it’s not unusual for local businesses to return 5% annually to their investors.
16. Something that we could do immediately, that would cost nothing… We could start identifying the businesses that are most in need of investment right now. Which companies have potential for growth? Which companies could, if they were capitalized, grow and add jobs? We could put the word out through our networks, and start aggregating the data. Second, we could start pulling together a list of people who are interested in local investing, even at relatively small levels. We could have people sign an “I’m a committed local investor” list, and capture their contact information so that, as opportunities arise in the near future, we know who we can turn to… The bottom line is that we need to start building the infrastructure now.
If you found this post at all interesting, I’d encourage you, after reading my last two Shuman posts, to check out the discussions I’ve had recently with Judy Wicks, the founder of the Business Alliance for Living Local Economies (BALLE), Zingerman’s co-founder Paul Saginaw, and author Amy Cortese. They’re all incredible.
[Michael Shuman is the author of Local Dollars, Local Sense: How to Shift Your Money from Wall Street to Main Street and Achieve Real Prosperity–A Community Resilience Guide.]