Author Michael Shuman will be speaking in Ann Arbor on Wednesday on the importance of local business ecosystems

local-economy-solutionIf you’re a regular reader of this site, you know that I think very highly of economist and author Michael Shuman, our nation’s foremost authority on the importance of cultivating, supporting and investing in local businesses. Well, he’s got a new book out called The Local Economy Solution: How Innovative, Self-Financing Pollinator Enterprises Can Grow Jobs and Prosperity, and the folks at Zingerman’s are bringing him to Ann Arbor this Wednesday morning to speak. Tickets are $50 a piece, which I know is a lot of money, but, if you’ve got a little extra cash saved up, or a tax refund check coming your way, I think you might find it well worth the investment. I’ve seen Shuman speak at least three times now, and every single time I’ve found the experience to be not only incredibly thought provoking, but also inspiring… So, if, like me, you’re anxious to find ways to strengthen your community, create meaningful career opportunities of local people, and stop giving our hard-earned dollars to large, out-of-state corporations, do yourself a favor and come out on Wednesday and join the revolution.

If you’re not sure about investing the money, I’d encourage you to check out some of the articles I’ve posted here after having heard Shuman speak in the past. They should give you a pretty good sense as to what to expect. Here are the links: 2006, 2012, 2013.

update: Actually, I can do better than that. Here’s a clip from my 2013 post, for those of you who don’t follow links. These as the 16 things which Shuman said on his last visit to Ann Arbor that struck me the hardest.

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.

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26 Comments

  1. T.H.
    Posted April 18, 2016 at 7:11 am | Permalink

    The only way to fix America is to put politics and local economies back in the hands of the people.

  2. Westside
    Posted April 18, 2016 at 7:47 am | Permalink

    I thought you were going to stop talking about the election. All this local stuff is a thinly veiled attack on Hillary. We need big corporations. We need international trade. Economies of scale. If you’re going to promote Bernie , do what journalist do- Endorse him. Sneaking in all this small business stuff, it’s obvious what you’re doing.
    Next you’re going to suggest we should start growing our own food!

  3. Katherine
    Posted April 18, 2016 at 7:52 am | Permalink

    Westside took the words right out of my mouth. This is some subversive Bernie Bro shit you’re pulling here.

  4. Westside
    Posted April 18, 2016 at 8:14 am | Permalink

    Thank you Katherine. I’m so tired of these Bernie Bros and their attempts to shut down discourse . Where do they think these laptops come from? We true progressives need to rally around Hillary and embrace the global economy. I mean, really? Local?

  5. anonymous
    Posted April 18, 2016 at 8:29 am | Permalink

    “What’s the best thing to come out of this election cycle?” you ask.

    The idea that you’re sexist if you don’t accept the awesomeness of Goldman Sachs.

  6. Westside
    Posted April 18, 2016 at 8:48 am | Permalink

    Goldman Sachs has created more wealth than any local company. Right? And yes, if you don’t love big banks and corporations you are probably a sexist. It’s those institutions investments in other countries that have allowed women to get out of the house and field and into the factory. That’s called progress. That’s called liberation!

  7. Ebru Uras
    Posted April 18, 2016 at 10:27 am | Permalink

    I’ll be there!!

  8. Posted April 18, 2016 at 12:04 pm | Permalink

    Y0ur #13 from 2013 is interesting —

    This will all start with Direct Public Offerings (DPOs), with individuals buying equity in small companies though crowdfunding portals.

    Michigan’s intra-state investment crowdfunding act passed in December of that year, with some, but limited, uptake. I think the SEC’s new rules on investment crowdfunding also just went into effect last month, only 4 years after the 2012 “JOBS Act” that directed them to create rules for it — it looks like Shuman praised that act at the time, and I’ll be curious whether he mentions it finally going into effect.

    Then, people will need a place to buy and sell stock, and local stock exchanges will emerge.

    And Michigan passed enabling legislation for those local exchanges in 2014 (first state in the country to re-enable, according to Amy Cortese?), but I’m not sure any have been created yet.

    many portals will crash and burn, but, by 2015, a few good websites will have emerged

    Still in the sorting-out phase of this, I think. MEDC and Michigan Municipal League (where I work) partnered with a couple of portals to list Michigan crowdfund opportunities, though so far the “public space crowd-granting” option, through Patronicity, has seen much more action than the real estate (FundRise) or business investment (LocalStake) avenues. Couple things might be done to open those opportunities further, but the SEC rules change is probably the biggest hurdle.

    Meanwhile, Ypsi’s got a broad set of entities crowdfunded to various degrees, between the Patronicity crowd-granted nonprofits (Cultivate and Farmers Marketplace), the ZipCap take on “loyalty equity” at Beezy’s, and various things that smell like investment crowdfunding — the Co-op’s occasional debt issuances to fund renovations, Corner Brewery’s initial investor solicitation, and the Thompson Block’s attempts to sell $10k shares. It’s interesting that the more closely these things resemble what Shuman describes, though, the more negative ink has been dedicated to them around town.

  9. Steve
    Posted April 18, 2016 at 1:16 pm | Permalink

    Let’s not forget Rick Snyder’s friends Matt and Rene Greff who financed a new kitchen with donations while jetsetting around the globe.

  10. Posted April 18, 2016 at 5:16 pm | Permalink

    Thanks for the comment, Murph. Without getting into a lot of detail, my experience with local investing did not go well. I entered into a deal that wasn’t very good, and I learned my lesson. That was over a decade ago now, though, and I’d like to think that things have improved, and that new, better models have emerged. With that said, most of the negative chatter I’ve heard doesn’t concern investments, but Kickstarter campaigns like the one mentioned by Steve which have rubbed a lot of people the wrong way. Investing, though, is something different altogether, and we do have regional successes, like Zingerman’s Roadhouse.

  11. jcp2
    Posted April 18, 2016 at 8:28 pm | Permalink

    I just don’t see how the individuals investing in small businesses ever really scales up to non-local investors, such as pension plans and other institutional investors. There’s a lot of due diligence before investing, and then expectations for financial reporting and transparency to investors/owners. Much simpler for local banks to make loans to local businesses, as at least they are set up to follow up on these issues, and depositors of the bank, who are functionally investors, have a more predictable income stream and protection from risk through diversification across many businesses.

  12. Westside
    Posted April 18, 2016 at 8:51 pm | Permalink

    Thank you jcp2! The system we have works perfectly well. Sure it could use a little tweak here and there, but what doesn’t. Hillary knows the bankers, she’s partied with them on Martha’s Vineyard (or wherever she goes for her August vacation), she’s sat next to them at dinner, hell they’ve paid her hundreds of thousands of dollars to hear what she thinks. Once elected they’ll do what she wants. The banks aren’t our enemy , they are our friends. I predictable income stream and protection from risk . Sure it’ll take decades to trickle down, but all we have is time. We don’t need to reinvent the wheel folks. If it ain’t broke don’t fix it! And for a lot of us things are perfectly fine. Even good. There’s no reason to turn over the cart.

    I agree with jcp2 and greatly appreciate his thoughtful comment.

    I wonder how much Mr.Maynards savings would be worth if he had invested in Apple stock in 2005? Let’s see it seems the stock hovered between $6-$10 in 2005. Wow!

  13. Posted April 18, 2016 at 9:21 pm | Permalink

    While I appreciate you snark, Westside, Jcp2 has a good point. Investing is difficult business and it takes work to know a good investment from a bad one. And, while no investment is without risk, putting your money into an index fund, at least historically speaking, has been a relatively safe investment. Sure, the results may be detrimental to society at large, but it works for the individual investor. And I’m not sure how you change that paradigm. Investing in a local hardware store is always going to be riskier than investing in IBM. My guess is that it will start small with people investing in relatively well known entrepreneurs. As I mentioned before, the people who invested in the Roadhouse, as I understand it, did quite well. But I don’t see a lot of opportunities like that. I suspect, however, we will see more. And people, at least at first, won’t pour all of their savings into local investments. But we don’t need that even if 1/25 of the population shifted 10% of their savings over, it would be hugely impactful.

  14. Posted April 18, 2016 at 9:27 pm | Permalink

    I can’t recall the town right now, but there was a small city that, about a dozen years ago or more, decided that they needed a department store in their downtown, and they went about selling shares to make it happen. I believe I’ve written about it here before. If I’m not mistaken, I believe I heard their former Mayor speak on a panel somewhere. At any rate, I think that’s also a model that could work. If the risk was spread broadly across a community, and people were satisfied with the plan and the management, I could see something like that working.

  15. Westside
    Posted April 18, 2016 at 10:36 pm | Permalink

    I feel that my work on this blog is complete. It was difficult , but I feel that I’ve proved all my points and after carefully considering others view points, still find mine to be better , more logical and obvious. Those of you whom don’t agree with me, don’t worry, not many people can comprehend things as well as I do. It’s a burden but I’ve resigned myself to it. You don’t need to thank me for the insights that I’ve provided, it’s the least I can do.

    After Hillary wins a resounding victory tomorrow in New York -I feel that everyone should fall in line. There is serious work to be done. It won’t be a revolution but I promise it will be slightly different . And that’s better than nothing. Dear Bernie Bros we at camp Hillary will take you in with open arms. We won’t denigrate or insult you, we’ll turn the other cheek, that’s how we are. It’s understandable that some might fall for a charlatan like Sanders. We all made mistakes in our youth.

    Just promise Mr.Maynard that when Starbucks comes offering you loads of cash to rent the bottom floor at Pearl you won’t slam the door in their face. It’s much easier to just go with the flow. We don’t need to rock the boat. We certainly don’t need to tip the boat over!

  16. Posted April 19, 2016 at 9:57 am | Permalink

    Mark, I know several Montana and Wyoming communities started community-backed dept. stores in the early 2000s — a way to deal with the local store closing and the nearest “city” being 3 hours drive away in some cases.

    Unfortunately, “The Merc” in Powell, WY, apparently just closed last month after 15 years in business. Of the others listed in that ILSR link, looks like Little Muddy Dry Goods in Plentywood, MT, and Family Matters in Malta, MT, are still in business. Washakie Wear (Worland, WY) appears to have closed in late 2011, and I can’t find anything about the Glendive store.

    So, yes, there are successful examples of community ownership working even for very un-exciting businesses — though in some of those cases, isolation and lack of other options was a big contributor to the community’s initial buy-in and continued support.

  17. jcp2
    Posted April 19, 2016 at 1:04 pm | Permalink

    I think that a community owned business with many small investors/owners can work when the business model is an acquisition and distribution of commodity goods, like a co-op. Similarly, people can and have formed investment syndicates with a general manager/partner, but these tend to be small and require a substantial amount of funding per member. For small specialized businesses without wide appeal, I would think that a loan from a community focused lending institution with deposits derived from local residents would be more preferable for all parties.

    What about community businesses that become very successful on a scale greater than the community that it started in? Main Street Ventures is reviled by many localists, as was Borders. Walmart started as a small general store. Starbucks and McDonald’s were once small independents. We love Sweetwater’s now, but how about in ten years, when there is one in every airport (DTW being the first now)?

  18. Westside
    Posted April 19, 2016 at 1:20 pm | Permalink

    We will always love Sweetwaters. May they be so lucky as to have one in every airport.

  19. Westside
    Posted April 19, 2016 at 9:23 pm | Permalink

    Wow. That was quick. I barely got through my first bottle of wine before they called it. Again, no need to apologize , it happens. But now it’s time to get serious. There’s only one woman who can beat The Donald. H-I-L-L-A-R-Y-! That’s your candidate, just as I’ve said all along.

  20. Westside
    Posted April 20, 2016 at 6:14 am | Permalink

    For anyone who needs more info about yesterday’s election just go over to my Facebook page where I will be gloating all day. Winners keepers – Losers weepers. See you at the polls in November.

  21. Westside
    Posted April 26, 2016 at 12:20 pm | Permalink

    I will be gloating on my Facebook page tonight after the results come in. Time to admit you were wrong Sanders people! I am a bit worried though as I heard someone in town has started a secret police type organization to hunt down Hillary supporters. Grow up people!

  22. kjc
    Posted April 26, 2016 at 1:08 pm | Permalink

    “I am a bit worried though as I heard someone in town has started a secret police type organization to hunt down Hillary supporters.”

    how do we join?

  23. Westside
    Posted April 26, 2016 at 1:31 pm | Permalink

    I’m sure that they’ll be contacting you after that post. But soon they will be powerless.

    It’s time for a little re-education of those who have been led astray. If Hillary is OK with the Koch brothers and true progressives she’s OK for everybody. Come to the light!

  24. Peter Larson
    Posted April 26, 2016 at 3:40 pm | Permalink

    We need to kill all supporters of candidates we do not like.

    That is the Ypsi way. No dissent will be tolerated.

    We want a uniform Ypsi. Except the black people and the poor people. We will ignore them.

    Eventually, they will be pushed out anyway.

  25. Westside
    Posted April 26, 2016 at 5:17 pm | Permalink

    Yes! Yes! Remember all the jobs that were created to pull the bodies out of Lake Victoria ?

  26. Westside
    Posted April 29, 2016 at 6:35 am | Permalink

    I really can’t believe that you Sanders people aren’t falling in line. I’m really getting tired of having to use my Facebook page to expose your failings when I should be promoting Hillary and attacking Trump.

    Please Sanders people- you lost. Do the right thing! Now!

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