Tuesday, March 11, 2014

Local Dollars, Local Sense

“America’s investment system is broken,” according to Michael Shuman, a community economist. “Half the jobs and the output in the U.S. economy derive from local business but almost all our investment dollars go into big corporations on Wall Street,” far from home. Shuman advocates balancing the scale between Main Street and Wall Street through new mechanisms developed for local investment which his research shows can yield “a five percent living rate of return,” among other community benefits. 

Shuman is the author of several books, including his most recent, Local Dollars, Local Sense. He proposes that cities and towns can finance their economic dreams by investing in quality of place. Specifically, we must begin to shift our investment dollars from Wall Street to Main Street, from corporations over which we have no control to local community enterprise where we can see a business up close and personal, track its progress in real time, and benefit from locally recirculated dollars. Investing in corporations may have been wise decades ago when corporations were often local. Now, Shuman emphasizes, corporations are global, stock markets are technologically driven “casinos of high risk,” and financial markets serve the corporate bottom-line, rather than the health and wealth of community economies.  

Shuman acknowledges that implementing local investment will require a paradigm shift for most investors. Current government and financing policies tout Wall Street as the single most valuable investment platform and communities have traditionally focused on attracting large business operations. Yet, says Shuman, data for Main Street investments show both lower risk and a more consistent and higher rate of return. “Small businesses, including homegrown businesses,” he reports, “have maintained their share of jobs in the economy since 1990 while nonlocal businesses have failed to increase their presence or profit in that same economy.” In other words, in a financial and public policy system that favors Wall Street, Main Street has held its own unassisted. Overall, sole proprietorships are three times more profitable than C-corporations; on regional measures, a high density of locally-owned firms is positively associated with per capita income growth.
Acknowledging that investing in Main Street is in its “infancy,” Shuman describes “cutting-edge capital tools” that have been successful in various U.S. locales.  Developed by non-profits, local and state governments, and private enterprise, these mechanisms have significantly assisted community economic development. They include creating revolving loan funds for local businesses, “buy local” campaigns, forming producer and consumer cooperatives with lending capacity, developing local business portfolios for investment, and bank issuance of specialty Certificates of Deposit (CDs) to benefit the business community.  
Main Street investment has multiple attractions, says Shuman. Investors can evaluate and promote products and services in their portfolio; they often know business owners and directors - or can get to know them - to provide feedback; they can see if their investments are environmentally and socially sound; and they can ensure that local businesses spend locally in a positive feedback loop for the entire community.  Local businesses are also flexible, able to shift with their market. In many cases, just-in-time delivery, lower shipping costs, and convenient storage facilities bring added advantage.
“The U.S. has $30 trillion held in various forms of savings, with less than 1% of those savings held at the local level,” asserts Shuman. If a larger percentage of that very large pot were dedicated to Main Street, even a small town of 5,000 could find itself possessing several million dollars for starting or expanding local businesses.

Fortunately, Shuman points out, public policy regarding investment is beginning to look toward Main Street.  In the past, an investor had to be accredited to formally invest in a business, a process open to people with a wealth base of $1 million in assets (excluding their home) and requiring extensive legal activity by the business seeking investment.  Accredited investors are roughly 2% of the economy. With the recently-passed federal JOBS Act, the other 98% of Americans who are unaccredited investors are being invited to the table.  The best-known result so far are crowdfunding websites such as Indiegogo and Kickstarter which allow a business to solicit dollars from the general public. 

Shuman confesses that he was once drawn to the tried-and-true “Wall Street is where it’s at” mantra.  Then, a victim of Wall Street’s collapse, the light bulb sparked and he started afresh.  Now he is dedicated to encouraging individual investment in local businesses to help them start, grow, diversify, and thrive. The best method to build prosperity, he believes, is to invest our extra dollars in “local businesses we know and trust, so that our families, our neighbors, and our communities become our true sources of wealth.”

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