Book Review: Path Toward Local Economy More Brightly Lit By Shuman Book

Wednesday, December 26, 2012 - by David Tulis

Local economy is about us. National economy is about them. In simplifying my theory to these few words, you see why the ideas of local economy and free markets are compelling. They aren’t about mere economics. But more. 

We come now to an authority on local economy whose book, "Local Dollars, Local Sense[;] how to Shift Your Money from Wall Street to Main Street and Achieve Real Prosperity," I have been reading with great care.

Local economy — whether for my hometown, Chattanooga, or yours —  tells the story of a conflict in which you are a part. On one side are family business, local interest, provincial connections, faith, family and church. On the other are great corporations, the welfare and surveillance state, credit and government intervention.

Liberty and grace vs. centralization and force, if you will.

Michael Shuman, author of "Local Dollars, Local Sense," says the U.S. financial system is stacked against local economy by way of custom and law. The hurdles to reinvigorating local economy are high. But he explores ways of getting around them. He suggests we rebuild internal markets in our given locales and raise our level of prosperity beyond what the national economy allows.

Locals can’t get the money

Small business in Chattanooga and other cities create half output and jobs in the U.S., but almost all investment dollars go to Wall Street. Americans have a long-established bias against investing locally in favor of investing in national economy and its “rickety” financial system The overall wealth of the U.S. economy is F$150 trillion, with liquid assets estimated at F$30 trillion. “Not even 1 percent of these savings touches local small business,” Mr. Shuman says. “Were local businesses uncompetitive, unprofitable, and obsolete for the U.S. economy, this gap would be understandable. But as we will see, local businesses are actually more profitable than larger corporations — and their competitiveness is impressive despite decades of inattention from policymakers and economic developers” (p. xx). We are overinvesting in the national stock and bond markets, and underinvesting in local economy. If half of that $30 trillion were shifted to local investment, it would be $2.5 billion new capital for a suburban city of 50,000 people.

But a system of “investment apartheid” prevents an inflow of money to local economy. Arcane federal law “has managed to keep small investors away from small businesses. Again, 98 percent of the American public cannot invest in more than half of the economy” (p. xxi).

National investment brings a return of 2.6 percent annually, Mr. Shuman calculates, while local investment is nearly double, at 5 percent. If he’s right, should we not desire to create workarounds to the bristly hedge set up by the U.S. Code and the Securities and Exchange Commission?

We are talking here about investment dollars, not loan dollars. Lending today is the creation of credit. Investing is the giving of existing dollars to a business to help that business grow and prosper, and the profit is not an interest payment, but a dividend on shares in the profit. Investing is riskier in a way, but more profitable. Local investing involves mutuality, personal connection, looking out for the other as much as looking out for ourselves. Bank lending is part of a what I would call a “tapeworm economy.”

Backyard opportunities in Chattanooga

Ideally, local investment efforts would come from wealthy investors and local people, not from tax-funded entities. But Mr. Shuman tells about a Burlington, Vt., economic development office that doesn’t chase smokestacks and seek to bribe big companies to invest in the city. It boosts local business instead with a revolving loan fund, assistance for women entrepreneurs, refugees and young people.

The group works according to several rules. One is maximizing local ownership. “Every job in a locally owned business generates two to four times as much economic development benefit as a job in an equivalent nonlocal business. Local businesses spend more money locally, which helps to pump up what is known as the local economic multiplier.” A study says that $100 spent at a Borders in Austin, Texas, circulates $13 in the local economy. A hundred bucks spent at a locally owned bookshop circulates $45 (p. 18).

Local wealth is greater because “nonlocal businesses come and go while local businesses stick around for years, even generations” and are a better generator of wealth, income and jobs. Outside factories have won $50 billion or more in breaks and subsidies in business-government deals that have been “huge losers.” Business from within preserves a locale’s culture, may better promote “smart growth” and ease of access for the public, and are lococentric and oriented to a long-term future. “Local businesses celebrate these features, while nonlocals steamroll them with retail monocultures” (p. 23).

The idea of a co-op

Mr. Shuman devotes his third chapter to the co-op. Nearly 30,000 co-ops exist in the U.S. operating in 73,000 locations. Most are consumer co-ops, counting 343 million members (many people are members of several). Credit unions such as Tennessee Valley Federal are banking co-ops, and electrical utility co-ops such as Volunteer Electric north of Chattanooga serve 42 million people. Agricultural co-ops have 3 million members (p. 45).

The sector owns $3 trillion in assets, generates $500 billion a year in revenue and pays 856,000 people $25 billion in yearly wages.

Mr. Shuman tells of several co-ops.
— A funeral home co-op such as People’s Memorial in Seattle pays a dividend, but not by check. It pays through patronage payments and price cuts.
— Office supplies are more affordable if purchased through a co-op. Lakes County Services Cooperative of Minnesota, created by state government, buys in bulk for its members, saving small towns a great deal of money. In 2009 the co-op bought $25 million in goods, saved members $3.5 million. The savings are, then, a dividend (p. 51).
— Furniture dealers join a Harrisburg, Pa., co-op for bulk purchasing of goods.
— Sunkist is the well-known co-op for citrus growers who deploy a common brand and join forces in advertising.

Raising money for Chattanooga business?

I won’t discuss Mr. Shuman’s analysis of how Uncle has made local investing almost impossible. In sum, you cannot sell shares of any business without it being a financial instrument subject to federal jurisdiction and control. A co-op intending to raise capital for small local business would need to compensate an investor by means other than by a dividend, and his holdings could not be a security.

For a town struggling to create prosperity and support new jobs, a co-op might be a way to bring my investment money to the table for better use than I can give it.

For money invested, the investor would get discounts on goods and services “and perhaps a patronage refund at the end of the year. If you become a member of dozens of co-ops, covering each of your basic needs like banking, insurance, energy, good, and health care, your capital investment may add up to several thousand dollars.” When you leave the co-op, you get your capital back. If you invest $100 and enjoy a $10 discount, your return is 10 percent. That’s quadruple what a stock might deliver. 

Mr. Shuman discusses a local electronic stock exchange. While local business might get capital through publicly traded shares, the money would disperse to other places, as do Volkswagen dividends. and local businesses would be commoditized as in the major markets. Local investing requires patient capital. “The widespread trading of shares in local companies could be the death of the local economy movement” (p. 181).

For Local Economy Man (Woman), an inspirational, factual book  

If you are an investor or a small business person, or a thinking person seeking ways to develop your influence locally, I recommend you read "Local Dollars, Local Sense." I hope to refer again to Mr. Shuman’s excellent book.

Mr. Shuman may well be a supporter of Democratic politics and have voted for Barack Obama. He favors unions. He seems to support some of the goals of the environmental movement, which in the 1980s replaced Marxism as the best means to create a more collectivist political and economic order. Mr. Shuman looks favorably on some regulation. Still, "Local Dollars, Local Sense" is a wonderful book that will inspire you to think in terms of local economy as against national economy.

How might you stand apart from libertarians and Republican conservatives and your liberal Occupy friends who have even less an idea of capital but just want more cheap student loans?

The concept of local economy rebukes the idol of politics over which so many people obsess. Let’s not keep looking at doings in Nashville and Washington. Local economy is not about politics in the familiar sense, but is an intellectual structure that gives means for self-determination, local control, local cooperation and, eventually, political and economic liberty.

— David Tulis writes for Nooganomics.com, which covers local economy and free markets in Chattanooga and beyond.

Source: Michael Shuman, Local Dollars, Local Sense (White River Junction, Vt.: Chelsea Green Publishing, 2012), 240 pp.
Note: David Smotherman at Winder Binder Gallery on the North Shore has been gracious enough to stock this book at my request.


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