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Small is Beautiful, for Local Economies
Microeconomics (from Greek prefix mikro- meaning “small”) is a branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of limited resources.
This is in contrast to macroeconomics, which involves the “sum total of economic activity, dealing with the issues of growth, inflation, and unemployment.” Microeconomics also deals with the effects of national economic policies (such as changing taxation levels) on the aforementioned aspects of the economy.
Looking at this basic Wikipedia definition from a localist perspective, let’s dive right in:
Individual behavior means making choices based on your own limited resources. Knowing where your food comes from and making a conscious decision to spend your hard-earned money with a farmer who can put that $5 directly into his or her own pocket helps to 1) feed the farmer’s own family, 2) put more crops in the ground for the next round of planting, 3) feed the farmer’s livestock, 4) put money back into their own community because they’ll use the $5 at other locally owned businesses they support. This is a multiplier effect, where a dollar spent in our community stays in our community and is recycled over and over again into wages, services, goods, and local taxes. In some cases, the multiplier can be up to eight times on a single dollar.
Now, let’s look at a firm’s decisions regarding the allocation of limited resources. When a small business owner makes an effort to pay a living wage or better to his or her small team, this is an investment in human capital. It’s also a way to give employees a salary they are worthy of and providing them with the resources to be productive individuals in their own community. They will be able to purchase more goods and services in their own neighborhoods with their income, thereby contributing to the multiplier effect.
With over 152,000 small businesses in New Mexico—representing 95 percent of all employers and 54 percent of the private-sector workforce, and over half being woman-owned—small businesses are the backbone of our economy. Collectively, small businesses are an economy all their own, creating jobs and serving many sectors from food and agriculture to industrial manufacturing to tourism and services.
What do they need to succeed in our state?
Resources. Capital. In many conversations with locally owned businesses, it was revealed to me that what many owners wanted was easier access to capital that allowed them to negotiate lower rates of repayment or to take on mid-size loans from $20,000 to $100,000 for staff expansion or inventory. Many lending institutions are risk-averse, not wanting to provide smaller loans like this to a small, relatively new business or to an owner who has personal debt or a spotty credit history. I’m not advocating for free money to business owners. I’m advocating for more conversation about how to clean up old debt, learning more about what the business does as a force for good in the community and how a repayment plan works to help support—not hinder—the business’s growth.
The Institute for Local Self-Reliance (ILSR) recently published results of data gathered from more than 3,000 locally owned independent businesses across the United States. They found that “…One obstacle is a lack of credit for businesses seeking to grow … One in three independent businesses that applied for a bank loan in the last two years failed to secure one. That figure was 54 percent among minority-owned businesses and 41 percent among young firms, whose expansion has historically been a key source of net job growth.”
Tax incentives for local businesses are key solutions to the problem, as well. The same study from the ILSR found that “…On the policy side of these challenges, majorities of the businesses surveyed said they would support legislation to cap the dollar value of the economic-development tax breaks that companies are eligible to receive, and that they think regulators should more vigorously enforce antitrust laws against dominant companies.”
Imagine our cities and towns helping local businesses succeed with hiring more local talent by giving them tax breaks instead of offering relocation incentives to the next corporate call center that comes to town with the promise of 200 $12-an-hour jobs? We might gain those jobs in New Mexico, but at what price? And what happens when that company gets another incentive to move again in 10 years to another city in our neighboring state? Goodbye, jobs.
What I’m also talking about here is the fact that those companies are not investing in local jobs the way a locally owned business would. For $12 an hour, their staff will not likely move into a higher pay scale with more skills; these are often basic customer-service jobs. Plus, they use their own out-of-state accounting firms and payroll services, their own marketing departments and all their own legal departments. They don’t put money back into our communities with local vendors.
Investments can make a difference in small communities. If local governments give incentives to local businesses to expand, those businesses could grow their workforces, pay higher wages and be a force in a community that needs local tax money for facilities and services such as libraries and first responders, and they could contribute more to the local economy by using local vendors.
In Pennsylvania, the Fresh Food Financing Initiative was seeded with $30 million in state money. This loan fund raised more than $120 million in capital to finance over 80 locally owned grocery stores in low-income urban and rural communities that lacked stores selling fresh food and where conventional bank loans for start-up food retailers were hard to come by. All but one of the businesses financed by this program have been successful.
Imagine focusing on our small and local businesses as if they mattered most, with their unique ways of serving communities. Imagine investing in them, providing them with the incentives and red-carpet treatment we reserve for big companies from out of state. It could be a game changer in our communities. Now, let’s make it happen, New Mexico.
Vicki Pozzebon is a purveyor of all things local. She is the owner of Prospera Partners, a local economy and business consulting firm. She was a 2010–2012 BALLE Fellow. Read her blog The Local Voice at vickipozzebon.com and follow her on Twitter: https://twitter.com/vickipozzebon
Sidebar: An excellent resource: The Institute for Local Self-Reliance Localist Policy Agenda https://ilsr.org/localist-policy-agenda/
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