January 19, 2018
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We Are Competitive

by Michael H. Shuman

Economic localization offers the key to solving a growing number of global problems, including peak oil, climate disruption, and the financial meltdowns. Yet the perception remains that this solution is very costly, because local goods and services supposedly are more expensive than their global alternatives. American consumers are convinced that “big-box” stores and bigger businesses mean lower prices— “always,” in the Wal-Mart vernacular.

In fact, local goods and services are already competing remarkably well in the marketplace—and they are likely to do better in the near future. Cost effectiveness actually is a reason to embrace localization and argues that the only thing standing in the way of localization flourishing is, oddly, policy-makers committed to propping up increasingly noncompetitive global corporations.

Local Living Economy

Ever since 2001, when the Business Alliance for Local Living Economies (BALLE) was founded, the term “local living economy” has become shorthand for a pragmatic approach to localization. Two principles lie at its core:

1. The wealthiest communities are those with the highest percentage of jobs in businesses that are locally owned. A growing body of evidence suggests that local ownership in businesses pumps up the multiplier effect of every local dollar spent, which increases local income, wealth, jobs, taxes, charitable contributions, economic development, tourism, and entrepreneurship.

2. The wealthiest communities are those that maximize local self-reliance. This doesn’t mean that they cut themselves off from global trade. But they rely on trade only for the diminishing universe of goods and services that they cannot competitively provide for themselves.

The Current Economy

In 2006, firms with fewer than 500 employees (which is how the U.S. government officially defines “small businesses”) accounted for 50 percent of all private-sector jobs. Since smaller businesses pay employees slightly less than larger businesses, they account for 44 % of payrolls. Roughly speaking, then, small businesses make up about half the private economy. Probably 99 percent of these small businesses are locally owned sole proprietorships, partnerships, and small corporations. The U.S. economy turns out to be remarkably local already. A good sense of the U.S. economy can be gleaned from the 2010 edition of the Statistical Abstract, an annual publication of the U.S. Census Bureau (unless noted otherwise, the figures below are all for 2006, the most recent year for which most data are available in the report).

Add both government entities and nonprofits to small businesses and one finds that nearly 60 percent of the economy is rooted in place. That’s the national average. Any decent accounting of unpaid labor, like stay-at-home parents, family care of the elderly, and volunteerism generally—all items economists don’t know how to count and therefore assign a value of zero to—would conclude that perhaps 80 percent of the economic activities in a typical community are done by resident entrepreneurs and firms. In other words, the world’s most powerful industrial nation is largely made up of locally owned businesses today.

But isn’t globalization upending this? Haven’t Wal-Marts, Home Depots, Borders bookstores, and thousands of other chains taken over our communities and destroyed local businesses? Well, yes, they have, but keep in mind that every business listed in the previous sentence is a retailer. The Census Bureau abstract’s table 654, which breaks down gross domestic product (GDP) by industrial sectors, shows that retail accounts for about 7 percent of the economy. In much of the other 93 percent of the economy, in everything from manufacturing to finance, local businesses have been experiencing a renaissance.

But surely these local businesses, even if they survive from year to year, are not as profitable as global businesses. In fact, table 728 in the abstract, on “Number of Tax Returns, Receipts, and Net Income by Type of Business,” shows that nonfarm proprietorships generate three times more after-tax income, for every dollar of sales, than corporations.

So are local businesses profitable in every sector? Let’s look at the 1,100 categories of the North American Industrial Classification System (NAICS), which is effectively the inventory of all firms in the United States. Of all 1,100 categories, only four showed the number of large firms exceeding the number of small firms in 2006. Topping the list of industries hard to localize is nuclear power (yet another reason to oppose that economically and environmentally dangerous energy alternative). The other three least localizable industries are sugar beet manufacturing, potash mining, and pipeline manufacturing. In every other part of the economy, we have many more examples of successful small, local businesses than we do of large, global businesses.

Another feature of the U.S. economy is that, as a country, we are surprisingly self-reliant. In 2008, the country imported $2.5 trillion worth of goods and services into our $14 trillion economy. That is, imports represented about 17 % of the economy. When the Chinese stop artificially keeping their currency low and other foreigners begin unloading their shrinking American dollars, both of which seem inevitable, this import percentage will drop. We are destined to become more self-reliant very soon. The only question is how fast.

Lowest Prices

But what about prices? Aren’t the Wal-Marts of the world always going to charge lower prices than their local competitors? What is not well appreciated is how nonsensical this question is. The U.S. economy is made up of literally millions of products. Studies that claim that this or that chain store is cheaper—and many of these studies have been commissioned by said stores and still call themselves “independent” surveys—do little more than cherry-pick a tiny sampling.

If you believe that price is the primary driver of consumer demand, then you’ve never been to Starbucks. There may be many reasons to buy your mocha latte with a shot of vanilla, but price is not one of them. What really matters to consumers is value, which considers price alongside many other factors: What’s the quality of the product? How trustworthy is the producer? What’s the after-purchase service package look like? How rewarding is the shopping experience? What’s the chance I’m going to be overcharged or ripped off? How well does the company treat its workers and the environment? Does it contribute to local charities and sponsor the local Little League? These turn out to be the very categories in which local businesses naturally excel.

[/column] [column width="48%" padding="0"]If local businesses provided goods and services with low value, then consumers—given the real facts about more expensive and shoddy local alternatives—would flock to the chain stores. In fact, buy-local campaigns always move consumers in the opposite direction. The more information consumers have, the more they buy local. One compelling explanation is that most consumers today know relatively little about great deals locally and instead have been influenced by billions of dollars of advertising pumping the virtues of buying globally.

But what about outsourcing to global service providers? Thomas Friedman’s book, The World Is Flat, is filled with anecdotes about American firms turning to low-wage workers in India and China to do taxes or patent filings. But all his colorful stories turn out to have little statistical significance. Table 1250 in the Census Bureau’s Statistical Abstract shows that the U.S. trade balance in services has been in surplus and steadily growing over the past decade to $144 billion in 2008. Imports of outside services have been fairly inconsequential.

Many do not appreciate the extent to which U.S. policymakers have rigged the economy against local business:
• If you’re a local business in most U.S. states, you must assess a sales tax. If you’re online retailer Amazon.com, you don’t.
• If you’re a global business, you can afford a battalion of attorneys that work the rest of the tax system so that your obligation is close to zero. If you’re a local business, you can’t.
• A generation ago, the way that Wal-Mart strong arms its suppliers would have been illegal under antitrust laws. Today, the behemoth gets a pass.
• Securities laws are so ridiculously expensive for small businesses who wish to have small (unaccredited) investors that virtually no pension funds are invested in the local half of private economy. Given the greater profitability of local businesses, this is a huge and inexcusable market failure.
• A recent study of forty-five economic development programs in fifteen states found that 90 percent were spending most of their funds to attract or retain nonlocal business.

Yes, the U.S. trade deficit has ballooned in recent years, but it’s all been because of our imports of foreign goods. Table 651 in the abstract shows that only about a quarter of our goods consumption is of “durables.” Cars, appliances, gadgets, DVDs, computers, toys, housewares—all the stuff increasingly manufactured in China—constitute only about a tenth of our overall spending. The “nondurables” tend to include food, building materials, wood, textiles, clothing, office supplies, and paper products. And the greater importance of nondurable goods in consumer spending provides yet another opening for localization.

When energy prices and shipping costs rise, nondurable imports will be the first casualties. This means that local production of food and clothing coupled with local distribution, for example, will once again be competitive against Wal-Mart’s importing of these goods 10,000 miles from China— even if the Chinese wages were zero.

Meanwhile, local businesses in every industrial sector are learning how to compete more effectively. Through community-based networks, local businesses are sharing best practices—in service, in technology, in business design, in marketing, in finance. These businesses are learning the competitive value of working together. There is no economy of scale that local businesses cannot plausibly realize through collaboration.

Thanks to the work of groups like Business Alliance for Local Living Economies and the Transition Network, local business innovations are now spreading globally. Community food enterprises are increasingly collaborating through sister restaurants and technical exchanges. Global conferences are passing along innovations in small-scale energy systems, credit unions, and local currencies. While the Lilliputian businesses have been slow to find their footing, they finally are learning that by working together they can restrain the Gullivers of globalization.

Postglobalization Politics

Globalization is fast approaching a cliff—one that much of the world isn’t anticipating. Global corporations won’t disappear, of course, but their role will shrink and many will go out of business. They’ll be forced to focus on the diminishing number of highly specialized goods and services that communities can’t cost effectively provide.

All of this assumes naively, however, that economics trumps politics. In fact, wobbly global corporations can be expected to convince politicians everywhere to save them. After the major U.S. banks and financial institutions began to fail in late 2008, a progressive president and Congress stepped in to bail them out with Troubled Asset Relief Program (TARP) legislation. If this happens every time other inefficient global enterprises are about to go out of business, then of course localization will fail—not because it can’t compete, but because policy-makers can’t tolerate its winning.

These inequities in public subsidies, regulations, laws, and economic development practices are so extreme, so uniformly tilted against local business, that they cannot be regarded as a mere accident. They reflect years of lobbying, favor buying, and campaign contributing by global businesses. As the economic plight of global companies deteriorates, these political manipulations will intensify. And thanks to a January 2010 decision by the U.S. Supreme Court overturning a 103-year ban on direct corporate spending to influence elections, corporations are now free to spend unlimited amounts on “political free speech.” Localization, therefore, could still be thwarted, along with its ability to deliver a new era of prosperity to communities across the country.

Increasingly, those supporting local living economies must be prepared to expose and block this coming political backlash. Whether the country’s landing in a post-carbon future is harsh or gentle, exorbitant or affordable, ultimately turns on whether our politicians will just allow local goods and services to win. Aren’t you tired of this stuff? Why is it that every election, it becomes impossible to hear the facts over all the misleading ads? And if it seems the problem is only getting worse, that’s because it is. We can thank the Supreme Court for that. In 2010, they decided that it’d be just fine for corporations to spend as much money as they want telling us who to vote for.

About the Author

Michael Shuman is director of research and public policy at the Business Alliance for Local Living Economies (BALLE). He holds an AB with distinction in economics and international relations from Stanford University and a JD from Stanford Law School. He has authored, co-authored, or edited seven books, including The Small Mart Revolution: How Local Businesses Are Beating the Global Competition (2006) and Going Local: Creating Self-Reliant Communities in the Global Age (1998). Shuman is a Fellow of Post Carbon Institute.