This is a guest blog post from Michael H. Shuman. Mr. Shuman is an attorney and economist, whose most recent book is “Put Your Money Where Your Life Is: How to Invest Locally Using Self-Directed IRAs and Solo 401ks.”
COVID-19 has turned your local budget into a sea of red ink and massive service cuts loom ahead. But don’t despair. Here are four ideas for stimulating your economy which cost little or nothing.
The key is understanding that your economy depends on your locally owned businesses. They comprise 60-80% of the U.S. private economy and pay most of our business taxes. They need the city’s support. Here’s how:
#1: Cancel All Corporate Attraction Efforts
By definition, this type of economic development focuses exclusively on nonlocal businesses. There is ample evidence that these programs are flops. Even when these incentives “work,” they typically generate jobs at ten to one hundred times the cost as local business programs. Nationally, this recommendation could save state and local authorities an estimated $80 billion per year. This idea will free up time and money for the kinds of economic development that support local businesses.
Plan B: If you’re unprepared to stop giving out money, here’s a fallback idea: decide how much public money is available for expansion of high-quality jobs, then issue an RFP for bids from your business community. Businesses who offer the most employment for the least money win. I guarantee that 99% of the winners will be locally owned businesses.
Some economic developers will balk, while others will celebrate. Put the former to pasture or privatize them.
#2: Reset the Rules of Procurement
Ensure procurement rules give local businesses a fairer shot at public contracts by considering the tax consequences of your procurement decisions. Ask bidders to indicate the minimum percentage of the contract they will spend on other local vendors, calculate the likely tax benefits, and adjust bids accordingly. This will increase the percentage of public money spent locally and boost the “multiplier” effect on local income, wealth, and jobs while reducing net spending by the local government.
Your procurement officers will resist, and you will need to remind them that their mission is to pick the bid that produces the greatest value for your city. You might start with a study (here’s one that New Mexico did) showing how few contracts local vendors are getting now or with a study showing the importance of tax dollars in generating local jobs, wages, and taxes.
#3: Move Your Financial Services into Local Banks or Credit Unions
The probability of a dollar deposited in a local bank being lent to local business is roughly three times greater than a dollar deposited into a big bank. Revenues collected from federal transfers and from taxes should be deposited in these institutions before they are spent. Local financial institutions should be expected, in return, to lend at higher rates to local businesses.
Your financial officers will complain that these small banks are unable to handle the large flows of money from your city. Introduce them to their counterparts in Phoenix and Tucson who figured out how to do this.
#4: Promote Private Local Investment
Your residents may have billions of savings sitting in stocks, bonds, pension funds, mutual funds, and insurance funds. North of 99% of it goes into nonlocal business and does little for your economy. Pry some of this money loose for local projects and businesses. Simple things your city can do to promote local investment are:
- Post on its website all local businesses actively seeking investment.
- Facilitate online conversations between local investors and local businesses.
- Encourage local businesses to solicit “adoption” by residents who pre-purchase goods and services. (I recently did this by pre-purchasing $1,000 of meals at my favorite struggling restaurant, which then gave me $1,200 in gift cards.)
- Provide education to residents about available tools to facilitate local investment of pension funds like self-directed IRAs and solo 401Ks.
Just do it. A week of website work could generate tens of millions of new dollars for your local businesses.
I have plenty of other suggestions like these: If you’re interested, please visit my website: www.michaelhshuman.com.