Small Business — The Key to Reviving Local Economies

The level of discontent in America is high today. Most people feel the country is not moving in the right direction, and they blame politicians for the mess. Their anger is justified, but politicians are not the only problem. Big businesses and banks play a major role too.

More directly, a steep drop in the standard of living over the past thirty years is a major consequence. The American Dream is fading fast. Today, relatively few Americans are able to:

  • have a nice home,
  • take an extended vacation,
  • provide “extras” for their families,
  • see their children get a good education, or
  • retire comfortably on savings accumulated during their working years.

The downward slide began in the late 1970s or early 1980s.  Corporate taxes dropped, shifting more of the tax burden onto smaller businesses and working families. Companies transferred work to foreign countries and eliminated American jobs.an image illustrates the effect of outsourcing jobs overseas on the local economy.

The economic crisis of 2008 and 2009 made things worse. Many were unemployed for a long time.  To live, they had to use their savings – the money they had set aside for their retirement and their children’s education. By 2015, millions of people had regained employment but they’d had to accept jobs that paid far less than what they were making before.

This economic crisis was a direct result of the outsized greed of corporate executives. Instead of focusing on long term growth and investing in new products and new technologies, many executives opted instead for short term profits. After the crash, the federal government bailed out the corporations that caused the crisis and ignored the smaller ones that were hurt by it. Instead of being punished, culpable or incompetent executives were rewarded with increases in their compensation and bonuses while their employees and former employees suffered.

Trickle Down Economics

In the early 1980’s, many economists promoted trickle down economics – the idea that by incentivizing top earners to make more, their increased wealth and prosperity would trickle down to the less fortunate.

Cities and states gave incentives to large corporations for local growth.  Local, state and federal laws were changed to aid this.  Unfortunately, small and medium sized companies were overlooked in the process.

Let’s look at one corporation – Walmart. Over the last 40 years Walmart has become one of the largest corporations in the world.

The result is a slow and relentless race to the bottom. Local jobs disappear, wages fall, and once-vibrant communities slowly decay. Walmart’s profits flow out of the local communities to Walmart headquarters, Walmart executives and Walmart investors.

Other corporations have since followed Walmart’s lead, moving operations to foreign countries, reducing wages at their American locations by hiring contract and part-time employees, and extracting tax and other concessions by threatening to move elsewhere unless states and municipalities paid up. Today Amazon is doing to Walmart what Walmart did to the rest of the country.

Trickle down economics is a failure. Unemployment may be low, but wages and labor participation are also low, while inequality is still growing. Millions of people have simply given up looking for work. Corporate CEOs and executives have made much more money while earnings for the lowest paid workers has not changed. In December of 2016, CNN reported the following:      

Year

1980 2016

Top 1% of Wage Earners

$428,000 $1.3 million
Bottom 50% of Americans $16,000

$16,000

 

Signs of Hope

Small Business Benefits

One industry in one state bucked the trend toward bigger and bigger corporations. In 1963, the state of North Dakota passed a law stating only a drugstore owned by a pharmacist or group of pharmacists could operate in the state. The goal was to make sure the first priority of their drug stores was to provide health care for the citizens, not to increase the profits of a large national corporation.

The impact has been surprising:

  • Drug prices in North Dakota are among the lowest in the country.
  • The local pharmacies have a far higher customer satisfaction level than the national chains and mail-order providers elsewhere.
  • There are more pharmacies per capita in North Dakota than in any other state, even in remote areas.

Attempts to change the law have failed.  An overwhelming 60% of the voters rejected an attempt led by Walmart in 2014.

two pie charts illustrate the effect of chain retailers and independent businesses on the local economy. Chain retailers send 13.6% of their revenue into the local economy whereas independent businesses reinvest 48% of their revenue locally.People have started to realize the pivotal role small businesses can have in making local communities and regions vibrant again.

  • Small businesses are more innovative and develop new products faster than large companies.
  • They employ more people and retain more during economic downturns. If they survive a downturn, small businesses usually recover more quickly than multi-nationals.
  • The gap between the lowest and highest paid employees is much lower at small businesses than giant corporations.
  • Small businesses provide better customer service than large multinational corporations.
  • Small businesses purchase more goods and services from other local businesses than large competitors.
  • Per dollar of sales, small businesses put as much as three times more back into the local economy as chain and big box stores.

Most Small Businesses are Struggling. Why?

Financing is one problem:  small businesses have difficulty getting the financing they need. While the federal government bailed out large corporations in 2008 and 2009, loans to small and medium sized businesses dried up. Banks would not lend them money because of the supposed “risk.”  And when they could get money, interest rates were extremely high.

Today Slow Money provides financing for local farmers and organizations. 28 local groups in this organization in America have invested over $57 million in over 630 local and organic food enterprises since 2010.The success the Slow Money movement has caught the attention of other investment groups.  They have started to invest money in local small to medium sized businesses.

Another problem is our tax structure: big businesses complain about taxes, but small businesses are the ones who really pay. Most small businesses follow the rules, and avoid fancy tax avoidance strategies such as offshore tax havens.

Regulations and enforcement are also heavily weighted in favor of large corporations. A $100,000 fine is small potatoes for a multi-billion dollar corporation, but it is more than enough to put most small companies out of business.

Small businesses are the underlying economic engine of most communities. They provide good jobs, develop products and services, improve economic stability, and reduce inequality. Slow Money, the ASBC, AMIBA, the FACT Coalition and many other groups are starting to change the economic discourse. But we have a long, long way to go.