Not long ago, I sat with a colleague and technical assistance provider to small businesses in a major southern city. As she told her story, she broke down in tears of frustration and grief. She had been working against the clock to help a committed group of small black-owned plumbing businesses meet all contractual requirements so they could bid to serve the city's new airport and nearby hotels. African-American owned businesses are the number one employer of black workers nationally, and securing these contracts would have grown these businesses and enabled the owners to hire more workers in a city where more than 50% of black men are unemployed. The city had been touting their commitment to these small businesses, yet, on the eve of the announcement, someone in power decided to award the entire contract to one company that included no locals and was owned by an old Ivy League business school classmate.
This exact same scenario plays out in towns across our nation. All too often, community tax dollars benefit the few at the great expense of the many. Our economic development decisions are maintaining a system of inequality.
In a "new economy" how would economic development create real community prosperity?
Dozens of studies presented in publications that range from Harvard Business Review to Economic Development Quarterly to the Federal Reserve now show us that incomes rise faster in places with more small businesses than in those dominated by big businesses, that counties with the highest density of local and small businesses do the best job of reducing poverty, and that economies of small-scale businesses have greater community well-being, including lower rates of crime and better public health. Further, according to the SBA, from 2004 to 2010 U.S. micro-businesses created a net of 5.5 million jobs while large businesses over 500 employees lost 1.8 million jobs. Very small businesses -- as in under 20 employees -- created all the net new jobs in this country.
Today, the literature is clear -- an economy with fewer big players does a good job of funneling wealth into few hands, but the best path to the most jobs and the most wealth for the most people is directly correlated with the density and diversity of local ownership per capita. Economic development is defined as "policy interventions with the aim of economic and social well-being of people" and should thereby strengthen local and community ownership. Unfortunately, less than a quarter of local governments are currently pursuing local and community-owned business development activities.
Instead, state and local governments have dramatically increased their use of "retention and recruitment" incentives -- from 56 percent using them in 2004, to close to 90 percent by 2009. Mainstream economic development chases Boeing, or Marriott, or Dell with tens of millions of dollars from town to town. Local governments may pay the equivalent of $200k per job only to have the company lay everyone off and move away after a few years.
In fact a new study from Good Jobs First shows how economic development incentives simply help the "corporate rich get richer." Top recipients include companies like Shell Oil, Dow Chemical, Amazon, Volkswagen and Wal-Mart. To top it off, less than one third of the dollars gifted to these companies are tracked. We only know from investigative watchdogs how common it is for millions of dollars to be awarded to companies that never hire any additional people. Some actually eliminate jobs. The nonprofit group Institute for Local Self Reliance notes that, "by privileging large firms, these programs award taxpayers' dollars where they're least needed, and put another way, make it so that small businesses have to watch a portion of their tax dollars go to subsidize their biggest competitors."
These incentive dollars come from us -- we the people -- and they are being used to drive inequality to levels not seen since 1928. We are funneling our own money into the private hands of the few.
I think it needs to be said clearly -- if we want more equal societies then local governments should not subsidize, provide tax breaks, or in any way provide concessions and support for large corporations with centralized ownership. It results in neither economic nor community development. It is simple wealth extraction and harm.
The Opportunity Ahead
"I did then what I knew how to do. Now that I know better, I do better."
-Maya Angelou
Shifting up to $80 billion (the money spent annually on economic development incentives) presents a massive, ready-made opportunity. Doing better would mean new eligibility rules for community economic development incentives. A community's dollars should be used to support its own people, with particular focus on the areas with the greatest need. If we want the majority of people to receive the maximum return on their community's investment then small businesses must be strengthened at every turn. Minority and women ownership should be prioritized to level the playing field. Bigger businesses should be supported in their efforts to transition to employee ownership.
Here are five ways to start the shift tomorrow:
1. Use incentive dollars to instead back local business hubs and networks that are focused on place, health and equity. These systems of support for locally owned businesses nurture local supply chains, enable peers to support each other, and foster the kind of collaboration necessary to make local food distribution viable or renewable energy locally affordable.
2. Re-direct corporate subsidies to organizations that provide technical assistance to micro enterprises. Groups like Rising Tide Capital are adept at strengthening these businesses to create jobs, and they generate nearly $4 in economic impact for every $1 invested. The Association for Enterprise Opportunity has shown that if just one in three microenterprises was strengthened to hire a single employee, the US would be at full employment.
3. Invest in shared infrastructure for local "economies of scale." For example, a foundation in Maine invested in a local grain mill, providing needed processing that made the resurgence of regional grain farmers viable.
4. Purchase land for the community. Agricultural and community land trusts preserve affordability for residents, farmers, and local business owners in contrast to speculative gentrification. Use land banks to bring vacant and blighted lots under the control of a public authority to redevelop the land for productive uses.
5. Support the creation of worker owned businesses, and support larger businesses, particularly those going through founder transitions, to become employee owned through ESOPs. Businesses from Dansko to Eileen Fisher to New Belgium Brewery have traveled this path in recent years. Said New Belgium CEO Kim Jordan, "One of the things that we think is a big societal issue is this widening gap between the haves and the have-nots. And we realized that we had an opportunity to support people owning something that was increasing in value. Shared equity has been an incredibly powerful engine for us."
Former Mayor of Kansas City, MO, and current publisher of Governing Magazine Mark Funkhouser says, "for several decades we have been conducting an economic-policy experiment in state and local governments, and now it's time to stop the testing because the results are clear: the dominant paradigm, incentive-fueled competition among these governments, does not create economic prosperity." Instead he argues that now is the time for "testing and developing a new paradigm for economic development, one that channels capitalism's strengths while protecting the commons and producing a more broadly shared version of prosperity."
Indeed.
We know better -- let's do better.
This piece appears as part of New Economy Week 2015: From Austerity to Prosperity, a week of online and in-person events being convened by the New Economy Coalition, Nov. 9-15.