“America’s investment system is broken,” according to Michael Shuman, author of Local Dollars, Local Sense. “Half the jobs and the output in the U.S. economy derive from local business but almost all our investment dollars go into big corporations on Wall Street,” far from home. Shuman advocates balancing the scale between Main Street and Wall Street through new mechanisms developed for local investment which yield, according to his research, “a five percent living rate of return,” among other community benefits.
Shuman is a community economist and author of several books, including his most recent, Local Dollars, Local Sense. His central message? We must begin to shift some of our investment dollars from Wall Street to Main Street, from corporations over which we have no control to local community enterprise where we can see a business up close and personal, track its progress in real time, and benefit from its recirculating dollars locally. Investing in corporations may have been wise decades ago when corporations were mostly local. But now, Shuman emphasizes, corporations are global, stock markets are “casinos of high risk” driven by technology, and financial markets serve the corporate bottom-line, rather than the health and wealth of community economies.
Shuman acknowledges that implementing local investment will be a paradigm shift for investors. Current government and financing policies favor Wall Street as the single most valuable investment platform and communities have traditionally focused on attracting global business operations. For example, 15 states have spent over 80 percent of their economic development dollars to attract and retain global businesses.
Yet, data for Main Street investments show, according to Shuman, that it is both lower risk and averages a more consistent and higher rate of return than global enterprise. “Small businesses, including homegrown businesses,” he reports, “have maintained their share of jobs in the economy since 1990 at the same time that nonlocal businesses have failed to increase their presence or profit in that same economy.” In other words, in a financial and public policy system that goes contrary to local investment while favoring the global businesses of Wall Street, Main Street has held its own unassisted. Overall, sole proprietorships are three times more profitable than C-corporations and, on regional measures, a higher density of locally-owned firms is positively associated with per capita income growth.
Acknowledging that investing in Main Street is in its “infancy,” Shuman described several “cutting-edge capital tools” that have been successful in various U.S. locales. Developed by non-profits, local and state governments, and private enterprise, these mechanisms have significantly assisted economic development at the community level. They include investing in revolving loan funds for local businesses, intensive “buy local” campaigns, the formation of producer and consumer cooperatives that have lending capacity, development of local business portfolios for investment, and local bank issuance of specialty Certificates of Deposit (CDs) to benefit the business community.
Shuman cites Main Street investment for its multiple attractions: Investors can evaluate and promote the products and services in which they’ve invested; they often know the business owners and directors – or can get to know them – to provide feedback; they can easily know if their investments are socially and environmentally sound; and they can ensure that local businesses are spending locally, creating a positive feedback loop for the entire business community. Local businesses are also flexible, able to shift with their market, and can help reinforce a community’s identity. In many cases, just-in-time delivery, lower shipping costs, and convenient storage facilities bring added advantage.
“The U.S. has $30 trillion held in various forms of savings, with less than 1% of those savings held at the local level,” asserts Shuman. If a larger percentage of that very large pot were dedicated to Main Street, even a small town of 5,000 could find itself in possession of several million dollars for starting or expanding local businesses. Fortunately, Shuman points out, public policy regarding investment is beginning to look toward Main Street. In the past, an investor had to be accredited to formally invest in a business, a process open to people with a wealth base of $1 million in assets (excluding their home) and involving complex and expensive legal activity by the business seeking investment. Accredited investors are roughly 2% of the economy. With the recently-passed federal JOBS Act, the other 98% of Americans who are unaccredited investors are being invited into the action. The best-known result so far are crowdfunding websites such as Indiegogo and Kickstarter which allow a business to solicit dollars from the general public.
Shuman confesses that he himself was drawn into the tried-and-true “Wall Street is where it’s at” mantra. Then, like so many others, a victim of Wall Street’s collapse and the housing bubble, the light bulb sparked on for him and he started afresh. Now his mantra and practice are about encouraging individual investment in local businesses to help them start, grow, diversify, and thrive. The best method to build prosperity, he believes, is to invest our extra dollars in “local businesses we know and trust, so that our families, our neighbors, and our communities become our true sources of wealth.”
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