Reclaim Democracy!

The Multiplier Effect of Local Independent Business

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By Jeff Milchen, with thanks to Stacy Mitchell.

Clearly communicating the importance of the local economic multiplier effect or “local premium” is a key part of effective “buy local” public education campaigns. The multiplier results from the fact that independent locally owned businesses recirculate a far greater percentage of revenue compared to absentee-owned businesses (or locally owned franchises). In other words, going local creates more local wealth and jobs.

The multiplier consists of three elements — the direct, indirect, and induced impacts.

  • Direct impact is spending done by a business in the local economy to operate the business, such as inventory, utilities, equipment, and employee pay.
  • Indirect impact happens as dollars the local business spent at other area businesses.
  • Induced impact refers to the additional consumer spending that happens as employees, business owners, and others spend their income in the local economy.

Private research firm Civic Economics has executed many studies quantifying the difference in local economic return between local independents and chain businesses. One such study in Austin, Texas showed an independent bookseller and music seller returned 3x as much money to the local economy as a proposed Borders Books and Music outlet would. The Austin Independent Business Alliance successfully used the study to rally opposition against a City-planned subsidy to attract a Borders Books and Music store.

Those results have been mirrored by subsequent studies (ten years of studies are summarized here), each showing a much greater local multiplier for spending at independent businesses than chains. These studies measured the direct and indirect impacts to determine the base level local economic activity of a purchase made at a chain and a local independent business.

On average, 48% of each purchase at local independent businesses was recirculated locally, compared to less than 14% of purchases at chain stores.

Civic Economics: Benefits of local business vs chains
Civic Economics: Benefits of local vs chains

The Institute for Local Self-Reliance conducted a study of the local multiplier effect in several small Maine communities in 2003. The study examined how much of a dollar spent at a local independent store is re-spent in the local area as payroll, goods/services purchased from area businesses, profits spent locally by owners, and donations to area charities. The study found that every $100 spent locally generated $45 of secondary local spending, compared to only $14 for a big-box chains — nearly identical to later results across the decade of Civic Economics studies.

Key Points

One study by Civic Economics has been the source of much confusion misrepresentation, to the detriment of many organizations. The study of Chicago’s Andersonville neighborhood found a total economic impact (i.e., direct, indirect, and induced) of $0.68 for each dollar spent at 10 local independents, compared to $0.43 for chain competitors. However, the projection of indirect and induced impacts does not mean $0.68 of each dollar spent at a local independent “stays” in the local economy, a widely spread inaccurate claim. It means $0.68 of additional local economic return is generated after additional spending cycles. Citing the higher numbers without including an explanation is wrong.

The Andersonville study examines just 10 businesses in one neighborhood of a large city, so we discourage extrapolating its findings too broadly. Businesses in smaller cities and towns typically have less ability to source many goods and services locally.

Be careful not to undermine the credibility of your group or campaign by presenting apples as oranges or statistically insignificant samples as a general truth! To gain respect as an authoritative voice within your community, we suggest you guard your credibility by checking your materials to ensure they convey verifiable, accurately worded information and only rely on primary sources. 

Stickiness

In addition to being accurate, make sure your message is memorable. Saying, “Independent retailers return more than 3x as much money per dollar of sales than chain competitors,” is more memorable than talking in terms of percentages or comparing $0.48 to $0.15. For restaurants, consider messages such as, “Per dollar of revenue, locally owned independent restaurants return twice as much to our local economy than chain restaurants.”

Buying remotely on the web creates almost no local benefit, only minutes of work for a delivery person. Calculating the added local wealth that would be generated by a 10% shift to local independents is one tactic successfully employed by several communities.

How much of each $100 stays in your community?
The local benefit of an online, remote sale depends on local driver wage, the size of the area (number of stops per hour), and distance to processing centers.

Study Variants

The size of the local premium varies depending on the type of business. Restaurants and service providers generate a large multiplier because they are labor-intensive and more of each dollar of revenue goes to local payroll. Most retailers, unless they source an exceptionally high percentage of their goods locally, also create a more modest multiplier than restaurants.

This is not to say restaurants are better for economic development than retail. May retailers have sizable revenue and professional job opportunities, which are important to any local economy. It’s just helpful to be aware of these differences because the mix of businesses involved in a particular study will influence the results.

Land Use

In 2009, Stay Local! in New Orleans commissioned Civic Economics to evaluate economic return per square foot of retail space used by both local merchants and Target Corporation. The local merchants studied generated twice as much sales activity per square foot and nearly quadrupled the local economic return per square foot compared to projections for Target. 

Quantifying Shifts in Spending

To gauge the overall impact on your local economy of shifting 10% of purchasing from absentee-owned to locally owned businesses, you would need to know the local multiplier for each category of spending and the percentage of peoples’ spending in each category. (e.g., 20% goes to groceries and the grocery multiplier is 0.15 or 5% goes to books and the local multiplier is 0.32).

What We Can Learn About Corporations From the Man Who Sold Shares in Himself

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Mike Merrill

Wired.com recently published an article about Mike Merrill, a man who sold shares in himself in exchange for a cut of his future earnings and for the right to make decisions about his life — that is to say, the shares were voting shares.

The story recounts some entertaining/troubling consequences. For example, when Merrill brought the question of whether to have a vasectomy to his shareholders, his girlfriend became apoplectic. In another instance, one of the biggest shareholders, who didn’t know Merrill personally, successfully pushed him to try a regimented and inconvenient polyphasic sleep schedule. His girlfriend objected, but Merrill felt beholden to his shareholders and carried on anyway. She left him.

The piece’s point (if there is one other than amusement) apparently is to reveal what works for companies doesn’t necessarily work for individuals. But reading it, I was struck by the opposite thought: the problems of Merrill’s system are identical to the problems of real publicly traded companies.

Shareholder interests regularly differ from the interests of employees, customers, and other stakeholders (Merrill’s girlfriend, by analogy here), and shareholders often prevail. The presence of absentee owners creates another conflict of interest (on top of conflicts between management and employees), upping the chance that someone – usually the (relatively powerless) employees, customers, or the public – will get screwed.

This dynamic is so dominant that these latter groups are, in general, permanently, systemically and ubiquitously screwed across the US, which, some argue, is the core reason for our country’s dramatic inequality.

The only difference between public corporations and Mike Merrill is that we’ve come to accept the consequences of absentee ownership as “normal” in the context of publicly traded companies, so we’re blind to their pathologies. When the same thing happens in an unusual context, it’s easy to see what’s wrong with it.

Any dysfunction can seem perfectly normal if we’re sufficiently used to it. But that doesn’t mean the world wouldn’t be a much better place if we woke up to the problem and fixed it.

By Nick Bentley
Organizer, Reclaim Democracy

Black Friday Now Black Thursday, But Don’t Expect the Best Bargains on Either

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The competition for Black Friday "deals" is getting ridiculousInstead of spending time with their families on Thanksgiving this year, employees for Walmart, Target and other chains get to give thanks by selling consumerism to people who think they’re getting great deals (often they aren’t–more below). Yes, more big box chains now are opening their doors for “Black Friday” sales on Thursday, Thanksgiving Day, which means employees of retail chains now must work on one of the only three days they traditionally haven’t had to work. Employees who don’t want to join risk drifting into part-timer purgatory or worse.

The corporate media and chain marketing campaigns again are doing their best to whip up a frenzy over supposedly great deals while encouraging people to sacrifice family time. But before rushing through dessert to ditch grandma and the kids, consider research commissioned recently by the Wall Street Journal. The headline with which it reported the results tells the story succinctly: The Myth of the Black Friday Deal (applies equally to Black Thursday). As you may surmise, you’re just as likely to save money on most items at other times in the year.

Of course, the corporate push to replace a day traditionally dedicated to family with consumerism is predictable, but here’s one ray of hope: chain employees and disgusted citizens are starting to fight back, a group of Walmart employees is planning to strike – almost unheard of in the U.S – and Target employees are protesting.

If you’d like to help defeat  the latest corporate encroachment, consider these actions:

But if you happen to participate in this madness, pause for a moment when handing over your cash and look for a moment at one of those bills. Just take a glance at George Washington’s face, or Honest Abe’s. What do you suppose those guys would think of our collective madness? We’re lucky dollar bills can’t cry.

Photo courtesy David Blackwell

Runaway CEO Pay and the Myth of “Shareholder Democracy”

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Even with better information, shareholders lack power to correct problems

By Lee Drutman 
Published December 30, 2005

CEO pay has become so unhinged from logic that even even Christopher Cox, President Bush’s Security and Exchange Commission Chairman, has vowed reform. Cox calls it “absolutely a top priority” to give shareholders “comparable executive-to-executive and company-to-company” numbers so they can “discipline” corporate boards who approve mammoth compensation. (Presently, myriad forms of compensation, —corporate jets, country club memberships and ridiculous severance packages often are obscured from shareholders.)

Cox is right to be concerned. At the 367 biggest companies last year, average CEO take-home pay was $11.8 million, while compensation far outpaced increases in profitability. Average worker pay, meanwhile, was $27,460.

No doubt, adequate disclosure of pay packages is sorely lacking at many companies, but a bigger question remains: even if they have that information, how exactly will shareholders go about disciplining corporate boards?

I ask, because at almost all U.S. companies, shareholders have about zero say into who sits on the board of directors and how executive pay is set. The directors are typically nominated by management, and shareholders are given one and only one slate of directors to choose from—a Soviet-style election that virtually guarantees managers will get their trusted friends on the board of directors. So it’s no surprise that executive pay packages continue to defy common sense. After all, what’s a few million among friends?

Unfortunately, Cox has demonstrated no interest in injecting even a modicum of accountability into the process by making it easier for minority shareholders to nominate candidates to the board of directors, something his predecessor, William Donaldson, unsuccessfully pushed for. The Chamber of Commerce and other lobbying groups for large corporations vehemently opposed any suggestion of this “proxy access reform,” effectively killing the proposal.

Without giving shareholders some means of holding directors directly accountable, it’s not clear how pay packages will ever be brought under control. Shame clearly hasn’t worked. To claim that directors would be more diligent if only they had better information doesn’t pass the straight face test.

Yet, there is some reason for hope. We may finally be reaching a critical mass of big institutional investors who are legitimately concerned about runaway CEO pay—perhaps enough to effect some change.

After all, bemoaning runaway executive pay is not just for cranky Grinches anymore. It’s also for Florida Governor Jeb Bush, who just last week announced that he was sick of “outrageous” executive compensation and “undemocratic” proxy voting and that Florida’s state pension fund was going to start using its $116 billion in assets to push for better corporate governance.

Recently, the largest U.S. manager of retirement funds, for university and college employees with $360 billion in assets, TIAA-CREF, also denounced high CEO pay. “There’s a burden on the board of directors to justify its compensation choices and explain them, so that shareholders can be confident that these are the right decisions,” said John Wilcox, the organization’s senior vice president.

Even a whopping majority—90 percent—of institutional investors think that corporate executives are overpaid, according to a recent Watson Wyatt survey. And the 85 percent who think that these excessive payments are hurting corporate America’s image (according to the same survey). And the 10 pension funds from the U.S., Canada and Europe (which represent a combined $1 trillion in assets) recently sent a confidential letter to the SEC, urging the agency to look more closely at how executive pay is being set at big companies.

But will that be enough?

After all, while CEOs continue to receive double-digit percentage raises year after year, workers barely keep pace with inflation. At 431-to-1, the U.S. ratio of CEO to worker pay is an anomaly among industrialized nations, where a more typical ratio is 25-to-1. Meanwhile, the percentage of company profits going to the top five executives more than doubled between 1993 and 2003, growing from 4.8 percent to 10.3 percent.

Yet, with each passing outrage, it seems that we are getting closer and closer to a critical mass of influential and respected investors who are completely fed up. When that moment comes, it is hard to say.

More disclosure can help bring us closer by highlighting more abuses. But when we are finally at that critical moment where enough major investors want to do something about excessive pay, they are still going to need the tools to do so—be it more say in selecting directors, the ability to vote directly on executive pay packages, or both.

If Cox is serious about disclosure, great. More information is always helpful. But without also giving the shareholders the tools to actually use this information, disclosure alone may not be such a generous gift for reform after all.

Lee Drutman is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy. An earlier version of this article was written for TomPaine.com.

© 2005 ReclaimDemocracy.org