Locavesting

The Revolution in Local Investing and How to Profit From It

Amy Cortese

• Publisher: Wiley
• Year: 2011
• ISBN:
  9781118085783
• Edition: 1
• Topic: Personal Development
• Subtopic: Personal Finance

How individuals and communities can profit from local investing

In the wake of the financial crisis, investors are faced with a stark choice: entrust their hard-earned dollars to the Wall Street casino, or settle for anemic interest rates on savings, bonds, and CDs. Meanwhile, small businesses are being starved for the credit and capital they need to grow. There's got to be a better way.

In Locavesting: The Revolution in Local Investing and How to Profit from It, Amy Cortese takes us inside the local investing movement, where solutions to some of the nation's most pressing problems are taking shape. The idea is that, by investing in local businesses, rather than faceless conglomerates, investors can earn profits while building healthy, self-reliant communities.

• Introduces you to the ideas and pioneers behind the local investing movement
• Profiles the people and communities who are putting their money to work in their own backyards and taking control of their destinies
• Explores innovative investment strategies, from community capital and crowdfunding to local stock exchanges

With confidence in Wall Street and the government badly shaken, Americans are looking for alternatives. Local investing offers a way to rebuild our nest eggs, communities, and, just perhaps, our country.

PART I

The Economics of Local

CHAPTER 1

Motherhood, Apple Pie, and Political Theatre

How We Are Failing Our Small Businesses

If we’ve learned anything from our near economic collapse and its aftermath, it’s that small business is right up there with motherhood and apple pie in the pantheon of American ideals. Just ask any politician, from either side of the divide.

President Obama preached the gospel of small business as he crisscrossed the country in 2010 pushing his $30 billion small business stimulus package. A typical venue was the Tastee Sub Shop in Edison, New Jersey—a town, the president noted, that was “named after somebody who was not only one of history’s greatest inventors but also a pretty savvy small business owner.” Addressing a crowd that included local business owners, he intoned: “Helping small businesses, cutting taxes, making credit available. This is as American as apple pie. Small businesses are the backbone of our economy. They are central to our identity as a nation. They are going to lead this recovery.”1

Just two months later, ahead of the midterm elections, a dozen House Republicans took to Tart Hardware (“Everything to Build Anything”) in a suburban Virginia industrial park to unveil their “Pledge to America,” a 45-page glossy pamphlet brimming with lofty promises to cut taxes and regulation that read like a Big Business wish list. “We are here to listen to the small-business people who are facing the same kind of uncertainty that small-business people all over the country are dealing with,” declared then-minority leader John Boehner, who likes to remind folks that he is just a small business guy himself who “stumbled into politics.”2

The rush to the nearest mom-and-pop store, camera crews in tow, in times of economic adversity is a political tradition. If we had a dollar for every time a politician delivered small-business bromides against the backdrop of a patriotic banner, we could retire the national debt. No doubt some genuinely hold this view, but politicians are nothing if not savvy. They are playing to the deeply held belief in small business that is central to how we view ourselves as a nation—less a melting pot than an audacious mashup of immigrants, commerce, and ambition.

From its earliest days, the country relied on and admired its independent business people—the merchants, farmers, and artisans that plied their trades in the colonies. Benjamin Franklin, the son of a soap maker turned eclectic entrepreneur and patriot, so valued independence and self-reliance that he bequeathed 2,000 pounds sterling (a small fortune in those days) to the cities of Boston and Philadelphia to establish loan funds that would help young artisans and apprentices start their own businesses. He specified a fixed interest rate of 5 percent to deter excessive profit making from the loans. In his will, Franklin explained his motive, noting that he had been trained as a printer in Philadelphia and that “kind loans of money from two friends” served as “the foundation of my fortune, and all the utility in life that may be ascribed to me.”3 (This generous act led one observer to dub Franklin “the inventor of microfinance.”4)

Many of us are descended from self-made businesspeople and entrepreneurs. My grandfather Ralph arrived at Ellis Island as a young boy in 1906, just one family among a wave from southern Italy looking for better economic opportunity. He never went to college, but like many of his generation, he was a tinkerer, experimenting with new electrode technology in his basement. After working at Westinghouse, in 1930 he founded his own company, Engineering Glass Laboratories. EGL built a thriving business producing electrodes, tubing, and other components for neon signs—a French innovation introduced to the United States in 1923. The company became the market leader, with a significant export business, and continues today.

My maternal great-great-grandmother, Mary Moore, serves as a reminder that American entrepreneurship is open to all. She ran a boarding house in rough-and-tumble New York for the scores of young men arriving from Ireland in the late 1800s through the turn of the century, becoming something of a local powerhouse with her ability to deliver the vote among that fast-growing population.

We all have stories like this to tell. And many of us aspire to someday, perhaps, unchain ourselves from our corporate overlords and go into business for ourselves. That impulse is what led Sagar Sheth and Kory Weiber, two young engineers with promising careers at General Motors, to strike out on their own. Their company, Moebius Technologies, manufactures high-tech medical equipment in a plant in Lansing, Michigan. “It’s one of these things where you realize you have to try, or you’ll always wonder what could have been,” Sheth, whose parents were born in India, told me. “To a large extent the American Dream is about entrepreneurs. What’s beautiful about this country is that anyone can be an entrepreneur—that’s very different from most places in the world.” Indeed, business ownership has been the escalator to the middle class for generations of ambitious immigrants.

If we’ve canonized small business entrepreneurs, it’s for good reason: They provide real economic benefits. What Franklin and his Revolutionary peers no doubt understood, and what our contemporary leaders intimate, is the value that local businesses bring to a community. They are engaged in the community’s civic life and add to its diversity, identity, and independence. They contribute to the community’s prosperity by employing local workers and spending profits locally, allowing that money to recirculate in the community—what is known by economists as the multiplier effect. Studies have shown that a dollar spent at a locally owned enterprise generates three times more direct, local economic activity than the same dollar spent at a corporate-owned peer.5 And their tax contributions help pay for local services. (It’s a pretty good bet that the owner of your local hardware store isn’t stashing his profits in a tax shelter in the Cayman Islands.)

While Wall Street has increasingly chosen fast, speculative profits over productive investment, small businesses are the engine of the real economy, the firmly on-the-ground Main Street. Broadly defined by the Small Business Administration as firms with 500 or fewer employees, small businesses make up 99 percent of all U.S. companies. They range from sole proprietors and mom-and-pop shops to established, locally owned companies that employ hundreds of workers. Also among their ranks are high-growth startups that have the potential to become corporate powerhouses themselves someday. Collectively, these 27.5 million companies employ half of all private sector employees and contribute half of private GDP—about $5.5 trillion annually. That’s more than the entire economic output of Germany and the United Kingdom combined. They’re innovative, producing 16 times more patents than their larger counterparts. And, most significantly in these days of high unemployment, they are responsible for more than two out of every three jobs created.6 From 1990 to 2003, small firms with fewer than 20 employees generated 80 percent of net new jobs.7

A study by Harvard professor Edward L. Glaeser highlights the link between firm size and employment growth. Analyzing census data from 1977 to 2007, Glaeser found that the U.S. counties with the smallest firms experienced job growth of 150 percent. As average firm size increased, job growth decreased almost in lockstep. Counties in the middle quintile had 90 percent employment growth, while those with the largest companies added just 50 percent more jobs.8

Large corporations create a lot of jobs, to be sure, but they eliminate more—at least domestically—making them net job destroyers.9 Indeed, in their drive to cut costs and boost margins, some of our biggest and most iconic corporations seem locked in a cycle of job destruction. In June 2010, Hershey Foods shuttered its historic chocolate plant in the Pennsylvania town that bears its name and moved production to Mexico. IBM abandoned its birthplace of Endicott, New York, earlier in the decade. And, like many Silicon Valley firms, Apple employs 10 times more workers in China than it employs at home. Big corporations moved quickly to cut jobs during the recession. Citigroup shed nearly 60,000 workers. In January 2009 alone, America’s largest public companies, including Caterpillar, Pfizer, Home Depot, and Sprint Nextel, sent pink slips to more than 160,000 employees. Even before then, the trend was clear. Collectively, U.S. multinational corporations shed 2 million domestic jobs from 1999 to 2008, an 8 percent decrease. Over the same period, their overseas hiring swelled by 30 percent, aided in part by tax breaks that encourage them to keep profits and investment overseas. The 1.4 million jobs that domestic corporations added overseas in 2010 would have lowered the U.S. unemployment rate to 8.9 percent, according to the Economic Policy Institute.10

Benjamin Franklin, or my grandfather for that matter, could hardly have imagined the vast scale of the multinationals that rule global commerce today. But small enterprises are still the underpinning of our towns, communities, and nation, enriching us culturally and economically. So it’s no wonder politicians and special-interest peddlers want to wrap themselves in small business’ warm glow.

Sticking Up for the Local Butcher

The problem is that for all of the flag-waving rhetoric, we have treated our small businesses dismally. Everything from federal tax policy to investment allocation to local development initiatives has favored the largest, most powerful enterprises—at the expense of the small entrepreneur. The photo op at the mom-and-pop has become a hollow ritual.

For a vivid illustration of where our national priorities lie, look no further than the bailout of Too Big to Fail financial institutions engineered in late 2008 by then-Treasury secretary Henry Paulson. As we know, hundreds of billions of taxpayer dollars went to prop up megabanks and those that enabled them, such as insurance giant AIG. All told, with federal lending programs, debt purchases, and guarantees factored in, the total assistance reached $3 trillion by July 2009, according to Neil Barofsky, inspector general for the Troubled Asset Relief Program (TARP).11

That bailout likely averted disaster. But rather than stimulate lending and economic activity, as hoped, it seems to have served mainly to fuel the record trading profits of its recipients and leave them larger and more systemically important than ever. Prominent critics, such as Nobel Prize–winning economist Joseph Stiglitz, have argued that TARP money would have been better spent supporting smaller financial institutions that did not engage in the reckless behavior that precipitated the crisis and might have actually used the money to make loans. It wasn’t until September 2010—after a protracted battle with some of Congress’ self-professed champions of small business—that President Obama signed the Small Business Jobs Act, establishing a $30 billion fund to spur local bank lending to small business as well as a smattering of tax breaks to aid struggling entrepreneurs. It was a welcome boost. But that’s tens of billions for small business, trillions for Too Big to Fail business.

As outrageous as the bailout was for many Americans, it’s just the tip of the iceberg. Each year, a staggering amount of subsidies, grants, and tax breaks go to our most profitable and politically connected corporations—an estimated $125 billion—with little economic or social payoff. There are farm subsidies to Big Agriculture ($10 billion to $30 billion a year, paid mostly to industrial-scale and absentee farmers); tax breaks for oil and gas companies (more than $17 billion a year); and tens of billions more proffered by state and local officials to woo large corporations to set up plants, offices, and stores within their borders.

Policy debates (or what passes for them these days) concerning everything from health care to financial reform to tax cuts, have been framed in terms of what is good or bad for small business owners. All too often, though, Joe the Small Business Owner is simply a prop, providing cover for an entirely different agenda driven by big business interests. The Chamber of Commerce, for example, actually claimed in a $2 million ad campaign that the creation of a Consumer Financial Protection Bureau intended to protect the public from abusive credit card and loan products would have a chilling effect on the local butcher.12 And the few programs aimed at giving smaller firms a fair shake often end up being perversely exploited by big corporations.

It hardly matches the rhetoric.

Sadly, this is not a new phenomenon. As a delegate to a 1980 White House Small Business summit told the New York Times: “Our problem is small business has always been a ‘motherhood’ issue—everybody is for it, but everybody ignores it.”13 And Republicans since Ronald Reagan have been trying to kill the Small Business Administration, the one government agency dedicated to helping the nation’s entrepreneurs.

Indeed, the crisis has simply illuminated what has been going on quietly for 30 years: federal economic, tax, and fiscal policy is crafted by and for the largest corporations, which are increasingly disconnected from any U.S. locale. This unholy alliance is bound by campaign contributions, lobbying muscle, and a revolving door among powerful corporations and the government agencies that oversee them. (Consider that the cost of winning a House seat has risen more than threefold since 1986, to $1.3 million in 2008, while senators in 2008 spent an average of $7.5 million.)14 In this cozy pay-for-play system, the little guy doesn’t stand a chance.

A Growing Capital Gap

It’s more than politics working against small business. As investors, we have let them down as well. The link between investors and businesses has largely been severed, with Wall Street acting as the intermediating force, extracting fees—or rent, in economic jargon—every step of the way. More and more small business owners are falling through the widening cracks of our financial system. Without access to capital, products go undeveloped, expansion is put on hold, hiring is snuffed out, and innovation suffers. A lack of capital is a key reason why half of new businesses don’t last more than five years.

Entrepreneurs have always scrambled to raise funds, bootstrapping their ventures by tapping credit cards, personal savings, and home mortgages, hitting up rich relatives, and eventually securing bank loans and lines of credit. High-growth ventures batting for the fences have been able to seek equity infusions from angel or venture capital investors. But those customary sources of early funding, never ideal, have all but dried up since the financial crisis. And the long-term trends are not promising.

Venture capital, for example, has always been reserved for a rarified category of companies—tech-savvy startups with game-changing potential. Think Google, Apple, and Facebook. Fewer than 2 percent of all entrepreneurs seeking funding from VCs or angel investors get it.15

But even for high-growth startups, venture capital has become scarce. VC firms from Silicon Valley to Boston retreated during the recession. Venture investments plunged 37 percent in 2009, to $17.7 billion, the lowest level in a dozen years. And despite a brief spike, investment fell again in 2010.16 When they did invest, VCs preferred less risky, later-stage companies with proven potential, continuing a pattern started well before the crisis. The move upstream is, in part, a reflection of the ballooning size of venture funds. As $1 billion funds have become common, venture capitalists need to do larger deals, often inves...

Table of contents

• Cover
• Contents
• Title
• Copyright
• Dedication
• Preface: Starting Anew
• Introduction: Cereal Milk for the Gods
• Part One: The Economics of Local
• Part Two: Experiments in Citizen Finance
• Conclusion
• Notes
• Acknowledgments
• Index