Neighborhood Economics: Transforming Local Businesses into Engines of Growth - Part 1

Unlock the secrets to financial empowerment with Michael Shuman, a visionary in the local investment landscape, as we delve into the profound effects of channeling funds into community businesses. Imagine a world where your investment not only yields returns but also fosters job creation and economic growth right where you live. That's the reality we explore in our latest Mindful Marketplace episode, where we discuss the trail Michael has blazed with his pioneering books and how the JOBS Act has revolutionized investment opportunities for everyday citizens.

Feel the pulse of local economies through the inspiring stories of Nova Scotia's neighborhood pension funds like Farmworks, which demonstrate the tangible benefits of investing in small businesses. We compare the substantial tax credits that bolster this regional approach to the hefty expenses incurred by cities vying for corporate behemoths. Our conversation with Michael is more than just an exploration; it's a call to action for listeners to consider the age-old practice of local investment as a means to enrich both their financial health and their communities. Join us for an episode that promises to challenge your perceptions and inspire a new way of thinking about where you put your money.

https://mainstreetjournal.substack.com/
https://www.cuttingedgecapital.com/
https://leadthechange.bard.edu/blog/author/michael-h-shuman-faculty-bard-mba-in-sustainability

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Transcript

Joel: 0:33

What if investing in each other could change the world? I'm Joel Skeen with bizradious, and this is the Mindful Marketplace. Hey, all Thanks for watching. I just wanted to quickly inform you about my financial services agency, which operates in the life insurance space. So we help families with debt elimination plans and create tax-favored retirement solutions. We support small businesses, nonprofits, worker-owned co-ops, unions and social enterprises with employee and member benefits. We offer white-glove insure-atec services to community banks, credit unions, financial co-ops and CDFIs, and we provide enduring acceleration and downside capture strategies for all kinds of investors. Check out the link in the video description and enjoy the show. Hey, michael, how are you Good? How are you? I'm doing fantastic. I'm. I gotta say I'm really glad I'm finally getting you on the show. You don't know this, but you're one of the reasons. You're one of the big reasons that this show exists and really, Well, I'm eager to hear more.

Michael: 1:47

Yeah, well, and I hope the show has been rewarding and you're not going to punish me for it.

Joel: 1:55

Yeah, well, you know, challenge and opportunity are the same word, right? So, yeah, no, we actually you probably don't remember we met briefly back. I went to a Bali the business alliance for local living economies conference back in 2013,. I think that you may have been at in Buffalo, new York, and I remember hearing you speak and you know I was overwhelmed with all of the good stuff there. But on the way back, my boss at the time, Amanda Edmonds, who was the director of urban farming, healthy food access nonprofit I was doing social enterprise for them and on the drive back from Buffalo to Detroit, I drove and she read this report that you had made about an impact report on, you know, local investment, and then I read local dollars, local cents. When it came out and I became on the, I knew Angela Barbash, yeah, and you know. And so what she's doing, what you've been doing, what Kevin Jones has been doing, who I've developed a bit of a relationship with, has been, you know, kind of what I wanted this whole thing to be about. So, yeah, I'm just really grateful to have you here.

Joel: 3:18

Fabulous, this is actually going to be a special series that our radio show is going to be doing. That's a little different than my normal format show and it's much more open-ended. We can just kind of talk and we can just. I just want to get to pick your brain and you know, kind of obviously the plan is for Kevin to and Rosalie to use this content as the lead up to the conference as well in San Antonio. But yeah, I feel like we can look at things from a telescope view, from a microscope view. You know, I guess you I remember seeing like a TED talk that you had done. That was how old now, maybe 15 years ago?

Michael: 4:04

What was it that? What was the light bulb?

Joel: 4:06

on local investment for you Like what was it that made you go like, oh, this, this thing, yeah.

Michael: 4:14

Well, I guess the answer would be that each book that I've done has solved questions that I started with and ended with questions that I haven't been able to figure out, and the local investment questions just kept coming up and getting bigger and bigger, you know, with each book, and and they still, they still are very big. I mean, I feel like one way of understanding the universe of local investment now is that we've changed the law but we still haven't figured out how to mobilize large numbers of small businesses and grassroots investors to take advantage of the law, and that just is going to require a lot of work, organizing and mobilization.

Joel: 5:13

Yeah, when you say the law, I know you were kind of considered, you know, somewhat of an architect of the the jobs act. Is that the law that you're referring to most, or are there other pieces to that?

Michael: 5:23

Well, the jobs act modified a big body of law that those of us who are, you know, unfortunate to be called lawyers have focused on for many years, and securities law is I mean, it's, if you, if you're in law school, you'll take an entire semester with it and barely scratch the surface. But some of the law is around the issuing of securities. A security is a piece of paper with some kind of return associated with it. The sum of the law is around the resale of those securities. Some is around the pooling of securities and funds, and some is around institutional investments out of, say, workplace pension funds. So in each of these areas there's a million details, and the details pretty much stack up against low cost and easy investment in local business, people and projects. And so the jobs act changed one piece of it, and it was a good step, but there's a lot more to do.

Joel: 6:50

What was that step, what was that piece that it changed?

Michael: 6:54

So the jobs act basically said okay, before the jobs act, if a grassroots investor wanted to put a penny into a local business, that business would typically have to do $15,000, $25,000, $35,000 of securities work with an attorney in order to permit that act. And what did that act do? It produced a thick document, a disclosure document, often written in eight point font, that no human being has ever read or understood. But if you do read it, the essence of every page is you will lose everything. You will lose everything page after page, and this is a ludicrous exercise.

Michael: 7:48

And what the jobs act did is said okay, we can simplify this exercise, put it online, create federally licensed portals that facilitate the simplification and allow any company to raise up to $1 million per year. That was then amended to be $5 million and will allow any individual, even an individual with small income, to put up to $2,200 of money into these businesses. So that was all fairly radical. And what has happened since is that about a million and a half people have put $2 billion into 7,000 companies. So it has changed something. But moving $2 billion in a universe where we should be targeting moving closer to 50 or 60 trillion dollars is a very small act.

Joel: 8:59

Yeah, it really is. Trillion is such a crazy number I often use this to try to explain it a little bit to myself and to everybody else is that if you go back a million seconds, you go back about 11 days. If you go back a billion seconds, you go back 31 and a half years, and if you go back a trillion seconds, you're going back 31,500 years to hunter, gatherer times, and so to know that numbers like billions sound big. But that's nothing compared to 50 or 60 trillion. I do want to just back up and zoom out.

Joel: 9:36

I know that, especially coming out of the 2008, 2009 crash and the subsequent recession and just seeing all the immense fraud and the just kind of disregard for the securities law or the manipulation of that securities law. I know there was a big movement at that time called move your money. That was about shopping local and buying local and what I think is so brilliant about what you're doing and what something that, no matter who I talked to, they love the idea of, but they don't know how they can do it is to actually then invest their money local. But I guess I think it's worth us spending a couple minutes here talking about what the actual impact of spending money local is, rather than spending money at a big box store or something like that, because I know people think it's. They have like a general idea that it's a nice thing to do and it's good. But one thing I love about your work is you really break down just how good it is.

Michael: 10:38

Yeah. So there have been dozens of studies around this point and I'll just give you one example. In British Columbia in 2013, there was an analysis of how a dollar spent in British Columbia moves through retailers and restaurants and if you put that dollar, if you spend that dollar in a locally owned independent restaurant and retailer, about 50 cents recirculates in the British economy, british Columbia economy. If you put that money into a chain, it's about 17 cents, and the reason is that Locally owned businesses tend to spend their money because of their relationships with other locally owned businesses, so the money sticks around the community and multiplies and the more times the money recirculates, the faster it recirculates, the more income, wealth and jobs. In the case of British Columbia, what it showed is that every time a British Columbian resident mindfully spends a dollar on a locally owned restaurant and retailer, the province enjoys about two and a half times the job effects, two and a half times the wealth effects, two and a half times the tax collections.

Michael: 12:12

It's really quite profound and, as I said, there have been many studies done along these lines.

Michael: 12:20

They tend to show that if you have two similar businesses one locally owned, one not or two similar industries one locally owned one, not the locally owned business or industry, will generate two to four times the economic development impact of a non-locally owned entity, and there's really been no study that has ever contradicted that.

Michael: 12:49

So that is the profound reason why, if all things are equal, it is rational for a consumer to buy a good or a service from a locally owned entity, or why it is rational for an investor to put a dollar into a locally owned entity. That multiplier effect is huge and if you think about it, every time you put money in Wall Street you get a private rate of return, but you really get no local rate of return, whereas if you invest your money in your community, not only do you get a private rate of return but you get this boost in the economy which increases the tax base, which puts people to work, which pays for police and schools, etc. Now we can't quantify what that social impact is for any given person. It varies by your values, but we know it's not zero and you cannot get that kind of social return from a Wall Street investment.

Joel: 14:02

Yeah, you get not only an individual return, but you get a collective return. You get a community return. One thing I always like to say is we are each other and in some way we have to break down such an individualized way of thinking about everything and remember that we all depend on each other. Everything is interdependent and everything is interconnected in some way, especially in our economy. That's the material reality. Example of that philosophy, just kind of laid right out there. I also imagine it creates more stability and resilience against those kinds of market downturns and recessions that are caused by the national markets. If your local community is strong, it seems like it would be less dependent on the big banks and on Wall Street.

Michael: 14:53

So there is a really wonderful book that was written, published this past year called Homecoming, by a woman named Rana Forahar from the Financial Times, and what is really interesting is that she has written her entire life for the Financial Times and for a kind of a globalization audience. Those are her people, and she concludes in the book that the old paradigm driven by David Ricardo, that every place should specialize in one good or service and get that competitive advantage and import everything else, that paradigm has completely fallen apart for a lot of reasons, and so now resilience is front and center and resilience is the new principle for successful economic development. Now the problem is, I mean, I've seen since COVID every economic development agency add resilience to its mission statement. But what they usually mean by resilience is well, if we're a coastal community and we see the ocean rising, we're going to bring some Dutch over to put up dykes so that we're a little more protected from the rising seas.

Michael: 16:15

Okay, that's part of resilience, but the other part of resilience that COVID taught us was being more self reliant being able to feed yourself, being able to provide yourself with energy, with water, with housing, etc. And self reliance. I mean we're not looking for perfect self reliance. That's ridiculous, but we are looking for higher levels of self reliance. If you can cost effectively feed yourself, you should do it, because it not only is good for wealth generation, it is also good for protecting yourself against threats to the global food system. You cannot possibly anticipate.

Joel: 17:03

Yeah, no, that makes sense. You have to look at that whole picture. You can't just slice it up and say, well, we'll just do this one part and think that you've solved it. And that's what I think your work on local investing is so important is because it's not enough to just buy local to see the real impact that we're talking about here.

Joel: 17:26

The investment dollars, the retirement savings that people are putting away each and every month, typically go to companies that they, you know, maybe they like them, maybe they don't, but they're not going to have that social and that collective impact on their local community.

Joel: 17:43

And so I guess, moving from the idea of spending local to the idea of investing local seems like there's a big valley and this big kind of chasm between people being able, like I get that like hey, I'm going to go to my local coffee shop instead of a chain, one Easy Done. But if you tell me, hey, we'll go invest your money locally, that's a whole different ballgame and I know that's what your work is a lot about. But what is, I guess? First I'd like to know what is. Do you have studies on, and data on, what the impact of moving those retirement savings and those investment dollars are and what kind of a future we could have in our communities If we were truly putting that investment dollars to work in our local communities on any level. Whether it's all of it, half of it, yeah, I just want to know what you've learned through your research.

Michael: 18:37

Well, we don't have a lot of studies on the question you're asking, but I'll give you one that I think is really interesting. So in 1998, the province of Nova Scotia in Canada allowed communities to set up neighborhood pension funds, and about 70 have been set up since then. One of the ones that I really love is called Farmworks, which supports local food businesses and small-scale farms. Now Nova Scotia is a country with about a million people and if we were to scale that up to the United States, you know we would have 21,000 neighborhood pension funds. That to me is a really exciting vision. So to induce Nova Scotians to put their money into the pension funds, the state provided a. The province provided a tax incentive, a pretty generous tax incentive for people to move their money. So about two years ago so what? 24 years after the enactment of this, they did a study looking at, okay, how many jobs came out of these investments and what was the cost per job in lost government money because of the tax credit. It turned out to be about $500 per job.

Michael: 20:11

Now to put that in perspective, we had six, seven hundred US jurisdictions competing for Amazon's second headquarters, and the vast majority of them were prepared to pay half a million dollars to a million dollars per job. So $500 per job. That is a real bargain, and this is the kind of economic development that is available if we do local investment. And let me point out one other thing too, which is, as you noted, most people are spending some of their money, if not most of their money, locally right now, and the reason is is that most of what we spend our money on is services, and services are inherently local. We spend our money on local services like healthcare or education, or professional services like lawyers or architects, or personal services like childcare, because we know and trust somebody.

Michael: 21:21

When it comes to local investment, I do a little exercise when I speak to audiences, and so this is, you know, in non-COVID times. Maybe 50 times a year I'll speak to audiences and I'll ask them, by show of hands, how many of you have put at least 1% of your pension funds into local business? And there are almost no hands, and if one hand goes up, they're usually wrong. So we have this system where 60 to 80 percent of the economy is in locally owned business and almost none of our investment capital is going into them. So we are all including all of us who love local business we are all systematically over-investing in Fortune 500 companies and under-investing in local business and, honestly, as long as you continue to invest in the wrong things, don't be surprised that you're going to be disappointed with the outcome.

Joel: 22:25

Yeah, because most I imagine most jobs are held by small local businesses too, and when we think about creating jobs, a lot of times the narrative that we have is that that's done by big companies. But my understanding is that about two-thirds of the jobs in the country are by small, independent businesses.

Michael: 22:45

Yes, so that's, and there's a couple of different measures you can use on this. If you use the measure of size of business, so in the United States we perversely define a small business as 500 employees or fewer. Most other countries do 200 or 100. But by that criterion it's about 60% of the economy is in small businesses. It's a stunningly large number. Now you can go further than that and there's another measurement system out there that says well, let's look at the coincidence of a branch of a business and its headquarters, and when you look at that, about 80% of the economy is locally owned. So that's where I say it's 60% to 80% and in terms of job creation it is a radical.

Joel: 23:59

And they're doing that without the investment dollars that the big companies are using. I think it shows just the strength and resilience of small local business owners that they're able to have that large of a force and be that large of a force, I should say, without all those investment dollars that the big companies are getting and the subsidies too, right. So that just speaks to the resilience of small, local, independent businesses.

Michael: 24:30

Absolutely, and the way that I cynically often state that is, despite the best efforts of economic developers to kill local businesses by making them less competitive and giving all their money to large businesses, they have thrived and retained their market share fairly consistently.

Joel: 24:54

And I want to hit on something too, because I think a lot of people, when I've talked to them about the idea of local investing, think of it as this brand new idea. But it's actually a pretty old one, Is that right? Yeah?

Michael: 25:06

Well, I mean, if you think about it, investing in your family or yourself or your town was the easiest thing to do, and it's only as we developed these kinds of first national and then global webs of capital that you could develop. You had options for moving your money all around the planet, and I think that we want to reinvent this local investment infrastructure. Now, one thing that's, I think, helpful in thinking about this problem is we tend to think about investment as investment in business, and that is an important piece of it, but, honestly, for most people, the most powerful local investments that they can make are in themselves and their family. So I'll give you two examples, one example which is not something that I'm proud of, but 2008 was a terrible year for me.

Michael: 26:19

It was a year that I got divorced, lost a job and it was a financial crisis of global proportions. I wound up in very significant debt, staggering debt, and what I did to get out of debt is I approached people in my community who I knew had a little bit of means and said look, I am paying 25% or more on certain credit cards. You're getting 5% or less on a bunch of your investments. Let's figure out a number in between that will make us both happy. And in crowdfunding for my own debt relief, I was able to save about $100,000 in interest payments and fast forward to today I'm completely out of debt and have an amazing credit score. But it was all because I was able to crowdfund locally out of debt.

Joel: 27:29

Yeah, you have this example in your most recent book, put your Money when your Life Is, where you say, hey, if you have a, even if it's not such a high crazy interest rate, but if you have a family member who has a student loan for seven or 10% and you can lend them, you've got some cash laying around and you want to make a return on that. Instead of making that return on Wall Street, you can lend that to them, have them pay off the debt that's at a higher interest rate and then they pay you back at five or six or whatever percentage you guys figure out. You make a return. It helps your family member or your friend and you've just made it a local investment without even having to go through securities laws and changing the structure or changing the way things are done, and that's right.

Michael: 28:19

And the rate of return is spectacular. That's the thing. The rate of return I got on that investment was probably typically 20%, and I'll give you another example. So in the last two years, the most successful investment that my wife and I have made is putting solar on the roof here, and we moved two years ago to Palm Springs, california. It's a desert. Our air conditioning bills in certain months were as high as $750.

Michael: 29:03

So since putting the solar on the roof, we have no utility bill and we pay ourselves back. That is, we borrowed money from our solo 401k, which is our own little pension savings account based on self-employment, and we pay ourselves back at a low interest rate. The interest goes back into our account. So again, we're getting a double digit rate of return on this kind of investment in ourselves. And if you think about it well, why stop there? Why not? We should also be investing in our neighbors putting solar on their roof, because we'll get the same rate of return. So there is almost an endless supply of these kinds of investments, before you even confront the question of putting money into businesses, whether local or non-local.

Joel: 30:02

Well, and that concept of seeing I think, especially paying off debt as an investment into yourself is so powerful Because you say that if you think of it kind of as an iceberg and maybe you're gaining your money in the market is gaining 8% or 9% or something like that, but then you put in $200 a month, let's say, into the market and it's gaining 8% or 9%, but then you've got another $200 credit card payment. That's 25%. At the end of the day, what's your net? You're still at negative 18%, and that was hugely powerful in my own life. I'll share my own debt story, since you shared yours In 2020, that was a pretty bad year for me.

Joel: 30:49

I had also gone through a divorce, I had moved across the country three times, I had to refurnish my life and then, right around the time when the pandemic hit, my business fell apart with that and my income went down over six figures in one year, and I also racked up a lot of debt because I was paying for stuff from when it was good right, and I actually through some of your concepts and through some other things that I had learned with our financial services agency, with a focus on helping people eliminate their debt faster, and it's exactly what you said.

Joel: 31:30

People don't realize just how much they're paying in interest. A 5% mortgage, you're going to be paying 50% of the balance of that home by the end of it, and most of the clients we help were able to get them out of debt in 7 to 12 years instead of 30. And on average, they save about $70,000 to $75,000 of interest during that time. And what I love that you said about it is that looking at the difference between well, this is an investment and this is a debt, and kind of thinking of them in this two-pocket sort of thinking, is a distinction without a difference.

Michael: 32:06

Yeah, it's something the financial services industry wants us to do because they want those of us who are in debt to justify continuing to put money into their financial instruments. But, as you point out, it's nutty to do that. Now, I mean, there are exceptions and for those listening, if you're in a workplace where your employer is matching your, say you know, 401k contributions, yeah, it probably makes sense for you to max out. But if you're out those, even if you have some debt, because if you're getting a 2 to 1, 3 to 1, 4 to 1 additional amount of money from your employer, you don't want to lose that. But that's not all that common.

Joel: 32:56

So yeah, or if you're using debt to buy an asset where you're getting a larger rate of return than the interest rate, that makes sense. But for consumer goods, that's where people and myself included, you know definitely have gotten into trouble. I also wanted to ask you a little bit about, I think, some of the sort of eyebrow raising questions that people might have when we talk about local businesses, specifically around risk. I think that a lot of people see startup businesses as risky. You know, people hear stats about how, you know, the majority of small businesses fail. You know, why would I invest my money locally when I could, you know, put it in a company that I know is secure and solid, and why would I put it into this startup or this local thing? Because it's so much riskier? Could you speak a little bit to what that risk actually is, Because there obviously is some, but I'm curious, through your research, what you've learned about that.

Michael: 34:01

Yeah yeah. There is no question that startups, whether or not they are locally owned, are highly risky, and the majority of startups will not be here in five years. However, startups are a tiny piece of what your local investment opportunities are, and if you are a risk averse local investor, you simply need to ask the threshold question is has this business been around for five or ten years or not? And a lot of the businesses you will find have been around. It's a grocery store that's building a second branch. It is a restaurant that's popular on one side of town that wants to put another restaurant on the other side of town. Those are the things that you want to look at, but there also are people who are more interested in risky investments, and if risk is your thing, then investing in startups makes sense. But the mistake that a lot of people make is the assumption that every local investment is a startup.

Joel: 35:21

And that's nonsense.

Michael: 35:22

The vast majority of local investment opportunities are not startups.

Joel: 35:30

Right, just because something's local doesn't mean it doesn't have a track record.

Michael: 35:35

Yeah, that's right. And so that's one issue, and I think you need to be a little bit systematic about this, and what I mean by that is you need to line up all of the risks of investing locally against all of the risks of investing non-locally and weigh out how these things come out. So I'll give you an example If you put all of your money into local businesses, you're going to be vulnerable to a local recession, and every community has localized recessions. It can happen because of a natural disaster or a company splits town, and if your portfolio is 100% local, you're going to potentially lose everything. So that's why there may be an argument for some degree of geographic diversification.

Michael: 36:40

On the other hand, we also know that people who evaluate companies locally get much better information.

Michael: 36:52

They have the ability to test out the good earth, service, ground truth, the representations, talk with the employees, talk with management and really get a clear headed view about whether to do the investment. That is almost impossible to do globally, and this is why, by the way, community banks, which mostly do relationship based lending, have lower default rates than global banks which rely on electronic credit stores, because those electronic credit stores know a lot less than the people with relationships. So that is the reason why, ok, a smart local investor will not put 100% into the community, maybe 5%, 10%, and you'll put it into businesses that you've done some due diligence around. But, by the way, if you want geographic diversification, you find other communities that are looking for geographic diversification and you put together local funds that are supporting local businesses across multiple geographies. So that is the direction that local investment is going to move in. We're not there yet, but it is going to happen. You're listening to a special neighborhood economic series of the Mindful Marketplace. Stay tuned tomorrow for the rest of the conversation.