The Post Carbon Reader Series: Economy

The Competitiveness of
Local Living Economies
By Michael H. Shuman, JD
About the Author
Michael Shuman is director of research and public
policy at the Business Alliance for Local Living
Economies (BALLE). He holds an AB with distinction
in economics and international relations from Stanford
University and a JD from Stanford Law School. He has
authored, co-authored, or edited seven books, includ-
ing The Small Mart Revolution: How Local Businesses
Are Beating the Global Competition (2006) and Going
Local: Creating Self-Reliant Communities in the Global
Age (1998). Shuman is a Fellow of Post Carbon Institute.

This publication is an excerpted chapter from The

Post Carbon Institute Post Carbon Reader: Managing the 21st Centurys
2010 Sustainability Crises, Richard Heinberg and Daniel
Lerch, eds. (Healdsburg, CA: Watershed Media, 2010).
613 4th Street, Suite 208 For other book excerpts, permission to reprint, and
Santa Rosa, California 95404 USA purchasing visit http://www.postcarbonreader.com.
 The Competitiveness of Local Living Economies

The only thing standing in

the way of localization is
policy-makers committed to
propping up noncompetitive
global corporations.

Economic localization (localization in the rest of
this chapter) offers the key to solving a growing num-
ber of global problems, including peak oil, climate
disruption, and financial meltdowns. Yet the percep-
tion remains that this solution is very costly, because
local goods and services supposedly are more expensive
than their global alternatives. American consumers are
convinced that big-box stores and bigger businesses
mean lower pricesalways, in the Wal-Mart vernac-
ular. And not a few localization activists concur, argu-
ing that consumers should nevertheless be prepared to
pay more to responsibly avert the calamities of a car-
bon-dependent world.
In fact, local goods and services are already compet-
ing remarkably well in the marketplaceand they
are likely to do better in the near future. This chap-
ter lays out why cost effectiveness actually is a reason
to embrace localization and argues that the only thing
standing in the way of localization flourishing is, oddly,
policy-makers committed to propping up increasingly
noncompetitive global corporations.
A Local Living Economy
Ever since 2001, when the Business Alliance for Local
Living Economies (BALLE) was founded, the term
local living economy has become shorthand for a
pragmatic approach to localization. Two principles lie
at its core:
1. The wealthiest communities are those with the
highest percentage of jobs in businesses that are
locally owned. A growing body of evidence sug-
gests that local ownership in businesses pumps up
the multiplier effect of every local dollar spent,
which increases local income, wealth, jobs, taxes,
charitable contributions, economic development,
tourism, and entrepreneurship.
2. The wealthiest communities are those that maxi-
mize local self-reliance. This doesnt mean that
they cut themselves off from global trade. But they
rely on trade only for the diminishing universe of
goods and services that they cannot competitively
provide for themselves.
Both principles would be very difficult to vindicate, if
not impossible, were global businesses ultimately more
competitive than local ones. If the scale of business has
to be large for them to compete, then it would be dif-
ficult for communities to embrace locally owned firms,
because larger-scale businesses require global pools
of owners. Nor could communities possibly achieve
greater self-reliance, because larger-scale businesses
imply greater reliance on trade. Fortunately, theres
powerful evidence that local businesses in the United

1 The post carbon reader series


States are already quite competitiveand likely to
become more so in the years ahead.
The Current Economy
The U.S. economy turns out to be remarkably local
already. A good sense of the U.S. economy can be
gleaned from the 2010 edition of the Statistical
Abstract, an annual publication of the U.S. Census
Bureau1 (unless noted otherwise, the figures below are
all for 2006, the most recent year for which most data
are available in the report).
Table 744, on Employer Firms, shows that in 2006,
firms with fewer than 500 employees (which is how
the U.S. government officially defines small busi-
nesses) accounted for 50 percent of all private-sector
jobs. Since smaller businesses pay employees slightly
less than larger businesses, they account for 44 percent
of payrolls. Roughly speaking, then, small businesses
make up about half the private economy. Probably 99
percent of these small businesses are locally owned sole
proprietorships, partnerships, and small corporations.
Add both government entities and nonprofits to small
businesses and one finds that nearly 60 percent of the
economy is rooted in place. Thats the national average.
Any decent accounting of unpaid labor, like stay-at-
home parents, family care of the elderly, and volunteer-
ism generallyall items economists dont know how to
count and therefore assign a value of zero towould
conclude that perhaps 80 percent of the economic
activities in a typical community are done by resident
entrepreneurs and firms. In other words, the worlds
most powerful industrial nation is largely made up of
locally owned businesses today.
But isnt globalization upending this? Havent Wal-
Marts, Home Depots, Borders bookstores, and thou-
sands of other chains taken over our communities and
destroyed local businesses? Well, yes, they have, but
keep in mind that every business listed in the previ-
ous sentence is a retailer. The Census Bureau abstracts
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The Competitiveness of Local Living Economies
table 654, which breaks down gross domestic product
(GDP) by industrial sectors, shows that retail accounts
for about 7 percent of the economy. In much of the
other 93 percent of the economy, in everything from
manufacturing to finance, local businesses have been
experiencing a renaissance.
If global companies were really beating local companies,
their market share of GDP would be growing. Table
744 in the abstract shows that in 2006, the global-local
breakdown was practically identical to what it was in
2000, and that small businesses accounted for 3 per-
cent less of the economy than in 1990. 2 So, in sixteen
years of globalization, small businesses lost only 3 per-
cent market share. Big deal. In fact, even that loss may
not have occurred.
The Census Bureaus table 741 provides figures on
Nonemployer Establishments, businesses (many
informal and home based) with no employees at all.
These entrepreneurs are not included in the small-busi-
ness figures just discussed. It turns out that in 2006,
more than 20 million Americans generated $970 bil-
lion of business with no employees at allor more than
7 percent of the U.S. economy (GDP that year was a
bit over $13 trillion). Comparable nonemployer data go
back only to 1997, when 15 million Americans gener-
ated $586 billion of business. Extrapolating backwards,
there were perhaps 10 million self-employed individuals

generating $300 billion of business in 1990. The 3per-
cent of market share supposedly lost by small busi-
nesses since then was actually more than made up for
by growth in smaller, home-based businesses.
So, despite nearly two decades of globalization and pub-
lic policies (elaborated below) tilted like a double-dia-
mond ski slope against small business, local businesses
have steadily maintained their share of the economy.
This fact underscores how competitive the sector is.
And if we retooled public policies to remove their big-
business bias, local businesses could be expected to sub-
stantially increase their market share.
But surely these local businesses, even if they survive
from year to year, are not as profitable as global busi-
nesses. In fact, table 728 in the abstract, on Number
of Tax Returns, Receipts, and Net Income by Type of
Business, shows that nonfarm proprietorships gener-
ate three times more after-tax income, for every dol-
lar of sales, than corporations. Partnerships fall in
between. Because the profits of corporations are effec-
tively taxed twicethrough corporate taxes and then
individual taxes on dividends and stock gainstheir
relative profit rates are even less attractive to investors.
So are local businesses profitable in every sector? Lets
look at the 1,100 categories of the North American
Industrial Classification System (NAICS), which is
effectively the inventory of all firms in the United States.3
Of all 1,100 categories, only four showed the number
of large firms exceeding the number of small firms in
2006. Topping the list of industries hard to localize is
nuclear power (yet another reason to oppose that eco-
nomically and environmentally dangerous energy alter-
native). The other three least localizable industries are
sugar beet manufacturing, potash mining, and pipeline
manufacturing. In every other part of the economy, we
have many more examples of successful small, local busi-
nesses than we do of large, global businesses.
A mistake that economic developers commonly
make is that they look at the average business size in
a given industry. From a community perspective,
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The Competitiveness of Local Living Economies
this is irrelevant. A community should be looking at
just the right size firm consistent with local resources
and regional markets. And any community trying to
become self-reliant can find myriad examples of small-
scale business success in nearly every category of the
economy.
Another feature of the U.S. economy is that, as a coun-
try, we are surprisingly self-reliant. Table 651 in the
Census Bureaus Statistical Abstract shows that in 2008,
the country imported $2.5 trillion worth of goods and
services into our $14 trillion economy. That is, imports
represented about 17 percent of the economy. When
the Chinese stop artificially keeping their currency
low and other foreigners begin unloading their shrink-
ing American dollars, both of which seem inevitable,
this import percentage will drop. We are destined to
become more self-reliant very soon. The only question
is how fast.
Lowest Prices
But what about prices? Arent the Wal-Marts of the
world always going to charge lower prices than their
local competitors? What is not well appreciated is how
nonsensical this question is. The U.S. economy is made
up of literally millions of products. Studies that claim
that this or that chain store is cheaperand many of
these studies have been commissioned by said stores
and still call themselves independent surveysdo
little more than cherry-pick a tiny sampling.
If you believe that price is the primary driver of con-
sumer demand, then youve never been to Starbucks.
There may be many reasons to buy your mocha latte
with a shot of vanilla, but price is not one of them. What
really matters to consumers is value, which considers
price alongside many other factors: Whats the qual-
ity of the product? How trustworthy is the producer?
Whats the after-purchase service package look like?
How rewarding is the shopping experience? Whats
the chance Im going to be overcharged or ripped off?
How well does the company treat its workers and the
 The Competitiveness of Local Living Economies

What really matters to

consumers is value
and local businesses
excel at providing value.

environment? Does it contribute to local charities and But what about outsourcing to global service provid-
sponsor the local Little League? These turn out to be the ers? Thomas Friedmans book, The World Is Flat, is
very categories in which local businesses naturally excel. filled with anecdotes about American firms turning
to low-wage workers in India and China to do taxes
If local businesses provided goods and services with low
or patent filings.4 But all his colorful stories turn out
value, then consumersgiven the real facts about more
to have little statistical significance. Table 1250 in the
expensive and shoddy local alternativeswould flock
Census Bureaus Statistical Abstract shows that the
to the chain stores. In fact, buy-local campaigns always
U.S. trade balance in services has been in surplus and
move consumers in the opposite direction. The more
steadily growing over the past decade to $144 billion
information consumers have, the more they buy local.
in 2008. Imports of outside services have been fairly
One compelling explanation is that most consumers
inconsequential.
today know relatively little about great deals locally
and instead have been influenced by billions of dollars Yes, the U.S. trade deficit has ballooned in recent
of advertising pumping the virtues of buying globally. years, but its all been because of our imports of foreign
goods. Table 651 in the abstract shows that only about
Back to the Census Bureaus Statistical Abstract. Table
a quarter of our goods consumption is of durables.
651 breaks down consumer spending in the United
Cars, appliances, gadgets, DVDs, computers, toys,
States into three categories: durable goods, nondurable
housewaresall the stuff increasingly manufactured
goods, and services. In 1970 services made up 45 per-
in Chinaconstitute only about a tenth of our over-
cent of spending. By 2008, it grew to 60 percent. This
all spending. The nondurables tend to include food,
trend is mirrored in every industrialized country in the
building materials, wood, textiles, clothing, office sup-
world. As people make more money, they get saturated
plies, and paper products. And the greater importance
with stuff. Once you have your third car, your fourth
of nondurable goods in consumer spending provides
computer, and your fifth television set, you begin to
yet another opening for localization.
see the virtue in spending your next available dollar
on more education or better health care. This trend is An important characteristic of many of the nondura-
great news for localization, because most services are bles is that their weight-to-value ratio is much greater
inherently local and depend on face-to-face relation- than that of durables. When energy prices and ship-
ships with people we know and trust. ping costs rise, nondurable imports will be the first
casualties. This means that local production of food
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 The Competitiveness of Local Living Economies

and clothing coupled with local distribution, for exam-

ple, will once again be competitive against Wal-Marts
importing of these goods 10,000 miles from China
even if the Chinese wages were zero. A paradoxical
implication of distant, low-wage manufacturing is that
distribution costs are becoming more important. The
less that labor is valued, the more that rising shipping
costs can threaten the competitiveness of the model.
Other trends, of course, also are likely to make global
goods more expensive. Carbon taxes, which will pro-
liferate as the evidence of climate disruption becomes
clearer, will further pump up the costs of global ship-
ping. Fears of terrorists cutting off or sabotaging long-
distance supplies will put a new premium on local
production of food, energy, and other necessities. The
Internet is giving more and more people the opportunity along innovations in small-scale energy systems, credit
to choose to live in places they love, irrespective of the unions, and local currencies. While the Lilliputian
communitys size or natural resources, and to participate businesses have been slow to find their footing, they
in their professions of choice from their own homes. As finally are learning that by working together they can
noted earlier, home-based businesses constitute one of restrain the Gullivers of globalization.
the fastest-growing parts of the U.S. economy.
Meanwhile, local businesses in every industrial sec- Postglobalization Politics
tor are learning how to compete more effectively.
If the analysis above is correct, globalization is fast
Through community-based networks, local businesses
approaching a cliffone that much of the world is not
are sharing best practicesin service, in technology, in
anticipating. Global corporations will not disappear,
business design, in marketing, in finance. These busi-
of course, but their role will shrink and many will go
nesses are learning the competitive value of working
out of business. They will be forced to focus on the
together. For years, True Value Hardware storesall
diminishing number of highly specialized goods and
locally ownedhave successfully competed against
services that communities cannot cost effectively pro-
Home Depots through a producer cooperative. Tucson
vide for themselves.
Originals is a group of independently-operated res-
taurants in Arizona that collectively buys foodstuffs, All of this assumes naively, however, that economics
kitchen equipment, and dishes to bring down their trumps politics. In fact, wobbly global corporations
costs. There is no economy of scale that local businesses can be expected to convince politicians everywhere to
cannot plausibly realize through collaboration. save them. After the major U.S. banks and financial
institutions began to fail spectacularly in late 2008, a
Thanks to the work of groups like the Business Alliance
progressive president and Congress stepped in to bail
for Local Living Economies and the Transition
them out with Troubled Asset Relief Program (TARP)
Network, local business innovations are now spread-
legislation. If this happens every time other inefficient
ing globally. Community food enterprises are increas-
global enterprises are about to go out of business, then
ingly collaborating through sister restaurants and
of course localization will failnot because it cant
technical exchanges. Global conferences are passing
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 The Competitiveness of Local Living Economies

compete, but because policy-makers cant tolerate its cannot be regarded as a mere accident. They reflect
winning. years of lobbying, favor buying, and campaign contrib-
uting by global businesses. As the economic plight of
Many do not appreciate the extent to which U.S. policy-
global companies deteriorates, these political manipu-
makers have rigged the economy against local business:
lations will intensify. And thanks to a January 2010
..If youre a local business in most U.S. states, you must decision by the U.S. Supreme Court overturning a
assess a sales tax. If youre online retailer Amazon. 103-year ban on direct corporate spending to influence
com, you dont. elections,5 corporations are now free to spend unlim-
..If youre a global business, you can afford a battalion ited amounts on political free speech. Localization,
therefore, could still be thwarted, along with its ability
of attorneys that work the rest of the tax system so
to deliver a new era of prosperity to communities across
that your obligation is close to zero. If youre a local
the country.
business, you cant.
..A generation ago, the way that Wal-Mart strong- Increasingly, those supporting local living economies
must be prepared to expose and block this coming
arms its suppliers would have been illegal under anti-
political backlash. Whether the countrys landing in
trust laws. Today, the behemoth gets a pass.
a post-carbon future is harsh or gentle, exorbitant or
..Securities laws are so ridiculously expensive for affordable, ultimately turns on whether our politicians
small businesses who wish to have small (unaccred- will just allow local goods and services to win.
ited) investors that virtually no pension funds are
invested in the local half of private economy. Given
the greater profitability of local businesses, this is a
huge and inexcusable market failure.
..The World Trade Organization and other trade
regimes, by prohibiting communities from identi-
fying which goods are locally made, essentially give
placeless companies an unfair advantage while deny-
ing consumers information that could help them
make more informed market choices.
..A recent study of forty-five economic development
programs in fifteen states found that 90 percent
were spending most of their funds to attract or
retain nonlocal business. Given this, the estimated
$50 billion spent each year by state and local eco-
nomic developersnot to mention federal supports
for big oil, big farming, big coal, big defense contrac-
torsprimarily accomplishes one result: to make
local businesses less competitive.
These inequities in public subsidies, regulations, laws,
and economic development practices are so extreme,
so uniformly tilted against local business, that they

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 The Competitiveness of Local Living Economies

Endnotes
1 U.S. Census Bureau, The 2010 Statistical Abstract,
PDF version, http://www.census.gov/compendia/
statab/2010edition.html.

2 Total annual payroll of the businesses discussed here is

used as a measure of their market share of the national
economy.

3 Downloadable at U.S. Census Bureau, Statistics of U.S.

Businesses (SUSB), http://www.census.gov/econ/susb/.

4 Thomas L. Friedman, The World Is Flat: A Brief History of the

Twenty-First Century (New York: Farrar, Straus & Giroux,
2005).

5 David G. Savage, Supreme Court Overturns Ban on Direct

Corporate Spending on Elections, Los Angeles Times,
January 22, 2010.

Photo Credits
Page 2, neon sign shop cba zoonabar.

Page 5, Old Boonville, MO Wal-Mart cb robertstinnett.

Images marked c are under a Creative Commons license.

See http://creativecommons.org.

Acknowledgments
Cover art by Mike King. Design by Sean McGuire. Layout by
Clare Rhinelander.

7 The post carbon reader series


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