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THE LOIS ALTERNATIVE

The Hershey Chocolate Company in Hershey, Pennsylvania, is not your typical LOIS business. Its stock is publicly traded, which normally makes local ownership impossible, but a local charity, the Hershey Trust, keeps ownership local by controlling 77 percent of all voting shares. Unlike most LOIS businesses, it is hardly small. In 2001 about sixty-two hundred employees were on payroll, many living in the Hershey area. The company not only saturates local chocolate demand but also sells worldwide to the tune of $4.6 billion per year.

The Hershey Trust is effectively the heart that pumps monetary blood throughout the regional economy. It owns 100 percent of the shares of the Hershey Entertainment and Resorts Company, which employs another fifteen hundred locals (plus five thousand seasonal workers) in its amusement parks, stadiums, campgrounds, country clubs, and numerous other enterprises. On top of that, the Trust runs a school for twelve hundred underprivileged kids, grades K through 12. Milton Hershey put all his stock in the Trust in 1918 to underwrite the academy in perpetuity.

In 2002 the Hershey Trust did what 99.9 percent of all corporate boards do: it decided that it would be wise to diversify its investments and that it would entertain offers to sell off its shares. The announcement sent waves of panic throughout the community as residents whose lives depended on the company contemplated the prospect of new owners gradually moving the company overseas. Local politicians, community leaders, and the unions pled with the Trust to reconsider. Pennsylvania’s attorney general, Mike Fisher, went into court to stop the sale.

A TINA company would have ignored the local rabble, fought the lawsuit, and kept its focus on profitability. The stakes were huge. The Chicago-based Wm. Wrigley Jr. Co. put a $12.5 billion buy-out on the table, and Nestlé and Cadbury Schweppes were reportedly prepared to offer as much as $15 billion. But something miraculous happened. The Hershey Trust’s board changed its mind. It reaffirmed its commitments to the community and even said that it wouldn’t revisit the issue without approval from the Dauphin County Orphans Court. The Trust, of course, could change its mind again and convert the company into a TINA business (local owners always can sell out). But for the moment its decision showed how the logic governing LOIS businesses is fundamentally different from that governing TINA, fundamentally more humane, fundamentally more community-friendly.

Everything we know suggests that LOIS businesses are substantially more beneficial for a local economy than TINA businesses. This doesn’t mean that TINA businesses are necessarily bad. Many sell a wonderful range of products, pay decent wages, and donate generously to local charities. But dollar for dollar of business, TINA firms contribute less to a community’s well-being than LOIS firms do.

‘Local’ Is What Goes Around

The temptation, when attempting to define a qualitative word like “local” in quantitative terms, is to resort to Justice Potter Stewart’s famous definition of pornography: “I know it when I see it.” But let’s try to do obetter. Perhaps the most critical element of local is proximity—both physical and geographic—because every person’s purchasing choices are driven, in part, by the convenience, familiarity, and comfort of nearby stores, restaurants, professionals, and so forth.

Think of yourself as the center of your own consumption solar system, emanating rays of purchasing power. Most of your purchases are made close by—the local bank that carries the mortgage, the local clothing shops, local filling station, local charities. Travel a little outside your community and the number of purchases diminishes. Maybe it’s that special trip to a mega-mall an hour away, or a consult with a medical specialist three towns over. Venture even farther out and you’ll find a few purchases you make on Amazon for a book or on eBay for some rare Pokémon cards.

Each purchase you make triggers purchases by others. For instance, a dollar spent on rent might be spent again by your property owner at your local grocer, who in turn pays an employee, who then buys a movie ticket. This phenomenon is what economists call “the multiplier.” The more times a dollar circulates within a defined geographic area and the faster it circulates without leaving that area, the more income, wealth, and jobs it generates. This basic concept in community economics points to the importance of maximizing the number of dollars entering a community and minimizing their subsequent departure.

The multiplier obviously diminishes with geographic distance. The farther from home you go to make a purchase, the less of the multiplier comes back and touches your community. Buy a radio down the block, the multiplier is high; buy it ten miles away, the multiplier weakens; buy it mail order, and your community gets practically no multiplier whatsoever.

There is one boundary beyond which part of the multiplier drops precipitously—that of a tax jurisdiction. A rough definition of “local,” then, might be the smallest jurisdiction with real tax authority. For some this will be a town, for others it will be a city or a county. Since every purchase leads to a variety of taxes—sales taxes, wage taxes, property taxes, and business taxes—making a purchase even one village over can significantly diminish the taxes that might have gone to your own local government. For example, the savings Massachusetts consumers enjoy when they make long drives to New Hampshire malls to avoid sales taxes wind up being huge losses to the Bay State.

A business can only be considered locally owned if those who control it live in that community. That could mean the ownership is held by the sole proprietor who lives and works in the same town. It could also mean that residing in the community are more than half of a firm’s partners (through a partnership, limited liability partnership, or S-corporation), shareholders (C-corporation), workers (worker cooperative or employee stock ownership plan company), or consumers (consumer cooperative). It could also refer to a nonprofit tied to the community either through its board, its mission (like a community development corporation), or through a local membership with voting rights. And it could refer to the business activities of local public agencies and public-private partnerships. There are differing consequences of each ownership structure—some, for example, are more vulnerable to a TINA takeover than others—but all offer robust benefits that stem directly from the localness of ownership and control.

There are still further complications when defining a business as local or not. Consider franchises. On paper a proprietor can own most of the outlet’s capital, claim most of the profits, and yet still, by the terms of contracts and licenses, enjoy very little control. The specifics matter here. If a Subway sandwich shop is technically owned by an individual, but is largely controlled by the national chain, it cannot really be considered a LOIS business.

Or consider the residence of a proprietor in a metropolitan area. Suppose you live in Miami. Under the definition above your locality might be the city limits. Finding a local lawyer is easy. If a lawyer lives and works in Miami, she is indisputably local. But suppose she works in Miami but lives farther north in Boca Raton. Is she still local? Or what if she lives in Miami but works in Boca Raton? In either case, some of the lawyers’ expenditures now leak out of Miami.

Or consider a computer purchase. You are careful to go to a locally owned electronics store but are dismayed to discover that most of the computers on display were assembled in Asia. After careful research, you finally find one model that’s assembled locally and sold in the assembler’s small shop. But when you crack open the machine, you realize all the components still come from Asia.

The truth is that these details matter enormously when it comes to the local multiplier. Yet few of us have time to do so much homework before every purchase. These complexities highlight why efforts to promote LOIS business involve far more than exhortations to buy or invest locally. Significant research is needed to help consumers identify goods and services with the highest degree of local content and control, and with the greatest likelihood of producing the greatest benefit for a community. The principle is easy, but its application can be difficult.

The Local Majority

Local business actually constitutes the lion’s share of the U.S. economy. The U.S. Small Business Administration (SBA) defines small businesses as firms having fewer than five hundred employees, and these actually account for half of private sector employment in the country and 44 percent of private payrolls. A more restrictive definition of small business—as a firm with fewer than one hundred employees—still accounts for about a third of private employment and private payrolls. By either definition, more than 99 percent of all firms in the United States are small businesses. Put another way, footloose global businesses dominate our imagination, get showered with subsidies, and monopolize our capital markets, but actually occupy only about half of the economy. Firms with more than five hundred employees constitute only about 0.3 percent of all firms. They account for 56 percent of private payrolls, but supply fewer than half of all private jobs.

The private sector, moreover, is only part of the U.S. economy. Nearly a quarter of the nation’s income, measured by the GDP, comes from household employers, nonprofits, and various government entities. All of these categories are place based, in the sense that none of them considers setting up shop in China. Large firms turn out to be responsible for no more than 42 percent of the economy, and placebased jobs account for at least 58 percent. We can say, therefore, that Small-Marts are responsible for most of a typical community’s economy.

This observation becomes even stronger when you consider what’s left out of these tallies. Businesses with no employees, millions of which Americans increasingly run out of their homes (many as their second or third jobs), are excluded. Another gap in the official data is unpaid household work, still done primarily by women. Were housework paid at market rates, some estimate this additional income would account for as much as a quarter of the economy. If the volunteers serving senior citizens were paid a wage of eight dollars per hour, the total value of the services would exceed the actual cost of formal home health care and nursing home care. The value of all volunteer efforts in the country, of course, is greater still. Another gap, according to Edgar Feige of the University of Wisconsin, is the underground or black economy, mostly homegrown, valued somewhere between $500 billion and $1 trillion. As law professor Edgar S. Cahn writes, “A wide range of estimates—from Gary Beck to Nancy Folbre—finds that at least 40% of our country’s productive work goes on outside of the market economy.” Nearly all of these missing pieces are local, which means that a better accounting system would most likely show that at least three-quarters of our economic activity is currently place based.

We must also remember that the Small-Mart sector is unevenly distributed throughout the country; in some regions its participation is significantly higher than the overall average. In a quarter of the states, firms with more than five hundred employees account for less than half of private payrolls. Move into suburban and rural areas, and the role of small businesses gets larger still. In Montana and Wyoming only four out of ten payroll dollars come from large firms, suggesting that the Small-Mart portion of their economies, in conventional accounting terms, probably hovers around 70 percent.

But don’t small businesses represent the backwater of business, the inefficient remnants of the old economy? Hardly. According to the SBA, small firms generate 60 to 80 percent of all new jobs and produce thirteen to fourteen times more patents per employee than large firms.

What about the high failure rate of small business? The SBA reports that a third of small business start-ups shut down within two years, and half within four years. These figures are sometimes tossed around to suggest how unreliable Small-Marts are, but the real story is much more interesting. The failure rates only refer to start-ups, not existing small businesses. Owners of a third of the closures, moreover, actually pronounce their ventures successful (for example, an entrepreneur who operates a home-based catering business for a few years that then serves as a launching pad for a new restaurant). And here’s another surprising fact: for almost every one of the last ten years the birth rate of small businesses has exceeded the death rate, while for large firms the death rate has been greater than the birth rate. Between 2000 and 2001 for example, 553,000 small businesses closed but 585,000 opened, with a net increase of 32,000 firms. The total universe of existing small business was about 5.6 million firms, which means that in any given year, about 90 percent of existing small businesses continue to compete effectively. During the same 2000 to 2001 period there was a net loss of about two hundred large firms.

How has globalization changed the role of small business? Over the past decade, while globalization was becoming a household word, a shift in favor of larger businesses has occurred, but arguably only a modest one. Between 1990 and 2001 about 4 percent of the jobs shifted from very small to large firms. Firms with 100 to 499 employees remained steady.

These data lend themselves to several different interpretations. On the one hand, you could conclude that the mighty gales of global “creative destruction,” in the famous phrase of economist Joseph Schumpeter, caused surprisingly little change in the composition of the economy. After all, fewer than four out of a hundred workers were affected, and more than 96 percent of the size structure of the economy remained stable (and again, a shift that is even smaller when one considers home-based, non-employee, and unpaid workers). On the other hand, you could see this as proof that TINA-style globalization has taken a serious toll on the smallest businesses in the United States and that if the next several decades look like the previous decade, small businesses could become as rare as the spotted owl.

Whichever view you choose, the question of why TINA did slightly better than LOIS during those years remains. Most economists would say that these trends prove the greater efficiency and superior performance of TINA firms. Global companies, taking advantage of economies of larger scale as well as lower wages and looser environmental standards abroad, are now producing the cheapest goods and supplying the most cost-effective services, undercutting an increasing number of local businesses. This interpretation omits, however, myriad “imperfections” in our market economy that uniformly favor TINA.

Consider two other important stories about the relative strength of LOIS versus TINA businesses that are mutually contradictory. (See appendix A for details.) One story is of massive consolidation. Between 1998 and 2002 the sector that experienced the greatest degree of consolidation was the securities industry, reflecting the decision of Congress to remove the regulatory barrier between banking and securities. Broadcasting and telecommunications, another industry undergoing massive deregulation, was second. Hospitals have also become more centralized—a direct result of the health care crisis—and the growth of chain stores has contributed to the consolidation of retailing of clothing, electronics, and sporting goods. Each consolidating industry could receive a dissertation’s worth of scrutiny of the people, technology, innovations, and laws responsible for the shift in scale.

But an equally important story is that almost as many sectors in the economy are actually decentralizing. Investment advising for trusts and estates has gone local. Minimills for steelmaking are doing well. Utilities are shrinking in size. Even as some textile, clothing, and transportation equipment manufacturing moves overseas, smaller plants in these sectors are expanding.

Which story is right? Well, both are. And they suggest that for every piece of bad news for Small-Marts, there’s good news as well. In many sectors Small-Marts are innovating, taking advantage of cutting-edge ideas in marketing and technology, and making inroads against larger business. And looking ahead (as we do in chapter 3), the most important trends in the global economy actually favor the expansion of Small-Marts. That doesn’t mean that the Small-Mart Revolution is inevitable, especially if the current pro-TINA biases in subsidies, capital markets, and economic-development practice are not undone. The Small-Mart Revolution requires dramatic changes in the behavior of consumers, investors, entrepreneurs, and policymakers.

But let’s return to a more basic question: Why should we favor LOIS and join the revolution at all?

Swing LO, Sweet Business

However we define local ownership, it turns out to be an essential condition for community prosperity for at least five reasons, spelled out below. The first four flow from the inherent difference between LOIS and TINA firms: most local entrepreneurs form their businesses in a particular place because they love living there. For a few sophisticated LOIS entrepreneurs, other factors like taxes, workforce quality, and clusters may come into play, at least in their initial decision about where to set up the business. But once a LOIS enterprise is up and running, the entrepreneur’s family, workers, and customers are woven into the fabric of the community, and as a result, he or she has relatively little interest in moving to Mexico or Malaysia.

Local Ownership Advantage #1: Long-Term Wealth Generators. Because their entrepreneurs stay put, LOIS businesses are more likely than TINA ones to be cash cows for communities for many years, often for many generations. The Hershey Chocolate Company has brought tens of billions of dollars into the community over its lifetime and will do so for the foreseeable future.

Local Ownership Advantage #2: Fewer Destructive Exits. The anchoring of LOIS businesses minimizes the incidence of sudden, calamitous, and costly departures. For about a century, the economy in Millinocket, Maine, was built around the Great Northern Paper Company, which was one of the largest and most advanced paper manufacturers in the world. During Christmas of 2002 the owners of the company living “away” decided that operations would be better based elsewhere, and the last fourteen hundred workers were laid off. For the next year the unemployment rate hovered at about 35 percent, higher than what the country endured during the Great Depression. This kind of death spiral—a sudden departure followed by massive unemployment, shrinking property values, lower tax collections, deep cuts in schools, police, and other services, which throws still more people out of work, and so forth—is far less likely in a regional economy made up primarily of LOIS businesses.

Local Ownership Advantage #3: Higher Labor and Environmental Standards. A community made up mostly of LOIS businesses can better shape its laws, regulations, and business incentives to protect the local quality of life. A TINA-dependent community is effectively held hostage to its largest TINA companies. While not shy about lobbying politicians, locally owned companies usually do not threaten to leave town. A community filled primarily with locally owned businesses can set reasonable labor and environmental standards with confidence that these enterprises are likely to adapt rather than flee. For example, on Maryland’s Eastern Shore, two powerful poultry companies, Tyson and Perdue, have successfully fought legislative efforts to raise their workers’ wages or clean up the billions of pounds of chicken manure they dump into the Chesapeake Bay ecosystem by deploying one powerful argument: regulate us and we’ll move to more lax jurisdictions like Georgia or Arkansas. (See chapter 6 for more on this story.)

Local Ownership Advantage #4: Better Chances of Success. In November 2003 I debated Jack Roberts, the head of Lane County Metro Partnership, the principal economic development organization in the region surrounding Eugene, Oregon. Like other developers in the state, Roberts handed out tax abatements to businesses as an incentive to either move to the area or expand. Consistent with the elephantmouse casserole, about 95 percent of his abatements were used to lure six TINA companies to move in, while the other 5 percent were given to dozens of LOIS businesses. Ultimately, according to an investigative report in the local newspaper, the cost to the community in lost taxes was about $23,800 per job for the TINA firms and $2,100 per job for the LOIS firms. Why were the TINA jobs more than ten times more expensive? Roberts argued that it was just bad luck. The firms recruited were mostly high tech, and when investors lost faith in the tech sector around 2000 and 2001, management cut costs by shutting down the plants. What Roberts’ argument overlooks, however, is that business cycles are always oscillating, and during inevitable down periods a TINA business will be prone to consider moving a factory to a lowercost region. In fact, even during up periods, a TINA business will consider moving if the rate of return on investment can be ratcheted a notch or two higher. Why keep a factory open in Eugene, earning a 10 percent return, if it can earn 20 percent in Bangalore? To a LOIS entrepreneur, in contrast, these community-destroying options are off the table.

Local Ownership Advantage #5: Higher Economic Multipliers. In the summer of 2003, a consulting group of economists called Civic Economics studied the impact of a proposed Borders bookstore in Austin, Texas, compared with two local bookstores. They found that one hundred dollars spent at the Borders would circulate thirteen dollars in the Austin economy, while the same one hundred dollars spent at the two local bookstores would circulate forty-five dollars—roughly three times the multiplier. In 2004 Civic Economics completed another study of Andersonville, a neighborhood in Chicago. The principal finding was that a dollar spent at a local restaurant had 25 percent more economic impact than a chain. The local advantage was 63 percent more for local retail, and 90 percent more for local services.

This last point, largely unfamiliar to economic developers, is worth further elaboration. A study of eight local businesses in the towns of Rockland, Camden, and Belfast found that they spent 45 percent of their revenue within their local counties, and another 9 percent statewide. The aggregate level of in-state spending was nearly four times greater than that from a typical chain store. Other studies in the United States and abroad also have found that local businesses yield two to four times the multiplier benefit as comparable nonlocal businesses.

Skeptics complain that these multiplier studies are flawed. They claim that the economic models used are filled with uncertainties, especially when a small locale is under study; that the multipliers studied are always specific to a location, so generalizations are difficult; and that the TINA and LOIS businesses being compared are really so different that it’s like comparing apples to goldfish. They also contend that the results are unreliable because the researchers have only partial information on the chain firms’ expenditures.

Whatever the merit to these objections, the skeptics overlook three points. First, the authors of these studies, unlike some of their TINA-scholar counterparts, are honest enough to point out the flaws in their own methodology. Second, these flaws differ little from the flaws of the pro-TINA studies, like the Moore School’s puff piece on South Carolina’s investment in BMW. Third and most important, the underlying reason why local businesses have higher multipliers is obvious and unlikely ever to change: they spend more locally. In the Austin analysis, local bookstores, unlike Borders, have local management, use local business services, advertise locally, and enjoy profits locally. These four items alone can easily constitute a third or more of a business’s total expenditures. That LOIS businesses almost always spend more locally means that they almost always yield a higher multiplier.

To recap all these advantages, look at the National Football League. All but one franchise is owned by a single (usually obnoxious) individual, and these modern moguls have threatened to split town if demands for hundreds of millions of dollars for new stadiums and salary increases are not met. When Cleveland refused, Art Modell, owner of the Browns, took his team to Baltimore. The one exceptional franchise is the Green Bay Packers, a community-controlled nonprofit, whose shareholder-members are primarily citizens of Wisconsin. Because its fans will never allow the team to leave town, the Packers have become a critical source of wealth and economic multipliers for Green Bay, one that will be around for generations of Cheesehead fans to come. Being locally controlled means the team cannot suddenly depart and punch a hole in the economy, even if its rate of return might be higher somewhere else. If the city ever passed a living wage ordinance, the Packers would learn to adapt, since fleeing is not an option.

If local ownership of a football team can confer all these benefits, doesn’t it make sense to insist on local ownership of farms, factories, and banks?

What the Meaning of IS Is

Here’s a quick recipe for local prosperity: create a diversity of locally owned businesses, design them to use local resources sustainably, and make sure that together they are fully employing residents and producing at least enough goods and services to satisfy residents’ needs. For those needs that cannot be met through local production, export enough goods and services to provide residents with the income to buy needed imports. To understand this formula, consider two ways how not to create a thriving local economy.

Suppose your community were completely self-reliant. You and your Robinson Crusoe brethren might build houses out of local wood and stone, grow food in the community greenhouses, draw water from rooftop rain collectors, and so forth. This kind of primitive economy can work, provided you’re willing to forgo all the products and technology originating from elsewhere on the planet. For most us this is inconceivable. Even those of us who embrace lives of “voluntary simplicity” have many clothes on our back, couches in our living rooms, and computers on our desks that come from elsewhere. We need to sell something to buy these goods. Absolute self-reliance won’t work.

Next, suppose your community met only other people’s needs—that is, your businesses were 100 percent dedicated to exports, like the Mexican maquiladoras that line the southern border of the United States. Now you’re making money, but you’re also a sitting duck that can be blown away by outsiders’ economic shotguns. If you followed economists’ advice to find your special niche in the global economy, you might be exporting one or two products, and your well-being would be totally dependent on the stability of those global markets. Lose your lead, as Detroit did with automobiles and Youngstown did with steel, and your economy collapses. Plus, you’re vulnerable to all kinds of nasty surprises because you’re importing everything else, even your most basic needs, which now must come in the form of canned food and bottled water. The best example of this is the U.S. economy’s dependence on foreign oil, which ties us—like a damsel in a bad melodrama—to sudden OPEC-orchestrated spikes in global petroleum prices and requires a foreign policy weighed down by increasingly expensive and bloody military involvements in the Middle East.

A better alternative is to blend the two extremes. The healthiest economy is both self-reliant and a strong exporter. Meet as many of your own needs as possible, then compete globally with a diversity of products. By being relatively self-reliant, you’re far less vulnerable to events outside your control. By having global sales, you’re not closing off your economy to outside goods and technology. Meanwhile, you’re conducting as much business as possible with both local and foreign consumers, which brings wealth into the community and pumps up the multiplier. Cut back on either self-reliance or exports, and you lose income, wealth, and jobs.

This may seem contradictory. If every community in the world became more self-reliant, wouldn’t the aggregate level of imports shrink and make it difficult, if not impossible, for communities to increase their exports? In the short term, yes. But over the long term, import substitution would enable tens of thousands of communities worldwide to stop wasting precious earnings from exports on imports they could just as easily produce for themselves, and encourage them instead to reinvest those earnings in industries that could truly fill unique niches in the global economy. It’s a mistake to view any economy, especially the world’s, as a zero-sum game where one player’s gain is another’s loss.

The relationship between any two communities in the global economy is not unlike a marriage. As couples counselors advise, relationships falter when two partners are too interdependent. When any stress affecting one partner—the loss of a job, an illness, a bad-hair day—brings down the other, the couple suffers. A much healthier relationship is grounded in the relative strength of each partner, who each should have his or her own interests, hobbies, friends, and professional identity, so that when anything goes wrong, the couple can support one another from a position of strength. Our ability to love, like our ability to produce, must be grounded in our own security. And our economy, like our love, when it comes from a place of community, can grow without limit.

If it’s important to develop strong exports and to be self-reliant through import substitution, should both strategies be implemented simultaneously or should one be prioritized over the other? The prevailing view among state and local economic development experts is to prioritize exports. That’s why they spend millions of dollars to lure and keep TINA businesses. Only through export earnings, as the Moore School scholars argued about South Carolina’s decision to give millions to BMW (see chapter 1), can a community enjoy the potentially unlimited fruits of new dollars.

But the argument is flawed. How does a dollar brought into the community from export sales differ from a dollar retained in the community’s economy through local sales? From a multiplier standpoint, there’s no difference whatsoever. One academic analysis of eight southeastern states, looking at the relationship between local services and nonlocal non-service industries like manufacturing and mining, found both dimensions of the economy equally important. After reviewing this data, Thomas Michael Power, chair of the economics department at the University of Montana, observes: “Growth in service activities played a very important role in determining overall local economic growth. Manufacturing and other export-oriented activities were not the primary economic forces. Others have also found evidence that ‘local’ economic activities may drive the overall economy rather than just adjust passively to export activities.”

Even though development through import replacement and development through exports propel one another, there are many compelling reasons to favor the former from a public policy standpoint. Import substitution involves shifting purchases from businesses outside the community to those inside, which usually means from businesses owned by outsiders to those owned locally. All the benefits of local ownership are therefore reinforced through import substitution. Every time a community chooses to produce its own apples rather than import them, assuming that the prices of all apples are roughly equal, it boosts the economic well-being of its own apple farmers, as well as all the local suppliers to the farmers and all the other local businesses where the farmers spend their money.

Export-led development means opening yourself up to many otherwise avoidable dangers. Importing oil leaves the fate of our economy in the hands of OPEC ministers, Latin American strongmen, and Arab sheikdoms. Importing Canadian beef invites outbreaks of mad cow disease. Importing chickens puts you on the front lines of the avian flu pandemic.

Import substitution also turns out to be one of the smartest ways of strengthening homeland security. Terrorists are keenly aware that the types of infrastructure most vulnerable to a catastrophic collapse are centralized structures such as the electricity grid. Nuclear power plants were actually on the 9/11 hijackers’ short list of potential targets, no doubt to terrorize the surrounding populace by simultaneously wiping out critical energy supplies and raining radioactive debris over them Chernobyl-style. The water grid in California could be shattered by a disruptive blow to the Tehachapi pumping station that brings water from the northern rivers to desert lawns in Los Angeles. The natural gas grid could be destroyed through sabotage of liquefied natural gas ports and other key pipeline interchanges. Centralized food supplies could be used to spread rapidly meat contaminated with mad cow disease and other microorganisms. To the extent that communities can make themselves more self-reliant—on their own electricity, water, fuel, and food—they will be far less vulnerable to terrorist attacks. The Wall Street Journal understood this point eight weeks after 9/11 when it published the following observation in an article on the front page of the “Capital” section: “Even before terrorists leveled the World Trade Center, economic and technological forces were combining to decentralize the economy. Sept. 11 will only reinforce these centrifugal forces….”

Supporting the development of diverse enterprises—enacting import-substitution policies—enhances the skill base of a community and acts as a kind of insurance policy, an investment in the people, know-how, and technology that can enable you to take full advantage of the “next big thing” in the economy. A generation ago a Boeingdependent Seattle could not have possibly known that its future lay, not in aerospace, but in software and coffee. You never can know, and it is only by having a diversified economy, as Seattle did, that you can have the skills to seize whatever opportunities arise.

Paradoxically, import substitution also turns out to be the best way to create a healthy export sector. An unhealthy approach to exports is to do what Millinocket, Maine, did, which, as noted earlier in this chapter, put all its economic eggs in the basket of paper production. Similarly, when economic developers attempt to divine what your community’s one or two great “niches” might be in the global economy, they are essentially playing a dangerous game of Russian roulette. If your niche suddenly becomes obsolete, you’re dead. A far smarter approach is to invest in dozens of local small businesses, all grounded in local markets, knowing that some will then develop a variety of healthy export markets. A multiplicity of export linkages is the most powerful and safest way to compete globally.

Suppose North Dakota wished to replace imports of electricity with local wind-electricity generators. Once it built windmills and became self-reliant on electricity, it would then be dependent on outside supplies of windmills. If it set up a windmill industry, it would become dependent on outside supplies of machine parts and metal. This process of substitution never ends. But it leaves North Dakota with many strengthened local industries—in electricity, windmills, machine parts, and metal industries—that not only can meet local needs but also can take advantage of export opportunities.

Even if import replacement leads to more exports, the distinction between this process and export-led development is much more than simply a matter of semantics. Had South Carolina followed an importreplacing development strategy, it would have used the same money it paid BMW—or much less—to nurture hundreds of existing, locally owned businesses, some of which would have then become strong exporters. Development led by import replacement rather than export promotion diversifies, stabilizes, and strengthens the local economy, while allowing the best exporters to rise on their own merits. As Thomas Michael Power says, “Export-oriented economies remain primitive, suffer through booms and busts, and go nowhere. It is only when an area begins making for itself what it once imported that a viable economic base begins to grow.”

This touches on a final advantage of import-substituting development. Which is easier: for governors, mayors, and economic developers to learn a foreign language like Japanese, travel abroad to snag some new global company, steal tens of millions of dollars from the taxpayers to provide the necessary incentives, and then have to defend the decision a decade later when the company moves on; or for the same folks to speak in plain English with their own business community, work together on nurturing homegrown enterprises, and enjoy the fruits of their efforts when they retire? The excitement officials and civil servants feel when they travel to exotic lands and rack up the frequent flier miles is understandable, but it should never be done on community time.

Myriad Benefits of LOIS

A community economy rooted in LOIS businesses will enjoy many other benefits because LOIS fits hand in glove with other theories about what constitutes a successful, healthy, and vibrant community.

LOIS, for example, is a natural cousin of “smart growth” or antisprawl policies. Promoters of smart growth envision, for example, the redesign of a community so that residents can walk or ride bikes from home to school, from work to the grocery store. They want to scrap old zoning laws and promote multiple uses—residential, commercial, clean industrial, educational, civic—in existing spaces. They believe it’s better to fully use the town center than to build subdivisions on green spaces on the periphery. Because LOIS businesses tend to be small, they can fit more easily inside homes or on the ground floor of residences. Because they focus primarily on local markets, LOIS businesses place a high premium on being easily accessible by local residents.

Not every LOIS business is a model environmental citizen—one can certainly point to small-scale manufacturers and local dry cleaners that release carcinogens—but an economy made up largely of LOIS business is more likely to be green. Local ownership provides an important form of ecological accountability since the owner must breathe the same air and drink the same water, and his or her family must ultimately live side by side with the rest of the community. Moreover, many LOIS businesses are service related, and these usually are labor intensive and have fewer environmental impacts. As noted earlier, a community with primarily locally owned businesses—businesses that will not consider moving to Mexico or China—can raise environmental standards with greater confidence that these firms will adapt, a circumstance that tips the political balance in favor of tougher environmental regulations.

A TINA-dependent community, in contrast, is likely to suffer several kinds of environmental hazards. Box stores, for example, are characterized by gigantic parking lots, which cover vast tracts of land with concrete that drain off oil, gasoline, and other toxins into the water table, often in torrents that can lead to flooding. When national chains move on, these huge spaces are neglected, become eyesores, and lower property values. Nationwide Wal-Mart has three hundred vacant stores, and most are less than a mile away from the Supercenter that took the predecessor store’s place.

The relative immobility of LOIS businesses also serves the rights of labor, though this argument contradicts the historic hostilities union organizers and old-school lefties harbor toward small business. Their concern has been that, compared to larger businesses, small businesses pay lower wages, provide fewer benefits, and are less susceptible to union organizing. There is evidence, to be sure, that businesses with more than five hundred employees pay about a third more on average than businesses with fewer than five hundred employees. But one recent statistical analysis of the relevant academic literature found that between 1988 and 2003 these differences, in both wages and benefits, shrank by about a third. If this trend continues—especially as many of the once high-paying larger firms continue to move factories overseas and as low-wage retailers like Wal-Mart continue to displace existing small business—these differences could disappear altogether.

TINA businesses that once offered fabulous worker benefits are now chopping them away, as more and more managers struggle to contain ballooning health care costs and place responsibility for pension contributions directly on the employee. The growing incidence of TINA firms declaring bankruptcy (including United Airlines, a company controlled by its supposedly enlightened workforce) as a strategy to escape long-standing health plans and pension benefits should give pause to anyone who thinks that big business is the ticket to economic security. The real solutions for all Americans to have better health care and retirement—and not just those employed or employable—must come, as they do in almost every other industrialized country, from smarter public policy (much of it, as discussed in chapters 5 and 7, state and local). In fact, public policies that do a better job of ensuring these benefits for all workers may eliminate one of the big reasons some choose to work for TINA firms and expand the number and quality of people eager to work in small business.

Small businesses may be less easy to unionize than large ones, but that doesn’t necessarily make them less sensitive to labor rights. Some of the most socially responsible entrepreneurs in this country are the small business pioneers who are members of organizations like BALLE and SVN and who believe that high wages and decent benefits are not just good motivators but also moral imperatives. The closeness of the relationships between the people on the top and the bottom of these small firms also can be a powerful force for empathetic management. And it seems ludicrous for labor to favor TINA businesses when nearly all of them, by now, cannot wait to purge their businesses of unions by moving production overseas.

Sooner or later, the labor movement in the United States will recognize that TINA enterprises have become dead ends for vindicating the rights of workers. Labor should embrace small business, unionize it where it can, and encourage worker ownership, participation, and entrepreneurship where it can’t. Meanwhile, higher community standards through living wages (discussed in chapter 7) and serious health care reform are probably the most effective ways of helping all workers, irrespective of the size of their employer.

Another sign of a prosperous community is how well it preserves its unique culture, foods, ecology, architecture, history, music, and art. LOIS businesses celebrate these features, while chain stores steamroll them with retail monocultures. Austin’s small business network employs the slogan “Keep Austin Weird.” Outsider-owned firms take what they can from local assets and move on. It’s the homegrown entrepreneurs whose time horizon extends even beyond their grandchildren and who care most about preserving these assets. And it’s the local marketers who are most inclined to serve local tastes with specific microbrews and clothing lines. “Weirdness” is what attracts tourists, engages locals in their culture, draws talented newcomers, and keeps young people hanging around. As Jim Hightower writes, “Why stay at the anywhere-and-nowhere Holiday Inn when we’ve got the funkilyrefurbished Austin Motel right downtown, boasting this reassuring slogan on its marquee: ‘No additives, No preservatives, Corporate-free since 1938.’”

Richard Florida’s arguments about the importance of a “creative class” for economic success, mentioned in chapter 1, also tend to support LOIS businesses. Florida argues that among the key inducements for a creative class to move to and stay in a community are its civic culture, its intellectual bent, its diversity, and its sense of self—all attributes clearly enhanced in a LOIS economy. A LOIS economy seeks to celebrate its own culture, not import mass culture through boring chain restaurants and Cineplexes. A LOIS economy seeks to have more residents engaged as entrepreneurs, and fewer as worker bees for a Honda plant. Myriad ideas and elements of a culture can best emerge through myriad homegrown enterprises.

What about a community’s social well-being and political culture? In 1946 two noted social scientists, C. Wright Mills and Melville Ulmer, explored this question by comparing communities dominated by one or two large manufacturers versus those with many small businesses. They found that small business communities “provided for their residents a considerably more balanced economic life than did big business cities” and that “the general level of civic welfare was appreciably higher.” A congressional committee published the study, and in the foreword, Senator James E. Murray wrote:

It appears that in the small-business cities is found the most favorable environment for the development and growth of civic spirit. A more balanced economic life and greater industrial stability is provided in the small-business cities. There the employment is more diversified, the home-owning middle class is larger, and self-employment greater. Public health is greater… the study reveals that a baby has a considerably greater chance to survive in his first year in the small-business city than in the one dominated by a few large firms.

Thomas Lyson, a professor of rural sociology at Cornell University, updated this study by looking at 226 manufacturing-dependent counties in the United States. He concluded that these communities are “vulnerable to greater inequality, lower levels of welfare, and increased rates of social disruption than localities where the economy is more diversified.”

We know that the longer residents live in a community, the more likely they are to vote, and that economically diverse communities have higher participation rates in local politics. Moreover, Harvard political scientist Robert Putnam has identified the long-term relationships in stable communities as facilitating the kinds of civic institutions—schools, churches, charities, fraternal leagues, business clubs—that are essential for economic success. As one group of scholars recently concluded after reviewing the social science literature: “[T]he degree to which the economic underpinnings of local communities can be stabilized—or not—will be inextricably linked with the quality of American democracy in the coming century.” A LOIS economy with many long-term homegrown businesses is more likely to contribute to such stability than the boom-and-bust economy created by place-hopping corporations.

But perhaps the most important benefit of spreading LOIS businesses is that it allows a community to rehumanize the economic relationships among its residents and reassert control over its destiny.

The Challenges of Social Responsibility

Just as LOIS is a necessary but insufficient condition for building a prosperous community economy, LOIS is also a necessary but insufficient condition for making businesses socially responsible. To understand why, it’s helpful to look at the three-stage evolution of the concept of socially responsible business.

The first phase was characterized primarily by Fortune 500 companies trying to improve their social performance, often in small ways with large public relations budgets. Perhaps the classic example is Share Our Strength, a campaign to end hunger whose sponsor, American Express, spent more on promoting its good deeds than on the deeds themselves. Many executives in these companies continue to share “best practices” in environmental and labor performance through Business for Social Responsibility (BSR), which got started in 1992. And, yes, it’s undeniably laudable when huge chain stores like Costco pay higher wages, or when the SUV-addicted Ford Motor Company announces its commitment to higher-mileage vehicles, or even when Wal-Mart teams up with noted green designer Bill McDonough to improve the energy efficiency of its stores.

A second phase was led by small- and medium-sized firms whose proprietors were more eager to align themselves and their companies with social causes, and whose CEOs collaborate through organizations like the Social Ventures Network (SVN). It’s hard not to applaud the Body Shops, the Ben & Jerry’s, and the Benettons of the world, each of which manufactures decent products, comports (however imperfectly) with reasonably responsible labor and environmental standards, and piggybacks snippets of consumer education in its advertising.

No one should confuse these small steps, however, with the promise of the Small-Mart Revolution. Kinder, gentler, friendlier, and greener TINA businesses can only go so far in reforming themselves before the brutal logic of globalization precipitates a move abroad that undoes all of this progress. How much credit do you get if you give your workers better wages and health care benefits this year, and then shut down the plant next? Or if you reduce your energy use, like WalMart, while encouraging millions of purchasers to skip nearby downtown stores and drive literally billions of additional miles per year to the Supercenters?

At the end of the day, any business that sacrifices its bottom line in the name of responsibility leaves itself vulnerable to a hostile acquisition by another TINA firm that has got the mettle to make such “hard choices.” That’s what happened to Ben & Jerry’s, which was gobbled up by Unilever. Alternatively, the heads of socially responsible TINA businesses sooner or later want to cash out and move on, and it becomes very hard to say no to lucrative offers by mainstream TINA companies, which is what happened when PepsiCo bought out Odwalla Juices and Groupe DANONE (makers of Dannon yogurt) acquired Stonyfield Yogurt. (How such owners can exit without sacrificing the local character of their company is discussed in chapter 5.) A commitment to social responsibility is just one more inefficiency the new TINA managers will try to wring out of these companies.

These dynamics underscore why social responsibility must include local ownership. And why it’s so disheartening to see a proliferation of nonprofits, books, green directories, conferences, and declarations proclaiming social responsibility without ever a mention of the issues of ownership or control. In early 2003 California State Senator Alarcon introduced a bill in the California state legislature (SB 974) that would have awarded 5 to 10 percent bidding preferences on state and local government contracts whenever a business achieved ten of thirteen criteria for social responsibility. It duly recognized corporations paying living wages, providing health insurance and retirement plans, promoting recycling, implementing job retention, and respecting consumer safety. But what about ownership? Except for a vague criterion encouraging “worker involvement or worker ownership,” there was no mention of local ownership whatsoever. Yet it also needs to be said that the criteria of the Alarcon bill are important and that they do not automatically flow from local ownership. No company structure, on its own, can guarantee that managers always do the right thing. Corporate responsibility requires LOIS but also two kinds of supplements.

First, a prosperous community requires healthy local governance so that reasonably high labor and environmental standards are set for all business. The “High Road” in economic development, as Dan Swinney, a sharp Chicago-based organizer, calls it, inevitably demands that public bodies set speed limits, rights of way, and traffic signals for commerce. For example, enacting a living wage ordinance as did the city of Santa Fe, New Mexico, raised labor standards significantly. An economy made up mostly of LOIS businesses may make it politically possible to enact a living wage, though it does not follow that LOIS businesses automatically will embrace it (many didn’t in Santa Fe). They will, however, adapt to it over time, because moving is not an option and shutting down is not in their interest.

A second mechanism is to nurture more enlightened shareholders. Some owners of LOIS businesses—family members, partners, friends, colleagues, and other investors—can be just as brutal in demanding that managers pay attention to the short-term bottom line as the faceless stockholders of publicly traded companies. A healthy LOIS economy ultimately requires activist shareholders who are capable of balancing the interests of the company with those of the community so that when a living wage ordinance is passed, they don’t react by shutting down. Because the shareholders live in the community and presumably know, appreciate, and even honor many of their neighbors, they are more likely than absentee owners to make more communityfriendly choices—but they won’t do so automatically. Public education and peer pressure must remind shareholders that their responsibility is to discharge their duties to both the company and the community in a balanced way.

The private and public spheres of a community are intimately related, and the tone and activities of one influence the other. An economy comprising mostly LOIS enterprises can weave together peer relationships among businesses, and between businesses and others, that facilitate communication, discourse, reason, even empathy, all of which are necessary for good governance and high stakeholder awareness.

Many economists concede that, in theory, a community rich with LOIS businesses will prosper. Yes, a community made up of locally owned businesses will enjoy more engines of wealth, over many more years, with less worry about catastrophic departures, and with greater multipliers for every dollar of business. And a self-reliant community will be more secure, better able to tap a deeper pool of labor skills, benefit from a wider range of connections to the global economy, and celebrate that its economic development programs, now shorn of outrageous incentives and extravagant junkets, are cheaper and more cost effective. But, insist these dismal social scientists, we are in an era where bigger is better. The most competitive goods and services can only come from larger TINA firms, and the consumer advantages they confer outweigh any potential community advantages from LOIS firms.

Were this dilemma real, if we had to choose between competitive goods and services from community-destroying TINA firms and uncompetitive goods and services from community-friendly LOIS firms, picking the right future would be agonizingly difficult. Fortunately, LOIS firms are far more competitive than almost anyone realizes.