Unemployment is on the rise again and there are many suggestions to “fix” it: Cut government spending, export more, build incubators to create new businesses, create industrial parks, recruit businesses to the area, ease credit for small businesses or cut taxes. But what is really wrong with the local economy and what will fix it? Here is some insight.
First, any local economy can be viewed as a bucket. William Fruth, president of independent economics research firm Polycom, describes the role of government as ensuring that money should pour into the local economic bucket faster than it leaks out.
The New Economics Foundation, a UK nonprofit, says that services and goods sold to people, businesses and organizations outside the local community add money to the bucket, while non-local purchases and payments made to people, businesses and organizations outside the community constitute a leak in the bucket.
There are two ways to keep the bucket full: You can pour the money in faster, or you can keep it in longer by plugging the leaks.
In Florida, our “bucket” overflowed for years due to tourism, construction and capital purchases made by newcomers. As that slowed, the leaks in the bucket began to exceed the additions from outside the community. While locally-owned manufacturing and distribution companies keep dollars in the community, those that are not leak cash out of the community in the form of profits paid to owners and stockholders elsewhere.
The second thing to understand about the local economy is the Local Multiplier Effect. The term refers to how many times dollars are re-circulated within a local economy before leaving through the purchase outside the area. Economist John Maynard Keynes first coined the term in his 1936 book, The General Theory of Employment, Interest and Money.
Imagine a hypothetical influx of money—say, $1 million—entering a local economy. Now imagine these dollars are spent on local goods and services. Each of the local vendors who earned those dollars then re-spends the money on more local goods and services. Envision this cycle happening several times before this money is finally spent on goods or services from outside the region. That $1 million re-circulating eight times would act much like $8 million by increasing revenue and income opportunities for local producers.
Now picture that same money being spent immediately at stores headquartered in other regions. Those transactions would add little to no value to the local economy; $1 million would act just like $1 million instead of several million dollars.
While the multiplier varies from economic sector to sector (for example, it is different for purchases of dental services than for sales of consumer goods), generally the multiplier ranges from three to ten. If more purchases are made locally and more businesses are locally owned, less money will leak from the “bucket.”
So what is the bottom line? What is wrong with our local economy? Our bucket is leaking faster than we can refill it, and the resultant layoffs are due to the negative Local Multiplier Effect. Each drop in payroll dollars is multiplied by the times that money would normally have circulated, and the problem will grow.
What will fix it? From a community perspective, local government should be applying for federal grants to create local employment by building schools and low-income housing, fixing decaying infrastructure and building new infrastructure. The multiplier effect of those new payrolls will help stop the leak in our “bucket.”
Likewise, exporting more, building incubators to create new businesses, creating industrial parks, recruiting specific types of existing businesses to the area, easing credit for small businesses, cutting taxes and many other actions all make sense and as many as possible should be implemented at once.
In the words of Walt Disney, “The way to get started is to quit talking and begin doing.”