Posted on February 16, 2009

I'm afraid I agree with Rush Limbaugh, Sean Hannity, and nearly all the congressional Republicans that the pork in the approved "stimulus bill" is nauseating. It takes the worst ideas in economic development – massive payouts to government white elephant projects and gigantic incentives to attract, retain or otherwise bribe global corporations – and puts them on steroids. I'm not condemning every line in the package, but the careless and thoughtless way this bill was assembled, packaged, and shoved through Congress ought to give small-mart advocates pause about the priorities of the new administration.

I'm not against a stimulus, per se, and here I do part company with many conservatives. I agree with John Maynard Keynes, perhaps the greatest economist of the 20th century, that when private purchasing peters out, the public sector ought to step in, borrow, and spend. It's like a defibrillating shock to a heart that stopped beating – necessary emergency treatment.

But whatever stimulus this legislation induces will be accidental, not intentional. Ultimately, stimulus in any state or community requires a strong economic multiplier. Core to the local economy movement is an understanding that economic development works best when it maximizes the local circulation of spending. One reason we "Think Local First" is that locally owned businesses spend more of their money locally. Nonlocal businesses re-spend money willy-nilly across the planet, not targeted within a community, and therefore have weaker multipliers. And white elephant projects, like highways, are usually characterized by big contracts with nonlocal contractors, plus they are frequently tainted by the inefficiency and corruption.

Let me be clear: There are important and long-neglected priorities in the country that government spending should address. I would like to see, for example, more spending on repairing infrastructure and on energy efficiency. But the stimulus impact of such spending requires local entrepreneurs.

Where Are Local Businesses?
There is nothing in the stimulus package to assure that federal funds will be spent on small, locally owned businesses. The more likely prospect is that "green jobs" initiatives will be led by Monsanto, General Electric, and Bechtel. Indeed, the Chicago Tribune just editorialized that stimulus ought to include the spread of Wal-Mart stores throughout the city.

If the stimulus package is implemented like economic development usually is, the last beneficiaries will be local business. We're about to release the results of a two-year research project, funded by the Kellogg Foundation, on the local business priorities of the top three economic development programs in 15 rural states. In all, we studied 84 program-years. In only eight of those program-years – about ten percent – was a simple majority of funds spent on locally owned business. Ninety percent of the programs spent most of their funds on nonlocal business, in many cases well over ninety percent of the funds.

Economic development today invests in big businesses least likely to stimulate local economies. And it does this, despite the fact that local businesses account for roughly half of local economies, in terms of jobs and output (an even greater percentage of the rural economies that we studied).

More reasonable conservatives, who appreciate that government can sometimes play a positive role in fixing a broken economy, lobbied for the current package to have more tax cuts and less spending. They argued that cuts in personal taxes – like payroll taxes, placed primarily on working Americans – would put more money in the economy more quickly than the megaprojects put forward by the Democrats. Frankly, they have a point.

But the Republican alternative had the same basic flaw the Democratic bill did – there was no assurance that the new spending induced by tax cuts would focus on local businesses. If tax cuts leads to a bonanza of sales for Wal-Mart, for example, the beneficiaries will be the Walton family and a bunch of schlock manufacturers in China. Tax cuts alone don't yield stimulus. Only tax cuts that lead to local spending do.

Eleventh Hour Alternatives
This suggests an interesting counterproposal: In the February 7th Washington Post, Dan Newman proposes sending every taxpayer a $2000 debit card. "The American Gift Card could bear a picture of Lady Liberty, since it may be used for whatever taxpayers wish: smarter clothes, dinners out, a weekend away, a new heater. And as gift cards tend to be used in person, they are of particular interest to local businesses." Newman's idea would be a stimulus home run if the card could be used only in locally owned businesses.

It's too late to move President Obama and the Congress in this direction, so perhaps the best we can do is plead with our state and local authorities to treat the money they receive from the feds more sensibly. Perhaps we can convince them to create local-business debit cards. Or, if they absolutely must underwrite public projects, we can insist on procurement reform that ensures that the money is largely spent on local contractors. These must become our priorities.

The depressing bottom line is that without local stimulus, there will be no stimulus whatsoever.

By Michael H. Shuman