Posted on November 25, 2008

Many of you were probably dancing in the streets on election night. I was – even though I identify myself as an independent. That the country will finally enjoy a leader who actually cares about ideas, who speaks grammatical English, who believes in science more than ideology, who doesn't see ecological or women's rights as liberal conspiracies, who exudes discipline, confidence, and charisma, who sincerely cares about the have-nots in society, and who won’t always resort to war as the answer to every national security problem is a huge relief.

But beware. Or, more precisely, be wary. Two weeks before the election, a Sunday talk show featured a debate between representatives of each campaign: Senator Evan Bayh (D-Indiana) representing Barack Obama versus Senator John Kyl (R-Arizona) representing John McCain. When the debate turned to which candidate would improve the nation's economic competitiveness, the two senators agreed that the goal was to attract more global corporations and spent the rest of their time quibbling over the best means of doing so. The role of small business was relegated to Joe the Plumber.

Obama's Big Thinking
President-elect Obama has surrounded himself with the visionary captains of global capitalism – those who believe that "kinder, gentler" free trade and free finance, qualified with corporate responsibility, will save our fast-sinking economy. Obama's chief economic advisor during the campaign, Jason Furman, is best known for a paper arguing that Wal-Mart, because it provides cheap goods for all, is one of the most progressive corporations in America. Robert Reich made his career in a series of arguments in early issues of The American Prospect suggesting (against Laura Tyson, another Obama advisor) that ownership of business generally – let alone local ownership – no longer mattered. And as John McCain fairly observed, candidate Obama has surrounded himself with experts who made awful calls over the past decade about relaxing standards for low-income housing loans and deregulating Fannie Mae and Freddie Mac, all of which contributed to the current financial mess.

What's most worrisome is that no one on the Obama A-Team understands that the key to revitalizing the economy and to fixing the financial crisis is nurturing and expanding locally owned business. But at the B- and C-Team levels there is enormous sympathy for the views of us locavores. So what should they be doing?

A New Local Financial System
In my previous blog entry I suggested several policies the Obama Administration could implement to address the financial crisis that would cost little or nothing, including:

• A series of reforms of archaic securities statutes that presently ensure that American’s savings, especially their retirement accounts, wind up almost exclusively in Fortune 500 corporations.
• New exemptions for microbusinesses to issue local stock, for internet entrepreneurs to create virtual stock markets, and for mutual fund managers to begin assembling portfolios with these securities.

Through such reforms, Americans could start rechanneling their savings into locally owned small businesses, simultaneously boosting their local economy and bringing down the risks of a financial failure.

How might this reform process begin? Buried in the mountain of policy papers issued by the Obama campaign is this intriguing proposal: "Barack Obama and Joe Biden will support entrepreneurship and spur job growth by establishing a small business and micro-enterprise initiative for rural America. The program will provide training and technical assistance for rural small business, and provide a 20 percent tax credit on up to $50,000 of investment in small owner-operated businesses. This initiative will put the full support of the nation’s economic policies behind rural entrepreneurship." (See "Barack Obama and Joe Biden’s Plan for Small Business.")

Was this a serious proposal? Will it be a priority? Will the tax credit apply to any investor, or just a sole proprietor investing in his or her own business? Who knows? But frankly, who cares? Politics is not a scripted one-act play; it’s improvisational theater. This proposal opens the door to the Obama agenda. We should kick that door open with some small-mart ideas:

• Support rural and urban entrepreneurs: Let's apply the tax credit to all small and local business, not just rural ones. Are inner-city entrepreneurs any less worthy? Or home-based entrepreneurs who have lost most of their retirement funds?
• Facilitate outsider investments in small business: The tax credit should be available to any investor in a small business, not just its proprietor. Under the current securities rules, this would be open only to the richest two percent of the American public who qualify as "accredited investors." If we want to open the tax credit to all Americans, we will need to create new exemptions in the securities laws that allow for any investor to place a modest investments (<$100) in any microbusiness.

A tax credit is an intriguing starting point for creating a sturdier community investment system. More than a decade ago, the Canadians at both the national and provincial levels introduced tax credits for citizens who placed their savings in labor-sponsored investment funds, or LSIFs. (LSIFs specialize in supporting businesses that are locally owned within the relevant province and friendly to labor and the environment.) More than ten billion dollars have since moved into LSIFs. Equally important, a new generation of investment advisors has added LSIFs to the options they promote with their clients.

Tax credits are no stranger to U.S. policymaking around investment. The state of Maine, for example, gives its residents a 40 percent tax credit in Maine for every dollar invested into a "qualified Maine business." What kind of business qualifies for this credit today? A Maine-based branch factory of a global company using advanced manufacturing technology qualifies. A Maine-based branch of a global bank qualifies. But, stunningly, genuine local businesses don't.

A home run for the Maine economy – and other states following in its footsteps – would be a 20-word amendment that redefines a "qualified Maine business" exclusively as a locally owned entity. Overnight, every investment advisor, pension fund manager, venture and hedge fund owner in the state would be angling to take advantage of the credit – and be pounding on the doors of the state's securities regulators and legislators for the kinds of securities reforms small businesses need.

What could it mean if these reforms, enacted at just the federal level this year, led to a 10 percent shift in investment by the last year of Obama's first term? Here are some calculations using 2007 data from the Federal Reserve: A 10 percent shift in people's direct stock holdings would be half a trillion dollars more for local business. A 10 percent shift in "indirectly held" securities, which includes retirement and insurance funds, would provide local business with more than a trillion additional dollars.

This should have been Obama’s response to McCain's numbing recitations of "Joe the Plumber." Who cares about minor tax increases on successful small businesses if, at the same time, we’re opening up huge new spigots of capital for their establishment and expansion?

Can anyone doubt that an infusion of $1.5 trillion into local businesses would revolutionize our economy? All of the green jobs, the entrepreneurship, the community development programs that Obama – like hundreds of politicians before him – has touted would finally have a chance of coming to fruition. Put another way, it seems unlikely that Obama will ever come close to achieving his goals, or fixing the financial crisis, without an investment shift at this scale.

Now is the moment for small business advocates to think big.

By Michael H. Shuman