28 Apr 2014
Michael Shuman: "I would say that we are winning"
We last spoke to Michael Shuman just over three years ago. He is author of several books on local economic development, the most recent being Local Dollars, Local Sense. He is an attorney, an economist, and his current job title is Director of Community Portals for Mission Markets. Not every day you meet one of those. As someone who knows more about economic localisation than most, I was keen to pick Michael’s brains on the impact he sees it as having, and how Transition initiatives pushing in that direction might be able to measure the impact they are having.
Our theme this month is about the impact that Transition has had. From where you sit, what’s your sense of the impact that Transition has had as a movement, as an approach?
There’s two ways that I would look at that. One way is Transition as an idea and the other way is Transition as an organisation. I think Transition as an idea has been tremendously effective. In the United States it has many different names. Some of it comes from the Post-Carbon Institute, some of it just comes from the environmental community, some of it comes from BALLE and other organisations. But the idea that the global economy has become unreliable and that we need to rebuild our community economies from the ground up has taken hold everywhere.
I don’t travel to a lot of places around the world, but maybe to a dozen countries, and every single one of those countries that I have gone to including developing countries like Brazil, there is evidence of this Transition underway. A couple of years ago I did a study for the Gates Foundation called Community Food Enterprises where we looked at 24 examples of great local food businesses. Half of them were outside the United States. In every one of these countries that we looked at there was an interesting profound localisation movement taking place.
The second part of the question is Transition as an organisation. To what extent are people using Transition materials as opposed to other things? My sense is that Transition is very strong in Canada and Australia and through much of Europe. I don’t see Transition having quite as much visibility in most of the United States yet, or having as much visibility in places like Japan or a lot of developing countries. But I think that’s changing and I appreciate there’s only so many hours in the day and you guys are working as hard as you can to get the message out.
A lot of your work, and increasingly a lot of what we do at Transition Network, is about trying to model and communicate and show in practice how localisation is a form of economic development, and is as valid, if not more valid, than the current approach. Where are we at, do you think, in that pursuit of being able to model and argue and present the case that localisation and more resilient local economies are a form of economic development?
I mostly follow evidence inside the United States and from that I would say that we are winning. There’s just been study after study that’s come out showing that localisation is good for job growth and good for per capita income growth, good for reducing poverty and good for environmental restoration, good for resilience. It is much easier, I think, to identify the small number of holes that remain in the localisation argument than to talk about all the good things that are happening.
I’ll give you an example. There was a nice study that came out from the Federal Reserve of Atlanta last August that looked at hundreds of counties across the United States. It performed a very empirically rigorous analysis and found that those counties with the highest density of local and small business were those that actually had the highest level of per capita income growth and were doing the best job of reducing poverty. Which is quite an extraordinary finding.
It’s extraordinary because there’s also a whole bunch of data that says that the wages paid by smaller businesses are lower, a little bit lower than those of larger businesses. The question of causality, the question of how these two facts ought to be related to one another is an interesting one.
Among the things that I think about are that at the end of the day, even with somewhat lower wages, local businesses spending more money locally are generating higher economic multipliers that generate more healthy public sectors that come back to people in other ways. That’s one way of thinking about it.
Another way of thinking about it is that the wage gap may in fact be narrowing. There is some evidence of this although I would like to look at the data again. The last time I looked at this data was maybe 5 or 6 years ago. Generally speaking, larger businesses paid more specifically because unionised manufacturing plants had significantly higher wages for the average worker. Most of these plants have moved overseas.
Instead, what has taken their place in a lot of US cities is Walmarts and large-scale retail which pays very, very low wages. That’s contributing to the shrinkage of the gap. But probably the most important thing, and this is where I think the research that we do is going to be very important, is that we’ve got to start a segment about where wages are better or worse. One of the things that we will soon find is that businesses that take on a set of socially responsible standards, that are mindful about environment, and mindful about labour actually do wind up paying better wages than the typical small business.
In my mind what that means is that localisation, part of the reasonable localisation agenda must be to educate smaller, newer businesses about the importance of embracing these higher labour and environmental standards in their day to day operations.
Where do you stand on the debates about what’s possible in terms of the political change that can be leveraged from the local scale? Some people say climate change, peak oil, these are huge global issues and they can only be solved through concerted international effort and that anything you do at the local scale is irrelevant and not making any kind of a difference. What meaningful change can local communities leverage, do you think?
I think local communities can have a huge impact and I say this not to disparage or discount the importance of other approaches that are national or global. But I think there is a very strong case to be made for local action on global problems. For the first 10 years or so of my professional life after I graduated from law school, I ran an organisation called the Centre for Innovative Diplomacy. We had several thousand mayors and council members, primarily in the United States, that we were educating about the impacts of so-called municipal foreign policy and how and why it ought to be done.
One of the first things that we did was we held a conference called SPA, the Stratosphere Protection Accord. I believe it was in 1996 but we brought together about 2 dozen American and Canadian cities that basically have the chutzpah to put together a treaty on ozone depletion issues. The treaty outlined certain goals that the mayors involved in this treaty would implement in their own communities with respect to the emission of halons and chloro-fluorocarbons (CFCs). That treaty, I believe, was a rough draft of the Montreal Protocol because that treaty led to a lot of other cities beginning to take initiatives on CFCs. It translated into profound political impact in the United States because there was a debate early on about federal standards with respect to CFCs and some of the national environmental community was prepared to basically sell out local initiatives by having federal standards that were, in the locals’ view, weak, pre-empt, that is override, the local standards.
There was a huge political fight and because of the clout of the mayors, that compromise failed. Instead, states and localities were allowed to take on tougher standards and then Montreal ultimately took place under the Bush 1 administration and I think it has been, while not a perfect accord, a pretty good accord on that issue.
In my mind, without local action, this never would have happened. I feel like we’re seeing a lot of local action now on carbon reduction. In some ways it’s a tougher issue than the ozone depletion issue because at least as I understand from pollsters and sociologists, that carbon is invisible and viewed as a benign gas makes it less fearsome than, say, CFCs which are very much chemical and not part of the day to day environment. So that’s one of the additional things that we’re up against. Plus the organised opposition of climate deniers is so much deeper, better funded, more entrenched than with the CFC manufacturers, so that’s another thing we’re up against.
But that said, I think every city ought to try to pursue this agenda as far and as deep as possible, share its successes with other communities and this is the way I think national change will finally take place.
If you’re a group such as a Transition group who are actively working to build resilience, localise the economy, what would you argue would be the best ways to measure the impact you’re having? What indicators would you be looking at?’
There’s a bunch of ways of thinking about the problem. Let’s start at the very top and most general level. In my view, there are three basic criteria for a successful localised economy:
- To maximise the percentage of jobs in locally-owned business
- To maximise local self-reliance
- To maximise the deployment and spread of high labour and environmental standards
There are tools that one can use on each of these criteria. So for the percentage of jobs in locally-owned business, I don’t know what the databases look like in the UK, but in the United States really down to the zip-code level we can get a pretty good picture of the number of jobs in different sizes of business in different sectors of the economy. We have 1100 sectors that we measure, so a very high level of detail and then we look at how many of those jobs are in self-employed businesses, how many of one to five persons and all the way up to very big businesses.
And so because we know that something like 99.9% of all businesses with fewer than 500 employees are locally owned, it’s easy to make a good determination of local ownership. It’s not going to be perfect, but it’s pretty good. What one can then see is year by year, the percentage of jobs in locally owned businesses has expanded.
On the second criterion, on self-reliance, this is where leakage analysis is very important. In the United States for BALLE, the Business Alliance for Local Living Economies, I developed a set of calculators that you basically plug in a county or zip code and you can instantly see what your level of self-reliance is in every one of 1100 sectors. I worked for BALLE a couple of years ago. When I left BALLE, they did not upkeep the tool and so we’re now trying to basically transfer the tool back to me and then I will upgrade them and try to make it available again.
One can clearly do these kinds of leakage calculations in a very expensive way using input-output computer programmes. Again in the United States, in order to use them and do a calculation for a community probably is going to cost anything from 1-10 thousand dollars. The whole idea behind the BALLE calculators is we’ll give you slightly less accurate estimates about how your sectors are performing in terms of self-reliance but it’ll cost you $20 instead of $1000.
That still is an objective of mine and we can talk more specifically about the methodology of doing that. But I think broadly speaking it can be done, it should be done and when you start looking at those numbers year by year, you start to see these are the sectors we’re becoming more self-reliant in, these are the sectors we’re losing self-reliance in and you can start measuring what your progress is. Obviously the goal here is to increase your level of self-reliance in as many sectors as possible but particularly those sectors, I would argue that are closest to basic human needs like housing, energy, food and health.
The last criterion about social responsibility – you know there’s a bunch of tools that are out there to measure companies triple bottom-line performance. Among them the B corporation measurement gears. I’ve seen an article recently that said they’ve counted something like 500 of these tools out there which means that it’s a very tricky enterprise to know which tool to use and which is going to give you the best information for your community.
I have a very simple standard, which is how many of your businesses are using any tool whatsoever to get feedback on their triple bottom line performance? Just measuring that in the community and seeing if one can press that one indicator higher will give you a fairly good sense of where you’re making progress on this third criterion. As I said, that’s the highest level. Underneath there one can then start to look at specific sectors: energy, food, health again, and look at specific indicators of progress or lack of progress around localisation.
The one thing that I would just say for focus on the Transition movement is that the most serious mistake that people make on indicators is they raise a bundle of money to do a terrific indicators report in year one and they are never able to do it again, to raise that amount of money again in years two, three etc. It’s really important, I think, in the short run, to use readily available data already compiled by the government or other private entities that’s not expensive and develop indicators around that.
Might an additional one to that be something around inward investment and the degree to which the community is mobilising and able to bring investment into these projects?
Yes, and in fact with the BALLE calculators we actually have three types of calculators. The first is the one that I described to you which is overall leakage, but it’s mostly about leakage of consumption dollars. Because US databases for weird historic reasons don’t measure farming and some of the food sector in the rest of the economy, we have a second food calculator using those specific data. And then our third calculator is around capital.
Now, again speaking for the United States, we have very good data on local banking and also the performance of non-local banks in re-investing in community, and this is because of a law that we passed in the 1960s called the Community Re-investment Act. Unfortunately banking…if you add together all forms of banking in the United States it’s about 8 trillion dollars. But if you add together all forms of long-term investment that people have in stocks, funds, pension funds, mutual funds and insurance funds that’s 30 trillion dollars. So that’s more than three times larger than what the banking capital is. And we have no data whatsoever, national, local, regional on how that money flows.
Just through logical deduction, one can see how almost none of that money has any local contact whatsoever. That is, when you put money in stocks and the stocks are all traded on a global stock exchange, all that money is non-local. This would be an area at least again for the United States that I would like to see at least States, if not the Federal government, try to compile more data, household by household so we can get a better handle on the movement of capital.
What we’re seeing, and you capture it beautifully in your most recent book, is new models emerging around local currencies, around local investment, new community energy company models and new food models. What kind of meaningful support would make a difference to these really being able to flower, do you think? At the moment they really just have to get going under their own steam and raise money wherever they can philanthropically. What would meaningful support in terms of finance, in terms of peer to peer, in terms of skills and so on that would really mean that this could gain some traction, do you think?
The theory that I think many of us have been working on in the United States is that if we can change the law that currently makes it difficult and expensive for the 99% of investors who are so-called unaccredited, that is not wealthy, if we make it easier for that 99% to put any money into local business, we will set in motion a whole bunch of changes in behaviour and institutions that will begin to shift money away from bigger business to smaller business.
Just so that folks have a sense of the scale of this, again, the number of our long-term investment is 30 trillion dollars. I would estimate that more than half of our economy is in locally-owned business. That means there is a fundamental misallocation of capital. Every single American is investing in Fortune 500 publicly traded companies and under-investing, that is not investing at all in local small business. If we can fix the laws that have led to this misallocation, I think something like 15 trillion dollars will move, not immediately but over time, from Wall Street to Main Street. That movement will have profound impacts in two ways. One way is because you’re putting a lot of new capital into promising resilient businesses at the community level, but the other way is that you are pulling money out of all these businesses that are doing lots of environmental harm in the world.
What people have not appreciated is that poor or outdated structure of securities laws is responsible for the single biggest subsidy that goes into unsustainable business. By reforming these laws we are beginning to dismantle that subsidy to large-scale, global unsustainable business.
Changing the law is not enough for individual behaviour. That’s why in Local Dollars, Local Sense and other things that I’ve written, I try to point out a whole bunch of very specific tools that people can use to begin to localise their money. But the problem is really twofold right now. One problem is that it takes a lot of work and energy to be a successful local investor and people just don’t have the time and the ability to do that. We haven’t made it easy enough for people yet.
The second problem is that in the big scheme of things, creating a local investment revolution really requires four different kinds of changes. To just run through them briefly, first you have to make it easier and cheaper for the average person to put money into a local business. So that means you have to make it easier and cheaper for that business to issue stock or debt notes or other forms of security.
The second thing you have to do is you have to make it easier and cheaper for people, once they buy these securities to sell them again so that they have some value. Everyone needs to cash out at some point.
The third thing we need to do is to make it easier and cheaper for to put these securities in a pool so they can create diversified portfolios of local business, because otherwise the types of investments people have are too risky.
And then the fourth thing to do is to make it possible and easy forthose who run large-scale investment institutions on behalf of big numbers of people; pension fund managers, people who run foundations, people who run university endowments, people who run big church chunks of money, you have to change the rules to make it possible for them to put money into these local businesses.
The thing about the way the law works in this area is that these things follow sequentially, which is to say as an institutional manager you cannot justify putting money into a local fund, i.e. a fund of local securities, unless it actually has a performance record of several years to show that it is doing pretty well and has a good rate of return. You cannot run a local fund unless you have the ability to buy and sell securities on a local exchange. And you cannot run a local exchange until you have a critical mass of local securities.
In the Unites States, and my sense is that this is also true in the UK, we are really at step one. We are at stage one now of making it easier and cheaper for people to buy securities. We still have a lot of work to do on that, but we have to then sequentially go through these other steps and it’s going to take a while to do that in terms of both legal and institution building. We’re talking about a process here that’s going to take at least 5 to 10 years to fundamentally reshape the investment environment.
When I last spoke to you, I asked you something like “what advice would you give people involved in Transition who would like to be as effective as possible in their local economy?” and your advice was “go to business school”. As somebody pointed out in the comments afterwards, if you went to business school nowadays the chances are what you would be learning is neo-liberal growth-based economics. If you were to design the Michael Shuman business school one-year diploma, what would that course cover? What do you think are the things that people would need to learn from an enlightened business school?
Well it’s not hypothetical, in the sense that I’ve been working with some wonderful people at Simon Frazer University in Vancouver to design and test out different modules for this programme. Some of what needs to be taught is sustainable micro and macro economics from a sustainability perspective. Some of it is looking at the topics of growing business but from a perspective of either triple bottom line for-profit business or triple bottom line social enterprise, which is usually non-profit.
But you could go through the process of how do you do financial statements, how do you do cash flow, how do you think about raising capital, how do you manage a workforce successfully, how do you do marketing. So all these things are important topics but it’s important to teach case studies of successful social enterprise or triple bottom line for profits, particularly small-scale triple bottom line for profits so that people can carry those lessons into their work.
I also think that economic development which is a topic that’s a little bit different than how to run your own business, but what can a community or what can a government do as a way of nurturing business. I think that also can and should be taught in a fundamentally different way. The new book that I am working on right now is called Reinventing Economic Development and one of the messages that I try to convey is that even as we are undertaking programmes in Transition towns around our style of economic development, it’s important to figure out models that pay for themselves.
For example, one can conceive of lots of ways of doing a ‘buy local’ programme. One way of doing it is campaigns, signs on billboards and buses and putting all kinds of messages out there to the general public. Unfortunately that costs money, and that money usually has to be fronted by government or foundation grants.
What I think is a better approach is you might undertake say a local loyalty card or a local debit card, and those cards have a business structure underlying them, so you’re really accomplishing the same thing, only you figure out a way to self-finance. I would include in that promoting entrepreneurship, raising local capital, developing partnerships among local businesses so they’re more competitive. These activities can be reframed in revenue-generating ways that allow them to be self-financing and grow, and also in a way to insulate themselves from the inevitable changes of government.
What we see in the United States is that economic development programmes yo-yo as various governments come in and out and it’s just a very unstable environment for doing anything. So getting a bunch of more modest small-scale, self-financing programmes supporting local business is a much better way of doing economic development. That’s part of what I’d want to teach as well.
Lastly, what’s your sense of what a tipping point looks like? You said at the beginning that your sense is that as an argument localisation is winning. When you’re in the middle of something, it’s really hard to know whether things are moving or whether they’re not moving. The thing with tipping points really is you can only see them with hindsight I guess?
There’s probably a bunch of them. The one that I think about the most goes back to this shift of money from global companies, of investment capital from global companies to local companies. Because the level of misallocation of capital is so profound and frankly complete right now, I think that once people begin to figure out how to shift money into local business, that could proceed very, very quickly.
In the United States, as I’ve argued, there will probably be a 15 trillion dollar shift over time, from Wall Street to Main Street. The first trillion dollar move hasn’t happened, won’t happen for a while. But when the first trillion dollars moves, people are going to notice, and one of the ways people are going to notice is that when there’s less capital chasing global companies, the value of those companies is going to go down. As more capital chases local businesses, the value of those companies is going to go up.
As that happens, people will take notice. People who are sitting on the fence, saying they still don’t see the evidence that local businesses are that successful or profitable. But when people start seeing those data, I think others will start to move their money. And so the next trillion moves, and another and another until all 15 moves. That inflection point will be an extremely important movement.
Hard to know when it happens, but capital moves very quickly, as countries like Argentina have realised to their peril. I think capital exiting out of Wall Street could happen very quickly and when you start to see articles about people fleeing the mainstream markets, of course many of those articles will be put in terms of panic, that’s when we’ll know that what we are doing has really taken hold.