Excerpts from an interesting piece by Charles Marohn of Strong Towns; what Charles leaves out is that the erosion of community is a built-in feature of the limited liability corporation (which feeds growth of central governments to address the socialization of risk flowing from removing owners from accountability): DUNKIN OUR FUTURE JANUARY 20, 2014 Not all economic development is created equal. Not all local investments build wealth in our community. Not all open markets produce optimal outcomes for all places. If we want our places to prosper over time, we have to be prepared to ask a tougher set of questions at the local level. ... Now truly, when going through a list of potential small business startups, the kind of thing that someone without an MBA but just a lot of drive and desire could undertake, is not doughnut shop at the top of that list? Along with bakery, pizza joint and coffee shop, in my mind I imagine these as being the familiar Stage 1 businesses that pop up out of nowhere whenever that magical critical mass is obtained. (For more on Stage 1, Stage 2 and Stage 3 businesses, listen to my interview with Economic Gardening guru, Chris Gibbons.) But if you are going to start a Dunkin Donuts, you need a cool half mil in net worth, at least half of which is liquid, meaning cash or something that can be quickly converted into cash. That doesn’t sound very small business friendly. For households where the highest wage earner is under 35 years old, the ideal age for someone who is not necessarily college material but nonetheless has the work ethic and the entrepreneurial spirit to step up and start a business, the median net worth (excluding home equity) in 2009 was $2,003. Let me say that again. Take over half the families where the primary breadwinner is 35 years old or less, add up their investments and savings and then subtract their debts, and they have less than $2k. In other words, they are only $498,000 short of being able to start a Dunkin Donuts. Note that for people 65 and older, that number jumps to slightly over $25,000, which should scare the hell out of everyone. What this means is pretty clear: Dunkin Donuts – and national franchises like them – are not looking for entrepreneurs. They are looking for investors. They want people who already have money, who have already amassed wealth. They are looking for those people because they want someone locally to assume the bulk of the risk, whose interests will be aligned with the corporation and shareholders sufficiently to ensure that the right management is retained and the store is run efficiently. That’s a very different person, and a very different impact on the city, than the doughnut shop started by your local go-getter with vision and a dream. That person will be sought after by the local investor. They will ideally become the manager of the Dunkin Donuts, with pay and benefits that are modestly above the other employees. They will not amass wealth or see appreciable returns over time for their efforts. Those will go to the investor. ... How could this not be all good? There are many reasons, but I’ll give you two of the most important ones for me. First, the relationship that Dunkin Donuts – and any national chain, whether selling tacos or auto parts or massages – has with your community is the same relationship that England had with its American colonies back in the 1700’s. The colonies provided raw materials. English merchants, manufacturers and transporters would take these materials, process them and provide them back – with all the value added – to the colonies. The government would take a nice bit off the top for the trouble and, just like that, you have a mercantilist economy, one designed to have a positive balance of trade for the English. This is kind of an abstract concept in a national economy. Dunkin Donuts is headquartered in Massachusetts. When the wealth of Minnesotans is spent on those butternut doughnuts and a percentage of that leaves the state and heads to Massachusetts, we don’t exactly think of that the same way we do a balance of trade with say…China. There is a flow of good back and forth across states and it all shows up in GDP statistics, so it’s all good. But when we look at it from a very hyper local level, when we take the point of view of the community, what we see is a transfer of local wealth to those outside of the community. Dunkin Donuts is looking out across the landscape and seeing a market they can serve. That’s capitalism. When they serve that market, they will exchange a good that is desired (butternut donuts) for capital that has been accumulated locally. That’s also capitalism. But capitalism also involves the entrepreneur that wants to start a donut shop locally. Although with this capitalism, the transaction is very different. You still have the exchange of the desired good for capital, but the capital stays within the local market, at least for that transaction. While I’m not going to debate the merits of capitalism – I agree it is the worst system, except for all the others – I think we have to acknowledge that a local capitalism has a much different impact on the overall wealth of a community than a national, mercantilist capitalism. This brings me to the second point: the entrepreneur. I want to remind you who this person is because we almost all know them. They are the hard-working, honest person who wasn’t cut out for college. Maybe they had a kid too young and actually took responsibility for that. Maybe they went astray before they straightened their life out. Maybe they are just a good, decent person but not one who is going to excel at reading or mathematics. In the localized version of capitalism, this person starts the doughnut shop. Over decades they slowly and incrementally build their business, creating a modest amount of wealth for themselves and their family in the process. In the national corporate franchise version of capitalism, this person becomes the night manager. They work for someone else. They may have some corporate profit sharing, but it is disconnected from their day-to-day work. They may have a 401(k) plan, but they’re not going to get wealthy from it. Here’s what breaks my heart: I’ve seen that night manager. I’ve seen the look in their eyes. And I’ve seen that entrepreneur, felt the look in their eyes. One is borderline resignation, an acceptance of fate. The other contains endless optimism. I want an America full of endless optimists. ... Let me just make one last point, and it is going to really bother all of you that hate it when I talk about macroeconomics (you can stick your trickle down, overly convenient, aggregate demand theories you know where). When we have zero interest rates, when we are printing billions of dollars each month and funneling it to Wall Street banks, when the cost of borrowing money is really, really cheap, does that help our local entrepreneur or our investor? When you have a liquid net worth of $2,000 but a lot of enthusiasm, are low interest rates going to help you be able to access the $498,000 you need to start a Dunkin Donuts? But when you have a net worth of half a million dollars or more, how easy is it going to be to access that startup capital in a market flooded with liquidity? Now flip that around….when you are the local entrepreneur trying to save some money so you can start your dream, how much would it help you to get a market rate of interest on your savings? Something more than say, 0.85%? When you are that new business owner trying to get into a storefront, how helpful is it going to be to not have the price of that space overinflated by cheap, yet inaccessible, outside capital? When you finally get things going and are trying to amass some savings and some wealth, would it not be nice if someone paid you a fair return for your frugality and prudence? Not all economic development is created equal. Not all local investments build wealth in our community. Not all open markets produce optimal outcomes for all places. If we want our places to prosper over time, we have to be prepared to ask a tougher set of questions at the local level. strongtowns.org/journal-squarespace-test/2014/1/20/dunkin-our-future.html
Posted on: Sat, 24 Jan 2015 06:43:10 +0000