Plugging the Leaks in Your Local Economy
Walker is a writer in Boston with a longstanding interest
in the economy of cities.
how important is my business to this community? That's a
question a lot of business owners ask.
Jim Parsons, the longtime owner of Parsons Pine Products
in Ashland, Oregon. Sometime around 1980 he decided that,
just once, he would pay all of his 100 or so employees-then
the largest industrial workforce in the community -in two-dollar
bills. "We had the bank bring in a batch of them," he explains.
"A year later some were still circulating."
two-dollar bills are so little used, Parsons could be reasonably
sure that any he saw in Ashland had originally come from
his payroll. It wasn't exactly a scientific experiment,
but it reminded people how important his company was to
the community. And it showed how money turns over-how one
purchase leads to another purchase and then another-perhaps
four or five times, for a place like Ashland, before the
bill physically leaves the community. In the Ashlands of
the country, the phenomenon of the local "multiplier," as
the turnover effect is known, is interesting; in less affluent
places, it can be critical.
LaMore, state director of the community and economic development
program at Michigan State University (MSU), puts it, "Part
of the problem of being poor in a poor community is not
just that you don't have much money, but that the money
leaves quickly." Getting money to stay, by making it possible
to spend it locally, is essential to prosperity.
LaMore refers to this as "plugging the leaks" of a local
economy. If you don't plug the leaks, he says, "You pour
money in and nothing changes." Well intentioned efforts
to put money into the hands of poor consumers often don't
help alleviate poverty.
just how much money circulates within a community, Dr. LaMore
and his colleagues have developed a survey tool called the
Community Income and Expenditures Model (CIEM).
Community Income and Expenditures Model
The Community Income and Expenditures Model (CIEM)
is a tool designed by Dr. Rex L. LaMore of Michigan
State University for local community organizations,
such as chambers of commerce or economic development
corporations. It helps track the flow of money in
and out of a given jurisdiction by surveying local
businesses about their payrolls and customer bases,
and surveying local consumers about their income streams
and spending patterns.
CIEM seeks to answer the following questions:
The CIEM is available online at
. Online documents
include timelines and step-by-step guidance for implementation.
For a discussion of a possible role for public universities
in local economic development, see:
much income is received by individuals and organizations
in the community?
much of this income originates from within the
much money is spent by individuals and organizations
in the community?
much of that money is spent within the community?
be used within a small town, a neighborhood, or even a ZIP
code to track money flowing in and out. The MSU group's first
survey found that the low-income neighborhood of North Lansing,
Michigan (population 16,999) was spending $22 million a year
on groceries, 84 percent of which left the neighborhood.
identifies housing, food, and transportation as the big
three of "leaky" communities. Rent checks often go to an
outside landlord. If there is no supermarket, residents
have to buy groceries elsewhere. And if there are no local
gas stations, car dealers, or taxi companies, or if local
residents are underrepresented on the payrolls of the city
bus system, transportation dollars leak out of the neighborhood.
problem, LaMore says, is that so many people make purchase
decisions primarily on price. "The price of the product
isn't the only thing you have to look at. You should also
ask, 'Where does that dollar go after the first purchase
and the second purchase?'"
theory has misled us to believe that the secondary purchases
don't have value," says LaMore. But they do. If, for instance,
"He decided that, just once, he would pay all of his 100
or so employees in two-dollar bills." rent checks go to
local landlords, those landlords will buy groceries or have
their dry cleaning done locally, if they can.
six communities have gone through the CIEM exercise over
the past decade. Ideally, a CIEM study helps a community
identify economic demand for a good or service not being
met locally-like the $22 million worth of groceries that
North Lansing residents bought. Once a leak is identified,
a community can take steps to plug it. That may mean a campaign
to support local merchants, lobbying a business to hire
local residents, organizing a housing cooperative to keep
local housing dollars local, or perhaps helping to finance
a new business in the neighborhood.
cautions that identifiable economic demand for a good or
service does not automatically translate into a business
opportunity. For one thing, there may be a particular reason
people go outside the neighborhood for that service. For
another thing, a new enterprise needs an entrepreneur, and
no package of tax breaks, zoning adjustments, or favorable
financing can make up for lack of "fire in the belly" of
someone willing to take the risk of establishing a new business.
best part of the model is that when people recognize what's
happening to the flow of money in and out of their community,
they behave differently," says LaMore.
not always. The Hillman school district in rural northeastern
Michigan went through a CIEM exercise in 1998. The CIEM
determined that local businesses bought about $69 million
per year in wholesale goods, almost 100 percent of that
outside the community. But this finding seems to have sparked
no particular response. "It made some interesting statistics,
but didn't generate all that much interest," says Jan Kellogg,
economic development specialist at the Northeast Michigan
Council of Governments in Gaylord.
done for the city of Lansing, Michigan, however, has led
to a new policy for city procurement: The city still goes
for the low bid on contracts, but a local bidder that comes
within five percent of the low bid is given an opportunity
to match it. If it can, it wins the job. What precipitated
the change? A contract for the purchase of 50 automobiles
for the city; an outside bidder beat a local dealer by just
new policy "hasn't had a significant impact," says David
Wiener, an aide to Lansing mayor Tony Benavides. "It hasn't
been a net that's caught a lot of local businesses. But
it has caught some."
CIEM was originally introduced as an executive order by
the mayor; the city council is now codifying it as a municipal
ordinance. The council is also working on an ordinance intended
to enrich the mix of city contractors with more women, people
from racial minorities, and people with disabilities through
recruitment and technical assistance. Structuring of city
contracts to make them more manageable by smaller firms
is also part of the game plan.
two ordinances in the works are "complementary," says Wiener,
and when both are in place, the "five percent solution"
might produce bigger results, plugging more leaks in Lansing's
economy. "Call me back a year from now," he says, suggesting
that he expects the procurement policy to have had greater
impact by then.
LaMore is confident that the "multiplier" can be a good
measure of community health, though he and his colleagues
are not sure yet what is "an appropriate range for a multiplier"
in a given type of community. He compares it to measuring
a person's blood pressure. "We know it's important, but
we don't know quite what it should be for a person of a
given weight and age."
and his colleagues would like to implement the model in
other communities, both in order to benefit residents and
to give the MSU team a better understanding of the multiplier
and what it really means for a given community. This should
help researchers identify practical steps that communities
could take to plug the leaks in their local economies.
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