Local Dollars, Local Sense

by Michael Shuman

(Post Carbon Institute, 2012)

Book Review – Part I

There is growing consensus among economists and anti-corporate and sustainability activists about the importance of relocalization as the centerpiece part of genuine economic and political reform. It reflects a widely held belief that any realistic solution to the economic, energy and environmental crises mankind faces will repudiate corporate globalization in favor of bioregional networks that enable people to source the majority of their food, energy and other basic needs within a 100 mile radius of their home. Thousands of cities and towns across the planet are working together in Transition Towns, Via Compesina and similar sustainability networks to op out of corporate agriculture and energy production in favor of local food and energy production schemes. The biggest obstacle they face is finding sustainable funding to support their work.

Michael Shuman’s latest book, Local Dollars, Local Sense is valuable for three different groups of readers: sustainability activists seeking to seeking financial support for small locally owned businesses; local business owners seeking start-up and expansion capital; and investors – both “accredited” and “unaccredited” (see below) – seeking to move their IRA accounts and other Wall Street holdings to safer, more profitable and more socially responsible and environmentally friendly investments.

A Dearth of Funding Options for Local Business

At present options for small businesses seeking start-up funding for organic farms, solar installation companies and similar “green” enterprises are extremely limited. A business owner has two basic choices in financing a new business. They can take out a time-limited loan at interest or they can sell shares, in essence allowing other people to become part owners and share in the profits (or losses). Even prior to the 2008 economic crisis, it was virtually impossible for small business people to find conventional bank loans. Nearly all the neighborhood banks we grew up with have been bought out by global investment banks, which have no incentive to make loans to small local businesses. The recent move by millions of Americans to move their accounts out of global banks to local banks and credit unions – which do lend to local businesses – has been a move in the right direction. Yet as Michael Shuman points out in Local Dollars, Local Sense, this is merely a drop in the bucket compared to the $30 trillion Americans have invested – most through IRAs and pension plans – in Wall Street Fortune 500 companies. Shuman makes a compelling case for moving half – $15 trillion – of that money out of Wall Street and investing it in local businesses. He also outlines a number of intriguing strategies for accomplishing this.

Shuman, member of the Post Carbon Institute, partner at Cutting Edge Capital (a firm specializing in raising capital from non-traditional funding sources) and long time relocalization advocate, presents strong evidence that local businesses provide a higher and more reliable return than the Wall Street casino, as well as providing a host of benefits for society and the environment. At the same time, unlike multinational corporations, they are accountable to the local residents who patronize them, which results in a strong incentive to be environmentally responsible, to treat workers fairly and to contribute positively to the community.

Small Business Makes Up Half of the US Economy

Although small local business makes up 50% of the American GDP, as well as providing 50% of US jobs, less than 1% of Americans’ combined savings and investments help to finance locally owned business. Most Americans still keep their short term savings (if they have any) in large multinational banks. In most cases, their only long term savings are tied up in IRA plans and pension funds. With the exception of municipal bonds, nearly all of this is invested in Fortune 500 multinational corporations – which, as most activists are aware, have no loyalty whatsoever to any community, state or country.

Legal Obstacles to Selling Shares in Local Business

As Shuman outlines in his first chapter, the main reason Americans don’t invest in local business relates to major legal obstacles to doing so. Outdated securities laws passed during the Great Depression make it extremely difficult for “unaccredited” investors – approximately 98% of Americans – to invest even small amounts in small businesses. “Accredited investor” is a term defined by the securities laws of various countries, which delineate which investors are permitted to invest in certain high risk investments, including, but not limited to seed money, limited partnerships, hedge funds, private placements, and “angel” investments. In the US, an accredited investor must have an income of $200,000 (for three years) and a net wealth of at least $1 million (excluding their residence).

A new business seeking funding from “unaccredited” investors is required to register with the SEC and state regulators. This, in turn, requires the creation of a disclosure and other legal documents at a cost of $25,000-150,000 in attorney fees. The U-7 or SCOR (Small Company Offering Registration) form alone is 39 pages, and each form must be accompanied by 14 disclosure documents (see http://www.nasaa.org/industry-resources/corporation-finance/scor-overview/)

While stressing the need to reform these archaic laws, as well as resurrecting regional stock exchanges that helped finance local business prior to the Great Depression, Shuman reports on a number of exciting investment models being tried across the US that conform to existing securities law.

To be continued, with examples of unconventional local funding models.

In my last (Oct 27) blog, I discussed a YouTube presentation by Richard Heinberg, based on his book Powerdown: Options and Actions for a Post Carbon World, about the way the ruling elite is likely to manage the inevitable social upheaval stemming from severe resource scarcity. Option I, which I discussed previously, is a type of feudal fascism involving a strong central government and the forced removal of large numbers of people to prisons and work camps. Heinberg admits that Option I may provoke strong popular opposition, which may make full, long term implementation of Option I impossible (see http://archive.richardheinberg.com/museletter/186).

Option 2 Ecological Keynesianism

As Option 2, Heinberg offers Susan George’s vision of Ecological Keynesianism.  (George is an American expatriate, economist and anti-globalization activist living in Paris since 1956). (see http://tinyurl.com/2fbulrr and http://loyno.edu/twomey/bread-world-and-global-network-justice?c_id=313).

Like Option 1, this scenario also envisions a strong central government, but operates more like the New Deal in creating work programs and rebuilding infrastructure.  Heinberg gives the example of the Tennessee Valley Authority, a vast New Deal social experiment accompanying the damming of the Tennessee River, in which thousands of Americans were moved into new experimental communities. I think the example is a good one, as this model sounds a lot like what Obama’s good buddy Zbigniew Brzezinski is proposing in terms of benevolent government that improves efficiency by foregoing democratic processes.

People often forget the downside of the TVA – namely that thousands of people were forced to participate in this experiment against their will. And that the creation of a large, somewhat brutal security network was necessary to police it – a network run between 1950-58 by former Nazi war criminal Werner von Braun.

Under this Green New Deal, a strong central government would provide the finance capital to build public transport systems, super-insulate millions of homes and commercial buildings; develop distributed renewable energy systems; and reorganize agriculture on biointensive, organic model – creating millions of jobs along the way.

George proposes to finance this massive capitalization by taxing speculative currency exchange transactions and eliminating tax havens in the Caribbean and elsewhere.  She points out that half of all world trade passes through off-shore tax havens – and that their elimination would automatically increase tax revenues by $250 billion dollars.

George states that the only way to bring about a Green New Deal government is to build a very powerful populist movement demanding it – as no western democracy will agree to it voluntarily, so long as they are under the thumb of multinational corporations.

Option 3 Bottoms Up

Option 3, according to Heinberg is a vast expansion of existing grassroots and local government activity to revamp local infrastructure to become more self sufficient in providing for basic food and energy needs. Heinberg believes that some areas of the world will be forced to go for Option 3, as more and more countries become failed states with the deepening economic and resource crisis (maintaining a strong central state requires energy for transportation and communication).

Heinberg’s main argument against adopting Option 3 in large industrialized countries is that in most communities in North America and Europe are ill equipped to provide even the most basic services (food, water, power, security) without the support of complex regional and national systems. A breakdown in these services would likely lead to social unrest, leading whatever central government that remains to implement Option 1.