A tidal wave of red ink, precipitated by COVID-19 shutdowns, is now drowning towns, cities, and counties across America. Massive cuts in services loom ahead, as do huge tax hikes. Localities face unprecedented challenges in rebooting their economies. Where I live, in Montgomery County, Maryland, the County Executive recently empaneled about twenty businesspeople and economic-development experts, including yours truly, to devise a strategy for moving forward. I’d like to share with you the seven recommendations I’ve made to the County thus far. Most will be relevant to your community as well.
(1) Cancel All Corporate Attraction Efforts
The starting place for rethinking economic development is to understand that the foundation of economic health is a diversity of locally owned businesses. We know from dozens of studies that a dollar spent in a local business generates two-to-four times the jobs, income, wealth, and taxes as a dollar spent in a comparable nonlocal one. Locally owned businesses are also the powerhouses that attract tourists, boost charitable giving, improve civil society, and lighten the carbon footprint. They even have been shown to improve public health, because local food businesses reduce levels of obesity and Type II diabetes.
By definition, corporate attraction focuses exclusively on nonlocal companies–those businesses least likely to do the economy any good. Scholars studying these programs are almost unanimous in pronouncing them collosal wastes of money. Even when these incentives “work,” they usually wind up generating jobs at ten to one hundred times the cost as less flashy local business programs. Yet the frenzied bidding process for Amazon’s HQ2 two years ago underscored that today’s economic developers remain eager to give away money to the world’s wealthiest corporations. While Montgomery County has indulged in less of this activity than some neighboring jurisdictions, its enthusiastic participation in the Amazon chase suggests the need for a clear mandate to forswear the practice. This will free up significant resources—hours and money—for the kinds of economic development we really need. (Net Cost: Less than zero, because of significant savings.)
(2) Reset the Rules of County Procurement
The County should reset its rules of procurement to give local businesses a fairer shot at public contracts. Specifically, it should take into account the tax consequences of its procurement decisions. The County should ask all bidders to indicate the minimum percentage of a contract they will spend on other in-County vendors, calculate the likely tax benefits, and adjust the bids according. This will increase the amount of public money spent locally and boost the “multiplier” effect on local income, wealth, and jobs. It will also lower net spending by the County government. (Net Cost: Less than zero, because of net savings.)
(3) Move the County’s Financial Services into Local Banks or Credit Unions
The probability of a dollar deposited in a local bank being lent to local business is roughly three times greater than a dollar deposited into a big bank. This is what motivated the cities of Phoenix and Tucson to move their banking services into local financial institutions. Revenues collected from federal transfers and from taxes should be deposited in these institutions before they are spent. Contracted local financial institutions should be expected, in return, to lend more to local businesses. (Net Cost: Smaller banks offer fees that are competitive with bigger ones, though there are modest, one-time transition costs in moving to new financial institutions.)
(4) Promote Private Local Investment
Residents of Montgomery County have about $170 billion in long-term savings in stocks, bonds, pension funds, mutual funds, and insurance funds. North of 99% of it goes into nonlocal business and does little for the County’s economy. The County should systematically try to pry some of this money loose for local projects and businesses. Among the simple things the County could do:
- Post on the County website all the local businesses actively seeking investment.
- Facilitate online conversations between local investors and these businesses.
- Encourage local businesses to solicit “adoption” by residents who pre-purchase goods and services. (Readers will recall I did this by pre-purchasing $1,000 of meals at Busboys and Poets, to help the company in tough times.)
- Educate residents about available tools to facilitate local investment of pension funds like self-directed IRAs and solo 401ks.
(Net Cost: The town of Port Townsend, Washington, with 10,000 people, has activated nearly a $1 million per year of new investing this way. Montgomery County has 100 times as many residents. One staff person and some creative web work could deliver hundreds of millions of capital to local businesses.)
(5) Set Up Grassroots Financed Economic Development Funds
Local investors prefer putting their money into well-managed funds rather than one or two businesses because funds deliver greater expert selection, diversification, and liquidity. The County should set up several different funds around various County priorities. One might focus on energy efficiency. Another on affordable housing. A third on covering the up-front costs startups face complying with county zoning, licensing, and other regulatory hurdles. The fact that the County has already created a Green Bank is a good foundation for this recommendation. The Green Bank, however, does not allow the participation of grassroots investors (that also should be changed). (Net Cost: If County-paid staff were combined with private capital, the short-term cost would be modest. In the long-term, new tax revenues from new business activity should significantly exceed the personnel costs.)
(6) Create a County Property Tax Credit for Local Investment
To incentivize residents to invest locally, the County should provide a property tax credit. (The state legislature in Michigan is now deliberating over a bill that would provide a 50% income tax credit for every dollar of local investment.) One way of thinking about a tax credit like this is that while Opportunity Zones offer incentives for the wealthiest investors to support local real estate development, local tax credits offer incentives for everyone to support every kind of local investment. This incentive would helpfully draw the attention of financial advisors throughout the County. (Net Cost: Some lost property tax revenue versus significant additional business stimulus and taxes. If the County is skeptical of the net benefits, it should commission a study.)
(7) Launch a Local Money System
If the County really wants to think outside the box, it might print its own currency, partially pay civil servants in the local scrip, and allow residents to partially pay their taxes in it. The virtue of the currency is that it only can be spent locally, which increases its velocity and impact. This is how many U.S. cities and counties revived themselves during the last Great Depression in the 1930s. There are fascinating examples all over the world – e.g., in Bristol in the United Kingdom and Berkshares in Western Massachusetts – about how this innovation can work. And as radical as it seems, it’s effectively what the Federal Reserve is doing now. We can and should expand the Fed’s stimulus locally. (Net Cost: Well designed, a local currency system pumps up the economy, at a cost of one staff person.)
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If you live in Montgomery County, I welcome your help in promoting these ideas. (Let County Executive Marc Elrich know it’s time for a complete overhaul of our economic-development priorities.) If you don’t, let me know what else you would put on this list for your community. Today’s economic crisis is a huge opportunity to get economic-development right.