We recycle our paper, our cans, and our bottles;
why not recycle (and control) our incomes?
Why the ‘Local Multiplier Effect’ Always Counts
By Tricia Truit, Earth and Sky Collective
A Valuable, but Hidden Economic Reality
The Local Multiplier Effect (LME) is a very valuable, hidden
feature of our economies. The term refers to how many times dollars are
recirculated within a local economy before leaving through the purchase of
an import. Famed economist John Maynard Keynes first coined the term
"Local Multiplier Effect" in his 1936 book The General Theory
of Employment, Interest and Money.
A Hypothetical Example
Imagine a hypothetical influx of money, say one million dollars,
entering a local economy. Now imagine these dollars are spent on local
goods and services. Imagine that each of the local vendors who earned
those dollars then re-spends that money on more local goods and services.
Envision this cycle happening several times before this money is finally
spent on imports – goods or services from outside the region.
In this case, those one million dollars recirculating eight times would
act much like eight million dollars by increasing revenue and income
opportunities for local producers.
Now another scenario: picture that same amount of money being spent
immediately at stores (or online) with businesses headquartered in other
regions on imported goods. These transactions would add very little or no
value to the local economy; one million dollars would act just like one
million dollars instead of several million dollars.
History and Impact
Over the past 50 years, the expansion of national businesses into local
domestic markets has diverted this vital monetary stream and redirected it
to centralized corporate coffers. There it is spent on large capital
expenditures, overseas goods and all too frequently inflated executive
salaries. This interception of funds has depleted local towns and cities
across our nation of an important source of funds: recirculated income.
It has been estimated that about a century ago, thriving industrial
communities had a LME in the high 20s or low 30s. Today it’s estimated
to be in the single digits. This reduction in the number of rounds that
monies make has had an extremely negative effect on our local economies.
All areas of community life are affected by this deficit. This lost
treasure of local economies was never measured, monitored, managed or even
Besides the obvious poverty-related problems of unemployment,
underemployment, homelessness, and lack of funds for social and public
health needs, there is also the issue of creating an unhealthy reliance on
a vast commercial network of imported goods. Many areas of life become
vulnerable to natural or man-made disasters which can interrupt this flow
of goods. Securities as diverse as food to homeland could be greatly
compromised by this kind of dependence.
Two Studies of the Impact of Buying Local
Two recent studies–one in Austin, Texas, the other in Maine–compared
locally owned businesses with nationally owned book stores as far as their
impact on their local economies. They reached very similar conclusions:
$100.00 spent at a national retailer yielded a return of about $15.00 to
the local economy. However when that same $100.00 is spent with a local
retailer it returns about $45.00 or 3 times as much income to the local
economy. When further defined, these returns from the national chain store
were usually in the form of lower-level service job wages.
Many factors are at work here. The large national chain store doesn’t
buy local services or goods in most cases. On the other hand the local
store does use local services such as accountants, bookkeepers,
advertising, legal services, possibly office supplies and many other small
incidental expenses. (For further information, check out: http://news.bookweb.org/
news/1508.html and http://news.bookweb.org/news/ 1884.html.)
Next Layer: Local Production and Recycling
The next deeper layer, beyond retail stores, to this equation is local
production and recycling. Whereas a local bookstore selling only local
authors or locally printed books wouldn’t be at all realistic, it is
possible to cultivate a retail climate for clusters of used book stores,
other used items, recycled items or even possibly a variety of locally
Selling recycled items has traditionally been the domain of charitable
institutions such as the Salvation Army and Goodwill. However there may be
a substantial and growing market in appealing to environmentally
conscious, anti-globalization populations.
Some strategies to move into the next layer include:
Conducting a public education campaign to teach people about the LME;
Increasing, encouraging and assisting small business and especially
Creating a Business To Business (B2B) Import Replacement program to
link businesses with local suppliers and services.
Local Money Models
If you’d like to expand beyond a neighborhood/ friends barter ring or
trading system, there are three basic Local Money models to choose from. Time
Dollars is most appropriate for small non-profits interested in the
community building aspects of local money. The famous Ithaca Hours
Model is a better choice for a broader town or entrepreneurially
focused approach. The electronic L.E.T.S. (Local Employment and Trade
Schemes) is another system that’s very popular in Europe, Australia,
and Canada. Its one restriction here in the US is that the IRS requires
the system managers to report member’s transactions, much like the way
an employer would report wages. Some people might consider that to be too
invasive and therefore might be reluctant to participate. For more on each
of these working models, see the following web sites:
TIME DOLLARS: www.timedollar.org;
ITHACA HOURS (local currency): www.ithacahours.org;
Earth and Sky Exchange (Western Mass.); http://www.earthskyexchange.org/links.htm
Tricia Truitt is a member of Earth & Sky Cooperative Exchange and a
proponent of local trading systems. She lives in Springfield, MA, and can
be reached at firstname.lastname@example.org. This article is excerpted from a
longer one in the Other Economies Are Possible
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