Plugging the Leaks in Your Local Economy

By Ruth Walker

Ruth Walker is a writer in Boston with a longstanding interest in the economy of cities.

Just how important is my business to this community? That's a question a lot of business owners ask.

Take 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."

Because 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.

As Rex 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.

Dr. 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.

To identify 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).

The 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. The CIEM seeks to answer the following questions: How much income is received by individuals and organizations in the community? How much of this income originates from within the community? How much money is spent by individuals and organizations in the community? How much of that money is spent within the community? The CIEM is available online at www.msu.edu/unit/cua/projects/Project.htm . 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: www.cedp.msu.edu/final.pdf .

It can 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.

LaMore 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.

The 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?'"

"Economic 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.

So far, 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.

LaMore 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.

"The 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.

But 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.

A CIEM 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 a whisker.

The 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."

The 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.

The 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.

Rex 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."

LaMore 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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