* Book: Michael Shuman. Local Dollars, Local Sense. Chelsea Green Publishing, 2012.
This book is a valuable addition to the literature about local investing and community empowerment.
Introduction by the author Michael Schuman:
“Americans’ long-term savings in stocks, bonds, pension, life insurance, and mutual funds total about $30 trillion. But not even 1 percent of these savings touches local small businesses, the source of half the economy’s jobs and output. Is it possible to beat Wall Street’s 5 percent long-term performance by investing in your community? The answer is a resounding yes!
Co-op members who lent to the Weaver Street Market in North Carolina and to the Seward Co-op in Minneapolis earned well over 5 percent per year. Many outside investors who bought preferred shares of the Coulee Region Organic Producers Pool, a co-op of organic farmers, are still receiving an annual dividend of 6 percent. Equal Exchange has paid a dividend to its preferred shareholders averaging above 5 percent for 22 years. Investors who participate in New Markets Tax Credits automatically get a tax credit equal to 5 percent of their capital for each of the first three years and 6 percent for the next four—even if the investment generates no real return whatsoever. Burt Chojnowski’s returns have been good enough to convince outside investors to put more than $300 million into his local companies and projects over 25 years in Fairfield, Iowa. Most of LION’s deals in Port Townsend, Washington, are paying between 5 and 8 percent returns per year. Microlenders on Prosper.?com are averaging an annual return of 10.4 percent. Jeff Haugland has paid the local shareholders of Community Grocers in Mount Ayr, Iowa, an annual dividend of 5.25 percent.
All of these profitable initiatives proceeded within existing securities laws. If, however, national or state governments were to implement sensible, simple, zero-cost reforms, the number, variety, and promise of local-investment opportunities could expand dramatically. The many examples in this book— and the thousands of others out there, some of which may be happening in your community right now—suggest that the universe of local investment is expanding faster than financial astronomers like myself can possibly keep track of it.
Not every local company, of course, will beat the 5 percent rate of return from existing markets. Betting on any one or two businesses, just like betting on any one or two NASDAQ stocks, is very risky. No one should read this book as suggesting that we each should pull all our money out of the stock market and put it all into our neighborhood diners or bookstores.
As models for local investment proliferate, the focus will shift to the quality of each investment and the quality of your local-investment portfolio. The country is about to travel up a steep learning curve to discern the best local businesses from the fraudsters and grifters, and how to build a local-economy infrastructure in our communities—replete with local purchasing, entrepreneurship programs, local business alliances, and public policy reforms—that will increase the probability of local businesses succeeding and local investments paying off. One modest step might be to move 5 percent of your money from Wall Street to Main Street each year. By the time you get to 100 percent in twenty years, the nation should have a thriving network of regional stock exchanges and local mutual funds.
But another vexing question about local investment I puzzle over is this: Does it make sense to invest in anyone else’s business, bank, project, or fund until I have thoroughly invested in . . . myself? Might I get a better than 5 percent annual rate of return investing in my own bank account, my home, my own energy-efficiency measures, and my education? Most of us ultimately have a significant portion of our wealth in these intimately close items. Getting these investments right might be the single best way to invest locally.
To beat Wall Street, investments in yourself must achieve not a 5 percent annual rate of return but a 7 percent rate. That’s because most of the options could not qualify for tax-deferred IRA or 401(k) investments, and the extra 2 percent … approximates the lifetime benefit of tax deferral.
Remarkably, though, the 7 percent goal is achievable—and in so many ways that many Americans, perhaps most, might never need to think about retirement accounts again.”
A review by Mike Rotkin, former mayor of Santa Cruz, U.S.A:
“Local Dollars, Local Sense, rooted in concrete examples, is a must read for those battling to transform local communities into the more humane and livable places that we all desire and deserve.”
“Most of the proposals I’ve studied and worked on tend to be either unrealistic about the ability of local communities to function outside of the larger capitalist system, or overly optimistic about the likely economic success and impact of alternative community institutions. But Michael Shuman, in his recent book Local Dollars, Local Sense, presents extensive and concrete examples of local communities that are redirecting the investments of ordinary Americans away from Wall Street and back to local community and small business.
What is most exciting and useful about Shuman’s current book is its focus on a frequently overlooked economic question: how can local communities create opportunities for individuals and groups of individuals to become the source of investment capital? An answer to this could, ideally, sidestep the challenge presented above. This is what Shuman tries to do.
Indeed, local communities can create new kinds of investment opportunities for working people by “tearing down the archaic regulations that prohibit ordinary Americans from investing in ordinary business,” argues Shuman. In many ways, his strategy parallels the microloan programs that have been, by and large, successfully developed and rolled out in third-world countries. But his suggestions reach further—a microloan program on steroids.
I found myself continually reflecting on the fact that many of his ideas could well be introduced into my own community of Santa Cruz, or similar small towns around the United States. Whether he is talking about expanding the role of cooperative or worker-owned businesses, redirecting pension fund investments from Fortune 500 mutual funds to local small businesses, or creating community banks, his examples are far more realistic than most of the ideas I studied (and rejected) during my 30 years in public office.
The book compellingly demonstrates how investments in local enterprise can result in rates of return as high or higher over the long haul than investments in the stock market. He also clearly outlines how the national regulations concerning who can be an “accredited investor” under Securities and Exchange Commission rules perversely block individual and institutional lending to local enterprise. He targets specific regulation for reform and demonstrates how much could be gained from such reform.
Ultimately, the book healthily balances actions that the readers can take within the existing regulatory and economic arrangements and actions that would require reforms to the current regulatory regime. I was hugely impressed with the number of concrete examples of communities already beginning to implement some of the programs that he outlines.
There is no local public official or local community activist who would not benefit from reading this book and then meeting with others of like mind to discuss which of Shuman’s ideas could most effectively be implemented.”