A case for American economic reform: Small businesses and inclusive economies

ABSTRACT

The American Dream is based on an inclusive economy. An inclusive economy thrives on diverse land ownership; adaptive re-use of existing buildings; local and alternative business ownership; community banks and credit unions; economic development reform and education; and, inclusion of all community members.

KEYWORDS:

• Inclusive
• economy
• diverse
• adaptive
• re-use
• local
• community
• equity
• reform
• inclusion
• citizens
• education

In the United States, there’s a fundamental misperception about how our economy should work. The dominant practice is perpetuated by longstanding myths about who knows best, flaws inherent in the American Dream, ineffective curricula taught in colleges, and, by economic development practitioners and policy creators with deep biases toward corporate structures and Wall Street’s fluctuations. Sayings such as “Grow or Die,” “Bigger is Better,” and, “Pull Yourself Up by Your Bootstraps,” are believed by adults just as children believe in the Tooth Fairy. Children grow up and lose their belief in that myth, but it is time for adults to recognize how their beliefs are dangerous to the future of our country.

An inclusive economy in which everyone – of any race, financial status, or personal orientation – has an opportunity to succeed is the premise for the American Dream. But in reality, the American Dream is accomplishable when certain advantages are maximized – often to the detriment of others who strive without the benefit of an edge, such as a stable environment during youth, adequate education, mentors, or the availability of the “seeds” necessary to plant, manage, and harvest success. The system most of us are operating under now is failing. If left unchecked it will cause economic ruin to those left behind, as well as those who have achieved successes in the current problematic landscape. Our current economy is tethered to a lead balloon that demands reevaluation of policies at municipal, state, and federal levels. Monopolies do not serve the greater good. The key to future productivity and success is to be proactive about prioritizing local economy development and upholding individuals in their pursuit of all they need for good health, prosperity, and well-being.

The evolution of our current economic development has been defined by the common practice of paying economic development professionals and entities for the number of jobs they attract into the market where they’re paid. This has shifted focus and budgets toward relocating large employers – read: moving jobs from one place to another as opposed to growing new jobs at the local level. Statisticians in regional and local governments and business councils count new jobs created without subtracting jobs that are eliminated by corporate relocations, restrictive land- and building-use policies, and all other, more subtle factors that impact an individual’s ability to maintain a business at the scale of their own community.

To build inclusive economies, the focus should be on small business retention and expansion. Small- and mid-sized businesses have a proven track record in terms of new job creation.

Why did Americans create exclusive – as opposed to inclusive – economies? For years, higher education has been focusing on extractive strategies. College students choose course offerings that teach Wall Street functionality, global markets, and profitability models. Inclusive economies, alternative ownership models (like worker-owned cooperatives), and how to obtain accessible financing for low- or middle-income American entrepreneurs is only taught on the streets, by the seats of pants, and while doing the equivalent of building and flying an airplane at the same time. Business colleges are guilty of throwing gasoline on the fires of the extreme wealth gap in America by measuring success in the number of degrees handed out or obtained by past graduates who scramble into corporate American jobs. Who – and where – are the graduates well-rooted in their communities with a firm grasp of how to keep American families functioning well?

During the COVID-19 pandemic, America entered a recession. People lost jobs and small businesses failed at alarming rates while the wealthiest Americans saw an increase in their net worth. There is a gap, and it will grow. According to an article published in July 2020 by the Brookings Institution: “ … relative to other spending groups in the U.S., the rich are projected to be the fastest-growing segment over the next decade. Specifically, the rich segment is projected to increase by 28% in population and 33% in spending power by 2030. The daily spending power of America’s rich is projected to grow to 26.4 USD billion” (Wu, Fengler, Mitterling, & Thomasberger, 2020).

What can be done to create opportunity for all people across the economic spectrum in this democracy?

First, we can shift measurement of success as a nation from the number of people in top wealth brackets to the number of middle-, low-, and significantly low-income individuals and family groups that are able to be self-sufficient, grow their family and generational wealth, achieve a stable rental housing situation or home ownership, and improve their overall health and well-being.

Next, a comprehensive approach to overcoming the current situation could be guided by the idea that an economy should be diverse – with as many types of businesses and business owners as possible. This includes entities from large, multi-national corporations to nonprofits to sole proprietors to small farmer’s market vendors. This means we must acknowledge and discourage policies that favor mergers and acquisitions in direct or subtle violation of existing anti-trust policies. Government subsidies of most businesses should be stopped. All economic development budgets should invest in small- and mid-sized business retention and expansion to stabilize each American city or town.

At this point, Americans are far behind in recognition of the problem. We are even further from taking corrective action. It’s ironic that Americans are willing to jump on the “Made in America” bandwagon but fail to connect the concept to antitrust issues: Main Street versus Wall Street. Made on Main Street in America provides more diverse wealth. The sooner we can connect the dots, the more likely we are to build a future that includes everyone. There is even a model: European countries (especially Germany) are leading the world in reimagining success by investing in small- and mid-sized companies, and they will avoid the widespread suffering Americans will face over the next decade or more here in the States (Ames, 2013; Nienaber & Kraemer, 2020).

At Local First Arizona, we practice a holistic view of small business development that includes five key strategies. The first, encouraging diverse land ownership, allows for all the others: adaptive re-use of existing buildings; fostering local and alternative business ownership models; investing in community banks and credit unions through personal and business transactions; economic development reform (policy research and implementation) as well as offering specific educational opportunities (seminars, bootcamps, an annual community event) for business owners, consumers, and youth; and – most important – the inclusion of all people and perspectives in the community.

Strategy one: Post-pandemic intentionality on diverse land ownership and adaptive re-use of existing buildings

Traditional urban planners in America work from a standardized perspective. They use rules and guidelines that were created apart from considerations about quality of life, historic preservation, or sense of place. These rules and guidelines were created in response to litigation, or to reduce costs. Current land use policies tend to favor large, uniform developments that lack human scale and do not necessarily enhance the character of a community.

In the decades after World War II, architects created smaller buildings to match human-sized scale that encouraged walkability, included charming storefronts, encouraged local business ownership, enriched neighborhood life, and allowed for good quality of life. Many of these buildings now face demolition to make way for new construction. The single new building then consumes a mega-block where several smaller, older buildings once stood.

Rethinking traditional urban planning begins with the economic argument that older and smaller buildings are better. They encourage walkability and allow for interesting street connectivity to make a place feel alive and vibrant. Because old buildings are small, they’re perfect to house independently owned businesses. These businesses keep money and jobs re-circulating in the local economy. Historic or vintage buildings (even when remodeled) offer the kind of diversity and unique personality that better connects residents to their place. “Connection to place” was shown in a recent Knight Foundation study (titled “Soul of the Community”) to be the single leading indicator in places that have prosperity (Knight Foundation, n.d.). They found that when people love their place, they are more likely to vote, volunteer, give charitably, and even pay their taxes, thus improving local prosperity for all.

In their study, “Older, Smaller, Better,” Preservation Green Lab, a research arm of the National Trust for Historic Preservation, demonstrated the measurable benefits of keeping older buildings (National Trust for Historic Preservation, 2014). They compared real estate values over time, employment rates for people of color, local prosperity, and jobs created per block in older venues versus new commercial buildings. In Seattle’s commercial areas, Preservation Green Lab proved blocks with older, smaller buildings provided 36.8% more jobs per square foot than those blocks with new, large buildings.

Older buildings create vital incubator spaces for entrepreneurial spirit. Recognizing that this spirit is essential for a city to thrive, Local First Arizona worked with the Phoenix planning department over an eight-year period to streamline the process for adaptive re-use of existing buildings. Because of this extensive work, over 200 new businesses opened in older buildings in the city center over a five-year span. Along with the arrival of a light rail transportation system, these businesses have absolutely improved the quality of life for the people who live in that area.

The built environment and local business ownership create the kind of quality of life people love to find in any city. Without mindful, integrity-based interference from academia, social activists, economic development professionals, and others who have a vested interest in the sustainability of their life-work environments, planning and development entities will continue to eradicate quality of life in American cities by rigid interpretation of outdated building codes that discourage creative infill design and adaptive re-use. We don’t need a study to prove “Newer, Larger, Worse” is as true as “Older, Smaller, Better.”

The greater economic development community needs to frame conversations around the connection between urban planning and job creation, along with quality of life and workforce retention. Many planners across the country are recognizing that old models aren’t working. Economic development policy makers should offer ideas, partnership, and support in finding new models to create great places that improve opportunities for prosperity. In a 2014 study titled, “Investing in Place for Economic Growth and Competitiveness,” the American Planning Association (APA) demonstrated that the next generation of workers does not want to live in a suburban monoculture (American Planning Association, 2014). They want creative environments with unique buildings and walkable urban streets.

So, why are so few planners encouraging this kind of redevelopment? Despite what the APA reports, most city planning departments don’t consider themselves to be part of an economic development ecosystem. In fact, they play a major role in business creation, workforce development, and even blight. The policies that make up their playbook could be quietly eroding opportunities to thrive in communities across the country.

In Phoenix, the adaptive re-use process was once so cumbersome that an estimated 40% of the downtown area consisted of old, empty buildings that had fallen into disrepair. Nearby, massive new offices, institutions, sports arena development, and parking structures were constructed. Visitors to downtown could bypass engaging with the actual downtown’s history and character. Phoenicians and others assumed the reason for the downtown blight was due to absentee owners, lack of interested new businesses, or economic recession. No one suspected that an oppressive building code was to blame, as entrepreneur after entrepreneur had their hopes and dreams squashed by an overzealous building inspector or an uncooperative plan reviewer, each armed with outdated policies and a complete disconnect from the actual planning they were educated to do.

Local First Arizona and its partners have been able to turn the tide in Phoenix, and are proud to say many employees in the planning department are eagerly working to preserve older building stock and work with entrepreneurs to find ways to expedite the process to get businesses open and cash registers ringing. It would be wise to encourage this positive trend in other cities and towns across the United States.

Establishing a streamlined and responsive adaptive reuse program took nearly a decade in Phoenix. It didn’t have to take that long, but Phoenix was recovering from a short-term reward system that encouraged unsustainable sprawl development, master-planned communities, and uncreative, commodity strip mall shopping corridors that were easy to approve and easier to fund. Phoenix had developed a culture of fast-moving growth, not once pausing to consider quality of life, and ignoring what the next generation, or an educated workforce, would choose for their lifestyles.

Due to policies put in place by the City Council, the planning department at the City of Phoenix had developed a deeply engrained culture that loved new development because it was easy to rubber stamp and move through the process fast. The planning department was made a “cost-recovery” department in 1990, which meant they needed to be sure they balanced their budget with no additional support from the city’s general fund. As a result, there was disdain for the small business owner who wanted to open a new cafe in a funky old building downtown. In fact, that one small business owner was a threat to their bottom line because he or she was going to cost a lot of time and would not bring in many development fees. It was logical for the planners to block the owner’s plans with impossible rules and regulations and slow review processes that required multiple inspections and tedious plan reviews aimed at issues not even related to the safety of the structure or people in it.

At the International Economic Development Council (IEDC) conference in Anchorage, Alaska in 2015, I asked a room full of economic development professionals how many of them had reviewed their city’s adaptive reuse policies. Not one professional raised their hand. Connecting these two professions seems logical and practical if the goal is to build great places that retain talent and diversify local economies. There is a direct correlation between planning and economic development that needs to be considered and actively investigated in cities and towns everywhere.

As the COVID-19 pandemic crisis continues to evolve, the next land grab is gearing up, just as after the 2008 recession. John Haines of Mercy Corps, and a leader in the Community Investment Trust Model, points out: “As Black communities continue to be disproportionately ravaged by COVID-19, there is dizzying talk in private equity and real estate circles of ‘dry powder’ circulating – 328 USD Billion of it to be precise – primed to swoop in on real estate deals. Market dynamics from before COVID-19, driven by a history of codified racism in urban development and planning, mean that a lot of those deals will more than likely be found in low- to modest-income communities of color.” (Iyengar & Haines, 2020)

Strategy two: Emphasis on local business ownership and alternative ownership models

Eighteen years ago, in 2002, the first economic study was completed by Civic Economics in Austin, Texas (The Civic Economics of Retail, 2002). It focused on the multiplier effect, which in turn led to several reports showing that local business ownership is critically important to job creation. If America had 30,000 Starbucks locations, the company would still only support one accounting firm, one graphic designer, and one website developer. Conversely, 30,000 independently owned coffee shops support 30,000 accountants who have one client, 30,000 website developers have one gig, 30,000 graphic designers have one client, and so on. The chain store model, like Starbucks, eliminates more jobs than in creates when professional service jobs associated with local ownership are factored into the math (Institute for Local Self-Reliance, n.d.). So, as the economists write about how hospitality supports only low-wage jobs, planners need to remember it’s the ecosystem of primary, secondary, and tertiary jobs that must be counted.

The “Buy Local” movement has been gaining momentum around the country since 2005 and many people mistakenly think it’s just about cute boutiques and hip restaurants. Independently owned businesses are bringing cities back faster from economic crises while simultaneously creating the kinds of places where people desire to live, according to Good Jobs First, a national policy resource center for grassroots groups and public officials that promotes corporate and government accountability in economic development (Good Jobs First, n.d.).

Too many economic developers are chasing chain store development even though trends studied and reported by the Institute for Local Self-Reliance (ILSR) in the past five years show independent businesses are bouncing back in big ways. Real estate developers struggle to get funding for projects that don’t include chain stores – or accredited tenants – which further exacerbates the problem. Even so, just before the COVID-19 pandemic, independent coffee shops were opening at 1.5 times the rate of Starbucks, 140 new bookstores had opened in the past three years, and even record stores were experiencing the best sales they’ve had in 20 years (Mitchell, 2016).

Economists speak about economies of scale – the saving graces of free market societies. But it’s not cheaper to buy a latte at Starbucks … or tires at Costco, or a movie at AMC. In measuring the true cost of doing business with most chain stores there is no reward for economies of scale unless you count gains measured by the day and not the year. Money in a customer’s pocket for a day certainly doesn’t change the outcome of a community when the overall community’s economy is attached to a lead balloon that includes low-wage jobs, no healthcare benefits, and no professional services job market.

Studies done by Civic Economics demonstrate the notion that money saved at chains drives an economy is flawed because it assumes chains are always cheaper, which isn’t true (Mercy Corps Investment Trust, n.d.). And any savings is significantly offset by jobs eliminated as well as lost income overall.

Economies of scale only work in a free market society. America does not have a free market society. Our food is subsidized. Eighty percent of all farm bill dollars since 1995 went to the largest 10% of America’s farms for commodity crops – which is why processed fast food is so cheap. Our oil is subsidized. Our biggest banks are subsidized. Even chain stores are subsidized. All these subsidies are funded with tax money. To believe in a free market in the United States today is dangerous. Americans have forgotten how the economy works and have no tools to measure the true costs – human, social, or environmental – of doing business.

Given these facts about the built environment and the importance of local business ownership, why is it so difficult to create great places that support work-life-play balance for all people? Definitely an area that needs more attention.

Strategy three: Community banks and credit unions are keys to a diverse and healthy economy

The third key element to this diversified economy strategy is localized funding. Ask any developer who wants to buy a gorgeous abandoned warehouse near a public transportation stop and put the coolest businesses inside. It’s going to be the best, most wonderful market for the local community. It will be so unique it attracts tourists and creates jobs. It will transform the economy in the area. What’s the next step for that developer? Learning that there’s not a bank that will fund a project like this anywhere to be found.

Why? Because giant, institutional banks with no local decision makers are transaction and deposit oriented. Their corporate employees and underwriters – in locations far away – have not prioritized building great places for the branch cities that support their hierarchy. They are risk averse and would much rather have developers build something new and populate it with the national brands they view as credit tenants. In fact, even in appraisals, developers get dinged when their buildings have locally owned businesses. Big banks perpetuate commodity development with no priority on the long-term social, cultural, or environmental impact on a community and its residents.

Three global big banks with branches in Arizona – Chase, Wells Fargo, and Bank of America – hold 63% of Arizona’s total deposits, or 89 USDB out of a total 142 USDB. During the COVID-19 crisis, these banks completed 44,000 loans valued at 3.8 USDB back to Arizonans which amounts to four percent of their total holdings here. In the first round of the Paycheck Protection Program (PPP), these banks were only able to serve their largest clients before the government program ran out of funds. Thousands of small Arizona businesses went without support, and it exposed a serious vulnerability in Arizona: we have too much money in only three massive banks. Only after a national outcry and Congressional reprimands did the big banks improve their contribution to small businesses.

Arizona’s small community banks, which combined hold only nine percent of Arizona’s deposits, or 13 USDB, loaned a significantly higher ratio of PPP funding versus their total holdings. Tiny Gateway Bank in Mesa, as one example, loaned out 21% of their total holdings, and they did it with only one branch.

Community banks are committed to the neighborhoods and communities where they are located and have a direct interest in place-based amenities. Community bankers are more engaged and informed with local issues and influences. They are much more likely to take a risk with a local business owner and forge a shared plan. They must invest locally; it’s the only way for them to survive.

In order to stimulate the economy, entrepreneurs and business owners need ample access to small business loans from bankers that care about the long-term health of the businesses in their community. Our community banks are more likely to fund the small businesses that are the engine of the economy. The more these banks have in deposits, the more they can lend back into our communities.

There’s a direct correlation between cool cities and the banks that fund them. Denver’s First Bank is the number two holder of deposits in Colorado. It funded most of the revitalization projects in downtown Denver, complete with old buildings and locally owned businesses. In Phoenix, local community banks hold only seven percent of the state’s deposits and lack the resources to take on the kinds of massive revitalization projects needed.

The dichotomy between powerful, global minded big banks and small businesses is crushing entrepreneurship and small business development everywhere, which reduces economic vitality and the hope of attracting the types of companies and people that want to live, work, and play in cool, creative places.

In addition to community banks, credit unions are filling gaps in local business lending and simultaneously spreading ownership across their members. Community Development Financial Institutions (CDFIs) can also play a role in keeping more money circulating locally, increasing opportunities for companies to grow and create jobs, especially in under-served areas.

Local First Arizona led the charge in encouraging the City of Phoenix to move 50 USD M in deposits out of a big bank and into local community banks by reminding them that, while they themselves were working hard to build a better city, their money was not. In fact, their money was invested elsewhere.

At the root of every great community is adequate, appropriate funding. If citizens want to build great places then they must move their money into banks or credit unions that share the same vision. Many residents work hard to build great places, but nothing is gained when residents and businesses alike have their money sitting in banks with no such vision or value.

Strategy four: Comprehensive economic development reform

The fourth part of this community wealth building strategy involves a comprehensive economic development vision that includes place-based creative design, readily funded, with local business ownership and high quality of life across a broad spectrum of society. Generative approaches to economic development can create a suite of job opportunities that offer improved quality of life for all people in a community, regardless of socioeconomic status.

Economic developers should frame compelling cases that underscore the need for overhauling policies around building codes and the adaptive re-use of existing buildings. Doing so allows restoration of quality for blighted older neighborhoods, historic and vintage, to be protected while being updated and preserved without displacing the people who live there and have a community. Repurposing older buildings means increased incubator spaces for small businesses to grow and thrive, building in new ecosystems of jobs, residences, and open spaces designed for play and relaxation in place-based vibrant communities. These are the factors that create equity and opportunity for all.

Planners, economic developers, entrepreneurs, and community bankers must align themselves around the vision the communities have for themselves, and work together to build resilient, vibrant, inclusive, and sustainable economies that provide higher quality of life, increased equity, and prosperity for all residents.

Strategy five: Include everyone

For every board, commission, or committee meeting, and every panel discussion, ask, “Who is not represented here?” Too often, plans are made for communities without even asking the community for its perspective.

We need collective acknowledgment of the historically racist policies that have disadvantaged communities of color by limiting loans for home ownership (redlining) and denying start-up capital to entrepreneurs. To remedy this, everyone needs to be proactive and intentional about investing in communities of color to enable families to build generational wealth. Small business ownership is one way to turn the tide on the racial wealth gap in America.

Closing

As noted, there are several ways that can help improve local economies and societies. We can move money from global banks to locally controlled banks – this improves local small business loan completion ratios and allows for greater on-site accountability. We can use older buildings as vital incubator spaces by protecting them and encouraging local ownership of them. We can develop land trusts and community investment trusts, such as the model developed by Mercy Corps in Portland, to improve financial literacy while helping everyday folks build equity resources they can then use to springboard into home ownership, and develop worker-owned cooperatives that democratize ownership that strengthens opportunities for wealth creation (Mercy Corps Investment Trust, n.d.). Limiting land assemblages locally and enforce anti-trust laws federally can help ensure more democratic ownership.

The old models of economic development are failing a majority of the people while giving advantage to few. It’s time to acknowledge how these systems were created to advantage the few; they’re not broken. They’re working as designed. A September 2014 study by Harvard Business School declared that the growing disparity between the very wealthy and the lower and middle classes is no longer sustainable (Wikipedia, n.d.).

The time for reform has come. The first step is acknowledging we have a wealth gap problem that has grown to monumental proportions and if left unchecked, will undermine the future of the country. Every single individual in every community has a role to play. We should move money out of big banks, shop local, and encourage local ownership (especially in historically marginalized communities), fight for policies that break apart Wall Street and Amazons, and invest in their own cities and towns with renewed hope. Local economies, and the relationships that come with them, are the path to a brighter, more inclusive future.

Disclosure statement

No potential conflict of interest was reported by the author.

Additional information

Notes on contributors

Kimber Lanning

Kimber Lanning is an entrepreneur and economic specialist who works to build a more vibrant and inclusive Arizona economy by creating and implementing new models of economic development. In 2014, Lanning won the International Economic Development Council’s Citizen Leader of the Year for her studies and work focused on systems change.