Franklin & Marshall College Franklin & Marshall College

Gar Alperovitz: President, National Center for Economic and Security Alternatives

Session: Entrprenuers and Communities in the Global Local Economy

 

Well, we seem to have a small business in book sales going on here (audience laughter) , and I’m delighted to be a part of it! (laughter). And about the title of my book! Let me tell you that I get very interesting reactions it. Some people say: "wow, how can you say such a thing in America?" Other people say: "you know, I wonder what’s coming next, what comes after capitalism?" And still others say: "my goodness, is there more wealth that can be created for more of us?" So it’s a puzzling title. But, those of you who read the book, or even skim it--or possibly get a friend to read it and tell you what it said, (laughter); "I haven’t read the book personally," is a comment that I hear a lot (laughter)—but, to return to what I was saying, those of you who get a chance to read the book will find that my argument is that the traditional models of corporate capitalism and state socialism probably are not the "be all" and "end all" of history; that it is possible for us to think creatively; and that there may be something new under the sun. I’m partly a historian, and basically my view is that political economic systems come and go, that there is systemic change, and that institutional change of one kind or another is as common as grass. Erik was just telling us, for example, of the decline of corporations and the rise of entrepreneurial institutions. Now, we may argue about details, but, basically, institutional change is a big part of what goes on. And we can think creatively about it.

Having said that, let me turn my attention to the question of local economies. I must first tell you that, compared to some of the experts in this room, I know almost nothing about the Lancaster economy. But I come from an area with very similar problems to the ones I have been hearing about this morning. I’m from Racine, Wisconsin, which is a dying industrial town in the middle of a rich agricultural dairy area. I was brought up in that environment, went to the University of Wisconsin, and I feel sort-of at home here. So let me tell you how I see some of these problems.

Let me start by saying that I think that what Erik was suggesting is very helpful. I had not known, by the way, that he directed, in the first Clinton administration, the program for base-closing economic transition policies and information. There’s a lot about public policy that we can learn from that experience, and I hope we’ll get into that later because we have an expert with us who can help us with what has been done in distressed communities when there has been money available. I have been thinking myself about this question of entrepreneurship, and particularly of the knowledge industry, and a good part of my book is very supportive of the idea of entrepreneur development. The book’s and my view is that the small businessman is an asset, not a problem to us. I may be somewhat less sanguine about whether we can solve our major problems by relying wholly on an entrepreneurial and knowledge strategy. I’m sure Erik would agree with the idea that many other things need to be done. I don’t know the latest statistics, but it used to be that only one out of five companies survived after five years of operation: that’s a very challenging and competitive environment. But more importantly--and this is really the entry place for my argument—I have noticed, everywhere I’ve been in the country where these discussions are being held, that every place is into entrepreneur development--including big places where there’s a concentration of universities, research centers, technical centers. The notion is that entrepreneurial development, particularly with a high knowledge content, is the name of the game; it’s very popular right now. So I think the question we need to ask is, "is it possible that that one route alone will take us where we want to go?"

I think that view is suspect—and I think we were hearing that view this morning; I don’t think we are hearing that view this afternoon; it’s a broader view this afternoon; but the view that that route alone will help take us where we want to go is, I think, suspect. I think that strategies that focus exclusively on entrepreneurial development are weak strategies, even though entrepreneurial development is important to do in its own right, and I have no real objection to moving forward with it. But I see my job as suggesting some options you might consider, reporting to you on other things that I’ve seen around the country, things which are different and which you might want to learn about, take seriously, incorporate into your long-term strategy.

One of the ways to look at the economy--and I think you probably know these statistics--is to look at the trend in manufacturing employment in the U.S. The trend is clear, and the numbers are pretty startling. In 1950, about 31% of the labor force was in manufacturing; by 1970, it was 25%; in 1990 it was 16%, now it’s about 11%; and most estimates are that, within about 10 to 15 years, manufacturing will have 5-7% of the workforce. Like it or not, that’s where we’re going, that’s the trend. What has been growing of course, above all, are the service industries: construction, finance, and retail. The service sector is the rising sector.

Now, one of the consequences of this--and most people are not quite aware of it--is that, even as we talk a great deal about globalization, what has really happened in the economy is "localization." Service industries are not entirely local of course, but they are far more local than other industries. The local doctor sends his kids to the local school. The local carpenter builds the local house. The local drugstore person buys from the carpenter, etc etc. etc. So, although you may not have noticed it, there’s a trend here. In 1940, about 42% of economic activity was localized, by 1980 about 52%, and by 1990 about 60%. So, with the rise of services, there has also come a much greater localization of the economy.

Now, one of the things that may follow from this is that, to the extent that you want to enhance entrepreneurial activity, one of the ways to do that would be to have a strong local economy. And moving from there, if you want to enhance the local economy, the question to ask is about the mechanisms through which you can strengthen the local economy. One of the ways to do that is to pay attention to local multipliers! Some places around the country have been paying attention to that--there are some really interesting examples, for instance, even in states like North Carolina. You all know what local multipliers are! One of the most common strategies is to have people buy locally when possible. Local institutions, including colleges and universities, often buy things from outside their local area. They can however turn to buying locally. It involves a policy shift. Cities, municipalities, can buy locally as a matter of policy. Many times you find that the purchasing agents, of large companies or universities, may just not be thinking about that--they may not even think about getting the lowest price, which they often can do by buying locally. Increasing the local multiplier is one simple strategy being employed in many cities, and it is one way to enhance this "localization’ trend in the economy which I consider to be a positive phenomenon

Another thing that is going on in many other cities is retention--and I am surprised I haven’t heard the word mentioned here this morning--retaining existing businesses, particularly when the owner entrepreneur is retiring. Now, one of the ways to do that is to have the workers buy the company. Typically, when they have been adequately trained, when workers have acquired big shares of a company, productivity has gone up, the companies have become more competitive, wages have gone up, pensions have gone up, and asset ownership has gone up. I don’t know how many of you know the term ESOP (Employee Stock Ownership Plan). ESOPs have been a way of doing that. But there are other techniques through which workers can come to own companies. Now here is one of these exotic ideas: that the workers own the companies. But think about it. Workers who own companies in their communities, unlike big corporations, and often unlike entrepreneurs--the typical story of is that of a minority entrepreneur who makes the money and then moves out of town, or into the suburbs--workers who own companies in their own communities are not going to get up and go. The companies they own are much more anchored. It sounds exotic, but you may not realize that, over the last 40 years, the number of firms that are substantially worker-owned in the US has gone from maybe 100 to over 11,000. And the numbers are growing.

Now, one of the speakers this morning said there are more entrepreneurs than there are members of labor unions today. That may be so; I think it probably is so now. But the implication is kind of suspect, because what’s really happening is that while labor unions have gone down from 35% to about 8 – 9% of the labor force, there are more worker-owners of companies than there are members of unions in the private sector. That is a fact, and it’s because of this rising trend of worker-ownership in the country. As I said, studies have shown that with adequate training, worker-ownership improves productivity; but, more importantly from the point of view of building a coherent, stable, and integrated community economy, worker-owned companies are one big way to retain jobs. So think "anchoring!" How do we anchor jobs? There’s also--and I’m going to come back to this later—the matter of transferring the ownership of assets to a much broader base. That is an important aspect of the matter as well.

There are ways of promoting worker-ownership of companies. Let me start with a few words about the role of universities and colleges, and of public policy. In the states where public policy has taken this phenomenon seriously, or in the states where public entrepreneurs at universities or colleges have taken it seriously, there has been a tripling of the rate of growth in these worker-owned firms, and an increase in the jobs-retention rates. Ohio, right next door, is a leading state. Kent State University has a Center--your Center might take this activity on at some point--which provides technical assistance--business plans and the like—and some initial planning money. There, just a small input of public entrepreneurship has been very powerful in anchoring jobs through the asset-ownership phenomenon. Let me give a couple more anchoring illustrations. How many here know what a CDC is, a Community Development Corporation? In this case, it’s a neighborhood structure, not the workers, that owns the assets in some form--usually a non-profit corporation. Most CDCs are involved in housing, but in some places they go beyond that. Close to here, in northern NJ, there is a Community Corporation by the name of "New Communities" which employs about 2000 people. It has a supermarket, and it has a health program. It makes money on some of its properties and plows the money back into public services in the community, and anchors jobs as well. Again, the trend is very interesting if you’re interested in the comprehensive community stability process. It’s been going on for 35 years or so, and even as the manufacturing trend has been downward, CDCs have gone from 0 to about 4,000. I’ve seen one study claiming that there are 6,000; that may or may not be so; they’re hard to count. But there’s a very interesting phenomenon of these kinds of alternative institutions that are businesses, business which use parts of the proceeds for social services or housing.

So, you begin to get a model of America Beyond Capitalism. I’ve given you two types of institutions that would belong to this America: worker-owned firms is one; neighborhood-owned institutions is the second one. Neither of these is anything you’ve ever heard of in the usual "isms": it isn’t socialism, it isn’t capitalism. It has a particular value if you’re looking for community stability and retaining jobs and increasing the local multiplier. A third one is very common. The third one is traditional American cooperative. What people don’t realize is, first, that there is a new wave of cooperative development in the country; and secondly, that most cooperative members are local, that they circulate money locally, that they don’t get up and go, that they’re anchored. There are over 100 million Americans who are members of co-ops. I was surprised myself to discover the extent of that form of ownership and stabilization process. But there is yet another phenomenon, and I find this one the most interesting and the least studied. It is the municipal ownership of businesses, with non-ideological republican mayors at the forefront of this phenomenon.

City socialism! What?

In America! What?

Yes! Indeed, cities themselves taking action as economic actors and owning resources, businesses, in order to retain jobs and to produce revenues for themselves. This is happening in many parts of the country. I’ll give you some examples. Riverview, MI is an example: they trap methane gas from the garbage, capture it sell it--it’s usually used for electric generation--providing jobs and making money that they add to their tax base. Another case; It used to be that many cities, when they developed a mass transit facility, expected developers to come and develop the area around the mass transit point. Developers would make a lot of money doing that, because a lot of people travel through those areas. Then the Cities would try to derive tax revenues from that. A number of cities now do the following: They now own the development rights and lease them out, and by doing that they have been able to increase city revenues, which can then be used for educational or other services, in some cases by 30 – 40%. Stuff like this is happening all over the country. High-tech is also part of it. According to the last study I saw, there were 200 cities--but I was recently told it is now up to 800 over the last year--that are setting up their own internet services, owning them as a public utility. And the service provides an additional way to get firms in and get very high broadband capacities as well as make money for the city. There’s one in Tacoma, WA; there’s another one in Glasgow, KY; and more of them are outlined in my book. [And by the way, there is a website associated with the book that gives you more resources: places and projects which I’m not telling you about in detail here but which you can read about; www.americabeyondcapitalism.com.]

There are other activities of interest: land trusts are another one of those areas which are neither traditional capitalism nor traditional socialism and which are attracting a lot of interest. They have public benefits, they keep jobs, they hold cities together and help build them, they recirculate funds in the local economy. They are developing, and they’re very interesting, and rarely are they at the center of people’s attention, except for being tried in some "other" community. So if you want to get serious about some of these things, my suggestion to you at the Center, would be to act as a gateway for information about these types of activities. There ought to be discussions in the community about things of this kind that are being done elsewhere—and you could even begin to incorporate some of them into your development plans.

Let me take this just a little further. I’m going to push you a little further in two other directions and then I’ll make some concluding remarks and sit down. In thinking about making a serious effort--if you’re looking at the longer haul, in a community of this kind, and particularly in a research center, beyond economic research to the new institutional innovations that are happening in many parts of the country to public policy--I suggest a couple of efforts at the state level and the local level. In some 31% of the communities that have been surveyed, the city also invests in businesses as a venture capitalist. And some 50% of the states have some similar venture ownership programs. These are more interesting and more expansive ways to use public policy again for the purpose of creating jobs, anchoring jobs, increasing the local multiplier, and stabilizing the city’s economic base.

There are states doing really interesting things to help community stability and community jobs, and I think that they’re going to be the winners, the ones that get ahead of the game. For example, the state of Alaska--now this is the one that is most interesting to most people. Let me tell you about the Alaska Permanent Fund. The APF is a staggering American innovation. Here we are, in the state of Alaska, with what is essentially a public trust financed by oil revenues. It invests the money as if it were a state pension fund. Many public authorities have pension funds which they invest in private stocks, and the state of Alaska does that using oil revenues. But the interesting kicker is that, as a matter of right, all who have lived in the state for one year get a share of the dividends. So in a good year--this is probably going to be a good year for them because oil revenues have been high--in their best year, they have had a family of five, that’s two adults and three kids, get $10,000, as a matter of right, from the public ownership of the resource. So there’s an interesting example. I don’t know what your resource might be in PA, but you should think about this other America Beyond Capitalism going on up in Alaska—and how something related might work here.

Many states have used public pension funds to target jobs and enhance the stability of local economies. In some areas, they have also used them to deal with environmental problems, offshore investment, and third world investment. CALPERS, the California State pension fund is probably the most well known. But many states now have ETI programs, Economically Targeted Investments so that they use the capital that the state assembles with the goal of enhancing the stability of local economies, and I think that’s bound to grow as time goes on.

The other most interesting state investor is Alabama; many states do things like this, but the one that I found most interesting is Alabama, because it’s a very conservative state. The Alabama pension fund has been very creative, and very successful as well. They have had some failures, but overall their success rate has been extremely high. As a matter of state policy, in order to keep jobs in the state, it invests in, among other things, worker-owned companies which are anchored in the state, some 250 of them. It’s a combination of public policy with firms that are anchored in the state. So, these are some things that are going on beyond the realm of things we’ve talked about so far, and I think these are things that are going to be growing around the country and that, I would also suggest, are good things to do for your own community.

You should know about them, put them on your research and policy agenda; but I’m also saying that if you don’t do them, since everyone else is going to be trying to do what Erik suggested you need to do, the ones that will be getting ahead of the game in some of these other areas are the ones that are going to be the overall winners.

Let me say a couple of other things. I mentioned anchoring companies and jobs, which I think is critical. I’ve talked about increasing local multipliers, so the money recirculates more within the local economy; and I have talked about, in fact, economies that are increasingly localized and about paying attention to the localization phenomenon, because what you can do locally to support the localization trend that is occurring on its own is going to yield a big payoff. But let me add one other thing. This morning, we kind of skirted around the edges of the problem of poverty, income distribution, wealth distribution. But we need to talk about that. I’m from Racine, Wisconsin—a city in many ways like your own. Now, you cannot, on the one hand, have a high level of poverty and income inequality, and have a healthy economy on the other hand. I mean, at a very simple level, to the degree that you have poverty, you don’t have local purchasers of goods and services. That’s the narrow end of the game: you cannot run a local economy if you have a lot of poverty. At the moral end of the game, you cannot have a "community" if the disparities grow and grow and grow, at least in my view. So you have to do something about poverty and inequality, in my opinion, and I think we need to address that aspect of things, and bring it into, and not keep it out of, the discussion. Listening to the paper that was being given this morning, I was shocked. I had not realized--and I’m a political economist, and I should know this--I had not quite realized that someone working at the minimum wage gets just about $10,000 a year. You can’t raise a family on $10,000 a year; that’s just not possible. Just think about the numbers, what they actually mean, and you can see that it’s not possible to have much of an economic base with people who can’t buy things. The other thing I also had not realized is that the minimum wage has shrunk back to the Eisenhower levels, or below what it was in the Eisenhower years, if you take account of inflation. So I think there’s a problem of inequity, but I think there’s also an economic problem here.

Let me give you one way to think about it. First, the economists usually lie to you about inequality. I mean, most economists will tell you: well, you know, if the income distribution is stable, there’s no change in inequality. Sounds right, doesn’t it? What they mean by that, however, is as follows: If I have $1,000 this year, and Antonio has $50,000, and then next year I have $2,000 and Antonio’s has $100,000, the ratio between us has not changed at all, still 50:1. No change in inequality, the economists will lie to you. Nonsense! The difference between our incomes has gone from $49,000 to a $98,000 gap. And that’s what has been happening in the US, plus growing relative inequality as well. The numbers are kind of staggering; but the Nobel economist Paul Samuelson gave a wonderful illustration of them in his textbook, which for many years was the most widely used textbook in the country. In 1948 Samuelson put it this way: if we try to illustrate distribution by piling up kids’ blocks, with each block representing $1,000, most of us would be, in 1948, a yard from the floor, while the top one percent would be at the top of the Eiffel Tower. And then he redid it in 2000--and I may have the figures slightly off, but the basic image is not off--he did it in 2000, and he said, well, we, most of us, would still be at about a yard from the floor, but the top is now Mt. Everest.

There has been a radical change in the distribution of income and wealth in the country, and that simply needs to be addressed. The last time I looked at the numbers, the top one percent had more income than the bottom 100 million people altogether--we were talking about McMansions this morning. Wealth distribution is even more extreme. The top one percent owns just under 50% of all the investment capital. That’s a medieval number! One percent has just about half the investment capital. According to the most recent figures available, the top two tenths of one percent of wealth owners made more money on the sales of stocks and bonds than everyone else in the entire society put together. That kind of extreme concentration is not going to produce a democratic society, and it’s not going to produce the kind of communities that we need, healthy communities. So one of the additional reasons I’ve been interested in these alternative forms, worker-ownership, neighborhood ownership, community ownership, and these different ways of getting the benefits of ownership of assets and wealth into non-profit institutions that own wealth, is that this is one way to begin to address not only the anchoring firms, but also to try to alter the ways we distribute the wealth--different patterns of wealth ownership that might provide for some greater distributional equity, and a sense of who owns the country in different ways.

I’m sure there are lots more questions that all of this raises, but for the moment, I hope I’ve given you some picture of America Beyond Capitalism—and of what might be done, practically, here and now. Thank you.