The newsLINK Group - The Multiplier Effect of Buying Local

Editorial Library Category: Cities & Towns Topics: Multiplier Effect Title: The Multiplier Effect: How Buying Locally Helps Communities Author: newsLINK Staff Synopsis: It isn’t that you don’t want any national businesses setting up shop; you do. Sometimes those businesses can import a lot of cash. But you get more of a bang for the buck by putting at least some of your focus on helping local, independent businesses, too. Editorial: The Multiplier Effect: How Buying Locally Helps Communities 4064 South Highland Drive, Millcreek, Utah 84124 │ thenewslinkgroup.com │ (v) 801.676.9722 │ (tf) 855.747.4003 │ (f) 801.742.5803 Editorial Library | © The newsLINK Group LLC 1 Many communities take for granted the idea that they can jump-start their economy by offering good deals to national companies if the national companies decide to do business locally. The idea does make some sense, because the companies that come to a geographic area do create jobs within the community and they do improve the economic situation, but the real question is a simple one: Is that the most effective way to improve a local economy? The answer is equally simple: No. It isn’t that you don’t want any national businesses setting up shop; you do. Sometimes those businesses can import a lot of cash. But you get more of a bang for the buck by putting at least some of your focus on helping local, independent businesses, too. Why is that? It has to do with something called an output multiplier. The concept behind an output multiplier is simple. When money is imported into a community from somewhere else, the benefit to that community is worth more than the initial dollar amount. If $1 is imported, then the output multiplier means that dollar will increase in value. For example, suppose that the output multiplier is 1.85. The imported dollar ends up being worth $1.85. How is that even possible? Consider an example. Suppose you’ve got a two-parent family with children, and both parents are working. When the parents get paid, they spend a certain percentage of their wages in the community and the balance outside the community. What qualifies as spending outside the community? Think of things like federal or state taxes, big- box retailers, and online shopping. The part spent within the community stays there; the part spent outside the community leaves. Now look at the money that stayed inside the community. The official name for the part that stays in a community is the retention percentage, or the retention factor. Whoever receives the part that stays is going to go through the same exercise, spending some money locally and spending some money that will leave the immediate community. Then the cycle begins again, until there isn’t any local money left. If you add up the retention factor from each cycle of spending, what you get is the output multiplier. It is really nothing more than the sum of all those local spending cycles, with the first few cycles counting the most. That is why the retention multiplier is larger than the amount of money that came into the community at the beginning: some of the money gets spent more than once. As you might imagine, it is difficult (and maybe even impossible) to know exactly how much money is going to be retained within a community, and how much is going to end up being sent somewhere else. There are too many variables. Mathematicians make a good attempt, though, by using something called a probability distribution to calculate a likely range for the output multiplier. For example, they can determine that the maximum retention will be some number between, say, 30 percent and 70 percent. If more money stays within a community, that’s obviously a good thing. And since it is a good thing, communities ought to be very interested in increasing their output multiplier as much as possible. If the amount retained is larger, after all, then the benefit to the community is larger, too. But how do you do that? Despite the efforts of the best tax accountants, the amount that has to be paid in taxes is often outside the control of the community. But a community can reduce the amount of money spent online or at national retailers by encouraging local businesses, and that will result in a larger output multiplier. How much of a difference does it really make to shop local stores within a community instead of the big-box retailers? It turns out that the difference can be significant. According to a 2009 study by a private two-man research firm called Civic Economics, $100 spent at a local business will result in $32

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