The Buy Local First Dividend: A Chain Reaction

Jan. 1, 2013 by Terry Garrett
The Buy Local First Dividend: A Chain Reaction


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Will Overwhelming Evidence Overcome Irrational Behavior?

Watching a M.D. or dentist work as a shill for the tobacco industry seems so absurd today that it usually evokes hearty, albeit nervous laughter.  But there it is, a mere 60 years ago.  By the 1920's there was ample evidence linking the harmful effects of smoking to human health.  The evidence was not only ignored, the solution for the tobacco industry was to recruit health "experts", M.D.s, to convince the public that not only was smoking safe, it was enjoyable and aided digestion after a big turkey dinner.
A similar episode is happening now within the economic realm.  Study after study has indicated the economic benefits to a local community when residents choose local businesses for purchases.  It's called the economic multiplier effect.  By choosing local first, the economic multiplier kicks in and we return $25 more of every $100 spent to recirculate in our local economy.
So, why do so many people still cling to the notion that it doesn't make a difference?  What causes their irrational indifference?  How do intelligent, well-intentioned people ignore evidence that is contrary to their present mindset?
Here is the most common claim that I found from across the web as well as having heard it in Sonoma County.   "It doesn't matter because big box stores hire local people and pay local taxes, which are their biggest expenses." 
This claim is made often in community debate about whether or not a new Walmart, Target, Lowe's or Home Depot should be permitted to open.  It's easy to see why folks might believe this argument without questioning it.  You see the building bustling with customers, full parking lots, people working there and know they're selling stuff.  That adds up to jobs and sales tax, right?  And experts tell us it's their biggest expense, right?
Let's take a closer look at Home Depot and Lowe's.  First, payroll and taxes are not their biggest expenses.  According to their SEC filings, payroll at both of these companies is less than 16% of sales income.  Local sales tax is 1.5% (Santa Rosa and Sonoma County, varies by district).  The payroll figure includes compensation for executives who don't live here, so presumably the figure is even lower at our local level.
Another question to ask is, "would the sales generated by a Home Depot or Lowe's exist in Sonoma County if they weren't here?"  Meaning is there a natural market demand for the goods and services and they fill that demand, or does their presence create the demand.  I think it's pretty safe to say the demand precedes the supply in this case.  If they weren't here, there are over 180 businesses in the building materials sector that could and would fill that demand, including numerous neighborhood and regional building materials and hardware stores, appliance stores, flooring stores and lawn and garden suppliers.

The net result is that the new chain store merely shifts market share from the existing businesses to itself.  It doesn't add productively to our statistics of new jobs and tax revenue.

Back to the economic multiplier for an example.  Let's take one Home Depot store (Lowe's is almost identical) that grosses $29 million a year in sales.  If that gross volume was fulfilled by local businesses, $7.25 million more would recirculate in our local economy.  That's $7.25 million that gets deposited in local banks and buys real property; hires accountants, attorneys, building trades providers, advertising, maintenance workers, clerks and a host of other jobs.

If there is existing demand for goods that isn't being fulfilled, then let's turn first to local businesses to supply it.  After all, that has been historically the method that Sonoma County residents employed.  The demand was expressed and local financiers, businesses and governments made it happen by forming the supply.  It wasn't until about sixty years ago that the trend toward attracting outside purveyors started.  It was a mistake to rely on that method, and it's a bigger mistake to continue that practice knowing that we are punished economically by it.
So, the next time you hear someone stand up at a city council hearing and state the benefits of permitting a big box store to open, remember the cigarette-shilling M.D. and know they're blowing smoke.  They got nothing.  Let your elected representatives know that you care more about the health and wealth of our local communities than you do about the false promise of saving $2 on a drill.