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 Author: gorwest
PostPosted: Wed Jan 13, 2016 10:27 am 
This is installment #3 of a "Doing economic development" series. In the first article I shared a brief history of economic development in Grant County, as I know it. The second installment was about the needs of small businesses and the idea that economic development efforts should be led by small business people, who are the actual economic developers.

First, I want to explore the meaning of "The Economy". The name is used constantly, but upon reflection, it is pretty hard to define. We all think we know what it means, but in fact we generally only have an indistinct feeling about what it means. Bear with me as I attempt to build a useful description of the economy. As I use the term with capital letters, I am hereafter referring to the U.S. economy, which is to be differentiated from our local economy (Grant County).

The next word to come to mind is "money". Money has something big to do with The Economy - money is like the blood flow in an economic animal. An economy is basically the circulation of money (I'll continue to use money as a primary term, though I think we need to broaden our understanding of it to include all resources and benefits, which are not all monetized in an economy).

In The Economy, the growing wealth gap is a symptom of unhealthy circulation. The idea of redistribution of wealth has become prominent, which instantly raises objections as "Socialism". Some of the common techniques for redistributing wealth include more progressive tax schedules, subsidies, and minimum wage increases. But I am not going to talk about that stuff, I want to uncover some of the systemic mechanisms in The Economy that tend to increase the wealth gap, and some local business related changes that we can make without governmental involvement.

In a living organism metaphor, where abnormal circulation indicates poor health, the causes are identified and treatment is applied. A healthy economy is dependent upon heathy money flow, and we need to properly diagnose the problems and apply treatments.

Earlier, I stated that economic circulation has three fundamental components: money coming in, money in recirculation, and money going out. When these elements are unbalanced, an economy is unhealthy. (Maybe not so much if there is excess money coming in, but even that carries the risk of boom and bust consequences. In our local economy, we do not have a surplus of money coming in at this time.) Below is a list of examples of these components.

"Money coming in" businesses have several forms: 1) export businesses, which source and/or manufacture products here and sell them outside the local economy; import displacement businesses, which source and/or manufacture locally and sell locally thereby displacing imports (the Gila WoodNet group is an example); 3) internet based businesses (another export type), where the company can be located anywhere and provide product and services electronically (consultants, web services); 4) companies based in Grant County that work outside of the area; 5) retirees (not really businesses, but anyone with a retirement income from a pool of money somewhere else is bringing money in); 6) state and federal entities; 7) grants. (This is not meant to be a comprehensive list, I'm just trying to communicate the concept.)

"Money recirculating" businesses include just about everyone, though the level of recirculation varies dramatically. Chain businesses, especially when the franchise is not locally owned, don't recirculate much, as products are purchased elsewhere and the profits go elsewhere. On the other end of the spectrum, a business that buys supplies locally and is owned locally can have a very high level of recirculation.

"Money going out" businesses (leaks) include most energy suppliers and national chains not locally owned, and lenders (other specific examples being building supplies, food, lots of stuff, really). These businesses are necessary to us, since we can not make everything ourselves. In fact, we can not practically even come close to being self-sufficient, so I am implying no disparagement.

The really low hanging fruit of economic development is the reduction of leakage. One of the biggest leaks, and easier leaks to fix, is energy usage. Most buildings, as an example, will benefit from energy upgrades, which can include insulation, air draft sealing, windows, more energy efficient electrical and gas powered devices, solar panels, and better controls. Performing building energy upgrades is a excellent local business opportunity and will support a number of jobs, so that's economic development right there. But the bigger effect is that installing upgrades will reduce energy costs dramatically, compared to the cost of the investment. Older buildings can realize a 10% to 100% return on investment - put another way, if the money was put into the bank, the interest rate would be 10% to 100%, permanently and with no management fees or worries. Even the stock market crashing will not affect an investment in energy conservation. Curiously, saving energy is not acknowledged to be an economic development tool. Lending institutions don't even like to loan money for it, which leaves open an excellent local investment opportunity for folks who want to invest somewhere besides Wall Street.

Another major economic leak is the interest on loans. For instance, a $150,000 house with a 30 year loan at 5% interest will end up costing approximately $290,000 - $140,000 will leave the community. At 8%, the end cost would be $396,000 - $246,000 would leave the local economy. But what if that house was financed by a local entity, one that didn't "sell" the loan to a larger financial business? The interest money would then become a "money recirculating" factor in local economic development, rather than a "money going out" factor.

Those are just two examples of non-traditional economic development that can be done locally by individuals without any changes in regulations or subsidies. There are also opportunities to invest in local businesses for the purpose of providing the needed resources that I talked about in Installment #2. I need to make the point that local investing has more than a money return, which is what conventional investing is only about. This is made clear by asking the question, what do you want money for? I had a neighbor up in Idaho many years ago, who once asked, "Do you know why we work? To make money, to buy things!"

When I think about what I want money for, it's a little bit broader than just buying things. I want to accomplish things... I want to live in a great place... I want a healthy environment... I want a healthy economy. It's true that you can buy that sort of thing, to a degree, using money. But you can also "buy" those things to a large extent by doing. Sometimes we "buy" a nice place to live through donating to good causes, and don't bat an eye that the "investment" didn't return any money, because we got something else of value. But there are circumstances where both can occur - I'll relate the example of our local community radio station. KURU is a nonprofit business; folks who want to listen to it donate money - we "buy" the radio broadcasts, though it is viewed as a donation. When it was in need of a new transmitter, the board decided to borrow the money instead of asking for the rather large donations that would be required. The solicitation was for six $5,000 unsecured loans at 5% interest, and the business plan pro forma showed that it could be paid back from operational savings and advertising revenues over a several year period. KURU probably could not have borrowed the money from a bank, because it had no security to put up, but supporters of the station were quite willing to risk $5,000 because the radio station is not just a money investment to them, it is a quality of life investment - but it is also one that pays more than a current conventional investment!

To sum up, local economic development can be done through local investing, and pay excellent dividends in both money and quality of life. Installment #4 will dig deeper into the mechanics of local investing.

Last edited by gorwest on Fri Jan 29, 2016 5:47 pm, edited 3 times in total.

 Author: almilligan
PostPosted: Wed Jan 13, 2016 1:16 pm 
Back before I retired I invested in four local businesses, made a little money on one, lost all my money on the other three. Ended up down some thousands dollars.

Couple of problems with local investment. Individuals have a had time accessing the risk in local investments with little or no history. And most people can't afford to lose several thousand dollars, according to the statistics they're more likely to loss than make money.

If you remember back to the modular housing factory in Lordsburg, I know of at least one local person that was financially wiped out when the factory closed.

 Author: gorwest
PostPosted: Thu Jan 14, 2016 7:46 am 
That's too bad about your investing experiences. You generalize that failure is the rule - can you share some of the details about what the differences between the success and the failures were? Learning about failures is important to establishing a fresh culture of investing where we live. Wall Street has many failures, too, and while fund investing can minimize risk, it also results in lower average returns. And there are almost never any quality of life returns, or local economic development effects, from abstract Wall Street investing.

One of the purposes of the Local Investment Opportunity Network is to encourage and facilitate discussion, which should better vet any investment opportunities, and identify how the businesses in question might become better. That was certainly a main topic of conversation during the KURU loan run-up.

Remember, I explained that what most businesses need are resources, one of the most important being human capital (reliable people, collaborative relationships, and broader experience).

Last edited by gorwest on Thu Jan 14, 2016 10:03 am, edited 1 time in total.

 Author: Azima Lila Forest
PostPosted: Thu Jan 14, 2016 9:56 am 
I really appreciate this series you're doing, Gordon. It recalls to mind some things i already know, and also teaches me some things i didn't know. Thank you!

Azima Lila Forest

 Author: gmcr
PostPosted: Thu Jan 14, 2016 7:40 pm 
Greetings All,

And thanks 1st to Gordon for thinking of GMCR / KURU as an example of efforts to improve our quality of life contributing to local economic development. Personally, my embrace of this line of thinking was the tipping point of my final move to New Mexico after many visits over many years. One day the light went on... economic reservations were overcome by my recognition of the value of just being here. YMMV!

GMCR/KURU is currently entering its 3rd year of FM broadcast which was preceded by an initial year and a half of web streaming as we nailed down our studio facility and went about securing our tower location, equipment, etc.

We have pursued a primary model of direct local member support and have been fortunate to have a small number of large donors that advanced our cause quickly however, under the demands of getting the station on the air within a compressed time frame, we still fell short.

We can all thank local individuals who stepped up with personal loans to GMCR. And we are no less grateful that our growing membership and listener support has made it possible to whittle down that obligation to 15% of the original loan in only two years. To those that stepped up, A Blessing On Ya! for your faith in our efforts and a further Blessing On Ya'll! that have donated - in any amount - to allow us to meet our obligations.

Gordon has described the circumstances more recently of how we were able to secure our new transmitter. In short, if this local support had not materialized, we may not have weathered the crisis or have suffered an indefinite and greatly disadvantaged state of affairs. Again we profoundly thank these folks for providing the resources to make this possible. We remain on track and have repaid more than 20% of that obligation and again we thank all of our members and supporters - in any amount - that ultimately pick up the tab.

Certainly, almost any investment incurs risk. But in times of global uncertainty, institutional instability, and governmental dysfunction, self reliance and local sustainability are essential elements of a viable Economy.

Gordon, thanks for all your efforts and for bringing this discussion forward.

Kyle Johnson
Gila / Mimbres Community Radio - KURU 89.1 FM

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