Local Empowerment is the Key to Dealing with Trump

How did America—a country dedicated to the proposition that all people are created equal—become one of the most unequal countries on the planet?
Results of the 2016 presidential election by county.

Results of the 2016 presidential election by county. (Source: Flickr)

In the modern era of presidential politics, Hillary Clinton won the popular vote by a bigger margin than any other candidate that lost the electoral college. Donald Trump won the presidency by 74 electoral votes while losing the nationwide vote to Clinton by 2.6 million votes and counting.
But there’s another divide exposed by the election, which researchers at the Brookings Institution recently discovered as they sifted the election returns. It has no bearing on the election outcome, but it tells us something important about the state of the country and its politics moving forward.

Donald Trump - Time Person of the Year

The divide is economic, and it is massive. According to the Brookings analysis, the less-than-500 counties that Clinton won nationwide combined to generate 64 percent of America’s economic activity in 2015. The more-than-2,600 counties that Trump won combined to generate 36 percent of the country’s economic activity last year.
Clinton, in other words, carried nearly two-thirds of the American economy.

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New Ro Magazine

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A rough draft of New Ro Magazine.
We are undergoing several nested transformations at once that are causing incredible disruptions of the economic, social, and political order.
The first is the shift from an economy that is powered by natural resources and physical labor to one in which knowledge and the mind have become the dominant means of production.
As described in Steve Denning’s Forbes article, “Roger Martin: How ‘The Talent’ Turned Into Vampires:”
How did America—a country dedicated to the proposition that all men are created equal—become one of the most unequal countries on the planet? Why do the nation’s leaders now spend so much of their time feeding at the trough and getting ever more for themselves? Why has public-mindedness in our leaders given way in so many instances to limitless greed?
These questions are being raised, not in some anti-capitalist rag from the extreme Left, but in the staid pro-business pages of the Harvard Business Review, in a seminal article by Roger Martin, the former dean of the Rotman School of Business and the academic director of the Martin Prosperity Institute: “The Rise and (Likely) Fall of the Talent Economy.
One key factor, argues Martin, is a fundamental shift in nature of the economy. Fifty years ago, “72% of the top 50 U.S. companies by market capitalization still owed their positions to the control and exploitation of natural resources.” But in the latter part of the 20th century, a new kind of organization began to emerge: an organization that prospered not by natural resources but through “the control and exploitation of human talent.”
The clustering of talent and economic assets also makes the city and other local entities the new economic and social organizing unit, undermining two core institutions of the old order: the large vertical corporation and the nation-state.

This age of urbanized knowledge requires a shift in power from the nation-state to cities and other local entities, which are the key economic and social organizing unit of the knowledge economy. That means also means that cities and other local entities must take on the outsized power of the nation-state and the imperial presidency. We must devolve power and resources back to the local level — raking back their tax money from the federal government so they can spend it on themselves.

Local empowerment, and with it, deep investments in civic and social as well as physical infrastructure is something that can be organized around in the short term. This would require investment in civic and social infrastructure as well as in physical infrastructure. A bi-partisan coalition of mayors and other urban leaders can advocate for this successfully.

We have about $30 trillion in Americans’ long-term savings in stocks, bonds, mutual funds, pension funds, and life insurance funds. Yet less than 1 percent of these savings touch local small businesses—even though roughly half the jobs and the output in the private economy come from local businesses.
In addition, from a Forbes article by Steve Denning we learn that a magisterial study by Deloitte’s Center for the Edge shows the rates of return on assets and on invested capital for 20,000 US firms from 1965 to 2011. It shows that “managerialism” has been steadily failing for the last half century.

Economy-wide Return on Invested Capital

The graphic shows that something has gone so terribly wrong with the type of businesses supported by Wall Street—the supposed engine of economic growth and the supposed creators of jobs. When these firms have rates of return on assets or on invested capital of, on average, just over one percent, we have a catastrophe on our hands. An ROA of just over one percent means that firms are dying faster and faster: the life expectancy of firms in the Fortune 500 is now less than fifteen years and declining rapidly.
If our capital markets were functioning efficiently, roughly half of our $30 trillion savings or about $15 trillion would be going into the half of the economy that is local small business.
David Weild IV, chief executive of IssuWorks and a former vice chairman of Nasdaq who has researched the decline in small-company capital formation, has argued that the public markets are effectively closed to 80 percent of the companies that need them.
Small businesses and startups are the backbone of the American economy, and according to a report done by Tim Kane for Kauffman Foundation:
[W]ithout startups, there would be no net job growth in the U.S. economy. This fact is true on average, but also is true for all but seven years for which the United States has data going back to 1977…. Startups create an average of 3 million new jobs annually. All other ages of firms, including companies in their first full years of existence up to firms established two centuries ago, are net job destroyers, losing 1 million jobs net combined per year.
As politicians go through the political drama of producing budgets, the truth of matter is that the only way to reduce the deficit is by reducing unemployment. According to an article written by Business Insider‘s executive editor Joe Weisenthal:
History is pretty clear on how you reduce the deficit: Get growth, and reduce unemployment.
We ran this chart earlier this week to show how nicely deficit/GDP and the unemployment rate correlated with each other. Throughout these decades tax and spending policies have changed a lot, but it clearly hasn’t mattered. When unemployment drops, deficit/GDP drops. When unemployment rises, deficit/GDP rises. Growth is the only deficit reduction policy that matters.

Unemployment vs. GDP chart

Given these facts, why do governments at all levels (local, state, and federal) continue to subsidize large corporations? As David Cay Johnston writes in an Al Jazeera America article:
State and local governments have awarded at least $110 billion in taxpayer subsidies to business, with 3 of every 4 dollars going to fewer than 1,000 big corporations, the most thorough analysis to date of corporate welfare revealed today.
Federal, state and local governments publish exhaustively detailed statistical reports on welfare to the poor, disabled, sick, elderly and other individuals who cannot support themselves. The cost of subsidized food, housing and medical care are all documented at government expense, with the statistics posted on government websites.
But corporate welfare is not the subject of any comprehensive reporting at the federal level. Disclosures by state and local governments vary greatly, from substantial to nearly nonexistent.
David Tepper

David Tepper

The top hedge manager, David Tepper, earned $1,057,692 an HOUR in 2012 — that’s as much as the average American family makes in 21 years!
Over the last thirty years, the United States has been taken over by an amoral financial oligarchy, and the American dream of opportunity, education, and upward mobility is now largely confined to the top few percent of the population. ~ Predator Nation by Charles H. Ferguson
The economic disaster was driven, Ferguson writes, by a combination of “very low interest rates, pervasive dishonesty through the financial system, massive lending fraud, speculation, demand for high yield securities, and not insignificantly, a squeezed American consumer desperate to maintain living standards, and told by everyone – including George Bush and Alan Greenspan, the brokers and the banks, that home borrowing was the way to do it.”
Charles H. Ferguson won an Academy Award for Inside Job.
Productivity is one way to measure the wealth of any nation. The top line above shows, we’ve been producing more and more per hour since World War II. The lower line shows average weekly wages (after factoring out inflation) for non-supervisory workers (who comprise about 85 percent of the workforce.)

Weekly Wages and Productivity Chart

From World War II to the mid-1970s, those two lines danced together. As productivity rose, so did the standard of living of working people. But something big happened in the mid-1970s — the government adopted a new economic philosophy based on deregulation and tax cuts.
The gap between those two lines represents an enormous amount of money — more than $3 trillion for 2012, for example. Where did it go? In the early 1970s, less than 9 percent of national income flowed to the top 1 percent. By 2007, it was nearly 24 percent.
The bankroll that stakes the high rollers like David Tepper comes from the productivity bonus that we are no longer earning.
It is clear as Jack Dorsey, creator of Twitter and founder and CEO of Square said at Techonomy Detroit:
[A] critical aspect of improving the U.S. economy is actually improving the small business economy and making it easier to start a business and to grow small businesses.
So what can local, state, and federal governments do to make it easier to start a business and to grow small businesses? We get an answer from Stacy Mitchell, Senior Researcher at the Institute for Local Self-Reliance. In an article she states the six steps that governments must take to support small businesses:
  1. Restructure the Banking System
  2. Close Corporate Tax Loopholes
  3. Extend Sales Taxes to Large Internet Retailers
  4. Get Corporate Money Out of Politics
  5. Cap Credit Card Swipe Fees
  6. Increase the Small Business Share of Government Purchasing
Why aren’t these steps being taken? Despite the talk, we must consider if politicians are really interested in economic development or is it more important for them to maintain the status quo? Aaron Renn addresses this issues in his post “Do Cities Really Want Economic Development?
Jane Jacobs once said that “Economic development, no matter when or where it occurs, is profoundly subversive of the status quo.” This, in a nutshell, is why policies and programs that might actually move the needle and generate economic development are not implemented. The politicians, power brokers, businessmen, non-profit executives, etc. all at some level benefit from the status quo. Anything that disrupts the status quo is a threat to them.
And as Michelle Long, Executive Director of BALLE in “The Incentive of Building Local” points out:
A recent New York Times special report described the squandered opportunities of economic development in local communities across America as tax incentives tallying more than $80 billion are handed out to oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains — usually with no concrete benefit, no jobs, no improved economic climate.
[Yet, b]uilding local economies from within — investing in the people and local businesses rooted right where they are — offers profound, long-term outcomes.
And the evidence is in: From Economic Development Quarterly to Harvard Business Review, communities with a higher density and diversity of local, independently owned businesses have more wealth, jobs, and resiliency than communities that rely on large corporations and big box retailers as “job creating” employers. Rather than funneling wealth into a few hands, strengthening local business ownership results in more wealth and jobs for more people, and greater personal accountability for the health of the natural and human communities of which we are a part.
study by the New York City Department of Transportation shows some additional ways to increase local business:
NYC DOT found that protected bikeways had a significant positive impact on local business strength. After the construction of a protected bicycle lane on 9th Avenue, local businesses saw a 49% increase in retail sales. In comparison, local businesses throughout Manhattan only saw a 3% increase in retail sales. Better walking infrastructure encourages retail strength, too.
In another example from NYC DOT’s study, retails sales increased a whopping 179% after the city converted an underused parking area in Brooklyn into a pedestrian plaza. Retail sales at businesses in the rest of the neighborhood only increased by 18%.

NYC DOT

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