Defending Place

David Morris, Vice President
Institute for Local Self-Reliance
November 1998

It is an honor and a pleasure to address this distinguished audience, especially about so important a topic. When we first decided to hold this meeting we were uncertain what the reaction would be to our thesis: that even in the age of the global economy and the world wide web, place matters, that we face the common challenge of the consolidation of economic and political power and would all benefit from a conversation about how we might develop a common strategy and language to confront that challenge.

We have been heartened by the almost universally positive reaction to our invitation. We are here to share information about what each of us is doing in our own sector, and to put our heads together to see if there are lessons to be learned that can be applied across sectors. This is a conversation about message and strategy and policy.

And with respect to policy, what better state or better moment to be having this conversation than in Minnesota in 1998, where one party controls the executive branch, another controls one legislative chamber and still another controls the other? This gives us an opportunity perhaps never before presented to have a conversation and develop a strategy that cuts across parties and political philosophies and resonates with the man and woman on the street.

Local institutions and community life

Let me begin with an observation from the French poet and philosopher, Marcel Proust. "The real voyage of discovery", he wrote, "lies not in seeking new lands but in seeing with new eyes." Seeing with new eyes requires challenging the conventional wisdom that bigger is better, that separating the producer from the consumer, the banker from the depositor, the worker from the owner, the government from its citizens, is a necessary requirement for achieving a prosperous economy and a healthy society.

Seeing with new eyes means rediscovering the importance of place. If I may be allowed to quote another Frenchman, Alexis de Tocqueville who after visiting our infant Republic, proposed a key reason for the self-reliant and democratic spirit of America: the array and strength of local institutions. "Local institutions are to liberty what primary schools are to science: they put it within the people's reach."

Perhaps the finest empirical analysis of the relationship between local institutions and community life was conducted 50 years ago by Walter Goldschmidt, then a researcher for the United States Department of Agriculture. I find it instructive both for its findings and for the reaction to its findings.

Goldschmidt examined two farm communities in California's San Joaquin Valley chosen for their remarkable similarity. Each had the same volume of crop production, comparable soil quality and similar climate. Both communities were equidistant from major urban areas and were similarly served by highways and rail lines.

They differed in only one major respect. The Dinuba economy was centered on many small family farms. The town of Arvin depended on a few large scale agribusiness farming operations. Goldschmidt discovered that Dinuba's family farm economy provided its residents with a substantially higher median income and standard of living. Moreover, the citizens of Dinuba, to a far greater extent than their counterparts in Arvin, were involved in building a strong community.

For example, the quality and quantity of projects that benefited the entire community, like paved streets and sidewalks and garbage and sewage disposal were far superior in Dinuba. The agribusiness town had no high school and only one elementary school. Dinuba provided its citizens with four elementary schools in addition to a high school. The family farm town had three public parks. The large farm town had a single playground, lent by a corporation.

Dinuba's residents not only invested their money in expanding their community's physical infrastructure. They also invested their time in building its civic infrastructure. Dinuba had more than twice the number of civic associations as Arvin. In Dinuba, various governmental bodies existed that enabled residents to make decisions about the public welfare through direct popular vote. No such bodies existed in Arvin.

One would think that the government's reaction to Goldschmidt's findings would have been delight, for he had empirically validated the uniquely American belief about that the key to a healthy society is the broadest possible ownership of productive assets.

One would be wrong. For 30 years the USDA suppressed the report. Indeed, under pressure from industry it went even further, abolishing Goldschmidt's position and later, the entire office that studied agriculture's impact on communities.

Hearing the story of Dinuba fifty years later, I'm sure that many of you think Goldschmidt must have been describing a mythical town. Or at most, a situation long since relegated to the dustbins of history. After all, that's what we would conclude by reading the daily headlines and watching the 7 o'clock news.

Community enterprise: diminished but very much present

The statistics are indeed sobering. A thousand farms a week have gone out of business since 1950. Community pharmacies have been closing their doors at a rate of about 1000 per year for the last five years. In 1972 independent booksellers claimed 58 percent of all book sales. By 1997 their share had fallen to 17 percent. Almost 5 percent of all retail spending today is captured by a single company, Wal Marts.

Last year almost one trillion dollars in mergers took place and during the first six months of this year 4500 corporate mergers were announced with a combined value of $1.7 trillion.

It is getting scary out there. A few months ago the federal government gave its stamp of approval on the merger of Travelers and Citicorp, giving birth to Citigroup, a financial enterprise with $700 billion in assets that serves l00 million customers in 100 countries. Two days ago Cargill announced it will purchase Continental Grain, allowing Cargill to reportedly control as much as 70 percent of the grain market.

These figures cannot be ignored. To a certain degree, they are the reason many of you are here today. But they should not be overstated. For the independent sector, while under attack and no longer our dominant organizational form, is not dead. Indeed, it still commands a considerable degree of resources, and an even wider degree of respect.

• In Minnesota, over 500 independent community pharmacies still exist.
• Almost 40 percent of all electricity customers in Minnesota own their own electric company, either in the form of a municipally owned or cooperatively owned utility.
• Over 400 community banks or credit unions have more than 25 percent of all bank assets in Minnesota.
• Minnesota may be home to more than 20,000 independent farmers
• Minnesota boasts over 30,000 second generation family owned businesses and 13,000 third generation enterprises.

These are impressive statistics by any measure. They reveal that in the battle for the hearts and minds of America, community-based enterprises retain considerable clout.

Community enterprises: effective, efficient and popular

In that battle, place-based enterprises need not simply tap into our nostalgic yearning for a simpler and more rooted yesteryear. They can make a powerful case that humanly scaled institutions are the most effective way to go. When we first began to research this topic we were amazed to discover how little evidence there is to support the conventional wisdom. Indeed, the widespread belief in the inherent efficiency of bigness and absentee ownership is a little like the widespread belief in the power of the wizard in the Wizard of Oz. Once Toto pulled the curtain aside we saw that there was much less there than we had thought.

In every sector of the economy, the evidence yields the same conclusion. Small is efficient, dynamic, democratic, and cost effective.

Consider education. Exhaustive studies have found that small schools have less absenteeism, lower dropout rates, fewer disciplinary problems, and higher teacher satisfaction and higher test scores than big schools. This evidence has now become so compelling that big cities like Chicago and Philadelphia and New York have literally begun downsizing their schools by subdividing existing school buildings into two or three or even four completely independent schools.

And the most impressive results have occurred when the school district not only shrinks the size of the school but shrinks the distance between authority and responsibility by delegating decisionmaking power to the individual school.

The same scale of institution that best cares for our children best cares for our money.

In 1990, 11,194 of the nations 12, 165 banks in this country had assets under $300 million and two-thirds had assets under $100 million. Happily, the Federal Reserve has found that there are no efficiencies to be gained by having banks any larger than about these sizes. In the 1980s, researchers found that Savings and Loans that stuck to their knitting and lent close to home did not, on average, require a federal bailout.

Community banks also serve their communities best. A l996 Federal Reserve study found that small banks made 82 percent of all commercial loans to very small business borrowers. A 1997 study by the U.S. Public Interest Research Group concluded that fees for checking accounts and other basic services were on average l5 percent lower at small banks than large, multi- state institutions.

In manufacturing too, small scale pertains. Small manufacturers constitute over 98 percent of the 360,000 U.S. manufacturing enterprises. Two thirds have fewer than twenty employees. From 1979 to 1989, small and medium-sized manufacturing businesses created more than 20 million new jobs while the Fortune 500 lost almost 4 million jobs.

Place-based enterprises are not only efficient, they are wildly popular. Poll after poll concludes that the vast majority of the population supports community team policing, home-based health care, community banks, neighborhood schools, local businesses.

In brief, community-based enterprises and institutions still command considerable resources and even more considerable respect and admiration. Today, individually and collectively, these enterprises are building on this foundation to survive in the age of planetary corporations and electronic commerce.

Surviving the global economy and the worldwide web

In our conversations with you, we have identified at least five main strategies you have adopted.

• Improve efficiency.
• Individual firms, often with technical assistance from their trade associations, are reducing production costs, managing smarter, and improving customer service.
• Work together to achieve the benefits of bigness without abandoning local ownership.
• In almost all of your sectors, locally owned enterprises have created cooperative purchasing and marketing bodies to lower costs, improve service and expand sales.
• Market your community roots.

Increasingly, place-based enterprises are marketing the virtues of neighborliness. They let their customers know that they have a stake in their community because their owners live there and that by shopping at their stores, their customers nurture the tissues of connectedness that form the basis of strong communities.

Sue to enforce existing laws against the arbitrary exercise of concentrated power.

Once upon a time, Americans fought to enact laws at the state and federal level that would prevent giantism from undermining community. Today many of these laws are unenforced. Much of the authority embodied in these laws is unexercised.

Today locally owned enterprises are resurrecting these laws as weapons in their battle for survival. The American Booksellers Association successfully sued six giant book publishers for providing discriminatory incentives to large bookstores. Last year, the independent booksellers again went to court, this time against Borders and Barnes and Noble, which together account for one third of all book sales, to stop them from demanding deep price discounts from publishers.

Community pharmacists have sued Wal Mart for selling drugs below their production cost as a way to drive them out of business.

The American Public Power Association and the National Rural Electric Cooperative Association have petitioned the Federal Energy Regulatory Commission to impose a moratorium on further large utility mergers.

Design new policies that nurture strong and diversified local economies

Let me spend my remaining time discussing this last strategy, because for the purposes of this cross-sectoral meeting, the creation of new place-oriented public policies may prove the most important.

Today our politicians love to gargle with the word community but when push comes to shove the policies they promote, whether liberal or conservative--the jury is still out on whether I can extend this comment to our own Governor Jesse Ventura--undermine the possibility of strong communities.

Consider for example, the way the Courts, and Congress, have interpreted the interstate commerce clause. The United States Constitution was enacted in part to make ours one country. To do so, it prohibited states from imposing undue burdens to interstate trade.

But in recent years the Courts and Congress have interpreted this constitutional provision so perversely that we now have a situation where communities can legally discriminate against their local businesses but are prohibited from treating out of state competitors the same as in-state enterprises.

This has had pernicious effects. Back in 1976, for example, the U.S. Supreme Court ruled that a national bank located in Nebraska could charge Minnesota credit card customers higher interest rates than were allowed by Minnesota law. A year later South Dakota repealed its interest rate ceiling on credit cards. Three years later, after Citibank failed to convince New York to follow South Dakota's lead, it moved the nation's largest credit card operation to South Dakota.

In the 1960s and again in the 1990s the Supreme Court ruled that a state or locality could not tax mail order firms. The result was to give remote businesses a 5-8 percent price advantage over local firms that do have to pay sales taxes.

In 1994, Senator Dale Bumpers introduced the Tax Fairness for Main Street Business Act, which would have given states the right to impose in-state sales taxes on mail order firms. The measure had the support of neither political party. Indeed, a few weeks ago Congress with overwhelming bipartisan support passed a bill that will extend the Supreme Court decision to all electronic commerce.

Government procurement policy may be equally destructive to local businesses. More than one sixth of the nation's GNP consists of local, state or federal government purchases. Almost universally, public law requires that public agencies buy from the "lowest responsible bidder". The rationale behind that rule is understandable. Citizens were concerned about officials awarding high cost contracts to their friends and supporters. But the unwillingness to take into account the effect of public purchases on the local community is both instructive and disappointing.

Here in Minnesota we have had a much-publicized example of this disconnect between the public sector and the public. Remember Zeno the shoe shine man and the Metropolitan Airports Commission? A few months ago a MAC committee recommended that the airport not renew its lease with one small shoeshine company and instead give its space to another company.

That decision probably would not have rated any news space except for the fact that the existing shoe shine operation was composed of elderly African American men. Its owner, Royal Zeno, age 79, had been shining shoes at the same spot for 36 years. The new company MAC wanted to give his space to was based in Kentucky and runs shoeshine operations at nine other airports.

The public reaction to MAC's initial decision was strong and negative. When I talked to Jeff Hamiel, Mac's executive director as the letters were pouring in he insisted, "We cannot be in the business of giving our friends a lifetime opportunity of being in the terminal." To which I answered, "Why not?". Assuming the customers are satisfied and the price is competitive, why can't we take community into consideration?

The public reaction and the threat of a civil rights law suit convinced MAC to back down. But they have yet to change their procurement philosophy.

Communities around the country are grappling with ways to encourage local ownership while not interfering with the normal dynamism and entrepreneurialism of the private sector. Stacy Mitchell of our staff has identified a number of such policies, which she will be documenting in an upcoming policy report. Let me list a few.

A number of communities, like Kent County in Maryland and Cape Cod, Massachusetts have adopted comprehensive plans that explicitly call for planning bodies to support "locally owned businesses".

Five cities on the west coast have adopted bans on "formula restaurants". These are defined by Carmel as a restaurant that is "required by contractual or other arrangements to offer standardized menus, ingredients, food preparation, employee uniforms, interior decor, signage or exterior design" or "adopts a name, appearance or food presentation format which causes it to be substantially identical to another restaurant".

Carmel is not prohibiting MacDonalds from setting up shop. It just can't look like a MacDonalds. In essence, Carmel is outlawing uniformity and in doing so, is encouraging local ownership

At the federal level, since the 1970s Congress has provided handsome tax incentives to companies that give stock to their employees. Over a thousand companies are now majority owned by their employees. Employee owned firms must operate in the same competitive marketplace as investor owned firms. But they tend to have a different decisionmaking calculus. The absentee owners of a firm might well make a decision to close a profitable operation if they can make more money in another location. For an employee owned firm, such a decision would be very unlikely.

Recently Congress debated a bill that would have abolished the inheritance tax for family owned farms and businesses if they were bequeathed to other family members who continued to operate the enterprise.

These are just a few of the public policies that nurture rooted economies. I'm looking forward to learning about many more novel policies from you today.

Let me end by observing, as every speaker now feels obliged to do, that we live in an era of great change. But let me also offer the distinction between change and progress offered by Bertrand Russell.

Change is inevitable, Russell wrote, while progress is problematic. Change is scientific while progress is ethical.

We will have change, whether we will it or not. But we will have progress only if we develop strategies that channel investment capital and entrepreneurial energies and scientific genius in directions compatible with our dearly held values.

In the context of today's discussion, this means strategies that defend and nurture place-based enterprises as the building blocks and life blood of dynamic, self-conscious and health communities.

This speech was originally presented at the Institute's Place Matters Conference in St. Paul, Minnesota, on November 12, 1998.

© 2000 Institute for Local Self-Reliance