Local governments of all sizes—counties, cities, towns, villages—are facing the challenge of restarting their economies with dwindling public resources. If the Hudson Valley is smart about it, the many jurisdictions can begin to spur unprecedented economic development at almost zero cost. The key is to invest in local resilience.
A front-page headline of a recent issue of the Wall Street Journal proclaimed, "US cities, thriving before the pandemic, will need new economic plans." This crisis has taught us that the fundamental premise of long-term economic well being is no longer to attract one or two "world class" global companies, but instead to create a diversity of locally owned businesses meeting basic local needs. Greater self-reliance in food, energy, and finance inoculates a community from future crop blights, oil cutoffs, or capital flights. That's the essence of resilience.
My latest book, Put Your Money Where Your Life Is, shows how the Hudson Valley's more than two million residents can move their pension savings from Wall Street to Main Street. By using well-established but little-known tools like the Self-Directed IRA and Solo 401k, residents can easily begin investing their life savings in Hudson Valley people, projects, and businesses.
Before the COVID-19 crisis, US households held $56 trillion in long-term investments in stocks, bonds, mutual funds, pension funds, and insurance funds. Even though local businesses account for 60-80 percent of the US economy, hardly a penny of this $56 trillion touched any local businesses whatsoever. In a healthy capital market, 60-80 precent of our savings would support 60-80 percent of our businesses—especially those businesses so closely tied to our community's wellbeing.
If we fixed our investment system, if we moved just 60 percent of $56 trillion from Wall Street to Main Street, every community would enjoy about $100,000 of additional capital per resident. A small town like Red Hook would have $1 billion to put into reviving its small businesses post-COVID. Poughkeepsie would have $3 billion, enough to reverse the decades of disinvestment that were triggered by foolish "free trade" agreements. The entire Hudson Valley would have $230 billion. And who needs perfection? If each of us with retirement savings commits to putting something into community renewal—10 percent, five percent, even just one percent—we can shift the course of history.
As my book shows, you can easily move your pension savings into local investments through two existing tax tools. The Self-Directed IRA enables you to direct a "custodian" to put your money into all kinds of local investments. For those who are self-employed, a Solo 401k enables you to do this from your own bank account.
That said, there's a role for public policy. Local governments around you need to redirect their economic-development policies to promoting local investing. They need to help struggling businesses learn about ways of raising local capital and help local investors (who are now 10 percent down in the stock market) learn the details about local investing.
Self-Directed IRAs and Solo 401ks cost something—not a lot, but something—and like speed bumps, their fees slow down the local investment revolution. Suppose we could bring down those costs? Automation and competition are likely to do this anyway, and I predict that the cost of a Self-Directed IRA and Solo 401k will ultimately shrink to about $100 to $200 per year, maybe even less. But let's go further and get rid of these costs altogether.
One way to do this might be through a local investment tax credit. For every dollar you put into local investment, you might get some amount off on your taxes. Suppose you had a five percent local property tax credit. If you reinvested $10,000 of your DIY Account into local business, you would get a $500 credit—more than enough to cover your fees for a year. Better still, let's apply the credit to the total amount of local investment you hold, so you can apply it year after year. (The state of Michigan recently introduced a bill to enact a 50 percent state tax credit like this.)
What else should we ask local policymakers to do? You might kindly request they consider the following:
• Move municipal banking into a local bank or credit union, as the cities of Phoenix and Tucson have done. This boosts local financial institutions and keeps more money recirculating at home.
• Provide a list of every local investment opportunity on a page of your county or town's official website. This would just be for informational purposes, but it could help investors and businesses find one another for private deal-making.
• Encourage your locality to issue municipal bonds for important local projects, like expanding local renewal energy capacity, and make it possible for grassroots investors to buy those bonds.
• Create a local land trust with both public and philanthropic funds that can buy up residential land for affordable housing and commercial land for affordable retail development. Allow grassroots investors to add capital as well.
• Share with businesses innovative structures to provide their employees with self-direction options.• Start economic-development funds that are run by the municipality but capitalized by grassroots investors (this is an exemption in the Investment Company Act that has yet to be exploited). Such pools might focus on food startups or affordable housing. They might help early stage entrepreneurs find funds to comply with early zoning and licensing fees.
• Get the managers of the municipality's public employee pension funds to start putting money into local investment options—perhaps into the municipal bonds or land trust loans mentioned above. They could provide their employees with local investment options.
All these policies would cost something, but I challenge any economic developer to show another set of policies that can generate billions of dollars off economic growth at such a low cost. Skeptics should heed the immortal words of Sir Francis Bacon: "It would be an unsound fancy and self-contradictory to expect that things which have never yet been done can be done except by means which have never yet been tried."
Michael H. Shuman, a leading visionary on community economics, is the director of Local Economy Programs for Neighborhood Associates Corporation and an adjunct professor at Bard Business School in New York City.