Developing the Cure for Corporate Welfare – Next City
The Equity Factor

Developing the Cure for Corporate Welfare

Michael Shuman says Philadelphia’s Reading Terminal Market is an example of a “pollinator business,” a smart economic development model. (Photo by Eugene Kim)

Philadelphians don’t exactly need another reason to love the Reading Terminal Market, the city’s one-hundred-plus-year-old iconic public market, but here it is anyway: The whole place is 100 percent self-financed.

Not only are the tenant vendors local, independent businesses, tenant rents and sales cuts fund 90 percent of the Market’s budget. The rest comes mostly from an annual fundraiser that brings in about $100,000. Contrast that with General Motors, Ford, Chrysler, General Electric, Boeing, Amazon and 42 other companies that received more than $100 million each in state or local incentives from 2007 to 2012, according to an independent study by the New York Times.

The study found that state and local governments gave up $80.4 billion in incentives to “attract and retain” businesses for the purposes of “creating jobs.” It’s a number that author and local economy expert Michael Shuman is sure is actually much higher.

“There’s so many reasons why that is a dumb way of economic development,” Shuman says. “The most important of it is the growing mountain of evidence that the best and more important economic development comes from locally owned business.”

Shuman has written four books on local economies, most recently The Local Economy Solution, which came out in June.

“What I was responding to this time was how there were many groups who are doing good work on local economies, and their first impulse is to try and go out and raise foundation money to support their work, while many economic development departments are still stuck ponying up public dollars for economic development,” Shuman explains, citing the aforementioned New York Times study as well as a study he led himself.

Beginning about eight years ago, Shuman and his colleagues began compiling data on statewide economic development programs in the U.S. Choosing 15 states, largely rural given a secondary focus on food systems, they analyzed the three largest statewide economic development programs in each. Of the 45 programs they studied, 26 were giving less than 25 percent of their incentives to local businesses. Sixteen programs were giving 90 percent or more of incentives to non-local businesses.

And yet, there is “a growing universe of self-financing businesses that were undertaking the functions of economic development,” Shuman says. He calls them “pollinator businesses,” self-financing businesses that serve other businesses, whose mission is about building a great local economic marketplace. Reading Terminal Market is one of them, featured in the book.

The first thing you have to do, Shuman says, if you want to support “pollinator businesses,” is to shut down all of your existing economic development programs that are dedicated to “attract and retain.”

“Those are a dead end,” Shuman asserts. “Then you take some of the savings and perhaps you invest in some local entrepreneurs getting pollinators going. Many of the pollinators that I write about are interested in either helping startups elsewhere get going or deploying some kind of franchise model, so you don’t have to start from scratch on most of these things.”

He categorizes them into five different fields — planning, purchasing, people, partnership and purse pollinators. Purse pollinators, for example, include credit unions like Vancity, in Vancouver, British Columbia, which Shuman features in the book. It’s one of the largest credit unions in North America, with 500,000 members, providing 38,000 local businesses with credit, partnerships and technical assistance. (It’s not in the book, but check out this lending model created by a food co-op and credit union.)

One example of a partnership pollinator model is used by Tucson Originals, a local restaurants’ association in Tucson, Arizona. As one of its services to members, Tucson Originals offers pooled procurement. They survey members annually to find out the top 25 products that every restaurant uses, and then coordinates cumulative purchases from bulk suppliers. It’s a way to give small — and particularly minority-owned — firms a more equal playing field with large corporate chains.

“Many of the entrepreneurs in Tucson Originals are Latino sole proprietors,” Shuman notes. “There’s no conceptual reason why any of these programs, even if the existing ones are not targeted at low-income, or of color, could not be redesigned to do so. In fact, the more challenging the economic circumstances, the more one needs a pollinator design because you basically don’t have the resources to pay for economic development as usual.”

There remain some important kinks to work out with pollinators. “Most of these pollinator models, while they have a theory of self-financing, they haven’t quite done it yet,” Shuman says. For example there’s Reading Terminal Market’s annual fundraiser.

“We also don’t know how well they’re going to survive a crisis, a change of management, a strike, a shortage, whatever,” Shuman says. “I kind of warn people that most of the models that you read about are probably not going to be around in five or 10 years. That’s the bad news.”

“The good news is,” Shuman continues. “People are learning from them, people are adapting models and figuring out what went wrong and do better the next time.” Some of the pollinators Shuman writes about in The Local Economy Solution learned from failures he wrote about in his earlier books.

The bottom line, according to Shuman, is that even at the state and local level, public policy right now is systematically subsidizing big business to the disadvantage of small business. “Cities cannot coherently have strong economic development if they continue to do that,” he says.

Part of the response will have to come from civic engagement, one way or another. Shuman points out a need for transparency about how much incentives go to local versus non-local business might help, or more accountability about how much gets spent in incentives per each job created after the fact.

“Another approach, you might call a libertarian approach,” Shuman says, “Is to just get rid of all of it. I’m deeply sympathetic with that. It’s clean. It gets rid of a lot of corruption in politics.”

The Equity Factor is made possible with the support of the Surdna Foundation.

Oscar is a Next City contributing writer, and was a Next City 2015-2016 equitable cities fellow. A New York City-based journalist with a background in global development and social enterprise, he has written about impact investing, microfinance, fair trade, entrepreneurship and more for publications such as Fast Company and NextBillion.net. He has a B.A. in Economics from Villanova University.

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