We all know at some level that “buying local” is important. We see the decals and signs at small, local businesses all the time. But does that mean we understand all the reasons for supporting local businesses? Buying close to home is more than just making yourself feel helpful despite the possibilities of paying slightly more for local goods and services. Recent research shows how critical it is to keep your dollars in the community, both on a commonsense level, and from the perspective of economists who are increasingly understanding the concept of financial circulation speed, or “velocity” and how that speed of flow has a multiplying effect on the local economy. The future of your local economy depends heavily on keeping your money close to home.
At a very fundamental level, the money you spend in the local economy tends to stay in the local economy. Studies were carried out in which researchers compared produce purchases made in a regional supermarket chain versus the local farmers markets and produce stands. They found that more than twice that money stayed in the local community when the purchases were made locally. This meant that purchasing locally was over 2x more efficient in terms of stimulating the local economy.
During these recessionary times, local economies are hit especially hard by a lack of local spending. Yet the research shows that it’s not always a matter of fewer dollars coming in, but where the money goes and how quickly it gets there. The idea is that currency is like a shark, it needs to keep moving in order to survive and thrive. When you spend money at a national chain, most of that money goes to other national or even international suppliers who are not necessarily in the same local market. Spending in your neighborhood prevents localized “desert” areas that lack retail stores and consumer services. Furthermore, it prevents the uninhibited growth of “motor miles” that are populated by the big-box stores, car dealerships, fast food chains, and national retailers which tend to choke out other local businesses.
“Buy local” efforts also serve another important purpose in local economies: they help identify opportunities for local businesses to serve underserved or even unserved markets and demands. When consumers repeatedly buy items from national retailers or e-commerce websites like Amazon or Walmart.com for a particular class of products – let’s say bicycles and bicycle accessories – it may mean an untapped opportunity for a local bicycle retailer to move into the area and service that need. Think like a supply chain manager. Perhaps an area where large amounts of corn are grown could support a local distillery where corn is the chief ingredient of a high-end whiskey.
So the idea isn’t that localities can always be 100% self-supported but rather to begin to shift the center of balance away from national retailers and chain restaurants and towards locally-owned companies. Then there is the “elephant in the room” when it comes to buying locally. National retailers can support low prices because of economies of scale and national (and international) buying power. Low prices tend to be more attractive to consumers. But the true cost of those lower prices is oftentimes the shrinking or complete disappearance of local establishments. Local businesses are populated and owned by people you know in the community. Wouldn’t you rather buy from a friend who also tries to source their products and services locally? How about the impact on the environment when goods have to be trucked in from across the country? Or items that are shipped in from other countries on big container ships? Did you know that trans-oceanic shipping is one of the biggest sources of air and water pollution on the planet?
It wasn’t that long ago that we were primarily a producing or manufacturing economy. Now we are primarily a service-oriented economy. A disruption in international supply chains like we are currently experiencing could shift manufacturing back to the local economy. Supporting local trade might be another way we can build variety and flexibility back into local markets.
Local spending and investment increase monetary “velocity”. The more quickly that money circulates in a local “microeconomy” the more hands and the more businesses that money passes through. That increases the benefit and purchasing power of that money. That same money isn’t as available to the big box retailers, which decreases their revenue and profits, and makes it more difficult for them to siphon off business from local companies. The more velocity that local investment has, the more likely it is to pass through local support businesses like suppliers, advertising, printing, and local payrolls. Historically, monetary velocity held relatively steady in the period following World War II through the 1970’s. During the 1980’s monetary velocity slowed as Federal Reserve policies changed and capital was plowed into the Stock Market and into banks and other financial institutions. This was good for financial centers and cities with Federal Reserve banks. But big financial centers like New York, Boston, Washington DC, and Charlotte sucked money away from smaller markets. Over the past 30 years velocity has decreased dramatically because currencies are not flowing freely. Worldwide, GDP is shrinking, and more money is being printed but less money is actually being circulated.
As the world recovers from the economic turmoil of the COVID pandemic, many smaller cities and towns are in jeopardy of being left behind. Buying local is more important than ever. Keeping funds in the local economy will help these smaller markets retain their business base, as this economic principle is more about keeping money moving and circulating through local companies and not allowing those funds to drain away to large national businesses or other larger cities in another region.
Virginia Business Systems has been supporting local businesses and the local economy since 1993. We were buying local before buying local was cool. Contact us today to see how you can buy local and support the local economy.