When companies export profit from local economy, negative multiplier effect kicks in

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The sun sets in Hixson upon retail shops that energize two sorts of clientele.

The sun sets in Hixson upon retail shops that energize two sorts of clientele.

By Alfred Adask

In 1999 Drs. William Heffernan, Robert Gronski, and Mary Hendrickson (professors in the Department of Rural Sociology at the University of Missouri) presented a paper entitled ““Concentration of Agricultural Markets”” to the National Farmers Union. That paper outlined fundamental changes in the social structure of rural American communities imposed by corporate agriculture.

One of the report’s most astonishing assertions was:

Today, most rural economic development specialists discount agriculture as a contributor to rural development because of the food system’s emerging structure.

Imagine —agriculture is being “discounted” as a contributor to rural economic development. For most of rural America what else is there besides agriculture to provide a foundation for their local economies? Moreover, what “structural” change could’’ve happened that would cause farming to become irrelevant to rural economic development?

The authors continue:

Formerly, in most family businesses . . . profits were . . . distributed locally among labor, management and capital. . . . [I]t made little difference how the profits were distributed . . . since the local family spent most of their profits in their local community. Thus, the rural community retained all of the profits [derived from local farms] and those profits. . . . contributed to the economic well-being of the community.”

Today, however, large non-local corporations, whether hiring local labor as wage earners or piece rate workers, see labor as just another input cost to be purchased as cheaply as possible. . . . Instead of being spent locally, farm profits now go to the company’s distant headquarters and are then sent to all corners of the globe to be reinvested in the food system. [Emph. add.]

Thus, by reducing family farmers from owners to mere managers, laborers, growers or sharecroppers, the globalized, corporate food system sucks farm profits out of local farm communities, leaves rural communities to survive on farm wages alone, and thereby impoverishes entire rural communities.

To illustrate, consider farmer John Brown who (with his family) successfully owned, managed and worked an Iowa farm in 1950. When farmer John passed on, he left the farm to his son (farmer Bob) who took out a bank loan in the 1960s (when agriculture was hot), failed to repay the loan in the 1970s (when agriculture went cold) and lost ownership of the farm through foreclosure.

When the new owner (a corporation headquartered in New York) bought the Brown’s Iowa farm, they “generously” allowed Bob Brown and his family to continue managing and working the farm (just as his father had).

Bob’s family was pleased. Even though they’’d lost actual ownership, they could still manage and live on “their” farm without suffering the humiliation of being driven off the land. Besides, their corporate owners provided a good medical, dental and life insurance policy. So maybe losing ownership wasn’’t so bad.

But no matter what sort of wages or insurance Bob’s family received as corporate employees, they (and their local community) did not receive the farm profits (perhaps 20% of the gross income). Instead, those profits were whisked out of the local Iowa community where they were created, sent to the corporate owners headquarters in New York and spent wherever the corporation wished.

If all the farms in this rural Iowa community were owned by distant, non-local corporations, none of the community’’s farm profits would be spent within the community where they were created. So, if we had 20 local farms that each generated an average of $50,000 in profits per year, $1 million in profits that would otherwise be spent locally would instead be transferred to corporate headquarters in New York.

A million dollar loss can be significant in small, rural communities. As a result of this corporate drain, $1 million worth of televisions, microwave ovens, new cars and similar products that might otherwise have been bought and sold in the local community will not be bought. Further, because the local electronics and automobile dealers won’’t sell as many TVs, microwaves and cars, they will also suffer reduced profits and also be less able to purchase additional products from their neighbors.

The “Concentration of Agricultural Markets” paper also explained:

So long as family businesses were the predominant system in rural communities, newly generated dollars [profits] in the agricultural sector would circulate in the community, changing hands from one entrepreneurial family to another three or four times before leaving the rural community. This “multiplier effect” greatly enhanced the economic viability of the community. [Emph. add.]

This “multiplier effect” is a subtle concept to grasp, but its effects are not confined to rural communities. In fact, the multiplier effect is regularly seen in the competition between big cities to attract tourists and conventions.

For example, suppose the National Fireman’s Association wants a place to hold their annual three-day convention. And suppose that convention will be attended by 2,000 firemen who will spend an average of $1,000 each on hotel, food, taxis, souvenirs and entertainment. That means the city that wins that convention will add $2 million into its local economy.

That’s good for local business, local workers and local politicians. The hotel owner makes more money and buys a new car; the car dealer makes more money and buys a new TV; the TV dealer makes more money and makes a down payment on a new house. Everybody profits from the extra money.

As a result of these cascading sales, economists guesstimate that every outside dollar brought into a community changes hands as much as three to seven times and thereby “multiplies” into the equivalent of an extra $3 to $7 for the local community. This “multiplier effect” means that the extra $2 million actually spent by the fireman conventioneers will “magically” generate the equivalent of $6 to $14 million of additional local business. That’s why the City of Chicago will fight tooth and nail with the City of Miami to host the Fireman’s Ball. The city that brings in $2 million may get a $10 million economic boost.

A zero sum equation?

But what economists don’’’ talk about are the negative conse- quences of the multiplier effect. While a local community might generate an additional $5 million in business for every $1 million in convention dollars it attracts, what happens to the communities that lost the $1 million in the first place? Doesn’’t it seem logical that the multiplier effect would cause the communities that lost $1 million to also suffer a $5 million “multiplied” loss in local economic activity?

After all, if the multiplier effect is real and it didn’’t generate “multiplied” losses at the community “source” of the money equivalent to the “multiplied” gains at the receiving community, we could all become infinitely wealthy simply by spending our money somewhere far from home. If I had $100 to spend, I’’d just go spend it in your community and you’’d get a “multiplied” $500 benefit. Then you could take that $500 and spend it in my community, and my community would get a multiplied $2,500. Then we’d take the $2,500 and spend it in your community, etc. etc. It would be the economic equivalent of a perpetual motion machine.

Obviously, that makes no sense.

Instead, the most likely way for the multiplier effect to work is as a “zero sum” process. That is, if you can take $1,000 from Chicago and spend it in Dallas and Dallas gets a “multiplied” $5,000 benefit, then it follows that the Chicago economy should have suffered an equivalent $5,000 “multiplied” loss.

Multiplied farm losses

When farmer Bob went to work for the new corporate owner of his former family farm in Iowa, Bob might’’ve received higher wages and better benefits than he ever made when worked for his Dad (farm owner John Brown.) Maybe his dad paid him $30,000 a year, and the corporation pays him $40,000—plus a dental plan. Such a deal! Sure, he lost ownership of the farm but, hey, he’’s doin’ better than ever before. (Better living through incorporation, hmm?)

However, because (1) the $50,000 in farm profit that former farm owner John used to spend in the local community has been vacuumed out and sent to corporate headquarters in New York; and (2) the multiplier effect of this loss may be equivalent to an “invisible” $250,000 loss to the local community—the local community will lose its former economic vitality and begin to “mysteriously” run down.

Thus, although the new corporate farm manager makes more money as a salary, his personal gain is more than offset by the multi- plied loss to the community caused by the exportation of local profits to distant corporate headquarters.

So if our hypothetical Iowa farm town sold 20 local farms to dis- tant corporations, there might be 20 farm managers making better money than they’’d ever hoped to make. They might even hire sev- eral farmhands for each corporate farm. Because they created more jobs, the new corporate owners would be praised and admired by the entire rural community. But if the 20 farms each “created” an annual $50,000 profit, and if that collective $1 million in profits were transferred far away from the local community to the distant corporation headquarters—then a 5X “multiplied effect” of the measurable $1 million loss might cause the equivalent of an “invisible” $5 million loss in local economic activity. Should we be surprised if a rural community subjected an annual $5 million loss “mysteriously” withers into a ghost town?

Man does not live by jobs alone

When the local economy first begins to decline, the local TV dealer and Ford franchise will make some extraordinary deals just hoping to stay in business. And of course, corporate farm manager Bob will thank his lucky stars he’s got the distant corporation to pay his wages while his local community slips into a mysterious depression. Further, being one of the few well-paid individuals left in the community, Bob could even make some great buys at his neighbors’ “going out of business” sales.

But in a year or two, the New York corporation that owns the farm will call farm manager Bob to tell him that due to falling wage scales in his community, they can no longer afford to pay him $40,000 to run the farm. In fact, since the former local Ford dealer (who went broke and lost his franchise) is willing to run the farm for $25,000 a year (and no dental plan), manager Bob is out unless he’’s willing to accept a $15,000 pay cut and work for $25,000 (that’s $5,000 less than the $30,000 he used to make when his dad owned the farm).

Now what?

As long as the profits are drained from the local economy and sent to a distant corporate headquarters, the “multiplier effect” may cause the local community to slide deeper into depression.

If so, in another year or two, the distant corporate owner might call again and tell corporate farmer Bob to accept another pay cut (now the former TV dealer is willing to manage the farm for just $20,000 a year). And so long as local profits continue to be exported to distant corporations, local competition for work will eventually drive wages down to a subsistence level.

Man does not live by wages alone

Implication: Wages alone are not enough to sustain a local com- munity; profits are the lifeblood of any community.

Why? Because in any business, profits are not simply what’s “left over” after you deduct your costs for labor, material and overhead (like rent). Instead, I suspect that profits are to some extent a “cre- ated” form of money. If so, profits have a “magical” impact that is “multiplied” and thus far greater than the mere numbers might suggest. I suspect that insofar as profits are “created,” they are “new money” injected into the local community. As such, the economic effect of these newly created profits should be identical to the effect of the money brought into town and spent by visiting firemen at their national convention. For every $1 of locally-created and locally- spent profit, the local community might get a $5 boost in economic activity.

Thus, one small farm’s (or store’s) $50,000 annual profit might generate a multiplied benefit to the local community of $250,000. Even though the farm owner might not be particularly wealthy, by spending his profits locally, he would be making a “multiplied” contribution to his community far greater than his own income. If so, “created” profits are the magical fuel for economic growth. Children would be healthy, schools safe, parents optimistic, and the community would be a “good place to live”.

In a sense, profits are our “savings”. They are the cushion we need to carry us over unexpected expenses like a tornadoes, crop failures or birth of another child. Without profits, a community can’t cope with emergencies or even afford to have more children without sinking deeper into poverty.

For example, if a community of 100 persons earns $10,000 in total wages a year, the average income per person (standard of living) is $100 per year. If that community has ten more children but their wages remain the same, the average income per person will drops to $91 per year. Without profits, communities not only sink into poverty, they wither in size and tend to become ghost towns.

Functionally, profits might be described as the “rent” paid to owners (of land, factories, etc.). Thus, profits flow to ownership, to legal title a property. Once a community loses local ownership of local land, industry or retail businesses, whatever profits that community generates and would otherwise enjoy, will be sucked out of that community. Given the “multiplier effect,” the resultant losses to the local community can be devastating.

The devil’s in the distance

The problems caused by “distant” ownership of property are fairly easy to see in the rural farm setting, but the very same process is going on all over the world. For example, when Walmart builds a new “mega-market” in Dallas, it inevitably bankrupts scores of mom-and- pop family businesses that used to sell food, hardware or magazines. Nobody cares. Those mom-and-pop operations were “small time” and probably never made more than $50,000 profit a year, anyway.

Dallasites think we’’re getting a good deal from Walmart because we’’re promised cheaper prices and more jobs. But we ignore the fact that we’’ll probably lose even more owners from “mom and pop” stores bankrupted by Walmart competition. More importantly, we’’ll lose the profits (and local “multiplied” effects) that mom and pop stores used to generate.

But given the multiplier effect, the $50,000 profit of each of those mom-and-pop businesses might’’ve “multiplied” to generate the equivalent of $250,000 a year in local economic activity. So if Dallas loses 100 mom-and-pop businesses to install one Walmart, the Dallas community may be collectively (and “invisibly”) impoverished by $25 million a year as former “multiplied” mom-and-pop profits are sucked out of Dallas (where “mom and pop” would’’ve spent them) and sent to Walmart’s distant corporate headquarters.

To illustrate further: Suppose the old mom and pop appliance store used to sell microwave ovens for $100 and made a $20 profit. But then Walmart came to town and started selling the same microwave for just $85. That $15 savings looks like a great deal to Dallas consumers, and any loyalty they might’’ve felt for the old “mom and pop” store disappears. Hooray for Walmart!

But bear in mind that when mom and pop sold microwaves for $100, their $20 profit was re-spent right there in their local community. Result? The multiplier effect turned that $20 profit into another $100 in local economic activity for their community.

Note that an additional 5X “multiplier” applied to a 20% profit margin creates an added “effect” roughly as great as the original $100 sale. In effect, by buying one microwave from mom and pop, we “magically” empowered our community to buy one more. By spending $100, we created a $20 profit which “multiplied” into $100 collective benefit.)

But when we replace scores of local “mom and pop” stores with one super Walmart, we send all those local profits back to the distant corporate headquarters. Thanks to Walmart, the $20 profit and the $100 “multiplied effect” that mom and pop used to generate simply disappears from the local community. Thus, even though each of us may save $15 by buying microwaves at Walmart, our community may be collectively impoverished by $100 in lost economic activity for every microwave sold. Result? No matter how much we seem to save individually, we are collectively impoverished by an even greater sum every time we buy from a distant corporation’’s local store.

And does our local government discourage Walmart from building in Dallas? Noooo! We offer tax breaks to entice ’‘em into our community! Of course, by giving tax breaks to foreign corporations, we necessarily increase the tax burden on local residents as we simultaneously bankrupt local mom-and-pop operations and allow distant corporations to suck the profits (and vitality) out of Dallas. We are thereby essentially paying distant corporations to rob Dallas and force its most productive citizens to flee to the suburbs.

Look at the various Black “ghettos” in Chicago, New York, etc. How many of the businesses and apartment buildings located in those Black communities are owned by local black residents? Not many. Not enough. Therefore, most of whatever profits are generated within a Black community tend to be instantly “exported” to other, distant communities. But if the multiplier effect is valid, local blacks must own local black businesses and keep black profits in black communities to stop their collective slide into poverty. (In the end, a “ghetto” is not a place where minorities congregate; it’s a place where the local people don’t own legal title to their homes, businesses and profits.)

And blacks shouldn’’t be conned into believing that a business owned by a “brother” who lives outside the community is preferable to a business owned by a Korean who lives in the black community. The issue is not race, but local ownership.

If this scenario is valid, we’’d better all begin to value whatever local owners we still have. Owners receive profits, and profits are the “new money” coming into a community that—“multiplied”—makes the entire community prosperous.

Multinational vampires

And what about the effects of multinational corporations? If the multiplier effect holds true, then every foreign corporation is essen- tially in business to suck the life out of local communities and nations. If that description seems extreme, consider all of the third world nations where corporations have established themselves. Are those “corporatized” nations growing richer or poorer? Ohh, they may point to some refineries and factories and other expensive symbols of progress, but what about the average native of those third world nations? Will wealth in the form of factories and refineries that the corporations bring to the third-world countries “trickle down” and thereby enrich the local poor? Not in the long run.

Instead, the locals will become collectively poorer. More impoverished. And of course, as the nation becomes increasingly impoverished, it also becomes increasingly desperate to attract additional foreign corporations because they will “create jobs”—even if those jobs offer only subsistence-level wages! The problem is that while foreign corporations may, indeed, create local jobs, they inevitably destroy local owners and thereby suck the local economy’s lifeblood— profits—out of the local economy. Result? More flashy skyscrapers in the capitol and deeper poverty for the average native.

At first, these third-world nations don’’t realize that the more foreign corporations they attract, the more local profits they lose, the greater the negative “multiplied” effect and, ultimately, the more impoverished they become. However, they eventually sense the relationship between their poverty and the presence of foreign “influences” (corporations), and start a revolution for the purpose of ejecting the foreigners and seizing the foreign-owned land and factories.

Frankly, I don’’t blame ‘em a bit. Multinational corporations which purchase ownership (and thus, profits) of third-world land and factories are sucking the life (profits) out of these poor people and their countries. Like any other parasite, they must be excised for the host to survive. Almost inevitably, the revolution will seek to “nationalize” the foreign corporations and convey ownership (and profits) from the foreign corporate headquarters to the third-world nation’s capitol. Admittedly, that’’s an improvement since the new government-owners won’’t be quite as distant as the former foreign corporate headquarters. Nevertheless, these idiotic socialist and communist revolutions usually miss the fundamental point: ideally, ownership, profits and prosperity are only available to those communities where local individuals own legal title to the “means of production” and thereby retain the “multiplied” benefit of their own profits. But revolutions that replace distant corporate owners with distant national owners generally result in little change or benefit for local people. Without local ownership and local profits, poverty continues.

Corporate colonization

Distant ownership (and claim to profits) of local communities is the dream of every king, tyrant, and greedy self-serving executive who’s ever walked the earth. In the past, claims to the profits of distant communities were made through the Huns’ plunder, Rome’s empire, and the European colonies. Today, corporations are simply the modern instrument for achieving “distant ownership of local property” (less charitably known as “looting”).

From an historical perspective, those domestic, foreign and multinational corporations that routinely seek to own and export property far from their corporate headquarters are identical in purpose and adverse effect to the Thirteen Colonies England planted in America. As such, corporations can be fairly described as instruments of modern colonization.

Just as our Thirteen Colonies were chartered by the King of England, so are our modern corporations chartered by our current state and federal governments. Just as England operated the Thirteen Colonies for the purpose of extracting unearned wealth (profits) to enrich King George, so modern corporations operate for the primary purpose of extracting the profits created by local “corporatized” communities and sending them to some distant corporation—who splits them (through corporate income taxes) with the government that granted the corporate “charter” (a limited liability license to steal).

For all practical purposes, when an Iowa farm community sells its farms to Archer-Daniel-Midland, it’s been colonized. It’s voluntarily agreed to surrender ownership of its productive resources (farms) and the attached profits (community life blood) to some foreign corporation.

Similarly, when the City of Dallas gives tax breaks to entice another out-of-state corporation to build a facility in Dallas, it may enjoy a short-term gain in terms of “job creation” but long-term, Dallas will be impoverished by that foreign corporation’s profit-taking. As distant corporations move into “Big D,” Dallasites become increasingly “colonized” as they send more and more of the profits of their labor to some distant corporation. The more intelligent and affluent Dallasites sense the growing poverty and therefore move to the suburbs. The result is the same “bull’s-eye” effect seen in almost every major American city: A dark, inner circle composed of impoverished minorities who own nothing, surrounded by lighter ring of affluent White suburbanites who enjoy a high concentration of business owners.

Local ownership

Is there a solution? Sure.

Private property.

Private, local ownership of the means of production. Foreign corporations should almost never be allowed into a community. In those rare instances when foreign corporations are granted entry, part of the condition of sale might be that at least half the stock in the local corporate facility (and thus over half the profits) must always be owned by local residents.

The lesson in the farmer’s “colonization” and subsequent poverty is pretty clear: To prosper, a community doesn’’t merely need wages, it needs profits. Profits flow to ownership. Distant ownership results in loss of local profits which, due to the invisible “multiplier effect,” can be far more devastating than simple accounting figures reveal. Thus, local prosperity depends on local ownership of productive resources. Prosperous communities don’t need programs to create jobs, they need programs to create owners.

Just as agriculture is being corporatized, colonized and impoverished, so are you and I. Distant ownership of local productive resources is the essence of the New World Order.

Conversely, the genius of the American Constitution and foundation for our nation’’s original prosperity may have been the creation of a political system of (1) decentralized government and (2) private ownership of property for common people. Both of these charac- teristics were previously unknown in European monarchies where all wealth, property and profits were owned by each nation’s solitary king. Could it be that our Constitution unwittingly created a society that functioned in accord with the “multiplier effect” and thereby made American prosperity possible?

I believe the answer is yes.

Today, if we sell our resources (including our labor) to distant corporations, we inevitably impoverish our local community and leave less to our children than we ourselves received. No nation can surrender its “inheritance”— private, local ownership of legal title land, labor and similar productive resources —without suffering increased poverty, violence and even revolution.

This essay is from Alfred Adask’s book, The Nature of Money, and appeared first in AntiShyster magazine, of which he was editor and publisher. Mr. Adask writes at adask.wordpress.com and has a talk show on radio and online via American Voice Radio Network.

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