Tuesday, 19 November 2013

Local multipliers are something of a myth


Trendy regional economic development folk like to tell you about "the multiplier effect" arguing that buying locally means that more money "stays in the local economy". We are told - mostly without any real evidence - that this multiplier effect is the magic formula for making poor communities less poor, that it explains how paying higher benefits improves local economics and is the reason why inefficient traditional high streets are better than supermarkets.

Here's an example of this mythmaking from New Start magazine:

Working with the Centre for Local Economic Strategies, Preston Council is researching how much of the procurement spend of institutions – including Preston College, the University of Central Lancashire and Preston Council itself – actually stays in the local region.

‘The findings so far suggest that each institution spends less locally than you’d expect’, Whyte says. ‘There’s scope for us to improve that by looking at how to maximise local spend and supply chains and if there are any gaps in the local market, think about what we could do to fill it.’

The Evergreen model fills those gaps through a network of co-ops supplying food, energy and laundry services to local institutions. Preston Council is considering emulating this approach and has undertaken a number of initiatives to boost and expand local coops, including setting up a Co-operative Guild network.

Sound great doesn't it? But what it covers up is a fundamental factor about local preference - it distorts the market and, in doing so, it raises prices. If local suppliers in Preston know that they won't be squeezed out by a supplier from distant Burnley or, god forbid, Skipton then there will be no need for them to keep prices under control.

Thus we witness the essential fallacy of the local multiplier - the gain made in keeping money circulating locally is taken up in higher prices. It is, at the local level, essentially protectionism - great for the businesses that benefit but awful for the consumers who don't. The money may be circulating for longer but the buyers are paying more than they would be if the system were a free market. There is no gain.

And this is before we start talking about the opportunity cost of public spending:

It is quite misleading to leave public policymakers with the notion that their spending is not at the expense of the private sector because it may be autonomous or have multiplier effects

There may well be a local multiplier but these strategies to promote it are not only ineffective but probably damaging to the local economy (and certainly an impost on consumers).  Apparently though, this is "new economics" and we should be excited:

Until recently experiments in local economics were small-scale and peripheral. But the failures of orthodox approaches are leading even the most successful local economies to find new ways to boost jobs and revitalise communities. With a paucity of ideas and support from central government local areas are now abandoning laissez faire for more interventionist approaches.

Welcome to the latest in a long line of failed and failing regeneration strategies!


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