Posted on April 3, 2008

A periodic feature of this blog will be to scrutinize economists whose arguments are selling communities short. The subtitle for the series might be: "Hey, they don’t call it the dismal science for nothing."

This first installment focuses on Art Woolf, State Economist for Governor Madeleine Kunin of Vermont a decade ago and now an Associate Professor of Economics at the University of Vermont. In a blog entry for the "The Vermont Tiger," Woolf discusses Vermont’s successfully luring Canadians to its ski slopes ("Buy Local, Eh?"). But his argument careens recklessly downhill from there:

"We don't hear a peep of protest from the Canadian 'buy local' folks. If they exist, and they are like the Vermont crowd, they would argue that the best use of Canadians' dollars is to spend them in the province. After all, why ski in Vermont if there are ski areas in Quebec? If that's true for Canadians it is also true for Vermonters. We should all ski at home."

Actually, that's correct. It's undeniably true that if Canadians skied locally, their own economy would benefit enormously. The reason is the economic multiplier. From a community perspective, money spent outside one's community yields zero local economic benefit. Woolf then ridicules his fellow Vermonters for loving local but profiting from globally minded Canadians:

"The buy local folks have a curiously asymmetrical view of economic activity. It's great for Vermont firms to sell products out of state. We celebrate Ben and Jerry's, IBM, GE, and many other firms located within our borders. But to them, it's not good for Vermonters to buy products produced outside of our borders. The illogic of these two statements should be clear to anyone. As David Ricardo noted long ago, trade produces wealth. Trying to be as self-sufficient as possible produces poverty. That's as true for Canadians as it is for Vermonters."

But it is Woolf's argument that is illogical. And it's also clear he doesn’t really understand localization.

Economic logic suggests that the strongest community is one in which local businesses maximize sales to local markets and maximize sales to global markets. Local production and global production together produce wealth. Take away either, and an economy suffers. That Woolf encourages communities in Vermont not to favor local markets – the markets that generate the highest multipliers of income, wealth, jobs, and tax receipts – condemns them to poverty. And this in a state filled with rural economies that are largely about local markets!

Woolf is unaware that localization advocates seek two very different goals: Increase the number of locally owned businesses in one's own community, whether the firms sell local or global. And nurture them through "Local First" campaigns. Our slogan is not "Local Only," nor "Local, Whatever the Cost" – but "Local First." Strong local markets prepare companies for going global, without giving away the diversified businesses local necessary for local economic success.

Woolf's real beef seems to be that if Canadians follow the buy-local logic, Vermonters will suffer. In the short-term, perhaps. But in the long-term, Canadian communities that go local will get wealthier, and then be poised to spend on all kinds of goods and services, including those from its closest neighbor, Vermont. Wealthier Canadians might even take even more vacations at Stowe.

Buying local first, when done wisely, means spending less money: Moving one's mortgage, the single largest expenditure by a U.S. household, from a global bank to a local credit union can save thousands of dollars over the lifetime of the loan. Local energy conservation, according to the Rocky Mountain Institute, can make the average U.S. household $3,000 wealthier. Local wellness investment, things like family counseling and good nutrition, preempts expensive nonlocal disease treatment and saves thousands in health care expenditures. (Future blog entries will elaborate these opportunities.)

The important point for now is this: Smart localization means finding and seizing opportunities for saving money and enjoying all the benefits – greater income, wealth, jobs, and tax revenues – that come from replacing unnecessary or expensive imports.

Moving my own mortgage from Bank of America to a credit union in Washington gave me lots more money to buy all kinds of things, including meals at local restaurants and nonlocal single-malt scotch. As I increase the fraction of my purchasing that is local, I'm also raising the level of certain imports into my community.

In other words, it's quite possible – paradoxically – that localization can increase a community's absolute level of trade. But rather than import things, like finance, that my community can do competitively, I'm importing those very special things like fine scotch that my community definitely cannot do. That's what David Ricardo really meant by comparative advantage.

Art Woolf believes that wealth comes through maximizing trade and trivializing local markets. In fact, his strategy is guaranteed to transform thriving communities in Vermont into destitute maquiladoras, where they achieve one or two comparative advantages that can collapse overnight with a shift in global markets. The smarter strategy is for a community, through the wealth of localization, to help its local businesses to realize hundreds of potential comparative advantages. It is localization that offers communities the only plausible path out of poverty.

By Michael H. Shuman