As the country emerges from the long shadow of COVID-19 and millions of essential businesses teeter on the edge of bankruptcy, communities will face agonizing fiscal decisions. Caught in the vice between escalating basic needs and shrunken tax revenues, they will be pushed to make deep cuts in essential programs, everything from job training to school lunches.
Philanthropy will be called upon the fill the gap, just as Uncle Sam has. But writing checks is not enough. If philanthropists gave every penny of their grant-giving capacity next year to Post-COVID relief, it would amount to about $1,300 per person—enough to cover most households’ expenses by a week or two. In fact, with the stock market shrinking and other ongoing commitments, far fewer funds per capita will be available.
A smarter approach for philanthropy would be to help unleash about $100,000 per person through local investment. That is the amount Americans have in long-term savings that should be invested in local businesses. By promoting a change in public behavior, philanthropy could leverage trillions of dollars of benefits annually for rebuilding communities in perpetuity.
Before the COVID-19 crisis, U.S. households and nonprofits held $56 trillion in long-term investments in stocks, bonds, mutual funds, pension funds, and insurance funds. Even though local businesses account for 60-80% of the U.S. economy and generally are more profitable than Fortune 500 companies, hardly a penny of this $56 trillion ever touches local business. In a healthy capital market, 60-80% of our savings would support 60-80% of our businesses—especially those businesses so closely tied to local income, wealth, jobs, taxes, and well-being.
If we fixed our investment system, if we moved just 60% of $56 trillion from Wall Street to Main Street, every community would enjoy about $100,000 of additional capital per resident. A small town like Red Hook, New York, would have $1 billion to put into reviving its small businesses post-COVID. Hartford would have $12 billion, enough to reverse the decades of disinvestment that were triggered by foolish “free trade” agreements. Los Angeles would have $400 billion more in investible capital. And who needs perfection? If each of us with retirement savings commits to putting something into community renewal–10%, 5%, even just 1%–we can shift the course of history.
The key is to mobilize people to move their pension savings from Wall Street to Main Street. My latest book, Put Your Money Where Your Life Is, shows how. By using well-established but little-known tools like the Self-Directed IRA and Solo 401k, everyone can easily begin investing their life savings locally.
To be clear, local investment does not only mean investing in local businesses. It also means getting yourself, your friends, and your neighbors out of credit-card debt (which sucks money out of the community in huge interest payments). It means getting your kids out of credit card debt. It means paying off your mortgage faster. It means helping your church or favorite nonprofit acquire its own building and lower operations costs.
Philanthropy can unleash this massive social change through three strategic acts.
First, provide modest grant support to the small but growing number of groups promoting local investment—groups you may not have heard about like Common Future, Slow Money, National Coalition for Community Capital, and the Next Egg. These groups are mobilizing businesses and investors to change their behavior and removing the legal impediments that stand in the way of more crowdfunding, more local investment funds, and ultimately local stock markets,
Second, model local investment yourself. Move more of your assets into the local economy. Incourage, a community foundation in Wisconsin, moved all of its assets in local real estate. The Heron Foundation in New York has invested a substantial part of its portfolio in affordable housing in its metro area. If in doubt about where to put your money locally, just let it sit in a local bank or credit union, where it can expand the lending capacity available for local businesses.
Third, consider building important new institutions. The Solidago and Stokes Foundations, for example, created Pioneer Valley GROWS, a multi-million-dollar fund that supports local food enterprises in Western Massachusetts. Significantly, they invite grassroots investors to participate in the fund, which is one way to use philanthropic dollars to leverage grassroots investment. Another way, demonstrated by the Ujima Fund and Boston Impact Fund, is to use philanthropic dollars as a loan-loss reserve, which reduces the riskiness of grassroots investors participating.
To consider what’s possible consider what our neighbors to the north have done. In 1999, the Canadian province of Nova Scotia passed a law permitting grassroots groups to set up local investment funds inexpensively, and more than 60 funds have been created ever since. If the United States had as many funds per capita, we would have 21,000!
I challenge anyone to show another set of initiatives that can generate trillions of dollars of economic growth at such a low cost. Skeptics should heed the immortal words of Sir Francis Bacon: “It would be an unsound fancy and self-contradictory to expect that things which have never yet been done can be done except by means which have never yet been tried.”
- Michael Shuman, Director of Local Economy Programs, Neighborhood Associates Corporation & Author of “Put Your Money Where Your Life Is: How to Invest Locally Using Self-Directed IRAs and 401ks.”
