Local Economy Preservation Funds offer solution to the small business crisis
“There may be a way to save local businesses at scale, while also creating a more equitable and democratic economy out of the ashes of the old,” write Thomas Hanna and Marjorie Kelly, research director and executive vice president at The Democracy Collaborative respectively, in a recent commentary in Next City. “States and cities could establish public holding companies that invest and acquire an ownership interest in distressed businesses.” Dubbed by the authors “Local Economy Preservation Funds (LEPF),” the funds would exit their investments to employees or other forms of democratic ownership or local ownership as the economy recovers.
States and cities could establish public holding companies that invest and acquire an ownership interest in distressed businesses.”–Thomas Hanna and Marjorie Kelly in Next City
Small businesses face an unprecedented crisis. Before the COVID-19 pandemic, employee ownership advocates identified a business succession crisis, with 2.34 million business owners approaching retirement this decade. Without succession plans, many of those businesses would close, causing considerably pain for local economies that depend on them. That crisis is now exponentially worse, and the time to address it has been shortened from years to months.
“Without financial support, many local businesses will simply disappear, taking with them tens of millions of jobs,” write Hanna and Kelly. Private equity and corporate acquirers are ready to scoop up distressed businesses, which would mean local communities would lose the social and economic value of local ownership, and wealth concentration would increase.
Hanna and Kelly’s proposal for Local Economy Preservation Funds is a model that has proven successful in the past. As they explain, during the Great Depression, the Reconstruction Finance Corporation (RFC) provided financial support to banks and businesses. In the 1980s, the Resolution Trust Company “took over and closed 747 failed Savings and Loan banks with assets of $400 billion.”
Because the federal government is not likely to create this kind of vehicle at the federal level today, the authors suggest that Local Economy Preservation Funds could be created by cities, states or regions, possibly drawing on the Federal Reserves’ Municipal Liquidity Facility for capital. Communities that invested in local businesses to keep them afloat would then be in a position to ramp up democratic ownership on the other side of the crisis.
For more on Local Economy Preservation Funds, join Marjorie Kelly for a National League of Cities webinar, How cities can create more equitable financial institutions in a post-COVID world. June 24, 1 Central Time, 2 ET.