bobmarino

another term for the local multiplier is the local premium, but the point being is that if you have 2 cities, one near , city L, and one far, city F, if you buy from small firms in city L more of your dollars will be recycled back into city L than if you purchased from larger firms. This is not an argument that purchasing locally produces a more Pareto efficient result for your "big market" comprised of both city L and F, it only means that a greater proportion of benefit accrues to city L. That is why I stated it is consistent with a neoclassical approach. Now I would separately argue that Pareto optimality should not be the goal of society, and that its public policy justification in Utilitarianism philosophy stands on very shaky ground. Moreover, that the niceties of neoclassical economics depend on simplified, ideal conditions that ignore real world complexities, human psychology, as well as empirical evidence.

so the "Big Four" have ~4.8 trillion in assets and a small business loan portfolio of ~91 billion, 1.9% of their combined assets. Small and medium sized banks (those with assets under $10 billion) have ~3.9 trillion in assets and a small business loan portfolio of approximately 413 billion or 10.6% of total assets.

The first take away is when you deposit money in a smaller bank chances are a much larger portion of your money will be reinvested back into the community in the form of small business loans.

A second, quite interesting, if more speculative takeaway, is what if the Big Four were broken up? What is their 4.8 trillion in assets were controlled by a much larger number of smaller banks? The answer is that the pool of assets available for small business lending would vastly expand. And yes, small businesses are credit starved, particularly so since the 2008 Financial Crisis. Another great benefit of breaking up the largest banks would be reducing the influence of the financial system on our political system which is particularly prone to regulatory capture.

Well, to address your main objection then that “the movement to buy/invest locally goes against all of economic theory.” That is not a correct statement. I would first point out that the quote from my first reply, which discusses the benefits of small businesses on local economies, is taken from the FDIC 2012 Community Banking Study. The study’s authors are trained, mainstream economists who based their conclusions on empirical evidence. Now, even if you stay within the bounds of pure neoclassical theory (which it sounds like you ascribe to) it remains the case that maximum utility (net benefit) accrues to localities when there is a preference for the goods and services of small, local-based firms over larger firms. This is mainly due to the local multiplier effect, the tendency of smaller firms to plow back a greater percent of their revenue into the local economy in the form of secondary vendor purchases than larger firms. Smaller firms typically use a local account, a local attorney, a local design firm, etc. In contrast, larger firms are much more likely to utilize larger, more distant firms resulting in money being transferred outside of the community. Lastly, in addition to the economic case, there are important cultural and political arguments for supporting small businesses and buying locally. One of the respondents touched upon an important cultural factor, avoiding cultural hegemony. As for a political argument, studies have also shown that communities with strong local businesses ownership tend to have greater civic engagement as measured by voter turnout and membership in civic organizations and community groups.

by the by, I'm one of the project partners

Hi,

putting aside the debate over free market theory for the moment, as regards the banking industry the evidence is very clear and compelling: smaller sized banks and credit unions do in fact lend a greater portion of their assets to small businesses. This mainly has to do with the business structure of large vs. small banking institutions. To quote the FDIC's 2012 Community Banking Study:

"Community banks tend to be relationship lenders, characterized by local ownership, local control, and local decision making. By carrying out the traditional banking functions of lending and deposit gathering on a local scale, community banks foster economic growth and help to ensure that the financial resources of the local community are put to work on its behalf. Community banks have always been inextricably connected to entrepreneurship. As of 2011, they held 14 percent of banking industry assets, but 46 percent of the industry’s small loans to farms and businesses."

Analysis of our own data is even more telling: BankLocal data as of 12/31/13 shows that the nation’s four largest banks, JP Morgan Chase, Bank of America, Citibank and Wells Fargo (collectively known as the Big-Four) only loaned 1.9% of their combined assets to small businesses compared to 10.6% for small and medium size banks.

If small businesses and the Main St. economy matter to you, then so should Local Banking.