Not all economic development is created equal. Not all local investments build wealth in our community. Not all open markets produce optimal outcomes for all places. If we want our places to prosper over time, we have to be prepared to ask a tougher set of questions at the local level.

Today is Martin Luther King Day. Over the weekend I finished Malcolm Gladwell’s latest book, David and Goliath: Underdogs, Misfits and the Art of Battling Giants, which contained a little bit of the story of one of this nation’s most important underdogs. It is truly amazing to ponder this man who faced such overwhelming forces, yet lifted up so many. I’m thankful we have a day when we are asked to do just that.

I have to start this post with a confession: I love the Dunkin Donuts’ butternut doughnut. We don’t have any Dunkin Donuts here in Minnesota – and I have to say, we don’t have any really good doughnut shops here in Minnesota, at least none I am aware of – and so when I run into one during my travels, I tend to swing in and grab a butternut. You can add that to Mountain Dew and ball park nachos on my list of vices.

It was recently announced that Dunkin Donuts is looking to expand into Minnesota. This will no doubt warm the hearts of the 1,125 people who showed their affirmation for the Bring Dunkin Donuts to Minnesota Facebook page (it’s not too late to join). It also means that we can follow much of the rest of the country in bastardizing the English language by going through the drive “thru” to a get doughnut spelled “donut”. The Final Edit will hate this on many levels.

Amid all the celebration, one little tidbit of information caught my attention:

Adequate capitalization – Requirements vary by market, but the lowest requirements are $250k minimum liquid assets and $500k minimum net worth per unit.

Now truly, when going through a list of potential small business startups, the kind of thing that someone without an MBA but just a lot of drive and desire could undertake, is not doughnut shop at the top of that list? Along with bakery, pizza joint and coffee shop, in my mind I imagine these as being the familiar Stage 1 businesses that pop up out of nowhere whenever that magical critical mass is obtained. (For more on Stage 1, Stage 2 and Stage 3 businesses, listen to my interview with Economic Gardening guru, Chris Gibbons.)

But if you are going to start a Dunkin Donuts, you need a cool half mil in net worth, at least half of which is liquid, meaning cash or something that can be quickly converted into cash. That doesn’t sound very small business friendly.

For households where the highest wage earner is under 35 years old, the ideal age for someone who is not necessarily college material but nonetheless has the work ethic and the entrepreneurial spirit to step up and start a business, the median net worth (excluding home equity) in 2009 was $2,003. Let me say that again. Take over half the families where the primary breadwinner is 35 years old or less, add up their investments and savings and then subtract their debts, and they have less than $2k. In other words, they are only $498,000 short of being able to start a Dunkin Donuts.

Note that for people 65 and older, that number jumps to slightly over $25,000, which should scare the hell out of everyone.

Dunkin Donuts – and national franchises like them – are not looking for entrepreneurs. They are looking for investors.

What this means is pretty clear: Dunkin Donuts – and national franchises like them – are not looking for entrepreneurs. They are looking for investors. They want people who already have money, who have already amassed wealth. They are looking for those people because they want someone locally to assume the bulk of the risk, whose interests will be aligned with the corporation and shareholders sufficiently to ensure that the right management is retained and the store is run efficiently.

That’s a very different person, and a very different impact on the city, than the doughnut shop started by your local go-getter with vision and a dream. That person will be sought after by the local investor. They will "ideally" become the manager of the Dunkin Donuts, with pay and benefits that are modestly above the other employees. They will not amass wealth or see appreciable returns over time for their efforts. Those will go to the investor.

And to the corporation Dunkin Donuts (DNKN – what a cute ticker symbol).

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So you are a local government, or someone concerned about your local community; why should you care? The city is going to get a half million dollar+ investment. Tax revenues are going to go up along with permit fees, sewer/water connection charges and all the other good transactional revenue. There are going to be new job opportunities, with at least a couple in management. And to top it all off, your residents are going to be able to get great coffee (but, sadly, no Mountain Dew) along with butternut doughnuts, all without having to leave the comfort of their car.

How could this not be all good?

The relationship that Dunkin Donuts – and any national chain, whether selling tacos or auto parts or massages – has with your community is the same relationship that England had with its American colonies back in the 1700’s.

There are many reasons, but I’ll give you two of the most important ones for me. First, the relationship that Dunkin Donuts – and any national chain, whether selling tacos or auto parts or massages – has with your community is the same relationship that England had with its American colonies back in the 1700’s. The colonies provided raw materials. English merchants, manufacturers and transporters would take these materials, process them and provide them back – with all the value added – to the colonies. The government would take a nice bit off the top for the trouble and, just like that, you have a mercantilist economy, one designed to have a positive balance of trade for the English. 

This is kind of an abstract concept in a national economy. Dunkin Donuts is headquartered in Massachusetts. When the wealth of Minnesotans is spent on those butternut doughnuts and a percentage of that leaves the state and heads to Massachusetts, we don’t exactly think of that the same way we do a balance of trade with say…China. There is a flow of good back and forth across states and it all shows up in GDP statistics, so it’s all good.

But when we look at it from a very hyper local level, when we take the point of view of the community, what we see is a transfer of local wealth to those outside of the community. Dunkin Donuts is looking out across the landscape and seeing a market they can serve. That’s capitalism. When they serve that market, they will exchange a good that is desired (butternut donuts) for capital that has been accumulated locally. That’s also capitalism.

A local capitalism has a much different impact on the overall wealth of a community than a national, mercantilist capitalism.

But capitalism also involves the entrepreneur that wants to start a donut shop locally. Although with this capitalism, the transaction is very different. You still have the exchange of the desired good for capital, but the capital stays within the local market, at least for that transaction. While I’m not going to debate the merits of capitalism—I agree it is the worst system, except for all the others—I think we have to acknowledge that a local capitalism has a much different impact on the overall wealth of a community than a national, mercantilist capitalism.

This brings me to the second point: the entrepreneur. I want to remind you who this person is because we almost all know them. They are the hard-working, honest person who wasn’t cut out for college. Maybe they had a kid too young and actually took responsibility for that. Maybe they went astray before they straightened their life out. Maybe they are just a good, decent person but not one who is going to excel at reading or mathematics.

In the localized version of capitalism, this person starts the doughnut shop. Over decades they slowly and incrementally build their business, creating a modest amount of wealth for themselves and their family in the process. In the national corporate franchise version of capitalism, this person becomes the night manager. They work for someone else. They may have some corporate profit sharing, but it is disconnected from their day-to-day work. They may have a 401(k) plan, but they’re not going to get wealthy from it.

Here’s what breaks my heart: I’ve seen that night manager. I’ve seen the look in their eyes. And I’ve seen that entrepreneur, felt the look in their eyes. One is borderline resignation, an acceptance of fate. The other contains endless optimism. I want an America full of endless optimists.

Tragically, we’ve priced them out. In the Original Green, Steve Mouzon talks about the difference in costs between a highway-oriented waffle house and a downtown, family-owned restaurant. This really struck home to me and reinforces the points I’m making with a simple comparison.

sign1.jpeg

The first thing they [the store owner] are forced to do is to erect the 200 foot tall sign that probably costs $200,000, because travelers at highway speeds will only be on the bridge for a few seconds, and if Waffle House doesn’t entice them to exit by then, they’ve lost their business. Next, because their entire customer base arrives by motor vehicle, they must pave every square yard of their site not occupied by their building for parking to accommodate their customers’ cars (the semis must park on the street.) So is there any shadow of doubt why poor Waffle House has such ugly buildings? Of course not! They’ve completely blown their budget on the sign and the parking lot!

Contrast that with this shop on Nantucket. The man in this picture (who happens to be renowned New Urbanist Mike Watkins) arrived on foot to this storefront, and is standing less than ten feet from the sign, which was probably procured for something much closer to $200 than $200,000. Because this store doesn’t have to operate at a wide extent to attract customers, they’re able to spend their money on other things... like being able to afford high rent in a nice building on Nantucket. Which place would you rather be?

Let me just make one last point, and it is going to really bother all of you that hate it when I talk about macroeconomics (you can stick your trickle down, overly convenient, aggregate demand theories you know where).

When we have zero interest rates, when we are printing billions of dollars each month and funneling it to Wall Street banks, when the cost of borrowing money is really, really cheap, does that help our local entrepreneur or our investor? When you have a liquid net worth of $2,000 but a lot of enthusiasm, are low interest rates going to help you be able to access the $498,000 you need to start a Dunkin Donuts? But when you have a net worth of half a million dollars or more, how easy is it going to be to access that startup capital in a market flooded with liquidity?

Now flip that around….when you are the local entrepreneur trying to save some money so you can start your dream, how much would it help you to get a market rate of interest on your savings? Something more than say, 0.85%? When you are that new business owner trying to get into a storefront, how helpful is it going to be to not have the price of that space overinflated by cheap, yet inaccessible, outside capital? When you finally get things going and are trying to amass some savings and some wealth, would it not be nice if someone paid you a fair return for your frugality and prudence?

If we want our places to prosper over time, we have to be prepared to ask a tougher set of questions at the local level.

Not all economic development is created equal. Not all local investments build wealth in our community. Not all open markets produce optimal outcomes for all places. If we want our places to prosper over time, we have to be prepared to ask a tougher set of questions at the local level.

The obvious follow up question here is, great Chuck, but how do we have local capitalism instead of franchise/corporate capitalism dominate in our communities? I’m so glad you asked. I’m going to try and break away today to post my thoughts on that over at the Strong Towns Network, where I’m positive we’ll have a vigorous discussion on the matter.


If you’re new to Strong Towns and want to get up to speed quickly, get a copy of Thoughts on Building Strong Towns (Volume 1), a good primer on Strong Towns thinking.