Q: When is $1 worth more than $1 for Kirkland residents?
A: When we spend that $1 at Kirkland-based businesses.
How can this be? It’s an economic principle called “The Multiplier Effect” which says that an increase in money spent locally creates a ripple effect as businesses and their employees in turn spend their earnings locally. This creates a virtuous cycle where a higher percentage of every dollar spent at locally-owned businesses gets redeployed back into the local community.
Studies conducted in Maine and Austin, TX found that locally-owned retailers tend to reinvest 45% of their revenue back into the local community (for a multiplier of 1.8), whereas national retailers only reinvest 15% of their revenue (for a multiplier of 1.2). If Kirkland residents were to shift $100M of disposable income to Kirkland-based businesses, the difference to Kirkland's economy would be $60M ((1.8-1.2) * $100M). This would equate to $600K in additional sales tax revenue (Kirkland gets 1% of the 8.75%) that could be spent on local services (e.g., police, fire, street maintenance).
The difference in reinvestment rates is due to three main factors:
- Owner’s Profit – if the owner is a local resident, then they are more likely to spend their earnings on products and services (cars, retail, restaurants, etc.) in Kirkland and other Eastside cities.
- Local Vendors – a locally-based business is more likely to utilize other local businesses to provide services (e.g., accounting, legal, advertising/marketing, catering, and entertainment). These businesses will in turn reinvest a higher percentage of their revenues back into this area.
- Employee Wages – a locally-based business tends to hire a greater percentage of their employees from Kirkland and other nearby cities than a business headquartered outside of this area. These employees will likely buy services from businesses on the Eastside and then those businesses will in turn re-invest in this area, etc.
In essence, if residents spend more at locally-based businesses, then the Multiplier Effect will pump more money into our local economy and lead to:
- More companies doing business in the Kirkland area;
- More jobs in Kirkland;
- Higher demand for housing and commercial space in Kirkland; and
- More funding for the City of Kirkland and Lake Washington School District that will translate into more services that can be provided for residents.
This article was originally published in 2009 with the title,
The Virtuous Cycle of Buying From Locally-owned Businesses, by John Zukoski.
Localization edits were made with permission of the author.