“Buy local” is the mantra of many, who state that spending money locally provides significant economic benefits. I’ve been thinking about this concept for some time now. To be honest, I struggle with the notion, because I think in terms of tradeoffs. It is true that money spent in on local products made in my community is received by local entrepreneurs. But that also means the money is not going towards something created by someone else.
At first blush, buying local seems to benefit communities more than buying international does. But to really try to understand the value of buying local vs international, the full effect of spending needs to be factored into the discussion. The concept of the “multiplier” – a core piece of macroeconomics - helps guide our thinking. The multiplier effect is dependent on the assumption that consumers, when receiving money, will spend a portion and save the remainder; the amount spent depends on the consumer’s marginal propensity to consume, which is the share of the additional funds he/she uses for consumption (less than 1). For example, if a person receives $100, and her marginal propensity to consume is 0.7, then she will spend $70 and save $30. The next person will receive the $70, and of this amount, $49 is spent and $21 is saved. Of the $49 spent, the next consumer will spend $34 and save $15. The money will flow through the economy in this way, and the cumulative effect on the economy will be $330, which is significantly larger than the original $100.
So back to the decision to buy local: To be extreme, suppose I am facing a choice to buy a basket made by a local artist, sold in my local farmers market, or one made in China, sold in a big box store. The basket made by the artist is probably more expensive, but also of higher quality. If I choose to buy the artist’s basket, the artist receives money, which he or she will choose to spend/save. If the artist and everyone buys a locally made product, local economic activity increases. In other words, the full economic impact is a multiple of the original amount spent on the basket.
Now suppose I decide, instead, to buy the made in China basket at the big box store, located in my community. Workers in the store (maybe they live in my community, but maybe not) will receive a salary, which they in turn spend on goods and services. Taxes are paid to the local jurisdiction. The suppliers are paid for the basket (and other goods). Some of these funds will stay in community, while some of the funds will leak out of my “local stream” but will benefit other communities. In addition, I have surplus cash (the difference in price between the two baskets), which I can use to buy something else.
Thus – the money I spend benefits someone, somewhere. Then the question boils down to how to quantify the benefits, so that we can compare and assess: does the higher quality basket provide the same amount of benefits as the less expensive basket plus the other products I can buy? And how do the benefits compare when I think of financially supporting a local artisan vs a low income worker in China? Note that the benefits do not have to be in terms of money, but it is easier to compare benefits if we measure them in terms of money.
My main point is that the issue is more complex than the mantra “buy local” suggests. There are winners and losers in both cases.