Tuesday, April 9, 2013

Neighborhood Economics

Neighborhood Economics
Merriam-Webster’s Dictionary defines “Economics” as “a social science concerned chiefly with the description and analysis of the production, distribution, and consumption of goods and services.” Webster’s defines “Macroeconomics” as “the study of the entire economy in terms of the total amount of goods and services produced, total income earned, level of employment of productive resources, and general behavior of prices.” It defines “Microeconomics” as “the study of the economic behavior of individual consumers, firms, and industries and the distribution of total production and income among them.

Federal, state and local government policies have failed because they are based on national macro and micro economic models that define a community where 100 people make $1 million a year and 1,000 destitute people make $0 a year as a thriving neighborhood (because the average annual salary of the 1,100 residents is $90,909.) This faulty economic analysis has allowed government to largely ignore the employment needs of people struggling in economically challenged neighborhoods. This results in social problems plaguing communities where unemployment is rampant. 

Macroeconomics explores aggregate national economic indicators largely without regard to the unique trends of local economies. Microeconomics explores aggregate corporate and individual economic indicators largely without regard to the unique trends of local economies. I believe that there is an unexplored subset of macro and microeconomics that I call “Neighborhood EconomicsTM” that has not received the focus and attention it deserves.

Tip O’Neil, the late Speaker of the US House of Representatives, was famous for saying that “all politics is local.” It is clear that “solutions to global problems are local” as well.  History has proven that a “strong” global economy does not mean healthy communities around the world.  The only way to effectively solve the most challenging problems in the world is to develop solutions that are custom designed for the unique needs of local communities and neighborhoods.  One size does not fit all in politics or economics.

Neighborhood Capitalism
Merriam-Webster’s Dictionary defines “Capitalism” as “an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.

Webster’s defines “Living Wage” as “a wage sufficient to provide the necessities and comforts essential to an acceptable standard of living.” Many experts believe that individuals have an “acceptable standard of living” when their housing expenses are 25% or less of their income. A living wage can therefore be defined as 4 times the average housing costs in the community where an individual lives.

Communities with high living wage employment are more likely to have low unemployment, higher literacy rates, better health care, lower crime and less poverty. Consequently, the single most important measure of success of local, state and national government public policies should be the extent of living wage employment in a community.

I call the establishment of policies based on living wage statistics in a community Neighborhood CapitalismTM because it is based on free-market economic policies targeting local communities. Most economic theories fail when they are converted to public policy because they are focused on applying aggregate national economic indicators to explain the health of local communities. I am convinced that Neighborhood Capitalism is more reliable than the federal government’s current aggregate economic policies because it is focused on using local economic indicators as the foundation for assessing the health of the national and global economy.

The one indicator that most accurately measures the success of government policies based on Neighborhood Capitalism is the Living Wage IndexTM (LWI) which I created last year. The equation for LWI is: L / W where “L” represents the number of people in “Living Wage Jobs” in the target community and “W” represents the total number of people of “Working Age” in the target community.

Living Wage Index
If every government in the world were evaluated based on this relatively simple equation applied to key large communities they would be influenced to move more rapidly toward peace and prosperity. Public policies would be focused on increasing the LWI by providing incentives for large and small businesses and nonprofits/NGOs to hire unemployed workers at living wages. These new government programs would reduce crime, improve health care, enhance public education and reduce the likelihood of terrorism and war. The LWI is frequently called the “Small Business Index” because this measure puts pressure on politicians to support policies that grow small and independent businesses who are the largest employers of local residents around the world.

The beauty of this approach is that it does not matter how neighborhoods are determined geographically as long as the same geographic boundaries are used when identifying LWI trends. An added benefit of this approach is that the data generated by the LWI could be aggregated in a way that would enable economists to recommend macroeconomic policies benefitting a broader group of people. In a relatively short period of time this very simple measure of free-market prosperity (if enforced) would influence government leaders to significantly increase the quality of life for every person on the planet.

If pressure were placed on government leaders to provide quarterly reporting (as required by publicly traded companies) on the Living Wage Index in predetermined geographic areas (i.e. municipalities or counties) it would be significantly easier to measure the success or failure of public policy. This trend analysis would enable policy makers and average citizens to understand the relationship between increases in the LWI and increase in average incomes, reduction in crime, elimination of poverty, improvement in healthcare and an increase in high school graduation rates. The case could also be made that an increase in the LWI would lead to less pollution because people earning living wages are more interested in the environmental health of the community in which they live.

Most importantly, LWI trends would enable the voting public to quantify the success or failure of their political leaders and make more informed political choices on election day. The LWI will not solve every problem facing the world today. However, it should increase employment and reduce poverty and crime in local communities.

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