Leaky Bucket
A simplified metaphor useful for analyzing local economies is the “leaky bucket”. Someone once said that money was like manure: 'no use unless it is spread'. Maybe so, but perhaps it is easier to talk about money as if it were water.
Imagine the local economy as a bucket. A very simple bucket like everyone likely owns. If someone has $10 and spends it on light bulbs in the local hardware store, that $10 goes into the bucket. But when they pay the electricity bill, it doesn't stay in the bucket. Spending on electricity is like a leak in the bucket: the money leaks out as NB Power is a business outside the Town. Now, there are ways of stopping all the money from leaking out like how insulating the house will cut the electricity bill, for example. If there's a local company to do the work, there'll be even more in the bucket. A full bucket means that residents have enough money to be able to buy what they need for a good quality of life, but if the bucket is leaky then to fill the bucket we need to pour the money in at a faster rate than it is pouring out.
So, there are two strategies to fill a bucket – you can pour in the money faster, or you can slow down its leakage by plugging some of the leaks. In economic terms it means we can focus on attracting more money into the Town – inward investment, grants, employment benefits, export sales and so on. And to slow down the rate of leakage we can consider local sourcing, which adds value locally by using local resources. We've often focused on bringing in new money but this second strategy for economic development should not be neglected.
Pouring In
The water flowing into the Town currently is from senior levels of government through transfers, grants, employment and welfare benefits, infrastructure investments, etc. Next, we have payroll: everyone in the Town who is employed collects a regular pay cheque and brings that money into the community, and we also attract tourists and other outsiders who spend locally. Then there is private investment from outside.
Leaking Out
What are the leaks? The most obvious for many towns is retail deficit. That is, we know that a great deal of retail spending is done in larger neighbouring communities like at the mall and power centres. Shopping online is another leak that is growing each day. Outside contractors or importing products from elsewhere is another could be another major leak. Also, for many small communities it's not always easy to find the expertise from consultants locally.
Creating Turbulence
Increasing inflows and plugging leaks will be advantageous but equally so will be to have the money stay in the bucket longer by moving it around. The local multiplier effect shows us that money can be used more efficiently if we do things differently. It is not about trying to close off your area from connections with the outside world, instead it is about increasing local linkages in order to make maximum use of all incoming inward investment, whether its source is government spending, business spending or consumer spending.
Next: Read our previous article titled How Does Your Garden Grow