Power for the People

The central idea is simple: people join together through some form of public, community or employee-owned business to meet local needs and thereby regain a measure of local economic democracy and control. Partly self-help, partly community mobilization, and partly sketches for future system-wide expansion, community wealth-building efforts can be found in virtually every region of the country. The range of efforts is vast. Community wealth-building institutions include community development corporations, community development financial institutions, social enterprises, community land trusts, employee-owned enterprises, and cooperatives. All pool capital in ways that create new jobs and anchor jobs in communities.

The efforts also define a new approach to challenging corporate power— a strategy that changes who owns, controls and benefits from the underlying economic wealth of the system. It involves not merely replacing private capital, but displacing it through developing community ownership of business. In other words, profits should flow to workers, consumers or the community—rather than outside investors. And these businesses need to succeed! Increasingly, too, ecological concerns are structured into the very core of many models.

Transformation Everywhere

Examples of the new approach are evident around the world, including worker-cooperatives in Argentina; the Grameen Bank of Bangladesh (which, with its founder, Muhammad Yunus, won the 2006 Nobel Peace Prize); and the Mondragón cooperative network in northern Spain, which employs nearly 85,000.

Non-profit social enterprise is a community wealth building strategy through which nonprofits independently secure resources to meet their missions in the absence of adequate government support. In San Francisco, a group known as REDF (formerly the Roberts Enterprise Development Fund) has helped boost the business activity of 50 social enterprises that have employed 6,500 people and earned revenues of more than $115 million. Three-fourths (77 percent) of social enterprise employees interviewed two years later were still working. Average employee wages had increased by nearly one-third (31 percent) and monthly incomes had almost doubled (90 percent). One of the enterprises in REDF’s portfolio is Buckelew Programs, a mental health agency with 220 employees that provides a continuum of services to roughly 7,000 clients each year and operates three social enterprises, including a green café and a green cleaning service, as well as a staffing service. This year, it intends to open a fourth social enterprise, a fresh-cut produce processing business.

In Grayland, Washington, Coastal Community Action—a nonprofit agency that operates a range of housing, food, healthcare, and employment programs—has built a 6 MW wind farm consisting of four wind turbines. The wind farm, which sells energy to the electrical grid, generates enough power to satisfy the energy needs of more than 1,500 households. The nonprofit estimates that its ownership of the $14-million wind turbine project generates $720,000 in unrestricted income each year, enabling it to increase service delivery options, lessen its local dependence on outside funding, and supplement the community’s ongoing projects and to meet more of the community’s needs.

In Seattle, Pioneer Human Services, founded in 1963, offers drug- and alcohol-free housing, employment, job training, counseling, and education to recovering alcoholics and drug addicts. It employs a total of 1,000 people and finances 99 percent of its $70 million budget through fees for services and earnings generated in the manufacture, distribution and sale of products. Businesses include retail cafés, sheet metal fabrication, aerospace precision machining (it’s a contractor for Boeing), wholesale food distribution, and contract packaging. Not only do these enterprises build community wealth and provide independent resources that finance social services, the businesses themselves are central to Pioneer’s mission of helping “people on the margins of society” stay out of prison and off the streets, enabling Pioneer to employ more than 700 men and women drawn from the ex-offender, homeless and drug-recovery populations it serves.

Community development corporations (CDCs), formed initially in the 1960s in a crucible of urban riots and rural neglect, now perform important community wealth-building and planning roles in cities and counties across the United States. CDCs can be found in virtually every major city. A Massachusetts study found that between 2003 and 2011, Massachusetts-based CDCs created or preserved over 9,000 homes and 14,000 jobs, while supporting more than 8,000 businesses and 160,000 families, generating nearly $2 billion of economic activity. A 2005 survey found that nationwide an estimated 4,600 CDCs help create 75,000 jobs per year.

Community development financial institutions (CDFIs), first given federal recognition in the 1990s, have the explicit aim of building wealth in low-income communities through providing financing where conventional lenders fear to tread. Even in the face of contracting conventional finance, assets in community investing institutions rose more than 60 percent–from $25.0 billion in 2007 to $41.7 billion–in 2010. In 2008 alone, credit unions financed and assisted businesses and microenterprises that created or maintained 35,624 jobs, financed the construction or renovation of 60,205 units of affordable housing, and provided 16,405 responsible mortgages to first-time and other homebuyers.

Community land trusts provide still another powerful illustration of community wealth building. Beginning in the 1960s and 1970s, pioneers like Bob Swann in western Massachusetts and Charles Sherrod in Georgia struggled against huge odds to develop modest land trusts efforts, often also involving other concerns, like respect for environmentally sound land use practices and rural community development. Today hundreds exist; in Irvine, California, the city’s strategic plan calls for 5,000 units of housing to be developed using land trust strategies.

Trusts of this kind keep the ownership of land underlying housing in non-profit or public ownership. Appreciation in land values is split via a formula between the homeowner and the trust, thereby avoiding gentrification. A study of a community land trust in Burlington, Vermont — the nation’s largest — also found that during its first two decades, 61.9 percent of residents who sold their land trust home after an average residency of six years were able to “step up” to traditional homeownership. Meanwhile the equity gain that the trust retains enables it to continue providing affordable housing to future generations. In a down market, community land trusts are even more important. Simply put, community land trusts keep people in their homes. A 2011 study found that land trust homeowners were 10 times less likely to be in foreclosure proceedings than conventional homeowners.

Employee ownership is another powerful community wealth-building strategy. The National Center on Employee Ownership (NCEO) estimates that in 2009 there were 9,800 companies owned in whole or part by workers through their pension contributions through a form of ownership known as an employee stock ownership plan or ESOP. As of 2009, there are 10.3 million employee-owners of companies own in whole or part by ESOPs, with net assets of $869 billion. In other words, the average ESOP employee-owner has an ownership stake of over $84,000. NCEO estimates that since 2009 the number of ESOPs has climbed over 10 percent to 10,900 companies.

Employee ownership also has powerful economic stabilizing effects: between 2000 and 2008, while the number of manufacturing jobs fell 29 percent in the state of Ohio, employee-owned manufacturing jobs held steady, dropping only 1 percent. Nationally, in 2010, 12.1 percent of all workers—nearly one in eight—had faced a lay-off in the previous 12 months; by contrast, only 2.6 percent of workers who were employee-owners were laid off.

Sharing the Wealth

Perhaps the most visible form of a community wealth building is the cooperative. More than 130 million Americans are currently members of a co-op or credit union. Because many Americans own shares in more than one co-op or credit union, the total number of co-op memberships in the United States exceeds 350 million. Overall, a 2009 University of Wisconsin study found that nearly 30,000 cooperatives in the U.S. account for more than $3 trillion in assets, $514 billion in total annual revenue, and provide 856,000 jobs.

Credit unions are governed by the core cooperative principle of one-member, one-vote. Importantly, they make their loans directly to their members – member-owners of credit unions can be confident that their deposits will be reemployed productively through loans that help finance local consumer purchases, create jobs and build wealth at home.

Another powerful community wealth-building mechanism is the state-owned bank. In North Dakota, a state-owned bank has operated since 1918, earning the state more than $300 million over the past decade, while helping support local banks and local community investment. Legislation exploring or creating such banks has been introduced this past year in more than a dozen states, including Arizona, California, Hawaii, Illinois, Louisiana, Maine, Maryland, Massachusetts, Montana, New Mexico, New York, Oregon, Virginia, and Washington.

As experience with the various democratized forms has become increasingly enriched over time, innovative strategies of collaboration among enterprises and/or with local governments have also begun to emerge. In California, a comprehensive, community-owned development project consciously links individual and collective wealth building in the diverse working-class Diamond neighborhood in southeast San Diego. With the support of the Jacobs Family Foundation, the community raised philanthropic and government funding to develop a commercial and cultural complex, anchored by a shopping center. A key element was the community public offering, which provided community residents and employees an exclusive opportunity to buy shares (valued at $200 and capped at $10,000) for a total 20 percent ownership stake in the project. As one community owner noted, “That we own stock, and that we have an opportunity to make a difference in what type of business goes in the community [is unbelievable]. We have some say-so in the community environment.”

The Neighborhood Unity Foundation also has a 20 percent ownership share that provides it with a sustainable source of funding for its community wealth building efforts. The Jacobs Family Foundation, which retains 60 percent ownership, intends to turn over its share to community owners by 2018. Ultimately, area residents will own 50 percent of the project and the neighborhood foundation the other 50 percent, retaining the profits generated to benefit the community rather than outside investors.

In Cleveland, Ohio, an integrated group of worker-owned companies, supported in part by the directed purchasing power of large hospitals and universities, has opened a major new vector of urban strategy. The first of Cleveland’s planned network of cooperatives opened its doors for business in September 2009. The co-op industrial scale laundry is a state-of-the-art, ecologically green, commercial facility capable of handling 10 million pounds of healthcare linen a year. Its sophisticated business plan provides all employee-owners a living wage and health benefits. If current projections are realized after seven years on the job each employee will have a $65,000 equity stake in the enterprise.

In October 2009 a second employee-owned, community-based energy company began large-scale installations of solar panels for the city’s largest nonprofit health, education and municipal buildings. (Additionally, it provides home weatherization services.) A third business scheduled to start operations this year is a year-round hydroponic food production greenhouse capable of producing three million head of lettuce and approximately 300,000 pounds of basil and other herbs a year.

More to Come

Many other enterprises are in the planning stage. Cleveland mayor Frank Jackson praised the co-ops for being “a model for how we can put our people back to work and rebuild our community.” A growing number of economic development officials, tired of chasing corporations with public subsidy dollars, like the idea of creating anchored, community-owned enterprises that won’t get up and move. Already, the Cleveland co-ops have inspired efforts in other cities to develop similar networks, including Amarillo, Texas; Atlanta, Georgia; Pittsburgh, Pennsylvania; and Washington, DC.

Community wealth-building strategies offer powerful possibilities for longer-term change. First, in most instances, the new wealth-democratizing approaches provide responses (or suggestive directions of response) to economic dislocation and social pain where traditional political approaches have failed. Second, in many instances, they involve quite unusual local alliances, frequently including small business and religious leader support. Third, often the institutional trajectories have also begun to define (and secure) new supportive measures from local, state and national policy makers, thereby also beginning to define new directions for potential ongoing and more expansive policy and political action. Finally, that they are based in local, everyday experience may also lead to changes in the foundations of political and democratic cultural development over time.

Together the above suggest a long, slow developmental arc left in the wake of the failure of conventional politics and economics. And already, a growing number of Occupy activists are looking to worker-owned cooperatives as a way to self-fund the movement, displace corporate economic space, and develop an economic base that can support alternative economic and political formations. The path to building a truly democratic economy may be long, but the growing base of community wealth building institutions provide some building blocks that, over time, suggests the quiet development, potentially, of the basis for a community-sustaining economy that serves the interest of all Americans, rather than our current system which disproportionately benefits the wealthiest at the expense of the 99 percent.

Steve Dubb is research director of the Democracy Collaborative at the University of Maryland.

Massey, they contended, was simply too dangerous to be in business. But their pleas fell on deaf ears. The company plugs along, despite its shoddy environmental and safety records, churning out profits for its parent company, Alpha Natural Resources.

To many, Massey is not simply one bad apple, but part of an economic system heavy with rotten fruit. Companies like Lehman Brothers, Bank of America, Countrywide, BP, and Walmart epitomize the relentless drive of corporations to maximize profit above everything else, including safety, fair working conditions, clean air and water, healthy communities, and common decency. In doing so, the very word “corporation” has become a dirty word.

Forget bad apples, perhaps we should just raze the entire orchard, right?

Our economy, like our environment, is in trouble. Limitless growth that drives the profit-hungry corporate model today is ecologically impossible. We simply cannot sustain business as usual, and the cracks in our system are showing.

“You look at the Arab Spring … what looked like very stable regimes across the Arab world were suddenly shown to be completely vulnerable and brittle, and I think that we may see the same kind of thing in our economy,” said Marjorie Kelly, a fellow at the Tellus Institute and author of the new book Owning Our Future: The Emerging Ownership Revolution. “What looks massive and permanent and invulnerable, may show itself quite suddenly to be brittle.”

Maybe this doesn’t sound heartening, but it should. The corporate model we have today hasn’t always been around, and it doesn’t need to remain the dominant way we do business. There is no reason we should be swabbing the decks of a sinking ship — alternatives already exist, and they are flourishing.

“What’s underway is an ownership revolution. It’s about broadening economic power from the few to the many and about changing the mindset from social indifference to social benefit,” Kelly writes. “We’re schooled to fear this shift, to think there are only two choices for the design of an economy: capitalism and communism, private ownership and state ownership. But the alternatives being grown today defy those dusty 19th century categories. They represent a new option of private ownership for the common good. This economic revolution is different from a political one. It’s not about tearing down but about building up. It’s about reconstructing the foundation of ownership on which the economy rests.”

Better Business

A common complaint in today’s world is one of disconnection. Our industrialized world has resulted in less contact with community — we don’t know our neighbors or who grows our food. In the same way that we’ve lost touch with a deeper sense of belonging and place, many of us have become disconnected from the soul of our work. The corporation-worker structure today is a master-servant relationship. We’re slaves to the company, working longer hours for less wages.

“Now mass layoffs to boost profits are the norm, while the expectation of a career with one company is long gone,” William Lazonick wrote. “This transformation happened because the U.S. business corporation has become in a (rather ugly) word ‘financialized.’ It means that executives began to base all their decisions on increasing corporate earnings for the sake of jacking up corporate stock prices. Other concerns — economic, social and political — took a backseat. From the 1980s, the talk in boardrooms and business schools changed. Instead of running corporations to create wealth for all, leaders [are told they] should think only of ‘maximizing shareholder value.’”

Our economy is dominated by a monoculture business model, Kelly says, driven largely by publicly traded corporations that have built in pressure from Wall Street for maximum short-term earnings. But a healthy, living economy needs biodiversity. We can find this if we begin to look around — across the U.S. and the world — where there are businesses designed not for maximum profit but with a mission-driven social and economic architecture. One of these models is the “social enterprise.”

The Social Enterprise Alliance defines these organizations as “businesses whose primary purpose is the common good. They use the methods and disciplines of business and the power of the marketplace to advance their social, environmental and human justice agendas.” And one of the defining characteristics is that “The common good is its primary purpose, literally ‘baked into’ the organization’s DNA and trumping all others.”

Here’s an example. Remember Working Assets? Starting out as a progressive-minded credit card company in the ’80s, it added phone service — first long-distance in the ’90s, then cellular in 2000 — and now it has created the subsidiary CREDO Mobile. The company operates as a privately owned for-profit business with most of the employees owning the stock, so it doesn’t have to bow to Wall Street pressures. They use their profits to help support causes they believe in — so far the amount of money donated is $70 million and counting.

Social enterprises can also be nonprofits, like Goodwill Industries, which last year turned donations from 79 million people into revenue that provided job training to 4.2 million people. And by reselling donated clothing, furniture and household goods, they divert an estimated 2 billion pounds from landfills every year.

The idea of social enterprises is catching on in the U.S. business world with the emergence of Benefit Corporations, also known as B Corps, which are designed ”to create a new sector of the economy which uses the power of business to solve social and environmental problems.” B Corps are all for-profit companies that have legal structures mandating that the company is designed to work not for maximum shareholder gain, but rather for the good of society and the environment.

Currently there are more than 500 companies that have become approved B Corps, and legislation has been passed in seven states (Maryland, New Jersey, Vermont, Virginia, California, Hawaii and New York) making them official entities. Some are larger corporations, such as Method Products and Patagonia, but many are smaller companies and business-to-business operations.

B Corps are similar in design to another kind of company called L3Cs. “The L3C is a hybrid between the nonprofit and for-profit models in that it is essentially a profit-generating entity with a socially beneficial mission,” writes Ashley Holmes for GreenBlue. “Like an LLC corporation, L3Cs have the same liability protection and are not tax-exempt; however L3Cs have access to forms of capital that traditional corporations don’t qualify for, all in order to further social and environmental goals. Americans for Community Development describe the L3C as a company that ‘combines the best features of a for-profit LLC with the socially beneficial aspects of a nonprofit … the for-profit with a nonprofit soul.’”

It’s About the Workers

B Corps and L3Cs create a legal foothold for a more sustainable kind of business. But other models get to the heart of the new economy as well and take up the important ideas of ownership and governance. Who gets to make decisions about how our companies are run and who gets to share in the wealth that’s created?

The U.S. helped create a system in post-war Germany for works councils, where workers are elected from companies to help manage how the business is run. “That means the councils help determine core issues, like when to open and close the store or office, who gets what shift, and who gets laid off or fired,” wrote Jeremy Gantz in a review of Thomas Geoghegan’s book “Were You Born on the Wrong Continent? How the European Model Can Help You Get a Life.” Germany also has co-determined boards that give workers a voice in governance, and companies with more than 2,000 employees have half of their boards composed of workers.

Empowering employees has proved a successful business model elsewhere. The John Lewis Partnership has been around in the UK since 1920 and has grown to over 30 department stores and more than 200 supermarkets, with a revenue of $13.4 billion. The business is employee-owned — all workers get to share the profits and vote for the governing council and company’s board.

“This firm has a written constitution, printed up and publicly available, which states that the company’s purpose is to support ‘the happiness of all its members,’” wrote Kelly. “Now, let me pause and note: This is the only major corporation I’ve found that declares its purpose is to serve employee happiness. This is so, at JLP, not because it boosts returns for shareholders. At the John Lewis Partnership, employee happiness isn’t a path to some other goal. It is the goal.”

Employee-owned companies aren’t just a British anomaly. “In the United States, the National Center for Employee Ownership reports that there are 11,300 employee-owned firms, with some 14 million participants,” Kelly found. “And in Europe, large companies have nearly 10 million employee owners. Employee ownership has been increasing in countries such as Spain, Poland, France, Denmark, and Sweden.”

Organizations can be run with employee owners or other kinds of members. The London Symphony is owned by the musicians who play in it. Barcelona FC soccer team and the Green Bay Packers football team are community-owned. Mutual insurance companies are owned by policy holders, and credit unions are owned by depositors.

Employee-owned businesses and cooperatives have emerged in the green business world with great success, as well. Community-owned forests in Mexico support indigenous people, protect the environment, and prevent illegal logging. In Denmark, community-owned wind farms have jumpstarted wind energy, supplying 20 percent of the country’s power. In Minnesota, Minwind is a farmer-owned wind development company that’s grown to 350 members.

A New Vision

There are different legal and social structures that can help to feed this growing new economy. In Quebec, a “solidarity” or “social economy” was created to help nonprofits and cooperatives, and it gets popular and government support. Spain is home to Mondragon Cooperative Corporation, which is a network of more than 100 cooperatives, employing 100,000 workers. This cooperative model helps support new business ventures. If a firm is struggling in its first few years, interest rates are lowered to help it instead of flagging the business as high risk and then jacking up interest rates like we do here, says Kelly.

Supporting these new ventures is important, but so is holding the companies accountable to their missions. For cooperatives and employee-owned companies like the John Lewis Partnership, where members get a vote and can elect those who make governing decisions (or run for the positions themselves), there is more power to make sure the company is keeping its word. With privately held businesses, accountability can be much harder. The B Corp certification process is one way that helps get around the blind spots; certified B Corps have to prove themselves to a third-party organization, creating accountability and transparency.

So what can we do in the U.S. to spur the development of socially and ecologically conscious business? “I used to think we needed new federal legislation and corporate chartering and that we could drive change with state and federal law,” Marjorie Kelly said. “And I do think we do need an articulation of what a company ought to be in law.” But we have to go beyond that, she insists.

“A teacher at Schumacher College posed a question: What kind of economy is suited for living inside a living being?” Kelly said. “It’s not an endlessly expanding economy. It’s not an economy that’s designed to serve the few at the expense of the many. It is an economy that is generative, that is life-serving in its purposes. How do we generate the conditions for life to continue and to thrive?”

The answer will likely be not one single thing, but rather a compilation and diversity of different business models that are consistent with supporting workers, protecting the environment, and serving the broader social good.

Here, then, is a simple question that, for some curious reason, no one bothers to ask, no less answer: How much are we spending on national security these days? With major wars winding down, has Washington already cut such spending so close to the bone that further reductions would be perilous to our safety?

In fact, with projected cuts added in, the national security budget in fiscal 2013 will be nearly $1 trillion — a staggering enough sum that it’s worth taking a walk through the maze of the national security budget to see just where that money’s lodged.

If you’ve heard a number for how much the U.S. spends on the military, it’s probably in the neighborhood of $530 billion. That’s the Pentagon’s base budget for fiscal 2013, and represents a 2.5 percent cut from 2012. But that $530 billion is merely the beginning of what the U.S. spends on national security. Let’s dig a little deeper.

The Pentagon’s base budget doesn’t include war funding, which in recent years has been well over $100 billion. With U.S. troops withdrawn from Iraq and troop levels falling in Afghanistan, you might think that war funding would be plummeting as well.  In fact, it will drop to a mere $88 billion in fiscal 2013. By way of comparison, the federal government will spend around $64 billion on education that same year.

Add in war funding, and our national security total jumps to $618 billion. And we’re still just getting started.

The U.S. military maintains an arsenal of nuclear weapons. You might assume that we’ve already accounted for nukes in the Pentagon’s $530 billion base budget.  But you’d be wrong. Funding for nuclear weapons falls under the Department of Energy (DOE), so it’s a number you rarely hear. In fiscal 2013, we’ll be spending $11.5 billion on weapons and related programs at the DOE. And disposal of nuclear waste is expensive, so add another $6.4 billion for weapons cleanup.

Now, we’re at $636 billion and counting.

How about homeland security? We’ve got to figure that in, too. There’s the Department of Homeland Security (DHS), which will run taxpayers $35.5 billion for its national security activities in fiscal 2013. But there’s funding for homeland security squirreled away in just about every other federal agency as well.  Think, for example, about programs to secure the food supply, funded through the U.S. Department of Agriculture. So add another $13.5 billion for homeland security at federal agencies other than DHS.

That brings our total to $685 billion.

Then there’s the international affairs budget, another obscure corner of the federal budget that just happens to be jammed with national security funds. For fiscal 2013, $8 billion in additional war funding for Iraq and Afghanistan is hidden away there. There’s also $14 billion for what’s called “international security assistance” — that’s part of the weapons and training Washington offers foreign militaries around the world. Plus there’s $2 billion for “peacekeeping operations,” money U.S. taxpayers send overseas to help fund military operations handled by international organizations and our allies.

That brings our national security total up to $709 billion.

We can’t forget the cost of caring for our nation’s veterans, including those wounded in our recent wars. That’s an important as well as hefty share of national security funding. In 2013, veterans programs will cost the federal government $138 billion.

That brings us to $847 billion — and we’re not done yet.

Taxpayers also fund pensions and other retirement benefits for non-veteran military retirees, which will cost $55 billion next year. And then there are the retirement costs for civilians who worked at the Department of Defense and now draw pensions and benefits. The federal government doesn’t publish a number on this, but based on the share of the federal workforce employed at the Pentagon, we can estimate that its civilian retirees will cost taxpayers around $21 billion in 2013.

By now, we’ve made it to $923 billion — and we’re finally almost done.

Just one more thing to add in, a miscellaneous defense account that’s separate from the defense base budget. It’s called “defense-related activities,” and it’s got $8 billion in it for 2013.

That brings our grand total to an astonishing $931 billion.

And this will turn out to be a conservative figure. We won’t spend less than that, but among other things, it doesn’t include the interest we’re paying on money we borrowed to fund past military operations; nor does it include portions of the National Aeronautics and Space Administration that are dedicated to national security. And we don’t know if this number captures the entire intelligence budget or not, because parts of intelligence funding are classified.

For now, however, that whopping $931 billion for fiscal year 2013 will have to do. If our national security budget were its own economy, it would be the 19th largest in the world, roughly the size of Australia’s. Meanwhile, the country with the next largest military budget, China, spends a mere pittance by comparison. The most recent estimate puts China’s military funding at around $136 billion.

Or think of it this way: National security accounts for one quarter of every dollar the federal government is projected to spend in 2013. And if you pull trust funds for programs like Social Security out of the equation, that figure rises to more than one third of every dollar in the projected 2013 federal budget.

Yet the House recently passed legislation to spare the defense budget from cuts, arguing that the automatic spending reductions scheduled for January 2013 would compromise national security. Secretary of Defense Leon Panetta has said such automatic cuts, which would total around $55 billion in 2013, would be “disastrous” for the defense budget. To avoid them, the House would instead pull money from the National School Lunch Program, the Children’s Health Insurance Program, Medicaid, food stamps, and programs like the Social Services Block Grant, which funds Meals on Wheels, among other initiatives.

Yet it wouldn’t be difficult to find savings in that $931 billion.  There’s plenty of low-hanging fruit, starting with various costly weapons systems left over from the Cold War, like the Virginia class submarine, the V-22 Osprey tiltrotor aircraft, the missile defense program, and the most expensive weapons system on the planet, the F-35 jet fighter. Cutting back or cancelling some of these programs would save billions of dollars annually.

In fact, Congress could find much deeper savings, but it would require fundamentally redefining national security in this country. On this issue, the American public is already several steps ahead of Washington. Americans overwhelmingly think that national security funding should be cut — deeply.

If lawmakers don’t pay closer attention to their constituents, we already know the alternative: pulling school-lunch funding.

Chris Hellman and Mattea Kramer are research analysts at the National Priorities Project. They wrote the soon-to-be-published book “A People’s Guide to the Federal Budget,” and host weekly two-minute Budget Brief videos on YouTube.

[Note: This is the latest National Priorities Project piece on TomDispatch about the true cost of national security. In a piece last year by Chris Hellman, the total cost of national security was calculated in a slightly different manner; it included interest payments on the borrowing that funded past military operations. In the national security numbers described above, such interest payments have been omitted.

For further reading on national security spending see “U.S. Security Spending Since 9/11,” an examination of the nearly $8 trillion the United States has spent on defense since the September 11th attacks. Also see “Debt, Deficits, and Defense: A Way Forward” by the Sustainable Defense Task Force.]

Thousands of real world projects — from solar-powered businesses to worker-owned cooperatives and state-owned banks — are underway across the country. Many are self-consciously understood as attempts to develop working prototypes in state and local “laboratories of democracy” that may be applied at regional and national scale when the right political moment occurs.

The movement includes young and old, “Occupy” people, student activists, and what one older participant describes as thousands of “people in their 60s from the ’60s” rolling up their sleeves to apply some of the lessons of an earlier movement.

Explosion of Energy

A powerful trend of hands-on activity includes a range of economic models that change both ownership and ecological outcomes. Co-ops, for instance, are very much on target—especially those which emphasize participation and green concerns. The Evergreen Cooperatives in a desperately poor, predominantly black neighborhood of Cleveland, Ohio are a leading example. They include a worker-owned solar installation and weatherization co-op; a state-of-the-art, industrial-scale commercial laundry in a LEED-Gold certified building that uses—and therefore has to heat—only around a third of the water of other laundries; and a soon-to-open large scale hydroponic greenhouse capable of producing three million head of lettuce and 300,000 pounds of herbs a year. Hospitals and universities in the area have agreed to use the co-ops’ services, and several cities—including Pittsburgh, Atlanta, Washington, DC and Amarillo, Texas are now exploring similar efforts.

Other models fit into what author Marjorie Kelly calls the “generative economy”–efforts that inherently nurture the community and respect the natural environment. Organic Valley is a cooperative dairy producer in based in Wisconsin with more than $700 million in revenue and nearly 1,700 farmer-owners. Upstream 21 Corporation is a “socially responsible” holding company that purchases and expands sustainable small businesses. Greyston Bakery is a Yonkers, New York “B-Corporation” (a new type of corporation designed to benefit the public) that was initially founded to provide jobs for neighborhood residents. Today, Greystone generates around $6.5 million in annual sales.

Recently, the United Steelworkers union broke modern labor movement tradition and entered into a historic agreement with the Mondragón Cooperative Corporation and the Ohio Employee Ownership Center to help build worker-owned cooperatives in the United States along the lines of a new “union-co-op” model.

The movement is also serious about building on earlier models. More than 130 million Americans, in fact, already belong to one or another form of cooperative—and especially the most widely known form: the credit union. Similarly, there are some 2,000 municipally owned utilities, a number of which are ecological leaders. (Twenty-five percent of American electricity is provided by co-ops and public utilities.) Upwards of 10 million Americans now also work at some 11,000 employee-owned firms (ESOP companies).

More than 200 communities also operate or are establishing community land trusts that take land and housing out of the market and preserve it for the community. And hundreds of “social enterprises” use profits for social or community serving goals. Beyond these efforts, roughly 4,500 Community Development Corporations and 1.5 million non-profit organizations currently operate in every state in the nation.

The movement is also represented by the “Move Your Money” and “bank transfer day” campaigns, widespread efforts to shift millions of dollars from corporate giants like Bank of America to one or another form of democratic or community-benefiting institution. Related to this are other “new banking” strategies. Since 2010, 17 states, for instance, have considered legislation to set up public banks along the lines of the long-standing Bank of North Dakota.

Several cities—including Los Angeles and Kansas City— have passed “responsible banking” ordinances that require banks to reveal their impact on the community and/or require city officials to only do business with banks that are responsive to community needs. Other cities, like San Jose and Portland, are developing efforts to move their money out of Wall Street banks and into other commercial banks, community banks or credit unions. Politicians and activists in San Francisco have taken this a step further and proposed the creation of a publicly owned municipal bank.

There are also a number of innovative non-public, non-co-op banks—including the New Resource Bank in San Francisco, founded in 2006 “with a vision of bringing new resources to sustainable businesses and ultimately creating more sustainable communities.” Similarly, One PacificCoast Bank, an Oakland-based certified community development financial institution, grew out of the desire to “create a sustainable, meaningful community development bank and a supporting nonprofit organization.” And One United Bank—the largest black-owned bank in the country with offices in Los Angeles, Boston and Miami—has financed more than $1 billion in loans, most in low-income neighborhoods.

Ex-JP Morgan managing director John Fullerton has added legitimacy and force to the debate about new directions in finance at the ecologically oriented Capital Institute. And in several parts of the country, alternative currencies have long been used to help local community building—notably “BerkShares” in Great Barrington, Massachusetts, and “Ithaca Hours” in Ithaca, New York.

Active protest efforts are also underway. The Occupy movement, along with many others, has increasingly used direct action in support of new banking directions—and in clear opposition to old. On April 24, 2012 over 1,000 people protested bank practices at the Wells Fargo shareholder meeting in San Francisco. Similar actions, some involving physical “occupations” of bank branches, have been occurring in many parts of the country since the Occupy movement started in 2011. Large-scale demonstrations occurred at the Bank of America’s annual shareholder meeting in May 2012.

What to do about large-scale enterprise in a “new economy” is also on the agenda. A number of advocates, like Boston College professor Charles Derber, contemplate putting worker, consumer, environmental, or community representatives of “stakeholder” groups on corporate boards. Others point to the Alaska Permanent Fund which invests a significant portion of the state’s mineral revenues and returns dividends to citizens as a matter of right. Still others, like David Schweickart and Richard Wolff, propose system-wide change that emphasizes one or another form of worker ownership and management. (In the Schweickart version, smaller firms would be essentially directly managed by workers; large-scale national firms would be nationalized but also managed by workers.) A broad and fast-growing group seeks to end “corporate personhood,” and still others urge a reinvigoration of anti-trust efforts to reduce corporate power. (Breaking up banks deemed too big to fail is one element of this.)

In March 2012, the Left Forum held in New York also heard many calls for a return to nationalization. And even among “Small is Beautiful” followers of the late E. F. Schumacher, a number recall this historic build-from-the-bottom-up advocate’s argument that “[w]hen we come to large-scale enterprises, the idea of private ownership becomes an absurdity.” (Schumacher continuously searched for national models that were as supportive of community values as local forms.)

Theory and Action

A range of new theorists have also increasingly given intellectual muscle to the movement. Some, like Richard Heinberg, stress the radical implications of ending economic growth. Former presidential adviser James Gustav Speth calls for restructuring the entire system as the only way to deal with ecological problems in general and growth in particular. David Korten has offered an agenda for a new economy which stresses small Main Street business and building from the bottom up. (Korten also co-chairs a “New Economy Working Group” with John Cavanagh at the Institute of Policy Studies.) Juliet Schor has proposed a vision of “Plentitude” oriented in significant part around medium-scale high tech industry. My own work on a Pluralist Commonwealth emphasizes a community-building system characterized by a mix of democratized forms of ownership ranging from small co-ops all the way up to public/worker-owned firms where large scale cannot be avoided.

Writers like Herman Daly and David Bollier have also helped establish theoretical foundations for fundamental challenges to endless economic growth, on the one hand, and the need to transcend privatized economics in favor of a “commons” understanding, on the other. The awarding in 2009 of the Nobel Prize to Elinor Ostrom for work on commons-based development underlined recognition at still another level of some of the critical themes of the movement.

Around the country, thinkers are clamoring to meet and discuss new ideas. The New Economy Institute, led primarily by ecologists and ecological economists, hoped to attract a few hundred participants to a gathering to be held at Bard College in June 2012. The event sold out almost two months in advance! An apologetic email went out turning away hundreds who could not be accommodated with the promise of much bigger venue the next year.

And that’s just one example. From April to May 2012, the Social Venture Network held its annual gathering in Stevenson, Washington. The Public Banking Institute gathered in Philadelphia. The National Center for Employee Ownership met in Minneapolis—also to record-breaking attendance. And the Business Alliance for Local Living Economies (BALLE) held a major conference in Grand Rapids, Michigan. Other events planned for 2012 include the Consumer Cooperative Management Association’s meeting in Philadelphia; the U.S. Federation of Worker Cooperatives’ gathering in Boston; a Farmer Cooperatives conference organized by the University of Wisconsin Center for Cooperatives; and meetings of the National Community Land Trust Network and the Bioneers. The American Sustainable Business Council, a network of 100,000 businesses and 300,000 individuals, has been holding ongoing events and activities throughout 2012.

Daunting Challenges

The New Economy Movement is already energetically involved in an extraordinary range of activities, but it faces large-scale, daunting challenges. The first of these derives from the task it has set for itself—nothing less than changing and democratizing the very essence of the American economic system’s institutional structure.

Even viewed as a long-range goal, the movement obviously confronts the enormous entrenched power of an American political economic system dominated by very large banking and corporate interests—and bolstered by a politics heavily dependent on the financial muscle of elites at the top. (One recent calculation is that
400 individuals at the top now own more wealth than the bottom 160 million.)

A second fundamental challenge derives from the increasingly widespread new economy judgment that economic growth must ultimately be reduced, indeed, even possibly ended if the dangers presented by climate change are to be avoided—and if resource and other environmental limits are to be responsibly dealt with.

Complicating all this is the fact that most labor unions—the core institution of the traditional progressive alliance—are committed to growth as absolutely essential (as the economy is now organized) to maintaining jobs.

History dramatizes the implacable power of the existing institutions—until, somehow, that power gives way to the force of social movements. Most of those in the New Economy movement understand the challenge as both immediate and long-term: how to put an end to the most egregious social and economically destructive practices in the near term; how to lay foundations for a possible transformation in the longer term.

And driving the movement’s steady build up, day by day, year by year, is the growing economic and social pain millions of Americans now experience in their own lives—and a sense that something fundamental is wrong. The New Economy Movement speaks to this reality, and just possibly, despite all the obstacles—as with the civil rights, feminist, environmental and so many other earlier historic movements—it, too, will overcome. If so, the integrity of its goals and the practicality of its developmental work may allow it to help establish foundations for the next great progressive era of American history. It is already adding positive vision and practical change to everyday life.

Breedlove liked the idea of moving to a more rural community with less pollution, a shorter commute, and safer schools. Menlo Park, like many urban areas at the time, did not seem to be heading in the right direction. In the end, Breedlove quit his job, sold the Silicon Valley house, packed, and moved the family to Visalia. He was not the only one. Many well-educated professionals at the time were leaving cities and moving to smaller communities because they thought those communities were better places to raise families. But things did not turn out exactly as they expected.

In 1969, both Menlo Park and Visalia had a mix of residents with a wide range of income levels. Visalia was predominantly a farming community with a large population of laborers but also a sizable number of professional, middle-class families. Menlo Park had a largely middle-class population but also a significant number of working-class and low-income households. The two cities were not identical—the typical resident of Menlo Park was somewhat better educated than the typical resident of Visalia and earned a slightly higher salary—but the differences were relatively small. In the late 1960s, the two cities had schools of comparable quality and similar crime rates, although Menlo Park had a slightly higher incidence of violent crime, especially aggravated assault. The natural surroundings in both places were attractive. While Menlo Park was close to the Pacific Ocean beaches, Visalia was near the Sierra Nevada range and Sequoia and Kings Canyon National Parks.

Today the two places could not be more different, but not in the way David Breedlove envisioned. The Silicon Valley region has grown into the most important innovation hub in the world. Jobs abound, and the average salary of its residents is the second highest in America. Its crime rate is low, its school districts are among the best in the state, and the air quality is excellent. Fully half of its residents have a college degree, and many have a PhD, making it the fifth best educated urban area in the nation. Menlo Park keeps attracting small and large high-tech employers, including most recently the new Facebook headquarters.

By contrast, Visalia has the second lowest percentage of college-educated workers in the country, almost no residents with a postgraduate degree, and one of the lowest average salaries in America. It is the only major city in the Central Valley that does not have a four-year college. Its crime rate is high, and its schools, structurally unable to cope with the vast number of non-English-speaking students, are among the worst in California. Visalia also consistently ranks among American cities with the worst pollution, especially in the summer, when the heat, traffic, and fumes from farm machines create the third highest level of ozone in the nation.

Not only are the two communities different, but they are growing more and more different every year. For the past thirty years, Silicon Valley has been a magnet for good jobs and skilled workers from all over the world. The percentage of college graduates has increased by two-thirds, the second largest gain among American metropolitan areas. By contrast, few high-paying jobs have been created in Visalia, and the percentage of local workers with a college degree has barely changed in thirty years—one of the worst performances in the country.

For someone like David Breedlove, a highly educated professional with solid career options, choosing Visalia over Menlo Park was a perfectly reasonable decision in 1969. Today it would be almost unthinkable. Although only 200 miles separate these two cities, they might as well be on two different planets.

The divergence of Menlo Park and Visalia is not an isolated case. It reflects a broader national trend. America’s new economic map shows growing differences, not just between people but between communities. A handful of cities with the “right” industries and a solid base of human capital keep attracting good employers and offering high wages, while those at the other extreme, cities with the “wrong” industries and a limited human capital base, are stuck with dead-end jobs and low average wages. This divide—I will call it the Great Divergence—has its origins in the 1980s, when American cities started to be increasingly defined by their residents’ levels of education. Cities with many college-educated workers started attracting even more, and cities with a less educated workforce started losing ground. While in 1969 Visalia did have a small professional middle class, today its residents, especially those who moved there recently, are overwhelmingly unskilled. Menlo Park had many low-income families in 1969, but today most of its new residents have a college degree or a master’s degree and a middle- to upper-class income. Geographically, American workers are increasingly sorting along educational lines. At the same time that American communities are desegregating racially, they are becoming more segregated in terms of schooling and earnings.

Certainly any country has communities with more or less educated residents. But today the difference among communities in the United States is bigger than it has been in a century. The divergence in educational levels is causing an equally large divergence in labor productivity and therefore salaries. Workers in cities at the top of the list make about two to three times more than identical workers in cities at the bottom, and the gap keeps growing.

Cities with a high percentage of skilled workers offer high wages not just because they have many college-educated residents and these residents earn high wages. This would be interesting but hardly surprising. But something deeper is going on. A worker’s education has an effect not just on his own salary but on the entire community around him. The presence of many college-educated residents changes the local economy in profound ways, affecting both the kinds of jobs available and the productivity of every worker who lives there, including the less skilled. This results in high wages not just for skilled workers but for most workers.

I consider the Great Divergence to be one of the most important developments in the United States over the past thirty years. The growing economic divide between American communities is not an accident but the inevitable result of deep-seated economic forces. More than traditional industries, the knowledge economy has an inherent tendency toward geographical agglomeration. In this context, initial advantages matter, and the future depends heavily on the past. The success of a city fosters more success, as communities that can attract skilled workers and good jobs tend to attract even more. Communities that fail to attract skilled workers lose further ground.

The growing divergence of American communities is important not just in itself but because of what it means for American society. While the divide is first and foremost economic, it is now beginning to affect cultural identity, health, family stability, and even politics. The sorting of highly educated Americans into some communities and less educated American into others tends to magnify and exacerbate all other socioeconomic differences. For example, there are vast differences in life expectancy among inhabitants of American cities, and these differences have been expanding for the past three decades. The divorce rates, crime rates, and political clout of different communities have also been diverging. These trends are reshaping the very fabric of our society.

The United States is not in particularly high spirits these days. Fear of economic decline is widespread, and insecurity about America’s standing in the world and its economic future is growing. Talk of the “death of the American dream” is everywhere, from well-articulated op-ed pieces to crude talk radio shows, from casual barbershop conversations to highbrow academic symposia. In a nation sharply divided along political lines, concern about the economy is shared almost equally by those on the left and on the right.

On the surface it seems we have good reason to be worried. Middle-class salaries are declining. Good jobs are scarce. Take the typical forty-year-old male worker with a high school education: today his hourly wage is 8 percent lower than his father’s was in 1980, adjusted for inflation. This means that for the first time in recent American history, the average worker has not experienced an improvement in standard of living compared to the previous generation. In fact he is worse off by almost every measure. On top of this, income inequality is widening. Uncertainty about the future is now endemic.

But the economic picture is more complex, more interesting, and more surprising than the current debate suggests. America’s labor market is undergoing a momentous shift. While some sectors and occupations are dying, others are growing stronger, and still others, just born, promise to alter the landscape dramatically. Most of all, the geography of jobs is changing in profound and irreversible ways. While these trends are national, even global, in scope, their effects are profoundly different in different cities and regions of the country. For example, the effects of globalization, technological progress, and immigration on American workers are not uniform across the United States. They favor the residents of some cities and hurt the residents of others. As old manufacturing capitals disappear, new innovation hubs are rising and are poised to become the new engines of prosperity. An unprecedented redistribution of jobs, population, and wealth is under way in America, and it’s likely to accelerate in the decades to come.

Some of the changes in the economic map reflect long-run forces that are outside our control. Others can be shaped and managed. But none of them are random, chaotic, or unpredictable. In the end, they all reflect clear and rather basic economic principles. Unfortunately, they tend to be obscured by the flood of data on the fluctuations of the stock market or the latest employment numbers. The focus on short-term events often results in information that is incomplete, irrelevant, or both. What happened today, this week, or even this month is not very illuminating, because the fundamentals of an economy evolve at a much slower pace.

But if we take a step back and look at the big picture, the forces that have been driving these changes reveal themselves very clearly. They are far more fascinating and much more important than the daily movements of the Dow Jones. This book examines the long-term trends that really matter to our lives—the vast changes that have taken place in the American labor market over the past three decades and the economic forces underlying these changes. But it also looks forward, seeking to provide insight into the trends that will shape our economy over the next three decades.

Economists like to distinguish cyclical change, the ups and downs of the economy driven by the endless cycle of recessions and expansions, from secular change, the long-run developments that are driven by deep-seated but slower-moving economic dynamics. Most of the current public debate on the economy—in the media, in Congress, in the White House—focuses on the former. The time horizon in this debate is six months or a year at most: How do we end the recession? What should be in this year’s budget? How will unemployment affect the next election? In this book, the focus is almost entirely on the forces that drive long-run trends. Understanding why these changes are taking place, where they are occurring, and how they are affecting individual Americans is crucial. Our jobs, our communities, and our economic destiny are at stake.

The changes taking place in the United States can be seen around the globe. New economic powerhouses are displacing old ones. What used to be tiny, barely visible dots on the map have turned into thriving megalopolises with thousands of new companies and millions of new jobs. Nowhere are these changes more obvious than in the Chinese city of Shenzhen. If you have not heard of it, you will. It is one of the fastest-growing cities in the world. In just three decades it has gone from being a small fishing village to being a huge metropolis with more than 10 million residents. In the United States, a fast-growing city like Las Vegas or Phoenix may triple or quadruple in size over a thirty-year period. Shenzhen’s population has grown by more than 300 times in the same period. In the process, Shenzhen has become one of the manufacturing capitals of the world.

Shenzhen’s rise is truly remarkable because it parallels almost perfectly the decline of U.S. manufacturing centers. Thirty years ago Shenzhen was an unremarkable small town that no one outside of southern Guangdong Province had even heard of. Its fate—as well as the fate of millions of American manufacturing workers —was sealed in 1979, when the Chinese leadership singled it out to be the first of China’s “Special Economic Zones.” These zones quickly became a magnet for foreign investment. In turn, that flow of investment led to thousands of new factories. These factories are where many American manufacturing jobs have gone.

As Detroit and Cleveland have declined, Shenzhen has grown. Massive production facilities of all kinds carpet the region. Every year the skyline adds new high-rise offices and apartments, and its workforce swells as more and more farmers leave rural areas to look for better-paying jobs in its cavernous factories. The Chinese call it the city with “one high-rise a day and one boulevard every three days.” As you walk along its wide streets, you feel the city’s energy and optimism. Shenzhen has been China’s top exporter for the past two decades and has built one of the world’s busiest ports, a sprawling facility dotted with huge cranes, enormous trucks, and containers of all colors. Twenty-four hours a day, seven days a week, 365 days a year, these containers are loaded onto enormous cargo ships bound for the West Coast of the United States. Twenty-five million of these containers leave the port each year, almost one per second. In less than two weeks that merchandise will be on a truck headed for a Walmart distribution center, an IKEA warehouse, or an Apple store.

Shenzhen is where the iPhone is assembled. If there is a poster child of globalization, it is the iPhone. Apple has given as much attention to designing and optimizing its supply chain as to the design of the phone itself. The process by which the iPhone is produced illustrates how the new global economy is reshaping the location of jobs and presenting new challenges for American workers.

Apple engineers in Cupertino, California, conceived and designed the iPhone. This is the only phase of the production process that takes place entirely in the United States. It involves product design, software development, product management, marketing, and other high-value functions. At this stage, labor costs are not the main consideration. Rather, the important elements are creativity and ingenuity. The iPhone’s electronic parts—sophisticated, but not as innovative as its design—are made mostly in Singapore and Taiwan. Only a few components are made in the United States. The last phase of production is the most labor-intensive: workers assemble the hardware and prepare it for shipping. This part, where the key factor is labor costs, takes place on the outskirts of Shenzhen. The facility is one of the largest in the world, and its sheer size is extraordinary: with 400,000 workers, dormitories, stores, and even cinemas, it is more like a city within a city than a factory. If you buy an iPhone online, it is shipped directly to you from Shenzhen. Incredibly, when it reaches the American consumer, only one American worker has physically touched the final product: the UPS delivery guy.

At a superficial level, the story of the iPhone is troubling. Here you have an iconic American product that has captivated consumers everywhere, but American workers are involved only in the initial innovation phase. The rest of the process, including the making of the sophisticated electronic components, has been moved overseas. It is therefore natural to wonder what might be left to American workers in the decades to come. Is America entering a phase of irreversible decline?

Over the past half century, the United States has shifted from an economy centered on producing physical goods to one centered on innovation and knowledge. Jobs in the innovation sector have been growing disproportionately fast. The key ingredient in these jobs is human capital, which consists of people’s skills and ingenuity. In other words, humans are the essential input—they are coming up with the new ideas. The same two forces that have decimated traditional manufacturing, globalization and technological progress, are now driving the rise of jobs in the innovation sector. The Great Recession has temporarily halted this growth, but the long-term trend points upward.

Globalization and technological progress have turned many physical goods into cheap commodities but have raised the economic return on human capital and innovation. For the first time in history, the factor that is scarce is not physical capital but creativity. Not surprisingly, innovators capture the largest share of the value of new products. The iPhone is made of 634 components. The value created in Shenzhen is very low, because assembly can be done anywhere in the world. Even sophisticated electronic parts, like flash memories and retina displays, create limited value, because of strong global competition. The majority of the iPhone’s value comes from the original idea, its unique engineering, and its beautiful industrial design. Essentially this is why Apple receives $321 for each iPhone—much more than any part supplier involved in physical production. This matters tremendously, not just for Apple’s profit margin and for our sense of national pride, but because it means good jobs.

The innovation sector includes advanced manufacturing (such as designing iPhones or iPads), information technology, life sciences, medical devices, robotics, new materials, and nanotechnology. But innovation is not limited to high technology. Any job that generates new ideas and new products qualifies. There are entertainment innovators, environmental innovators, even financial innovators. What they all have in common is that they create things the world has never seen before. We tend to think of innovations as physical goods, but they can also be services—for example, new ways of reaching consumers or new ways of spending our free time. Today this is where the real money is. A part of the $321 that Apple receives ends up in the pockets of Apple’s stockholders, but some of it goes to Apple’s employees in Cupertino. And because of the company’s great profitability, it has the incentive to keep innovating and to keep hiring workers. Studies show that the more innovative a company is, the better paid its employees are.

You might think that the rise of innovation is pretty exciting if you work for, say, Google or a biotech company but that it doesn’t matter all that much if you’re a teacher or a doctor or a police officer. After all, the majority of Americans will never work for a high-tech startup. Why should they care about the rise of innovation? As it turns out, however, innovation matters not only for the well-educated workers who are directly employed by high-tech firms—the scientists, engineers, and creators of new ideas—but for most American workers.

If you take a walk in one of America’s cities, most of the people you see on the street will be store clerks and hairstylists, lawyers and waiters, not innovators. About a third of Americans work either for the government or in the education and health services sectors, which include teachers, doctors, and nurses. Another quarter are in retail, leisure, and hospitality, which includes people working in stores, restaurants, movie theaters, and hotels. An additional 14 percent are employed in professional and business services, which include employees of law, architecture, and management firms. In total, two-thirds of American jobs are in the local service sector, and that number has been quietly growing for the past fifty years. Most industrialized nations have a similar percentage of local service jobs. The goods and services in this sector are locally produced and locally consumed and therefore do not face global competition. Although jobs in local services constitute the vast majority of jobs, they are the effect, not the cause, of economic growth. One reason is that productivity in local services tends not to change much over time. It takes the same amount of labor to cut your hair, wait on a table, drive a bus, or teach math as it did fifty years ago. By contrast, productivity in the innovation sector increases steadily every year, thanks to technological progress. In the long run, a society cannot experience salary growth without significant productivity growth. Fifty years ago, manufacturing was the driver of this growth, the one sector responsible for raising the wages of American workers, including local service workers. Today the innovation sector is the driver. Thus, what happens to the innovation sector determines the salary of many Americans, whether they work in innovation or not.

A second reason that the rise of innovation matters to all of us has to do with the almost magical economics of job creation. Innovative industries bring “good jobs” and high salaries to the communities where they cluster, and their impact on the local economy is much deeper than their direct effect. Attracting a scientist or a software engineer to a city triggers a multiplier effect, increasing employment and salaries for those who provide local services. In essence, from the point of view of a city, a high-tech job is more than a job. Indeed, my research shows that for each new high-tech job in a city, five additional jobs are ultimately created outside of the high-tech sector in that city, both in skilled occupations (lawyers, teachers, nurses) and in unskilled ones (waiters, hairdressers, carpenters). For each new software designer hired at Twitter in San Francisco, there are five new job openings for baristas, personal trainers, doctors, and taxi drivers in the community. While innovation will never be responsible for the majority of jobs in the United States, it has a disproportionate effect on the economy of American communities. Most sectors have a multiplier effect, but the innovation sector has the largest multiplier of all: about three times larger than that of manufacturing.

Excerpted from The New Geography of Jobs, by Enrico Moretti. Copyright © 2012 by Enrico Moretti. Reprinted by permission of Houghton Mifflin Harcourt Publishing Co. All rights reserved.