Tuesday, March 17, 2009

The Resurgence of Main Street

Small towns often seem fragile in booms. If the town is within commuting distance of an urban center, they transform from close-knit ecosystems to bedroom communities. The longer the boom continues, the greater the percentage of the population that works and shops outside of the community. Higher wages in the urban centers offset the commute costs, and local businesses, with their limited market, cannot compete on wages.

The result is easily seen. Drive down Main Street of any small town and you will be greeted by the empty storefronts on either side; what businesses remain are boutique shops and hair salons, where the customer to employee ratio at any given time is at or near 1:1.

Main Street is plagued by infrastructure problems, not the least of which is adequate customer and employee parking. The age of the buildings and their layout are not conducive to employee-intensive operations like manufacturing, and power may be inadequate even if floor space for that type of business can be found. Main Street is built and structured for one-to-one business operations; personalized services like shoe and watch repair, dress shops, smoke shops, a butcher, a cafe, etc.

The decline of Main Street during the boom is often attributed to the big box retailers. And, to the extent that the Super Center on the edge of town offers convenience and commoditization of day-to-day staples, there may be some truth to that. However, the big box retailer doesn't come to town with the intention of shutting down main street; the specific demographic and economic factors that attracted the retailer were preexistent and already working against Main Street businesses.

When a customer can buy a new pair of work boots for $15, there is little or no demand for the services of the Main Street shoe repair shop. There is much wailing and gnashing of teeth as the mom-and-pop shop turns off the lights for the last time and the owners move on to other lines of work. The sense of loss is not for the building owner who finds himself without a tenant, but rather a nostalgia for the tidy shop permeated by the smell of new leather and mink oil.

But, beyond the emotional, what has really happened? Simply, it is a reallocation of resources. The owners and employees of the shoe shop have moved on to produce goods and services that are in demand, thus enabling them to make more money than before. The people in the community can purchase shoes for $15, thus increasing their real wages. And, most importantly, the building previously occupied by the shoe shop is available for other, more productive uses*. In real terms, the community as individuals and as a whole are better off.

As all booms must, however, the recent one ended. Some investments made during the boom have been revealed as unsustainable, and capital held by those investments is being reallocated to other, more productive uses. Labor will be displaced until those reallocations can occur. Driving patterns and consumption habits of the residents of the small town will change.

Among the ranks of unemployed will be a multitude of ersatz entrepreneurs. Perhaps they are naturally inclined to risk taking, but found it more advantageous to work for someone else. Maybe, they will stumble onto an entrepreneurial venture. Or, maybe they will grow tired of looking for employment and decide to make their own job out of sheer necessity. You will know who they are; they're the ones who will be able to match consumer needs and newfound habits with an ability to deliver the demanded goods and services at the right place and price.

You may object on grounds that it will be impossible for customers with no money to pay for the goods and services, so the new entrepreneurs will fail. Doubtless this is true. Many will fail. However, many more will flourish. You may find the answer to your objection in its flip side; that is, how do people get money to purchase the goods and services they demand? By producing goods and services that other people demand, of course.

The farmer trades with people who need food. The plumber trades with people who need plumbing repairs. The HVAC technician repairs furnaces that need repairing. The prices may change to match the amount of money in circulation, but the producers will still produce in their newfound occupation as entrepreneur.

These new entrepreneurs will not have a lot of capital to invest in new buildings and equipment. Some may be able to work from their kitchen table, but others will require low-cost retail space. They will find that space in the empty storefronts on Main Street and long-forgotten strip malls. In other words, the correction precisely reverses the economic trends that drained employees and businesses from Main Street in the first place, with one major difference.

This time, the business owners on Main Street have $15 shoes.

The businesses that will open will not compete with the big box retailer, but rather, compliment the retailer while the owners avail themselves of the lower-priced goods sold by the big box store. The new homes that were built as bedrooms for urban center workers are now new homes for local workers and business owners. The community has come full circle; true wealth creation is not measured in the paper profits of the boom, but rather the standard of living at the low point of the correction.

There are many who correctly predicted the current correction, and still more who have jumped on the negative sentiment to make dire predictions of the future. I do not disagree that there are reallocations which have not been completed and more reallocations to come. However, I believe that the vast majority of any pain to come is in urban areas; in fact, I would predict a lot of up for small towns from here, with a caveat.

Small towns and rural areas will lead the urban centers until the next credit-created boom. However, government statistics and financial reporting is focused on the urban areas, so the resurgence of the small town will be wholly missed. The proof of the resurgence will only be found in the store windows on Main Street.

But, here's the caveat. No one, from Washington D.C., the states' capital buildings, or city hall has realized what a correction means to their fiefdoms. Workers, who come to town to sleep at night, mow the lawn on weekends, and go to the park with the kids, are content to let them play at their petty politics and central planning. Entrepreneurs, risking whatever savings they have left to earn a living, won't.

They will demand that local politicians get out of their way. To the extent that city hall fights them, entrepreneurial progress will be delayed or simply occur in the next town over. It may take an election cycle to remove the current crop of petty tyrants, but they will be removed. That is one of the many good things that come with a correction. Unfortunately, they'll be replaced with a new crop of petty tyrants, but that's a different article.

Gerald Celente looks at empty Circuit City stores and asks, “who will replace them?” as a rhetorical question. I ask the same question, but not rhetorically; I look forward to seeing what some visionary entrepreneur will do with that property, very soon.
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*There are many factors that determine whether the building is put to new use, including the owner's willingness to let the building sit empty rather than reduce rents or sell the building outright. The number one factor, however, is political. A productive, new use is necessarily transformative; the community may prefer to wax nostalgic at an empty storefront than allow the property owner and his new tenants to transform the structure to its new use. Local politicians may require prohibitive kickbacks or favors in return for demolition or building permits. Historical societies may suck whatever remaining value the building has for productive use through arbitrary rules imposed on the property owner.

It may well be that the best use of the property is as new infrastructure for the downtown area: a parking lot. That is a decision that could easily be made by the property owner. The political tide of a thousand petty tyrants, however, too often makes that an impossible use until extensive, expensive “downtown rejuvenation” studies have been completed and the land deeded to the town willingly or through eminent domain.

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