New Rules
for the New Localism
Favoring Communities,
Deterring Corporate Chains

Multinational Monitor: What do you mean when you refer to localism?
Stacy Mitchell: We mean a shift away from policies that have promoted large-scale production, long-distance transport lines and absentee ownership, and towards policies that foster an economy which is small-scale, community-based and locally owned.

MM: What's the relationship between absentee ownership and long-distance transport, and democratic rule?
Mitchell: We believe that decisions should be made by the people who feel the impact of those decisions. That's the essence of democracy. What we've seen in the last few decades is growing consolidation in the economy. There are fewer and fewer people in distant corporate boardrooms who are making decisions that profoundly affect our lives, local economies and communities.

It's that concentration of power, both economic and political, that is the concern. If you want to talk about what makes a strong community or what makes a strong democracy, you're talking about a place where people control their own futures. We're moving increasingly away from that as global corporations gain greater power.

MM: Whether corporations are local or not, you still have to confront business power. In what ways do you find small and local business more compatible with democratic values?
Mitchell: Local ownership ensures that economic resources are broadly owned and locally controlled. It keeps decision-making local. While large corporations are required by law to maximize returns to shareholders, locally owned businesses can be guided by other values besides the bottom line. And because they are owned by people who live in the community, they tend to have a far greater concern about the community's welfare and long-term health and vitality.

If you look at retail, for example, in places dominated by chain stores, all sorts of decisions that affect our communities -- whether to close a store in a distressed neighborhood, protect a watershed, stock a controversial book, pay a living wage or contribute to a local cause -- are made in distant boardrooms where the values and needs of the local community carry little or no weight. In the case of locally owned business, those decisions are made locally by people who live in the community and who are going to feel the impacts, whether it is a polluted water source or social distress.

Small, local businesses also keep dollars in the local economy. If you shop at a local store or support a local farmer, those dollars in turn tend to be spent with other locally owned businesses, and so they help support a network of community-based enterprises. This enriches the community as a whole and diversifies the range and quality of jobs available.

MM: Your project has suggested an array of tools to try to restrict chain stores and superstores. What are some of the things that communities have done, or might be able to do, to restrict a large Wal-Mart, say, from coming in?
Mitchell: Cities and towns have a great deal of authority in this area. They exercise the authority primarily through their land use powers, their ability to make decisions about planning and zoning.

Hundreds of cities and towns in the last few years have recognized the impacts that chain stores and big box retail in particular have on local economies and communities.

They're implementing a variety of policies in response. One example is a size limitation, which prohibits construction of stores over a certain size. Some communities have simply banned the big boxes, the stores like Home Depot and Wal-Mart that are over 100,000 square feet; others have chosen lower thresholds, like 20,000 square feet, for example, which is smaller than a Borders Bookstore. These communities are nurturing local enterprise by insisting on human scale.

Another policy that many communities are adopting is to require that community and economic impact studies be done for any proposed retail development of a significant scale. These reviews look at all sorts of factors, from the impact that a development might have on the environment in terms of things like storm water runoff and wetlands, to the impact that it will have on the local economy, the vitality of the downtown and the character of the community. It's a way of getting all the facts on the table before you make a decision. If the community finds that the proposal doesn't meet its requirements, then these laws give it the authority to say, "no."

Probably the most far-reaching policies are formula business bans, which about half a dozen towns around the country have adopted. These prohibit formula restaurant and retail chains from locating in a community. They don't say that Starbucks can't come in, but they do say that, if Starbucks wants to build, it has to look and operate, both internally and externally, completely differently from any other Starbucks in the country. This sets up a pretty significant hurdle that most major retail corporations are not willing to comply with. Coronado and Arcata, California are examples of cities that have recently adopted these policies.

We've also seen groups of neighboring towns coming together to establish regional policies on retail development. They are looking at the impact of chain store expansion on the whole region before granting approval, and also at how to craft long-term economic development strategies and other tools to support locally owned businesses and new entrepreneurs.

MM: To what extent are these kinds of tools -- the physical size caps, the formula bans or others -- being adopted by significantly sized cities; or are they really just a tool that is being used by a handful of small towns?
Mitchell: Dozens of small- and medium-sized cities have enacted these kinds of policies. In larger cities, more often what happens is that they'll get passed on a neighborhood-by-neighborhood basis. For example, there are neighborhoods in San Francisco and Kansas City that have size limits of 10,000, even 4,000 square feet. These are in place specifically to keep out the Pottery Barns and Rite Aids of the world.

We're seeing this sort of grassroots activism in all kinds of places -- in cities and small towns, in working class communities as well as middle class communities, in rural areas and big cities, and in all different regions of the country.

MM: How do you respond to the argument that people can choose to go or not go to Wal-Mart and similar stores, and the fact that they choose to go there must mean that they like them, that they do good things for consumers?
Mitchell: Over the past 10 or 15 years, we have seen an unprecedented shift from locally owned retail to absentee-owned retail. Two or three companies now dominate nearly every sector. What we're getting is not more competition, but less. That's never good for consumers.

The trends are staggering. Barnes & Noble and Borders have about half of all bookstore sales nationwide. Eleven thousand independent pharmacies have closed since 1990. Home Depot and Lowes have about 40 percent of all building and hardware supply sales. Five firms control 42 percent of all grocery sales, up from 19 percent just six years ago. Three companies -- Office Max, Office Depot and Staples -- control 75 percent of office product sales nationwide. Blockbuster Video rents 1 out of every 3 videos nationwide. And Wal-Mart now controls 7 percent of all retail spending. That includes everything we buy -- from books to clothing to groceries to computers. About $1.50 out of every $20 spent goes to a single company. That is dramatically more concentration then there was even 15 years ago.

The idea that people should vote with their dollars misses the underlying reality about how this process works. A company like Blockbuster Video will come into a community and will often locate near a very successful independent video store. They tend to offer very low prices at first. All they really have to do is draw off just enough business to put the local store in the red; they don't even have to be the most popular of the two businesses. Blockbuster and the other big retail chains have the financial resources to operate new stores at a loss for many months after they open; a local business can't do that. So even if it's the most popular and efficient and best run of the two choices, it can't necessarily survive against that kind of predatory tactic.

It is also important to realize that economic consolidation is not simply the result of market forces. It is a trend that has been driven in no small part by public policy. At the local level, land use and transportation policy often encourage and underwrite chain store development on the outskirts of town while undermining downtowns and local businesses. Cities and states routinely provide multi-million dollar tax breaks and subsidies for corporate chains. You can always read in the papers about cities that are giving millions to get a Wal-Mart or underwrite a Home Depot or bring in a Borders Books store. Rarely are those kinds of public funds made available to locally owned businesses. Instead, they get to see their tax dollars used to subsidize their biggest competitors.

At the federal level, there are examples like our current sales tax policy, which exempts Internet retailers like Amazon.com from paying state and local sales taxes. This essentially gives distant companies a 5 to 8 percent price advantage over local stores. Taxpayers have also funded a range of infrastructure -- highways, publicly managed shipping ports, satellite systems built by NASA, laser scanning technology developed by the military -- that local businesses have relatively little use for, but that far-flung global empires like Wal-Mart could not possibly survive without.

So the future of local business will depend not only on the decisions that we make as consumers, but also on the decisions that we make as citizens. Right now, public policy decisions favor large corporations over local business. The New Rules Project makes the case for precisely the opposite approach: Policies that nurture community-rooted enterprise and limit concentrations of economic power.

MM: Do size caps and similar kinds of regulations run into constitutional challenges under the Commerce Clause or other provisions?
Mitchell: In the case of the land use and planning ordinances, there are occasionally lawsuits brought by developers against cities and towns. They rarely win; courts have consistently granted cities and towns a great deal of leeway over land use.

Even so, developers often use a threat of a lawsuit to push through what they want, especially in small towns with limited budgets to fight in court.

MM: What about the formula store restrictions?
Mitchell: Those have been upheld as well. They are very carefully crafted because the Supreme Court has interpreted the constitution to prohibit state or local laws that burden interstate commerce. It is unconstitutional for a city, town or state to prohibit a business based on the fact that it is absentee-owned. The formula business bans are structured to avoid this problem by not banning chains outright, but stipulating that they build a unique business that does not operate according to a centralized formula. It's a hurdle that allows only those chains that are truly committed to being in the community.

MM: Have the chains argued that these are laws that have the same effect as banning them and really have that intent as well?
Mitchell: There have been only a few minor cases around these laws. The chains have not been aggressive in pursuing legal challenges, perhaps because these policies are quite popular in the communities that have them. It would also be a tough case to make: In one of the towns that bans formula businesses, there's a regional taco chain that actually built a one-of-a-kind restaurant.

MM: You have been working on bank ATM surcharge bans. Why does that issue fit into your overall project?
Mitchell: ATM surcharges are the $1.50 or $2.00 fees that you pay when you use an ATM owned by a bank other than your own bank.

Surcharges are anti-competitive. They enable big banks to use their size and market power to disadvantage small banks and credit unions.

Normally in the free market, companies gain customers by lowering their prices. Surcharges work in exactly the opposite way.

In most areas, two or three banks own almost all of the ATMs. For these dominant banks, imposing surcharges on non-customers can induce them to move their accounts to one of the dominant banks in order to avoid the fees. In fact, the higher the surcharge, the more likely credit union and small bank customers are to move their accounts. It's an inverse form of price competition whereby big banks gain customers not because they have better service or lower fees, but simply because they have market power.

Because of this, we think that ATM surcharges should be banned.

No one is arguing that banks that own ATM machines shouldn't be compensated for providing that service. Banks are already compensated through a fee called an interchange fee. Every time you use an ATM machine, your bank pays the owner of that ATM a fee of about $0.75. That not only covers the actual cost of providing you that service, it provides the bank that owns the ATM a profit. Surcharges are an additional, unnecessary fee.

MM: Are any jurisdictions banning ATM surcharges?
Mitchell: There were efforts in the years right after surcharges were introduced in 1996 to get a national ban passed through Congress, but there was no way to overcome the bank lobby and its campaign contributions.

So the effort from activists shifted to the states. Two states had banned surcharges from the beginning: Iowa and Connecticut. There were popular grassroots campaigns and legislative efforts in at least half of the other states to ban surcharges, but they didn't get anywhere. Again, I think the power of the banking industry and campaign contributions really made it an uphill fight.

From there, the focus moved to the cities. The place where it gained the most traction was San Francisco. After failing once again to get elected officials to outlaw surcharges -- in this case the San Francisco Board of Supervisors -- activists placed a referendum to ban surcharges on the ballot in 1999. It won by a 2-to-1 margin.

San Francisco, along with Santa Monica, which also banned surcharges around the same time, were promptly sued by Bank of America and Wells Fargo. The banks alleged that the cities did not have the authority to ban surcharges. Only the federal government, they said, could regulate national banks.

The banks got some very significant help from a federal agency called the Office of the Comptroller of Currency (OCC), which is a division of the Treasury Department charged with regulating national banks. The OCC endorsed this idea that cities and states have no authority over national banks operating within their borders. The district court sided with the banks, the cities appealed and we are now waiting for a ruling from the Ninth Circuit.

In the meantime, the OCC went to court to help big banks dismantle the surcharge bans in Connecticut and Iowa. In fact, over the last decade, the OCC has used its power to overturn dozens of state banking laws designed to protect consumers and maintain fair competition. For the banks, it's a brilliant corporate strategy: If you've got Congress and federal regulators in your pocket, but states and cities continue to exercise their democratic authority, get the federal government to preempt that authority.

MM: To what extent do states maintain market share caps for banks?
Mitchell: Federal law allows states to limit the market share of deposits that any one bank may control. Iowa is the most restrictive; no bank may capture more than 15 percent of deposits. This, combined with the state's innovative ATM law, which has prevented large banks from gaining control of electronic banking networks as they have everywhere else, has resulted in Iowa having a very large number of healthy small banks. It's an illustration of why rules matter.

MM: Do you think this might be an approach that is worth examining for other sectors?
Mitchell: Yes, the issue of allowable market share comes up most often in the context of mergers. Unfortunately, regulators are no longer concerned about companies amassing substantial market share. Antitrust was originally based on the idea that a competitive economy was one that was made up of numerous competitors. That's no longer the way that we approach antitrust from a regulatory and legal perspective. Antitrust is now very much focused on the narrow, short-term measure of consumer prices. Mergers that achieve economies of scale, and theoretically lower prices, are usually allowed to go through, even if they lead to dangerous concentrations of market power.

This thinking applies to how we police companies as well. In retail, the Robinson-Patman Act was designed to prevent price discrimination and ensure that large retail companies couldn't pressure manufacturers into providing lower prices than those available to small companies buying at similar volumes. Federal regulators no longer prosecute Robinson-Patman violations. The idea is, if big retailers can pressure manufacturers for lower prices, then don't consumers get lower prices? Well, sure they do in the short term, but what happens when the chains no longer have any competitors in those sectors? We've lost touch with the big picture.

MM: To what extent are the chains or the big banks expanding internationally and to what extent are the kinds of issues that you're raising relevant outside of the United States?
Mitchell: All the major retail chains that are operating here are expanding globally. Wal-Mart has hundreds of stores overseas now. Starbucks has thousands of outlets around the world.

It's an issue that is popping up everywhere, and we're seeing that same grassroots activism that is happening in the United States taking place all around the world as people try to figure out how to prevent their local economies from being taken over by these absentee-owned global companies. In Cuernavaca, Mexico, citizens are currently organizing to block a giant Costco store. In New Zealand, communities are fighting their own version of Wal-Mart, a chain called the Warehouse.

One difference is that, while development here is entirely a state and local issue, other countries have national planning policies. So new policies about corporate retail development are being adopted at the national level. Ireland, for example, doesn't allow stores over 32,000 square feet, which is about one-fifth of the size of a typical Wal-Mart store. Norway and Argentina likewise ban big boxes. England has a new policy in place that requires new retail development go into areas in and around the downtown; development is allowed on the outskirts of town only when a legitimate need can be demonstrated.

It is also important to realize that economic consolidation is not simply the result of market forces. It is a trend that has been driven in no small part by public policy.