Multiplier

The multiplier is the fundamental building block for community economics, as well as for economics generally. Each time an individual purchases a good or service, he or she sets in motion ripples far beyond the initial transaction. With those ripples, one economic transaction multiplies into numerous others. The more frequent and intense those ripples within a defined economic system, the stronger that system can be.

Consider a consumer in Massachusetts who buys an apple for a dollar from a farmer in Washington State via mail order. That farmer, in turn, may use that dollar to buy toothpaste at a nearby store. The store owner then might use the same dollar to pay an employee, who spends the dollar at a local bookstore. In this way, the initial transaction cascades into a series of transactions that reverberate throughout the community, national, and ultimately global economy.

Because of the time lags between transactions, the cascading effect of a single purchase ultimately slows, attenuates, and stops. The conventional view among economics scholars is that a typical dollar spent in the U.S. economy has a multiplier effect of approximately 1.5 to 3 (though some poor multipliers can be closer to 1, and some exceptional multipliers as high as 5). Put another way, most dollars expended will increase national economic activity, as measured by gross domestic product, by between 50 and 300 percent.

From the perspective of a community, a key to prosperity is to keep as much of the multiplier within the community as possible. In the example above, the consumer in Massachusetts, as well as his or her neighbors, may be better off if he or she buys the apple from a local farmer. To the extent that all the resulting transactions—the toothpaste purchase, the employee pay, the bookstore expenditure—would then be kept within Massa-chusetts, the entire state would experience more jobs, income, and wealth.

Keeping the multiplier local also benefits state and local taxing authorities. The transactions from a mail-order purchase of an apple will boost the tax base in Washington State, which will be able to tax the consequent increases in wages, income, property value, and sales. The transactions from a local purchase of an apple, in contrast, will enrich the tax base of Massachusetts. Because taxes usually lead to public expenditures, they too exert a multiplier effect.

The multiplier highlights two important points for community economists. The first is that local purchasing, hiring, saving, and investing are all critically important ways to boost a community economy. This insight has been the main justification for “buy local” movements and campaigns, for local money systems that induce consumers and businesses to keep their money inside the community, and for efforts to create supplier relationships among local businesses.

A second point is that poverty is often not simply the absence of resources but also the presence of a weak multiplier. Three out of four dollars the federal government spends in Native American reservations leave within two days, and similar phenomena can be seen in other impoverished rural communities and in inner-city ghettos. The positive side to these dismal statistics is that even poor communities can substantially improve their economic prospects if they can create local banks, businesses, and investment opportunities to capture these money flows before they leave the community.

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