What Does E > P Mean?

www.epistleblog.com

June 25, 2010

By Mark Lautman

E>P is a symbol that represents the most practical way to think about how a local economy really works. Economic Development is the act of growing a community’s economy faster than it’s population. When the local economy grows faster than the population, everyone should have more money than they had the year before.

When the growth of the Economy is greater than the growth of the Population (E >P), the revenue for the community’s tax dependent institutions, such as your schools, hospitals, and city and county government, grows faster than the service burden – without raising taxes! More money crosses the thresholds of local retailers and service businesses giving them additional retained earnings to improve productivity and expand. Families have extra money to invest in health, education, housing and a better life.

When the economy grows slower than the population, E<P, the reverse happens. You must serve more people every year with less and less revenue. This is what happens in a recession. If a local economy grows slower than its population for too long, it is catastrophic for the community’s tax dependent institutions, local businesses and residents.

E>P

Economy > Population

Economy (Revenue) > Population (Service Burden)

Economy

On the economy side of the equation, there are three factors:

  1. The economic base, or cash importers
  2. The service sector, or cash cyclers
  3. Net worth, or wealth keepers

The economic base is made of local enterprises that produce goods and services that are paid for or funded by customers or enterprises located outside the economy. They bring all the new money into the local economy. Without them your economy would not exist.

Economic base or cash importing sectors include extractive industries like mining and oil & gas production, most manufacturing, agriculture, tourism, tele-servicing centers, military bases, national labs, film and digital media.

Grow these economic base sectors faster than the population and the economic pie gets bigger. If they shrink, the pie gets smaller. The money brought in by the economic base of a community is either spent on goods and services in local businesses, saved or spent outside the local economy (leakage).

The services sector is made of those enterprises that produce goods and services that are purchased by local residents or enterprises that are sold to other local residents. This economic activity is important because it keeps the money that the economic base is bringing in circulating longer. The service sector is important because it generates the lion’s share of the community’s tax revenue. The quality and range of a community’s service sector businesses are also a major factor determining the community character and quality of life.

Net Worth is important because it represents changes in the wealth or monetary value of local households, business and institutions. When local net worth is rising people spend and invest more and the economy is more likely to grow faster than the population. When home values and 401Ks are contracting people tend to spend and invest less.

On the population side of the equation there are three factors:

  1. Dependents too old and too young to work
  2. Qualified workers
  3. Unqualified workers

There are two critical things to watch on the population side: what is happening to total population because the local economy will need to scale with total population and the ratio of dependents to qualified workers is critical. Ultimately you want the proportions of the too young and the qualified to grow faster than the too old and the unqualified.

The big question is: Which way is the E>P formula pointing for your community in the years ahead?

Next question: Is there anything you can do about it?

When a community’s economic base is projected to decline, community leaders have two choices; wait (hope) for something new to come along to replace the lost jobs, or act to grow new sectors to the economic base that can make the economy even stronger and more diversified.

There are really only a few things you can do to grow the economic base:

  1. Defend your existing economic base industries – slow their rate of decline.
  2. Create more economic base jobs – expand existing ones, start up new ones and recruit new ones faster than you lose them.
  3. Dramatically increase productivity – in other words raise the average earnings of remaining economic base workers
  4. Increase the amount of stuff your economic base employers and residents source within the community.

E>P is the framework for our deliberations on what we need to do as a community to replace the economic base we have lost and will likely to lose in the years ahead.

Mark Lautman
Lautman Economic Architecture LLC
Community Economics Lab