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Trickle Down, Percolate Up, and Missing the Middle

May 17, 2010 By Lee Egerstrom, Economic Development Fellow
A diverse group of new businesses and professional firms formed in Minnesota in the severe recession of the past couple of years point out flaws in national and state efforts to stimulate the economy and rebuild the shrinking middle class.

Despite an adverse environment for starting businesses, creative Minnesotans keep launching new ventures, notes Amy Fredregill, Minnesota vice president of Cooperative Network, the joint cooperative trade association for Minnesota and Wisconsin. These firms provide professional services, housing, property management, health care, retailing, agricultural purchasing and marketing, and biomass energy development.

Several dozen of these new ventures are incorporated under Minnesota's 308B co-op law that went into effect in 2003. What makes these ventures unusual is that local investors can team with member-owners of these co-ops to raise capital needed to start and operate their businesses.  

These startup entities use new technology, new business codes, new concepts and pooled resources to achieve a host of efficiencies, improve productivity and lower transaction costs. 

This is occurring even as state and federal policies try to put the economy back where it was, overlooking that the economy we had was as fragile, and empty, as old Humpty Dumpty. The working middle class has been shrinking for the past several decades; the extremes of the wealthy and impoverished keep growing with public policy barely sustaining one end of the spectrum and rewarding the elite that needs help the least.

What we have is a "hollow middle" in the economy, said John Podesta, founder of the Washington-based Center for American Progress, on a recent visit to Minnesota 2020. Going forward, he said, policy makers and thinkers must explore better ways for building an economy for the 21st Century.

Taking small steps toward that goal, however, are those Minnesotans using the state's cooperative code to create enterprises that will move members into more competitive and efficient activity. These members have potential for even greater upward mobility when economic conditions improve.

Fredregill notes formation of such diverse 308B enterprises as Twin Ports Commonwealth at Duluth, Prairie Skies Biomass Co-op at Fairmont, Wirth Community Cooperative in Minneapolis, Centerfield Wind Co-op at Hayfield, The Nokoma (housing co-op) in Minneapolis and GSC Financial Co-op, in St. Paul, among startups in the past year.

Let's look at three, properly Minnesota-named enterprises as examples of how these firms work, and at what they can achieve as building blocks for a new Minnesota economy:

St. Paul-based Iceberg Technology Group is a group of a dozen or so computer and information technology consultants. They jointly market their services to clients, thus becoming the "middle man" that formerly linked clients with appropriate consulting expertise at fees charged to both ends of the transaction.

Steve Kerns, a consultant-member of the three-year-old co-op, said Iceberg helps its members find clients. It has also helped other, nonaffiliated IT professionals, he said, by lowering fees the consultants are charged by firms booking their services.           

New Ulm-based Black Dog Cooperative Law  was started in January with intentions to function much like Iceberg. Founder Joel Dahlgren, a veteran cooperative law specialist with Minneapolis and southern Minnesota law firms, said most work can be done online and can involve other attorneys who may become member-partners of the firm.

Most law firms are limited liability partnerships (LLPs) that, like limited liability companies (LLCs) are similar to co-ops. He chose to form Black Dog as a co-op, however, because of the special practice it is developing and to reflect his own interest in cooperative business. He's a former attorney with the St. Paul Bank for Cooperatives and Land O'Lakes, and he currently serves as general counsel and chief financial officer of United Farmers Cooperative at Winthrop.

Bemidji-based Blue Ox Cooperative follows the same kind of reasoning. This newly-formed group has northern Minnesota entertainers as members. They envision sharing "front office" resources while they work on their art and, in many cases, maintain other careers and jobs.
Wisconsin and Iowa have both adopted variations of the Minnesota 308B co-op laws. Several states, including North Dakota, have adopted forms of Vermont's L3C law that allow for low-profit investment by nonprofit entities in community-backed enterprises. LLCs, patterned after the professional partnership firms and originating in Wyoming, have potential for further development - either with some modification or in partnership with other business models. 

All need to be explored if we are to strengthen the middle of the economy and create a new generation of productive, taxpaying citizens.
Going forward

Hopeful headlines on recent news stories suggest we may be coming out of the national and now global recession. Danger spots abroad remain, such as in Greece, and will influence how well the economy responds. But is a U.S. recovery based primarily on household spending (70 percent of U.S. GDP) sustainable?

Not if political rewards such as tax avoidance schemes fatten the privileged classes, shrink the middle class, and barely meet basic human needs of the underprivileged. A strong middle class is needed to buy homes, autos and household goods, support entertainment, and create markets for new goods and services.

Rebuilding the middle class will need entrepreneurship, job growth from new industries, and new systems capable of insulating Minnesotans from transient industries in the global economy while helping our businesses compete.

Political largesse doesn't trickle down, and basic sustenance doesn't percolate up. Economic policy must be targeted at encouraging and expanding the middle of our economy.    

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