What is a Local Economy and How Does it Work?


NEW Money Fills the Bucket

New money enters the local economy (represented by the water spigots filling the bucket) through a couple of methods:

1. Primary Industry Direct Exports - businesses that directly export goods and services with payment coming from customers outside the Sitka area. Exports of goods that are created from local resources make the biggest impact on the local economy. Every time parts and materials are imported, even if they are eventually exported as a new value added product, money leaks out of the economy. Goods directly exported from the community do not generate sales tax revenues for the City.

2. Primary Industry Visitors - businesses that provide goods and services to visitors (non-residents) that in turn are leaving their money behind in the community. In addition purchases of goods and services by people that are physically present in Sitka generate a significant amount of sales tax revenues for the City. These revenues help pay for City services that residents need and enjoy.

3. Grants and Transfer Payments - grants received by local non-profits and government agencies bring in new money that was not previously circulating within the local economy. While grant funding is becoming more difficult to get due to the national economic recession, Sitka will be seeing an increase in transfer payments as the number of senior residents grows throughout the next decade because transfer payments include monies that come into the local economy through the healthcare system (i.e. Federal Medicare and Medicaid payments). Other types of transfer payments include: unemployment insurance and retirement income from non-local sources (i.e. Federal and State government employee pensions, etc...).

Economic Leakage

Money leaks out of the local economy whenever goods and services are purchased from outside sources. Buying locally, even when the products themselves are imported, keeps money circulating in the community for a longer period of time. Economic leakage is represented by the water flowing out of the holes in the bucket. You can patch some of the holes, but you cannot stop the bucket from leaking as long as goods and services are imported into the community. This is why support industry is also important to a local economy as they help slow the leakage of money from the economy.
Support industries re-circulate existing $$$ by selling goods and services to residents, businesses, government, and non-profit entities in Sitka.

A Healthy Economy is a Full Bucket

Without NEW $$$ flowing into the bucket at a rate equal to or greater than the leakage, the bucket WILL drain out.

When the bucket stays full, the economy is stable and local government can plan for and maintain a budget that provides for essential services. When the bucket is overflowing, and their is "extra" money, additional services and infrastructure such as library upgrades and new playgrounds, can be supported by local government without increasing taxes and fees charged to the community's residents.

However, If the bucket is not overflowing, and residents want improved or additional local government services, they will have to pay for these services through increased local taxes and fees OR do without. AND when the bucket is not kept full, even existing and essential services may have to be cut or additional City revenues raised through increased taxes and fees.

You cannot solve budget deficits by simply increasing taxes or fees that are taken from money already circulating in the community. That pool of money will continue to drain out of the bucket until there is nothing left to draw from.