A recent column warned that growing inequality between regions in the United States is the most pressing issue of our time. Before I offer potential solutions, I want to remind readers that there are strong economic forces behind growing inequality.
Workers are more productive in large cities, drawing ambitious workers to urban places. Moreover, urban centers have thicker labor markets, enabling workers to change jobs more easily and providing better options for family members seeking jobs. Businesses will find it easier to attract the workers they need in these large urban places as well, creating a dual opportunity for cities.
Amenities are often thicker and more diverse in urban places. There are typically more options across many things that families increasingly value, like schooling, recreation and the like. Of course, many smaller places have their own charms, and many Americans happily exchange their urban living for smaller places, which is why the in-between suburbs tend to be the fastest-growing counties in the nation.
The point of this is that market forces dictate many of the advantages and disadvantages of each place. Where public policy does play a role, it usually unfolds over a very, very long time. The decline in the Rust Belt — those Midwestern towns where it is most evident — has been unfolding since the 1950s. For example, Detroit was already losing population before Barry Gordy founded a record label that would be called Motown.
However, the heavy influence of the invisible hand in these matters does not mean that public policy action, or lack of action, has not also played a role in regional divergence. In many communities, poor economic performance can be laid directly at the feet of poor public services. Obviously, poor educational outcomes, public corruption that scared away commerce, and poor tax and regulatory policies often beggar communities. But, this last issue is nuanced, and increasingly points to a duality of problems.
I often poke fun at the fiscal idiocy that created Chicago’s public finances. I am right to warn others away from this plight, but under-investment also imposes a heavy toll on places. In addition to its effects on educational outcomes, there is increasing evidence that educational spending is viewed by families as an important aspect of their location choice. School performance, and, as a proxy, spending on schools is a magnet for families.
One result is that places with large unfunded debt, as well as places with low spending on public services, face economic stagnation. Places that spend more, but do so without larger debt, see better economies. It should come as no surprise that families choose communities because of perceived value, not just price. Places that are convincingly value-oriented, particularly in their schools, will do well.
This reveals the formidable truth that the best way for an individual community to perform better is not to wait on outside help, but to tackle the biggest problems themselves. Places with good and improving schools, safe streets and welcoming neighborhoods grow. If you are dissatisfied with the economic growth in your community, it is probable that one or more of these factors are missing.
However, this probably won’t fix inequality between places because too many cities and counties are not up to the task of tackling their biggest problems. This leaves two potential policy options, both of which will be important. One is what is often called the U-Haul school of economic development, the other a broader suite of place-based programs. Neither are a panacea.
The U-Haul policy is, as the name suggests, incentivized relocation of individuals and families from poor to rich places. The policy recommendations I have seen are mostly limited to relocation subsidies for displaced workers. These merit consideration and may be very helpful for individual families, but they are likely to make regional inequality worse. The only broad benefit is that they will move more families away from places that are unlikely to recover.
Place-based policies include specialized worker training, targeted assistance to businesses and broad infrastructure spending programs. All of these show some promise in some places, but there are also real weaknesses. The business assistance programs appear to work well for manufacturing and logistics, but not in other sectors. With factory employment shrinking, these programs can likely impact less than a quarter of U.S. counties, though many of these counties are in the hardest hit areas. Worker retraining programs are expensive, lead to little industrial restructuring and have a dismal track record. Together, programs like these might improve economic conditions in some counties, but they will not fix the majority of slow-growing counties.
The best programs are likely to be highly tailored to individual communities, involve both private and public sector activities, and focus on making workers more productive.
Fortunately, Indiana has been a leader in this sort of program. The Stellar Communities program, its evolution into the Stellar Regions program and the Regional Cities Initiative are all prime examples of highly tailored, low-cost efforts to reduce regional inequality.
What we have to accept in focusing on ways to fix regional inequality and divergent economic conditions is that most of the factors that lead to decline are really easiest to influence at the local level. We must also accept that broad federal programs are unlikely to be tailored to local problems. Moreover, the once seemingly endless pot of federal dollars now has a visible bottom. The fixes are going to have to come from thoughtful state policy and urgent local efforts.
Michael J. Hicks, Ph.D., is director of the Center for Business and Economic Research and a professor of economics at Ball State University. His column appears in Indiana newspapers.
