Brookings recently published “Saving the Heartland: Place-based policies in 21st Century America.” The paper provides a rigorous analysis of the factors leading to regional inequality, which has grown substantially in the past two decades. I’ve pulled some select quotes to create an abbreviated version of the report.
What are Placed-Based Policies?
“The economic convergence of American regions has greatly slowed, and rates of long-term nonemployment have even been diverging. Simultaneously, the rate of non-employment for working age men has nearly tripled over the last 50 years, generating a terrible social problem that is disproportionately centered in the eastern parts of the American heartland.”
“Do America’s profound spatial economic disparities require spatially targeted policies?”
“This paper argues for reconsidering place-based policies, because (i) convergence has stalled or reversed in recent decades (ii) increasing social problems are linked to a lack of jobs rather than a lack of income and place-based policies may do more than individually targeted policies to create jobs for the not working, and (iii) a modest body of evidence suggests that increasing the demand for labor has a materially greater impact in depressed areas.”
“America’s regions have long displayed enormous economic disparities, but for most of the 20th century, poorer states were catching up rapidly (Barro and Sala-I-Martin, 1991) and relative unemployment rates did not persist (Blanchard and Katz, 1992). Migration flowed to high income regions, and capital was attracted by low wages in poorer areas. Both flows helped incomes to converge. In recent decades, regional income convergence has slowed or even reversed (Berry and Glaeser, 2005, Moretti, 2011), and place-based non-employment has become durable.”
“Five facts collectively suggest that this geographic escape value has tightened: declining geographic mobility, increasingly inelastic housing supplies in high income areas, declining income convergence, increased sorting by skill across space, and persistent pockets of non-employment.”
“Since 2007, the share of American residents who moved across counties has never exceeded 3.9 percent.” … “This decline in cross-county mobility is mirrored by the drop in the within county mobility rate which fell from over 13 percent in the 1950’s to under seven percent.”
Reasons for lack of migration:
- Public benefits are hard to carry over state boundaries. Medicaid and Temporary Aid to Needy Families (TANF) are administered at the State level.
- Rising housing costs in skilled cities make migration cost prohibitive. It has typically been the opposite (e.g. settlers moving to the frontier building inexpensive housing).
Long-term unemployed poses significant challenges to regional economic depression. Below are key characteristics associated with non-employment:
- …are unhappy / have low levels of life satisfaction.
- …impacts the minority community at higher rates.
- …associated with mental health problems and opioid abuse.
*Imprisonment rates in Heartland higher than coasts.
“Yet the fact that the competitive equilibrium is not a social optimum does not justify targeted regional policies, since we don’t know the direction of the problem. Most of the best agglomeration studies (e.g. Combes et. al., 2012) support the existence of agglomeration economies, but they give us little confidence about heterogeneity of local spillovers across space. The million-dollar plant identification strategy of Greenstone, Hornbeck and Moretti (2010) provides little hope of identifying heterogeneous agglomeration effects because great swaths of America, especially the high-income coastal regions, were generally not recipients of these plants. Consequently, it is impossible to know whether a relocation of capital and labor from Los Angeles to Kentucky will lead to benefits in Kentucky that are large enough to offset the losses in Los Angeles.”
The Simplest Argument is Resilience:
The simplest equity-based justification for place-based policies is that a concave social welfare function implies benefits from insuring against local shocks, or even redistributing from higher income areas to low-income areas. Redistribution based on local income differences is less 24 We include a somewhat richer model in the online Appendix. 20 justifiable when higher income levels in some areas are offset by higher housing prices. A more straightforward argument for place-based redistribution is that it provides insurance against place-based shocks, without distorting labor supply or work effort.
Strongest Argument Against:
The strongest argument against place-based redistribution is that the correlation between place and income is relatively weak in the United States. In a regression where income is regressed on region dummies corresponding to our heartland definitions, those region dummies explain only 0.3 percent of the variation in income. When income is regressed on state dummies, those indicator variables explain only 1.2 percent of the variation. When income is regressed on Public Use Microdata Area (PUMA) dummies, those dummy variables explain 7.1 percent of the variation.
“… the benefit of eliminating spatial income variation would represent a real welfare gain, but it would also distort migration and capitalization.”
Best Rationale for Spatial Policy
“We now turn to the third, and we think the best, rationale for spatial policy: market failures that can most plausibly be addressed at the local level. Police departments that use hot spots policing target resources towards areas where there is more crime, presumably because the impact of policing resources on crime is higher in those areas. The strategy seems be effective on both targeted areas and neighboring areas, suggesting that crime isn’t merely displaced to different areas (Braga et al., 2014). We now turn to a model for place-based that captures the same economic logic that resources can reduce the not working rate more when targeted towards areas with higher not working rates.”
The Externalities of Not Working
- Cost born by other taxpayers due to a reduction in tax revenue and increase in public expenditures.
- Social Externalities born by Families and Friends
- Non-employment Spillovers: less demand for local products, which reduces local labor demand.