Foreword
For the last several decades, the arc of our economy changed from convergence to divergence. On critical measures such as median household income, poverty, unemployment rates, and life expectancy, there exists a yawning gap between the best- and worst-performing communities.
Economists and policymakers are now able to measure these disparities at increasingly granular levels. At The Hamilton Project, we created a measure called the Vitality Index to assess economic and social well-being in every U.S. county. This index enables us to compare conditions in each county’s vitality in 1980 and 2016.
What we see alarms us. Inequality has grown across the country, and despite periods of strong economic growth when living standards improved across the earnings distribution—such as in the late 1990s—places with poor economic performance in 1980 are generally still struggling. Broad swaths of the rural South, Southwest, and Midwest continue to lag behind the rest of the economy. Natural disasters and the globalization of manufacturing have significantly depressed outcomes in formerly thriving cities such as Flint, Michigan, and New Orleans, Louisiana. By contrast, many coastal cities along with a number of other major metro areas have outperformed the rest of the country.
The evidence of geographic disparities continues to pile up. In the lowest-performing fifth of counties, 33 percent of prime-age adults are not employed—nearly double the rate of the best-performing places. Many of those who do have jobs earn wages depressed by a range of factors, including the disappearance of labor unions, the declining inflation-adjusted value of the minimum wage, and the absence of college degrees or even high school diplomas. The 23 percent poverty rate in the highest-poverty counties is nearly triple that of the lowest-poverty counties; life expectancy is a full six years higher in the top fifth than in the bottom fifth.
No serious examination of the geography of prosperity would be complete without a focus on how racial inequality exacerbates place-based problems and impedes the effectiveness of policies designed to ameliorate them. In their chapter, “The Historical Role of Race and Policy for Regional Inequality,” the economists Bradley Hardy, Trevon Logan, and John Parman document the range of ways in which public policy has limited economic opportunity for black Americans. From discriminatory housing policy to exclusionary and unequal education systems, these policies contribute both to the spatial concentration of the African-American population in the United States and to poorer economic outcomes in these areas. As such, they have left a clear imprint on today’s geographic disparities.
We agree with economists Benjamin Austin, Edward Glaeser, and Lawrence Summers, who recently argued that conditions today demand a reconsideration of place-based policies.* But it is also important to recognize that many place-based policies have failed, leading many economists to prefer programs that target individuals rather than places.
We therefore focus on ideas motivated by new evidence about those policies that do appear to work and lessons from those that have failed. Accordingly, in the chapters that follow we present proposals from a distinguished group of scholars who offer evidence-based solutions to the problems faced by struggling regions and their residents.
David Neumark proposes that the federal government subsidize employment in areas of extreme poverty, with the goal of revitalizing communities and boosting workers’ careers over the long run through the acquisition of skills that are valued by private-sector employers.
Tracy Gordon proposes that the federal government do more to aid states with limited fiscal resources. Gordon considers how to overhaul the federal government’s massive $700 billion intergovernmental grant apparatus to offset differences in the states’ long-run fiscal capacity and respond more quickly to regional economic downturns and national recessions.
E. Jason Baron, Shawn Kantor, and Alexander Whalley offer a proposal for a regionally targeted expansion of the 1988 Manufacturing Extension Partnership Program. Their proposal would enable existing research universities to promote local economic development by transferring knowledge to local employers in struggling places.
Stephen Smith applies the evidence and experience of development economics in his proposal for improving U.S. policy ranging from infrastructure to education, health, and nutrition. These are ideas that are likely to improve the functioning of educational and safety net investments, thereby helping people in struggling areas to escape from poverty traps.
For a century, the progress the United States made toward realizing broadly shared economic growth gave our economy much of its unparalleled strength. Today, with these evidence-based proposals, we see steps that can help restore the conditions of inclusive growth that made it possible for individuals from any part of the country to benefit from economic opportunity.
*Austin, Benjamin, Edward Glaeser, and Lawrence Summers. Forthcoming. “Saving the Heartland: Place-based Policies in 21st Century America.” Brookings Papers on Economic Activity (forthcoming).
Introduction
by Ryan Nunn, Jana Parsons, and Jay Shambaugh
The United States has never been a place with uniform culture, politics, or economic outcomes. Regional disparities in economic performance are longstanding, and have led to both economic and policy responses. Workers and businesses in struggling areas sometimes migrate to other places, make investments that raise their productivity, and eventually catch up (at least in part) with workers and businesses in prospering areas. In addition, place-based policies—policies targeted to disadvantaged areas and their residents rather than directly to disadvantaged people—are sometimes enacted in an attempt to help struggling regions.
Place-based policies have a mixed record, with some prominent successes—such as the Tennessee Valley Authority bringing electric power and jobs to a previously very poor region—but with a number of failures as well. Economists have often been skeptical of both the efficacy and efficiency of targeting places instead of people. Nevertheless, evidence of stark regional economic gaps, lack of convergence in living standards over the past few decades, and declining geographic mobility all demand a reconsideration of whether there are effective policies that could help share economic growth and raise living standards in struggling places.
As we will show in our framping chapter, “The Geography of Prosperity,” and illustrated in figure A, gaps in economic performance and living standards across U.S. counties are indeed very large. In 2016 the typical household income in the richest 20 percent of counties is more than twice that in the poorest 20 percent, and the gap has increased noticeably since 1980. People in top-performing counties are far more likely to work, less likely to be in poverty, and even more likely to live longer. These disparities are large in part because of rising national income inequality, but also because convergence between places has broadly slowed today.
In the first three quarters of the 20th century there was a general pattern of income convergence, with poorer regions catching up to richer ones (see figure B). Moreover, shocks that led to high unemployment tended to dissipate as local economies rebounded or people moved away from struggling areas (Blanchard and Katz 1992). The lack of large, persistent gaps across places often made place-based policies seem either unnecessary or inefficient.
Today, though, both long-run convergence and recovery from negative shocks have slowed. Unemployment rates do not fall as quickly after a localized adverse shock, and economic shocks have become increasingly geographically concentrated, with persistent impacts on local labor markets (Autor, Dorn, and Hanson 2013). There has also been a decline in geographic mobility: workers, especially those with less than a college degree, are simply less likely to move across states than they once were (Wozniak 2018). At the same time, southern states and other states with relatively low levels of economic activity no longer experience substantially faster rates of economic growth than other states (Ganong and Shoag 2017).
While disadvantaged areas have generally failed to catch up, a select few areas of the country have shot far ahead. In addition to rising income levels, measures of innovation and dynamism reflect this pattern: for example, more than 75 percent of all venture capital funding in 2017 went to just three states (Pitchbook and NVCA 2018; authors’ calculations). The top 50 counties accounted for more than half of all patents in 2015 (U.S. Patent and Trademark Office; authors’ calculations). Business start-ups have been similarly concentrated, with only seven states accounting for nearly 50 percent of all start-ups in 2014 (Business Dynamics Statistics [Census 2014]; authors’ calculations).
Substantial gaps in economic outcomes exist at the region, state, county, and even neighborhood levels. Even places that are generally prospering tend to have large pockets of disadvantage: 7 percent of extreme poverty Census tracts (i.e., tracts with a poverty rate of at least 40 percent) are in counties in the top quintile of median household income.
The Role of Place-Based Policies
Gaps in income and economic performance across areas have drawn extensive policy attention throughout the history of this country. Whether a part of Henry Clay’s early 19th century infrastructure plan for internal improvements, the establishment of land grant colleges in the second half of the 19th century, or the New Deal–era Tennessee Valley Authority, many past plans for place-based policies focused on physical or educational infrastructure. In more recent decades, place-based policies have taken a variety of different forms, all aimed at stimulating economic activity in distressed locations.
Economists have looked to a few different justifications for place-based policies. First, there may be a need to better match workers to employers (Neumark and Simpson 2015). As Austin, Glaeser, and Summers (forthcoming) note, if increases in labor demand have larger impacts in struggling areas, this suggests that policies targeted at specific places could be optimal.
Second, for places exposed to damaging shocks, there is an insurance rationale for place-based policies (Kline and Moretti 2014). Third, a lack of local public goods—whether due to long-run disparities or damaging temporary shocks—may call for place-based investments in institutions and other public goods (Kline and Moretti). Finally, equity considerations suggest that if some people are not able to or do not want to move from a struggling region, it would be appropriate to help them when possible.
As outlined in Austin, Glaeser, and Summers (forthcoming), there are several different types of place-based policies. These include direct public investment, such as the federal highway system. They also include more-indirect policies such as tax benefits or grants to businesses and individuals. For example, the New Markets Tax Credit program attracts capital to low-income neighborhoods by giving tax credits to individual and corporate investors. Finally, policies could come in the form of regulatory relief, as in the United Kingdom’s enterprise zones.
Perhaps the most well-known modern set of place-based policies in the United States are enterprise zones, which are geographically targeted tax benefit and grant programs that exist at both the state and federal levels to encourage business development. Analysis summarized in Neumark and Simpson (2015) shows that enterprise zones have had mixed results. These policies have generally failed to increase employment or reduce poverty, in particular for poor residents in these areas, but have sometimes increased property values, which is unlikely to help the most disadvantaged in targeted areas.
Whereas many previous attempts at place-based policies have appeared either inefficient or ineffective, the patterns noted here, and in more detail in our framing chapter, raise the question of whether there exist efficient policy responses that can help struggling regions grow faster and attain higher living standards. Careful examination of the body of evidence generated by previous place-based policies, as well as a new emphasis on rigorous evaluation and experimentation, suggest multiple directions for policy that are explored in this volume.
In the framing chapter of this volume we review the geographic disparities that characterize our modern economy, elaborating on many of the patterns discussed in this introduction and illuminating some of the forces that contribute to the success or stagnation of places. In the following chapter economists Bradley Hardy, Trevon Logan, and John Parman examine the connection between racial and geographic inequality, highlighting the roles of racial segregation and structural racism in public policy. The legacy of these policies continues to shape economic outcomes for people and places today, and their effects should be taken into account when crafting any place-based policies.
The final four chapters in this volume provide new directions for place-based policies. David Neumark of the University of California, Irvine, builds on the accumulated evidence of unsuccessful policies to suggest a better approach to geographically targeted employment subsidies. Neumark proposes that the federal government subsidize employment in places that are struggling, focusing on nonprofit jobs that contribute to local public goods and lead to private sector employment. Tracy Gordon of the Urban-Brookings Tax Policy Center draws on the experience of the American Recovery and Reinvestment Act of 2009 to propose a set of reforms that would ensure that federal policies more effectively support places with limited fiscal capacity and resilience. Economists E. Jason Baron, Shawn Kantor, and Alexander Whalley propose an expanded Manufacturing Extension Partnership that would increase the effectiveness of universities at promoting local economic growth. The volume concludes with a chapter by Stephen Smith of The George Washington University, who draws insights from development economics to improve place-based policies in the United States.
Chapter 1: The Geography of Prosperity
by Ryan Nunn, Jana Parsons, and Jay Shambaugh
Abstract:
Over the last several decades, the fortunes of regions and communities across the United States have stopped converging. Evolving patterns of trade and technology, among other factors, have created concentrated prosperity while leaving many places behind. In order to formulate an effective policy response at the local, state, and federal levels, it is necessary to understand how economic activity has shifted, as well as the factors that are associated with success or failure for particular places. To present a full picture of which places are thriving, how that picture has changed over time, and what factors are associated with success or failure, we created the Vitality Index, which measures the economic and social well-being of a place. We find that places in 1980 with higher levels of human capital, more diverse economies, lower exposure to manufacturing, higher population density, and more innovative activity tended to have higher vitality scores in 2016. Further, both the differences in fiscal capacity among states and declining migration rates can reinforce differences in economic outcomes across places. The analysis in this chapter underscores the complicated overlap of gaps across places: differences across regions, states, and counties are all substantial, as are differences within counties.
Chapter 2: The Historical Role of Race and Policy for Regional Inequality
by Bradley L. Hardy, Trevon D. Logan, and John Parman
Abstract:
Contemporary racial inequality can be thought of as the product of a long historical process with at least two reinforcing sets of policies: First are the policies governing the spatial distribution of the black population, and second are the policies that had a disparate impact on black individuals because of their locations. Understanding current black–white gaps in income, wealth, and education requires understanding the complex relationship between regional inequality, race, and policies at the local, state, and national levels. In this chapter we outline the ways that the spatial distribution of the black population has evolved over time and the ways that spatial distribution has interacted with policy to, at times, reduce and exacerbate levels of inequality. Recognizing the ways that past policies explicitly stymied black economic mobility and how current policies have explicitly or inadvertently done the same provides a basis for understanding how to craft future policies to reduce racial inequalities. Furthermore, recognizing the interconnection of discrimination and the spatial distribution of the black population is important for understanding certain components of regional and spatial inequality.
Chapter 3: Rebuilding Communities Job Subsidies
by David Neumark
Abstract:
Poverty remains a persistent problem in many areas in the United States. Existing place-based policies—especially enterprise zones—have generally failed to provide benefits to the least advantaged. Drawing on lessons from the often-negative findings on effects of past place-based policies, but preserving the potential advantage of policies that try to improve economic outcomes in specific areas, I propose a new place-based policy—Rebuilding Communities Job Subsidies, or RCJS—to encourage job and income growth in areas of economic disadvantage. RCJS targets neighborhoods classified as extremely poor, and low-income workers in those neighborhoods, with a period of fully subsidized jobs to build skills and improve and revitalize areas of extreme poverty, to be followed by partially subsidized private sector jobs.
Chapter 4: Harnessing the U.S. Intergovernmental Grant System for Place-Based Assistance in Recession and Recovery
by Tracy Gordon
Abstract:
American places are pulling apart from one another—economically, socially, and politically. Declining regional income convergence, increasing geographic concentration of joblessness, and an increasing awareness of the social costs of long-term joblessness and economic isolation have led many economists to question their traditional skepticism of policies that aim to revitalize distressed areas. Arguments in this vein typically focus on evaluating past programs and identifying conditions under which place-based assistance can be effective. Often overlooked in these discussions, however, is that the federal government already injects about $700 billion annually (3.5 percent of GDP) into state and local economies through intergovernmental grants. This chapter examines how the federal government could adapt the existing grant apparatus to perform better as a shock absorber in recession and an economic equalizer in recovery. After reviewing the existing system, it proposes changes to help federal grants offset differences in underlying state fiscal capacity and respond more quickly to regional economic downturns and national recessions.
Chapter 5: Extending the Reach of Research Universities: A Proposal for Productivity Growth in Lagging Communities
by E. Jason Baron, Shawn Kantor, Alexander Whalley
Abstract:
In contrast to the observed convergence in incomes between high- and low-income areas throughout much of the 20thcentury, recent decades have seen an increased clustering of economic activity that has led to diverging fortunes of different places. This phenomenon has revived interest in place-based policies that seek to revitalize lagging communities. Perhaps due to the widely held perception that high-tech clusters around the United States owe much of their success to neighboring universities, establishing research universities in lagging communities is increasingly being considered as a potential place-based policy. Our policy proposal seeks to shed light on the potential role of research universities as anchor institutions for local economic development. After carefully analyzing data and reviewing the literature, we propose that instead of establishing a new research university, lagging communities should focus on transferring productivity-enhancing knowledge to their local employers from existing research universities near their regions. To help achieve this goal, we propose a regionally targeted expansion of the 1988 Manufacturing Extension Partnership program that would encompass a broader range of sectors.
Chapter 6: Development Economics Meets the Challenges of Lagging U.S. Areas: Applications to Education, Health and Nutrition, Behavior, and Infrastructure
by Stephen C. Smith
Abstract:
This chapter examines the development economics evidence base for insights into policy reforms that would benefit struggling areas in the United States. My focus is on improving education, physical and mental health, infrastructure, and institutions. First, consistent with findings on education policy effectiveness, I propose raising the legal minimum dropout age (prospectively to 19), providing better information about the benefits of completing high school, supporting targeted paraprofessional tutoring, and providing family financial incentives for attending school and graduating from high school. Second, to improve health outcomes in struggling areas, the focus is using and building on existing effective health and nutrition programs and services, identifying ways to include more families who are eligible for but not participating in these programs. Moreover, the recent development and behavioral economics evidence base has extended our understanding of the psychological, cognitive, and economic behavioral lives of the poor; the literature highlights the ways that poverty can impede cognitive functioning, with implications for policies to uplift lagging U.S. areas. Third, a review of evidence on the benefits of improving lagging rural and urban area transportation infrastructure points to the likely benefits of improved connectivity for lagging U.S. areas: reversing the legacy of past discriminatory policies, encouraging sector-based clusters, and extending access to high-speed internet. Finally, the chapter highlights the relevance of some cross-cutting themes in development economics, including the high returns to reliable household microdata and the importance of improving institutions to enable more inclusive, substantial, and lasting progress.
