Americans appear deeply divided, in part because they are experiencing vastly different economic outcomes based on where they live.
What causes these regional disparities? How can they best be addressed? What role can government policy play in rebuilding distressed communities? Are there new ideas? Or can some old ones be redesigned to work better than in the past?
Economists have traditionally favored helping people rather than places, worried that concentrating resources on an area would drive up land prices more than the resident wages among other reasons. But well-designed place-based assistance can be effective. And policymakers are becoming more sophisticated about measuring and evaluating what’s working and what’s not, although this still can be difficult.
In a new paper, I identify one lever that’s often overlooked: making better use of $700 billion in annual federal grants to state and local governments. Today, that money – for highways, economic development, and Medicaid – is not going to where it needs to go. Places that already have adequate resources get more money because of grant provisions designed to reward political influence or prevent states and localities from gaming the system.
The US could do a lot better helping places suffering from long-term decline and economic shocks like national recessions or regionally focused downturns.
On one hand, globally-connected metropolitan areas are prospering. For those who can afford it, the returns to living in a place like New York or San Francisco Bay Area have never been higher. The reasons are complex but involve technology, trade, and agglomeration economies – or the added zing that comes when people and businesses cluster together and share information, ideas, and other ingredients for creating successful new products and thriving communities.
At the same time, small and mid-sized cities are being left behind. This is especially true for places without diversified economies, colleges and universities, or access to new immigrants. Rural communities and those that have been unable to replace their lost manufacturing base have been hard hit.
In the past, economic fundamentals often helped restore distressed areas. Workers moved away from places with bad geography, weather, a depressed economy, or simply poor luck. Businesses took advantage of the economic bust and invested where land, labor, and capital became cheap. When they did, poor regions tended to catch up to rich ones by growing faster.
Unfortunately, the trend toward regional income convergence has stopped. There are many explanations but most observers blame high home prices – propped up by NIMBY attitudes and policies toward growth – repelling all but the wealthiest workers from the most productive places. Mobility is no longer the answer for most people.
Divergent regional fortunes have revived interest in an old idea: federal policies to help distressed areas. We still have a lot to learn. Federal programs like Empowerment Zones, Enterprise Communities (both created in 1993), Renewal Communities, and the New Markets Tax Credit (added in 2000) as well as their state counterparts have a mixed track record.
Making matters worse, our political system is not very good at targeting areas that would benefit most from assistance. Policymakers can be tempted to spread resources too thinly across many places to secure political support. (For example, the 1960s Model Cities program started with a half dozen cities and grew to 150 within only a few years to limited success.)
Or politicians pick places already poised for growth to get quick wins (a concern in the new Opportunity Zone program). And it’s tricky to determine whether subsidizing one area over another creates new overall economic benefit and just shifts development across the street or around a region.
For all of these reasons, broader policy levers – lower business taxes, more K-12 education spending – may work better than targeted place-based assistance.
We still have much to learn about these investments. But policymakers must do a better job closing the gulf between successful communities and failing ones. The individual and social costs of letting many places fade away are simply too high.
