One County Thrives. The Next One Over Struggles. Economists Take Note.
Posted June 29, 2018 5:14 p.m. EDT
Loudoun County, Virginia, and Jefferson County, West Virginia, share bucolic countryside and a 14-mile border. But there are two big differences between them that capture something fundamental about our age.
Economically, Loudoun County is humming from the technology boom in Washington’s suburbs, with the number of businesses rising 49 percent from 2005-2015. But on the other side of that border, Jefferson County does not have the same economic dynamism: The number of businesses in the county fell 11 percent in the same period, according to census data.
The two counties have diverged politically, too. In 2004, both favored George W. Bush for president by a similar, moderate margin. In 2016, Hillary Clinton won Loudoun by 17 percentage points; Jefferson favored Donald Trump by 15 points.
It is a chasm you can find nationwide, according to calculations by Jim Kessler of the think tank Third Way. In 2004, there was just a 2-percentage-point gap in how the presidential candidates fared between counties that had gained businesses versus those that had lost them in the preceding decade. In 2016, that was a 15-point gap, with the places that had lost business favoring Trump.
This divergence is more than a statistical curiosity. It is one more piece of evidence for a shift that is causing some leading thinkers on economic policy to make location and geography more central to their work.
Historically, within the same country, poorer places have tended to converge with richer places. Policymakers and macroeconomists could focus on trying to improve overall national well-being, with confidence that a higher growth rate or lower unemployment would be, over time, widely shared.
But averages can mask a lot of discontent. If growth in jobs, incomes and output is concentrated in a few areas, the overall national numbers might look perfectly fine even as people in huge areas of the country feel despair and a lack of opportunity.
Path dependence may be one cause of recent trends. In a place with a depressed economy, for example, the most ambitious people move to places with more opportunity, leaving an even bleaker situation behind.
Elisa Giannone, a Princeton economist, found in a recent working paper that from 1940-1980 the wage gap between poorer and richer cities in the United States converged at an annual rate of 1.4 percent — but that on average there has been no such convergence since then.
Enrico Moretti, an economist at the University of California, Berkeley, has done extensive work arguing that the divergence has roots in the rise of more technologically intensive industries combined with the offshoring of lower-skilled work, such as manufacturing. Many of the thriving areas are places where these technologically advanced companies and their employees cluster.
In what is surely a related pattern, Joseph Parilla and Mark Muro of the Brookings Institution found that not only are there big differences in the productivity of different regions — how much economic output is generated per worker — but that the high-productivity regions are also pulling away from the low-productivity ones.
This body of work — focused on how differences in regional economies can explain broader challenges — is attracting more notice from economists and policymakers who have tended to look at things from a national perspective. They are realizing it may not be enough to worry about overall levels of GDP or employment or wages, when those headline numbers can mask big problems.
“Convergence used to be the order of the day,” said Larry Summers, the Harvard economist and former Treasury secretary. “Now if anything divergence is the order of the day. There’s a lot more to understand, but at a minimum we need to start recognizing place as a legitimate construct in our thinking.”
Summers, known for his work on macroeconomics, began arguing around the time of the 2016 election that economics researchers needed to start taking regional divides more seriously as a contributor to bigger problems. To that end, he recently wrote a paper with Harvard colleague Edward Glaeser, a leading scholar of urban and regional economics, and Benjamin Austin that examined how the rising rate of nonemployment among prime-age men in parts of the American heartland had fed into social dysfunctions.
The paper argued that targeted tax subsidies in those areas could create broad benefits. So, for example, if the earned-income tax credit, which enhances the after-tax income of low-income workers, were more generous in lagging areas than in thriving ones, it might pull more people into the workforce and offer greater social and economic benefits than the current one-size-fits-all version.
But the more widespread idea that these geographical differences are really important to understanding the economy does not necessarily translate to a coherent set of policies.
“I think what’s happening is we may have a better understanding of the dynamics of these lagging regions, and we may be able to better describe what is contributing to that, but we don’t have a new set of ideas policy-wise to address them,” said Amy Liu, director of the Metropolitan Policy Program at the Brookings Institution.
Would it be better, for example, to help people stay, or to help them go? Invest in transportation infrastructure or better schools, or ease relocation to more dynamic places?
Kessler, vice president for policy at Third Way, argues that the Democratic Party needs to put this divide at the center of its policy agenda.
“Income inequality is a moral issue, but this is a different type of inequality — it’s inequality of opportunity,” Kessler said. “The question is how do you make sure that more people who do not have a college degree or come from the right place are able to have opportunity.”
His organization has proposed, among other things, a public fund to support small-business loans in the struggling regions, nationwide broadband internet and vouchers to help the unemployed move to places where there are more jobs.
Individual proposals aside, experts have not formed a consensus on how to make economically moribund places feel more like economically dynamic ones. But it is clearer than ever that this divergence explains much of what ails the United States’ economy, and just maybe its politics, too.