Place-based economic policies as a response to populism

HOW do you solve a problem like Ohio? Over the course of a generation America’s once-thriving industrial heartland has withered. Economic stress has contributed to rising rates of drug addiction and falling life-expectancy. Frustrated, Ohioans and other Midwesterners pushed Donald Trump to victory in November. That has focused attention on the plight of declining industrial areas in the rich world. Yet orthodox economics has few answers to the problem of regional inequality.

Economists used to think the best policy was often merely to wait. From 1880 to 1980 the incomes of poorer and richer American states tended to converge, at a rate of nearly 2% per year, according to research by Peter Ganong and Daniel Shoag of Harvard University. That pattern has since broken down (see chart). Yet the shift of resources and the movement of people from declining places toward thriving ones remains an important part of the process of economic growth. In theory, the gains should be big enough to compensate those harmed by the shift, leaving everyone better off. “Governments should not try to rescue failing towns,” The Economist wrote in 2013. “Instead, they should support the people who live in them.”

This position never lacked for critics. Declining places can become poverty traps. A shrinking tax base means a deterioration in local services (including the public education that might provide young people with the skills to succeed elsewhere). Low and falling housing costs disproportionately attract people on fixed government incomes, like pensioners, who tend to take more in government services than they add to the local economy. What’s more, people resent as elitist the notion that the decay of beloved cities is an acceptable part of the rough-and-tumble of a dynamic economy. That resentment can motivate votes against the institutions of globalisation. Just as America’s Midwest helped carry Mr Trump to power, Brexit triumphed thanks to support from deindustrialising places like Middlesbrough and Wolverhampton. The liberal-minded are learning that they ignore regional disparities at their peril.

Economists are woefully short of compelling solutions, however. Some reckon the main problem is that the process of reallocating resources has occurred too slowly. Constraints on growth in thriving cities, from strict zoning regulation to inadequate infrastructure investment, mean that they have become pricier rather than much larger. Mr Ganong and Mr Shoag suggest that these constraints make Americans less likely to move; those who do are less likely to head for richer places. Enrico Moretti of the University of California, Berkeley and Chang-tai Hsieh of the University of Chicago argue that American GDP might now be as much as 13.5% lower than it ought to be as a result. But although a speedier and more complete reallocation would boost GDP and the economic fortunes of those who choose to migrate, it would hardly improve the outlook for those who remain behind—and many inevitably would.

More generous transfers from “winners” to “losers” might help. In many rich economies prosperous areas already support poor ones. Subsidies—health and pension payments, as well as industrial and agricultural protections—provide a cushion against regional decline. But they are not a basis for long-run economic recovery, and have not been enough to stem the growth of populist political movements. Many people want it both ways: not only redistribution but also good jobs, without having to move too far to get them.

Attempts to jump-start local economies are another obvious response. Governments have a long record of experimentation with such “place-based” policies: from the massive infrastructure investments of the Tennessee Valley Authority (TVA) to EU structural funds and “enterprise zone” programmes, providing incentives for hiring and investment in struggling areas. These efforts do boast a certain economic logic. Modern cities thrive because of the benefits to firms and workers of crowding together. Clustering speeds the flow of ideas, cuts the cost of dealing with clients and enriches social lives.

Wise men at their end

Yet studies of place-based policies offer something less than a ringing endorsement. Though some programmes appear to boost employment or the number of firms, others fail to have any significant effect or bring local benefits only at the expense of others. Research suggests that the TVA, for instance, fostered a manufacturing cluster in its own area but to the detriment of other regions. It is hard to help one place without harming another.

Indeed, more immigration would in many ways be an elegant solution to regional decline. By putting together underused infrastructure and rich-world institutions with foreign labour, immigration would be good for migrants, while also bringing new spending and entrepreneurial activity to struggling places. Some leaders, like Rick Snyder, the governor of Michigan, have expressed interest in place-based visa programmes which would allow struggling areas to recruit immigrants from abroad, so long as they remain in the place issuing the visa for a set amount of time. An intriguing idea: but now is not the moment when governments are likely to promote the potential of immigration.

So more creative solutions may be needed. In the late 19th century America’s federal government gave land to states, which they could sell to raise proceeds for “land-grant universities”. Those universities (today including many of the country’s finest) were given a practical task: to develop and disseminate new techniques in agriculture and engineering. They have become centres of advanced research and, in some cases, the hub of local economic clusters. Mainstream academic economists might tut at a modern-day version of the programme, meant to foster new ideas, train workers and strengthen regional economies. But if economists cannot provide answers, populist insurgents will.

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