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Place-based policies for shared economic growth



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.

places left behind and places thriving

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.

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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.

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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.

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A close-up view of a budget performance spreadsheet with with a pencil sitting on it. The numbers are actually real budget figures, but there's no identifying words or symbols.

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.

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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.

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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.

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