The Modernization Sequence, Regional Divergences and Mobility

December 5, 2018 4:59 AM

How to Get Growth in the Places That Need It Most - "The 2017 tax reform law gave the wrong kinds of incentives to help struggling urban areas and regions." (thread)

"The North can make a steam engine, locomotive, or railway car; hardly a yard of cloth or pair of shoes can you make." - William T. Sherman

it isn't just products, but also public goods -- food, shelter, sanitation, transportation, education, health care, child/elderly care, parks, recreation -- and governance:

• "Practically everything is being driven by the shift to knowledge industries that strongly tend to cluster in big cities with lots of talent and near good research universities. You can't understand America without understanding this shift. It's the big picture."
• "Here is a thread about TEXAS, my home state - its politics, its economy, its future, and what it says about America as a whole."
• "Statistics don't quite capture the extent of U.S. poverty. Here's why America is poorer than it thinks."
• "Why are people moving less than they used to?"
• "If the big lesson of 2016 was that rural areas in the North will vote like rural areas in the South, the big lesson of 2018 is that Southern cities will vote like Northern ones."
• "In Midwestern districts (+Pennsylvania, which I think of as part of the 'political Midwest') where at least 35% of the population has a bachelors' degree, Democrats cleaned up, going from a 10-16 deficit in House seats to a 20-6 advantage."
• "Universities are the closest thing we have to a 'magic bullet' for reviving America's declining, forgotten, rural, and left-behind regions."
• "Even as we bemoan high rents in cities like SF and D.C., tons of cities in America are still languishing in poverty. They need economic development."
• "The U.S. economy has long been moving away from 'hands' industries such as mining and manufacturing toward 'minds' sectors such as finance, health and education."

The economic problem tearing countries apart - "Regional divergence has afflicted all western countries since the 1980s."

One of the great achievements of the postwar decades was that growth was not just fast but also broad-based. That led inequalities between individuals to narrow, but not just that: it also produced convergence between regions within nations — between their centres and peripheries, between big cities and small towns.

Strikingly, this phenomenon was universal across the western world.

In the US, average incomes in poorer places grew faster than in richer ones. This held between cities as well as states. Smaller towns kept pace with or outperformed larger ones in terms of wages and employment, as Hendrickson and her colleagues show. In western Europe, too, the income dispersions between regions fell.

Second, all this changed around 1980, more or less everywhere. In parallel with the shift of economic value from factory employment towards high-tech production and knowledge services, the previous economic convergence between places halted and reversed.

In the US, less developed places stopped catching up with more developed ones. Bigger metropolitan areas experienced faster wage and employment growth than middling cities and small towns.

In Europe, regional income differences grew bigger again — both across the continent and within virtually every European country.

And third, while in most countries individual income inequality mostly jumped in the 1980s but then stabilised at a higher level, regional disparities have continued to widen. The financial crisis reinforced this divergence, both in Europe and in the US.

The roots of this divergence lie in the shift of economic value creation from industrial production to services. It is not that western countries lost their manufacturing — they largely produce as much stuff as they ever have — but that they need ever fewer workers for it. Within manufacturing, globalisation has helped rich countries move from low-productivity, labour-intensive products to higher-tech, less labour-intensive ones. And each product is itself produced in ever more automated ways.

The new jobs, meanwhile, are in services, and the well-paid ones are in high-skilled services. These tend to thrive in the biggest cities, whereas manufacturing could do well in midsized towns. And it is high-education jobs that are driving regional divergence, as the striking chart below shows, from research by Elisa Giannone.

How to bring along the left behind - "It is imperative to reconnect lagging regions with activity in the centre."

The most significant policies fell into three areas where successful policymakers directed more resources than unsuccessful ones: business extension services; customised job training and general policies to increase skill levels; and infrastructure improvement. Examples from Grand Rapids include helping related businesses work together to solve common challenges to expansion, such as the West Michigan Medical Device Consortium aimed at co-ordinating and helping local manufacturers’ shift into supplies for the medical device industry. On skills, better-than-average funding of job training programmes has been complemented with policies to increase skill levels from early childhood and to attract academic institutions and the high-skilled workforce that comes with them...

This may sound obviously sensible. But it is worth reflecting on why exactly such policies make sense. The economic transformation of the past 40 years has shifted the engine of value creation from a territorially spread-out system of labour-intensive industrial production to more agglomerated activity of knowledge-based and high-tech services. Even manufacturing is now much more dependent on high-level cognitive service-style work (engineering, programming and other problem-solving activities) than on manual, mechanical labour. So if it is an economic fact of life that value-creating activity today congregates where such knowledge-based activity thrives (above all in the big cities), then addressing regional divergence must, at a minimum, intensify the connection between places left behind and those soaring ahead.

also btw...

• What has worked to take people out of poverty? DeLong: Land reform, nitrogen, and access to markets.
• Georgism as the alternative to capitalism? "The most intriguing technical proposal Collier advances is for an updated 'Georgeism'. The political economist Henry George argued that the foundation of public revenue should be the taxation of rent on land. Collier argues that we need to tax more forms of rent, including that from agglomeration, which now goes to lucky individuals and businesses."

posted by kliuless (15 comments total)

From left behind to poles of attraction - "How to bring capital — human as well as financial — to declining regions."

Let’s examine, too, policies that are not as good as they’re cracked up to be. Two reports, one from Brookings and the other from the Center on Budget and Policy Priorities, both find that in the US tax cuts for business in left-behind regions have done little to boost their performance or create jobs, except at an exorbitantly inefficient price (compared with using the same amount of fiscal resources on more effective policies such as, say, skills programmes).

So we should perhaps not hold our breath for results from what the Economist magazine calls “the biggest tax cut you’ve never heard of” — a scheme included in last year’s US tax legislation to reduce or eliminate capital gains tax on investments made in designated “opportunity zones”. The problem is that there is very little certainty that this will bring forth investments that would not have happened anyway, or that they are in the right kind of capital (all investments are eligible) in the places that really need them (many already-gentrifying areas have been named opportunity zones).

Tax incentives can, in fact, be worse than doing nothing. As my colleague Sarah O’Connor recently pointed out, when local governments compete for investment from large companies — the recent scramble for the privilege to host Amazon’s HQ is a case in point — overbidding can make a community end up giving more to the company than the company brings to it. An intriguing proposal to prevent this, outlined in the Brookings report, is to impose a 100 per cent federal tax on any incentives offered to specific companies by local authorities. In Europe, one can see the EU’s state aid rules as serving a similar function: preventing local or national governments, especially poorer ones, from bidding away development resources in the quest for investment.

This is not to deny that more capital for lagging places is necessary to address regional divergence. They obviously need capital for digital and other infrastructure, without which they are cut off from the engines of growth; but even if they could catch up in skill levels and connectedness, this would be of no use if businesses lacked the capital to avail themselves of the better opportunities. The Brookings report documents the striking fact that since the financial crisis “many larger banks have stopped issuing loans below a $100,000 threshold” even as smaller community banks are disappearing rapidly. That may hurt left-behind areas in particular; indeed rural lending has dropped precipitously... Not only may banks not be helping; they may be doing active harm. There is an argument, put forcefully by Nicholas Shaxson, that an oversized banking sector may be a prime cause of regional divergence, because it facilitates financial engineering that draws money from around a country into the cities that house financial centres.

Library as Infrastructure - "Reading room, social service center, innovation lab. How far can we stretch the public library?"
posted by kliuless at 5:23 AM on December 5, 2018 [3 favorites]

This sort of highlights what I think has become the most perverse twist of American politics. Republicans are almost entirely incentivised to keep the areas they represent poor and underdeveloped while packing the well educated into cities. To continue to exploit grievance politics you need to maintain the grievance.
posted by srboisvert at 12:16 PM on December 5, 2018 [1 favorite]

This is a really good set of links and I've been too busy today to really comment, but thanks!

Further to srboisvert, I wonder about the simultaneous change of the two US parties into urban/rural parties at the same time that urban and rural economic outcomes are diverging - is one leading the other, are they both correlated with something else?
posted by Homeboy Trouble at 5:58 PM on December 5, 2018

Oddly, the link for "intriguing technical proposal Collier advances" brought me to a paywall, but this SEEMS to work for me:

https://t.co/Ck2lH2qtPX

It sounds like an interesting book. That Financial Times review says,

The most interesting feature of the book is that its answer is as much ethical as narrowly economic. The central principle it advances is “reciprocal obligation”, as the basis for the co-operative world, civilised society, ethical businesses and functional families we need.

I like this idea, and I feel like - if framed properly - it could be really helpful in bringing people together.

I wonder if a lot of people in less prosperous rural communities feel unneeded, and unvalued, and if we could create programs that emphasize the things we - all across the country - get from one another and need from one another.

Thanks for this post and these great links, kliuless!
posted by kristi at 6:21 PM on December 5, 2018

Further to srboisvert, I wonder about the simultaneous change of the two US parties into urban/rural parties at the same time that urban and rural economic outcomes are diverging - is one leading the other, are they both correlated with something else?

Well, one correlation to look at would be The Great Migration and White Flight, both of which occurred just prior to the solidification of the current US political order during the 1960s. Whites fleeing to the suburbs (and then, later to exurbs) helped turn the Republicans into a "rural" party without actually contributing much to the rural economy -- because most of their productivity and other economic activity is still taking place within city limits.
posted by tobascodagama at 7:47 PM on December 5, 2018

more on georgeism as a governing philosophy! (if not capitalism replacement ;)

1/Here's a quick thread about Georgism, which I think is a severely underrated, deeply misunderstood, and quintessentially American alternative to standard capitalism.

2/Why is Georgism such a niche thing?

My guess: It focuses on land, which is not a thing most Americans think about a lot, especially these days.

And this is a shame, because really, Georgism is about so much more than land.

3/Georgism is really about what humans produce versus what nature produces.

"Land" should be read as a stand-in for all the things that humans merely seize and divide up among themselves.

4/"Capital" is really a combination of things.

Every machine, every building, every vehicle requires some input of human labor and ingenuity to create.

But it also requires natural resources, which humans seize and divide up instead of working to create.

5/Standard economics has no easy way of separating out nature's bounty from the product of human effort and ingenuity.

But this division matters, because human effort and ingenuity are things we want to reward, while nature's bounty is something we want to divide equitably.

6/Georgists love the Land Value Tax because it seizes on one clear-cut case where you can easily identify the dividing line between nature's bounty (a plot of land) and human effort and ingenuity (the structures built on that land).

7/But Georgism should be about much more than this one policy.

It should be about a general approach to constructing an economy: "Reward human input, divide nature's bounty equitably."

8/My favorite Georgist was the economist Wolf Ladejinsky, who designed the land reform programs in Japan and Taiwan.

9/Ladejinsky's policies were not focused on land taxes. Instead, he focused on seizing land from landlords and giving it to small hard-working farmers.

This policy was Georgist in the general sense because it rewarded the farmers' hard work, while dividing land equitably.

10/Some believe that Ladejinsky's land reforms were a crucial reason for the stunning economic success of Japan, Taiwan, and other countries that copied the policy.

11/Similar policies have probably been effective in other countries, like India.

12/Some also credit Ladejinsky's policies with preventing Japan/Taiwan/Korea from becoming communist.

Ladejinsky was derided as a communist by American conservatives, who (disastrously) opposed land reforms in Latin America. But in fact Georgism was a vaccine against communism.

13/Land reform, though, is a policy for a poor agrarian country with lots of surplus rural labor. What would Georgist policies look like in a rich country like America, aside from land value taxes?

14/Housing reform, of course, is pretty Georgist.

15/I also think inheritance taxes can be viewed as Georgist, since they take wealth away from people who didn't do anything to build that wealth:

16/Place-based policies strike me as Georgist too:

17/Progressive income/wealth taxation can be seen as Georgist as well.

Some of rich people's riches comes from hard work and ingenuity; some comes from luck. Luck is like a natural resource - it's something humans receive instead of creating. So try to divide it equally.

18/Broadly, standard capitalism strikes me as a system that rewards both effort/ingenuity AND luck/plunder, while communism rewards neither.

If we define Georgism as a system that rewards effort/ingenuity but not luck/plunder, then call me a Georgist!

(end)

Also, Georgism seems like it needs a new name that doesn't tie the idea to one specific dude.

Any suggestion I could make ("humanism"?) would be cheesy, which is why it'll take a manifesto to really make a name stick. Someone needs to write a book...

posted by kliuless at 6:36 AM on December 6, 2018 [4 favorites]

2/Why is Georgism such a niche thing?
Well, I mean if you count taking land from one group and giving it to another as Georgist, isn't that mostly how the US was formed? We did that.

Also because Georgist 'land taxes' are round-about property taxes which would be so easy for the wealthy to game. Direct property taxes already operate in an approximately Georgist way in many states, which people constantly push back against. See property taxes in places like New York, New Jersey, and Texas vs places like California where they are capped or Colorado, or other places where they barely exist. Also the evidence is very weak that a Georgist taxing policy results in different land use patterns to maximize land value. I mean, NYC, Texas and New Jersey are all developed differently, and Texas is pretty similar to Alabama which is low property tax state. Land use laws like zoning have much stronger effects than taxes. Which is true in general unless taxes are at confiscatory rates.

Also once the tax rates start to get confiscatory enough to result in land use changes, they change them dramatically (see California in the past).
posted by The_Vegetables at 7:47 AM on December 6, 2018 [1 favorite]

Also my pet issue for the subject "how to get growth to the areas that need it most" is to simply spend the same dollars that go to those areas for highways and vague mobility improvements for literally anything else. Like 75% of discretionary state and federal funds are for roads and little else.

Seriously even giving them to the locally already wealthy would be an improvement, because generally the locally wealthy in a rural area are not in the same ballpark as the urban wealthy.
posted by The_Vegetables at 1:16 PM on December 6, 2018 [1 favorite]

Second, all this changed around 1980, more or less everywhere. In parallel with the shift of economic value from factory employment towards high-tech production and knowledge services, the previous economic convergence between places halted and reversed.

Here's a pretty good chart showing this divergence. Idiosyncratc Whisk It shows the divergence of cities 1 standard deviation above and below the US median income. Unfortunately the author doesn't identify the cities, but the ones below the median are getting crushed and falling farther behind. The US median wage is growing, slowly, Home price to income in cities 1 deviation below the median is lower than it was in 1985. Home prices are only 15% of median income, hit a low in 2013, and have slightly risen since then. It basically means that those with the skills to earn above median incomes have no desire to live in low-income cities at any price. This is a real problem.
posted by The_Vegetables at 1:29 PM on December 6, 2018

The thread was interesting, but it was a bit too "everything else I like also counts as Georgism because why not" for my taste.
posted by tobascodagama at 1:43 PM on December 6, 2018

sure, abstract catch-all's aren't too useful, but 'neo-georgist' (humanism) "separating out nature's bounty from the product of human effort and ingenuity" -- an updated 'labor theory of value' perhaps -- may be?

like in the negative sense: How America's racist past cost homeowners $156 billion

We've known for some time that racism limited blacks' housing options in ways that lowered the value of homes. De jure and de facto segregation — racially restrictive housing covenants that prohibited blacks from buying in certain areas throughout the 20th century — and racially biased redlining from the 1930s beyond the passage of the Fair Housing Act of 1968 — which deemed majority-black neighborhoods too risky for mortgage lenders — isolated blacks in areas that realized lower levels of investment than their white counterparts. Our new data shows that in the average US metropolitan area, homes in neighborhoods where the share of the population is at least 50% black are valued at roughly half the price as homes in neighborhoods with little to no black residents.

Even for those who acknowledge our racist history, the 50% price difference isn't about racial bias; it's about accepting the effects of the past at face value. It's assumed lower housing quality, underfunded schools and crime — all consequences of racism and poverty — set a deserving price point. Our study tested those assumptions.

We examined homes of similar quality in congruent neighborhoods — with the exception of the racial demographics — to make an apples-to-apples comparison between places where the share of the black population is 50% or higher and those where there are little to no black residents. What we found astounds. Differences in home and neighborhood quality do not fully explain the price difference. Homes of similar quality in neighborhoods with similar amenities are worth 23% less in majority-black neighborhoods, compared to those with very few or no black residents. After accounting for factors such as housing quality, neighborhood quality, education and crime, owner-occupied homes in black neighborhoods are undervalued by $48,000 per home on average, amounting to a whopping $156 billion that homeowners would have received if their homes were priced at market rates.

To put it plainly, racial bias is taking away money that could be put toward college tuition or a small business. Devaluation means municipalities with a significant percentage of African Americans lose tax revenue that could be put toward government services and infrastructure. Racism robs money that residents and government officials use to uplift their social status. Bigotry imposes a "black tax" on residents of majority-black neighborhoods that white neighborhoods simply don't face.

oh and...
EIB launching new scheme to build social housing alongside Government - "The vastly wealthy European Investment Bank is launching a new scheme to build social housing alongside the Government. The EIB will lend to private developers who will build houses, and then lease them out as social housing for 30 years... it would be the first public-private partnership for the provision of social housing in Europe... The EIB – owned by the EU member states – is designed to provide competitively priced finance for 'economically viable projects that promote EU policy objectives.' "
posted by kliuless at 6:00 PM on December 6, 2018

also thinking about recognition and incentives, like: "praising presidents for the overlap of their presidencies with long, ordinary spans of job growth is like making big payouts to CEOs for a growing stock price in a broad bull market," i guess there isn't too much difference between economic rents and georgeism per se, but like MMT isn't so novel as much as focuses attention on a particular misconception (in MMT's case, that deficits matter).

georgeism takes a 'you didn't build that' (by yourself) view and parcels credit more broadly (and/or taxes unearned gains). it also works from a 'veil of ignorance' perspective. like if our presence is random, then spreading the 'circle of concern' further in space and time would be a natural (georgist!) extension :P
posted by kliuless at 11:08 PM on December 8, 2018

God: Political economy of a global public good - "To put the discourse of the political economy of global public good into a broader perspective, some provocative questions are in order: First, regardless of what one perceives God to be, if God were to put a price-tag on rain, sunshine, air, earth, planets, stars, space, oceans, lakes, rivers, forests, minerals, who could afford them? Second, what in fact have human beings brought into the universe by their own ability? Third, are there any original inventions that humans have brought about without using the existing ideas and materials? Fourth, what human inventions will still be around in the next five thousand years? The answer to the fourth question can be discerned by answering the question of what human invention today is five thousand years old? These philosophical questions are meant to instil some spirit of intellectual humility among those who get too excited and fascinated by human innovation."
posted by kliuless at 12:12 AM on December 9, 2018

Silicon Valley is betting on one Iowa town's efforts to bring tech jobs to rural America - "Silicon Valley leaders are joining Pillar Technology's initiative to help provide intensive training for students in Jefferson, Iowa, a town of 4,200. Participants could land tech jobs paying $65,000."

Minneapolis Confronts Its History of Housing Segregation [FPP] - "By doing away with single-family zoning, the city takes on high rent, long commutes, and racism in real estate in one fell swoop."
posted by kliuless at 5:58 AM on December 11, 2018

policy drivers of US geographic deconvergence: "here's a quick thread on regional inequality and the policy levers that led us there"

4. Another policy shift was... banking deregulation, the end of interstate banking restrictions throughout the 1970s and 1980s and 1990s. Lost local banks which provide local credit, centralization of credit in coastal areas.

5. Then there were the changes in retail pricing rules, Robinson-Patman and fair trade laws. This destroyed local retailers and opened up the road for Walmart. It also helped eliminate local manufacturing, centralize it, and offshore it.

6. There was the 1982 substantial relaxation of anti-merger law. Regional cities had headquarters of local corporations stripped out as big companies bought up competitors.

7. Patent laws became far more restrictive in the 1980s and 1990s, leading to the inability to start tech firms anywhere but near tech clusters where the lawyers and financiers lived.

8. There are many other levers. Tax changes in the 1980s (and more recently the Trump tax cuts) pooled capital in areas where the super-rich already live. Bankruptcy rules helped privilege big creditors, who large live in coastal gilded cities.

9. Another interesting set of changes were the restructuring of farm supports, from supply management programs protecting local farms to prioritizing large scale production and big ag monopolization. Changes in meat-packing as well to consolidate chicken, beef, pork industries.
10. Bottom line, there's nothing inevitable or natural about any of this. America ran a policy to equalize dense and rural areas of the nation for 200 years. In the 1970s, we flipped those policy levers. This is where we are now. It's not superstar cities, it's policy.

posted by kliuless at 2:22 AM on December 19, 2018 [1 favorite]