November 29, 2020
Regional Divergence and Local Taxes
In the century after the Civil War, the USA went through a long period of regional convergence. This simply means that as our standard of living grew, poorer places generally grew faster than richer places. This caused states and cities to ‘converge’ towards one another at a time when our overall standard of living grew more than five-fold. By the 1970s the trend of convergence slowed appreciably, and by the 1990s reversed. Over the past three or so decades, rich places have grown more quickly, while poor places grew more slowly.
Population flows exacerbate these trends. Rich places tend to attract more people, while poorer places shed them. This results in some stark geographic anomalies. For example, Columbus, Ohio has captured 130 percent of Ohio’s population growth in the 21st Century, while Indianapolis captured 120 percent of all Indiana’s job growth. In recent decades, nearly all large urban places thrived, while smaller cities and rural places mostly stagnated.
Unsurprisingly, decades of these patterns cause unease and even resentment among many residents. There are several good studies tying this divergence to growing political discontent.
Just last week, mayors of seven Midwestern cities called for a domestic Marshall Plan to invest in their cities. They invoked the memory of America’s large commitment to rebuilding Europe after World War II.
Their argument focused mostly on federal investment in clean energy technologies and urban infrastructure as a means for revitalizing cities. Unfortunately, the gist of this argument is that such investments would boost primarily factory and construction employment. While I think it is time to have a frank discussion about place-based economic policies, this particular argument has two fatal weaknesses.
First, the federal government heavily subsidizes poor places and people already. Federal tax dollars are disproportionally collected in affluent cities and distributed disproportionally to poor places. While most of those tax dollars flow to individuals, not local governments, the notion that poor cities and rural areas are not getting their share of government spending is simply false. It is the other way around. Rich places receive far fewer tax dollars per person from federal taxes than do poor places. Moreover, within states, rich counties subsidize poor counties through state tax systems.
Again, it would be wise to review the spending priorities to poor places. But, taxpayers in rich cities also tax themselves more heavily than do smaller cities and rural places. To ask them to fork over even more money to places unwilling to raise their own revenues seems to me like a political dead end.
The second, bigger problem confronting the idea of a domestic Marshall Plan is that what ails cities and rural places has almost nothing to do with private sector capital investment. The problem is more fundamental. Declining cities and struggling rural places almost always have two overwhelming problems: Their educational attainment is too low to attract the types of jobs that will grow in the 21st Century, and the quality of their public services is too low to attract new households.
This is a tough thing for most people to hear about their community, yet it is inevitably true. As an exercise, I have my undergraduate students build a predictive algorithm of a county’s population growth using only educational attainment. They can do so with about 90 percent accuracy, and that gets at the heart of why the nation is experiencing regional divergence.
Educational attainment is the strongest causal factor in regional economic growth. A century ago, workers enjoyed a wage premium by moving to a city with good transportation networks and a cheap energy source. Those factors dictated the strength of cities. Today, educated workers enjoy a wage premium by working closely with other educated workers. In the 21st Century economy, education and skills have replaced electricity, railroads and canals as the prime contributors of city growth.
There is a small chance that federal place-based economic policies can help smaller cities and rural places do better, but it is no more than a small chance. Federal spending might improve roads or sewage systems, extend broadband or help subsidize more reliable electricity. All of these are helpful, but they aren’t the keys to revitalizing a Rust Belt city or aging factory town.
The real policy challenges remain at the state and local level. The federal government isn’t going to address the fundamental weaknesses that keep some places poor while other thrive. Moreover, most people wouldn’t want them to. The building blocks to better educational attainment happen in school board meetings and in statehouse votes, not in Congress. Places that do well recognize this, and places that do not will continue to lose population and relevance. That leads me to my final point.
Recall that more affluent cities typically tax themselves more heavily than other places. There’s a reason for this, and it reinforces the divergence between rich and poor places. Over time, household preferences change, and in recent decades school quality and neighborhood amenities have become more attractive. These attributes seem especially attractive to mobile households with educated workers and children. In short, the type of families that communities wish to attract. They also cost money.
The implication is that places that tax themselves more heavily to provide better schools and neighborhoods will capture most of the population growth. These are state and municipal governments who seek to compete for people on the basis of value. In contrast, many state and municipal governments focus more heavily on lower tax rates. These communities compete on price, not value. There may have been a time when being a low-price community was a successful strategy, but that time has long since passed. The economic forces that led to that change show no signs of abating, and successful cities have already figured that out.
About the Author
Educational Attainment, the 21st Century Fund and the Future of SchoolingIndiana ranks 42nd in educational attainment.
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