America’s growing geographic divide is causing experts and policy-makers to revisit one of the most fundamental policy questions: When it comes to healing distressed places, should we favor people-based policies that essentially help residents relocate to more vibrant areas, or should we favor place-based policies that focus on rebuilding the economies of distressed places and creating new and better jobs for people where they already live?
Economists have long come down on the side of people-oriented policies that essentially bring people to jobs.
The pioneering research by Raj Chetty and his collaborators, which documents the often substantial differences in economic opportunity that come from being born in particular places, suggests there is much to be gained from helping families, especially those with young children, move from distressed places with limited opportunity to more vibrant ones with better schools, amenities, job markets, and public services. University of California, Berkeley economist Enrico Moretti has documented the costs of land-use restrictions that drive up the cost of housing and hinder workers in distressed areas from moving to more dynamic coastal superstar cities and tech hubs.
Now, new research from economist Timothy Bartik of the Upjohn Institute for Employment Research makes a strong and convincing case for the efficacy of place-based policies; policies that essentially bring jobs to people, in bolstering the economies of distressed places, and helping workers and their families get a leg up where they live. Targeting places can sometimes be the best way to help people.
Most economists see clear economic gains (or “efficiencies”) from policies that directly focus on people, creating supports or incentives to relocate from more distressed to more vibrant places with more and better economic opportunity. But Bartik believes this case is somewhat overdrawn. In contrast to the broader economic consensus, he sees considerable gains from helping to boost the job markets of distressed places, thereby enabling the people who live there to find more and better jobs and thrive where they are. What’s more, he argues that current place-based policies are wrongly focused on luring large firms through tax incentives and must be retooled so that they actually helped distressed communities and the people who live in them.
For one, Bartik argues many people simply do not want to move, even if they can afford to. He quotes Adam Smith as saying: “A man is of all sorts of luggage the most difficult to be transported.” Efforts to move people to jobs will likely only work for a subset of those who live in distressed places. Bartik points out that roughly 70 percent of Americans stay in the same state they were born, and more than half of all Americans and 40 percent of more mobile college grads stay in the same metro area.
There are significant economic and social gains to people staying in place. Moving is hard on people, especially children. Losing proximity to friends and family takes its toll on well-being and life-satisfaction. Anyone who has moved a lot (like me) knows that the communities we live in, and in which we forge social and business ties, create a special kind of location-specific capital that is very hard to replicate in a new place. A wide body of research, some of which I have covered here, shows that the opportunity and psychological costs of moving are substantial, with estimates in excess of $100,000 for every close family member or friend left behind, and typically in excess of a year of income.
Furthermore, policies which subsidize moving tend to have few takers. Bartik cites research which shows that out-migration subsidies typically increase out-migration rates by no more than 2 percentage points. And encouraging even more people to move to superstar cities may only exacerbate the winner-take-all housing affordability crisis we are already experiencing right now.
Helping people to move to jobs might seem like a good way to recalibrate the local job market, reducing the population to fit available jobs, but, as Bartik aptly point out, it misses the simple fact that a place that loses people also loses economic demand. When people move away, they no longer buy things, invest in housing, pay for rent or other goods or services, creating a big hit to local demand. Out-migration also decreases property values, which will further depress local demand. As a result, when people leave a depressed local economy, jobs fall in more or less equal proportion. All of this reduces the community’s tax base and ability to deliver necessary public services. The people-to-jobs approach does nothing to help those who are left behind.
In these ways, policies that encourage people to leave may ultimately end up making distressed communities even worse off. “Encouraging people to leave a distressed place thus does not make it easier for those staying behind to find jobs,” is how Bartik puts it.
On the flip side, there are considerable benefits to place-based policies which bring jobs to people.
While many economists argue that enabling more people to move to dynamic coastal cities will improve productivity and grow the economy overall, Bartik contends there may be even greater benefits to helping people stay in place and instead growing jobs in these distressed places. Indeed, creating jobs in distressed places has an outsized effect on employment to population ratios (employment rates). When jobs are added to distressed communities, the growth in employment rates is 60 to 90 percent higher than in other places, an effect that persists for decades. “For every 100 new jobs, about 23 contribute to raising the employment rate in an average place, but 40 do so in a distressed place,” Bartik writes. “The additional jobs created in distressed places draw people into productive employment, raising the overall effective national labor supply and economic output.”
For these reasons, he adds: “A good job in one’s home community therefore can be more valuable than a good job somewhere else.” The problem is that current place-based policies are overwhelmingly dominated by the use of tax incentives to lure businesses from one state or community to another—policies that, more often than not, are politically motivated, wasteful, and highly ineffective. Bartik shows that such tax incentives account for about 80 percent of all the resources devoted to place-based policies.
These tax incentives go overwhelmingly to large established firms—think Amazon HQ2 or Foxconn—that do not need them. They do not target high-value, high-growth, or locally-rooted firms. Nor do these tax incentives target distressed communities—more affluent states are as aggressive in providing incentives as more distressed states, and within states, there is little effective targeting of incentives on distressed communities.
Good place-based policies that bring jobs to people are the bread and butter of state and local economic development. They must be crafted in ways that actually help improve the economies of distressed communities, create better paying jobs for their workers, and generate meaningful economic and social opportunity for families and children that live in them. That means curtailing excessive incentives and focusing on policies that work.
Instead of offering incentive packages to big firms, cities and states should favor improving the mix of business services and business inputs to locally-rooted small and medium-sized firms. This should entail policies like helping local startups and startup ecosystems, skill development, technology transfer, and providing education and training programs that bolster the local workforce and connect workers to local firms. As Bartik notes, such policies are five to ten times more cost-effective than incentives in creating local jobs.
An effective strategy for revitalizing distressed communities can’t be a set of politically-motivated one-off policies, it must take the form of a long-term package of complementary polices attuned to local economic conditions. Bartik believes that it should be subject to ongoing revaluation and recalibration and it may well cost less than the current wasteful policy dominated by incentives.
Bartik offers two key suggestions for federal policy. One is for the federal government to help curb the current wasteful inter-state competition over incentives, most of which would be illegal in the European Union. Here, he suggests imposing a federal “incentive tax” as high as 100 percent on big incentive packages to large firms, those with more than 10,000 employees. Bartik sees this as more economically, administratively, and politically feasible than an outright ban on all incentives.
His second suggestion is for a more integrated and comprehensive block grant approach for distressed places aimed at providing needed assistance for job training, skill development, business services, local cluster development, infrastructure and other programs that do work to bolster distressed places. That of course will most likely have to wait for a new administration.