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Why we need to focus more on place-based policies

Why we need to focus more on place-based policies

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International trade theory teaches us that relative to no trade, free trade between nations makes them better off. Recent research tells us that the overall gains to the U.S. from trade with China are positive but small. Even so, trade with China has given rise to a significant economic shock involving massive job losses and declines in human welfare in several regions within the U.S.

Even though the shock or the surge in manufacturing has now ended, its effects in the U.S. have endured. Commuting zones — one way of describing local economies — that were exposed to import competition from China account for a large share of net manufacturing job losses. Specifically, the U.S. economy lost 1.5 million manufacturing jobs between 1980 and 2000 and 5 million more between 2000 and 2017. This fall in manufacturing employment was not accompanied with offsetting job gains in other sectors. Therefore, trade-exposed commuting zones saw substantial declines in total wage and salaried employment. In addition, these job losses and declines have not resulted in any noteworthy outmigration from economically depressed commuting zones.

So a full decade after the conclusion of the China trade shock in 2010, we are left with a large number of commuting zones in which American workers have lost their jobs, their earnings, their ability to get married but they continue to live where they once worked. This has led to declines in the demand for local goods and services, housing values, and property tax revenues. Concurrently, there has been an increase in the receipt of government transfer payments including Social Security and Medicaid.

Economists generally back “people-based” over “place-based” policies. The logic is that it is more important to invest in mobile workers rather than bolster a place where workers live. Economists contend that directing public funds to regions doing poorly is akin to squandering resources.

The best-known “people-based” government program that assists workers displaced by trade competition is the Trade Adjustment Assistance (TAA) program. This program helps workers displaced by international trade with job training and relocation assistance, subsidized health insurance, and extended unemployment benefits. The program is “people-based” because it invests in workers. Relative to the magnitude of the job losses, the TAA program is too small and hence provides too little relief to most workers who lost their jobs because of import competition in the 1990s and 2000s.

Even though economists favor “people-based policies,” the evidence shows that those laid off because of import competition from China frequently don’t move because of unaffordable housing, childcare costs, and the uncertainties associated with finding a new job and moving to a new place. As a result, the left-behind people live in left-behind places.

That said, left-behind places never completely die. Instead, in such places, fewer people get married, fewer have children, more children live in poverty, and young men are less likely to graduate from college. This insalubrious situation has led to skyrocketing suicides and rising deaths from alcohol and drug poisoning that the economist Anne Case and the Nobel laureate Angus Deaton have called “deaths of despair.”

Therefore, a rethinking of economic policy is now needed in the U.S. to focus on two key points: the need to provide adequate assistance to workers in “mass-layoff events” and to recognize that this assistance, frequently, will need to be place-based.

In addition to this “loss from trade” based justification for place-based policies, there are at least three other reasons for wanting to reconsider place-based policies. First, in some circumstances, bringing in more people or firms into a region increases the productivity of other persons or firms in that region but those deciding to move to that location don’t capture these gains. Therefore, it may make sense to subsidize in-migration or growth with the aim of bringing private returns closer to the social returns.

Second, when individuals possessing human capital work with each other in close proximity, this physical closeness can raise everyone’s human capital and increase firm productivity because knowledge is easily shared and this can lead to the quicker adoption of innovations. The presence of such “knowledge spillovers” can provide a rationale for local policymakers to attract skilled workers to a particular region.

Finally, the lower employment rate of disadvantaged minorities in many urban cores stems from there being fewer jobs per worker in these cores. This can happen because of what economists call the “exit of jobs” from these cores when the underlying industrial structure changes. The “fewer jobs” phenomenon can endure because of residential segregation that arises because of discrimination in housing markets. As a result, government policy may be needed to get disadvantaged minorities out of an undesirable equilibrium in which they otherwise might be trapped.

Batabyal is the Arthur J. Gosnell professor of economics at the Rochester Institute of Technology but these views are his own.