Blog Post

AEIdeas

What does America look like to an economist? In the new working paper “Jobs for the Heartland: Place-Based Policies in 21st Century America,” Benjamin Austin, Edward Glaeser, and Lawrence Summers neatly outline the problem of “left behind” places in the US economy (bold by me):

We divide the U.S. into three regions: the prosperous coasts, the western heartland and the eastern heartland, divided based on year of statehood. The coasts have high incomes, but the western heartland also benefits from natural resources and high levels of historical education. America’s social problems, including non-employment, disability, opioid-related deaths and rising mortality, are concentrated in America’s eastern heartland, states from Mississippi to Michigan, generally east of the Mississippi and not on the Atlantic coast. The income and employment gaps between the three regions are not converging, but instead seem to be hardening into semi-permanent examples of economic hysteresis.

As the economists note in today’s follow-up New York Times piece, the relative GDP of what they call the “eastern heartland” region would be 50% higher had it grown at the rate of America’s coastal states for the past half century, and more than double had it grown at the rate of the western heartland states.

So next steps? Simple enough. Focus ameliorative policy on the troubled region. But that’s not typically how we do things in the US versus, say, Europe. Policy tries to help poor people rather than poor places. In the European Union, it is just the opposite. And it is along those lines that Austin, Glaeser, and Summers dismiss some commonly proposed place-based ideas such as directing federal activity (there just are not that many federal workers) or infrastructure spending (such projects have a mixed record at encouraging local employment) toward the troubled region.

A better idea, the authors write in the NYT, is for Washington to create a regionally-targeted wage subsidy that would boost workers’ hourly wages, “which would effectively increase the national minimum wage without discouraging employers from creating new jobs.” (When Glaeser has written previously about the wage subsidy idea, he’s suggested a $3 per hour boost.) The main downside highlighted is the cost of the subsidy. On that issue:

The wage subsidy can be lowered in labor markets with low joblessness, and it should be phased out entirely for the prosperous and the long-term employed. The subsidy should be highest for workers who have been jobless for a long period, and for veterans, or for those overcoming a labor market disadvantage.

(I have previously blogged about the general idea here and wrote a New York Times column on it here.)

And on that cost issue, I would refer you to this essay by Glenn Hubbard on novel labor policies, in which he approaches the cost issue differently:

As my Columbia colleague and Nobel laureate Edmund Phelps has observed, the loss of opportunities for work implies more than just lost wages for directly affected individuals. Such loss leads to negative externalities in crime, drug use, high tax rates to fund social assistance, and other ills. Phelps argues that funds to support work could be drawn from amounts saved by reducing negative externalities through low-wage subsidies for employment.

One more thing: Note how the authors — including Summers, a prominent Democratic economist — push back against the idea of a universal basic income as a possible solution:

The fans of programs that accept, and even encourage, joblessness, like universal basic income, seem to forget that human satisfaction doesn’t come primarily from material comfort, but from purpose, a feeling of accomplishment and the social support that often occurs in a work environment. An America in which 40 or 50 percent of adults live without working, relying on the generosity of a federal handout, is a nightmare.

Previous I have pointed out how at least one potential 2020 Democratic presidential candidate has nixed the UBI.