This post is part of a symposium on the LPE of Rural America.
For a long time, regional inequality in the United States was on the decline. Between World War II and 1980, poorer places throughout the United States gained ground on richer ones, creating an era of geographic convergence. As growth was spread across the country, regions gradually became more economically equal. Consider just one example: In 1940, residents in Mississippi earned merely 26 percent of what Massachusetts residents made. By 1979, however, the state had witnessed significant economic gains, and its residents earned nearly 70 percent as much as their East Coast counterparts.
The past forty years tell a different story. For decades now, we have been in an era of geographic divergence, with “superstar” cities and certain regions capturing growth, while others fall behind. The consequences of this rising inequality have been well-documented. Areas that have suffered economically have higher rates of health problems and have suffered from calamitous numbers of “deaths of despair.” As more people try to move to fewer thriving places, we see unaffordable housing in some cities, and an erosion of the tax base in others. Politically, geographic inequality is undermining the representativeness of both the Senate and electoral college, as shrinking rural states wield outsized power over national policy. National security and resilience is implicated too. Concentration into a small number of cities means that an attack on one city or an extreme weather event could wreak havoc on the entire country—or even entire world.
The causes of widening geographic inequality are less well understood. Dominant explanations focus largely on inexorable economic forces. In particular, economists refer to “agglomeration” effects, by which they mean that there are benefits to co-locating. Even if higher housing and labor costs in a “hot” area should push businesses to move elsewhere in search of cheaper inputs (that’s the economic convergence story), it might be better to have a large talent pool of specialized workers in, say, tech or health care. Concentration therefore has benefits.
In a recent paper, we argue that such explanations leave out a critical factor: the effects of specific regulatory choices on economic geography. As we show, from the Progressive and New Deal Eras through roughly the 1970s, the United States had a system of structural regulation in network, platform, and utility (NPU) sectors—transportation, energy, communications, and banking. In these areas, the regulatory system was designed in a manner that dispersed economic activity. Aggressive antitrust enforcement and trade policies also contributed to the era of geographic economic convergence. Deregulation, we suggest, naturally had the opposite effect: it concentrated economic activity and growth.
Consider some examples. First, during the mid-20th century, the airline industry was structurally regulated. The Civil Aeronautics Board allocated routes to different airlines and set prices through a system of “equal rates for equal miles.” Distance, not demand, drove pricing under this model, which approached air travel more like a public utility than a competitive market. Under this system, big carriers were allocated some high-demand routes between big cities, and some less-profitable routes between smaller cities. But the result was to ensure that a large number of mid-sized and small sized cities got air service.
In the past 40 years since airline deregulation, airlines have predictably dropped routes to smaller and mid-sized cities, instead focusing on the most profitable routes. They’ve also moved from a point-to-point system to a hub-and-spokes system, concentrating flights in a small number of “fortress hubs,” and in the process massively reducing the number of flights from many cities—places like St. Louis and Cincinnati. The result is, of course, a disaster for cities that lose air service. Who wants to run a Fortune 500 company or host an annual convention in a city that doesn’t have frequent flights to a large number of destinations? Small and mid-sized cities, and their regions, suffer as a result. There is a similar story to tell about the deregulation of trains and buses, leaving more places cut off from transportation networks.
Or consider banking. In the middle of the 20th century, the banking laws promoted diffusion. Banks were not allowed to branch across state lines; in some cases, even intrastate branching was largely curtailed. The result was that there were thousands of small banks around the country, and no truly gigantic megabanks. This dispersed economic power and wealth. The bank owner might have been one of the richest people in town, but earned nothing like the CEO of today’s goliath Bank of America. Mid-level bank managers and staff provided a strong upper middle class. But with a single national headquarters and many branches, today’s banks need fewer such managers—and they are concentrated in a smaller number of places.
Antitrust provides another pathway for geographic diffusion. Vigorous enforcement of antitrust laws, along with an antitrust philosophy that focused on the structure of industry—not just on consumer prices—also dispersed economic activity. Rather than the behemoth monopolies or oligopolies we have today in sector after sector, many smaller firms could compete. This, in turn, meant that in any given city, you’d have more small and mid-sized business owners and mid-level employees. With the shift to the Chicago School’s consumer welfare approach to antitrust, the economy has become significantly more concentrated. The natural result is that wealth and economic power concentrate as well—in the cities where those firms are headquartered.
In the trade context, as David Autor, David Dorn, and Gordon Hanson have shown, with rising import competition from China, regions that lost out on producing those goods saw higher unemployment, lower wages, and more reliance on safety net programs. These dynamics affected not only the manufacturing sector but the entire community—and wages and employment rates remained depressed even a decade later. This result makes perfect sense, even though economists didn’t predict it. Losing an anchor manufacturing business can devastate the entire community—including shops and restaurants—just as getting an anchor business can spur a more vibrant community economically. Moreover, manufacturing isn’t distributed evenly across the country. Of course, some areas were going to be hit harder than others. Policy choices mattered here too.
We do not pretend that the mid-twentieth-century regulatory order was perfect; far from it. Nor do we advocate any kind of wholesale return to the regulatory models of the past. We do, however, think that any discussion of the decline of rural America must attend to these policy choices. To revitalize rural America, we need to learn from the history of regulation and deregulation—and make regulatory choices that help more of the country thrive.