It’s time to put work and place back at the center of economic policymaking
The “left-behinds” are in revolt, and it’s about time. Too many Western economies have worked for too few for too long. The surprise Brexit vote was likely only the first knell of a major reckoning. The economic development model of the early 21st century — global integration combined with knowledge- and technology-led growth — has failed on its promise to usher in an era of unprecedented common prosperity. Its failure is only now becoming apparent, obscured first by the credit-fueled boom of the 2000s and then by the dislocations of the Great Recession. Troublingly, the model is now at risk of being thrown out altogether for its shortcomings before being given the chance to improve from within. In order to ward off the materializing specter of a President Trump and buy time to try to fix the globally-integrated economic order that has underpinned three-quarters a century of peace and prosperity, establishment policymakers must first convince voters that they have been heard and then prove that our institutions still have the capacity to generate and implement big ideas, fast. To do that, policymakers are going to have to think outside of the orthodox.
What went wrong
The model fell short because it rested on a few critical but faulty assumptions. For several decades now, the frameworks informing economic policy have treated individuals as consumers first and workers second. In no realm is this truer than trade policy. It’s increasingly clear that individuals view things the other way around, however. The modern economy’s failure is not in providing abundance for consumption, which it does quite well. Rather, its failure is in providing meaning, specifically meaning through work. And it has failed in a geographically uneven manner.
It turns out that the manufacturing sector had a unique — and uniquely democratic — economic geography. The manufacturer’s balancing act of minimizing costs, maximizing productivity, and optimizing location resulted in an extremely distributed settlement pattern where some places did many different things, others many related things, and yet more one particular thing. The manufacturing era produced diversified metropolises, specialized industry clusters, and company towns scattered all across the landscape. Manufacturing populated the map of the United States, and every place on that map had a clearly-identifiable purpose.
The service-dominated knowledge economy — at least how it has developed thus far — has a very different and far more exclusive geography. Rather than sprouting in the same places where manufacturing once stood, high-end services and knowledge- and technology-based industries are clustering to an unprecedented extent in the largest, densest, most connected places with the highest concentration of educated talent. Knowledge industries appear almost impervious to the cost of land and labor in the new economy’s new hubs. In a reversal of standard economic logic, the most expensive locales have become the fastest growing. In the manufacturing era they would have propelled economic activity out of themselves in search of lower costs; in the knowledge era, they are absorbing more and more activity as profitability and productivity depend on proximity to the right people, the right competitors, and the right collaborators. What’s driving the economy forward is pulling our politics apart.
Long before it became apparent that the knowledge economy was bypassing much of the country, many manufacturing-oriented regional industry bases began to erode. Some of this was due to automation, some to the sector’s migration to the South, and yes, some to trade as well. In fact, new research shows that trade with China artificially hastened manufacturing’s decline, making the losers from the open, integrated economic model of the past few decades more numerous and worse off than originally anticipated. As businesses and middle-class jobs disappeared from community after community and only Dollar Generals opened in their place, people were told to be patient, celebrate the market’s magic, and rejoice in the choice delivered by trade. But as places lost their economic meaning, the people within them did too.
How to fix it
The challenge for policymakers is how to reconcile the geography of the past with the economy of the future. The answer is to find economic meaning again for people outside of major metropolitan hubs.
The most popular idea in the econo-blogosphere right now is to unshackle people from their places. Free them to move to opportunity in a great tech-fueled migration to the metropolises of the future. If only more people could afford to live in Cambridge or Brooklyn, or if only DC didn’t have its height restrictions, Trump’s allure would dissipate on the breeze as the disaffected masses rushed to thriving cities. It’s true that high cost, high productivity, high wage cities are experiencing a crisis in affordable housing, which effectively locks out would-be migrants from lower-cost markets. But the political problem facing the United States today is not that Trump’s America is clamoring at the gates of San Francisco to snag an affordable condo in the Castro, just as “let us make London even stronger” was hardly the Brexiteers’ rallying cry.
Most people don’t want to move to opportunity; they want opportunity to move to them. They want economic opportunity in their hometowns. And they’re going to have to be met at least halfway. To argue that the solutions to the West’s malaise are to be found in bolstering its winners is to fundamentally misread some extremely clear political signals. Kevin Plank, the CEO of UnderArmor who has taken a personal interest in redeveloping Baltimore, provided an astute observation in a recent interview that it is human nature to wish to see the place you live succeed. More places must become winners if our politics are to stabilize, and achieving that will require targeted interventions in the economy.
Balance in a country’s economic geography is especially important in a federalist system with distributed political power, such as the United States. In such a system, when the people and places on the losing side of economic change outnumber the winners, they will wield disproportionate political power. In only 13 states did the majority of a population live in a county that spawned new businesses as quickly as the national economy from 2010 to 2014. That means that nearly three-quarters of the seats in the U.S. Senate represent places falling behind. While wages remained stagnant for most Americans during the recovery, the nine counties of the Bay Area amassed 10 percent of all new worker earnings nationwide from 2010 to 2014, with only 2 percent of the country’s workforce. Such imbalances are and ought to be politically unsustainable.
What’s to be done? To some extent, globalization hasn’t gone far enough. The promises and opportunities of globalization have failed to reach the places where its costs have been felt most painfully. Too many people do not see themselves in the integrated, cosmopolitan, and prosperous future that those who live in great global cities hold so dear. Connectivity needs to be bolstered — air being the most critical. In the United States, where a single airline can determine the economic fate of a city, re-energizing competition policy is an absolute imperative. A massive infrastructure building campaign would not only create immediate job opportunities for the millions of construction and manufacturing workers who remain displaced even seven years after the recession, but it would also tie a splintering country closer together and render the “left behind” places less remote. To take some of the poison out of today’s populist discourse, cross-cultural exchanges should be more common too — study abroad should reach into high schools and vocational schools, rather than remain a luxury for the college-educated. Foreigners must become less foreign, globalization must become more tangible, and empathy for immigrants must rise.
Over the long term, nothing will be more important than providing everyone with the skills and training they need to thrive. The United States remains abundant in both high- and low-skilled labor, explaining why globalization has led to such divergent outcomes — high-skilled workers riding high on the country’s comparative advantages internationally, with low-skilled workers forced to compete directly with China and other lower cost locales. The economy has transitioned to a knowledge-based one faster than the labor force has, and the labor force must catch up. Doing so will enable more regions to offer deep pools of talent to new firms and emerging industries and enable more people and more places to leverage the country’s natural comparative advantages in the global marketplace.
Economic activity may also be unnaturally concentrated at present — the result of market failures and information asymmetries — and the geographic patterns we observe today may not actually reflect the new economy’s natural equilibrium. In an economy that runs on information, filtering it and disseminating the most salient pieces is critical. There may be room for public policy to improve information about investment opportunities outside of favored locales. Federal incentives to channel economic activity into places needing it most may be less costly than supporting workless people and places via the social safety net. Visas or vouchers to repopulate and reinvigorate dying towns may be cost-effective too; after all, our cities are assets — the sunk investments of prior generations — looking for productive use.
The economy has grown increasingly dominated by larger firms over the past several decades too. The concentration of economic activity across firms reinforces geographic concentration — fewer, larger companies implies fewer physical locations, thanks to economies of scale — and also mutes competition, making it harder for new firms to pop up in any location. The policy response to this dynamic is more difficult to prescribe. Anti-trust enforcement clearly must be boosted. Large firms should be subjected to increased scrutiny when they attempt to buy up potential future competitors. When acquisitions do occur, companies should be encouraged to keep operations local rather than centralize them back in HQ. Many second-tier places still produce innovative and entrepreneurial new companies, only to see them acquired and uprooted by a dominant player in the market.
Many other ideas need to be added to the toolkit — some far more innovative and faster-acting than those proposed here. Interventions should be as market-based as possible, but some intrusive ones may be necessary to save the liberal society and world order we have built from those who wish to dismantle it altogether. Anyone with a stake in the future needs to make sure that the next era of American economic policymaking is dedicated towards the rise of the rest.
Had the last few decades of economic policy been crafted with workers in mind instead of consumers, the transition to an open, connected, knowledge-driven economy would have been less disruptive. Work — prideful, plentiful work, in hometowns — rather than material concerns turns out to have been the American Dream’s anchor. The country needs to adopt an economic development model that puts work and place back on center stage. And the country needs to bring political economy back into economic policymaking. A democratic system in which the majority does not benefit from the reigning economic order cannot be expected to remain stable for long. The goal of economic policymaking in a democracy is to generate the highest standards of living for the greatest number of people. Our institutions need to reorient back around this guiding principle, and fast.
Disclaimer: The opinions expressed here are the author’s alone and do not reflect the views of his employer.
Kenan Fikri is manager for research and policy development at the Economic Innovation Group and formerly an associate fellow at the Metropolitan Policy Program at Brookings and a consultant for the World Bank.