Two Ways to Improve the SOAR Blueprint

Earlier this week, I wrote about the problems facing the Ashland-Huntington metro area. Then, just this week, I ran across an interesting piece of news: the Save Our Appalachian Region (SOAR) project had published its “Blueprint” for promoting growth in Appalachia. SOAR is a valuable project: it’s a huge, collaborative organization involving private firms, government, nonprofits, individual citizens, really the whole of society getting together and working to find solutions to promote growth in Appalachia. It’s an excellent project, and I suspect, regardless of its final product, the connections created and conversations started will be productive and useful for some communities.

And the blueprint they produced is, by and large, pretty good. It limits itself to goals that can actually be accomplished, and then from there prioritizes the most high-impact or feasible ones. They generally avoid some of the most wasteful ideas like “build tons of new roads” or “give us even more tax credits,” and offer a range of suggestions, the worst of which are innocuous, while the best are very likely to actually make a real, positive difference. Proposals like reclaiming Appalachia’s many beautiful but abandoned buildings and refurbishing them into usable spaces are good. Building infrastructure that enables collaborative work, remote work, digital services, etc is also a valuable project. Better internet access may indeed help local businesses. Public and private investment in and collaboration with blossoming knowledge, tourism, or creative hubs is also very valuable, and some practical plans are laid out.

So overall, the plan is good. But I want to make two quibbles with it, two places where I think the SOAR collaborants have missed out on a key factor.

First, let’s look at a neat chart they presented:

Source, page 4.

This diagram is less useful than it may seem, and in fact can be deeply misleading. It confuses two basic economic concepts: stocks and flows. Flows are revenues and losses, stocks are assets and liabilities.

Region economic development is driven by the accumulation of productive assets at a faster pace than liabilities. It is actually that simple. When assets grow faster than liabilities, your region gets more prosperous. Assets can grow or shrink for many reasons. Technological change can turn formerly little-used or unknown natural resources into valuable products: for example, oil after cars were invented, or even wind as wind energy becomes more economical. Assets can also vanish for the same reason. Assets can also include physical structures, infrastructure, natural beauty, skills and talents of the population, access or location relative to markets or input-suppliers, etc. Assets can also include actual financial assets: government rainy day funds, local economic elites, philanthropic organizations, etc.

Liabilities, meanwhile, are things like a high density of Superfund sites or other pollution, geographic isolation, poor health among the population, demographic decline, lack of access to key inputs or markets, or, of course, financial liabilities like government indebtedness or pension obligations. Liabilities can also include things like negative perceptions of a culture.

So let’s return to our graph.

Are traded goods assets or liabilities? No! They’re not! However, a high volume of traded-goods activity can lead to asset-accumulation as successful firms reinvest, local elites improve institutions, the socially marginalized are employed and integrated, etc. The benefit of selling goods elsewhere isn’t the profit itself, but the way that profit is invested. Case in point: coal mining! Coal mining profits were not well invested, thus, despite huge flows of revenue and profits, few assets were accumulated, while large liabilities were acquired in the health and environmental side of the ledger.

Simply increasing the volume of trade with the outside world won’t make Appalachia rich. Wealth comes after years of beneficial re-investment in schools, support services, tertiary industries, amenities, and the elimination of liabilities.

In other words, revenue from sales to other places is not “good money” unless it is reinvested in productive assets, or the elimination of costly liabilities.

The model being presented to SOAR is mere mercantilism, a hundreds-of-years-old discredited economic theory.

Mercantilism says prosperity is gained by selling many goods for cash, using little of that cash to buy other goods, and hoarding the remainder. But that’s bogus! Real prosperity comes from selling goods for cash, then using that cash to buy things that will make you more able to sell even more goods in the future. Buying from Wal Mart does not hurt the Appalachian economy, and replacing every dollar of “imports” with local consumption would probably do nothing for the economy, and could even be damaging.

I’m not saying it’s bad to buy local! It’s not! I’m just saying that you can never get to prosperity by suppressing imports.

Plus, the import/export items listed are a bit suspect:

Apparently it’s only good money if you sell physical goods? That’s ridiculous! Here are some other ways to increase “good money”: attract tourists, attract college students, provide legal and financial services, sell to people just passing through, receive remittances, etc. Failure to explicitly target the services sector is a key gap in the SOAR plan. I’m gonna hammer this home in my next point, but for now just keep it in mind.

Meanwhile, we are misled to think that it’s bad for the region to buy imported items. What? That’s ridiculous. What’s bad for the region is that those items are not produced locally at competitive prices. Their availability and purchase is a good thing, as it means people are getting the goods and services they want. You can’t grow by telling people to stop buying curry powder at Wal Mart, or foregoing that essential surgery in Cincinnati. That’s not growth! That’s just worse living standards!

You grow by investing in productive local assets. Upset about imports? Make it yourself! Start a business! Can’t compete? Well then, maybe that business isn’t a good use of your time and money. Find one that is. Appalachia has productive assets to support businesses.

Finally, think about the “local economy.” Is it really “neutral”? I don’t think so. As productive assets increase, more people working in the traded sector will want to consume things like restaurant meals, theater, movies, community life, local schools, etc. These businesses then hire people, who have follow-on consumption. The SOAR report estimates that 1 coal job creates 3.5 other jobs. Well, how? Is it all just support industries for coal? Nope: it’s because those coal miners spend money locally, and then those workers spend their money locally, and so on and so forth.

All that to say: Appalachia should focus on enhancing assets and reducing liabilities. The path to prosperity is not through doubling down on sales of physical goods while suppressing purchases of physical goods from elsewhere.

Now, to be clear, there is such a thing as “bad money” in terms of economic development. For example, it is undeniably bad for a region when they lose financial assets via, say, embezzlement by corrupt officials. It is undeniably “bad money” for a region when a firm pulls out its investments and relocates elsewhere, not because of the flow of cross-border sales, but because this is a loss of an asset, and sometimes the firm leaves behind liabilities in the form of pollution or locals who depend on government for support for years and years afterward.

Likewise, it is undeniably bad for a region when their families liquidate their home equity and savings (assets!), write a check for their net worth, and mail it to Lexington.

The usual word we use for this “bad money” is “tuition.”

Now look, education is extremely valuable and totally worth the money! But Appalachia’s relative paucity of universities results in every generation’s accumulated wealth being stripped away and mailed off to a few hubs. Even eastern KY’s universities tend to be around the Appalachian fringe: Morehead, Richmond, Berea, etc. Pikeville and Williamsburg boast some substantial institutions, but all private, though the recent medical school addition to the University of Pikeville is incredibly encouraging.

I’m not saying Appalachia shouldn’t send its kids to college! I’m saying that the root of the “bad money” wealth transfer is in the fact that all that coal money never turned into large-scale higher educational centers in Appalachia. Lexington, meanwhile, made out like a bandit!

And this is where the SOAR blueprint really misses the mark.

Higher education has two functions: knowledge generation and talent production. Talent production is the one many economic development theoreticians focus on, and it is important. All 5 of SOAR’s objectives focus on talent production: training, career pathways, employer-focus, workforce clusters, etc.

Here’s the problem: the returns to investments in talent production flow almost entirely to students and employers.

Talent production results in well-qualified students… who can take their training anywhere!

And that’s great, for those students! It’s not so great for the community that hoped that workforce training would lift up the local community! Now, true, a large enough talented workforce can help attract employers. But here’s a dirty little secret: the thing that attracts the best employers, the highest-paying employers isn’t talent at all. The best employers can hire talent to go wherever they are located.

No, what the best employers care about, and what actually drives innovation and start-ups and patenting and all the good parts of economic development is knowledge generation.

What do I mean by knowledge generation? Simple! Publication of research. Or something like that.

Companies want access to cutting-edge work in their field. Yes, they want recent graduates and skilled workers, but people can move easier than factories. If they’re building a factory, they want to know they are going to have access to innovative development, on-site researchers, a genuine knowledge cluster. A focus on talent-production can all-too-easily lead to your trainees finding better jobs outside the region: good for them, not so good for the places (and budgets…) they left behind. A focus on knowledge-production, on the other hand, builds enduring assets. What’s needed are research centers, graduate schools, and other knowledge-creating institutions. A place doesn’t become prosperous simply by training its people; it becomes prosperous by creating the ideas and processes in which people around the world will be trained.

Now, to be clear, workforce training is necessary. You can’t go 100% knowledge-production and 0% workforce development. That wouldn’t do much good either.

While workforce training can yield short-run benefits, Appalachia’s real deficit is in advanced-knowledge-production, not worker skill and training.

That’s why things like Pikeville’s Osteopathic School of Medicine are exciting: they’re sites where real knowledge-generation is happening! Ideas can be exported, not just products! No surprise, then, that Pikeville and Williamsburg’s populations have been more resilient than many other towns: they have universities with graduate programs that actually produce new knowledge!

So what am I actually saying?

Well, first of all, we should note that despite the misguided diagram, the SOAR blueprint did not actually call for any kind of reduction in purchases of non-Appalachian goods. And the promotion of Appalachian goods it did call for seemed as much aimed at promoting sales elsewhere or tourism as local consumption, so there’s no need to critique it.

Plus, I’m late to the party. There have been SOAR discussions ongoing for a long time. And I’m not even from the SOAR region! I’m from Jessamine County, living in Washington, DC (booooo!)! What right do I have to interject at this point?

I have no right. I’m not entitled to a comment now. But I love my state, and I want the best for my Appalachian neighbors, friends, and family, so I offer some ideas not to put-down the good work done on SOAR thus far, but rather because, well, it’s an inclusive process intended to produce a major blueprint. All voices are helpful, right?

There are two ways the SOAR blueprint could be tweaked a bit:

1. Prize Knowledge Production- Either add an objective to the 21st century workforce, or consider another component altogether, noting the importance of the SOAR region developing its own vital research clusters that attract top-flight talent and researchers, and produce high-quality publications, patents, innovations, and, ultimately one might hope start-ups. The Pikeville Osteopathic School of Medicine could be highlight as one such example already.
2. Focus on Asset Development- There should be a component looking at next steps: say you add 30,000 jobs. Then what? Is SOAR a permanent employment-brainstorming program? Or is the goal to break Appalachia’s centuries-long deficiency in terms of wages, income, and wealth? If that’s the goal, then we need to have a conversation about investments, big ones. Maybe that’s happening somewhere behind the scenes, maybe I missed some other document, maybe people think we shouldn’t get ahead of ourselves… but personally, I think any effort that’s all “flow” and no “stock” is going to end up an unsustainable disappointment.

Check out my Podcast about the history of American migration.

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I’m a native of Wilmore, Kentucky, a graduate Transylvania University, and also the George Washington University’s Elliott School. My real job is as an economist at USDA’s Foreign Agricultural Service, where I analyze and forecast cotton market conditions. I’m married to a kickass Kentucky woman named Ruth.

My posts are not endorsed by and do not in any way represent the opinions of the United States government or any branch, department, agency, or division of it. My writing represents exclusively my own opinions. I did not receive any financial support or remuneration from any party for this research. More’s the pity.