In a polarized age, Boston Fed wrestles with healing a fractured U.S. economy

[October 04, 2019]  By Howard Schneider

BOSTON (Reuters) - For much of the 20th century incomes grew faster in poorer areas of the United States than in richer ones, workers relocated to find the best opportunities, and the benefits of economic growth spread even to the less educated.

Starting in the 1980s that process reversed, and the resulting split in the economy between areas that are succeeding and those that are not "calls out for solutions," Boston Federal Reserve Bank President Eric Rosengren said in opening remarks to be delivered at a research conference here focused on how deep the fracture has become and what to do about it.

"We need to try new policies," Rosengren said. "The gap in income distribution between poorer and richer states is no longer shrinking. ... Migration from poorer to richer states...has slowed. Housing costs in thriving areas have become prohibitive to workers in less prosperous places."

The papers to be presented at the conference, titled "A House Divided," described a U.S. economy whose divisions by income and sense of opportunity may, the researchers suggested, be behind some of the country's political polarization.

In surveying research on "The Geography of Desperation," Carol Graham, research director at the Brookings Institution's Global Economy and Development Program, and University of Maryland doctoral student Sergio Pinto noted that the places where President Donald Trump did better than expected in the 2016 election were also "counties with higher levels of poverty, obesity, deaths due to drugs, alcohol, and suicide, more non-Hispanic whites, individuals on disability or other safety nets, and smokers."

Meanwhile "racially and economically diverse urban and coastal places (were) much more optimistic," they wrote, and had "lower incidences of premature mortality."

The reasons for the divide are complex, the papers prepared for the conference suggested. They include longstanding forces like the globalization of manufacturing, which caused job losses in many Southern and heartland communities without any clear way to recover them.

But some dynamics are only now coming to light, such as the benefits of "agglomeration" for higher skilled workers who gain advantage from proximity to one another, a possible reason why some cities like San Francisco have moved ahead so fast.

The Federal Reserve Bank of Boston's President and CEO Eric S. Rosengren speaks in New York, April 17, 2013. REUTERS/Keith Bedford/File Photo

The research being discussed also suggests that, for lesser skilled workers, the costs associated with moving to those "superstar" locations outstrips the wage premium offered for the jobs they are qualified to do there. Added to population aging and other issues, that is another reason why U.S. workers may have become less mobile.

The lack of mobility itself poses a problem. It means that places with higher than average unemployment or that otherwise lack economic "vitality" tend to stay that way, Katheryn Russ, a professor at the University of California, Davis, and George Washington University professor Jay Shambaugh wrote.

While in the 1970s, a state's unemployment rate in one year was not predictive of its unemployment rate a decade later, unemployment in a given state is now "highly persistent," the two wrote.

"Either a wave of shocks are hitting the same states over and over, or unemployment is not fading back to the national average at the same rate as before. ... The flexibility of the United States labor market seems to have faded sharply," they wrote.

What to do about it?

It could be as obvious as better schools or building the infrastructure needed to develop markets, Russ and Shambaugh suggested. But the problem is so deep, and threatening to worsen, that more dramatic steps may be needed, such as subsidizing jobs in worse-off areas or shaping immigration policies to boost population in places that are in decline.

"There is no magic solution," they concluded.

(Reporting by Howard Schneider; Editing by Leslie Adler)

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