How Would I Fix the Rust Belt?

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A commenter asks,

As libertarian economist, what do you recommend for WWC [white working class] in the Rust Belt. Paul Krugman is right the jobs in these areas aren’t coming back no matter what happens to China. And it is really hard to solidify a culture without private investment. (And no David Brooks Sullivan Travels nonsense is not the answer.) Do we teach these kids to work hard to basically get the hell out like the urban inner cities of the 1980s?

1. I could dodge the question, and say that as a libertarian I leave it up to the WWC in the rust belt to figure it out.

2. How are all those programs to alleviate African-American urban poverty workin’ out for ya?

3. I think that what the Federal government does poorly is administer programs at a national level–see (2). What it does well is hand out money. So here is what I would recommend:

First, come up with some criteria for determining a low-income geographic region. Something like the bottom 20 percent of counties in terms of median income. (County is not the right geographic unit, but you get what I mean.) Hand over some Federal tax money to the governmental units in those regions. In addition, give a very large subsidy to any organization that builds a new facility that employs at least 1000 people in one of those regions or which relocates a facility from a high-income region to one of those regions. Even if the facility does not hire from the local community itself, the multiplier effects should be favorable.

40 thoughts on “How Would I Fix the Rust Belt?”

  1. If you really care about those geographies, and our electoral system seems to indicate we must, maybe free them from employment taxes for a while? I think the goal would to be to make cost of living there as low as it is in other countries, as opposed to layering them with the overhead costs of highly developed economies on the coasts.

    The SBA already has identified a bunch of zones, although it seems overly political as opposed to a simple formula. That’s only an advantage in some government contracts though.
    https://www.sba.gov/contracting/government-contracting-programs/hubzone-program/hubzone-maps

    • I’m not a Keynesian, but there are some things that have to be somewhere, military bases for example, that can and maybe should be able to be anywhere. Why not depressed areas? I’m not making specific recommendations, but why not ask these type questions?

  2. Subsidies to geographically redistribute employment seems like an emerging policy meme. “Regional inequality” has been getting less attention than racial or income inequality.

    A paranoid republican would nevertheless insist on as many ‘local’ hires as possible, lest the more creative and clever progressives use the program to move Democrats from deep blue places to swing states.

  3. “In addition, give a very large subsidy to any organization that builds a new facility that employs at least 1000 people in one of those regions or which relocates a facility from a high-income region to one of those regions.”

    An organization such as the federal government? Maybe it could subsidize itself and move some operations to the hills of Kentucky or West Virginia.

  4. 2. How are all those programs to alleviate African-American urban poverty workin’ out for ya?

    Well, whatever happened to the Blue State inner city ghetteos starting in 1990 seems to have worked in the long run. Crime has dropped 70% over that period in Compton California which was the gang violence capital of the nation in 1990. Look at Oakland, CA historical crime rates! And there was nobody in 1990 that was saying this historic crime was just beginning and we were entering a golden age of lower crime. (In fact nobody accepts this as true even today!)

    Was lead paint, NWA gangsta rap, legal abortion, gang violence exhaustion, desire not to use drugs, Rodney King? (It probably was not an increase in church attendance) Or just the young citizens learned that their life was either gang violence or getting an education? One strange aspect of modern life is we can’t explain this success but it seems like we can’t believe either.

    Why does this matter? The election was won by Trump because he won the majority of these WWC voters that REALLY want the economy and culture of old while these voters have a weird short term electoral college advantage. Remember Trump (2016) got less votes than Romney (2012) against a weaker candidate.

    • Or just the young citizens learned that their life was either gang violence or getting an education?

      Has educational attainment increased in any correlated proportion to the decline in violent crime? My understanding is that inner-city improvements are largely a product of gentrification processes that push lower-income persons into more sparsely-populated suburban communities, not that the same populations that lived in inner-cities 20 years ago have suddenly taken off.

      • While long term I agree with the gentrification narrative of The Simpsons gag line “Our prices discriminate so we don’t have to” long term, there are some missing links in the argument:

        1) The crime drop started in 1990 and the gentrification process really did not start until 1997ish. SoCal which was hit by a fairly big recession in the from 1991 to 1994.
        2) Almost all of California population growth has been minority populations the last 25 years.
        3) I suspect some of the gentrification processes not only changes the new citizens but the interest of old residents. Your priorities change with more economic resources to protect.
        4) If it were mostly the gentrification process doesn’t that completely counter-act the we need cultural changes? It appears it is all economic improvements were the main change here. Then the conservative arguments of church going and marriage should be ignored completely. So we should completely ignore the writing of Charles Murray and Ross Douthat because it is all economics anyway.

    • I can’t speak to most of that, but in Compton and other parts of south central LA it is mostly hispanic now, not american black. I expect that has something to do with the crime rates.

      • Why can’t people believe the (African-Americans) residents of Compton improved their lives? Considering the issues of the WWC in West Virigina, we have examples of terrible ghettos that did decrease crime by 70%, less drug use and improved their lives. Maybe, we can bring those ideas to the Rust Belt.

        Also, no wonder African-Americans believe there is racism in the US. When we discuss the improvement of their communities, nobody gives the African-American residents any credit on these comment.

  5. Maybe Woolf is on to something. Increase telework, and gut DC?

    Meanwhile… you can make people happier for free by letting them have more local control within the communities at the county and town level.

  6. It’s so fashionable to think and to say “those jobs aren’t coming back.” Why? Of course THOSE jobs aren’t coming back, but the implication that we can’t change the fixed cost of employment is just nonsense. Obama certainly increased it.

  7. From a PSST perspective, the problem here is that re-specialization is costly and time-consuming, right? That suggests that the more we can lower that cost, the less painful the pattern-formation process will be. So wouldn’t a good PSST-driven action set involve things like investments in current-economy basic skills (e.g., computer literacy, service skills) as well as research into how to effectively teach adults new skills? How about a Friedman-esque voucher system for adult education?

    • I suspect you have the problem right but I also suspect education lags specialization. Education programs are really placation. You still need an actual remedy. I suspect that is making the cost of entrepreneurship as close to the actual cost as possible. No insurance mandates, unemployment coverage (it’s a “startup dummy!”), liability, etc.

    • It is easy. Lots of people have relocated. The Pittsburgh Diaspora is a thing.

      Those that are unable to relocate – due to age, temperament, mental illness, or whatever – are still there. Being unable to relocate is highly correlated with a lot of other social ills. If all the go-getters, the educatable, and entrepreneurial leave, you are left with a concentration of the dregs of human capitol.

      That’s whats happened is a lot of cases. I lived in the rust belt, and my facebook feed illustrates this pretty well. All of the drug addled fuckups I knew in high school still live within 50 miles of my old high school. All of the smart, social kids I knew have spread out over the US. They didn’t stick around to goose aggregate statistics, so there’s a strong selection bias in the aggregate statistics.

      Which is a long way of saying that building an office park next to some drug addled fuckups isn’t going to turn them into productive workers.

      • Does that mean that the people still there are the kind of fuckups who will fail at life no matter where they are? What is the problem then, if they stay segregated from the rest of society?

  10. n addition, give a very large subsidy to any organization that builds a new facility that employs at least 1000 people in one of those regions or which relocates a facility from a high-income region to one of those regions. Even if the facility does not hire from the local community itself, the multiplier effects should be favorable.

    Alternatively, could this facility get the right labor supply? Why would good workers move to these areas? One interesting experiment is the state tax rates in Red states have really fallen while Blue states remain high. However, outside of energy states (TX,OK,ND,SD) most red states growth has lagged blue states growth and employment. MN is a higher tax rate than Scott Walker WI but MN is growing faster. (And I suspect the size and growth of Texas is blocking other red states because they have the right labor supply.)

    • “However, outside of energy states (TX,OK,ND,SD) most red states growth has lagged blue states growth and employment.”
      Really? I’m curious to know where you get that.

      https://en.wikipedia.org/wiki/List_of_U.S._states_by_economic_growth_rate

      Sorting 2010-2013 by per capita GDP growth, of the top 24 states (above national average) I count 5 voting for Clinton (compared to 19 out of 50 in total), and not the most populous ones. And that’s not accounting for costs of living, which are increasing faster in urban ‘blue state’ areas.

      For unemployment, there doesn’t appear to be a decided trend one way or the other.

      https://en.wikipedia.org/wiki/List_of_U.S._states_by_economic_growth_rate

      10 out of the lowest 26 are blue, but both NY and California are in the higher 24. And again, this isn’t taking into account other factors like the fact that there is significant net intranational migration from blue states to red states (e.g., unemployed blue staters moving to red states to find work).

      So I don’t see where you’re getting this trend.

  11. I’m not a libertarian, but I strongly endorse your first instincts on the issue. We should leave it to the individuals to decide. To the extent we do anything it should first be aimed at eliminating institutional barriers to individual adaptation. This includes fewer regulations, building limits in coastal areas, elimination of rent seeking “licenses”, and reduction of other unfair institutional privileges.

    The problem with some of the other solutions being recommended — such as incentives to build production facilities in one rust belt area — are the unintended consequences. Growth in one area may very well come at even more decay in the ten neighboring decay areas. We are likely just squeezing the Pillsbury dough boy and causing unseen problems elsewhere.

    If the decentralized actions of hundreds of millions of people reveals that some areas are stagnating or decaying, then the complex adaptive system is sending both a signal and an incentive to get the hell out NOW! Maybe we should allow the system to adapt, and stop thinking that we are smarter than something we can’t even comprehend.

  12. Why not focus on micro-enterprise? (relocation incentives can be a mere shell game)

    One can run a start-up services business on a smartphone (think “Uber of X” business model). Cloud platforms for business services can be purchased by single seat and provide individuals with enterprise quality backoffice services. Teaching individuals how to turn a business concept into an offering and a plan can be highly motivating, and as a benefit to a local economy, it can be emergent and highly resilient. I suspect that an effective program could be based on start-up workshops and business case competitions and become viral. Local businesses might be just as keen as governments to run such programs.

    There is another negative side to encouraging underperforming groups to chase corporate roles. Smart contracts (think Ethereum) have the potential to create an enormous shakeout of back-office roles. As Kling has eloquently emphasized, organizational capital makes up most of the roles in large organizations (as a management consultant I found that customer value-added roles only make up on average about 1 in 5). This PSST problem may be in its infancy.

    The only guarantee of liberty is profit. I think libertarians can do a better job of emphasizing that one should choose liberty to achieve personal responsibility. Being responsible for your own successes and failures is the antidote to the oppressor-oppressed narrative.

    • One can run a start-up services business on a smartphone (think “Uber of X” business model).

      Then why has this not happened especially the last eight years? Or 15 years? This stuff is not new and these communities are collapsing because of ‘Jon Galts” or ‘J D Vance’ are getting the heck out. And one of the strangest aspects of tech growth is how much it is still center in Northern California despite the potential for other cities. (Add point most ‘Uber of X’ business models are failing a lot and even Uber is losing over a $1B per year at this point.)

      • I suspect one reason is because in places like Detroit they have evolved all these frictions based on being the industrial centers of the past. They worked because of all the surplus. Now that they lost the surplus they are just frictions and costs. So, they are treating new firms as if they were highly profitable cash cow legacy enterprises. Or, rather I have no idea if that is the case or not, but I’d act like it is.

      • I just saw one quote (from McKinsey) that 162 million people in Europe and the United States—or 20 to 30 percent of the working-age population—engage in some form of independent work. My emphasis is on both “Uber” and “X,” the X being a common platform for any service vs a dedicated platform for one driver service. The point is that the platforms and awareness have improved dramatically in the last 2 years, vs 8 or 15, and that a bottom-up model is far superior to top-down.

    • I agree with the spirit of what you say, but regulatory burdens are not insignificant in some rust belt states. Again, occupational licensing laws, financial regulation, building restrictions, labor laws, etc. all get in the way. Now, it may not be as bad as it is in California, but the rust belt doesn’t have the luxury of a booming tourist industry and great weather to offset its problems.

      Easing the regulatory burden, imo, is central to improving the rust belt’s performance.

  14. Where have you been? It has been fixed. Trump is now soon to be president. (And all the false propaganda I have had to endure will soon be replaced with new false propaganda about how terrific everything is. Some things really are that simple.)

    • Again, why were the Carrier jobs ther to save?

      They should have been outsourced 20 years ago, right?

      • In fact, at equilibrium they never existed in the first place, so we haven’t lost anything!

  15. “In addition, give a very large subsidy to any organization that builds a new facility that employs at least 1000 people in one of those regions or which relocates a facility from a high-income region to one of those regions. Even if the facility does not hire from the local community itself, the multiplier effects should be favorable.”

    If preserving 1000 jobs = attracting 1000 jobs (seems reasonable), this seems to recommend more Carrier deals.

    • Belive me, my big league not being influenced by such deals is tremendous, believe me.

      But it happened, which means it is possible.

  16. Relaxing occupational licensing laws and modifying the regulatory regimes in rust belt states to make them more business friendly (lower property taxes would help, and fewer building restrictions too) would go a long way I think in restoring things. So too would reducing the power of unions. Better to have more lower paying jobs than fewer higher paying jobs. The focus, I think, should be on getting rid of building and housing and other regulations that drive up costs of living while easing barriers to entry (so new businesses can more easily form) and occupational licensing/union influence so as to allow for a more functional labor market.

    In the end, even these will not fully restore the midwest to past economic glory. The reality though it that the extent to which the rust belt’s lagging behind is a problem is overstated. It’s a (comparatively, at least) shrinking region. People who can find opportunity else where often leave, and many who can’t find it there probably couldn’t find it if they left too. In other words, does it really matter if America’s underclass is becoming increasingly geographically concentrated, if it’s also becoming smaller? The latter point is what matters most.

  17. Hi Arnold,

    Do you want to reconsider Morgan Warstler’s guaranteed income/wage subsidy plan in the light of the problems that are being considered now? The plan seems to have the right incentives.

    My additional suggestions

    A revenue neutral tax shift to land value taxation will make low income high potential areas attractive. There is no need to play the game of thresholds. (I see two – definition of low income and employing 1000 people in your suggestion)

    Instead of single person movements, one might coordinate, groupon like, a group of people moving into a new place. There could be a verified social network setup with potential movers talking to current residents and other potential movers with that explicit purpose. If a group chooses to move, they will have a decent part of their initial frictions taken care of. They will know people in the town when they move in.

    Making the minimum wage dependent on the cost of a 2/3 bedroom house in a county will also be an interesting rule. (To be pedantic, making the minimum wage a monotonically increasing function of the cost of a house in a county) Counties that encourage low cost housing will also get the benefit of cheap labour. The SF’s and the Seattle’s will get their minimum wage increases and Detroit will get its natural incentive.

    A more general rule of the above could be that the federal register itself is equally divided into rules that are marked as red, amber and green lets say. Rules marked as red are rules everyone has to follow. Those marked as amber are rules that counties with below 33 percentile income are exempt. Those marked as green are rules that counties with 66 percentile below are exempt. New rules coming into the register could come in at any category and periodic rebalancing could be done.

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