The Economics of Left-Behind Regions
There are doom loops everywhere you look
A few days ago the New York Times had a good piece on how the former East Germany is suffering from a demographic doom loop: Young people, especially educated women, have been moving out. Those left behind are depressed; men, presumably, are frustrated; and they’re angry. One result has been strong support for the neo-Nazi Alternative für Deutschland (AfD), which, of course, has been endorsed by Elon Musk and received support from JD Vance.
The article noted that there have been parallel economic and political trends in other advanced countries, including the United States. Indeed, last fall I wrote a newsletter, “The Political Rage of Left-Behind Regions,” making explicit comparisons between East Germany and West Virginia.
What readers may not know is that while all advanced nations are currently experiencing some version of the kind of regional divergence afflicting East Germany, this is a relatively recent phenomenon. Between the early 20th century and around 1980, the opposite was happening: poorer regions were steadily closing the gap with richer regions.
Then the dynamics reversed. East Germany, America’s eastern heartland, England’s North, rural France, Korea outside Seoul were all to some degree left behind.
Furthermore, we know a fair bit about why this trend reversed (although we don’t have easy answers.) And as it happens, the economics of regional convergence and divergence was one of my research specialties during my academic career.
So I thought I’d devote this weekend’s primer to economic geography. Let’s explore four questions.
1. Why economic activity sometimes clumps together, but sometimes spreads out
2. Why did regions begin converging in the early 20th century? Why did they diverge again in the 1980s?
3. Social and political consequences of being left behind
4. Can anything be done for left-behind regions?
Coming together and pulling apart
It’s not hard to understand the incentives for both people and businesses to move away from densely populated areas. One big reason is that land and housing are expensive in and near big cities. Apartments on Manhattan’s Upper West Side, where I live, cost around $1700 per square foot. That’s about 15 times the price in Wheeling, West Virginia.
The price of land is also an issue for businesses, given the size of sprawling modern factories and office parks. Furthermore, employers can often hire workers at lower wages if they move away from the big cities.
So other things equal you would expect people and jobs to spread out across the landscape. However, other things generally aren’t equal, because there are important advantages to concentrating economic activity in a limited number of places. The Victorian economist Alfred Marshall long ago identified three main reasons for geographical clustering of industry:
A large local market supports firms providing specialized services
A large pool of workers with specialized skills is good both for employers, who can find the workers they need if they expand, and for workers, who can find new jobs if their current employer lays people off
There are what we would now call technological spillovers from personal interaction, but I like Marshall’s version better: “The mysteries of the trade become no mystery, but are, as it were, in the air”
I’d add that areas with dense populations of high earners offer a lot of amenities supported by all that concentrated purchasing power. I’m not just talking about fancy restaurants and boutiques. If you haven’t lived in a densely populated area, you may not realize just how convenient it is to have almost everything you might want just a few minutes away.
So which wins out — the advantages of spreading out or agglomeration economies, the advantages of clumping together? The answer is that there’s always a tension between the two, and sometimes the balance tips one way, sometimes the other. And these tipping points can have huge consequences for the geography of prosperity — and despair.
Convergence and divergence in U.S. history
In the second half of the 19th century, as America industrialized, it also became geographically divided. The growing manufacturing sector was largely concentrated in the Northeast and the inner Midwest; the so-called Manufacturing Belt was substantially richer than the Farm Belt that comprised most of the rest of the nation. And yes, there was political conflict. Those high tariffs that Trump loves favored the manufacturing belt over the heartland; the original populists were farmers suffering from low agricultural prices and high levels of debt.
Regional inequality in America probably peaked in the early 20th century. (Income estimates for those years are more educated guesswork than hard data.) Around 1920 or so there was a tipping point in the opposite direction. There were probably several factors involved. The ability to transport goods by truck made it less important to locate manufacturing at major railroad hubs. Electrification meant replacing old-fashioned multistory mills, with a steam engine in the basement driving crankshafts and pulleys, with sprawling one-story factories in which each machine had its own electric motor — and such factories were best located away from dense urban areas. As small firms grew into large corporations, many moved their production to wherever manufacturing was cheapest; for example, the auto industry, born in Detroit, began opening factories in the South. And telephones probably made it easier to coordinate operations at faraway, low-cost locations, in a preview of the way the internet would facilitate globalization much later.
For all these reasons, there was a period of at least half a century during which income in America’s poorer regions steadily converged on income in richer regions. Here, for example, is the ratio of per capita income in Mississippi, which has consistently been America’s poorest state, to income in Massachusetts, which has always been near the top:
As you can see, Mississippi in 1929 was really backward economically, practically a Third World economy living inside the world’s wealthiest nation. By 1980, however, it had closed much although not all of the gap.
Then the convergence stopped and began going into reverse.
Economists think they know what happened, although few saw it coming. Mainly, we think, the shift away from a manufacturing-based economy to a knowledge-based economy worked to the advantage of metropolitan areas with large numbers of highly educated workers and already existing concentrations of knowledge-intensive businesses, while leaving small towns and less educated regions behind. Only 25.5 percent of Mississippians have college degrees, the second-lowest percentage in the nation (just above West Virginia), compared with 47.8 percent in Massachusetts. Combine that with the Boston area’s concentration of universities and technology companies, and Mississippi’s low wages aren’t the kind of business draw they once were.
Furthermore, numbers on income don’t fully capture the extent to which lagging U.S. regions have fallen behind, in part because poor states receive what amounts to large aid from rich states, because they benefit from Social Security and Medicare while paying relatively little in federal taxes. More telling is the loss of economic opportunity, reflected in large numbers of adults in their prime working years who are not, in fact, working. More on that, and its social consequences, in the next section.
As I said, you can see the same phenomenon of divergence and left-behind regions across the advanced world. For personal reasons, I’ve spent some time in the North of England, and its depressed cities are, well, depressingly familiar. If Germany had been reunified in, say, 1960, East Germany might well have seen rapid convergence with the nation’s west. By the time the wall actually fell, however, advanced economies had entered an era in which regional success or failure tends to be self-reinforcing; East Germany started behind and has never caught up.
And the consequences of being a left-behind region go beyond the purely monetary costs.
The cost of being left behind
If left-behind regions simply offered their residents jobs at lower wages than their counterparts in more successful regions, that would be sad but not tragic. What’s more important is how many working-age adults in left-behind regions don’t have jobs at all.
For a job is more than a source of income; it’s a source of dignity and self-worth. When people in their prime working years — especially, let’s be honest, men in their prime working years — aren’t working, it does a lot of psychological and social damage.
In 2018 Benjamin Austin, Edward Glaeser and Lawrence Summers published a paper titled “Saving the heartland,” which focused on the problem of prime-age men — that is, men 25-54 — without jobs. They produced the following startling map for 2015:
Source: Austin, Glaeser and Summers
In my 2023 newsletter I did a cruder, narrower but slightly more up-to-date comparison of working-age employment in West Virginia and New Jersey:
Source: American Community Survey
A larger proportion of both men and women are not working in WV, but the disparity is bigger for men.
It won’t surprise you to know that regions where many adult men aren’t working are also places where social pathologies, especially “deaths of despair” — deaths from drugs, alcohol or suicide — are high. Here’s a map for 2019-23:
Source: SparkMap
Given these economic and social stresses, it’s not surprising that voters in left-behind regions are angry. It’s a bit more surprising that they channel this anger into votes for political parties whose policy programs would make them even worse off.
This is especially true in the United States. As I noted the other day, West Virginia overwhelmingly votes for Republicans, yet the state is deeply dependent on federal programs, especially Medicaid, that Republicans have singled out for savage cuts. One thing I didn’t point out is that these programs do more than provide red-state residents with health care and help families put food on the table. They are also, directly and indirectly, one of the few major sources of jobs. There are more West Virginians working in hospitals — largely supported by Medicare and Medicaid — than there are mining coal.
Yes, I’m aware that if you point out that red-state residents are voting against their own interests, you’ll get attacked as a liberal snob who thinks “real Americans” are stupid. No, I don’t know how to get past that. But it is the truth.
What can be done?
The woes of left-behind regions are a major social problem; the tendency of voters in these regions to back authoritarian parties like the AfD or the GOP pose a threat to democracy. So at this point you probably expect me to offer some good solutions. Unfortunately, regional decline is a genuinely hard problem to solve, or even mitigate.
One answer — which tends to come mainly from the right — is that people should simply move to where the jobs are. Writing in National Review, Kevin Williamson declared
The truth about these dysfunctional, downscale communities is that they deserve to die … They [the people who live there] need real opportunity, which means that they need real change, which means that they need U-Haul..
You know who else has said something similar? JD Vance.
There are two problems with this idea. One is the crazy price of housing in some of our most dynamic regions, largely the result of NIMBY policies that have blocked housing construction.
Also, not everyone can or will abandon their community and family ties, and outmigration can leave those who don’t move worse off — think of the outmigration of educated women from East Germany.
What about protectionism? Donald Trump believes, or claims to believe, that he can restore heartland manufacturing with tariffs that will eliminate the U.S. trade deficit. I could talk at length about why that won’t work, but for now simply note that I began this post with the case of Germany — a nation that runs gigantic trade surpluses. So this really isn’t about the trade deficit.
Finally, what about “place-based policies” — government spending and subsidies designed to redirect jobs back to declining regions?
I’d say that we don’t yet know how much such policies can accomplish. The Biden administration made substantial efforts in that direction, with subsidies whose primary goal was either environmental protection or national security, but which included serious efforts to promote jobs in lagging regions. These policies didn’t win over enough heartland voters to prevent a Trump victory, but it’s increasingly clear that Republican legislators really, really don’t want those subsidies canceled.
So it’s possible that industrial policies to revitalize left-behind regions will eventually be like Obamacare — not worth much electorally to Democrats at first, but becoming an election-winning issue once voters realize that Republicans want to take them away.
It’s not going to be easy. Regional doom loops really aren’t anyone’s fault; they’re a consequence of deep economic forces that are hard to fight. Across the advanced world, the track record of efforts to reverse regional decline is at best mixed. Germany has spend 35 years and a lot of money trying to rebuild East Germany, without much success. On the other hand, Britain has had some success in its efforts to boost the old industrial North. Notably, Manchester, once a symbol of industrial decline, has experienced a major revival.
And even if we can’t reliably reverse doom loops, we can at least mitigate their effects and improve the lives of those who happen to live in declining regions.