Helping Globalization’s Losers

In Photo: President Donald Trump in the Rose Garden of the White House in Washington, October 17, 2017.

POPULISM’S wave has yet to crest. That is the sobering lesson of recent elections in Germany and Austria, where the success of anti-immigrant, anti-globalization parties showed that a message of hostility to elites and outsiders resonates as strongly as ever among those fed up with the status quo.

It also is the lesson from America, where President Donald Trump is doubling down on gestures to his angry base, most recently by adopting a negotiating position on Nafta that is more likely to wreck the trade agreement than to remake it.

Economic theory suggests that regional inequalities should diminish as poorer, cheaper places attract investment and grow faster than richer ones. The 20th century bore out that theory, as income gaps narrowed across American states and European regions.

No longer. Now affluent places are pulling away from poorer ones. This geographical divergence has dramatic consequences. A child born in the bottom 20 percent in wealthy San Francisco has twice as much chance as a similar child in Detroit of ending up in the top 20 percent as an adult. Boys born in London’s Chelsea can expect to live nearly nine years longer than those born in Blackpool.

Opportunities are limited for those stuck in the wrong place, and the wider economy suffers. If all its citizens had lived in places of high productivity during the past 50 years, America’s economy could have grown twice as fast as it did.

Divergence is the result of big forces. In the modern economy scale is increasingly important. The companies with the biggest hoards of data can utilize their machines most effectively, the social network that everyone else is on is most attractive to new users and the stock exchange with the deepest pool of investors is best for raising capital. These returns to scale create fewer, superstar companies clustered in fewer, superstar places. Everywhere else is left behind.

Even as regional disparities widen, people are becoming less mobile. The percentage of Americans who move across state lines each year has fallen by half since the 1990s. The typical American is more footloose than the average European, yet lives less than 20 miles from his parents.

Demographic shifts help explain this, including the rise in two-earner households and the need to care for aging family members, but the bigger culprit is poor policies. Soaring housing costs in prosperous cities keep newcomers out. In Europe a scarcity of public housing leads people to hang on to cheap apartments. In America the spread of state-specific occupational licensing and government benefits punishes those who move. The pension of a teacher who stays in the same state could be twice as big as that of a teacher who moves mid-career.

Perversely, policies to help the poor unintentionally exacerbate the plight of left-behind places. Unemployment and health benefits enable the least-employable people to survive in struggling places when once they would have had no choice but to move. Welfare makes capitalism less brutal for individuals, but it perpetuates the problems where they live.

© 2017 Economist Newspaper Ltd., London (October 21). All rights reserved. Reprinted with permission.

Image Credits: Doug Mills/The New York Times

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