The Reason Why American Regions Are Unequal

5 minute read
Sitaraman is Director of the Vanderbilt Policy Accelerator for Political Economy and Regulation and New York Alumni Chancellor’s Chair in Law at Vanderbilt Law School. Serkin is Elisabeth H. and Granville S. Ridley Jr. Chair in Law at Vanderbilt Law School. Their paper, Regulation and the Geography of Inequality (along with Morgan Ricks), was recently published in the Duke Law Journal

Policymakers often blame the problems facing America’s struggling places on the “natural” advantages of today’s superstar cities. As Nobel-prize winning economist Paul Krugman recently said, the “economic forces that have been hollowing out rural America are deep and not easily countered.”

But it wasn’t just inevitable economic forces that left many mid-sized cities, small towns, and rural areas struggling to keep up. It was also a set of public policy choices that sowed the seeds of rising regional inequality, including deregulatory efforts in the late 20th century.

From the early 20th century until about the 1970s, one of the goals of regulation was ensuring that economic activity was dispersed across the country. Policymakers believed that basic infrastructure and utilities—rail, buses, airlines, telephone, banking—were critical to commerce and economic development. In those sectors, they adopted regulations to ensure that communities all over the country benefitted from these services.

The model was the venerable U.S. Post Office. Since the founding of the country, the postal system has been designed to help stitch together even small, far-flung places. Think about it this way: it’s cheaper for the postal service to send a letter from New York to Boston than from New York to Alaska. But the price for a stamped letter is the same. In an era of email and text messages that might seem quaint, but throughout the 19th and 20th century, it meant that people could communicate at an affordable price, regardless of where they lived. This created opportunities everywhere.

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A similar approach governed other infrastructure. In the late 19th and early 20th centuries, for example, railroads were perhaps the most important way to transport goods. Before regulation, railroads would often charge more for short legs from small towns to the city than they would charge for the whole route. This meant higher prices for farmers along the route who were trying move their goods to market. Regulators banned this practice, and restricted the ability of railroads to exit from service. Regulation ensured fairly-priced and reliable railroad service throughout the country.

Air and bus service to smaller places benefitted from a similar system of entry-restriction and cross-subsidies. Under the regulated era, companies needed federal approval to offer service on routes between places (that’s entry-restriction). Companies also had a duty to serve some less profitable routes, usually to smaller places, but were then given some highly profitable routes to offset their losses (that’s a cross-subsidy). This system ensured that smaller places had affordable, reliable service—and it simultaneously kept companies afloat.

This approach was not limited to transportation. From banking to telephones and communication more broadly, regulation ensured that economic opportunity was not just concentrated in a few places.

The result of this system was an extraordinary period of geographic convergence. Consider just one example: In 1940, residents in Mississippi earned merely 26% of what Massachusetts residents made. By 1979, however, the state had witnessed significant economic gains, and Mississippians earned nearly 70% as much as their East Coast counterparts.

But then, in the 1970s and after, deregulation undid this Progressive-Era and New Deal regulatory system.

Deregulation allowed railroads to discontinue service and even abandon rail lines altogether. This meant that some smaller towns lost access to rail. Between 1980 and 2008, the U.S. rail network shrunk by more than 40%. For producers, losing rail service is a disaster. For investors, lack of access to transportation networks is a deterrent, concentrating investments in more connected places.

Airline deregulation also had disparate geographic impacts. As airlines consolidated over time into the big four and into fortress hubs like Dallas or Atlanta, service even to big cities like St. Louis, Memphis, and Cincinnati has shrunk. Some small cities, like Cheyenne, Wyoming, now guarantee revenue for the airlines just to get a bare minimum of flights. Fewer convenient flights, of course, makes it harder to run a global business or to host national conventions.

The story was similar with bus deregulation. The head of Greyhound observed during the debates over bus deregulation in the late 1970s that “the rural areas are going to have to suffer.” Even one of the biggest champions of deregulation, Alfred Kahn, had second thoughts about intercity bus service. “I’m not sure I would ever have deregulated the buses,” he said, “because the bus is a lifeline of many small communities for people just to get to the doctor or to the Social Security office.”

In short, 40 years of deregulation has contributed to increasing economic divergence, with thriving places increasingly pulling ahead of struggling ones.

Today, we seem to have forgotten the tradition of regulation to promote geographic equality. Broadband, one of the most important modern communications technologies, emerged in the era of deregulation. Instead of legal obligations to provide universal service at regulated prices, broadband internet has remained patchy—at best—in smaller towns and rural places. Only now, decades later, is the federal government finally addressing this problem. But importantly, we are doing it through massive taxpayer subsidies, not through legal obligations on highly-profitable companies.

People in smaller places and rural communities have suffered considerably. Data shows that economic opportunity is worse in these places, and opioid addiction and “deaths of despair” are higher. The harms are national, too. Divergence in economic opportunity drives surging home prices in thriving places, compounding the affordability crisis. It saps the country of talented people who don’t have the full range of opportunities. And the increasing concentration of wealth and economic activity breeds resentment and makes the country as a whole less resilient to economic, political, and social challenges. We can change direction. But to do so, we need to stop blaming “economic forces” for these problems and start thinking about how public policy can fix them.

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