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Market-Based Solutions to Vital Economic Issues


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Market-Based Solutions to Vital Economic Issues
Oct 28, 2022

All Economics Is Local

The Federal Reserve’s fight against inflation is a national battle, but the different inflation rates across its 13 districts illustrate potential internal challenges faced by the Federal Reserve Bank presidents who represent those districts. The headline inflation rate, which stands at 8.2% nationally as of September, is only one part of the story, however. How America is experiencing inflation shows considerable variation from place to place. Inflation numbers by metropolitan area show that prices were higher by 6.6% in August in New York compared to a year ago, while in Phoenix, inflation was nearly twice as that, running at 13% over the same period.

There are several reasons for these regional differences in inflation – for starters, different labor and property markets pushed further apart by the pandemic. Regional differences are not unique to price levels, however, and they highlight the fact there is not one homogenous U.S. economy. Indeed, the answer to the question of what is the state of the economy, how fast it is growing or even how prosperous folks feel, might very well depend on where one is asking the question. And, the Fed can’t set different interest rates for different places in the U.S.

Take, for example, the statistics from 2010 to 2019 – a period of steady growth for the nation’s GDP when, following the financial crisis, the economy added jobs nearly every month. The statistics illustrate how stark and dramatic differences are across areas. For example, over this period, Greeley and Fort Collins, CO had more than just beautiful mountains nearby to offer. Both areas had their job numbers go up by 31.9% and 23.6%, respectively. In contrast, it is an entirely different picture in not so fortunate places such as Peoria, IL and Charleston, WV, where employment fell by 9% and 9.4%, respectively, over the same period. Other measures, such as productivity and standard of living, show similar or greater divergence. Just in my own state of North Carolina, there is wide variation: measures of productivity went up by 6.6% in our home Extended Metropolitan Area1 of Raleigh-Durham while it fell 5.3% in Greensboro.

OECD’s most recent report on how regions and cities across the OECD progressed over the period 2001-2018 along several dimensions connected to economic development and well-being point to similar large regional differences in the US. While most US states are richer than OECD regions, falling in the top 25% in terms of income, there are large disparities across the states, especially in the areas of community and jobs. Mississippi ranks in the bottom 30% of OECD regions in terms of jobs, while North Dakota is among the top 5%. The report also highlights significant differences how GDP per capita increased across the US from 2001 to 2018. San Francisco, which has the highest GDP per capita within the entire OECD, thrived, recording an average annual growth rate of 2.5% during that period – the highest in the US, which our research has illustrated continued into 2022. In contrast, GDP per capita decreased at an average yearly rate of 1% in Lehigh, PA. These differences pose problems for policymakers. When inflation rates varies significantly from one place to another, for example, the Fed is stuck with the problem of overshooting in low-inflation areas and undershooting in high-inflation areas. Large economic disparities suggest that for a national economic policy to be successful, it needs to be locally (economically and politically) successful.

Economists have long attributed such disparities to spatial-mismatch – the idea that the difficulty people have in getting to jobs makes disparities worse – possibly made worse by the rise of superstar cities where highly productive highly-paid knowledge economy workers have clustered. Constraints on growth in these thriving cities such as restrictive zoning policies and inadequate infrastructure, however, have made living in these places much pricier, and therefore, inaccessible for many. As people become less mobile, opportunities are limited for those stuck in the wrong places, and regional disparities widen.

Any solution to the regional disparities will be one in which the high-value added knowledge jobs that lead to productivity growth can easily exist in smaller places outside of superstar cities. The pandemic may have just presented an opportunity to do precisely that. Remote work enables decoupling of productivity from its physical location since people with high-productivity jobs can work from anywhere. It may be too early to tell whether remote working habits will stick. Barrero, Bloom and Davis estimate that the share of hours worked remotely is likely to stabilize at about 20%. If that remote work is done outside of the superstar cities, that might be enough to yield a strikingly different equilibrium outcome.

America’s regions have long displayed enormous economic disparities; increasingly, however, they go beyond the broad-brushed prosperous coasts and western and eastern heartlands classifications. The US economy is a much finer mosaic.

1 Extended Metropolitan Areas are a geographic designation developed for the American Growth Project, and they represent U.S. urban areas connected in economically meaningful ways

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