Getting Real About Rural America

Nobody knows how to reverse the heartland’s decline.

But it’s also important to get real. There are powerful forces behind the relative and in some cases absolute economic decline of rural America — and the truth is that nobody knows how to reverse those forces.

.. But reviving declining regions is really hard. Many countries have tried, but it’s difficult to find any convincing success stories.

Southern Italy remains backward after generations of effort. Despite vast sums spent on reconstruction, the former East Germany is still depressed three decades after the fall of the Berlin Wall.

Maybe we could do better, but history is not on our side.

What’s the matter with rural America? Major urban centers have always been magnets for economic growth. They offer large markets, ready availability of specialized suppliers, large pools of workers with specialized skills, and the invisible exchange of information that comes from face-to-face contact. As the Victorian economist Alfred Marshall put it, “The mysteries of the trade become no mysteries; but are as it were in the air.”

But the gravitational pull of big cities used to be counteracted by the need to locate farming where the good land was. In 1950 U.S. agriculture directly employed more than six million people; these farmers supported a network of small towns providing local services, and some of these small towns served as seeds around which various specialized industries grew.

Nor was farming the only activity giving people a reason to live far from major metropolitan areas. There were, for example, almost half a million coal miners.

Even then, rural areas and small towns weren’t the “real America,” somehow morally superior to the rest of us. But they were a major part of the demographic, social and cultural landscape.

Since then, however, while America’s population has doubled, the number of farmers has fallen by two-thirds. There are only around 50,000 coal miners. The incentives for business to locate far from the metropolitan action have greatly diminished. And the people still living in rural areas increasingly feel left behind.

Some of the consequences have been tragic. Not that long ago we used to think of social collapse as an inner-city problem. Nowadays phenomena like the prevalence of jobless men in their prime working years, or worse yet, the surge in “deaths of despair” by drugs, alcohol or suicide are concentrated in declining rural areas.

And politically, rural America is increasingly a world apart. For example, overall U.S. public opinion is increasingly positive toward immigrants. But rural Americans — many of whom rarely encounter immigrants in their daily lives — have a vastly more negative view.

Not surprisingly, rural America is also pretty much the only place where Donald Trump remains popular; despite the damage his trade wars have done to the farm economy, his net approval is vastly higherin rural areas than it is in the rest of the country.

So what can be done to help rural America? We can and should make sure that all Americans have good health care, access to good education, and so on wherever they live. We can try to promote economic development in lagging regions with public investment, employment subsidies and, possibly, job guarantees.

But as I said, experience abroad isn’t encouraging. West Germany invested $1.7 trillion in an attempt to revive the former East Germany — more than $100,000 per capita — yet the region is still lagging, with many young people leaving.

I’m sure that some rural readers will be angered by everything I’ve just said, seeing it as typical big-city condescension. But that’s neither my intention nor the point. I’m simply trying to get real. We can’t help rural America without understanding that the role it used to play in our nation is being undermined by powerful economic forces that nobody knows how to stop.

 

How Are Those Steel Tariffs Working?

 Trade deficit. “We need and we will get lower trade deficits, and we will stop exporting jobs and start exporting more products instead,” Commerce Secretary Wilbur Ross said last March after the President announced his steel tariffs. We disagree with the President’s preoccupation with trade deficits, which are affected more by capital flows and currency values than trade policy.

But it’s worth pointing out that the trade deficit in steel increased last year by $1 billion as exports (measured in dollars) fell 7% and imports rose 1%. Imports ton for ton fell more than exports did. But the average price of steel per ton increased more for imports than exports, perhaps due to shifts in currency values and product deliveries—e.g., businesses importing more expensive specialized steel grades.

Retaliatory tariffs by Canada and Mexico contributed to a $650 million drop in American steel exports. At the same time imports increased from Mexico and Canada, which are deeply integrated into U.S. supply chains. In many cases manufacturers paid the tariff and passed on the cost to customers.

Mr. Trump’s tariffs had a de minimis impact on Chinese imports, which were already subject to 28 dumping duties. They principally reduced imports from Turkey, Russia and South Korea, which turned around and shipped more steel to other countries.

For example, U.S. imports from Turkey fell by 930,000 tons last year. But Turkey exported 330,000 more tons to Canada and 780,000 more tons to Italy. European steel makers have complained that a flood of imports is driving down prices. But lower prices have made European manufacturers more competitive. Some U.S.-based manufacturers like Harley-Davidson have also moved production to Europe to dodge retaliatory tariffs and take advantage of lower steel prices.

Jobs. While domestic steel production rose 5% last year, the tariffs had little impact on employment in the industry. Steel makers added 2,200 jobs in 2017, but just 200 in the last year. One reason is that steel makers ramped up production at highly-efficient minimills with electric-arc furnaces that employ few workers.

Negotiating leverage. The Trump Administration argued that it was using steel tariffs as a bargaining chip in negotiations with Mexico and Canada for a revised Nafta. “The president’s view was that it makes sense that if we get a successful agreement, to have them be excluded,” U.S. Trade Representative Robert Lighthizer said last March. “It’s an incentive to get a deal.”

One group of Americans has benefited from tariffs: steel companies, which are making more money as they benefit from their ability to raise prices in a protected market. Government can always help a politically connected few at the expense of the many. But on every other measure, the steel tariffs have been a bust.

How Goes the Trade War?

Consumers, not foreigners, are paying the Trump tariffs.

Say this for Donald Trump: He’s provided us with many iconic quotations, which will surely be repeated in histories and textbooks for decades if not generations to come. Unfortunately, they’ll be repeated because they are extremely clear examples of bad ideas.

In economics, the line you hear most is Trump’s declaration that “trade wars are good, and easy to win.” Coming in second is his assertion that “I am a Tariff Man,” coupled with the claim that foreigners pay the tariffs he has been imposing.

Now, that last claim is something you can test. Over the course of 2018 Trump imposed tariffs on about 12 percent of total U.S. imports, and many of those tariffs have been in effect long enough that we can get a first read on their consequences.

On Saturday economists from Columbia, Princeton, and the New York Federal Reserve released a paper, “The impact of the 2018 trade war on U.S. prices and welfare,” that used detailed import data to assess the tariffs’ impact. (The paper, by the way, is a beautiful piece of work.) The conclusion: to a first approximation, foreigners paid none of the bill, U.S. companies and consumers paid all of it. And the losses to U.S. consumers exceeded the revenue from the new tariffs, so the tariffs made America poorer overall.

How did they get this result? The U.S. government collects data on the prices and quantities of many categories of imports. Many of these categories faced new tariffs, but many others didn’t. So you can compare what happened to the tariffed imports to the de facto control group of untouched imports; this tells you the impact of the tariffs.

Under Trump’s vision, in which foreigners would have paid the tariffs, what you would have expected to see is falling prices for tariffed goods, offsetting the tariff, so that consumer prices didn’t change. What you actually see, however, is no visible effect of the tariffs on import prices. So foreign suppliers don’t seem to have absorbed any of the tariffs, which were fully passed on to consumers; tariff-inclusive prices (Figure 1) have risen by the full amounts of the tariffs.

Seven Fixes for American Capitalism

Ideas from the Right, the Left, and across the Atlantic to mend what’s broken in our economy.

Antitrust Pivot

Many of the U.S.’s biggest economic ills—rising inequality, stagnant wages, low productivity growth—stem in large measure from corporate consolidation and monopoly power run amok. That’s the message from a new breed of policy wonk urging a return to the trustbusting days of the early 20th century.

The movement—labeled the New Brandeis School by its proponents and derided as Hipster Antitrust by its critics—is looking to ditch the Chicago School approach that’s dominated antitrust enforcement since the late 1970s. The Chicago School hews to what’s known as the consumer-welfare standard, which finds mergers anticompetitive only if they raise prices.

The new model takes its inspiration from Supreme Court Justice Louis Brandeis, who emphasized the need to restrain big companies and the concentration of economic power. Lina Khan helped galvanize the movement with a 2017 paper she wrote as a law student at Yale that made the case that Amazon.com Inc. is a threat to competition, even though it’s lowered some prices for consumers.

Any ambitious government-led project to reshape the U.S. economy usually runs into the same objection: We can’t afford it. One school of economic thought says that’s all wrong.

Modern Monetary Theory, a once-fringe set of ideas now getting some mainstream attention, says governments borrowing in their own currency have more room to spend than they think. The U.S., for example, can run deficits without having to worry about going bust, because it creates the dollars in the first place. The real constraint only kicks in when there’s too much spending relative to a limited supply of goods and services—in other words, when inflation spikes. And there’s been little sign of that in America for decades.

MMTers argue that their system isn’t so radical; it’s the way things already work, at least some of the time. Presidents, including the current one, haven’t balked at measures to boost the military or cut taxes, even when the resulting deficits run into the hundreds of billions. And emergencies, such as the 2008 financial meltdown, typically push concerns about balanced budgets deep into the background.

Now there’s a different sort of emergency on the horizon: climate change. Since the threat is arguably greater than economic depression or even war, it requires action on a suitably vast scale, argue Democrats who’ve picked up on the issue.

And MMT offers a key to unlock the financing. That’s why freshman Representative Alexandria Ocasio-Cortez, one of the first U.S. politicians to talk publicly about MMT, is also at the forefront of the drive for a Green New Deal. The maximal version of that program includes shifting the U.S. to 100 percent renewable energy within 10 years. If that wasn’t ambitious enough, the plan also calls for the government to guarantee a job for everyone who wants one—an MMT favorite that’s also a throwback to Franklin D. Roosevelt’s New Deal.

“Clearly, the environment matters more than entries on balance sheets,” says Randall Wray, a senior scholar at the Levy Economics Institute of Bard College and one of MMT’s most prominent proponents. “The environmental thing is real. It’s not financial.”

MMT’s detractors say government spending on that scale could trigger the kind of inflation that would wreck the whole economy. America’s national debt has already ballooned since the Great Recession, they warn, and adding more will erode the country’s creditworthiness and undermine the dollar’s role in global finance.

While those warnings are still frequently heard, there are signs that they’re losing their impact as the debate leans left. Several renowned economists who aren’t MMTers have recently tried to downplay the risks attached to deficits and debt. They include Olivier Blanchard, former chief economist at the International Monetary Fund, and Obama administration heavyweights Larry Summers and Jason Furman. Bank of England chief Mark Carney has made the case that action on climate change represents an economic opportunity, not a burden.

Ocasio-Cortez didn’t manage to garner enough Democratic support for her first attempt at actual legislation, a proposal to set up a Green New Deal committee. But there’s broad sympathy for the idea in principle, including among several of the party’s presidential candidates, and many of them have also endorsed a jobs guarantee. —Katia Dmitrieva

Tech to the Rescue

Amazon.com Inc. Chairman and Chief Executive Officer Jeff Bezos wishes there were a trillion human beings in the solar system. With room for that many people, there would be “a thousand Einsteins and a thousand Mozarts,” he told the Economic Club of Washington, D.C., in September. The world’s richest man is funneling $1 billion or more a year into a company, Blue Origin, that he hopes will help make extraterrestrial settlement a reality, creating places to live for all those Einsteins and Mozarts.

Bezos and others argue that innovation is the essential ingredient in human betterment. They have a point. Life would be pretty awful without the advances made by past generations, such as indoor plumbing, vaccines, refrigeration, and telephones. Bezos even asserts that freedom itself, not just material well-being, depends on technological progress: “I don’t even think stasis is compatible with liberty,” he told the Washington audience.

In the view of the tech-to-the-rescue crowd, innovation can solve just about every problem humanity faces. Global warming can be fixed with better electric cars, solar cells, wind turbines, and batteries. Income inequality can be solved by educating or retraining workers for the high-tech jobs of the future.

The Information Technology & Innovation Foundation, a Washington think tank founded in 2006 to propagate this philosophy, argues that using antitrust law to break up or discipline the big technology companies can backfire, discouraging innovation and harming consumers. Robert Atkinson, president and founder of the ITIF, co-wrote a 2018 book with Michael Lind called Big Is Beautiful: Debunking the Myth of Small Business.

The techies welcome a prominent role for government in paying for education and conducting or supporting research and development. But the movement is split on trade. The nationalists want to keep the U.S. in the tech vanguard and are willing to resort to tariffs and subsidies to preserve its dominance. The globalists, including some heads of multinational companies that earn lots of their profits abroad, are happy to see other countries advance technologically, figuring that the benefits of breakthroughs—say, a cure for cancer—will be shared by all of humanity regardless of their origin.

The common theme is that prosperity depends on a robust tech sector. “We’re in a 10-year productivity depression” that’s hurting living standards, says Atkinson. “Tech is really the only way we’re going to raise productivity growth.” —Peter Coy

Tariff Truthers

If there’s one thing most economists around the world today can agree on, it’s that tariffs are bad. Protect one domestic industry with an import tax, and you hurt a swath of others. Tariffs reduce choices for consumers and push up prices for goods. They stifle competition and deter innovation. And they invite other countries to retaliate, leading to the sort of tit-for-tat behavior that’s left U.S. soybean farmers watching crops once destined for China rot in their fields.

Libertarianism

Devotees of small government were stirred by candidate Trump’s vow to “drain the swamp” and pull U.S. troops out of foreign quagmires. But President Trump, with his tariffs and deficits, has proved to be “the opposite of a libertarian,” the Libertarian Party declared in March.

Still, the free-market purists aren’t giving up the fight. One of their bugbears is the Federal Reserve and its cheap money—a distortion of the market’s natural efficiency, according to Austrian economist and libertarian idol Friedrich Hayek. When Ron Paul, America’s highest-profile libertarian, ran for president in 2012, he pushed for the Fed’s abolition and a return to the gold standard. “If you want to restrain government, you restrain the power to create money,” he said. “That’s what gold does.”

The Fed can probably rest easy. Americans aren’t exactly clamoring for a return to gold, while hyperinflation and other disasters predicted by libertarians in the easy-money decade since 2008 haven’t come to pass.

Some libertarian ideas are finding a larger audience. Among them are the call for stripping back zoning rules, because they limit the construction of affordable housing, and their criticism of patents that lock in profits for Big Tech or Pharma and licensing requirements that insulate professionals like doctors from competition. A common theme of such critiques—that the economy is rigged in favor of big and established actors—commands growing support among mainstream economists.

And beyond the realms of U.S. policy, the world is evolving in ways that give libertarians hope. Those who deplore the “tyranny” of central banks are rejoicing at the explosion of cryptocurrencies. (The Libertarian Party accepts donations in Bitcoin.) Recreational marijuana use is already legal in 10 states and backed by more than 6 in 10 Americans, according to a poll by the Pew Research Center.

Paul, who outperformed most expectations during his own tilt at the presidency, says a popular Libertarian candidate could well emerge in 2020. It’s a stretch to say he’s cheerful about the wider outlook, though. “It’s a bubble economy in many, many different ways, and it’s going to come unglued,” he told the Washington Examiner. —Andrew Mayeda