Inequality Across U.S. States

A Bloomberg article by Virginia Postrel explores a discouraging trend in income inequality.  For decades, incomes across states in the U.S. converged — i.e. poor states caught up to rich ones — just as Robert Solow‘s growth theory predicted:

Poor places are short on the capital that would make local labor more productive. Investors move capital to those poor places, hoping to capture some of the increased productivity as higher returns. Productivity gradually equalizes across the country, and wages follow. When capital can move freely, the poorer a place is to start with, the faster it grows.

(Photo: Rakkhi Samarasekera)

That steady convergence, however, has stopped.  One possible explanation?  High housing prices in rich cities, caused by government regulation:

In a new working paper, [Daniel] Shoag and Peter Ganong, a doctoral student in economics at Harvard, offer an explanation: The key to convergence was never just mobile capital. It was also mobile labor. But the promise of a better life that once drew people of all backgrounds to rich places such as New York and California now applies only to an educated elite — because rich places have made housing prohibitively expensive.

The good news?  There’s still room for less-educated workers in states that didn’t increase regulations — places like Nevada, Florida, and Texas. “Places that didn’t have this increase in regulation still have the old process that worked,” Shoag says in the article, “where people move to the richer areas, human capital levels converge, incomes converge — the whole chain that used to exist for the whole country is still true if you focus just on the areas that haven’t had as large an increase in regulation.”

(HT: Marginal Revolution)

Left Houston for CA

The premise of the article is that states with rich cities can't draw capital, and therefore poor states (ostensibly with fewer rich cities) are not catching up wealth-wise? That doesn't even make sense.

Let me synopsize this article as I have understood it (you can choose to fault me, not the article, that's fine): if only nice but high-density cities like Boston and San Francisco would become more like sprawling unzoned heat-baked s---holes such as Houston and Las Vegas, wealth and talent would start to flow into them at an even higher rate than they already do? If the car industry was located in either Bay Area, and then failed, there would still be demand to live in these cities (the dot com explosion did not depopulate the Silicon Valley, and I'm guessing there was more wealth lost there than there was in Detroit in a similar timespan). People are in Houston because of oil, and they were in Vegas because of the housing boom (and previously gambling). When those industries fail/ed, I can't imagine people wanting to hang around, and they'll go wherever the income/rent ratios are best ... that may well be other sprawling cities with low rents and pay (where the low cost of living (and desperation in a period of high unemployment) will allow employers to pay a LOWER, not HIGHER wage ... neither the Joad family nor Polish-American slaughterhouse workers got rich moving to where the jobs were) ... and I suspect that migration is yet another talent filter (with those who can afford to taking the opportunity to move to a nicer place). This all assumes some relationship between income and ability, which is valid if you pretend we're talking about free markets (which no western culture has truly seen in millenia).

Finally, so many important industries are now so location-dependent (Wall Street, Silicon Valley/Rte 128, Hollywood, Detroit, Oil, Boeing) that flow of capital will be more determined by the success of individual market segments than any societal effects.

What I would conclude, if anything can be concluded from these disparate facts, is that regulation both leads to and is a by-product of high demand cities, thereby drawing the best and brightest (who can afford to live there, and don't fight further quality-of-life regulation), so high-demand cities are where (non-off-shored) capital will go in an information (non-manufacturing) economy. The conclusion "regulation is evil" -- based on non-sequitur or at best correlation-not-causation -- seems like this is either an industry shill piece, or at least one that will be parroted by the all-regulation-is-evil folks (who will probably fail to understand the jist as thoroughly as I did).


Paul Pawelski

The problem with this discussion is that the regulations are being described as being in the large cities, but the summary of the article was about growth in poor states where labor and other necessities for business are cheaper. New York City is not in South Dakota. The state of New York has much larger GSP than South Dakota. The reason the model does not continue to work is because while South Dakota has an unusually well educated and mechanically skilled workforce, transportation of product to and from a state that has only the federally mandated two Interstate highways sucks. The Black Hills are beautiful, housing costs are reasonable, healthcare is affordable. However, the cost of moving physical goods is prohibitive. Why do you think Caterpillar has an engineering design office in Rapid City, but builds its new manufacturing plants in small Southern towns that are within 50 miles of a major metro hub? Increasing regulations in metro hubs only moves manufacturing to outlying towns. Increasing regulation in States does move jobs, but only to locations close to other hub cities.

Before you flame, I am talking about the article, not the original paper. I am addressing the gross over simplification by pointing out a clear contradiction that many coast centric people tend to ignore.


Joe J

MOre a general comment. Since don't have time right now to read the report, I apologise if it is covered.
A question defining rich and poor states, does it take into account, just salaries or peoples available spending cash, considering the cost of housing in the rich ciities.
I know several who took the high paying job, moved to DC, then left when they realised, that after taxes and the high living cost here, they had way more available spending money at their old location.