As America’s big “superstar” cities pull away from the rest of the country, the former industrial hubs and rural towns left behind in today’s tech-driven economy are doing whatever they can to compete—and it isn’t always healthy. The contest to host Amazon’s second headquarters epitomized their problem. Desperate for tech cachet and tens of thousands of jobs, cities from Albany to Fresno stepped forward, in many cases by offering subsidies and tax breaks they could barely afford. Even then, Amazon anointed the thriving Washington, D.C., suburbs and (initially) New York City as its winners.
As I and my Brookings Institution colleagues Mark Muro and Bill Galston noted in a recent report, the U.S. economy suffers from a stark geographic divide. America’s largest cities—places such as New York, Seattle, and San Francisco—have accounted for 75 percent of the nation’s employment growth since 2015. Geographic inequality warps our politics. The counties that voted for Donald Trump in 2016 account for barely more than a third of the nation’s GDP.
Past presidents and Congresses weren’t shy about singling out the most troubled communities and directing federal help toward them. During the Great Depression, Franklin D. Roosevelt identified the entire South as “the Nation’s No. 1 economic problem” and created agencies such as the Tennessee Valley Authority and the Rural Electrification Administration to address the needs of its most isolated communities. In the 1960s and ’70s, when central cities were seen as the locus of economic distress, successive administrations tried to arrest the decline of urban centers.
Today the notion that Washington should “help poor people, not poor places”—to the point of urging people in declining areas to move—has become conventional wisdom. With the exception of the modest “opportunity zones,” a provision of the recent tax law that allows lighter capital-gains taxation for investors in certain troubled areas, place-specific aid has fallen out of favor.
But troubled communities don’t just give up. Left to their own fate, state and local policy makers often end up shoveling money at companies in the hope of attracting future investment. It isn’t working. For today’s left-behind communities to bounce back, the federal government has to act.
Each year, state and local governments spend tens of billions of dollars on incentives directed toward individual businesses. Confronting political pressure to turn around the local economy, state and local leaders feel compelled to make these offers, and companies that don’t seek them are leaving money on the table. But the results are disappointing by almost any standard.
Wisconsin alone offered the Taiwanese electronics company Foxconn more than $4.5 billion to create 13,000 new jobs in the state. According to a recent Bloomberg investigation, the company is unlikely to create the jobs promised in the Wisconsin Valley. Meanwhile, executives have flip-flopped on whether a majority of the jobs created will be in production or research and development. Instead of fueling a midwestern manufacturing renaissance, Wisconsin is stuck with a company it can no longer trust.
Elsewhere, Kansas and Missouri spent years fighting a border war. By collectively forgoing an estimated $217 million in taxes, they succeeded in poaching companies from each other within the Kansas City metro region without creating any new jobs that wouldn’t have otherwise arisen. When incentives do bring new jobs to a region, most go not to the local unemployed but to workers who migrate to the area. And as states and localities direct taxpayer dollars toward incentives to lure employers to the region, funding dries up for education, workforce development, and infrastructure—factors that help determine whether a place declines or thrives.
Federal policy can and should discourage this race to the bottom. A 100 percent federal tax on incentives and subsidies, an idea put forward by former Delaware Governor Jack Markell, would discourage communities from offering them at all.
But giveaways are only the symptom of a larger problem: Small and midsize communities face distinct and growing disadvantages relative to superstar cities, and they need the federal government’s help to deal with those obstacles. Tellingly, Amazon’s HQ2 search all but ruled out smaller cities; its request for proposals noted a strong preference for metro areas with more than 1 million residents.
Theoretically, advances in communication technology should free companies to set up shop, and workers to live, in small cities and towns with low costs of living. In practice, internet service is often slow in rural areas, if it’s available at all. Should the Federal Communications Commission fast-track its goal of achieving universal broadband in the United States at affordable rates, left-behind places will disproportionately benefit.
Small and midsize communities also suffer from a lack of business financing. As the banking industry has consolidated, many communities far removed from the nation’s financial centers have become capital deserts, where local entrepreneurs cannot find the money to launch and expand their businesses. Many big banks have stopped issuing business loans below $100,000—a problem for small borrowers. Congress should pursue reforms that improve data on small-business financing to reduce the high transaction costs of small-business lending and lift the current cap on small-business lending by credit unions so that local businesses can generate jobs and build wealth in their communities.
Worst of all, small and midsize cities have trouble fostering tech-savvy workforces. The problem is self-reinforcing: Many people with advanced digital skills gravitate to larger cities with many potential employers, and new employers arise in places with deep reserves of tech-savvy workers. The federal government could help underserved communities by investing in computer-science training and creating a national information network to match tech firms looking to expand to places outside today’s tech hubs.
But beyond setting policies that target specific problems, we also need to be willing to invest heavily in a few places. Instead of telling laid-off workers to move to Boston or Dallas, Muro and Rob Atkinson of the Information Technology and Innovation Foundation want the government to cultivate “growth poles”—smaller urban hubs with the potential to become economic anchors for left-behind regions. By beefing up universities, transportation systems, and economic-development initiatives in places such as Roanoke, Virginia, and Salem, Oregon, the federal government can help these growth poles attract new employers and draw workers from the left-behind communities around them.
The federal government hasn’t attempted interventions on this scale in some time. The prevailing view has been that any interference with today’s winner-take-all version of urbanism—that is, anything that keeps workforce talent and highly productive firms from concentrating themselves in the same cities—would be economically inefficient. Not even the congestion and high cost of living that define superstar cities have been enough to make companies seek employees and office sites in lower-profile places. Amid a public backlash in New York City, Amazon backed off its plans to build part of its HQ2 there. Yet instead of showering those 25,000 new jobs on an unsung midsize city, the e-commerce giant has only doubled down on existing superstar markets like the D.C. area and Nashville.
The American economy suffers when only a handful of places are driving its growth and vast swaths of the country are falling backward. The Economic Innovation Group finds that “had distressed communities merely stagnated, the U.S. economy would have added one-third more jobs over the past 15 years than it actually did.” The country needs policies explicitly designed to spread innovation around—and using federal money to do so will pay significant dividends.
Americans and our elected representatives shouldn’t accept the superstars’ dominance as the natural order of things. The country’s economy and its politics are healthier when prosperity courses through communities large and small, not just a few of the glossiest cities.
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