An economic revival policy that fits rural areas well

Paul Krugman’s recent opinion piece in the New York Times argues that eastern Germany and southern Italy show that the US can’t help it’s rural citizens. I’m not sure I follow his argument in the piece, but he’s right that there are several reasons to believe that most large-scale economic policy proposals do not work well in rural areas. There is, however, one policy that would work particularly well.

Large-scale economic revival policies that have garnered a lot of political attention include: antitrust (essentially breaking up large corporations), raising the federal minimum wage aggressively, and instituting a jobs guarantee. I see each as working much better in cities and suburbs than in rural areas.

Expanding and enforcing antitrust law would push back against firm monopoly and monopsony power. Studies show that the consolidation of industries has been bad for workers. In the example of hospitals, when there is only one company running all of the hospitals in a city, it becomes harder for medical care workers to quit a bad job and move to a better one. As a result, hospitals can pay workers less, offer fewer benefits, and use more contractors. The issue here is that in a rural area there’s likely only one hospital anyway (or one factory or one chicken processing plant, etc). So it wouldn’t be efficient to split the rural hospital in two. There just aren’t enough patients to justify double the number of MRI machines, administrators, and accountants.

With the federal minimum wage unchanged for nearly a decade, and currently set at a poverty rate of $7.25 for an hour of work, raising the federal minimum wage seems like a no-brainer. The pushback to a higher federal minimum wage often comes from employers in rural areas. Their argument is that many jobs in rural areas would not make sense if the minimum wage was, say, $15.00 an hour, so the increase would disproportionately create job loses in rural areas. Thankfully, many states and cities are already moving towards a $15.00 minimum wage without federal intervention. But in many rural areas, the current optimal minimum wage is probably quite a bit lower than $15.00, perhaps $10.00 or $11.00 (granted federal wage increases would be gradual, but the point is that the optimal minimum wage is generally considered to be lower in rural areas, though there are exceptions). This is because the marginal productivity of a larger share of workers in rural areas is less than $15.00 per hour, compared to workers in cities and suburbs.

The jobs guarantee elicits comparisons to the Civilian Conservation Corps, which was very active in rural parts of the US. The idea of the jobs guarantee would be to turn the unemployment office into the employment office and to offer a $15.00/hour job to anyone who wants one. For rural areas the jobs guarantee wage faces the same problem as the minimum wage proposal discussed above, but additionally, there are highly-localized pockets of deep despair and poverty in rural areas. For example, my parents live in a town of about 5,000 people that has lost more than 2,000 jobs to trade since the 1990s. Perhaps I am not being creative enough, but I’m not sure there’s enough work (without adding equipment, tools, supervision, or expertise) to support even 400 new federal jobs in the area. Vegetable gardens, picking up trash, and childcare might be able to accommodate a few hundred people, but the problem is so large and so localized that I worry about what several thousand federal workers would actually do all day in the tiny town. In the case of my parents’ town, it’s probably better to just give people the money and not worry about what they do all day than to have them carry rocks back and forth between two piles.

There is one policy that fits rural areas better than it fits anywhere else: increasing who gets ownership income.

Ownership income is the main explanation for why the super-rich are so damn rich. Bill Gates, while known for Microsoft (which benefited massively from intellectual property protections), actually owes much of his wealth to diversified investments (getting paid for owning things other than Microsoft). Rich people own an enormous portion of the country’s stocks, bonds, and real estate, and these investments offer a return that equates to an increasingly large share of national income. With labor income, which has also seen the rich (CEOs, doctors, lawyers) pull away from everyone else, time is an equalizer. Everyone gets the same amount of time (24 hours per day). But when it comes to ownership income, whoever owns the most and the best gets the most money. The majority of people don’t own anything that offers a return (to keep with the analogy, they have 0 hours per day), while the wealthiest people own tens of billions of dollars of productive assets (they have millions of hours per day).

This is not a natural outcome but the direct result of US rules, which means it doesn’t have to be that way. A combination of two policy proposals would result in a very effective way to improve quality of life for people, that works particularly well in rural areas. First, Dean Baker proposed a scrip tax that would replace the US corporate income tax with the ownership of non-voting shares (say 25%) of each company. The idea here is that corporations do everything they can to avoid paying taxes, and usually are pretty good at it. But if the treasury owns a portion of the shares of those companies, then it eliminates the need to tax them. When the company does well and makes more money so does the treasury. The scrip tax could be used to create Matt Bruenig’s proposed social wealth fund (SWF). Essentially think of this as an index fund that is owned by every person in the US equally. Each person would receive dividend payments from this fund, just like rich people do now. For a family of four, this dividend would be several thousands of dollars a year that they would get the same way rich people get their money, just by existing in a system designed to benefit them. **In his report, Matt discusses several ways to pay for the SWF; I’m personally drawn to the funding idea from Dean, which is why I combine the two ideas in this blog post.**

Why would expanding ownership income work for rural areas? First, fewer people in rural areas have ownership income now, compared to cities and suburbs. We can see this in both the Survey of Consumer Finance and the Current Population Survey. Ownership income is rare in metro areas (cities and suburbs), but is even more rare in rural areas. That said, the scrip tax/SWF would not be a transfer from cities and suburbs to rural areas, but a transfer from the ultra rich to everyone else. There are very rich people everywhere, including in rural areas.

Second, rural areas face a problem with diversity of industry. On an aggregate level, rural areas have all sorts of industries, just as cities and suburbs do. But on a local level, there is often one dominant industry, an outcome that is much less common in cities and suburbs. For example, my parents town made nylon starting in the 1930s. This was the industry that employed pretty much everyone, directly or indirectly. The main street was “Nylon Boulevard,” and the town called itself “the nylon capital of the world.” When nylon production was moved to Mexico (and then subsequently Asia and Brazil), there was no other industry for the former nylon workers to move into. The people with the means to leave did, but many people were tied to their homes (now much more likely to have an underwater mortgage and much harder to sell) and families and were subjected to a downward spiral that continues today. Had the nylon factory been in a city, the workers could have stayed in their homes but more easily switched jobs, simply because there are so many more industries in a densely populated local area (there are counter-examples here, like Youngstown, OH, but on average this is the case).

With the scrip tax and social wealth fund, 25% of those nylon-producing assets would have been owned by the fund, while the nylon workers who own shares of the fund would own a tiny portion of every industry. Thus, the result is a diversification of assets. If one geographic area or one industry gets hit, everyone in the US loses a few pennies in the value of their share of the fund, but the local area’s total set of assets are at least slightly more diversified. Their shares of the fund are much more stable relative to their local economy. Certainly the job losses would still devastate the area, but at least one source of income would be largely unchanged (or even increase, as the outsourcing resulted in higher profits for the DuPont corporation).

Lastly, prices are 12 percent lower in rural areas compared to non-rural areas. This is one of the reasons the minimum wage proposals don’t work as well in rural areas, but it is also the reason that ownership income expansion works particularly well in rural areas. Since each person in the US would own the same portion of the fund, each person, no matter where they live, would get the same amount in their dividend payment. However, this dividend payment would buy more goods and services in rural areas than it would in cities and suburbs. The difference in prices is partially because land values differ so much between rural areas and cities/suburbs. An acre in southwest Delaware is never going to be worth as much as an acre in downtown Seattle.

While there are certainly details to be worked out for any large-scale economic policy, it is silly to suggest that the failure of Germany and Italy prove there’s no policy that would help US rural areas. Norway and Alaska offer a counter-example that would work well.