Reviving the Rust Belt: What’s the Answer?

Last Thursday I attended an event hosted by Transform Rockford which was part of their Community Learning series. At this event there were two economists from the Chicago Fed who spoke about a recent study they conducted on cities in the “rust belt” or, the postindustrial Northeast and Midwest regions. The goal of this study, the Industrial Cities Initiative (ICI), is to “identify policies and programs that promote (or inhibit) economic growth and vitality in industrial cities.” While Rockford was not included in this study, the results are of relevance to this city which, like cities across the Midwest, has grappled with the decline of manufacturing since the 70’s.

Cities researched during the study include Green Bay, Racine,  Aurora, Joliet, Gary, Grand Rapids, Pontiac, Fort Wayne, Waterloo, and Cedar Rapids. As criterion for selecting cities, industrial cities were “defined as cities that in 1960 had a population of at least 50,000, with manufacturing accounting for at least 25 percent of total employment.” The primary question was, how does loss of manufacturing employment effect total unemployment, loss of population, and median family income?

You can read the working paper here to see the graphs and data collected. Rather than simply restating the findings, I am going to highlight some of the benefits I saw from the study and then raise a few questions about it. One cannot be a good Austrian economist without giving at least some criticisms of anything from the Federal Reserve : )

– I appreciated Susan Longworth’s emphasis that there is no “one size fits all” answer to the problems faced by industrial cities. She underscored the unique situation of each city and said the best approach is one that seeks to find the city’s specific strengths and weaknesses and build a strategy around that recognition.

– I also liked the point made about job creation itself not being enough to revitalize a city. There is more to a strong and healthy economy than simply having an abundance of jobs. “Make work” schemes don’t help a community in the long-term, they only hinder its true recovery.

Some questions I would have liked to see addressed:

– Briefly mentioned at the start of the lecture was the fact that this study was being conducted so the Fed could better understand community development and have make better monetary policy decisions. Of course, being a Fed study, it would not have considered the possibility that the Fed should not be making monetary decisions at all, but this was the glaring issue from my perspective. The role of the Fed (and the oft-cited Community Reinvestment Act) in the economic downturns that impacted these cities so dramatically was, of course, not discussed.

– In most of the graphs shown, Rockford’s data was compared to the numbers for the United States as a whole. I think this is misleading. I think it denies the natural ebb and flow of the economy throughout the nation. Each city should not be expected to have the same ratio of manufacturing work, skilled workers, employees with higher educations, etc…because these are variances that make some cities good for some things and other cities good for other types of production.

– Also, it seems a weak assumption that these industrial cities should regain the manufacturing jobs lost over the years. This point was hinted at, but not explored as it deserved to be. Susan Longworth noted that when manufacturing has returned to these communities, it requires fewer, but more skilled, employees as it used to. This points to an improvement of the capital structure—less-skilled workers have been replaced with capital, such as better machinery or production techniques.  There is nothing to be decried here. It is a beautiful example of how the economy develops. I think it was Henry Hazlitt (though I could be wrong) who gave the example of unemployed carriage-makers at the beginning of the 20th century. No one in their right mind would bemoan the invention of automobiles, simply so these carriage-makers could maintain their familiar occupations. Of course the upheaval of their market was difficult, and it took time for them to find and adjust to new employment, but this invention offered long-term benefits. The automobile made the world a better place, and freed the carriage-makers to use their time for a more highly valued end.

– It would have been interesting to see the correlations between increased minimum wage, higher taxes, increased regulations, protectionist policies, and the loss of manufacturing in these cities. I wanted to ask questions about these causes, but since they were not included in the study, it would have been to no purpose. But rather than studying the common number of community leaders in each city (how many people held leadership positions in multiple organizations), I would have liked to see some data on how the government’s intervention has harmed these communities. But I wasn’t expecting this kind of presentation from the Fed anyways, so I wasn’t very disappointed.

Overall, the faulty assumptions made about why these cities have experienced a decline made it difficult to find useful application from the data collected. And the emphasis on data as a source of knowledge for decision-making made me grateful, once again, for the solid axioms held by the Austrian school because these irrefutable truths about people and the economy leave us with no doubt as to the ideal path of recovery.

For more reading…

Index for the ICI study 

On the Community Reinvestment Act and the Housing Crisis

On the Austrian Business Cycle Theory 

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