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Economic Development is the Answer to Income Inequality

By David J. Robinson

In his State of the Union address, President Obama said what many of us know to be the truth. America’s income inequality is growing. In fact, UC Berkeley’s economics professor Emmanuel Saez believes the gap between America’s richest 1 percent and the rest of its citizens is at its largest point since 1928. As reported by the Pew Research Center, in 1928, the top 1 percent of American families received nearly 24 percent of all pretax income and the bottom 90 percent of the population received just over 50 percent. The Great Depression and a post-World War II boom moved income inequality in the other direction but starting in the 1970’s that slide began to move the other way. By 2012, the top 1 percent of Americans received nearly 22.5 percent of all pretax income and the bottom 90 percent’s share is below 50 percent.

social inequalityPublic policy however is not just about defining a problem. It is about developing a solution to specific societal problems. The solution to income inequality is implement public policy solutions that increase the wealth for everyone else.

It is not an accident the plight of the bottom 90 percent began to slide in 1970. That is about the time the American manufacturing industry began what is now a forty year jobs decline. In 1950, American manufacturing not only constituted one-third of all jobs but they paid above average wages while requiring less than a college  degree. The American Dream during the 20th Century was built on manufacturing jobs. World War II left America as the only global economic powerhouse in one piece. American industry capitalized on this opportunity and rebuilt the world.

However, like all parties, eventually this post-World War II boom ended. Once struggling allies recovered and become effective global competitors. Complicating matters even more, advances in technology made American manufacturing plants more productive. One hundred seventy workers now produce what it took 1,000 workers to produce in 1950. Increased global competition and productivity are good for manufacturing companies but tough on the workers that used to serve them. From 2000 to 2009, America lost over 30 percent of its manufacturing jobs and only 9 percent of Americans now work in the high-wage manufacturing industry.  Those without an advanced degree are left with low wage, low skill service jobs as a weak replacement for the higher wage manufacturing positions.

The challenges of the American manufacturing industry illustrate the solution to America’s income inequality is to increase the wealth of all its citizens through economic development.  Economic development is a profession practiced for the most part at the state and local government. The national government sets important tax, trade, labor and communications policy but the success or failure of most regions is in the hands of their own local and state leaders. Smart economic development policy focuses on the creation not just of jobs, but high-paying jobs. Smart economic development policy also takes a broad perspective and addresses a wide range of strategies beyond tax incentives.

Most regions across America are implementing economic development policy through basic building block economic development strategies. A smaller number of regions are truly increasing the wealth of their residents through targeted industry based strategies known as the five drivers of economic development. Building block economic development strategies prepare sites for development through land use planning, annexation and eminent domain but they also address infrastructure development, workforce, tax policy and quality of life issues. These basic economic development strategies form the majority of the work for the typical city or state economic development department.

It may not be sexy but making sure a site for a high-wage job opportunity is zoned properly, has the infrastructure in place and a ready workforce are fundamental steps for any economic development project to get off the ground. Quality of life matters too. Few regions are successful if they are not safe, have quality schools, housing and recreational activities. The billion dollar rebound of Times Square in New York City is a direct result of America’s largest city addressing a massive crime problem. Knowledge workers in white collar or high-tech fields are highly mobile and are more interested in the quality of their region at times than the quality of their company.

Basic or building block economic development strategies are not enough in a competitive global economy. Successful regional economies illustrate a select number of winning pro-active job retention and attraction campaigns develop high-wage jobs. These five drivers of economic development focus on advanced manufacturing, energy lead economic development, technology based economic development, globalism and the white collar service industry.

While American has fewer manufacturing jobs, the jobs in this sector have high wages and many regions are growing them quickly. Energy is the main driver of successful regional economies.  North Dakota’s gross domestic product grew more last year than China’s and twice as fast as Texas (who had the second fastest growth rate in the nation). North Dakota is “shale” central and is benefiting from new oil and natural gas exploration. Oregon is proving smart growth and a focus on alternative energy can produce high-wage jobs. Silicon Valley, Boston’s Rt. 128 and North Carolina’s Research Triangle Park are global leaders in the development of high-tech companies with high-wage tech jobs. South Carolina and Tennessee successfully recruited global auto assembly plants fueling billion dollar regional growth.

Companies exporting or recruiting from foreign homes pay 15 percent higher than other jobs.  Tulsa’s aerospace industry is a national leader proving companies that export pay higher wages.  Not all service jobs are low paying. Regional service leaders such as Tampa, Florida are successful not just due to warm winters but also through a pro-active strategy to recruit high-wage white collar professionals.

America’s regional and state economic leaders didn’t get that way by accident. Each took a thoughtful approach to economic development. They determined what successful economic clusters they possessed and created and implemented a strategy to grow those markets. Those strategies are built around multiple building blocks strategies and not just the headline grabbing tax incentive deals. Those strategies can start America down the path to addressing income inequality much like the post-World-War II manufacturing boom did.


Author: David J. Robinson is principal of The Montrose Group, LLC and an adjunct professor in the The John Glenn School for Public Affairs at The Ohio State University. He can be reached at [email protected].

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