In Cleveland, OH, during his bid for the presidency, Walter Mondale blamed his opponent’s policies for turning the region into a “rust bowl.” Journalists latched on, and America’s Northeast became infamous as a region in terminal decline, earning the moniker America’s Rust Belt. Once-thriving cities like Cleveland, Pittsburgh, and Detroit became examples of smoking husks of urban decay, economic stagnation, social despair, and population loss. Pundits and politicians alike now portray the Rust Belt’s displaced workers as victims of neoliberal globalization.
Except self-inflicted injuries don’t create victims. Closer analysis of the Rust Belt’s decline gives us a picture of a region that signed its own death warrant. Powerful anti-market institutions (often “acting on behalf” of “the People”) dragged down the Northeast’s economy, creating the stagnation we see today. A combination of powerful unions, regulatory capture, and protectionist policies diminished the area’s dynamism. Many people and firms, finding themselves excluded from the market by powerful rent seekers, left the Northeast. Some stayed and fought. Others, in a powerful demonstration of a strength in the American experiment, sought productive employment elsewhere.
“Urban decay” and “Rust Belt decline” need elaboration. The Northeastern United States remains one of the wealthiest regions on the planet, with access to political and economic freedoms much of humanity envies. The Northeast’s “fall” lacks clarity without comparisons to the region’s past.
Many major Rust Belt cities have lost almost half their residents since the 1970s. Buffalo, Pittsburgh, Cleveland, and Detroit provide excellent examples. In 1970, Buffalo had a population of 462,783, Pittsburgh 520,167, Cleveland 751,046, and Detroit 1,511,336. By 2006, they had lost 205,025, 223,106, 344,619, and 667,220 people, respectively. Even more striking, “deaths of despair” studies by authors such as Case and Deaton and Dwyer-Lindgren et al provide evidence the Northeast has suffered from excess mortality due to drug and alcohol disorders, interpersonal violence, and other forms of self-harm since the 1970s. Lawrence King et al compare the deindustrialization of the Northeast to a similar phenomenon that developed in Eastern Europe after the fall of the Soviet Union; societal despair leading to loss of life in both regions.
How does a region rust away? In a country heralded as a free-market environment, we expect business to boom. In competitive markets, labor and capital flow freely to their most efficient uses and away from inefficient, unprofitable employment. Most markets, however, do not fit a textbook “competitive” market structure. Once established, individuals and firms have every incentive to stymie competition. With good jobs, the last thing workers want is their employer hiring workers who might replace them. In fact, workers would love to have their jobs enshrined by a law ensuring “businesses may not hire anyone without our explicit consent.” In the real world, no one person has enough influence to make such demands. That kind of power lies in the hands of organizations which can coordinate collective bargaining.
Powerful firms exert influence to exclude competitors through regulatory capture. Because government regulators need cooperation and buy-in from the businesses they regulate, the two sides often cultivate an amicable relationship where personnel cycle between employment in regulatory positions and executive positions in private industry. Ernesto Dal Bó thoroughly explores the theory behind this “revolving door” behavior. Regulated industries exert their influence over regulations to limit smaller, less-established firms, blocking potential competitors. But this effect diminishes when elections of regulators hold them accountable.
America’s Northeast presents powerful examples of the harm of regulatory rent-seeking involving housing and zoning laws. Gyourko et al’s regulatory housing index for the US counties, in conjunction with the Mandatory Inclusionary Zoning Database, identify the Rust Belt as one of the most heavily regulated housing markets in the country. Glaeser et al point to the rising influence of local homeowners challenging large-scale development in their areas as one of the main drivers of rising housing prices since the mid-1900s, demonstrating how a small group of interest-holders can wield political influence to secure their market position to the detriment of others. Between these factors, the Northeast experiences significantly higher housing costs than any other region.
Vested interests in the Northeast have a long rent-seeking tradition of trade protectionism. Such interventions distort otherwise-free markets by reducing competition, leaving established firms less likely to innovate and with less necessity to take risks to expand their business. Lenway, Morck, and Yeung’s statistical analysis of protectionism in the American steel industry demonstrates that large, established firms that lobby heavily invest significantly less in research and development than other firms. They found that firms who lobbied fired more workers in response to the repeal of protectionist policies than non-lobbying firms. Greenland, Lopresti, and McHenry demonstrate a direct link between population decline and vulnerability of local labor markets to the opening of international markets. The Northeast lies right in the middle of their analysis — and the center of their map of vulnerable counties. The vulnerability to increased competition implies the very protectionist policies industries lobbied for weakened them instead.
The same pattern of vested interests securing their market position to the detriment of society at large, shows up in the academic literature on unions. One of unions’ main contributions involves reduced turnover rates in their industries. Historically, even where unions were unsuccessful in the short term, the pressures they put on employers forced firms to adopt practices that reduced labor mobility. Powerful unions reduce job turnover rates wherever they are present, raising the real wages of their members, but keeping people outside the union out of work. Unions in the Northeast often tie into the political process in a way that makes them very difficult to circumvent, adding to their already-formidable collective bargaining powers.
Powerful organizations using their influence to suppress competition paints a gloomy picture. Still, with sufficient freedom, we see hope and successful examples of the strengths of the American experiment. The Rust Belt denotes a failed part of that experiment. The power of local organizations to freeze out competitors reduced the region’s appeal. We should not be surprised when people and industry leave for better opportunities elsewhere. When unions restrict labor-market entry, people will migrate to areas where they can work, where right-to-work laws are commonplace. Firms, too, will locate where friendlier regulatory environments, such as the Southern and Midwestern regions, allow them to build housing for the influx of incoming migrants. Where people cannot get jobs or find homes, they pick up and leave. Where they find homes and jobs, they stay. This is not an excuse for complacency. Many of the policies that drove industrious work away from the Rust Belt remain politically popular at a national level. Legislation like the PRO Act, which includes limits on independent contractor status and right-to-work privileges, presents a real threat to the Sunbelt’s success. But until that sun sets, the American dream lives on.