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Moving the Jobless to the Jobs-Crucial for Economic Growth

There are very few things Washington could do to help the U.S. economic recovery and long-term growth than welcoming more entrepreneurs, creators, and workers from overseas. But while the movement of people to America is on the agenda in D.C., politicians might want to think about the benefits of people moving inside America, too.

Around the world, movement from poor rural areas to rich cities within countries has been a vital part of wealth creation. China alone has 140 million internal migrants, for example—most moved from the middle of the country to more prosperous coastal areas such as Shanghai, where they can earn more while their children can get a better education and quality health care. Just as international migrants send back $406 billion to their home countries each year, internal migrants support the families and communities they leave behind. And the wealth they create alongside the taxes they pay allow central governments to provide services and support to lagging regions.

Internal migration has been a powerful force for improving quality of life in the U.S., as well. People moving to Texas and California are going where the jobs are. And when poor people in the U.S. move to rich areas, that’s also a force for more equal national growth. Alongside the movement of goods and finance, the opportunities presented by movements of people are why poorer areas of the U.S. have traditionally grown faster than richer ones. Harvard economist Robert Barro and Columbia’s Xavier Sala-i-Martin estimated the rate of “income convergence” between states—how fast the gap is shrinking between poor and rich states—was about 2 percent per year between 1880 and 1998.

But more recent analysis by Peter Ganong and Daniel Shoag of Harvard finds that the rate of convergence across U.S. states has slowed dramatically over the past 30 years-poor states are growing faster than rich states, still, but the relative pace is much closer than it used to be. From 1940 to 1980, the gap between incomes in poor and rich states narrowed by 2.1 percent a year. But after 1980, the rate of narrowing slipped to less than 1 percent.

One big reason for this, they suggest, is a similar slowing of migration from poor to rich states. Before 1980, each doubling of income across states was associated with a population growth rate of 1.46 percent higher. Poor people from relatively poor states moved to the richer states in search of a better life—so rich states saw rapidly rising populations. But in recent years, the relationship essentially disappeared. Poor states and rich states are seeing the same rate of population growth. The decline in migration can account for all the slowdown in income convergence over the past few decades, they conclude.

Ganong and Shoag note that the slowdown in migration has been particularly severe for low-income workers. They suggest that rapidly rising house prices in wealthy areas help account for that. As house prices rise, the benefits of living in productive areas erode for low-skilled households. And the researchers note that the impact of housing regulation measured through land-use court cases is a big factor behind rising house prices. More regulation leads to higher house prices at a given income level—pricing poor people out of the housing market. Rich areas haven’t needed a passport system to keep poor people out of their communities; they’ve just regulated land use so much that there’s no cheap housing available.

Of course, that’s not necessarily easy for Washington to fix. Most of the regulations involved are made at the state and local level. But one thing Congress could do to help reduce the cost of housing and help deal with the fiscal cliff: Dump the home mortgage interest tax deduction.

The $100 billion the U.S. government provides each year in home mortgage interest tax relief makes housing more expensive. Three-quarters of the tax relief on home mortgage interest goes to the top 20 percent of earners, according to the Tax Policy Center—and hardly any people at the other end of the income distribution benefit from the credit. The credit encourages richer Americans to borrow more, bid up prices, and buy bigger houses on bigger plots. All that squeezes out the affordable rental housing that poor migrants need if they are going to get to where the jobs are.

Republican and Democrats agree that we should focus on equality of opportunity. But one of the best opportunities we can give people is to move from areas of little economic potential to areas with jobs and quality education. Getting rid of the home mortgage interest tax deduction is one way both to raise revenue and to help poor people help themselves. Of course, it’s also an idea with no political traction at the moment—but we’ve seen such things change before.

(Re-Printed from BloombergBusinessWeek)

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