I want just throw out some scattered thoughts about a topic that I think is very important, but not particularly well understood: population loss. By population loss, I mean when a local economy sees a decline population. I find this an interesting topic because population loss has been a…
I want just throw out some scattered thoughts about a topic that I think is very important, but not particularly well understood: population loss.
By population loss, I mean when a local economy sees a decline population. I find this an interesting topic because population loss has been a big factor in many areas of the country, and because the net economic effects of population loss are unclear and underdiscussed.
When a local economy experiences a negative economic shock, the local marginal productivity falls below marginal productivity in other areas, and population loss can result as people leave the area.
This benefits those who leave by increasing their income. It benefits local residents by making labor more scarce, and driving up wages. This is the motivation behind vouchers that make it easier for people to move when they lose a job.
However, there are lots of negative effects when people move away as well. It creates a housing vacancy and reduces local tax revenues. Because a lot of local government costs are fixed and even more are hard to reduce even if you want to, this puts a fiscal strain on remaining residents. Once vacancies become high enough, they also create significant costs by themselves related to blight, maintenance, and crime.
Those who leave also create a spillover negative demand shock that hurts local businesses who were selling things to them.
I also suspect a declining population is bad for an economy in ways that aren’t fully understood yet. For example, Litan and Hathaway show that lower population growth is a big driver of the fall in start-up rates though it’s not entirely clear why.And agglomeration economies are important factors in determine local productivity. Glaeser, Kolko, and Saiz show that density also facilities greater consumer choice by creating sufficient market sizes for more niche products and services.A big question of course is: how linear or non-linear are these effects? Do winning places gain more or failing places lose more by reallocation? The losses incurred in Detroit certainly seem to be non-linear in the negative direction.
So declining population can help labor reallocate and reduce unemployment. But it also risks reducing investment, innovation, amenities, and productivity, and increasing fiscal costs in places that are already struggling.
I am not ready to take a policy stance yet, and I still think a lot remains unsettled about this issue. My hunch is population loss imposes larger costs than we currently think, but productive reallocation is at the core of a well-functioning economy. For example, the fact that our most productive cities restrain population growth with restrictive zoning seems like a big problem. Declining population in struggling areas is the mirror of growing population in thriving areas, and do we really want to lean against this?
But despite the importance of reallocation, I think is the debate misses the fact that reallocation can help on the margin, but it imposes costs along the way. And New York City and San Francisco are not the only successful economies, and there are successful third tier cities and rural areas, and places that survived the loss of manufacturing jobs. Can we not learn lessons from them? “If it’s not working, empty it” seems like an impossible and insufficient solution to struggling parts of the country.
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