Populism's wave has yet to crest. That is the sobering lesson of recent elections in Germany and Austria, where the success of anti-immigrant, anti-globalization parties showed that a message of hostility to elites and outsiders resonates as strongly as ever among those fed up with the status quo. It is also the lesson from America, where Donald Trump is doubling down on gestures to his angry base.
The anti-immigrant, anti-trade remedies will not work. But the self-defeating nature of populist policies will not blunt their appeal. Mainstream parties must offer voters who feel left behind a better vision of the future, one that takes greater account of the geographical reality behind the politics of anger.
Economic theory suggests that regional inequalities should diminish as poorer (and cheaper) places attract investment and grow faster than richer ones. The 20th century bore that theory out: Income gaps narrowed across American states and European regions. No longer.
Affluent places are now pulling away from poorer places. This geographical divergence has dramatic consequences. A child born in the bottom 20 percent in wealthy San Francisco has twice as much chance as a similar child in Detroit of ending up in the top 20 percent as an adult. Opportunities are limited for those stuck in the wrong place, and the wider economy suffers. If all of its citizens had lived in places of high productivity over the past 50 years, America's economy could have grown twice as fast as it did.
Divergence is the result of big forces. In the modern economy, scale is increasingly important. Companies with the biggest hoards of data can train their machines most effectively; the social network that everyone else is on is most attractive to new users; the stock exchange with the deepest pool of investors is best for raising capital. These returns to scale create fewer superstar firms clustered in fewer superstar places. Everywhere else is left behind.
Even as regional disparities widen, people are becoming less mobile. The percentage of Americans who move across state lines each year has fallen by half since the 1990s. Demographic shifts help explain this, including the rise in two-earner households and the need to care for aging family members. But the bigger culprit is poor policies.
Soaring housing costs in prosperous cities keep newcomers out. In Europe, a scarcity of public housing leads people to hang onto cheap flats. In America, the spread of state-specific occupational licensing and government benefits punishes those who move. The pension of a teacher who stays in the same state could be twice as big as that of a teacher who moves midcareer.
Perversely, policies to help the poor unintentionally deepen the plight of left-behind places. Unemployment and health benefits enable the least employable people to survive in struggling places when once they would have had no choice but to move. Welfare makes capitalism less brutal for individuals — but it perpetuates the problems where they live.
What to do? One answer is to help people move. Thriving places could do more to build housing and infrastructure to accommodate newcomers. Accelerating the reciprocal recognition of credentials across state or national borders would help people move to where they can be most productive. But greater mobility also has a perverse side-effect. By draining moribund places of talented workers, it exacerbates their troubles.
Politicians have long tried to bolster left-behind places with subsidies. But such "regional policies" have a patchy record, at best. South Carolina lured BMW to the state in 1992 and from it built a thriving automotive cluster. But the European Union's structural funds raise output and reduce unemployment only so long as funding continues. California has 42 enterprise zones. Not one has raised employment.
Better to focus on speeding up the diffusion of technology and business practices from high-performing places. A beefed-up competition policy could reduce industrial concentration, which saps an economy of dynamism while focusing the gains from growth in fewer firms and places. Fostering clusters by encouraging the creation of private investment funds targeted on particular regions might help.
Bolder still would be to expand the mission of local colleges. In the 19th century, America created lots of public technical universities. They were supposed to teach best practices to farmers and factory managers in small towns and rural areas. They could play that role again today for new technologies.
Politicians might even learn from Amazon, whose search for a home for a second headquarters set off a scramble among cities hoping to lure the giant e-tailer. Governments could award public research centers — in the mold of America's National Institutes of Health or Europe's CERN — to cities that prepare the best plans for policy reform and public investment. This would aid the diffusion of new ideas and create an incentive for struggling places to help themselves.
Perhaps most of all, politicians need a different mind-set. For progressives, alleviating poverty has demanded welfare; for libertarians, it has meant freeing up the economy. Both have focused on people.
But the complex interaction of demography, welfare and globalization means people policy is insufficient. Assuaging the anger of the left-behind means realizing that places matter, too.
Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.
