Stuck! The Law and Economics of Residential Stagnation.

• Author: Schleicher, David

INTRODUCTION: AMERICA'S STICKY INTERNAL LABOR MARKET

Leaving one's home in search of a better life is, perhaps, the most classic of all American stories. We fled England in pursuit of freedom from religious persecution by the British. We moved north in the Great Migration. (1) "Go West, young man," we were told, "and grow with the country." (2) Federal programs allow us to "move to opportunity." (3)

But today, the number of Americans who leave home for new opportunities is in decline. A series of studies shows that the interstate (4) migration rate has fallen substantially since the 1980s. (5) Americans now move less often than Canadians, and no more than Finns or Danes. (6) Even the most prominent study finding no general decline in mobility does observe that mobility rates are lower among disadvantaged groups and that mobility has not increased despite becoming "more important" to individual economic advancement. (7)

More troubling still, Americans are no longer moving from poor regions to rich ones. This observation captures two trends in declining mobility. First, fewer Americans are moving away from geographic areas of low economic opportunity. David Autor, David Dorn, and their colleagues have studied declining regions that lost manufacturing jobs due to shocks created by Chinese import competition. Traditionally, such shocks would be expected to generate temporary spikes in unemployment rates, which would then subside as unemployed people left the area to find new jobs. But these studies found that unemployment rates and average wage reductions persisted over time. (8) Americans, especially those who are non-college educated, (9) are choosing to stay in areas hit by negative economic shocks. There is a long history of localized shocks generating interstate mobility in the United States; today, however, economists at the International Monetary Fund note that "following the same negative shock to labor demand, affected workers have more and more tended to either drop out of the labor force or remain unemployed instead of relocating." (10)

Second, lower-skilled workers are not moving to high-wage cities and regions. Bankers and technologists continue to move from Mississippi or Arkansas to New York or Silicon Valley, but few janitors make similar moves, despite the higher nominal wages on offer in rich regions for all types of jobs. As a result, local economic booms no longer create boomtowns. Economically successful regions like Silicon Valley, San Francisco, New York, and Boston have seen only slow population growth over the last twenty-five years. (11) Inequality between states has become entrenched. Peter Ganong and Daniel Shoag have shown that a hundred-year trend of "convergence" between the richest and poorest states in per-capita state Gross Domestic Product (GDP) slowed in the 1980s and now has effectively come to a halt. (12)

This Article will make two claims. First, it will argue that the stickiness of America's internal labor market is a fundamental macroeconomic problem that influences the quality of monetary policy, overall economic output and growth, and the efficacy of federal safety net spending. While there is no way to determine an optimal rate of interstate migration, important federal policies--like the use of a single currency and cooperative federalist social welfare programs--rely on a substantial amount of interstate labor mobility to function. (13) Further, empirical estimates show that increasing interstate migration rates, and particularly moves to rich regions, would substantially increase economic activity and welfare. (14)

Second, the Article will show that state and local (and a few federal) laws and policies have created substantial barriers to interstate mobility, particularly for lower-income Americans. Land-use laws and occupational licensing regimes limit entry into local and state labor markets. Differing eligibility standards for public benefits, public employee pensions, homeownership tax subsidies, state and local tax laws, and even basic property law doctrines inhibit exit from low-opportunity states and cities. Building codes, mobile home bans, location-based subsidies, legal constraints on knocking down houses, and the problematic structure of Chapter 9 municipal bankruptcy all limit the capacity of failing cities to shrink gracefully, directly reducing exit among some populations and increasing the economic and social costs of entry limits elsewhere. The effect on mobility of a few of these policies, like land-use restrictions, is already understood in the literature. But this Article is the first to recognize the pervasiveness and variety of state and local policies that limit mobility.

A number of these policies changed substantially in ways that made populations stickier during the period when mobility fell. It is not clear whether these legal changes caused declines in mobility, or simply failed to push back against "natural" changes that reduced mobility--such as an aging population, declining churn in employment, and decreasing diversity of employers by region due to the increasing economic dominance of the service sector. (15) But state and local policies in part dictate where people move, particularly by keeping people out of the richest metropolitan areas and best job markets. (16) Whether as a direct cause or as mere bystanders, state, local, and federal laws therefore bear some responsibility for declining interstate mobility.

Abstracting from these two claims, a key takeaway of this Article is that the success of macroeconomic policy turns in large part on state and local government interventions traditionally analyzed using microeconomic tools. (17) In aggregate, these local and state policies play a substantial role in creating or failing to combat the central macroeconomic problems of our time: slow growth rates, increasing inequality of wealth and income, and the difficulties of balancing inflation and unemployment.

However, state and local policies must answer to state and local needs, which are often in tension with broader national interests. In particular, population stability--the very opposite of mobility--can be beneficial to existing residents of a local or state government. Areas with stable populations are less risky and more attractive to investors. (18) Families, too, may prefer population-stable areas, where grandchildren are more likely to live near their grandparents. State and local governments that want to promote investment and the interests of local families and homeowners may thus place a premium on stability. In fact, as I (and others) have argued elsewhere, the structure and process of state and local government decisionmaking often overrepresents the voices of those local residents who care the most about stability and the least about growth. (19)

State and local governments have few incentives to consider broader national economic implications when writing zoning codes or establishing public pension rules. My previous work has shown how the very existence of local governments encourages people to move away from economically superior locations in order to receive a preferred package of government services. (20) Where local or state governments have the power to limit entry or reduce exit, the harm to agglomerative efficiency, and thus national economic output, is substantially increased. Surprisingly, even many federal policies also fail to take national macroeconomic issues into account. (21) Most of the federal policies discussed in this Article--from Medicaid waivers to Chapter 9 bankruptcy for municipalities--are developed in silos without much input from institutions like the Federal Reserve or from other officials concerned with broader questions of unemployment and inflation.

Recognizing these tensions, this Article seeks to chart a course that will help law and policymakers at every level better promote federal macroeconomic policy. As this Article will establish, the entity best situated to protect federal interests is the federal government. Ideally, the federal government should develop tools that force decisionmakers at all levels of government to consider the macroeconomic implications of their interventions. As a second-best solution, the federal government could counteract laws that reduce mobility by creating direct financial incentives for individuals to move. Of course, neither strategy will solve all the problems of residential stagnation overnight--some people simply will not want or be able to move. But the strategies recommended in this Article are an important first step in reorienting federal, state, and local law to better reflect national economic needs.

The rest of the Article proceeds as follows: Part I discusses why mobility is important on a national macroeconomic level. Part II discusses how law obstructs entry, exit, and the graceful decline of dying cities. The Article concludes by sketching a legal and policy agenda to increase interstate mobility in America.

1. WHY IS INTERSTATE MOBILITY IMPORTANT? LABOR MOBILITY AND LAW IN ECONOMIC THEORY

   As a preliminary matter, this Article does not purport to span the entire field of mobility studies. A rich literature addresses issues of international labor mobility, particularly the immigration law regime. (22) Scholars have also extensively discussed intrastate residential mobility, especially how residents and workers in a single labor market choose between competing local governments when deciding where to live. (23) International and intrastate mobility are important fields, but to focus exclusively on these two areas is to ignore a crucial aspect of American migration patterns.

   This Article instead seeks to push the discussion of interstate mobility to the forefront. (24) As this Part will demonstrate, interstate migration has important macroeconomic implications that deserve serious scholarly attention. The following Sections...