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Daily RC Article 99

Reviving Communities: Rethinking Economics for Local Prosperity


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Two books, one by Raghuram Rajan and another by Oren Cass, revisit our economistic worldview and argue that we should instead put the health of our local communities front and centre. Stable families, good jobs, strong schools, abundant and safe public spaces, and pride in local cultures and history – these are the essential elements of prosperous societies. Neither global markets nor the nation-state can adequately supply them, and sometimes markets and states undermine them...

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Rajan calls community the “third pillar” of prosperity, as important as the other two pillars – the state and market. No less than excessive centralized state power, he writes, unmanaged globalization can tear apart the fabric of local communities. Cass is explicit that US trade and immigration policy should focus on American workers first and foremost. This means ensuring that local labour markets are healthy and that there are plenty of good jobs at decent wages. Both authors emphasize the gains from trade and reject protectionism. But they agree we may have gone too far into hyper-globalization and paid insufficient attention to the costs for communities.

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When a local factory closes because a firm has decided to outsource to a supplier across the border, more is lost than the hundreds (or thousands) of jobs that move abroad. The impact is multiplied through reduced spending on local goods and services, which means workers and employers across the entire local economy feel the hit. The local government’s tax revenues fall as well, so there is less money to spend on education and other public amenities. Anomie, family breakdown, opioid addiction, and other social ills often follow.

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Economists’ usual answer is to call for “greater labour market flexibility”: workers should simply leave depressed areas and seek jobs elsewhere. But as Cass reminds us, geographical mobility must be coupled with “the opportunity to stay.” Even during times of significant migration, the bulk of local populations stayed put and needed good jobs and solid communities…

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Ultimately, it is only through the creation and expansion of well-paying jobs that local communities can be made vital. Cass’s proposal is to encourage employment through wage subsidies. Rajan emphasizes the role of local leaders who can mobilize community assets, generate social engagement on the part of local residents, and create a new image – all in the context of more supportive state policies and managed globalization. Other economists have advocated regionally targeted manufacturing extension programs, fostering partnerships between local employers and universities. Yet others recommend local public spending, such as on job training programs for small and medium-sized enterprises.

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We do not have a good fix on what works best, and a fair amount of policy experimentation will be needed to make progress. But the urgency of action is heightened by the fact that ongoing technological trends threaten to exacerbate communities’ existing problems. New digital technologies tend to exhibit scale economies and network effects, which produce concentration rather than localization of production. Instead of diffusing gains, they create winner-take-all markets. The globalization of production networks magnifies such effects further.

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How we balance these forces with the needs of communities will shape not only our economic fortunes, but also our social and political environment. As Cass and Rajan show, it is a problem that economists should no longer ignore.

Rajan and Cass challenge the dominance of global economic perspectives, emphasizing the crucial role of local communities in fostering prosperity. They highlight the damage caused by unmanaged globalization and advocate for prioritizing the health of local labor markets and communities. The closure of local factories has broader implications beyond job loss, affecting the entire local economy and leading to social issues. Solutions proposed include wage subsidies, local leadership mobilization, regional manufacturing programs, and targeted public spending, acknowledging the need for policy experimentation. The impact of technological trends further accentuates these challenges, underscoring the necessity for a balanced approach that considers both economic success and community well-being.
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