Main Street USA's economic slide isn't just a rural problem

Reprinted from the Humphrey Institute News, Autumn 1994.

G. Edward Schuh

Published January 1, 1995  | January 1995 issue

The following column is the first in a series that will address problems—and solutions—facing Ninth District rural communities.

We will consider for publication contributions that pertain to the changes affecting Ninth District rural communities.

Others columns in the series:
A banker's perspective on economic development
fedgazette, April 1995

Community development: an entrepreneurial approach
fedgazette, July 1995

Economic decline in rural areas is a serious problem in contemporary America. Individual communities are shrinking and, in some cases, disappearing as local citizens migrate to urban centers. Important services such as those provided by doctors, dentists and hospitals are dwindling and, in some towns, disappearing. Drugstores, grocery stores and other forms of commerce are also moving on.

As economic activities decline, the local tax base and services available to local citizens grow weak. For example, with fewer students it becomes difficult to sustain the same quality of education in rural areas as young people in urban and suburban areas receive. What we see is a vicious circle of economic decline leading to more economic decline. They appeal for more assistance through existing agricultural programs. However, most of those programs fail to address the root causes of the problem. Designed to save the family farm, commodity programs that support prices above market-clearing levels haven't done what was intended for them. Most of the income transfers paid through these programs go to large producers. In many cases large producers are able to purchase the land of their smaller neighbors. This increases the movement out of rural towns and areas.

These commodity programs also don't address rural America's basic problems. Rural America's decline is largely due to the decline of small manufacturing in rural communities. Although this nation's main manufacturing sector is bouncing back from its downturn of the 1980s, it is not coming back in rural areas.

A related problem is the growing gap in per capita incomes between rural and urban populations. Rural citizens now earn on average about 30 percent less than their urban counterparts. That is as wide as the gap has been since World War II. This difference in income also encourages people to move out of rural areas. Unfortunately, this migration is highly selective and drains the human capital and talent from rural areas. It is the younger, better educated, healthier, more entrepreneurial people who leave.

Working on the rural side of the equation alone won't resolve the problem. Urban centers are highly attractive to the migrants because that is where the jobs are located. The concentration of economic activities in these centers is due in part to the direct and indirect subsidies available to the firms that locate there. These subsidies are reflected in publicly built water and sewage systems, occasional tax relief for location in these centers and the continued construction of transportation systems to alleviate congestion.

This illustrates why the widening gap in incomes between urban and rural areas is not something that will be solved only by addressing the problems of rural areas. Clearly, steps need to be taken to strengthen schools and training programs in rural areas, and to improve the rural infrastructure. This will encourage other economic activities to locate there. By the same token, however, steps need to be taken to reduce the subsidies that lead to the concentration of economic activities in urban/suburban agglomerations.

Schuh's column in the fedgazette is reprinted from the Humphrey Institute News, Autumn 1994 issue.