Internal Migration & Convergence

+ Brandon Fuller

In his latest Bloomberg Businessweek column, Charles Kenny discusses the importance of internal migration to economic development:

China alone has 140 million internal migrants, for example—most moved from the middle of the country to more prosperous coastal areas such as Shanghai, where they can earn more while their children can get a better education and quality health care. Just as international migrants send back $406 billion to their home countries each year, internal migrants support the families and communities they leave behind. And the wealth they create alongside the taxes they pay allow central governments to provide services and support to lagging regions.Internal migration has been a powerful force for improving quality of life in the U.S., as well. People moving to Texas and California are going where the jobs are. And when poor people in the U.S. move to rich areas, that’s also a force for more equal national growth. Alongside the movement of goods and finance, the opportunities presented by movements of people are why poorer areas of the U.S. have traditionally grown faster than richer ones.But more recent analysis by Peter Ganong and Daniel Shoag of Harvard finds that the rate of convergence across U.S. states has slowed dramatically over the past 30 years—poor states are growing faster than rich states, still, but the relative pace is much closer than it used to be.

We’ve covered Ganong and Shoag’s work in previous posts here and here. It suggests that the decline in convergence is largely due to a slowdown in migration from poor to rich states. The slowdown in internal migration reflects higher house prices in America’s most productive areas, prices that are out of reach for increasing numbers of would-be migrants. Ganong and Shoag find that the higher house prices reflect tightening land use restrictions. Relaxing such restrictions and building additional housing in richer areas would both increase economic growth and reduce income disparities.

While Congress can’t force local authorities to scrap inefficient land use restrictions, Kenny sees one way that federal policy might help:

Dump the home mortgage interest tax deduction. The $100 billion the U.S. government provides each year in home mortgage interest tax relief makes housing more expensive. Three-quarters of the tax relief on home mortgage interest goes to the top 20 percent of earners, according to the Tax Policy Center—and hardly any people at the other end of the income distribution benefit from the credit. The credit encourages richer Americans to borrow more, bid up prices, and buy bigger houses on bigger plots. All that squeezes out the affordable rental housing that poor migrants need if they are going to get to where the jobs are.

This reminded me of Edward Glaeser’s recent column in the Boston GlobeGlaeser wants to reform the mortgage interest deduction but he worries that scrapping it all together might actually hurt some of America’s productive cities:

Many Americans could increase their incomes — and the nation’s productivity — by bringing their skills to these areas. But if they do, these workers face not just higher costs but larger federal tax payments; as a result, their disposable income can actually go down if they move. Michigan economist David Albouy estimates that the tax code causes America to lose about one-quarter of 1 percent of income each year because it pushes people away from more productive places.Whatever its downside, the mortgage interest deduction partially offsets this effect. One study found that the average tax benefit for homeowners in greater Boston was over $5,000, while the average benefit in non-metropolitan Florida was less than $2,000. Meanwhile, Albouy estimates that, without the mortgage interest deduction, the social losses from pushing people away from productive areas would increase to just under half of 1 percent of national income…We can get rid of the mortgage deduction without penalizing Massachusetts and other high-price states, if we replace the deduction with a tax credit that takes account of city-to-city differences in the local cost of living. The credit would not be tied to home value or borrowing. If Congress still wanted to encourage homeownership, the credit could be tied to owning a home. But it doesn’t need to be.The credit would help create a more productive nation by partially offsetting the tax costs of moving to a more productive area. A more sophisticated plan is to tie to the tax credit to local earnings for ordinary workers, rather than just to local housing prices. We have more of a national interest in encouraging people to live in productive places than to live in areas with, say, beautiful sunsets.

Whatever the solution to encouraging greater internal migration in the United States, Ganong and Shoag’s paper is something of a warning for rapidly urbanizing countries in the developing world. Rather than turning their richest regions into gated cities for the well-to-do, governments should do their best to make ample room for urban expansion. Doing so will keep housing affordable and encourage faster internal income convergence.

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