Will the structure of the US Economy lead to long-term stagnation?

That’s the argument recently made in the Economist‘s Free Exchange blog.  The argument goes to the effect that economies grow and prosper to the extent that they can increase the size of their “tradable” sectors (i.e., those sectors that can export goods or services and import money).  The post points out that in the past few decades, almost all of the job growth in the US has been in nontradable sectors like healthcare.

Why is this the case?  The Free Exchange writers posit that this may be due to the fact that there is a massive transfer of government resources from the highly productive metropolitan areas like New York, Boston and San Francisco to places with lower productivity like Phoenix, Fort Lauderdale, etc.  This happens as people retire from the Snowbelt to the Sunbelt.  They take their Social Security and Medicare with them.  In their new sunny homes, these people use their incomes to bid up wages in the nontradeable sectors like health care and personal care services.  (Click on the image to the right to see a full size map demonstrating this transfer.)

In these low-productivity areas, the tradeable firms can’t compete with these new higher wages and this stifles growth in those sectors.  And, in an economy where competitiveness depends upon the creation of new ideas, a vicious circle begins:

[While] population is flowing from high productivity to low productivity cities, this is not generating a proportional transfer in productivity. Migrating workers—even those who continue to work in a tradable sector—are those that were least involved in the process of idea creation in their old city, and they therefore contribute little to the development of a new spillover [i.e., tradable] cluster in their new city.

Very interesting. . . . you can read the full post here.

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