In this blog we look at the uneven economic recovery from the "Great Recession" across the U.S. and consider how the widening wealth gap highlights the importance of the municipal bond market.
The American economy's recovery from the "Great Recession" has been widely reported1 as "uneven".2 But what does this actually mean in practice? What does it have to say about the importance of the municipal bond market?
Job and Economic Growth Concentrated in Prosperous Zip Codes
A widely cited recent study3 from the Economic Innovation Group helps quantify just how uneven the recovery has been. The study, which examined the years from 2011 to 2015, looked at seven key metrics to evaluate the economic health of communities by zip code throughout the U.S.: adults without a high school diploma, poverty rates, prime-age adults not working, housing vacancy rates, median income ratios, changes in unemployment, and changes in business establishments. It then divided these zip codes up evenly into five categories: Prosperous, Comfortable, Mid-Tier, At Risk, and Distressed.
According to the report, while the U.S. "added 10.7 million jobs and 310,000 business establishments" from 2011 to 2015, this growth was heavily concentrated in prosperous zip codes. Although these prosperous communities accounted for just 29% of the nation's jobs in 2011, they captured 52% of the new jobs created and 57% of the new business establishments nationwide through 2015. On the other hand, the lowest-tier zip codes falling in the "distressed" category lost more than 17,000 businesses in the same period.
The Most Prosperous Cities Tend to be Booming Tech Hubs or Sunbelt Destinations
So where are these prosperous zip codes, and how do they differ from their distressed counterparts? It may come as little surprise that the most prosperous cities tend to be booming tech hubs or Sunbelt4 destinations. Of the 100 largest cities in the U.S., the ten most prosperous, when measured by the study's metrics, are scattered throughout the west coast (Irvine, CA; San Francisco, CA; Seattle, WA; San Jose, CA;) and southwest (Gilbert, AZ; Henderson, NV; Scottsdale, AZ), as well as two in Texas (Plano and Austin). The ten most distressed large American cities, on the other hand, are largely concentrated throughout the rust belt (e.g., Cleveland, Newark, Buffalo, Detroit, Toledo, Milwaukee), with just one in the south (Memphis), and two in the west (Stockton, CA and Tucson, AZ).
The Greatest Wealth Divide: Urban versus Rural Communities
The greatest wealth divide, however, becomes most apparent when urban and rural communities are compared. Among counties with populations greater than 500,000, 50% are prosperous. However, just 14% of counties with populations below 100,000 fall in the same category. Counties with small populations are 11 times more likely to be distressed than larger ones.
This urban-rural wealth divide lies at the core of skyrocketing wealth inequality in the United States. To start with, residents of poorer areas may not find it so easy to relocate5 to more prosperous parts of the country where many new jobs are being added. As prosperous urban centers have added jobs, they have become increasingly expensive, with rents in some cases tripling or quadrupling. Cheaper areas may be more livable from a cost perspective, but they are falling short in attracting the economic growth that powers job creation. Indeed, cities where rent is cheap like St. Louis, MO or Jackson, MS have some of the weakest economies in the nation.
Northeast U.S. Continues to Host Majority of Highest Income Counties
Even among prosperous cities, there is a further geographic concentration of wealth and opportunity. Of the 75 highest income counties in the U.S., 44 were located in the Northeast as of 2012, running in a nearly continuous band from Boston to Washington DC. On the other hand, 97% of the poorest counties in the country (with median family incomes below $35,437) were in the south.
The Importance of the Municipal Bond Market
All this said, what is the role for the municipal bond market? Depending on where you look the picture painted is one that is very mixed. The economic picture looks bright for large, prosperous metropolitan areas where, with access to private capital, they continue to power economic growth, generate new businesses, jobs and their tax base. But the situation is not quite so positive for the more distressed parts of the country. These are, quite literally, being left behind in terms of both job growth and access to business formation as the ever-widening wealth gap leaves many municipalities languishing with diminished tax bases and stressed social services.
It seems to me, however, that the inescapable, but fortunate, reality is that the municipal marketplace offers a critically important financing vehicle to those communities lacking the benefits of their larger, wealthier brethren. If finances are managed appropriately, cities like Cleveland, Newark, and Buffalo can achieve access to the same costs of capital as do large metropoles such as Los Angeles and New York City. Investing in important, new infrastructure for retaining and attracting new business is not the exclusive opportunity of the rich. True, tax exempt issuance does not bridge the wealth gap, but it does offer communities an important building block for underpinning a long term-path for potential growth. As the forgoing suggests, the utilization of tax exempt financing across the broad national expanse of less wealthy municipalities is one small, but critically important element to offset the wealth divide.
1The Wall Street Journal: U.S. Economic Expansion is Unevenly Spread, Study Says, September 25, 2017
2The Hill: Recession, recovery leave behind suffering communities, September 26, 2017
3Economic Innovation Group: The 2017 Distressed Communities Index
5Quartz: Geography is making America's uneven economic recovery worse, April 29, 2016
6The Brookings Institution: Metro Monitor 2016, January 2016
7Citylab: America's Wealth Is Staggeringly Concentrated in the Northeast Corridor, December 13, 2013
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