The Forgotten Cities

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Scholars criticize regulatory decisions that funneled economic growth away from inland cities.

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New York, San Francisco, and Los Angeles have been deemed “superstar” cities. Detroit, St. Louis, and Des Moines—not so much. Was this divergence inevitable?

Many observers claim that geographic inequality is the result of unavoidable economic trends. Large corporations cluster their jobs near superstar cities, reinforcing thriving economies while leaving other regions to be left behind.

But according to a recent article by Vanderbilt Law School professors Ganesh Sitaraman, Morgan Ricks, and Christopher Serkin, the economic growth narrative behind the rise of the country’s largest cities leaves out an important factor: federal regulatory failures.

Sitaraman, Ricks, and Serkin explain that the strong regulatory framework imposed during the Progressive Era and New Deal encouraged geographically dispersed economic growth. They say that the “unraveling” of that older regulatory framework, starting around 1980, began an era of increasing economic and geographic inequality.

The scholars trace the rise and fall of the older regulatory order across the sectors of transportation, communications, trade, and antitrust.

A core element of federal transportation regulation during the 20th century was to ensure the reduction of price and service differences through internal cross-subsidization, where revenue from profitable routes would be used to maintain service and lower fares on less popular connections.

Regulators employed cross-subsidization across each of the key transit sectors of rail, motor carrier, and air travel. In 1906, the U.S. Congress authorized the Interstate Commerce Commission (ICC) to regulate railroad rates, later adding trucking and intercity bus routes under the ICC’s purview in 1935 through federal legislation. In 1938, the Civil Aeronautics Board (CAB) was assigned to regulate air fares by levying the same cross-subsidization model on the young airline industry. The result of such cumulative regulation, according to law and economics scholar Richard Posner, required the delivery of “services to classes of customers and geographical areas that might not be served in a free market.”

But what happened when federal policymakers pulled back transportation service protections? Sitaraman, Ricks, and Serkin describe the effects of such deregulation as “devastating.” Legislation adopted in 1980 restricted the ICC’s authority to regulate fares and impose exit restrictions in passenger rail and bus service, which allowed companies to discontinue routes to rural and smaller communities.

Airline deregulation followed a similar trajectory. The CAB started deregulating airline rates via administrative action in 1977, and subsequently they were dissolved altogether due to the Airline Deregulation Act of 1978. Flights to and from heartland cities such as Memphis and Cincinnati became more expensive per mile than those from New York or San Francisco, differences that “were forbidden prior to deregulation.” Inland cities suffered economic loss as conventions, tourists, and businesses moved toward cheaper and more convenient coastal centers.

Similar to transportation systems, communications networks are also a vital part of infrastructure and serve as “key catalysts” for economic expansion, note Sitaraman, Ricks, and Serkin. They describe a familiar regulatory story: The Communications Act of 1934 created the Federal Communications Commission (FCC), which imposed regulatory policies that resulted in nationwide average pricing for telephone users.

The expansion of cellular phone and broadband internet services during the 21st century, however, has not seen the strength of price cross-subsidization used to ensure equitable access. The FCC has failed to apply universal service mandates to new networks, leaving 30 percent of Americans without home broadband access and many rural areas without reliable cellular service. The economic impacts include lower property values and disincentives for business expansion.

On trade deregulation, Sitaraman, Ricks, and Serkin analyze the more recent trend in congressional delegation of trade policymaking to the executive branch, an approach that began with the Trade Act of 1974, which gave the President “fast-track” authority to negotiate trade agreements. National trade agreements have disparate impacts on different parts of the country, and fast-track authority undermines the ability of congressional representatives to voice the concerns of their potentially forgotten constituents.

Furthermore, geographic considerations are farther removed from the trade policy process due to procedural lapses. In its publications about trade agreements, the U.S. International Trade Commission (ITC) studies the predicted national impacts of trade agreements on labor, profits, and other economic factors—but fails to describe regional or city-specific impacts.

Sitaraman, Ricks, and Serkin use industry examples to identify the failures of antitrust regulation that led to corporate consolidation and the decline of geographical economic dispersal. In retail, legislation adopted in the 1930s regulated unfair competition against small retailers by preventing large chain stores from offering below-market predatory prices to attract customers. But those efforts were weakened in 1975, resulting in an expansion of chain retailers with distant headquarters. Banking industry deregulation through the 1994 Riegle-Neal Interstate Banking and Branching Efficiency Act led to a similar result, as “too big to fail” nationwide banks replaced smaller financial institutions, along with their local economic benefits.

The cumulative effect of deregulatory policies across transportation, communication, trade, and antitrust over recent decades has caused geographic inequality to rise, with ill effects on all levels of cities. Superstar cities experience affordability crises, while smaller stagnated cities confront revenue difficulties. But the trend can be reversed.

To restore a fair pricing model for underserved customers, Sitaraman, Ricks, and Serkin argue for reincorporating internal cross-subsidization through a combination of rate regulation, service mandates, and entry restrictions across the transportation and communication industries. They also suggest that Congress could revise trade policy to require the ITC to evaluate the geographic impacts of proposed trade agreements, a step that should help generate political pressure to avoid agreements that adversely affect certain regions.

Sitaraman, Ricks, and Serkin advocate procedural change as well. Specifically, they call for federal legislation or an executive order mandating all agencies to examine the geographic impact of their regulatory decisions.

The diverging economic trajectories of superstar and forgotten cities was not inevitable, conclude Sitaraman, Ricks, and Serkin. Federal regulatory policy serves as a key cause of—and, they say, a key solution to—geographic inequality.