Tides of Fortune: Why Geography Matters for Income Inequality

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hrough the past four decades, income inequality has become endemic in the United States. Since 1967, incomes at the lowest quintile have remained virtually stagnant, while the mean income of the top 5% of households has increased enormously. The recent recession has had a severe impact on the incomes of households in the bottom quintile, causing them to drop to their lowest level since 1985. Conversely, upper-quintile incomes have largely recovered from their recession-level low, standing approximately at 2007 levels. Recent economic gains have mostly accrued to the upper and upper-middle classes.

But the trend towards increasing economic disparities is as much a story told by geography as it is one told by class. As America’s rural economies are depleted of their vitality through the erosion of their population base and lagging post-secondary educational attainment, its large metropolitan areas continue to perform impressively in key metrics for economic performance. According to the Bureau of Labor Statistics Consumer Expenditure Survey, the average income of households in areas with under 100,000 consumer units was $50,433 in 2013. For areas with over 5 million consumer units, the average household income was $75,733 in the same year. Household income in the Northeastern and Western megalopolises is yet greater: $80,862 in New York and $92,846 in San Francisco. These numbers reveal an underlying trend whereby large, highly educated cities progressively account for a greater share of American economic output. In 2014, the ten highest-performing metropolitan areas in the USA generated 34% of its GDP.

These cities are overwhelmingly concentrated on the coasts. In 2000, counties on the Atlantic, Pacific, and Great Lake coasts contained 51% of the USA’s population and accounted for 57% of its civilian income. Of the ten metro areas with the highest GDP in 2014, all but Dallas-Fort Worth and Atlanta are located on the coasts. The reasons for these cities’ economic dominance are numerous. Many have benefited from a historic dominance of certain key sectors: finance in the case of New York, entertainment in Los Angeles, energy in Houston, high technology in San Francisco, and higher education in Boston. They tend to be home to larger concentrations of college-educated professionals than surrounding rural areas. Easy access to ports also contributes to a city’s comparative advantage in a world where international trade plays a decisive role in determining the prosperity of regions.

However, some argue that the main drivers of coastal dominance are “lock-in” effects arising from the initial rapid growth of coastal cities in an era when cheap water access constituted an overwhelming advantage for urban areas. Prior to 1816, the cost of moving goods fifteen miles overland was comparable to the cost of moving them across the entire Atlantic Ocean. Based on a trip from London to New York, this translates to land transport having been approximately 230 times more expensive than maritime transport on a mile-for-mile basis. Today, the cost gap is on the order of ten to one. The advantage of port access still exists, but on a far smaller scale than in the pre-industrial era. Instead, coastal cities benefit from the continued effects of their prior economic dominance. Even though their location no longer confers significant advantages, they remain magnets for human and financial capital due to the presence of established, successful industries. New York’s harbour may no longer form the basis of its prosperity, but much of the USA’s financial sector remains based in the city, with little incentive to move elsewhere.

These trends are by no means restricted to the United States. Coastal-inland inequality is pervasive in China and may be partially attributed to the timeline of its market reforms. The first special economic zones, designed to attract foreign direct investment, were established in coastal cities in the southern provinces of Guangdong and Fujian. In fact, it was not until 2000 that China opened up the entirety of the nation to FDI. The result of these preferential development policies has been a prosperous coast and impoverished inland regions. The figure to the right, taken from UNICEF China, demonstrates the gradient in urban disposable income as one moves progressively further from the coast.

Lock-in effects have also played a role in China’s coastal-inland inequality: the first regions to have been developed are consistently more affluent than those which were later opened to FDI. However, in China’s case, the coastal regions’ head start was engineered as a conscious policy decision. Given the export-oriented nature of the Chinese economic boom, the concentration of FDI in coastal regions with access to ports has proven to be a wise decision. However, significant growth in the western regions will be needed to reduce regional disparities in economic output and standard of living.

What does this mean for policymakers? The geographical advantages of coastal cities are no longer major factors in their affluence. Instead, their pre-existing dominance of major industries leads them to attract capital, which in turn reinforces their economic position and draws in more capital, thereby creating a cycle of prosperity. To develop their inland regions, policymakers must encourage the growth of emerging sectors in those areas to allow them to benefit from lock-in effects in the long term. Directed investments in inland regions may prove essential to mitigating regional inequalities and ensuring broad-based prosperity for all their nations’ citizens, no matter their geographical location.

About Christopher Scarvelis

Christopher holds a DEC in Health Science from Marianopolis College and will begin pursuing studies at the McGill University Faculty of Law in the fall. At Marianopolis, Christopher was a founding member of the Marianopolis Drug Awareness Society, an organization that seeks to promote harm-reduction approaches to managing the public health implications of drug abuse. He is a member of the Canadian International Council and a regular attendee of Montreal branch events. His research interests include education policy, urban development, and the impact of domestic political institutions on international behaviour. Christopher may be reached by email at christopher.scarvelis@gmail.com.