Simple economic ideas aren’t really very hard to understand. So, I’m often puzzled to hear folks make the claim that Indiana’s low cost of living is an attractive feature. It is not. A low cost of living is actually evidence of chronic economic problems, and is maybe the last thing anyone should want to claim about their community. Cost of living differences between places are almost always a consequence of land prices.
In centuries past, the cost of land differed for many reasons. Proximity to a water port, or river made transportation cheap. So, land near deep ports or rivers was highly prized. Arable land, that produced a variety of crops with little need for irrigation was also highly valuable. Coal, oil or natural gas also made land valuable in places where these commodities could be extracted. In some places, cities that could be defended from marauders or advancing armies was very valuable for the safety it provided.
For most of the past century, none of these things have really mattered for land prices in the United States. What drove land prices was simple the desire for people to live there. Nothing more. From 1900 to about 1950, job prospects drew people to places in the U.S. This was a great time for the Midwest. Productive factories started in the region, leading to migration from farms to cities, from Europe to America and from poor southern states to the industrialized cities like Detroit, Chicago, Kokomo and Toledo.
Ironically, the factories first moved to the Midwest to find workers near rivers and lakes. It never was just the land. But by 1900 workers were moving here in droves. By the 1950’s that began to slow. Our economy got so good at making things that demand for workers in Midwestern factories declined. New jobs around the country replaced factory jobs, and workers could choose more easily where they lived.
By the 1980’s job growth in America was primarily driven by the movement of families, not businesses. Families increasingly chose communities based upon characteristics they liked. Weather, mountains and oceans mattered. In the 1980’s, January temperatures explained a lot of migration choices. But, by the 21st century, weather and mountains mattered far less to migrants than good schools, the absence of crime and recreation or shopping activities locally.
Economists label this phenomenon of household location decisions as quality of life. Today, quality of life is driving not only most population growth, but also employment growth. The productivity of regional businesses matters a bit, as does the availability of housing. In fact, there are about 40 metropolitan areas nationwide whose housing policies are stifling growth. None of these are in the Midwest, where excess housing, not a housing shortage is the problem. And that brings us back to cost of living.
I cringe when I hear otherwise smart people claim that a low cost of living is an attractive feature of a community, or explains Indiana’s low incomes. That is just nonsense. In fact, it is evidence that people don’t wish to live there. The absence of demand for housing is depressing home values, and the value of land. But, you don’t need to rely upon some fancy economic models to understand that this is so. You can just look at where people are moving.
Across the nation, migration and overall population growth is happening only in expensive places. In fact, you can predict population growth pretty well by looking at home prices on Zillow or some other listing service. High priced places have lots of people looking for homes, and low priced places have lots of people trying to sell homes.
All this simply means that a low cost of living should be viewed with alarm by civic leaders, not promoted in marketing material. A low cost of living doesn’t offset local wages. On the contrary, businesses locating in undesirable locations have to pay a wage premium to attract good workers. It is a simple and obvious economic truth that places with low land values are that way simply because people don’t move there.
This misunderstanding about cost of living as an attractive feature of a community is common, even among otherwise brilliant people. It often leads to poor public policy such as ill-considered housing subsidies. But, the worst part of this is the tendency to dismiss Indiana’s low and declining personal income a simply a by-product of low cost of living. That just isn’t how wages or cost of living works.
Michael Hicks is the George and Frances Ball Distinguished Professor of Economics and the director of the Center for Business and Economic Research at Ball State University.
