The Economist recently reported on the Iron Law of Convergence in the US economy. Economists have observed the tendency of poor areas to catch up with rich areas in the US throughout much of US history. In recent decades convergence has slowed and in recent years there has been signs of divergence in recent years. For example:
A recent paper by Alison Weingarden of the Federal Reserve Board estimates that since 2007 the gap between the labour-force participation rate of “prime-age” workers aged 25 to 54 in big cities and similar workers in rural areas has grown from 1 to 3.8 percentage points. Since 2015, the difference between the unemployment rate of prime age city-dwellers and their rural counterparts has increased from 0.3 to 1.2 percentage points.
Nobody seems to know what is disrupting the Iron Law of convergence from working. One hypothesis is that housing regulations increase housing prices making it more difficult to move to where there are good jobs. Another hypothesis is that technological change has widened the gap between rich and poor.
However, the main reason for this phenomenon is monetary policy. Low interest rate policy helps the wealthy, capitalists, bankers and Wall Street and do not help labor and rural populations. Economic equality grew in the US through most of the 20th century, but that was reversed after the US went off the gold standard in 1971. Since then there has been a powerful force unleashed in favor of economic inequality: a runaway inflation policy by the Federal Reserve.
