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A Missing Precondition

eye on the news

A Missing Precondition

To take advantage of economic opportunities, struggling regions need improved social capital. June 13, 2019
The Social Order
Economy, finance, and budgets

The United States is enjoying its lowest level of jobless claims since 1969, and the Labor Department indicates a reversal in the long-term trends of sluggish productivity and slow wage growth for middle-class workers. And yet, a long shadow lingers over the country’s otherwise bright economic outlook. It’s not a shadow cast by the trade war, volatile stocks, diminished labor-force participation, or inequality, but rather by low social capital—that is, the interpersonal relationships that generate reciprocity and a shared sense of community, and that play an important role in a healthy economy.

The disintegration of civil institutions —the source of social capital—disproportionately harms distressed regions. As Tim Carney showed in Alienated America, struggling rural and Rust Belt towns that supported Donald Trump in the 2016 primary were united by the absence of not only economic opportunities, but also social connectedness and the institutions that foster it. By contrast, communities that voted for Hillary Clinton boast flourishing civil institutions, including neighborhood associations, clubs, and churches, along with stable, two-parent households.

Studies indicate a positive correlation between high social capital and economic opportunity, including mobility and wage growth. One obvious explanation holds that well-off communities have the resources to sustain vibrant institutions and social capital. This would suggest that disadvantaged regions need a combination of market forces and government assistance aimed at creating more economic opportunities. But what if social capital is not simply a sign of economic vitality, but also a precondition for it?

Consider one example, business formation, which is crucial for improved productivity and job creation. The current period has seen historically low levels of new business formation. Startup activity, though ticking up, remains below historical norms: the share of new firms in the economy has precipitously declined since the late 1970s. The drop in entrepreneurial endeavors, meantime, has disproportionately affected struggling regions. According to the Economic Innovation Group’s John Lettieri, since the Great Recession, the “geography of startup activity has become highly concentrated,” with half of new businesses launched between 2010 and 2014 located in just 20 counties in the U.S. Critics blame factors ranging from corporate power and the growth of the regulatory state to unequal access to financial capital. But a limited access to social capital also plays a role.

Entrepreneurship typically requires self-reliant individuals, but evidence suggests that social networks and social capital are the key ingredients in entrepreneurial behavior. Most entrepreneurs, for example, lack access to bank loans and venture capital. According to the Kauffman Foundation, 81 percent of their funding comes from personal or family wealth, along with personal networks. Similarly, most business owners report that their first ten customers come from their social orbit. Such findings show how social capital acts as “both glue, which forms the structure of networks, and at the same time a lubricant that facilitates the operation of networks.”

Vibrant communities, then, serve as the launching ground for individuals’ risk-taking ventures. That such communities are increasingly confined to affluent cities and towns perpetuates the unequal distribution of social capital, depriving other regions of the powerful economic engine of productivity and job creation. In these circumstances, narrowly tailored economic policies, such as wage subsidies or a universal basic income, can only do so much. Similarly, removing barriers—whether bad regulations or excessive licensing requirements—while helpful, cannot foster social ties. If the U.S. is to expand opportunity, policies aimed at increasing social capital will be critical.

Photo: JackJM/iStock

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