DP9593 Local Economic Development, Agglomeration Economies, and the Big Push: 100 Years of Evidence from the Tennessee Valley Authority

Author(s): Patrick Kline, Enrico Moretti
Publication Date: August 2013
Keyword(s): place based policies
JEL(s): J20, N92, O40, R11
Programme Areas: Labour Economics, Public Economics, International Trade and Regional Economics, Development Economics, Economic History
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=9593

We study the long run effects of one of the most ambitious regional development programs in U.S. history: the Tennessee Valley Authority (TVA). Using as controls authorities that were proposed but never approved by Congress, we find that the TVA led to large gains in agricultural employment that were eventually reversed when the program’s subsidies ended. Gains in manufacturing employment, by contrast, continued to intensify well after federal transfers had lapsed -- a pattern consistent with the presence of agglomeration economies in manufacturing. Because manufacturing paid higher wages than agriculture, this shift raised aggregate income in the TVA region for an extended period of time. Economists have long cautioned that the local gains created by place based policies may be offset by losses elsewhere. We develop a structured approach to assessing the TVA’s aggregate consequences that is applicable to other place based policies. In our model, the TVA affects the national economy both directly through infrastructure improvements and indirectly through agglomeration economies. The model’s estimates suggest that the TVA's direct investments yielded a significant increase in national manufacturing productivity, with benefits exceeding the program's costs. However, the program's indirect effects appear to have been limited: agglomeration gains in the TVA region were offset by losses in the rest of the country. Spillovers in manufacturing appear to be the rare example of a localized market failure that cancels out in the aggregate.