By Abigail R. Hall Blanco
A 1964 report commissioned by President Lyndon B. Johnson referred to Appalachia, or the area surrounding the Appalachian Mountains, as “a region apart.”
The answers lie in economics.
It’s not difficult to see why. At the time, some third of Appalachian families lived in poverty and unemployment rates were well above the national average. In some counties, income was a mere 44 percent of the national average. Education levels were low. Over 20 percent of adults in Appalachian Kentucky, for example, had less than five years of formal schooling.
The Appalachian region stretches over 10 states, from New York to Alabama. While the entire region has lagged economically, the central Appalachian region, encompassing Eastern Kentucky and parts of Tennessee and West Virginia, has consistently demonstrated the worst economic performance.
For nearly 250 years, economists have sought to understand the puzzle of economic development. Why are some places wealthy and others poor? In offering explanations for the weak economic conditions in central Appalachia, policymakers, researchers and others have placed the blame on low levels of education, poor healthcare, overreliance on coal—even the region’s culture.
Following the 1964 report and President Johnson’s war on poverty, the U.S. government created the Appalachian Regional Commission, or ARC, in 1965. For nearly 60 years, the ARC has implemented thousands of programs aimed at promoting economic development throughout the region.
The original ARC prioritized several types of projects—a new highway system, water and sanitation improvements, tourism and education. Today, the ARC maintains five distinct “investment priorities,” which bear a striking resemblance to those in the 1960s: business development, education, workforce training, critical infrastructure, and leveraging the region’s natural resources to boost tourism.
To date, the ARC has invested more than $4.5 billion on 28,000 projects. Other government agencies have invested another $10 billion. In 2020 alone, the ARC spent about $42 million on 65 separate projects in Kentucky.
So what do we have to show for all of this investment? Sadly, not much.
The region continues to lag behind the rest of the country—significantly so. To measure the economic performance of Appalachian counties, the ARC uses a classification system that draws upon unemployment rates and income data, as well as poverty rates. This allows for a comparison of Appalachian counties to each other and to the country as a whole.
Appalachian Kentucky fares the worst. Of the commonwealth’s 120 counties, 54 fall under the purview of the ARC. In 2021, only three of those counties are considered “transitional,” meaning they are moving toward economic parity with the rest of the United States. Thirteen of the counties are considered “at risk,” meaning they rank between the worst 10 percent and worst 25 percent of all counties in the United States. Most of Kentucky’s Appalachian counties—38—are considered “distressed.” They fall in the lowest 10 percent of counties nationwide.
How can we explain the failure of the ARC to achieve economic development? The answers lie in economics.
The first reason for the persistent failure of the ARC is what is called the “knowledge problem” of top-down planning. Simply put, planners are unable to answer a fundamental question of economics: Given a finite number of resources, how do we determine where, when and how these resources should be used? In markets, this question is solved by using price signals. By calculating profit and loss, entrepreneurs can decide what goods and services to produce. But economic planners in government don’t have this same ability. There is no comparable mechanism to the price system, leaving them unable to engage in economic calculation. The result is that the ARC is unable to consistently “pick winners” when it comes to their investments.
The second reason relates to incentives. Unlike firms in competitive markets, the ARC isn’t competing for consumer dollars. Instead, it is competing for a share of the larger government’s budget. Without profit and loss signals to measure success, economics teaches us that bureaucracies measure success by the size of their budgets and the number of people they employ.
This has two implications. First, the places that receive the most ARC funds may not be the areas that would use the money most effectively, but rather those that are best able to navigate the political process. Second, this implies that as opposed to minimizing costs and incentivizing entrepreneurial behavior, the ARC is likely to waste money to expand its budget. Instead of trying to please consumers, entrepreneurial efforts will be focused on pleasing bureaucrats.
So what can be done about the poverty in Eastern Kentucky and the rest of Appalachia? It is clear that the ARC has been unable to achieve systematic development in the region, and economic analysis tells us why future interventions are unlikely to yield different results. The solution lies in an expansion of markets and economic freedom in the region. Solving economic problems requires private property, prices and entrepreneurial discovery. Only by offering the people of the region more opportunities to engage with markets—and not with government bureaus—will the region see the economic growth it so desperately needs.
Dr. Abigail R. Hall Blanco is an associate professor of Economics at Bellarmine University. Her broader researcher interests include political economy, market process economics and economic development. Follow her on twitter at @Abigail_R_Hall.