Silicon Valley heavyweights are investing in America’s flyover country
Credit: Getty   

In the summer of 2016, America’s educated elites were searching for an explanation for Donald Trump’s unprecedented rise. They found it in part in a remarkable book written by 32-year-old lawyer JD Vance. Vance’s autobiographical essay on his upbringing in and among the Appalachian working class folk who had given Trump near worshipful support, Hillbilly Elegy, became an unlikely best-seller. Now in its’ 68th week on the New York Times bestseller list for hardcover non-fiction, Vance’s portrait of a people whose challenges are changing American politics is a must read for anyone interested in “flyover country”.

But Vance is now on to something perhaps more important. In partnership with Steve Case, the founder of one of the big firms from the early Internet era, America Online, Vance has launched a venture capital fund called Rise of the Rest. Backed by $150 million from some of the biggest investors and business leaders in America, such as the Koch Brothers and Amazon founder Jeff Bezos, Rise of the Rest will seek out and invest in start-ups in America’s Rust Belt and flyover country. That could help reverse one of the biggest causes of the despair that fueled Trump’s rise: terminal economic decline.

JD Vance, venture capitalist and author of ‘Hillbilly Elegy’. Credit: Drew Angerer / Staff / Getty

Vance describes this decline in his book. His grandparents were like thousands of others who were lured out of their rural poverty in the 1940s through the 1960s by manufacturing firms in the Midwest. Manufacturing provided good pay for jobs that people without any college education could do, getting them out of poverty and into the middle class. But, as Vance notes, these jobs started to dry up in and after the 1970s. The firm that attracted Vance’s grandparents, Armco (now AK Steel), fell on hard times as so many other old-line American manufacturers did. While the company still operates a plant in Vance’s hometown of Middletown Ohio, it no longer employs as many people as it once did. As a result, Middletown’s population has been declining for nearly twenty years; the people who remain often engage in the sort of self-destructive behaviors, such as opioid addiction and drug use, that are on the rise throughout America’s flyover country.1

This slow decline has been occurring for decades, but it was exacerbated by two factors that arose only in the new century: Chinese competition and the 2007 financial crash. China’s entry into the World Trade Organisation created a flood of competition for lesser-skilled manufacturing jobs throughout the world, but especially in America. Economist Richard Freeman notes that the opening of Eastern Europe, China, and India to Western investment after the end of the Cold War roughly doubled the size of the global labour force. America’s separate free trade agreement with Mexico and Canada, the North American Free Trade Agreement, opened Mexico’s then-nearly 100 million people to US investment.2

The resulting competition helped to drain plants and capital away from older, more expensive locations like the American Midwest and towards lower-cost markets. Labour economists David Autor and Gordon Hanson have estimated that Chinese competition alone cost America more than 2.4 million jobs between 1990 and 2007.3

Middletown’s population has been declining for nearly twenty years, and the people who remain often engage in the sort of self-destructive behaviors, such as opiod addiction and drug use

That date, 2007, is key because of what happened after. What is known in the US as the Great Recession and elsewhere as the Great Financial Crash had an immediate and, so far, long lasting effect on American manufacturing. Unemployment skyrocketed throughout the US in the aftermath of the crash, but particularly so in the industrial Midwest. Unemployment doubled between October 2007 and 2009 in each of the four primarily industrial Midwest states that flipped from Barack Obama in 2012 to Donald Trump in 2016.4

Unemployment has since dropped back to or below 2007 levels in those states, but at a high cost. Median household income throughout this region dropped significantly between 2007 and 2015, meaning that the jobs that did come back didn’t pay as well those that left. And many people dropped out of the labour force after 2007 and have never come back. Labour force participation rates have dropped in each of the four key Midwestern states, especially in the two states most exposed to the automobile industry, Ohio and Michigan.5 These rates are dropping across America as the population ages, but aging alone does not explain all or even most of this decline. For millions of Americans, especially those who never attended university, the events of 2007 changed their lives forever.

Vance’s effort is meant to counteract this trend by reversing the proclivity of American investors to look to the wealthy coasts or overseas to find entrepreneurial start-ups. Fully 88% of America’s entire stock of venture capital investment flowed to the top twenty metropolitan areas in 2016Over half of America’s metropolitan areas had no access to venture capital at all, and Rise of the Rest co-founder Steve Case notes that 75% of all venture capital was invested in just three states: California, New York, and Massachusetts. That means that the innovative new companies that can bring growth to older areas just can’t get the money to allow them to start, grow, and thrive.

75% venture capital was invested into only three states. Credit: Getty, Wikimedia, Pixabay

Vance’s effort won’t change things overnight. The money currently at stake is relatively small, even if the participants say they will open their more lucrative networks to entrepreneurs identified by the venture. It takes time to build businesses, and it takes even more time to change a community. But where there are seeds there might someday be trees, and then someday a forest. Populism rarely takes root in places with thriving, growing communities.

If Vance’s efforts begin to help reverse the decline that has ravaged much of non-coastal America, it can only help reduce the demand for harmful, destabilizing politics.

FOOTNOTES
  1.  The attached map shows this starkly. It shows the rise in deaths of opioid abuse by county from 1987 to 2015. Note the incredible rise from 2007 in places like Ohio, Pennsylvania, and the Appalachian regions of Kentucky and West Virginia. Many of these areas are also places where Trump’s share of the vote was significantly higher than Republican nominee Mitt Romney’s was just four years earlier. See https://www.lee.senate.gov/public/index.cfm/2017/8/theopioidcrisis and https://www.nytimes.com/interactive/2016/11/08/us/elections/how-trump-pushed-the-election-map-to-the-right.html.
  2.  Mexico’s population now exceeds 127 million people and despite NAFTA its GDP per capita remains less than a fifth that of its mighty northern neighbour.
  3.  The China syndrome: local labour market effects of import competition in the United States. See also  The China Shock: Learning from labour market adjustment to large changes in trade.
  4.  See the maps available here for Michigan, Ohio, Pennsylvania, and Wisconsin.
  5.  Compare rates for October 2007 to October 2017 here.