CLUSTERF**K!

The problem was exacerbated by the clustering of industries. As we already saw, there are many good reasons for industries to cluster, but one potentially negative consequence is that a trade shock may hit with particular violence, potentially affecting all the firms concentrated in the region.

This can set off a downward spiral. Laid-off workers spend less in local businesses, such as shops and restaurants. The value of their houses declines, sometimes catastrophically, since to a large extent the value of my house depends on how nicely your house is maintained. When most of a neighborhood starts to go down, everyone goes down together. Households with larger declines in housing wealth experience a tightening of their credit limit and their ability to refinance, which further reduces their consumption.⁵⁰ This hits the shops and the restaurants, and some of them end up closing. The disappearance of these amenities, the dearth of nice neighborhoods, and the catastrophic decline in the local tax base that makes it harder to provide water, schools, lights, and roads can eventually make an area so unattractive that it becomes impossible to revive. No new firm will want to move there to take the place of those that have died.

This logic applies just as much to the manufacturing clusters in the United States as it does to those in India or China. Tennessee, for example, had a large concentration of clusters producing goods directly competing with China, from furniture to textiles. The closure of these firms has produced a series of ghost towns. Bruceton, Tennessee, which was profiled in the Atlantic, had been home to the factory of the Henry I. Siegel Company (H.I.S.). At its peak, H.I.S.

this town has struggled to figure out how to survive. The three giant H.I.S. plants in town are empty, their windows broken, their paint peeling. A few new manufacturing operations have come, but they’ve also left. One by one, the businesses on the main streets of Bruceton and neighboring town Hollow Rock have closed, leaving modern-day ghost towns. In downtown Bruceton, the bank is gone, the supermarket and the fashion store have closed, and there’s a parking lot where there used to be another supermarket. All that’s left is a pharmacy where seniors come to get their prescriptions filled.

The neighboring town of McKenzie lost its pajama factory and a shoe company in the 1990s. It is still trying to convince new businesses to come. Whenever the town hears a new factory wants to move, city employees call the decision maker and try to sell the town to them. They have had some interest, but no taker yet. The Atlantic article goes on:

One reason they may not be getting bites, Holland [the town’s mayor] says, is because of the town’s depressing Main Street. One company was going to locate in McKenzie, but when executives showed up to town and saw empty businesses on Main Street, they decided it wasn’t a place they wanted their families to live.… “They said it looked like an atomic bomb went off, so they just kept walking.… They didn’t even give it a second chance.”⁵¹

This is not a reason to try to prevent clustering, since the gains from clustering are potentially very large, but a warning to be willing to step in and deal with what happens when the cluster unravels.