Rural Economic Stagnation Despite Farm Recovery in the Long Aftermath of the 1980s US Farm Debt Crisis

Abstract

This study aims to elucidate the previously unstudied long-term economic effects of the Farm Debt Crisis of the 1980s in rural America. Leveraging variation in local agricultural commodity mixes, this study utilizes a shift-share instrument to identify exogenous variation in local crisis intensities. Analysis reveals that the Farm Debt Crisis had a persistent negative impact on incomes and populations in rural economies through 2023, implicating the Farm Debt Crisis in the economic stagnation and demographic decline in rural America that began in the 1980s. Persistent supply-side tightening of credit at local community banks is shown to be an important cause of the long-run economic outcomes. The study also reveals significant differences in the recovery of the farm and non-farm sector in rural economies. In more crisis impacted counties, the farm sector has recovered, while the non-farm sector has continued its relative decline. Differential tightening of credit between the two sectors is proposed as an explanation for the stark difference in recovery dynamics, and government policy interventions are argued to drive this sectoral redistribution of lending.