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Shutdown's damage to the Minnesota economy will be real, significant -- and incalculable

Layoffs of state workers drain about $23 million a week in purchasing power from the state’s economy.
MinnPost photo by Terry Gydesen
Layoffs of state workers drain about $23 million a week in purchasing power from the state’s economy.

In a familiar ad for a credit card, costs of two items are quoted and then the cost of a third more intangible benefit from those purchases is listed as “priceless.” If a similar analysis were done for the current shutdown of Minnesota state government, the cost of the shutdown would be listed as “incalculable.”

But just because the shutdown costs to a complex economy like Minnesota’s will be too difficult to measure with precision, doesn’t mean the losses won’t be real and significant.

Here’s where a lot of the damage will occur:

State, families, business
First, there are the most obvious costs: the losses sustained by the state, families, non-profits and businesses during the shutdown. Layoffs of state workers drain about $23 million a week in purchasing power from the state’s economy. This will be felt by businesses as workers’ families adjust their spending patterns and those decisions ripple through the economy as sales decline. As the shutdown grinds on, the effect on businesses will grow as families initially spend down their savings and then make deeper cuts in spending on both essential and discretionary items.

Estimates are that the state loses $1 million a week in revenue while the state parks are closed and another $1.25 million a week while the state lottery is not operating. A host of other lost revenue streams have yet to be estimated.  In addition, added costs from the cessation of more than 100 road construction projects need to be calculated.

Further, there are indirect costs to families and businesses -- such as increased absenteeism and decreased worker productivity – because state childcare assistance has been suspended.  A variety of state services, such as background checks for employees and license renewals for health-care workers, are not available. A loss of these services results in bottlenecks and other problems for businesses and non-profits.

The full list will be long and varied. For example, early-stage businesses are reportedly being hurt because registration in the state’s highly successful angel-investor program is unavailable to would-be investors during the shutdown. This all adds up.

Ongoing costs
Harder to estimate are the ongoing economic costs that will continue after the shutdown ends. These will include increased interest costs on Minnesota state debt in coming years if the recent downgrade of the state’s credit remains in place, as is likely. Even though the shutdown apparently triggered the downgrade by Fitch’s, the accompanying statement from the rating agency made it clear that it was reacting to Minnesota’s pattern of using accounting gimmicks and one-time solutions to balance its budget over many years. When the state will regain its higher depends on how this current crisis is settled and on future state financial decisions.

Many school districts will face increased interest costs as they borrow to plug holes in their own annual budgets caused by delays in promised state dollars. Even though the administration and legislators promised in 2009 that the shift of $1.4 billion in the previous biennium’s budget would be paid back starting in the current fiscal year (FY2012), it is clear that money will not be paid back until FY2014 at the earliest. Moreover, some of the budget solutions being discussed go a step further and would delay additional dollars during the next two years.

It will be harder to estimate the economic losses from additional ongoing changes that businesses and non-profits will make, either to adjust to the consequences of the shutdown or to modify their operations to insulate themselves against future government disruptions. Moreover, many agencies that get funding from the state know they will be facing cuts, but they don’t know how large those cuts will be until a final budget deal is approved.

Quality of life
But an estimate of the shutdown’s economic losses isn’t complete without considering another category of costs, even if a dollar value cannot be readily calculated.

In the hyper-focus on dollar amounts in budget deliberations, it is easy to lose sight of the fact that government exists to improve the quality of life for its citizens. The quality of Minnesotans’ lives has been diminished because of the shutdown.

Some of the affects may seem small or transitory, such as modified or canceled vacation trips to state parks. But others are more serious, such as a senior citizen’s move to a nursing home because the senior could not continue to live at home when home-care assistants could not get licenses during the shutdown or their backgrounds could not be checked out.

Looking ahead
When the shutdown finally ends, will there be any benefits? It’s possible -- if policymakers make changes in their approaches and in the budget process itself as a result of the experience.

For example, policymakers are now starting to realize that tax loopholes and preferential treatment of certain activities are really “tax expenditures,” a term that economists were using when I was in graduate school many decades ago.

Considering existing loopholes during the budget process would open a wider range of alternatives earlier in the negotiations. And the brinksmanship that become the staple of legislative budget sessions must be replaced with a structure that promotes intermediate negotiations and compromises earlier in the legislative calendar.

But if these changes don’t occur, we will face additional discomfort in future years. This same governor and many of the same legislators will be facing another large deficit in two years, a deficit that will be made even larger to the extent that more one-time funds are used to plug the current budget gap. 

Finally, an additional cost or danger occurs to me. It is the danger that some national policymakers will observe events in Minnesota and decide that the shutdown is uncomfortable but not a disaster, and draw the false conclusion that postponing raising of the national debt ceiling is a risk worth taking. If that happens, the cost of Minnesota’s shutdown would be incalculable – and catastrophic.

Paul Anton is chief economist at Anton Economics in Minneapolis.

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Comments (15)

The damage?

Who knows until a budget is passed and signed.

Even though Republicans pretend that there is a big expansion of government in Dayton's budget, the fact is that there are big cutbacks in services and programs in his numbers (and even bigger ones in the Republican numbers).

But we won't know until a few days after the signed budget.

Also inherent in the budget, which we also don't know, are the policies that Koch has said so firmly that they won't budge on. No more early childhood education? Voter ID? Stemcell research? Abortion funding? What else? Who knows until an agreement is reached?

'Incalculable?' as in non-existent.

The vast majority of Minnesotan's have felt no direct impact from the shutdown - other than traffic on I94 going through St. Paul is a much easier ride.

The folks don't care as long as their taxes don't go up - so each passing day makes Governor Dayton's shutdown look all the more silly. The Republicans sit back and watch the Governor have to deal with his distraught union backers/state employees. Looking very good for the GOP, very sweet indeed...

I would like to add to Mr. Anton's observation about impacts and future impacts.

Many Federal Programs, particularly infrastructure programs such as - transportation, and flood control, water supply etc, require non federal matches. If those matches are not forthcoming pressure will be on the federal government to reprogram those funds to states that are ready to cost share. A micro version of this has happened in places like Washington County who have added transportation surcharges so that they always have funds to cost share when opportunities for state or federal funds become available.

For existing infrastructure projects that demobilized because of the shut down there will additional cost to re-mobilize. These constitute scope changes for which contractors can legitimately request additional compensation. That won't be inexpensive. For those schedules that can not be stretched out because other contract commitments or the end of the construction season the state will incur either winter construction costs or increased overtime.

As Mr. Anton said it is not just about what has this year but it impacts what was in the bonding bill last year.

A good sound budget is a worthy goal but the legislature and the governor had a long time to get there. Most of us would be fired if we missed a deadline this badly. Particularly one with this kind of financial impact.

One aspect of a "crash" is that it gives a chance to examine the "status quo" and how it works. We can, of course do this anytime but there is a natural "if it works, don't fix it" mindset, which usually works pretty well.

BTW: 70,000 "Circuit Breaker" "rebate" checks to market rate renters are supposed to go out in mid-August. According to my "napkin math" these average $900. These are not taxed and do not affect means tested payments like unemployment benefits or welfare. If the shutdown continues these will not be sent out as scheduled.

I've been told in reply to my previous posting on this that the people expecting these "rebate" checks like, totally don't care if the shutdown delays this money to them!

Mr. Corcoran, tell us more about yourself because likely you are hiding or minimizing some reliance you have on government. I run a small business that has some state government revenues. When I met with the staff and reviewed the pay cut and reduced hours that I would have to do if we were not deemed essential the most horror struck look on anyone's face was the wife of the local R party chair. Another R made some negative remarks about our new "not one penny more Representative". So yes Mr. C there are Republicans who don't think this is such a 'sweet deal'.

I'm afraid Michael Corcoran has it right. The shutdown hasn't impacted Minnesotans in visible ways except for de-railing camping at state compgrounds. If the summer heat buckles a freeway, put the cones out but don't fix it. Come September, let the schools remain closed. Then see how long it takes reality to sink in.

The folks don't care as long as their taxes don't go up - so each passing day makes Governor Dayton's shutdown look all the more silly.

No one is proposing raising taxes for most folks.

An online service for new drivers licenses, birth records, and hunting & fishing licenses is being started. Everything will be available online and free. While at first it may just draw attention to the problem, an event is being planned whereby on a specific date, holders of the 'new' licenses will be encouraged to leave their 'old' documents at home and participate in a mass drive to an undisclosed destination. After a few more days, 'new' fishing license holders will have a 'fish-in' at another undisclosed destination, holding only their new licenses. There are no plans on a hunting event yet. All licenses will be free. No facts will be checked. All will be self-printed. And all will be as valid as any such license/permit/document issued by the state since July 1st. This movement is expanding as a form of civil disobedience. More to come.

“'Incalculable?' as in non-existent. The vast majority of Minnesotan's have felt no direct impact from the shutdown - other than traffic on I94 going through St. Paul is a much easier ride.”

In your dreams, #2. We all know you’re a lot smarter than a trained and experienced economist. but did you actually read this article? Whatever,I’ll give you the benefit of the doubt (not that there is any) and figure you simply missed the following:

http://www.minnpost.com/politicalagenda/2011/07/11/29890/conservative_gr...

There’s a lot more out there in the media, showing that the shutdown really is affecting people in substantial and tangible ways. Businesses are cutting hours and staff, construction workers are suddenly out of work, state contractors are cut off—it goes on and on. Really, all it takes is reading a newspaper once in awhile to cut down on the ignorant statements.

“The Republicans sit back and watch the Governor have to deal with his distraught union backers/state employees.”

Oh yeah, that must be why they’re suddenly stumbling over themselves proffering up ways of coming up with new revenue. Check it out:

http://www.minnpost.com/stories/2011/07/11/29880/several_gop_legislators...

Oh, and state workers are not exactly “distraught.” They’re rallying at the Capitol, phonebanking, doing lit drops, and in myriad other ways supporting our Governor. And if you truly believe they’re going to abandon the man who stands between them and a 6% pay cut, loss of collective bargaining rights, and a 15% across the board cut in staffing, I have two words for you—Dreeeaammm Onnnnn…

Yeah they are, #7. Lately, some Rs have suggested extending the sale tax to clothing and services, raising liquor and cigarette taxes, and taxing internet sales. All of these are regressive and fall disproportionately on lower income families.

Of course, the missing idea is the one the Governor had in the first place--getting their rich friends to pitch in with the rest of us.

#2: You should clarify that you speak only for yourself, as your comments clearly show only your own attitude. You offer not a shred of evidence to support your projection that “the vast majority of Minnesotans” are unaffected. My own opinion, worth neither more nor less than your own, is that nearly all are affected, or soon will be.

Some pretend there is no real consequence, some actually cheer the harm to Minnesotans, and then there are the people who actually feel the effects. There are too few of the latter in our legislature.

The shutdown will be just like the stimulus. A bunch of D's will say the cost was some ridiculous number that is incalculable. I'm curious to see how they will word the foolishness. Something like, the shutdown cost or lost the state of MN 7 billion dollars. Has unemployment went below 8 percent yet?

Like most on these pages, Mr Anton omits discussion of the catastrophic costs of continuing the ever-increasing spending habits of the DFL. When the costs of the shutdown are juxtaposed with the costs of continuing the status quo, I'll take Mr Anton more seriously.

Good point, #13. I'd be up for that analysis. Of course, as I'm sure you realize, it would have to begin with the fact that budget commitments and assumptions coming out of the previous administration would have called for a budget of some $39 billion. Not even our Governor is proposing that. For the foreseeable future I don't see anything like the "catastrophic" business-as-usual DFL spending habits--as you would have it--on the horizon. That said, that prospect doesn't begin to scare me the way it apparently scares you. The money is out there, and no situation is static, including the needs of Minnesota's people.

Therefore, such an analysis would of necessity have to include the effects of inflation on the costs of goods and services, the need for expanded services inherent in an aging population, increased enrollment in public schools, exploding health care costs, and the like. It's nuts to try an pretend those things aren't happening and in turn insisting that revenues don't have to go up. How high is what is debatable, not whether it must happen at all. That's the debate, and it's the reason that legislators must be adults, not tantrum throwing, foot stomping children.

#13 I don't think any economist would necessarily disagree with you. It was not the intent of this article to look at that issue. The intent was to show that a shut down is not a "no cost" solution.

The smoke and mirrors accounting of the last few years have actually hidden the high cost of government as has the failure to include tax expenditures that would be tax deductions that result in not all income not being taxed or tax credits.

I don't think many people would say every state program is necessary or that they are prioritized in a way that is in the best interest of the citizens of the state. But that requires a systematic look not a machete.