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On Labor Day, a closer look at Minnesota’s underperforming economy

Our economy is losing ground. As demonstrated in a recent Minnesota 2020 report, Minnesota economic performance has lagged in comparison to the rest of the nation.  Since 2002, Minnesota’s employment growth and per capita personal income has fallen relative to other states, while our unemployment rate has risen.

Minnesota 2020 has argued that the state’s waning economic performance is due in large part to public disinvestment during the era of “no new taxes.”  In absolute terms and relative to other states, public revenues and expenditures in Minnesota have declined considerably since 2002.  However, there are other competing explanations of Minnesota’s economic decline.  For example, some say Minnesota’s slumping performance since 2002 is the result of strong growth in the defense sector; as the argument goes, because defense is a relatively small share of the state’s economy, Minnesota was not well situated to benefit from growth in defense spending so our economic growth lagged relative to the rest of the nation.

Previous analysis from Minnesota 2020 demonstrated that only a small share of the state’s lackluster gross domestic product (GDP) growth since 2002 can be attributed to growth in defense spending. National defense spending alone cannot explain Minnesota’s economic underperformance in recent years.

Additional factors to consider
However, there are other factors that could explain Minnesota’s relatively low GDP growth since 2002. For example:

• Energy-producing states experienced rapid GDP growth due to increasing energy prices. While Minnesota participated to some extent with the ethanol industry’s expansion, energy production nonetheless contributes less to GDP growth in Minnesota than in the nation as a whole. Thus, the boom and energy prices buoyed national GDP growth more than in Minnesota.

• The slump in new home construction has hurt the forestry and wood products industries.  Insofar as these industries are a significant component of Minnesota’s economy, it could also explain some portion of Minnesota’s low GDP growth relative to the rest of the nation.

• Airlines have fallen on hard times in recent years.  Given that air transportation is a larger component of GDP in Minnesota than nationally, the slump in this industry has hit Minnesota harder than most other states and could also help to explain Minnesota’s poor GDP growth in comparison to the rest of the nation.

To quantify the impact of these trends, data from the U.S. Bureau of Economic Analysis (BEA) were used to compare Minnesota and U.S. total GDP growth to “adjusted GDP” growth after factoring out the following areas: national defense, oil and gas extraction and mining support activities, petroleum and coal products manufacturing, forestry (this category also includes “fishing and related activities” that are lumped together with forestry in BEA data), wood products manufacturing, and air transportation.  GDP growth was adjusted for inflation using the GDP price index from the BEA.

 From 2002 to 2006, Minnesota total real GDP growth lagged 3.8 percent behind the national average. After factoring out national defense, energy extraction and production, forestry and wood product manufacturing, and air transportation, Minnesota GDP growth was still 2.0 percent below the national average.

Part of the gap explained
Based on this analysis, it is clear that economic trends pertaining to national defense, energy, wood products, and air transportation contributed to Minnesota’s lackluster GDP growth relative to the rest of the nation from 2002 to 2006.  However, even after factoring out the impact of these areas, over half of the gap between Minnesota and the rest of the nation in terms of GDP growth remains.

Furthermore, this analysis probably overstates the extent to which Minnesota’s low GDP growth can be attributed to broad economic forces beyond our control.  For example:

• BEA data does not separate out the portion of GDP attributable to national defense for individual states.  Thus, for purposes of this analysis, it was assumed that national defense contributed nothing to Minnesota GDP growth from 2002 to 2006, which is almost certainly not the case. As a result of the inability to quantify the national defense share of Minnesota GDP, this analysis overstates the extent to which Minnesota’s below average GDP growth is the result of growth in defense spending.

• This analysis ignores trends that have buoyed Minnesota GDP growth relative to the rest of the nation.  For example, as a result of the global demand for steel, the taconite industry in Minnesota has enjoyed significant growth.  Non-oil and non-gas based mining is a larger share of GDP in Minnesota than in the U.S. as a whole and expansion in this area has provided a disproportionately large boost to Minnesota GDP growth.  By only focusing on factors detrimental to Minnesota GDP growth, this analysis overstates the extent to which Minnesota’s sub-par GDP growth is the result of broad economic trends beyond our control.

Economic boom didn’t happen
Proponents of the “no new tax” agenda have argued that their policies would result in an economic boom in Minnesota.  This clearly has not occurred.

The extent to which anti-tax advocates can blame external factors for Minnesota’s slumping economic performance is limited.  Even after adjusting for these external forces in a way that likely overstates their impact, Minnesota’s GDP growth is still considerably below the U.S. average.  In short, “no new tax” proponents are running out of excuses.

Minnesota’s strong economic performance relative to the rest of the nation was built on public investment in education, transportation, and other public infrastructure and services.  Now, after several years of public disinvestment, Minnesota’s position as a national leader is jeopardized as we slip relative to other states on key indicators of economic prosperity and quality of life.

It is time to return to the policy of smart investment before our economic performance deteriorates even further.  Prudent and adequate public expenditures — as opposed to the current ongoing starvation diet — are the best strategy for a bright future for the North Star state.

Jeff Van Wychen is a fellow at Minnesota 2020, an economic think tank based in St. Paul. This article is reprinted from its website.


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