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The bitter fruit of ‘shrinking government’

Has government shrinkage been a boom or a bust for Minnesota’s economy? The size of government in Minnesota has declined significantly relative to that of other states. In terms of state and local government taxes, own-source revenue, and total revenue, Minnesota has gone from a relatively high public-revenue state in 1998 to “just about average” in 2006.

Conservatives argue that a reduction in the size of government will free up resources for more private investment, thereby stimulating business expansion and job and income growth. Progressives argue that cuts in public investment can undermine education, infrastructure and public services upon which a thriving economy depends.

It is difficult to resolve this dispute definitively. However, we can examine broadly accepted measures of economic performance to see if Minnesota’s position relative to other states has improved or deteriorated from 1998 to 2006. The three measures focused on below are 1) the unemployment rate, 2) the rate of employment growth, and 3) median household income.

The unemployment rate
The seasonally adjusted unemployment rate for the United States has increased slightly from 4.5 percent in 1998 to 4.6 percent in 2006. Over the same period, Minnesota’s unemployment rate increased from 2.7 percent to 4.1 percent.

From 1998 to 2006, Minnesota’s unemployment rate has gone from significantly below the national average to only modestly below the national average. If a relatively high level of state and local government revenue was in fact strangling Minnesota’s economy, Minnesota should not have been outperforming the rest of the nation in terms of the rate of unemployment in 1998. Furthermore, the relative shrinkage of government from 1998 to 2006 should have caused Minnesota’s unemployment rate to improve relative to the national average. In fact, the reduction in public investment coincided with an increase in Minnesota unemployment relative to the rest of the nation.

Rate of employment growth
Total employment growth in Minnesota from 1997 to 1998 was 2.0 percent, one-half percent above the national growth rate. However, from 2005 to 2006 employment growth in Minnesota was 0.6 percent, less than one-third the national growth rate of 1.9 percent.

If we examine employment growth over a longer period — for example, three years instead of one — a somewhat similar pattern emerges. From 1995 to 1998, employment growth in Minnesota (5.0 percent) was slightly below the national growth rate (5.3 percent). From 2003 to 2006, employment growth in Minnesota (0.9 percent) was dramatically below national growth (4.9 percent). Once again, the improvement in relative economic performance predicted by anti-tax proponents did not materialize.

Median household income
Minnesota median household income in 1998 was $47,926, which was 23.3 percent above U.S. median household income. By 2006, Minnesota median household income was $56,211, down to only 16.6 percent above the U.S. median.

From 1998 to 2006, U.S. median household income barely kept pace with inflation; in constant dollars, national median household income increased by a slight 0.2 percent.  Over the same period, Minnesota’s median household income declined by 5.2 percent.

Based on the limited number of indicators examined above, a pattern emerges. While Minnesota is still outperforming the rest of the nation in 2006 on two of the three factors examined, on all three Minnesota was doing less well relative to the rest of the United States in 2006 than in 1998. The shrinkage of government in Minnesota has not brought about the improved economic performance promised by proponents of “small government” and “no new taxes.” In fact, the opposite occurred.

The facts examined above are consistent with the progressive paradigm. Declining public investment has coincided was a deterioration in Minnesota’s economic performance relative to other states.

Mitigating factors don’t explain underperformance
Proponents of “small government” will no doubt point to mitigating circumstances to explain Minnesota’s deteriorating performance relative to the rest of the United States. In recent years, Minnesota has had a light dependence relative to other states on industries that have boomed (e.g., energy, defense) and a heavy dependence on industries that have done poorly (e.g., wood products, airlines). While these have been contributing factors, a Minnesota 2020 analysis shows that they do not explain the full extent of Minnesota’s underperformance relative to the national average.

The “no new tax” movement in Minnesota has a faith in the benefits of shrinking government that is akin to a religious conviction.  However, history teaches us that even the most ardently held beliefs must ultimately yield under the weight of evidence.  Minnesotans should arm themselves with the facts regarding the true impact of diminishing public investment.

Jeff Van Wychen is a research fellow at Minnesota 2020, a progressive, nonpartisan think tank based in St. Paul. His research focus is primarily on property tax and state and local budget issues.

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Comments (11)

  1. Submitted by Richard Schulze on 08/03/2009 - 09:59 am.

    Its kind of fun being in an indeterminate stage regarding what’s next.

  2. Submitted by Joe Williams on 08/03/2009 - 08:37 am.

    While I don’t doubt these figures to be true, I do wish that you would cite your source for “broadly accepted measures of economic performance.” Thanks!

  3. Submitted by Thomas Swift on 08/03/2009 - 09:28 am.

    For all the guys out there that have ever wondered what it would be like to marry a very successful businesswoman, and thereby have the wherewithal to create a “think tank” full of smart people who write funny greeting cards to perk up beleaguered labor union bosses, Matt Entenza has indeed provided a valuable service.

    Hey, someone should mail this one out to California, they’d get a real kick out of it too!

  4. Anonymous Submitted by Anonymous on 08/03/2009 - 10:13 am.

    Mr. Swift, being a scholar as well as a gentleman, is no doubt familiar with the Latin phrase “ad hominem.” I wonder if Mr. Swift has ever been laid off from a job, and, if he has, if he considered how his situation would be different if he were in Alabama rather than Minnesota.

  5. Submitted by Greg Kapphahn on 08/03/2009 - 04:22 pm.

    WOW! T.S.! Over 70 words without even once addressing the facts sited in the piece upon which you were commenting. I think the word I’m looking for is “vacuous.”

    As the old saying goes, if you can’t dazzle them with brilliance, baffle them with B.S.!

    Except that I’m not baffled or dazzled. I am, however, concerned about the figures the article states and hoping that they day has indeed arrived when the more functionally intelligent and psychologically healthy citizens of Minnesota will realize that when it comes to “no new taxes” which was always a lie to begin with, we can’t get something for nothing.

    What we had and were, at one time, quite happy to pay for, is rapidly going down the drain. All of us, with the exception of the fabulously wealthy, are worse of and sliding deeper and deeper into the quality of life and business climate hole we started digging a few years back… and we haven’t even stopped digging yet.

    Meanwhile Governor Pawlenty and the current crop of Republicans are standing around the rim of the hole and hollering down at the citizens of the state that we just have to keep digging faster and harder. That’ll get us where we want us to go! (China?)

  6. Submitted by Richard Schulze on 08/03/2009 - 05:15 pm.

    I hear that Somalia is nearer the Utopian dream that Grover Norquist and the small government and no tax crowd envisions.

    1)A country about the size of Texas where you can roam free. Free from the Nanny-State.
    2)Minimal law enforcement/police
    3)Liberal gun ownership
    4)Less restrictive regulation regarding the extraction of natural resources.
    5)No national health care debates
    6)Pro-life, no contraception and or abortion debates.
    7)Minimal infrastructure to maintain.
    8)Free from taxes!

    Forgot—there are no post offices there, either.

  7. Submitted by Thomas Swift on 08/03/2009 - 09:00 pm.

    Actually, Greg, I confronted the speciousness of this piece quite well….succinctly is the word you really want.

    You see, California is one of the most highly taxed states in the union, and yet it is crumbling under the weight of three decades of liberal rule. The electronics industry that fueled the SF bay area’s (and to some extent the state as a whole) halcyon days has pulled up stakes and removed to…wait for it….Texas. Low tax, business friendly Texas.

    Oddly enough, you can visit many former Silicon Valley businesses and drop in on 3M’s spiffy engineering campus all before lunch since they are all located in Austin.

    Low tax, business friendly Austin, Texas.

    Sometimes I just forget that there are some MinnPost readers that require a bit more overt text to understand the point than others.

    Maybe we’ll be able to attach graphs and pictures sometime in the near future….that should help a lot, don’t you think?

  8. Submitted by Richard Schulze on 08/04/2009 - 06:53 am.

    I like stick figures Tom. Could they be integrated into the mix as well?

    Perhaps we all could baffle and obfuscate a little better with some snappy images.

  9. Submitted by Tom Miller on 08/04/2009 - 12:15 pm.

    When governments tax, they spend into the local economy. The multiplier effect of spending in the local economy helps it to thrive. The money stays at home, city within city, county within county, state within Minnesota, U.S within the U.S. Governments don’t take money out of the economy.

    When businesses receive tax breaks, their obligation is to maintain and enhance their own capital by increasing profits. This excess money in large corporations will chase the cheapest cost of labor and capital goods around the globe – China, India, etc.

    These facts are much of the reason for Minnesota’s slide over the last ten or a dozen years. Lowering taxes takes money out of local economies.

    As a society, where should our loyalties and interest lie? Prudently investing in our communities and families or ensuring that the rich become richer?

  10. Submitted by dan buechler on 08/04/2009 - 09:40 pm.

    Thomas Swift ESQ. is such a good writer he should be with the New York Post. In the meantime we prefer reading more reality based articles. Still one of the latest economist mags did contrast California and Texas and Texas is doing well. But remember folks the 6 years from 2002 on had policy written by Texas oilmen and for Texas oilmen. Yeehah go git em cowboy!

  11. Submitted by dan buechler on 08/05/2009 - 01:59 pm.

    Yes and seriously it was once a “capital crime” i.e. worthy of beheading or a death sentence in prison to move significant money outside one’s nations borders. With an accelerating world especially in the area of communications and finance maybe now it is even more important to establish pride in one’s place, (whatever as teenagers are apt to say). In today’s world I really don’t have the answers altho methinks a little more regulation would help. If private investment money is freed up who really knows where it goes but essentially as your article states the local and macroeconomic effects are not good. Kinda like South Dakota which is just an outpost of Minneapolis/Chicago/New York. Good day and keep on writin’.

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