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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.

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.