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Minnesota’s economy can do better

Louis D. Johnston, an economics professor at St. John’s University and a MinnPost writer, recently took issue with a new report on Minnesota’s economy published by the Center of the American Experiment

Peter NelsonPeter Nelson

Instead of engaging in a productive dialogue on Minnesota’s economy, the professor used his entire space at MinnPost to attempt to poke holes in the report. At the start, he notes the report includes 30 figures, 5 tables and numbers 40 pages. But he then fails to address nearly all of the data presented in the report that point to weaker economic performance for Minnesota in the future. Here are some warning signs he ignored:

  • What matters most for long-term growth is productivity. Yet the state’s productivity — gross domestic product (GDP) per worker — is lower than the U.S. average and may be slipping relative to the nation, especially in regard to service producing productivity. This point is corroborated by a recent report by the International Monetary Fund [PDF] that shows growth in Minnesota’s total factor productivity dipped below the national average between 2005 and 2010.
  • High-tech jobs pay nearly twice as much as the average job and are an important part of how Minnesota wages keep up with the nation. However, Minnesota lost high-tech jobs at the turn of the century.
  • Most new jobs are created by new businesses, but new firm formation in Minnesota has steadily declined since 2000, and the percent of Minnesota employment in new firms sits below the national average.
  • The state demographer has highlighted how important positive migration will be for Minnesota “to shore up its labor force needs.” Unfortunately, migration data show the state is now losing productive people in their prime earning years.
  • Finally, projections from Minnesota’s own state agencies forecast Minnesota will fail to keep pace with the nation on income and job growth. Most notable, the Minnesota Department of Employment and Economic Development projects Minnesota job growth will be slower than the nation in 19 of 22 major occupations.

All of these points deserve attention.

Johnston claims the report has two problems. First, he argues the report’s “assertions about taxes and regulation are not borne out by scholarly research.”  Second, he argues the report is “missing a critical reason for slower growth that scholars across the political spectrum agree on.”

Plenty of scholarship finds a robust relationship [PDF] between taxes and growth, as well as regulation and growth [PDF].  It’s true some studies arrive at conflicting results and find little to no relationship.  However, the existence of conflict in the economic literature does not negate the fact that many scholars find a robust evidence supporting our conclusion that taxes and regulation matter. 

The fact is, it’s hard to find an economic question where a consensus exists in the academic literature. Lack of consensus does not mean there is no answer to the question at hand. It just means economists can’t deliver a clear answer. As a result, a lack of consensus necessarily means policymakers must look to and weigh other evidence to make sound decisions.

While our report did not set out to outline additional evidence, it does reference some further evidence for policymakers to weigh. For instance, Minnesota’s lowest taxed industry — manufacturing — also happens to deliver the strongest growth out of any major industry relative to the nation. Also, Minnesota tends to lose people to lower tax states in the flow of domestic migration.

The fact is, any economist will tell you that taxes distort economic decisions. No one piece of evidence provides the smoking gun, but together, the weight of the evidence strongly suggests taxes and regulations matter.     

What about Johnston’s second claim? He argues we shouldn’t expect Minnesota to grow faster than other states because state incomes are converging. As the economic theory goes, states starting at lower incomes will grow faster than states starting with higher incomes. Because Minnesota’s income starts at a higher point, the state should not grow as fast. Not only did Johnston claim this is “a critical reason for slower growth,” but he also claimed this is a point “scholars across the political spectrum agree on.” 

Most economists now agree that convergence is “conditional.” While that normally is used to describe why convergence doesn’t happen between rich and poor countries, it can also be applied to convergence between rich and poor states. Tax and regulatory policy may in fact be one of those conditions, which would mean only two states with the same set of tax and regulatory policies — one rich and one poor — should converge. One study [PDF] finds that states with lower taxes are more likely to converge to the national average and even concludes that policymakers in southern states “can assist in the convergence process by committing to low taxes.”

In a recent paper [PDF], two Harvard economists report income convergence “has weakened considerably” since 1980. The much weakened level of convergence suggests it is a much less relevant factor, if a factor at all, in explaining Minnesota’s average growth over the past 15 years.

Peter J. Nelson is a vice president and Senior Policy Fellow at Center of the American Experiment.

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Comments (5)

  1. Submitted by Matt Haas on 09/08/2016 - 09:23 am.

    Per usual

    Perhaps the author might explain why adopting the tax and regulatory environment of say, Mississippi will somehow turn us into something other than say, Mississippi? Fact of the matter is, the places that have adopted these ideas are poor, destitute wastelands (outside those with a mitigating factor such as oil) while those taking the opposite approach thrive. That’s just cold, hard, experiential evidence. Perhaps the author might posit why that is?

    • Submitted by Jim Million on 09/08/2016 - 10:15 am.

      OK, then

      please explain the impressive growth of Atlanta into the 1970s and consequent Georgia revitalization.

      “…a mitigating factor such as oil.” Uh, yaah. Natural resources tend to bend most curves.

      • Submitted by Rachel Kahler on 09/08/2016 - 01:42 pm.

        Impressive growth

        40 years ago. While there are examples of states with faster growing economies, it’s because those states had a pretty low bar (the Dakotas spring to mind). And if the growth in Georgia actually translated to the benefit of the people rather than the just the corporations that were attracted by the “revitalization,” I’d be curious as to why Georgia sits at a rank of 33, while Minnesota sits at a rank of 9 when comparing wealth. I’d also be curious as to why people from all over the country (all over the world, really) bother to come to Minnesota to work for good companies when they could work in Georgia for good companies. Surely, the weather can’t compete and the cost of living there is cheaper than here. There must be something else…

        • Submitted by Jim Million on 09/09/2016 - 01:02 pm.

          Perhaps

          fewer Scandinavian and German descendants. Principally, the State of Georgia (very specifically Atlanta) mounted a very successful campaign to attract companies in the North to either re-locate or build major branches. Georgia’s plan was very successful, even as “the mini-depression” came upon everyone in the later ’70s. Greater Atlanta, mainly Smyrna, became SE regional bases for the major computer companies, for example. The push involved upgrading employment base toward white collar, college educated professionals, as well as others. I recall my first visit to Atlanta, in 1972, when the Hyatt Regency tower was new, either the first or second of its design, with those very cool and very new Otis Elevator external pods running up the inside walls of a very tall atrium in this location. That was an initial step in bringing back downtown Atlanta. Major League Baseball formed the professional sports anchor when the Milwaukee Braves franchise became the Atlanta Braves, for example. We know about Atlanta football all too well. We
          should remember that Georgia Tech is also there, and literally back in the game for sometime now.

          The simple point here is that Georgia government and business leaders united in a well-designed and coordinated campaign that succeeded to the point where Atlanta became the epicenter of the Southeast, as Dallas also revitalized itself as that center of the Southwest. One result is that both cities became key national and international airline hubs. Atlanta did have a long way to come back, certainly from the time Sherman’s Army totally trashed it. That’s not really the point, though. Atlanta ran right past many other well-positioned places, like the Twin Cities.

          Minnesota has been too long in coming to its new realities, at least as successfully. We are working on plans, but seemingly not so well coordinated. Perhaps we should recognize the simple fact that we went somewhat backwards in the same decades Dallas and Atlanta grew rapidly. Once a significant corporate home office center, the Twin Cites suffered decline in its older farm implement/support industry, then merger/buyout of other operations bases–IDS and Honeywell, for example. While Minneapolis is aggressively building new office spaces, the IDS Tower still cannot find a buyer as recently as last week. We also lost Control Data to industry factors, as well. Even 3M put in place (if I recall correctly) a corporate growth plan that pretty much excluded its home state. Fortunately, we do remain their home. Our one very strong and growing agriculture/commodities leader (Cargill) has flourished while even Pillsbury and General Mills are no longer what they were.

          What we now see in aggressive transportation and sports enhancement indicates we got the message, a bit too late, but perhaps in time to turn the Twin Cities “back to the future.” We certainly have worked diligently to make MSP an ever-growing international airline hub as we have consolidated local entities.

          What we seem to have lacked for too long has been strong leadership and common alliances for our own
          sake. Infighting and lack of goal agreement have held us back from our future, perhaps far too long. That’s a personal observation, but a fair one, I believe. In some important ways, we seem to remain too much a provincial place on the plains. I don’t believe we truly dithered; however, I do firmly believe we refused to recognize our new realities.

          In any case, we are back on some tracks, literally building new rather than ripping up old.

  2. Submitted by joe smith on 09/08/2016 - 10:05 am.

    I have a hard time with all the “scholars”

    who claim that higher taxes don’t prohibit business growth. They site one study or another to reenforce their stance. The same reason folks drive 50 miles extra to get a washer/dryer combo for $50 less, is the same reason a small business, medium business or large business will move 200 miles for 4-9 points (depending on what State you move to) more on their investment. All you have to do is contrast New York State, where businesses were taxed out of their state starting 35 years ago, versus today where they are advertising multiple tax breaks of all sorts to bring businesses back. It is math that drives a business to move for more profit, not a political ideology or some study.

    I wonder if these “scholars” have ever run a business? Having done business in multiple states around our country, you find qualified welders, fabricators, mechanics, accountants and any other trade or skill you are looking for in our lower 48 states. Once you figure that out, taxes and regulations of that particular state, become a huge deciding factor.

    Manufacturing, mining, logging, construction and shipping pay regular hard working folks salaries that are middle class. Folks can raise a family, buy a house and build a life on these jobs. We are in a phase in America where we celebrate a doctored unemployment number (both parties) and claim a minimum wage job at Subway as job growth. It is somehow more desirable in many circles, to have a French studies major than being a class A welder. I wonder who does better in the real world of families, bills and obligations between 500,000 class A welders or 500,000 French studies majors? Regular hard working blue color folks are depending on their country and state to have taxes/regulations that encourage small to huge businesses to open where they live. They don’t want to move, but will, to find employment.

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