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North Star fading? As population ages, state faces complex challenges in restoring its economic luster

By Dave Beal | Monday, Aug. 11, 2008
Minnesota economists and analysts are trying to solve a high-stakes mystery: Why has the state’s role as a shining star of the U.S. economy dimmed in recent years?

Week after week, Minnesota economists and analysts dig deeper into a high-stakes mystery.

Why, they are asking, has the state’s role as a shining star of the U.S. economy dimmed in recent years? And if that pattern continues, won’t it compound the work of state policymakers as they struggle to reach an elusive consensus over how to deal with issues raised by the state’s aging population and other key trends? 

The sleuthing is particularly intense at the Minnesota Department of Finance in St. Paul. There, economists have been busy this summer assembling and interpreting data for two new state commissions. Their work will help the panels come up with recommendations for long-term fiscal policies to guide the state starting next year. Gov. Tim Pawlenty established one of the commissions; the Legislature created the other.

A Job Trends Working Group, made up of analysts and officials from Finance and other parts of state government, also has been sifting through the data. That group began meeting last December.

In particular, lackluster growth in per capita income and the rising unemployment rate have been raising eyebrows. By both measures, Minnesota has long been a leader among the 50 states.

Slipping in the rankings

Not so much anymore. From 2004 to 2007, growth in Minnesota’s per capita income ranked a dismal 47th in the nation — 13.5 percent vs. 16.2 percent for the U.S. overall, the Finance Department says. The U.S. Bureau of Economic Analysis says the state ranked 11th in per capita income last year. That was down from seventh in 2003, when Minnesota trailed only half a dozen East Coast states.

As for the state’s unemployment rate, it edged above the U.S. rate in February 2007 and again three months later. That was a first, says state economist Tom Stinson. And since the current jobless data series began in 1972, Minnesota’s jobless rate has typically run from 1 to 2 percentage points below the U.S. rate.

Minnesota's unemployment rate now is similar to the U.S. average.
Chart courtesy of the state of Minnesota
Minnesota’s unemployment rate now is similar to the U.S. average.

“The question is: Is this just a little blip in a long historical trend or is there something going on here that we need to be concerned about?” says Stinson. “Have structural changes weakened Minnesota’s position? I think it’s too soon to tell.”

Research done by Terry Fitzgerald, now an economist at the Federal Reserve Bank of Minneapolis, still stands as one of the most definitive summaries of the Minnesota economy’s ascent to star status. In a 2003 article he wrote for the Minneapolis Fed’s Region magazine, Fitzgerald tracked the state’s rise in per capita income relative to other states and the nation from 1929 to 2001.

Using per capita income as his principal yardstick, he found that by the late 1990s, Minnesota had vaulted from a decidedly subpar performance to a top 10 state. The state’s per capita income was 86 percent of the national average in 1929. By the end of the 1950s, it had moved up to about 95 percent. By 2001, it had reached 108 percent of the U.S. level.

State still envied
This is a remarkable achievement envied in many other states. Just ask Jim Nowlan, a longtime friend of mine who is the editor and publisher of the Stark County News in downstate Illinois. Nowlan, who has been active in Illinois public affairs for decades, notes that per capita income has gone the other way in his state — from 118 percent of the U.S. average in 1960 to 104 percent last year.

How did Minnesota do it? In his article, Fitzgerald suggested that much of the explanation rests in rising levels of education in Minnesota relative to the nation.

In an interview, Fitzgerald said that despite the state’s faltering rankings in per capita income and some other measures lately, he’d write the same article today. He argues that despite the less reassuring numbers of the past few years, Minnesota’s economy has still fared far better than most states over the long haul.

But Fitzgerald’s work also underscores how much more Minnesota has to lose than other states. And for many, the troubles that have surfaced in the last few years raise unsettling questions. Is the state’s economy as solid as it was a few years ago? What lies ahead?

Difference in per capita GDP growth (MN-US), 2000-2007
Chart courtesy of the state of Minnesota
Difference in per capita GDP growth (MN-US), 2000-2007

Such concerns are inescapable at the Finance Department. Economists there are mandated to keep a close watch on the short-term ups and downs of the state economy in order to predict government revenue and expenses. Their forecasts provide the governor, legislators and local officials with information critical for setting levels of taxation and public spending.

Mood shifts
Much of the current unease was on display last month, when Tom Stinson and Tom Gillaspy, the state’s demographer, laid out a fresh version of their “Two Toms” show to members of Gov. Pawlenty’s 21st Century Tax Reform Commission.

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When Stinson and Gillaspy first began their joint presentations to leaders and community groups four years ago, there wasn’t much sign of the star-dimming statistics being bandied about today to describe the state’s economy. The nation was not suffering from the credit crunch and the declines in housing prices and the stock market that are worrying so many Americans this year. And the long surge of baby-boomer retirements now about to begin still seemed a long way off.

So not surprisingly, their presentation has taken on more of a sense of urgency. Basically, they are delivering a three-part story:

Tom Stinson
MinnPost photo by Craig Lassig
Tom Stinson

Chapter One: the good news about the long-term performance of the state’s economy.

Chapter Two: the less-rosy numbers from recent years.

Chapter Three: a look at four “mega-forces” — globalization, technology, energy prices and demographics — that will shape Minnesota’s economy in coming years.

Here’s Stinson, talking to the governor’s commission about Chapter Two: “The performance of Minnesota’s economy is not as good as we had hoped and, in some ways, it’s not been very good at all.”

As their PowerPoint presentation proceeded, more unsettling pieces of the puzzle flashed onto the screen.

From 2004 to 2007, the state’s gross domestic product rose only 4.8 percent in Minnesota — 47th in the nation. Over this same period, Minnesota’s personal income grew just 4.4 percent, ranking the state 45th. From 2000 to 2007, Minnesota’s employment growth ranked 30th.

Steve Hine, research director for the state’s Labor Market Information Office, has provided more such data to the working group.

A sampling: Minnesota’s job growth consistently outperformed the nation in the five years following the 1991 recession. But in the five years after the 2001 recession, job growth in Minnesota lagged behind the nation. Over the year ended last October, jobs grew faster in Minnesota than in the United States in only one of 11 major sectors. And the state’s labor force participation and employment-to-population rates, which had been leading or nearly topping all states, slipped a few notches in the rankings from 2001 to 2007.

Structural or cyclical?
Stinson identifies the defense and energy industries as two sources of the trouble. Minnesota is getting significantly smaller shares of the growth in these industries than the rest of the country. He says these changes could be structural, meaning they reflect fundamental shifts in the economy as opposed to short-term swings.

Tom Gillaspy
MinnPost/Daniel Corrigan
Tom Gillaspy

Two other sore spots for Minnesota, the housing and transportation industries, look more cyclical.

Four of the state’s seven worst-performing sectors over the year that ended in March have been seriously affected by the housing slump.

Poring through the continuing revisions to and shortcomings of the data and assigning different weights to this or that piece of statistical evidence can call for the skills of a Sherlock Holmes. But even after taking all of the data problems into account, it appears Minnesota’s economy underperformed the U.S. economy in 2006 and 2007.

Then there’s Chapter Three of the Two Toms’ story, which features the elephant in the room: retiring baby boomers. Less than three years from now, the boomers will begin turning 65. Over the two decades that begin in 2010, the ranks of Minnesotans 65 and older — mostly retired — will swell to 1.2 million from 750,000.

That spells trouble for employers trying to fill jobs and for governments needing tax revenues. Stinson cites an example of how state taxes decline for a married couple after retirement. In the year before retiring, a typical couple with $65,000 in annual income would pay $4,682 in Minnesota income and sales taxes. In the year after retiring, their income would fall to $45,000 and their income/sales tax bill would drop to just $1,987.

Multiply that tax decline by waves of newly retired taxpayers in coming years. That will give you a sense of the drain on tax revenue that looms for state and local governments.

Stinson says Minnesota still starts from a position of strength and has time to deal with its economic problems, but it needs to get on with the over-arching solution: boosting productivity — meaning more output per hour by the state’s workers. Achieving that goal calls for improved education and training, better management, a strong infrastructure and significant technological advances.

That’s a big order and, and Gillaspy offers a familiar warning: “Past performance does not guarantee future results.”

As the Stinson-Gillaspy show wound up, Michael Vekich, who chairs the governor’s commission, said Minnesota reminds him of a company that has a 70 percent share of its market but is sitting on its laurels.

Turning to Minnesota’s two Toms, Vekich said: “I think what you’ve presented here is pretty sobering.”

Dave Beal, a former business editor and columnist for the Pioneer Press, writes about business and the economy. He can be reached at dbeal [at] minnpost [dot] com.