Yesterday brought more grim tidings about Minnesota employment. The Department of Employment and Economic Development announced that another 13,300 people lost their jobs in February, pushing the state’s unemployment rate up another half-point to 8.1 percent. Minnesota has dropped 32,000 jobs in the first two months of the year. The state’s most recent economic forecast predicted a total of around 70,000 for the year. And although it was expected that half of that decline would occur in the first quarter, we’re outpacing that prediction substantially so far.
When I spoke with University of Minnesota economist V.V. Chari on Wednesday, I asked him about the about-face in the state economy that’s emerged in recent years.
SP: For many years, Minnesota consistently beat the national average in job growth and other measures of prosperity. Then, around 2006, we seemed to fall behind the curve in job creation in a short time. What happened?
V.V. Chari: I’m personally puzzled by it. I’ll say one thing about this–in a way, we knew that the superior performance of the Minnesota economy over a 20, 25-year span relative to the U.S. economy cannot persist indefinitely. Eventually [even world growth leaders like] China and Singapore and Hong Kong are going to start growing at 2 or 3 percent a year.
Roughly, up until the late ’90s, the Minnesota economy outperformed the national economy. We started getting a lot closer to average growth rates starting, really, in the late ’90s or so. More recently, we’ve underperformed. I don’t think we have a complete answer to all of the questions about what led to underperformance. It certainly is true that one of the things Minnesota has historically been able to do is replace declining industries with new industries which flourish for a while, and then they decline and we move on to something else. We seem to have lagged in that way for the last few years.
I’m not sure. I’m not sure there is a single policy reason I could point to and say, if only these things had been done, things would have worked out much better. Since I’m part of the university, there are those in the university who think that underfunding the university is the source of all our problems. That may have some merit to it. There are others who argue that our failure to continue to invest heavily in infrastructure has led to a variety of problems.
SP: I have wondered whether the tax-cutting turn in state government, which really started in the late ’90s, is a factor. Obviously that wouldn’t have produced immediate, contemporaneous decline. But has Minnesota’s relative movement away from being a high-tax, high-service state has hurt its economic standing, or is too soon to say that?
Chari: I think it’s a little bit too soon to decisively draw that kind of conclusion. Rather than describe it as a high-tax, high-service state, I describe it slightly diffierently. It was a state where the government worked remarkably well in the sense that the output of government for every dollar given to the government was, I think, much higher in Minnesota than in other states.
Our political class–historically, and even now–has been remarkably honest. That’s one thing that’s helped. And we’ve somehow been able to deliver government services very efficiently. You hear this everywhere. Here’s one simple example, but I think it illustrates the whole gamut of services. When was the last time you heard a Minnesotan complain that getting a driver’s license from DMV, or getting a title, was a huge problem? I’ve never heard that from a Minnesotan. Talk to any resident of any other state, and one thing they dread is–oh my God, I’ve got to go to the DMV. Happens in New York, happens in Illinois, happens in Connecticut, happens in California: Oh, I’m going to have to stand in line forever, and I’m going to have to deal with this idiot clerk who’s going to take forever.
We don’t complain about those kinds of things. They don’t happen in Minnesota. That’s one tiny example of the sense in which government has operated extremely efficiently here. As, in fact, is true more generally. If I want to return something at a Best Buy in Minnetonka, I have no problem. I’ve tried returning things at a Best Buy in Chicago, and it took an hour and a half.
I know that people who leave the University of Minnesota, including many of my colleagues, unfortunately–one of the things they report missing the most is the extraordinary efficiency of our administrative staff. The people who make anywhere from $25,000-$75,000 are, I think, much more efficient in Minnesota than they are elsewhere in the nation. I don’t mean just the South; even compared to places like New England, we do very well.
And I don’t know that that has changed. It’s possible that we can afford to be a high-tax state because we manage our tax dollars responsibly. Other states–New York, for example, cannot afford to be a high-tax state because the state government of New York would be sure to waste a huge fraction of it.
So there’s some appeal to that [critique], but I think it’s too soon to say.