Chari interview, part II: Jury’s still out on causes of Minnesota’s declining economic performance

V.V. Chari
V.V. Chari

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.

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Comments (5)

  1. Submitted by Brian Simon on 03/20/2009 - 01:27 pm.

    I was doing some reading last night about Fed policy & what kinds of investments we should be making to promote ongoing growth. The author made a compelling argument for investing in education, referencing a book from last year; the title was something like ‘The Race Between Education and Technology.’ One of the premises is that much of the growth we enjoyed in the 50s, 60s & 70s was due to the increasing rate of education nationally – in the 30s & 40s, only a minority of individuals graduated high school. By the 70s, a high school diploma was the norm & large numbers of people were attaining 4yr degrees.

    Here in MN, my understanding is that we are no longer leading the nation in producing well educated individuals via our public schools – we’re closer to the mean, whereas we used to lead. Perhaps there is a correlation between our education output and our economic output.

  2. Submitted by Ross Williams on 03/20/2009 - 10:02 pm.

    “Perhaps there is a correlation between our education output and our economic output. ”

    I don’t think there is any doubt about that. Whether that explains all of Minnesota’s problems or not is another question. Part of the problem is that we continue to pour money into 20th century road infrastucture that is not critical to a lot of modern businesses.

    The most valuable asset that attracts businesses and makes them successful is a well-educated and informed workforce. The second, related, asset is information infrastucture.

    The Minneapolis Federal Reserve found that early childhood education gets the best return on investment. And the United States in general is falling behind in providing broadband infrastucture.

    Yet we continue to invest in bricks and mortar. On the Range, we are even investing money in empty buildings on the theory that empty space will attract business. But there is vehement opposition to public investment in modern fibre optic communications that are going to be increasingly critical for successful businesses.

    It also doesn’t help that the Minnesota Department of Transportation is committed to the old model of trying to build its way out of congestion. It is apparent that all that road building just induces people to drive more and further. The result is more traffic and the congestion is just moved around, not alleviated. So not only aren’t we training our own kids for future jobs, but we can’t attract skilled employees from elsewhere.

  3. Submitted by John Olson on 03/23/2009 - 07:38 am.

    Part of this as well may very well be the disappearance of several large Minnesota-based corporate entities that were assimilated and are no longer a part of the corporate “fabric” of the community. Like them or loathe them, when these corporate HQs were here, they were leaders and contributors to local philanthropy.

    Companies like Honeywell (now part of Allied Signal and based in New Jersey), Norwest (part of Wells Fargo), Dayton-Hudson (now Macy’s), Control Data, St. Paul Companies, Burlington Northern (now BNSF, based in Ft. Worth, TX), Soo Line (now part of Canadian pacific) are just a few examples.

    Some will argue that Minnesota’s “business climate” is to blame–and in some cases will be correct in that assessment (see Amhoist for an example). In other cases, it is simply a case of companies being bought up and consolidated into other businesses (like North Central Airlines becoming Republic Airlines, then swallowed by Northwest Airlines). Yes, there may be some jobs still here, but the corporate headquarters staff that used to be here for those companies are long gone.

  4. Submitted by Thomas Swift on 03/23/2009 - 01:25 pm.

    “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.”

    Although I wonder if citizens of New York wouldn’t dispute their status as a high tax state, that is a very insightful statement.

    And I must say that Brian has picked up my thoughts precisely in his very well stated observation. “Perhaps there is a correlation between our education output and our economic output.”

    We so often hear that a major cause of our stalled business climate is our failing “investment” in pubic education. And yet public education has increased to the point that it now consumes 45% of our state budget; billions and billions of dollars.

    We’re “putting it in” all right; but the flow at the other end (competent, well educated kids) has slowed to a trickle.

    Has Minnesota’s public education system gone “New York” on us? That’s the argument I’ve been making for years.

  5. Submitted by Henry Wolff on 03/23/2009 - 04:16 pm.

    My educated guess would be:
    1) reached end stages of our incredible run of good fortune in having large, wealth-building resources or enterprises in the state
    2) changing demographics of the state mean that we are getting a lower return on our preK-12 education investment
    3) exploding costs of higher education keeps it just out of reach of the masses

    The MN miracle was our luck in having the Iron Range, the milling powerhouses, and then the 3Ms, Honeywells and Control Datas. This allowed us to fund a high level of govt services. I am afraid that people are going to confuse cause and effect and return to a high tax state thinking that will fix everything.

    Medtronic and the med device companies were big wins. But we’ve lost our two big banks. The mines have played out for the most part. 3M and Medtronic can’t sustain our growth rate on their own.

    The only hope is to try to build around our legacy educated workforce. But our education model as it stands can’t keep up. In higher education we need to experiment with very low cost education models. For preK-12, I’m not sure what the answer is.

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