The president of the Federal Reserve Bank of Minneapolis offered a little something for everyone when he spoke to the Minnesota Senate Finance Committee Tuesday.
Neel Kashkari said that if Minnesota is to meet its workforce needs over the coming decades, it needs to be open to more immigration, not just from within the United States but from around the world. But he also said that if the state wants to take on its housing shortage, especially at prices accessible to low-and-middle-income households, it needs to rely on the private sector — and therefore must look at how government regulations and requirements contribute to the high cost of building.
While more open immigration policies are core to the Democratic agenda, over-regulation of the economy fits well with that of Republicans. Those were hardly the only hard-to-pigeonhole views Kashkari expressed to lawmakers Tuesday.
Kashkari took over the Minneapolis Fed in 2016 and is one of the 12 members of the Federal Open Market Committee, which sets much of the monetary policy for the United States. Since taking office, he has made racial and geographic disparities one of the primary research areas of the Minneapolis Fed. While based in Minneapolis, the bank oversees all of the Ninth Federal Reserve District, which includes Minnesota, Montana, North and South Dakota, and parts of parts of Wisconsin and Michigan.
Kashkari has set his research branch off on projects ranging from early childhood development to affordable housing. “How do we educate as many Americans as possible, given the resource constraints we have as a country?” he said.
One of those constraints, he said, housing affordability. “Red area or blue district, affordable housing is becoming an increasing challenge and we’re trying to understand why isn’t the private market able to step in and build more units, build more apartments, build more homes that people can afford. We need the private market to move in this direction, to meet the scale of the need.”
He complimented the city of Minneapolis for its recent land use plan that seeks to increase density. “We do think density has a role to play. It can’t solve everything, but we do think more private-market supply is part of the solution.”
But he also warned about the unintended consequences of policies with noble intentions. California will require solar panels on all new homes by next year, a mandate that will add up to $10,000 to the price of a new home.
“That is a direct impact on affordability for low-income families,” said Kashkari, who was the Republican nominee for governor of California in 2014. “Sometimes we have very different public policy goals that can work at cross purposes with each other. I’m not here to tell you that solar panels are a good idea or a bad idea. I’m here to say all of us should do rigorous analysis to say what are the real consequences of these policies. Is it helping families or is it making the problem worse?”
His researchers are now looking at the reasons housing developers can’t and won’t produce housing that meets the needs of lower- and middle-income buyers. “Why is it that the minimum costs of a unit or a house has gotten so high that the economics just don’t make sense for that development or that family and what are the policy solutions that can lower that level?”
Sen. Carla Nelson, R-Rochester, asked Kashkari about the impacts of the tight labor market on the state’s economic growth. The inability to find workers was one of the reasons state economists have lowered growth projections and revenue growth projections in coming years.
Kashkari said that one of the Fed’s most-significant powers — setting interest rates for borrowing — is dependent on accurate data of growth in the economy. “I have been in the camp that I don’t think we are yet at maximum employment,” he said.
When he hears employers complain of a worker shortage, he asks them: “Are you raising wages? And usually the answer is, ‘no.’”
“Literally millions of people have come off the sidelines who previously said they weren’t interesting in working who are now taking jobs,” he continued. “So the question is, how many more are out there. I’m of the view that there is still slack in the labor market and until we see wage growth really pick up, I’m going to believe that there are still more Americans out there.”
But he said attracting immigrants will be a vital part of the workforce solution. “If you look at our country, we’re having fewer kids than we did in prior generations,” he said. “And a big part of economic growth is population growth: more workers to produce things, more consumers to buy things. And if our population growth is slowing because we’re having fewer kids, where is our economic growth going to come from?
“You have three choices. You can either accept slower growth, you can turn to immigration or you can try to subsidize fertility,” he said. “That’s just the math. If it were up to me, I would say that immigration is a huge competitive strength for America.
“Japan has very low fertility, yet culturally they are very resistant to immigration so they are trying to subsidize fertility. They are literally trying to offer tax credits and financial incentives to encourage Japanese families to have more babies. Let me tell you, it takes 20 years to grow a new worker. It’s not a fast solution even if it’s even possible.”
Combating disparities
When he arrived in Minnesota three years ago, Kashkari said was surprised to find the state has some of the biggest disparities in the country when it comes to outcomes for whites and people of color. So he asked his economists to explain the causes.
“To be honest, we didn’t get very good answers,” he said.
In response, the Minneapolis Fed created the Opportunity and Inclusive Growth Institute, which just hired a Notre Dame professor, Abigail Wasniak, to lead it.
Sen. Bobby Joe Champion, DFL-Minneapolis, took issue with Kashkari’s stated emphasis on immigration to fill future labor needs. He said the first source should be the unemployed and underemployed people already in the state. “It seems you are falling into the same challenge that others have, which is you look past those who are sitting on the sidelines,” Champion said. “African-Americans, for example; Native Americans, for example; other American-born individuals who are on the sidelines.”
“That causes me some trepidation,” Champion said. “I’d like to know how you can reconcile those two notions, because I think you’re just falling into the same challenge.”
But Kashkari pushed back. “I don’t see any conflict because I said two things. One, immigration; and second I said education. And education is about giving all Americans, all Minnesotans, the skills that they need to realize their full potential and to participate fully in the economy.”
He said most of the work his staff has done is focused on making sure sure all Minnesotans “and in particular Minnesotans in low-income communities and Minnesotans in communities of color” are getting the same education as other communities, Kashkari said.
One hot topic that Kashkari did not allow himself to get embroiled in was whether the current tax structure in Minnesota — with relatively high state taxes and a cap on the deductibility of state and local taxes (known as SALT) under the federal tax reform bill of 2017 — is having an impact on the economy. He said he has not looked at the latest state revenue forecast and would leave that analysis to state economists.
Afterward, when asked if the SALT cap could be (as New York Gov. Andrew Cuomo has said) causing high earners to flee high tax states, Kashkari said it is too soon to tell. And since the Fed is concerned with the national economy, movement within the country might impact individual states but not the overall economy. “If the flight flows from one state to another state, it’s not going to move the national economic statistics any,” he said.
I once knew a real estate developer in Colorado, a dozen years ago, who actually had a working conscience. Yes, I know that’s hard to believe, but it’s true. He was able to build an “affordable” residential development of small, single-family detached homes in a Colorado Front Range community by asking everyone involved in the process to lower their expectations. He took a smaller fee for himself. He asked landowners to accept less than “the market” might have paid them. He asked contractors to accept a bit less than their normal percentage for organizing and building the development. He asked buyers to accept fairly ordinary housing – neat, clean, modern, but not 2,800 square feet with 3 bathrooms and a media room. Most were 1,200 to 1,400 square feet, 2 or 3 bedrooms, 2 baths or 1-1/2 baths. No 3 or 4-car garages. No 1-acre lots. Off-the-shelf designs.
It worked.
Until it didn’t. That development sold out quickly, but by the time I left Colorado, the developer had retired, and everyone else in the business was driven by the same mantra that powers most business – maximum profit.
One of the primary reasons affordable housing is so tough to build is pretty much the same reason why auto manufacturers advertise their bargain models, but once you’re in the showroom, make sure to show you several upscale models with additional features. A low-end car, like low-end new housing, has minimal features beyond basic utility and functionality. Having succumbed to a culture saturated with advertising, we’d all like to have at least a few additional features, each of which drives up the price for both seller and buyer. Regulations, and especially zoning, can make affordability even farther out of reach. It’s not all that complicated, really. Like auto manufacturers and their dealers, real estate developers want to build middle and high-end housing because that’s where the profits are, and without profits – at least in this culture – real estate developers, contractors, real estate agencies, etc., all go out of business.
“And a big part of economic growth is population growth: more workers to produce things, more consumers to buy things.
And the earth can’t handle population growth.
Lot’s of things need to change, not just climate.