Even Where It’s Good, Minnesota’s Economy Isn’t Great
Mankato is one of Minnesota’s most prosperous cities. Yet, as Peter Nelson pointed out in an op-ed in the Mankato Free Press, even Minnesota’s best-performing areas are not enjoying an outstanding economy by the standards of our neighboring states.
In a recent fedgazette article, The Federal Reserve Bank of Minneapolis spotlighted how Mankato’s economy has been outperforming the state as a whole on a number of measures. The city boasts an unemployment rate well below the state rate and has experienced stronger growth in employment, labor force and population over the past 10 years.
That’s good news for Mankato relative to Minnesota. However, a new Center of the American Experiment report, Minnesota’s Economy: Mediocre Performance Threatens the State’s Future, suggests Mankato can do even better.
The report finds that with respect to the measures that matter most to people living in the state — economic growth, incomes and jobs — Minnesota’s economy during the current century has been average, at best, when compared to the nation.
If the state is doing average and Mankato is doing better than the state, how can the city expect to perform even better?
Our report compared economic growth between 2001 and 2014 across the 30 metropolitan statistical areas (MSAs) in Minnesota and the states bordering Minnesota. Mankato grew by 27 percent and outperformed every Minnesota MSA except Rochester, which grew by a hair higher 28 percent.
Though growth was stronger in Mankato and Rochester compared to other Minnesota MSAs, these cities don’t even break into the top 10 when the comparison broadens to MSAs in bordering states. On that comparison, Mankato ranks thirteenth and is clearly in the middle of the pack.
No one expects Mankato to compete with economic growth in Fargo and Bismarck, two North Dakota towns fueled by Bakken oil. But what about cities in Iowa? Four of the top eight MSAs are in Iowa, including Cedar Rapids, Des Moines, Dubuque and Waterloo.
These Iowa cities provide perhaps the best comparison to Mankato because all are similarly situated in prime agricultural country. And by this comparison, it appears something about Minnesota might be holding Mankato back.
Minnesota’s economic performance should be held to a high standard. Anyone who lives in Minnesota knows the people of Minnesota top the nation on a wide range of factors that contribute to both a high quality of life and a productive workforce. Minnesota ranks among the top states for educational attainment, health, family cohesion, public safety, workforce participation, civic engagement and access to cultural amenities.
Despite all these advantages and the state’s prosperous past, our systematic review shows that Minnesota’s economy has been average, at best, over the past 15 years. Worse, leading indicators are nearly all pointing downward. Data show a declining level of business creation, entrepreneurship, investment and job growth in key industries, all of which weaken future growth prospects. And lagging growth in incomes and jobs is exactly what state agencies currently project.
Why is Minnesota underperforming?
Minnesota is justly regarded as a blue state. Minnesota’s taxes are among the highest and most progressive in the country. Minnesota’s regulatory environment also ranks among the most burdensome.
Are Minnesota’s blue-state policies responsible for its economic underperformance?
Minnesota’s manufacturing sector may be the exception that proves the rule regarding Minnesota’s blue-state policies. Minnesota’s manufacturers are the main reason Minnesota GDP continues to grow at close to the same pace as the nation. Without higher than average growth in the manufacturing sector between 2000 and 2015, Minnesota’s GDP would be $7.1 billion lower.
A number of factors contribute to Minnesota’s manufacturing advantage. However, one particular factor, taxes, might come as a surprise. A recent analysis by the Tax Foundation reveals that Minnesota imposes the second lowest tax burden on capital intensive manufacturers. This is largely due to the fact that Minnesota does not tax income derived from the sale of goods outside the state.
Iowa, however, ranks even better and actually imposes the lowest tax burden on capital intensive manufacturers. And Iowa’s overall state and local tax burden is also much lower than Minnesota’s. According to the Tax Foundation, Minnesota imposes the eighth highest tax burden while Iowa ranks 31st.
Iowa’s lower tax burden translates to lower costs for Iowa businesses. Iowa’s regulatory burden is also lighter as shown by the fact that it has now taken twice as much time — over 1,000 days and counting — to approve the Sandpiper Pipeline to carry Bakken oil across northern Minnesota as it took Iowa to approve the Dakota Access Pipeline to carry the same oil. Thousands of construction jobs and millions in annual property tax revenue are now at risk up north due to the delay of the Sandpiper Pipeline.
Though no one piece of evidence can prove Minnesota’s blue-state policies slow Minnesota’s economy, the weight of the evidence strongly suggests that this is the case. Fortunately, these policies are the result of human decisions and can be changed and improved upon.
Coupling better tax and regulatory policies with the state’s current advantages in educational attainment, work ethic, public safety and family structure will give Minnesota and Mankato its best opportunity to reach its full potential.