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Minnesota’s economic performance has room for improvement

This op-ed appeared December 30, 2017 in the St. Cloud Times.

In these pages (“Wisconsin tops Minnesota in more than college football,” Nov. 29), Jason Flohrs and Eric Bott of Americans for Prosperity cited a finding from our new report, The State of Minnesota’s Economy: 2017, that Minnesota’s economy was 2.5% smaller in 2016 than it would have been if the state’s economic growth had matched that of the nation generally since 2000.

Again in these pages (“Dismal economic times in Minnesota? Hardly,” Dec. 17), Louis D. Johnston of the College of St. Benedict/St. John’s University, queried this. He wrote that “Minnesota’s GDP may be growing more slowly but it’s not because of economic policy. Economic research has shown time and again that states that start out with low levels of income per person grow faster than states that begin with higher levels of income per person. This phenomenon is known as “income convergence” and shows up across countries, regions, provinces, and states…A clear implication of income convergence is that high-income states, like Minnesota, tend to have below-average growth rates.”

This is what Prof. Johnston said when our 2016 report made the same point about Minnesota’s below average growth. It was wrong then, and it is wrong now.

It used to be true. During most of the 20th century, poorer states and regions in America caught up with richer ones at a rate of about 2 percent annually. In 1930, for example, workers in Mississippi earned just 20 percent of the wages of workers in New York. By 1980, the proportion had increased to 65 percent. The 1990 paper by economist Robert Barro, which Prof. Johnston previously referred to on this subject, studied data from this period.

But it isn’t true anymore. A July 2017 paper by economists Peter Ganong of the University of Chicago and Daniel Shoag of Harvard looks at the data for more recent years and finds that since 1980 these regions have stopped converging. Specifically, Ganong and Shoag find that “The convergence rate from 1990 to 2010 was less than half the historical norm, and in the period leading up to the Great Recession there was virtually no convergence at all”.

Other recent research supports this. A January 2017 study by Elisa Giannone, an economist at Princeton, finds that convergence has declined in U.S. cities too. Between 1940 and 1980, poor cities caught up with rich ones at a rate of 1.4 percent a year. Since then, they have lagged behind.

In other words, the ‘convergence’ which Prof. Johnston uses to explain Minnesota’s slow rate of economic growth relative to the US average, was not happening over the period covered in our report. Obviously, it cannot be to blame.

The truth is that the economic theory of ‘convergence’ is rather more nuanced than Prof. Johnston presents. It says that poorer areas will catch up with richer ones if they are alike in characteristics such as the savings rate, population growth rate, quality of human capital, and, yes, government policy. That is why economists actually call this ‘conditional convergence.’ Looking at this, we begin to see possible explanations for the lack of convergence in the United States since the 1980s.

Prof. Johnston’s argument is based on outdated research and an overly simplified application of economic theory. However, he is right that there is no ‘magic bullet’ for economic growth. He is also right that Minnesota’s economic performance is not ‘dismal’. But it could be better. And, with the economic advantages of a hardworking, highly educated workforce and a diverse economy, we should do better.

This is the opinion of John Phelan, an economist at the Center of the American Experiment in Golden Valley.

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