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High-tax Minnesota lagging in economic growth

This op ed appeared in the Duluth News Tribune on September 29th, 2019

In July, the economic expansion which began in June 2009 clocked up its 121st month, surpassing the expansion between March 1991 and March 2001 to become the longest period of economic growth in American history.

On some measures, this aged specimen appears to be in good health. In the nine quarters from the fourth quarter of 2014 to the fourth quarter of 2016, U.S. domestic product growth, or GDP growth, averaged 1.9%. In the nine quarters since then, it has averaged 2.8%.

The job growth that began in early 2010 continues apace as well. In August, the share of working-age Americans either unemployed or out of the labor force altogether — 39.1% — was lower than at any time since December 2008.

At the same time, there are those who think this expansion is in its death throes. The yield curve went from the obscurity of the financial pages to front-page news when it inverted recently, meaning it is now cheaper to borrow long-term than short-term. This is often a harbinger of a recession. The stock market tumbled on this news; and 38% of economists surveyed by the National Association for Business Economics think the United States will experience a recession in 2020.

Only one thing is certain. Whether from old age or bad policy, the current economic expansion will end at some point, and we will want to be well-placed to cope when it does.

Sadly, recent data offer Minnesotans cause for concern.

In the first quarter of 2019, Minnesota had only the 36th fastest-growing economy out of the 50 states and District of Columbia. Our economy grew by 2.6% in real terms, below the national rate of 3.1%. This was the third consecutive quarter in which Minnesota’s economy grew more slowly than that of the U.S. generally. Over that period, the U.S. economy grew by 9% percent in real terms, while ours grew by 6.3%.

Our labor market, too, shows worrying signs. Over the 12 months from September 2018 to August 2019, Minnesota’s working-age population grew at a faster rate than that of the U.S. — 0.9% compared to 0.4% — but employment grew at a slower rate: 0.8% compared to 1.2%. As a result, while the number of unemployed people rose nationally by 1.3% over that period, Minnesota saw an increase of 20.1%, the fastest in the country.

Our state government has basically two policy levers when it comes to Minnesota’s macroeconomy: taxation and regulation. A regulatory burden is a hard thing to quantify, but Minnesota routinely ranks toward the top of the rankings of states in tax burden. We also lag national averages on worker productivity, capital per worker, venture capital per worker, and new and young businesses as a share of all businesses. All of these deficiencies contribute to our lagging growth. If you don’t think our state’s high taxes are responsible for this, I’d ask you, in all honesty, what is?

Fixing the roof while the sun is shining is generally good policy. We have had nine years of economic growth in the U.S. and in Minnesota, which should have been plenty of time to get in shape for the next inevitable downturn. Our state has not taken advantage of this as fully as we could have. It will be a tragedy if we turn out to have squandered the opportunity.

John Phelan is an economist for the Center of the American Experiment (AmericanExperiment.org), which is based in Golden Valley, Minn. He wrote this for the News Tribune.

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