Minnesota’s economy can do better
Louis D. Johnston, an economics professor at St. John’s University and a MinnPost writer, recently took issue with a new report on Minnesota’s economy published by the Center of the American Experiment.
Instead of engaging in a productive dialogue on Minnesota’s economy, the professor used his entire space at MinnPost to attempt to poke holes in the report. At the start, he notes the report includes 30 figures, 5 tables and numbers 40 pages. But he then fails to address nearly all of the data presented in the report that point to weaker economic performance for Minnesota in the future. Here are some warning signs he ignored:
- What matters most for long-term growth is productivity. Yet the state’s productivity — gross domestic product (GDP) per worker — is lower than the U.S. average and may be slipping relative to the nation, especially in regard to service producing productivity. This point is corroborated by a recent report by the International Monetary Fund [PDF] that shows growth in Minnesota’s total factor productivity dipped below the national average between 2005 and 2010.
- High-tech jobs pay nearly twice as much as the average job and are an important part of how Minnesota wages keep up with the nation. However, Minnesota lost high-tech jobs at the turn of the century.
- Most new jobs are created by new businesses, but new firm formation in Minnesota has steadily declined since 2000, and the percent of Minnesota employment in new firms sits below the national average.
- The state demographer has highlighted how important positive migration will be for Minnesota “to shore up its labor force needs.” Unfortunately, migration data show the state is now losing productive people in their prime earning years.
- Finally, projections from Minnesota’s own state agencies forecast Minnesota will fail to keep pace with the nation on income and job growth. Most notable, the Minnesota Department of Employment and Economic Development projects Minnesota job growth will be slower than the nation in 19 of 22 major occupations.
All of these points deserve attention.
Johnston claims the report has two problems. First, he argues the report’s “assertions about taxes and regulation are not borne out by scholarly research.” Second, he argues the report is “missing a critical reason for slower growth that scholars across the political spectrum agree on.”
Plenty of scholarship finds a robust relationship [PDF] between taxes and growth, as well as regulation and growth [PDF]. It’s true some studies arrive at conflicting results and find little to no relationship. However, the existence of conflict in the economic literature does not negate the fact that many scholars find a robust evidence supporting our conclusion that taxes and regulation matter.
The fact is, it’s hard to find an economic question where a consensus exists in the academic literature. Lack of consensus does not mean there is no answer to the question at hand. It just means economists can’t deliver a clear answer. As a result, a lack of consensus necessarily means policymakers must look to and weigh other evidence to make sound decisions.
While our report did not set out to outline additional evidence, it does reference some further evidence for policymakers to weigh. For instance, Minnesota’s lowest taxed industry — manufacturing — also happens to deliver the strongest growth out of any major industry relative to the nation. Also, Minnesota tends to lose people to lower tax states in the flow of domestic migration.
The fact is, any economist will tell you that taxes distort economic decisions. No one piece of evidence provides the smoking gun, but together, the weight of the evidence strongly suggests taxes and regulations matter.
What about Johnston’s second claim? He argues we shouldn’t expect Minnesota to grow faster than other states because state incomes are converging. As the economic theory goes, states starting at lower incomes will grow faster than states starting with higher incomes. Because Minnesota’s income starts at a higher point, the state should not grow as fast. Not only did Johnston claim this is “a critical reason for slower growth,” but he also claimed this is a point “scholars across the political spectrum agree on.”
Most economists now agree that convergence is “conditional.” While that normally is used to describe why convergence doesn’t happen between rich and poor countries, it can also be applied to convergence between rich and poor states. Tax and regulatory policy may in fact be one of those conditions, which would mean only two states with the same set of tax and regulatory policies — one rich and one poor — should converge. One study [PDF] finds that states with lower taxes are more likely to converge to the national average and even concludes that policymakers in southern states “can assist in the convergence process by committing to low taxes.”
In a recent paper [PDF], two Harvard economists report income convergence “has weakened considerably” since 1980. The much weakened level of convergence suggests it is a much less relevant factor, if a factor at all, in explaining Minnesota’s average growth over the past 15 years.
Peter J. Nelson is a vice president and Senior Policy Fellow at Center of the American Experiment.