COVID-19’s Economic Impact in Minnesota

In anticipation of the possible widespread proliferation of COVID-19 in Minnesota, economist John Phelan outlined risk factors for the state economy, as well as bright spots where Minnesota may fare better than other states.

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Drawing on data from the recent report, The State of Minnesota’s Economy: 2019, Phelan predicts that Minnesota’s diverse economy will help shield the state from a certain amount of economic turmoil, but that excessive taxation has led to deeper seated problems with labor productivity and other economic indicators.

Stockpiling Will Be a Boost in the Short Term

On the one hand, consumers rushing to stockpile products like toilet paper, hand sanitizer, paper towels, disinfectant wipes, and cough medicines will create a temporary economic boost, similar to the yearly Christmas season boost.

Reduced Spending in Other Areas Will Be a Drag

On the other hand, reduced spending on air travel, restaurants, cinemas, and sporting events will depress the economy. The NFL, NBA, NHL, and MLB, for example, have cut off supply by suspending their seasons. The short-term boost from stockpiling supplies could cancel out other reduced spending in the short term, but the longer it takes to ease fears of viral transmission, the more dominant this effect will be.

Positive Income Effects

Oil prices have fallen, in part, because of weaker demand.  A month ago, the average price per gallon in the Twin Cities was $2.31. It is now around $1.90 or even $1.80.

Gasoline is a major budgetary item for many households, so this price reduction will obviously help consumers. But it also helps producers, as the cost of a major input is reduced. This will create a positive real income shock, like the oil shocks of the 1970s in reverse.

One major difference between now and the 1970s is that the US is now a net oil exporter, not an importer. As a result, there is now a sizable US oil sector which will be negatively impacted. Overall, however, the general benefits to the economy of lower oil prices should be a net positive.

Negative Wealth Effects

Many Americans’ stock portfolios are a significant percentage of their overall wealth. As the stock market tumbles, they become less wealthy, and less likely to spend. A recent example of this is when house prices fell during the sub-prime bust.

Minnesota’s Economic Diversity Helps

In one respect, Minnesota is well placed to handle COVID-19 because of its diverse economy, with a sectoral profile matching that of the US generally very closely, especially for a relatively small state. Similar to having a diversified portfolio, this will help in the face of economic turmoil.

However, certain sectors will still be negatively impacted. Companies that do business with China will find this far more difficult, and sectors like aviation will feel a pinch as demand falls.

Deeper Seated Problems Could Hurt Minnesota’s Economic Recovery

As explained in the new report, The State of Minnesota’s Economy: 2019, Minnesota lags national averages on labor productivity, capital investment, venture capital, entrepreneurship, and research and development. Because of this, the state’s economic growth lags the national rate. These issues can be attributed to excessive taxation.

If Minnesota’s economic growth rate had matched that of the US generally since 2000, GDP per capita in our state would be approximately 18% higher than it actually is. This would make it easier to withstand economic challenges and help the state bounce back from the effects of COVID-19.

In conclusion, Minnesota will struggle with many of the same challenges as the rest of the country. However, there are also a few bright spots where the state’s economy should fare better than the average. Unfortunately, excessive taxation will contribute to a weaker recovery.

Coronavirus is a human tragedy. It illustrates, once again, the need for a strong economy to provide the resources to cope.