How state policy affects economies on opposite sides of the Red River

This letter appeared in The Forum, October 15th 2020

Comparing states is an American national pastime. On all sorts of measures, from sporting success to quality of life, we love to see how our state fares compared to others. State economic performance is one of the most popular comparisons. Fastest Gross Domestic Product growth, most new jobs, top investment destination, all these are among the measures by which state’s economic performances are ranked.

Very often, the different economic outcomes are attributed to different state economic policies. This isn’t always fair. There are factors other than policy which drive economic outcomes.

For example, North Dakota has led the nation in economic growth in recent years, with real GDP increasing by 40% between 2010 and 2018. But just two counties – McKenzie and Williams – account for 34% of that, and they are at the heart of the Bakken oil fields. Choosing to develop natural resources is an aspect of state policy—as Minnesota’s hesitance to develop its non-ferrous mining demonstrates—but the allocation of such resources is driven by geology, not policy. It wouldn’t, then, be fair to compare Minnesota’s economic performance—where real GDP grew by 17% between 2010 and 2018—with North Da­kota’s and conclude that the latter’s relative success was wholly, or even largely, a result of superior state policy.

To assess the success of state economic policy more precisely, we want to exclude as many as possible of these non-policy factors that influence economic outcomes. In our new report, Minnesota’s Border Battles, we do this by comparing outcomes in neighboring counties in different states between 2010 and 2018.

Factors such as geography or demographics – which are little to do with policy but which the literature on economic growth says do influence outcomes – are likely to be fairly uniform between, say, one end of the Main Avenue bridge which connects Fargo with Moorhead and the other. Observed differences in economic outcomes between the two must be largely the result of local policy.

So how do the states compare? Empirical research consistently finds that high taxes have significant negative effects on economic growth. The Tax Foundation’s 2020 State Business Tax Climate Index ranks Minnesota 45th and North Dakota 16th, so we would expect to see slower growth on Minnesota’s side of the border.

And we do. In the North Dakota counties bordering Minnesota, population, businesses, jobs, personal income and wages all grew faster than in the Minnesota counties bordering North Dakota, and poverty fell faster. The only measures where the Minnesota counties won were on the age and education levels of their population. Minnesota also loses when compared to Iowa and South Dakota. Its only win comes along the Wisconsin border, and even that is with caveats.

These results suggest a strong effect of state economic policy on economic outcomes. They support the findings of the balance of empirical research which says that high taxes have significant negative effects on economic growth. North Dakota is benefiting from its policies. We hope that Minnesota will take note.

John Phelan is an economist at Center of the American Experiment.