Losing the border battles
One way to evaluate the effects of Minnesota’s economic policies is to compare border counties. Minnesota mostly comes up short.
Whether it’s sports or economics, comparing states is a popular American pastime. Two states that pursue different policy approaches can provide something close to the “natural experiments” that social sciences, such as economics, use in place of lab experiments.
But we shouldn’t push these comparisons too far. Even neighbors like Minnesota and Wisconsin, with many similarities, also have different characteristics not driven by economic policy that affect economic outcomes. For example, while both states share a climate, Wisconsin has been hit harder by the manufacturing decline and lacks a dominant urban center like the Twin Cities.
We can exclude most of these differences by comparing interstate counties that share a common border. Factors such as geography, climate, or demographics can be assumed to be uniform between, say, Washington County in Minnesota and St. Croix County on the other end of the I-94 bridge in Wisconsin. The differences in economic outcomes we do see in each county can be attributed with more certainty to differences in tax and regulatory systems in the two states.
Exact rates have shifted around, but since 2000 Wisconsin has consistently had lower taxes overall than Minnesota, and its border counties have been more prosperous than their Minnesota neighbors. For Wisconsin, personal income per capita increased by 3.25 percent annually compared to 3.02 percent in Minnesota. This may seem trivial, but compounding numbers adds up to large differences over time. If Minnesota counties’ personal income per capita had grown at the rate of Wisconsin’s, their increase would be $1,798 higher. We see a similar story with wage growth since 2000, rising 2.51 percent annually in Wisconsin counties compared to 2.41 percent in Minnesota.
Unemployment rates at the border offer another useful comparison. In July 2014, Wisconsin’s border counties had an average unemployment rate of 5.6 percent compared to 5.0 percent in Minnesota. Then, in August 2014, Minnesota enacted a series of minimum wage hikes. By January 2018, Wisconsin border counties’ unemployment rate had fallen to 3.5 percent compared to 3.9 percent in Minnesota’s border counties. In other words, the decrease was nearly twice as large across the St. Croix River.
Looking at Minnesota’s other neighbors also shows interesting results. Iowa has high taxes too, including the highest corporate income tax in America, but its total tax burdens tend to be lower than Minnesota’s. Correspondingly, Iowa’s border counties have experienced slightly higher growth in personal income and wages than their Minnesota counterparts. In addition, Iowa counties have experienced job growth, while the number of jobs in Minnesota’s counties is actually in decline.
At the border, North Dakota has outperformed Minnesota across the board. The oil boom might seem a significant factor in this, but the Parshall Oil Field is in the western part of the state, far from the Minnesota border. This shows the importance of the border county analysis. If Grand Forks benefits from the oil boom, East Grand Forks should see this, as well. Instead, personal income, wages, unemployment, population, and employment growth have all been stronger on the North Dakota side. For example, in the North Dakota counties wages grew 3.83 percent annually compared to 3.50 percent in Minnesota’s border counties.
South Dakota is the one state where Minnesota border counties are doing better on a per capita income basis. But a closer look reveals that South Dakota has experienced significant population gains, while Minnesota has been losing people. It seems young, low earners are moving from Minnesota to South Dakota for better job prospects. As people move faster than economic activity, this pushes down the per capita income numbers in South Dakota counties in the short term, but long term it is better for their economic prospects.
Minnesota is an excellent state because of its people, not its government. The state abounds in natural resources and boasts one of the smartest, hardest working labor forces in America. But bad economic policy can erode all these advantages. If we want to remain competitive, the people of Minnesota need to demand from their legislators policies that will continue to nurture a culture of prosperity.