High per capita gross domestic product (GDP) states—such as Minnesota—tend to have lower rates of GDP growth over time, for reasons discussed in part 1 of this series. However, Minnesota has successfully bucked this trend during the current business cycle, with per capita GDP growth nearly double the U.S. average—a trend which stands at odds with conservative claims that Minnesota’s economy is faltering.
The following analysis will focus on the current business cycle, which began with the onset of the Great Recession in December 2007. It’s useful to examine a full business cycle to get a meaningful long-term perspective of the performance of one state relative to another or relative to the national average.
For example, a state that had a steep job loss relative to the national average during a recession can be expected to have above average job gains during the recovery because it has a larger pool of unemployed or underemployed workers to draw from. The above average growth in this state during the recovery is not a signal of superior long-term economic performance, but rather a function of the greater job losses during the recession.
From 2007 to 2016,* real (i.e., inflation-adjusted) per capita Minnesota GDP has increased by 6.0%—nearly double the national growth rate of 3.2%. To some extent, this difference in per capita GDP growth rates is a function of different rates of population growth. While Minnesota’s population growth has far surpassed the Midwest average, it has lagged the national growth rate since 2007. Minnesota’s slower rate of population growth relative to the rest of the U.S. has the effect of accelerating our per capita GDP growth, all other things being equal. However, even if we examine simple GDP growth (i.e., growth in total real GDP ignoring changes in population), Minnesota’s growth rate still surpasses the national average over the course of the current business cycle as shown in the graph below..
In a recent report, the conservative Center of the American Experiment examines GDP trends extending back to 2000. Based on this longer time frame, Minnesota slightly outperforms the national average in real per capita GDP growth, but slightly underperforms the rest of the U.S. based on simple real GDP growth, unadjusted for changes in population.
The CAE is quick to attribute Minnesota’s slightly subpar GDP growth rate from 2000 to 2016 to progressive “blue state” fiscal policies, while ignoring other far more reasonable explanations. For example, the small degree to which Minnesota underperformed the national growth rate could be due entirely or in part to GDP convergence, which—as noted in the preceding article—was statistically significant during the period from 2000 to 2016.
Perhaps more importantly, the period during which Minnesota underperformed that national average in real GDP growth extended from 2000 to 2007. This roughly corresponds with the period during which conservative “no new tax” dogma dominated state fiscal policy. As a result, real per capita state and local government taxes, own-source revenue, total revenue, and total expenditures fell significantly in Minnesota, while the same categories increased in the rest of the nation, as shown in the graph below. During this period, Minnesota was among the most aggressive states in the nation in cutting real per capita state and local government revenues and expenditures.†
From this data, we cannot prove that the austerity that dominated Minnesota fiscal policy during the period from 2000 to 2007 was the cause of corresponding low rate of GDP growth relative to the rest of the nation. However, these findings certainly fly in the face of conservative efforts to attribute every disappointing economic trend to progressive policies.
Minnesota—like every state—faces fiscal challenges. But during the current business cycle, Minnesota’s GDP, job, and median income growth exceed the national average.
*Real GDP and real per capita GDP information used in this analysis is from the U.S. Bureau of Economic Analysis. The most current year for which annual GDP information is available is 2016.
†These findings are based on state and local government finance data compiled annually by the U.S. Census Bureau, converted to real per capita amounts using population data from the U.S. Census Bureau and adjusted for inflation using the Implicit Price Deflator for State & Local Government Purchases from the U.S. Bureau of Economic Analysis. Based on this data, Minnesota ranks 43rd among the fifty states in the percent changes in real per capita taxes (i.e., only 7 states had a greater real per capita decline than Minnesota), 47th in the percent change in own-source revenue, 46th in the percent change in real per capita total general revenue, and 47th in the percent change in real per capita total general expenditures during the period from 2000 to 2007.