Minnesota’s Economy Doing Relatively Well

Conservative interest groups contend that Minnesota’s economy is floundering, the victim of “blue state” (i.e., progressive) fiscal policies. Critiques published by North Star and others show such claims are generally bogus and based more on politics than coherent economic analysis. Evidence of Minnesota’s strong economic performance relative to other states can be found in the state coincident economic index published by the Federal Reserve Bank (FRB) of Philadelphia.

There are many ways of examining the performance of an economy over time, including job growth, change in unemployment rates, and income growth. These indicators are valuable in measuring various aspects of the economy, but in isolation each gives an incomplete picture of overall economic performance. For example, a reduction in the unemployment rate could be the result of increased employment—or it could be due to discouraged workers leaving the workforce. Growth in employment alone tells us little about growth in wages and salaries. Frequently, different indicators can provide conflicting information as to whether the economy is expanding or contracting.

In order to develop a more complete gauge of economic changes over time, economists have developed “coincident economic activity indexes,” which combine several diverse indicators into a single broad measure of economic activity. The Philadelphia FRB state coincident index is based on four state-level factors: non-farm payroll employment, average weekly hours worked in manufacturing, unemployment rate, and wage-and-salary disbursements adjusted for inflation. Using a dynamic single-factor model, these four variables are combined into a single index.

In 2010, non-partisan staff at the Minnesota Department of Employment & Economic Development (DEED) replaced the existing Minnesota Labor Market Index (which had become less useful over time as a measure of state economic growth for reasons noted in a 2010 DEED newsletter) with the Philadelphia FRB state coincident index.* DEED regularly publishes updated versions of this index under the heading of “the Minnesota Index” in order to answer the question, “How is Minnesota’s economy doing?” According to DEED:

[An] advantage of the Philadelphia Fed’s index is that changes in Minnesota’s index can easily be compared to other states since each index is calculated with the same statistical technique using the same four economic indicators. Minnesota’s recessions and expansions in terms of depth, duration and dates can quickly be compared to any other state’s business swings.

This coincident index does not provide information on the performance of Minnesota’s economy in an absolute sense, although other indicators—such as the unemployment rate, labor force participation rate, and per capita personal income—do show that Minnesota is doing well compared to the rest of the U.S. The index does, however, provide a powerful tool for measuring state economic growth over time relative to the nation as a whole.

During the early years of the 21st century, Minnesota’s economic performance tracked closely to the U.S. average, based on the Philadelphia FRB coincident index. Minnesota’s recovery from the Great Recession began about six months ahead of the national recovery, and since the depths of the Recession, Minnesota’s economy has grown much more robustly than the rest of the U.S.

From the beginning of the century (January 2000), Minnesota’s index has increased by 51.2 percent, compared to 37.9 percent nationally. Growth in the index from the depths of the Great Recession is 37.8 percent in Minnesota, compared to 23.8 percent nationally.

Conservatives regularly argue that tax cuts spur economic growth and that tax increases stunt it. An examination of Minnesota’s coincident index provides no support of this premise. In fact, growth in Minnesota’s index lagged slightly behind the national index during the early years of the century, following major tax cuts enacted in 1999, 2000, and 2001. Since the enactment of significant tax increases in 2013, Minnesota’s index has grown slightly more rapidly than the national index.

These trends are presented not as proof that the tax increases enacted at or shortly before the start of the century caused below average economic growth relative to the rest of the U.S., nor that the tax increases of 2013 caused above average growth. Economic growth is driven by a diverse range of factors, of which state tax policy is only one—and not a particularly important one at that. Attempts to associate short-term economic trends to state tax policy decisions are generally simplistic and irresponsible. These trends are highlighted here simply to underscore the fact that even this sort of limited analysis does not support the conservative premise that tax cuts stimulate economic growth, while tax increases impede it.

This is not to say that state fiscal policy is completely irrelevant to economic performance. For example, former state economist Tom Stinson has argued that decisions made by state leaders circa 1960 to increase investment in elementary, secondary, and higher education helped to spur above average income growth in Minnesota relative to the national average over the next half century. While these sorts of investments can make a positive contribution to a state’s economy over the course of decades, it is generally not realistic to expect a major short-term dividend.

The Philadelphia FRB state-level coincident economic activity index is a sophisticated and broad-based measurement tool that shows that growth in Minnesota’s economy has been strong relative to the rest of the nation over the course of the 21st century—especially over the last eight years. Furthermore, trends in the index show no indication that recent state tax policy decisions have done anything to impede Minnesota’s economic progress.

 

*Within the last fourteen months, the Philadelphia FRB revised the data and methodology used in its state-level coincident index; these changes are described in a memo from the Philadelphia FRB. The amounts published by DEED under the heading of “the Minnesota Index” are based on the new revised Philadelphia FRB index, as is the analysis presented below.