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State Trend in Sub-Par GDP Growth Reverses Under Progressive Policies

by | Aug 5, 2016 | Other

In the post-World War II era, Gross Domestic Product (GDP) has been the principal way of measuring economic growth or contraction. Based on this widely accepted measure, Minnesota’s economy has slightly underperformed the national average over the course of the current century, but has outperformed the national average in the two years since the enactment of progressive taxation and investment policies in 2013.

This is the fourth installment in a series of North Star articles examining conservative charges that, over the course of the 21st century, “blue-state policies are eroding the state’s historic economic strength.” The claim overlooks the fact that—as noted in the first part of this series—for the first thirteen years of the current century, the state’s fiscal policy has had a decidedly conservative tone, as Minnesota was among the “leaders” in the nation in terms of cutting the size of government. In fact, by the end of the “no new tax” era, total state and local government expenditures as a percent of personal income were below the national average.

In this installment, our focus shifts to GDP growth in Minnesota relative to the national average and adjacent states. GDP is defined as the monetary value of all the finished goods and services produced within a nation’s or state’s borders over a period of time. A recent North Star article examined growth in Minnesota’s GDP relative to the national average using quarterly data from the U.S. Bureau of Economic Analysis (BEA), which extends back to 2005. In order to extend the analysis back to the beginning of the 21st century, it is necessary to use annual GDP data from the BEA.

From 2000 to 2015, average annual GDP growth in Minnesota was 3.7 percent, only slightly below the national average of 3.8 percent. Over this period, Minnesota also lagged behind the GDP growth of adjacent states (Iowa, North Dakota, South Dakota, and Wisconsin), which increased at an annual average rate of 4.1 percent. Excluding North Dakota (reasons for excluding North Dakota from the adjacent state average were discussed in part two of this series), average annual growth in adjacent state GDP was 3.8 percent—still slightly ahead of Minnesota.

While Minnesota has underperformed the national and adjacent state averages in GDP growth over the course of the 21st century, this sub-par performance was concentrated in the period prior to 2013—when conservative policies dominated the state’s fiscal agenda. From 2000 to 2013, Minnesota’s GDP increased at an annual average rate of 3.6 percent, modestly below the national average of 3.8 percent and the adjacent state average of 4.2 percent. Excluding North Dakota, the adjacent state average GDP increased by 3.8 percent.

GDP growth

Since the passage of the 2013 tax act, these trends have reversed. During the two-year period from 2013 to 2015, Minnesota GDP has grown at an annual average rate of 4.2 percent, modestly greater than the national rate of 3.8 percent, the adjacent state average rate of 3.3 percent, and the adjacent state excluding North Dakota average rate of 3.7 percent.

It must be noted that the reversal of trends in Minnesota GDP growth relative to the national and adjacent state averages was modest. Furthermore, it cannot be proven that this reversal of Minnesota’s fortunes is the result of progressive policies enacted in 2013. As noted in part 1 of this series, there are other economic forces at work that are more powerful than state taxing and spending decisions; winnowing out the contribution of Minnesota’s fiscal policy from the immense background noise created by the numerous other trends borders on the impossible. Finally, it may be possible to identify sub-periods within the span from 2000 to 2013 where Minnesota GDP growth surpassed the national and adjacent state averages, but these intervals are more than offset by other intervals where Minnesota GDP growth was below these averages.

However, these findings regarding GDP growth are sufficient to cast serious doubt on the assertion that Minnesota’s slightly sub-par GDP growth over the course of the 21st century is the result of “blue-state policies.” To the extent that Minnesota underperformed the national and adjacent state averages in terms of GDP growth since 2000, the underperformance occurred entirely within the period when conservative fiscal policies were predominant.

The next and final article in this series will examine the information presented in the first four installments and its implication for arguments attributing state economic performance to state fiscal policy decisions.

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