Explaining Minnesota’s lagging economic performance


It’s no secret that Minnesota’s economic performance has been sluggish in recent years. Relative to the national average, Minnesota’s unemployment rate has increased and household income has fallen.

While Minnesota remains above the national average in most major economic indicators, the extent to which we are outperforming other states has declined significantly. By some measures, we have fallen below the national average. From 2006 to 2007, employment growth in Minnesota was the 7th lowest among the fifty states.

One theory holds that Minnesota’s lagging economic performance relative to other states since 2002 is the result of strong national growth in the defense sector combined with the fact that defense is a rather small portion of Minnesota’s economy. The defense sector certainly has increased since 2002 as a result of protracted wars in Iraq and Afghanistan. From 2002 to 2006, national defense has increased from 4.2 percent of U.S. gross domestic product (GDP) to 4.8 percent based on data from the U.S. Bureau of Economic Analysis (BEA).

As the argument goes, because national defense is a relatively small share of Minnesota’s economy, Minnesota was not well positioned to take advantage of growth in defense spending, so Minnesota’s economic growth lagged relative to the national average.

National GDP growth has certainly outpaced Minnesota GDP growth in recent years. From 2002 to 2006, inflation-adjusted U.S. GDP increased by 13.0 percent, compared to only 10.1 percent in Minnesota based on BEA data.

If defense is factored out of U.S. GDP, growth in national GDP from 2002 to 2006 drops to 12.4 percent-a significant drop but still well above growth in Minnesota’s GDP.

The extent to which national GDP exceeds growth in Minnesota GDP from 2002 to 2006 appears to be partially attributable to defense spending. However, even after factoring out growth in U.S. GDP due to national defense, Minnesota’s GDP growth still lags behind the national average. Only about one-fifth of the gap between U.S. GDP growth and Minnesota GDP growth is attributable to growth in the defense sector.

Unfortunately, information on national defense as a percentage of Minnesota GDP is not available on the BEA website. The above analysis assumes that none of the 10.1 percent growth in Minnesota GDP is attributable to national defense. If any portion of the growth in Minnesota GDP is due to defense, the portion of Minnesota’s lagging GDP growth relative to the U.S. average that can be attributed to growth in defense spending is reduced.

The vast majority of Minnesota’s lagging GDP growth relative to the U.S. average cannot be attributed to growth in defense spending. So what does explain Minnesota’s lagging performance?

Since 2002, Minnesota public revenues and expenditures have both fallen significantly. Adjusted for inflation in the price of government purchases, per capita state and local government revenue in Minnesota has fallen by 3.6 percent over the last five years. In addition, Minnesota state and local government revenues and expenditures as a percent of personal income have fallen below the national average. This decline in government revenues has been accompanied by reduced investment in education, transportation, public safety, and other public goods. One possible explanation for Minnesota’s lagging economic performance is our lagging investment in public services and infrastructure.

While further study is merited, one thing is clear: predictions by “no new tax” conservatives that a cut in government spending would improve Minnesota’s economy relative to other states have not materialized.