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Commentaries on Greater Minnesota

Periodically we will present commentaries on topics of interest to community and economic developers across rural Minnesota. Below is a list of all commentaries with the most recent listed first.

 

Commentaries
How Did That Happen?
January 2012
Jack M. Geller, Ph.D.
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The email that arrived on December 2 was unmistakable by its subject line, "How'd that happen?" Without even opening the email sent by a friend in St. Peter, I knew that he was referring to the $876 million projected surplus announced the day before. It was certainly a fair question, as anyone other than Tom Stinson (the State Economist) who tells you that they saw it coming is likely pulling your leg. In fact, just the day before most of the state's major news sources were informing their readers and listeners to prepare for a projected deficit of at least $500 million. So I will have to admit that I too was surprised by the news.

Immediately politicians and political pundits filled the media with their own unique interpretations of this good news. Some suggested that the surplus, along with the state's current 6.4 percent unemployment rate indicated that Minnesota is well on the road to economic recovery. Others used the good news to suggest that it affirms the policies and budget restraints that were put into place during the last legislative session are working. Of course, when such good news occurs everyone wants a piece of the credit and everyone is free to read only those parts of the forecast that are congruent with their perspective. But in fact, the November forecast has two separate components and each tells a unique story. These components are (1) the budget forecast for the remainder of the current biennium; and (2) the economic outlook and budget forecast for the next biennium.

There's little doubt that the news regarding the remainder of the biennium is good; after all, how can an $876 million surplus be viewed any other way? But as my friend in St. Peter asked, "How'd that happen?" Well the reality is that the surplus was generated more through reductions in state expenditures than increases in state revenues. In fact, the groundwork for the projected surplus was actually laid in 2010. For you see, now that the state's books have been officially closed for 2010 we learned that state revenues actually came in $358 million above previous projections, with most of it tied to increased income taxes. That, along with state expenditures coming in $205 million lower than anticipated and a small balance carried forward from the year before, allowed the state to close its books with an ending balance of $526 million.

As I noted above, this laid the groundwork for the current biennium's surplus. When the November forecast was released we actually learned that revenues for the reminder of the biennium are actually expected to come in $24 million less than previously projected. But again, expenditures are expected to be $348 million less than earlier projected; more than making up for the slight drop in revenue. Tie that to the balance carried forward from the previous year and Minnesota ends the biennium with an $876 million surplus!

Now if you are wondering why the state is spending less than projected, the answer can be found mostly in our Health and Human Services spending. In fact the overwhelming majority of the savings comes from reduced expenditures in our state's Medical Assistance program. Some of this can be credited to higher than expected federal matching funds and some is from simple savings in the program. But the major take-away here is that while the news is certainly good, any suggestion that the surplus is indicative of the state's economy taking a sharp turn upwards is unfortunately both premature and wrong-headed.

Looking ahead to the next biennium which begins July 1, 2012, the news doesn't really get much better. In fact since the last forecast in February, the projections for economic growth have been lowered. Back in February GDP growth for the next biennium was projected at 3.2% and 2.9% respectively. Unfortunately, with this latest forecast those figures have been revised downward to 1.8% and 1.6%; and the probability of another recession which was previously set at 20 percent is now at 40 percent. The consequence of all this is that economists now expect Minnesota to begin the next biennium with a $1.3 billion deficit.

So by now you may be asking, is there any bright spot in all this? Well in some ways the answer is yes. First, let's not lose sight of the fact that an $876 million surplus is always good news. Second, with Minnesota's unemployment rate more than 2 percentage points below the national average, we are certainly in a better position to economically recover at a faster rate than many other states. And lastly, while wages fell greater in Minnesota during the recession than they did nationally, it now appears that our wages are rebounding stronger as well. In fact, since the plunge in 2008 Minnesota wages have actually increased by 2.9 percent, while wage growth nationally has been 1.7 percent.

Back in June 2009 my column discussed the likelihood of a very slow and steady economic recovery, which former Vice President of the Minneapolis Federal Reserve Bank Art Rolnick nicknamed "a bathtub recovery." Clearly by any measure, that projection turned out to be accurate. Now as we enter 2012 it appears that Minnesota has indeed been slowly climbing its way out of the bathtub. And I suspect that if our political leaders can simply avoid any major changes to the budget or wrong-headed jolts to the economy, we just may find ourselves back to, or possibly above pre-recession levels by 2014.

Geller is professor & head of the Arts, Humanities & Social Sciences at the University of Minnesota, Crookston. He also serves as the director of the federally-funded EDA Center at UMC. He can be reached at gelle045@umn.edu

This document was prepared by the University of Minnesota, Crookston under award number 06-66-05709 from the Economic Development Administration, U.S. Department of Commerce. The statements, findings, conclusions, and recommendations are those of the author(s) and do not necessarily reflect the views of the Economic Development Administration or the U.S. Department of Commerce.

The University of Minnesota is an equal opportunity educator and employer.

 
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