An All Too Slow but Steady Recovery

The recent news that the Minnesota unemployment rate dropped again in March to a rate of 6.6% certainly was welcome news to government officials and economic developers alike. In fact, a belief that Minnesota is finally climbing out of the grasp of the “Great Recession” now seems to be common; and why not? Minnesota has now experienced three straight months of employment growth; we’ve added over 7,000 new jobs year-to-date; and at 6.6% Minnesota now has the 11^th lowest unemployment rate in the nation. And yet … in spite of all this good news, many do not necessarily feel like the recovery has truly taken hold and that good times are ahead.

So is this economic good news really something to celebrate, or is it all just statistical mumbo-jumbo? Well, like everything … it depends on how you look at it. On a positive note, a 6.6% unemployment rate is good news; and the fact that it has steadily declined over the past year is even better. With a national unemployment rate of 8.8% and with the state of Nevada now occupying the top spot at 13.6%, Minnesota’s rate of 6.6% cannot be viewed as anything but positive. Minnesota’s manufacturing sector, which had taken a particularly hard hit, has shown a great resilience with a net gain of close to 8,000 jobs in the past year. And the traditional growth sectors of health care and education continue to add jobs, although not as rapidly as we have seen in the past.

At the same time, most of Minnesota’s contiguous neighbors actually have a lower unemployment rate, with North Dakota leading the nation with a current 3.7% unemployment rate. And with South Dakota at 4.8% and Iowa at 6.1%, that leaves Wisconsin as the only contiguous state behind us at 7.4%. But is the unemployment rate really a good measure economic recovery? I would suggest that at best, the unemployment rate is a very crude measure.

One shortcoming is that the unemployment rate does not differentiate between temporary employment and permanent, full-time employment. And a recent study by the National Employment Law Project reports that more than 20% of the job growth in this recovery is comprised of temporary employment. The rate also does not differentiate between low-medium wage jobs and what I would call a “first-earner income;” you know … the type that you can raise a family on. So clearly, the types of jobs being created can have a big impact on how we view this recovery.

But in addition, there are a number of other forces that are creating headwinds for the Minnesota economy that lead me to believe that while we are certainly not going back into recession, the recovery will be steady, but slow. Allow me to cite just a few:

· First, we have to recognize that the Minnesota workforce is continually expanding. In fact, a certain amount of job growth is required just to keep the unemployment rate from rising further. So as we congratulate the current crop of high school and college students graduating this month (including my daughter) we have to realize the growth in the size of workforce actually works against the lowering of the overall unemployment rate as more jobs need to be created just to stay even.

· Second, we have tended to discount the importance of the residential construction industry and the financial services industry in their contributions to job and economic growth over the past 15-20 years. In fact a recent report by the Federal Reserve Bank of St. Louis documents the reduction of their contributions to both jobs and GDP growth, which will further slow down the prospects of a speedy economic recovery. And while we are now seeing the typical seasonal increase in construction employment in Minnesota, it will likely be a fraction of the job growth we have experienced in years past. That’s not good.

· And finally as I noted in a previous post, we must remember that the overall employment picture of our region is comprised of jobs in the private, public and nonprofit sector. And with the presence of multiple public institutions of higher education, a MnDOT regional headquarters and a large regional security hospital in St. Peter, the Mankato/North Mankato region is disproportionally dependent upon public sector jobs. As a result it is likely that the current mood at the State Capitol will create some additional headwinds for the region as reductions in the public workforce take hold.

So overall, while there are no real signs to suggest that the steady improvement in our economy will reverse, these headwinds noted above may keep the recovery from speeding up as well. In other words, be prepared for an all too slow, but steady recovery.

A Brain Gain in Rural Minnesota?

As demographers see it, much of the history of the 20^th Century in America can be described as a massive rural-to-urban migration. It was in fact this rural-to-urban migration, along with European immigration that provided the labor for the development of our great industrial economy. And after World War II as agricultural technology accelerated the displacement of labor with capital equipment, it freed up even more rural residents to move to urban locations and support the emerging service economy; and later the information economy.

Today, we seem to take it for granted that in most communities across rural Minnesota, a large percentage of the high school graduating class will leave town to go off to college or try to increase their economic life chances in more urban locations. And few places across Minnesota represent this trend more illustratively than the western tier of counties and specifically southwestern Minnesota. For it is here in southwestern Minnesota that the census documents county population decreases of up to 50 percent since 1960 (e.g., Traverse County); and where many of the counties recorded their peak census populations back in the 1930s and 1940’s. Accordingly, for the majority of their current living residents, population decline is the only demographic trend that they have ever known. And given that it is typically the young folks who migrate to urban centers, many have labeled this chronic migration of youth as “The Brain Drain.”

So my ears perked up when I read a recent report authored by University of Minnesota Extension Research Fellow Ben Winchester, who suggests that within this broad pattern of demographic decline, not all age cohorts are decreasing in size. And further, that there are some cohorts that are actually increasing in significant numbers that represent “A Brain Gain” for rural Minnesota. And yes, this pattern is even occurring in southwestern Minnesota.

Winchester’s notion and evidence of a “Brain Gain” is really rather simple to understand. He uses the case of Grant County, MN as an example, where overall population losses of 32 percent have occurred since 1960. Here he suggests that similar to patterns in the past, in Grant County young people continue to migrate out in pursuit of higher education, better jobs and the lights and excitement of urban life. And the Census data seems to strongly support that contention, with significant population losses in the cohorts between 18-30 years of age. But using the same Census data, Winchester also documents substantive population gains in cohorts between the ages of 30-44, as well as between the ages of 10-14.

By now you may be asking what exactly accounted for this sizeable population gain in some selected age cohorts. Through the use of multiple focus groups among these newcomers, Winchester suggests that there are multiple reasons, but one of the primary factors is the desire of those who left a rural community in their late teens and early 20’s to return to their home region a decade or so later. Not surprisingly, now with a spouse and children in tow, many of these former rural residents want their children to experience the good schools, as well as the safe and supportive environment that they had growing up. And it is the presence of these returning newcomers’ children that leads to the gains in the 10-14 age cohort.

Winchester also notes what he labels as “push factors” for many of these rural newcomers; these being the high cost of living in urban areas, congestion, along with the long commuting times that led them to seek a more rural lifestyle for themselves and their family. And somewhat interestingly, several of these newcomers cited their desire and the opportunity to start their own business as a reason to move to a rural community. But most interestingly, these factors were just as important for newcomers who never previously lived in a rural community as it was for the former rural residents.

In looking more closely at Winchester’s study two main thoughts come to mind. First, is that if this demographic Brain Gain is occurring in Grant County MN, it is likely occurring in your county as well. Second, while economic development professionals spend a great deal of time strategizing on how to attract new businesses, I seldom hear enough about well thought-out and focused strategies to attract and retain these newcomers that represent this Brain Gain for rural Minnesota. Winchester not only suggests some targeted strategies that rural regions may want to consider, but he even includes an abbreviated economic impact analysis of the 52 newcomers he interviewed for his study. The results may be surprising to some economic development professionals.

Interested? A copy of the results of Winchester’s focus group research can be viewed and downloaded at http://www.edacenter.org/downloads/Ben_Winchester_Report_2.pdf

The LGA Mess

In his first official veto letter, Governor Mark Dayton noted his objection to the legislature’s proposed cuts to Local Government Aid to cities and counties. Specifically, he repeated his often-mentioned comment that cuts in LGA simply force local governments to increase property taxes; a tax perceived by many as more regressive than other state-collected taxes. On the other hand, proponents of the LGA cuts accurately note that the State of Minnesota is broke and that there was nothing in the bill that requires local governments to raise property taxes. And so the debate continues … Of course the truth is that both sides are right; and like much political rhetoric, there is more interest and concern about “being right” than actually fixing the problem.

Actually, it’s too bad that many legislators today were not around at the establishment of Local Government Aid, nor do they seem interested in a history lesson. For if they were, they would see the similarities in the arguments being made today as they were 40 years ago. LGA was first established in the early 1970s as a key component of what has often been called the Minnesota Miracle of 1971. A decade in the making, the legislation was a response to a wide variety of concerns regarding state and local financing of government and educational services. But foremost in the legislators’ minds was property tax relief. For you see, by the 1960s it was obvious that Minnesota was becoming a patchwork of “property tax rich” and “property tax poor” communities. These inequities led legislators to think about ways to equalize funding to ensure that some level of basic services could be provided through means other than just local property tax revenues.

However, another factor seldom mentioned was the desire of state legislators to prohibit local governments from establishing their own local sales, income or other taxes. In fact in many states local sales and even income taxes were not at all unusual. But here in Minnesota, the perception was that if local governments established these additional taxes, the revenue inequities across communities would likely increase – not decrease. Accordingly, these and a variety of other concerns culminated in the early 70’s to establish a system of state aid that had three core components:

1. A significant increase in state-levied taxes, primarily through sales and income tax revenues;

2. The establishment of a state aid formula to local governments, which reduced inequities by augmenting local property tax revenues; and

3. A prohibition of local governments establishing their own sales and tax revenues without legislative consent. Of course today virtually all of Minnesota’s metro communities now have their own dedicated sales tax … but that’s another story.

Over the subsequent 40 years the LGA formula has been modified a few times, however the general consequence has been mostly to continually increase state aid to local communities, thereby making many communities more and more dependent upon LGA to fund city services. This was especially true in the 1990s. As a result today, for some communities LGA could comprise up to, or even more than half of their general fund budget. And while such a situation puts a community financially at great risk as they now face these proposed cuts, let’s remember that it was state officials, not city or county governments that created this system. As one city administrator from west-central Minnesota candidly questioned, “Why did the state keep giving us more and more LGA?”

So here we are today. After years of creating a dependence of local governments on state aid, the LGA cuts over the past few years, as well as the proposed cuts have quite predictably led to increased local property tax levies. After all, it’s the only consistent source of revenue the legislature allowed local governments to have.

But of course the real question is what do we do now? So here are three things I hope our legislators might consider:

1. First, legislators need to realize that there are some core services that the state needs to ensure all Minnesotans have local access to. Accordingly, LGA should not go away, but rather it should be targeted to those defined core services.

2. Second, local governments need to be slowly weaned off their dependence on LGA. However, this will need to be deliberate, strategic and take some time. Drastically cutting LGA as a way to erase a budget deficit will only lead to higher property taxes and greater fiscal inequities across Minnesota.

3. And finally, legislators need to remember that part of the deal creating LGA was the prohibition of levying local sales and income taxes. If legislators are so quick to cut off LGA, are they equally prepared to unshackle local governments on the types of tax revenues they can collect? It’s time to look before you leap.

Economic Activity vs Economic Development

For almost three years now in addition to serving as the head of the Liberal Arts and Education department at the University of Minnesota, Crookston, I have also been directing Minnesota’s Economic Development Administration University Center. The EDA Center, as it is known across the state is a federally-funded center that is designed to provide technical assistance to local, county, regional and tribal economic development agencies across Minnesota.

Due to the economic downturn of the past few years, economic development agencies have been under increased pressure to improve local economic conditions and seek new and creative ways to facilitate private capital investment and job creation. And as a result, the number of technical assistance requests from local agencies to our EDA Center has been on the rise. Sometimes those requests are to assist in the development of a new business incubator or to explore the feasibility of a new type of revolving loan fund. But quite often we are asked to evaluate a local EDA’s current operation or to provide assistance with organizational transitions and consolidations.

During these organizational assessments it often becomes evident that for an organization designed to facilitate business development, many local EDAs do not have established and written policies and criteria regarding what types of businesses they will provide assistance to and under what circumstances. Unlike banks that typically have formal and well-established lending and risk requirements, many local EDAs simply accept requests for assistance and make decisions without the benefit of such established criteria. And as a result, many of the local committees, often comprised of well-meaning city council members, lose sight of the difference between increasing economic activity in their community and increasing the size of the local economy.

Three principles that should guide local economic development committees in this regard are:

1. First is that the funds that EDAs utilize are public funds; and as such, it is important that the dispensing of such funds be congruent with the values of the local taxpayers who have provided those funds. So for example, while banks and other private lenders will examine collateral requirements and assess the risk of default, local EDAs understand that regardless, providing public funds to help establish a new adult bookstore or other such establishment is simply inconsistent with the use of public funds. Understanding community values is essential.

2. Second is that because these are public funds they should be dispensed with the goal of increasing the size of the local economy and not to increase the amount of activity within the existing economy. It is this principle that often leads local EDAs to only provide financing to manufacturing or other primary sector firms. Because these firms mostly export their goods out of the local economy and bring new cash into the local economy they help grow the size of the economic pie. To the contrary, while helping establish a new local bakery or coffee shop may be a valuable community amenity, such businesses only give local residents new consumer choices, but it does not grow the local economy. Economic development is about growing the economy, not providing greater consumer choice.

3. Third is because these are public funds derived from local taxpayers including local business owners, they need to be dispensed in a fashion that does not unfairly advantage new business ventures to the disadvantage of existing taxpaying businesses. For example, should it be our local government’s role to collect tax revenues from all the car dealers in town and then use these tax funds to help subsidize a new car dealer wishing to enter the market that will directly compete with these established car dealers? Most of us would say no.

While these three principles may seem rather simple and obvious, they are often the very factors that create contentiousness and controversy at the local level. And now that the economy is undergoing a slow and steady recovery, local EDAs will start receiving even more requests to assist businesses. Having a set of written policies and criteria are the most objective way to adhere to a set of principles that are fair, congruent with local values and are aimed at growing the local economic pie and not just creating new ways to slice up the existing pie.

The Real Power of Rural Voters

Now that the Minnesota State Legislature is about to go back into session we will undoubtedly hear remarks about the continuing loss of political clout across rural Minnesota. Such is typically the case when the decennial census figures are released and the task of legislative redistricting and reapportionment occurs. There’s just no getting around the fact that since the mid-20^th century, rural legislative districts have been getting larger and larger, while the number of rural legislators gets fewer and fewer.

For many of us it doesn’t seem that long ago that the majority of legislators lived in rural Minnesota. But as the rural population migrated to the Twin Cities and to our regional Metro areas, the number of legislators from truly rural districts has dwindled to slightly more than one-third. And while there was once a time when the legislature was filled with active farm operators, today there are none (at least I don't think there are any left). Accordingly, this reality has rural Minnesotans concerned that fewer and fewer of our legislators truly understand their concerns. But within this context, allow me to suggest an alternative hypothesis; that being that while the numbers don’t stack up well for rural Minnesota, the politics certainly does. In fact, I would argue that in some ways the political success of both Minnesota Democrats and Republicans over the past few years has rested firmly in the hands of rural voters. Allow me to explain.

In 2006 and 2008 when the DFL gained firm control of both the Minnesota House and Senate; and likewise in 2010 when the Republicans gained control of both houses, political pundits talked about the advent of a political “tsunami.” In other words, they suggested that political sentiment and dissatisfaction created an overwhelming push in one direction (in 2006/2008 to the left and in 2010 to the right) with little regard to the individual attributes of particular legislators. So in the recent 2010 elections some have argued that as long as you had the Republican endorsement you had a good chance of finding political success.

But let’s step back a moment and look more clearly at this political tsunami district by district. It is here you will see districts such as those in the Twin Cities core (e.g., districts 58-67) where the DFL didn’t lose a single House or Senate seat. Likewise, in many of the Twin Cities suburban districts (e.g., districts 32-36) Republicans have had an equally solid hold on their seats. For you see redistricting over the years has created many politically safe districts for both parties. As a result, the real battle for control of the Minnesota Legislature actually lies in those swing districts. And over the past decade the majority of those swing districts were located in rural Minnesota.

To more clearly demonstrate my point; let’s take a look at the election results for the Minnesota State Senate. On the morning of Election Day November 2, the DFL held a commanding majority of seats 46-21; but by the end of election night the GOP held the majority of seats 37-30. Sixteen of the Senate’s 67 seats (24%) changed partisan affiliation; all from Democrat-to-Republican. It represented the first time in close to 40 years that the Republicans held a majority of seats in the Minnesota Senate. So if there was ever a political tsunami – this was it!

But where exactly did this tsunami come from? A close look at the 16 Senate seats that changed partisan hands show that approximately two-thirds (10) were in districts located outside the Twin Cities and far from the suburbs. In other words, it was rural Minnesotans that created this tsunami and tipped the balance to the GOP. Similarly, it was the same rural voters that took the GOP majority away from the House in 2006 and provided the DFL with what was believed to be an insurmountable majority in 2008. Given this reality do you still want to argue that rural Minnesotans are politically powerless? While rural voters may be unorganized (politically, that is), they are far from powerless.

So what should rural Minnesotans do with all of their newly-recognized political power? Well here’s a thought: As the Legislature begins the important work of balancing a deficit-ridden budget, it will be necessary for all Minnesotans to tighten their belts and accept some level of sacrifice to get out of this mess. But we will also expect our legislators to ensure that the budget is not disproportionately balanced on the backs rural Minnesota communities, colleges, hospitals, nursing homes and school districts. For you see, rural voters have already shown that they can both giveth and taketh away.