What is happening in the State Legislature this session is astounding. State government will grow 7-10 times faster than the 3% rate of Minnesota’s overall economic growth. It is not sustainable.
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The economic measure no one is talking about at the Minnesota Capitol
By Evan Ramstad
Democratic legislative leaders and Gov. Tim Walz list lots of things they did this spring that they couldn’t when Republicans controlled part of the Legislature, like legalizing marijuana, creating a paid family leave fund and targeting carbon-free energy by 2040.
They also raised state government spending far faster than the state economy grew.
I’ve written that I disliked the decision announced in March to spend nearly all of the state’s budget surplus, but I believe some growth in government is natural. Even outsized growth is needed at times. Inflation has to be accounted for and so do other changes in societal needs and constraints.
Still, Democrats engineered the largest leap in the size of Minnesota’s government relative to its economic growth since 1960, the farthest back I could find figures to make comparisons.
Walz has likened this spring’s decisions to the “Minnesota Miracle” period of the 1970s, when the Legislature created the modern state government and tripled its size in a decade. My colleague Lori Sturdevant, who joined the Star Tribune in 1978, told me this spring she thought the legislative session was the most consequential since that time.
The 2020s are not the 1970s, however. The state of Minnesota is performing nothing like it did then.
The population is growing slower than ever. Our workforce is still smaller than it was in 2020. And the state’s economy is growing only around 3% a year, about one-fourth the rate it did in the 1970s. In 2022, in fact, it grew just 1.2%.
Instead, we are one of the first states in the country to contend with the question of whether we can stay rich without growth.
I did not expect the Legislature to confront that this spring. But I also didn’t expect them to make Minnesota’s government such a notably bigger portion of the state’s economy overall.
In theory, that will crowd out private sector spending and investment. But we’re in new territory as a slow-growing place. Few economists theorize about or study slow-growth economies but, for those who do, Minnesota is now clearly a place to watch.
State policymakers have room to make mistakes. Minnesota’s state finances are in excellent shape. The state’s reserve fund is full, bonds are being paid and tax collections through the first quarter remained better than forecast.
But when Democrats were confronted by Republicans and reporters about the giant leap in spending, they responded in generalities. My attempts to get explanations from the governor’s office and some legislators in recent weeks sent me spinning down rabbit holes.
The Democrats could say the law of large numbers means that it’s easier to accomplish things on smaller margins of growth than 40 or 50 years ago. Or they could say that, when the economy slows down, it’s good for government to spend more or to redirect resources.
I’d have questions about those arguments, but they haven’t even been made. Instead, Democrats have only said that Minnesota can handle the higher government spending.
“We have the resources,” Walz said in his State of the State speech in April.
“We remain one of the richest states in the country,” House Speaker Melissa Hortman told reporters after that speech.
Though final budget decisions were pending before my deadline, here are the numbers:
Spending in the government’s two-year budget cycle that starts July 1 is likely to be 20% to 30% higher than it was in the two years that end June 30.
That means state government will grow seven to 10 times faster than the 3% rate of Minnesota’s overall economic growth, which I reached by averaging the three years ended 2022.
The last time the state’s general fund grew more than 20% was in the 1978-79 cycle, when it rose 26%. In the three years before then, state GDP grew an average of 12% annually.
That means government back then grew only about twice as fast as the Minnesota economy.
I dug up some other numbers to illustrate this step change in Minnesota government in a way that’s more fun than serious. So don’t use this on a macroeconomics exam.
The company that for most of the 20th century was Minnesota’s largest — 3M — from its listing on the New York Stock Exchange in 1946 until the 1970s was always two times the size of Minnesota’s government. By that, I mean 3M’s sales were always roughly double the state’s government expenditures. Both grew at relatively consistent rates.
After Minnesota’s government got bigger in the 1970s, 3M was about 1.5 times larger and stayed that way up to now. 3M is about to spin off a sizable part of the company. But even if it kept it, and if Minnesota’s final budget hits the top of its expected range, state government would surpass 3M in size.
