Our $6.2 billion state budget deficit is unprecedented. In fact, some would argue it’s the perfect storm: an unpredictable recession triggered by an unforeseen speculative asset bubble that was an unusual market failure. It was none of these. Markets collapse. When they do, we have to dig out. Fortunately, Minnesotans know how to use a shovel.
State tax revenues fall during recessions. As the economy contracts, people lose jobs. People nervous about employment spend less. Less spending equals less business and fewer profits. As each shrinks: income, consumption and profits, state tax revenues fall. In fact, tax revenues fell during the 1981-82, 1990-91, and 2001 recessions. The banking collapse, which deepened our recession, is hardly new either. It is a species of market failure that’s relatively common. In 2008, the International Monetary Fund identified 124 systemic banking crises over the last 40 years. (Yes, on average, that’s three per year.) We haven’t had a major crisis in the U.S. since the Saving & Loan debacles in the late 1980’s, but we have, fortunately, preserved some of the tools we need to start digging out. What are those tools?
Short-term, we need to maintain state spending and raise the income taxes of the wealthiest Minnesotans. Why? To lift ourselves out of the recession, we need to encourage economic activity, like state spending. If the goal is more buying and selling, either public or private dollars will do. The point is, when the car is stalling don’t remove the gas from the engine. Some argue that raising the income taxes of the wealthy removes just such economic fuel. True, but raising the taxes of middle class removes more. And firing public employees removes much, much more. A dollar in a nursing assistant’s paycheck will be spent next Thursday at the local grocery store. A dollar in a CEO’s index fund may not be spent at all.
Long-term, we need to make sure Minnesota’s spending is focused on more than stimulus. It needs to be focused on stewardship. We ought to ask ourselves: What spending best prepares Minnesota for the state we are becoming? Is the state as a whole better prepared if more individuals buy Range Rovers or if more schools buy school buses? Even in a recession, Minnesota’s resources are considerable. As we steward them, we should be clear about who the next stewards will be and the challenges they will face.
Our state is becoming older, more racially diverse, and less equal. If current trends continue, around 2025 the number of Minnesotans over the age of 65 will be greater than the number of school age children. By 2035, one in four Minnesotans will be nonwhite or Latino. In other words, as the Baby Boomers age out of the workforce, the incoming workforce will be much more racially diverse. These trends, by themselves, are important but not alarming. The problems arise when they are paired with a second set of trends.
First, wages have stagnated. In the United States, between 1947 and 1977 real average hourly earnings went up by $6.83 per hour. In the next 30 years, from 1977 to 2007, they increased 85 cents per hour. Where household income has increased it’s often come as a result of adding a second income-earner (often a woman) and increasing the number of hours both income-earners work each week. Without a third spouse or an eighth day, those gains top out.
Second, by virtually every measure of well-being people of color in Minnesota are getting left behind. Compared to white Minnesotans, people of color are over three times as likely to live in poverty, half as likely to graduate high school on time, almost two and a half times more likely to lack health insurance, and (for African-Americans in the Twin Cities) more than three times as likely to be unemployed. Our racial disparities are among the worst in the country. We ought to call this what it is: a moral and economic failure that threatens everyone’s future.
If we don’t invest in improving livelihoods and reducing racial disparities we risk becoming a stagnant, divided place we would hardly recognize as Minnesota.
Over the coming months many elected officials will talk about the need to make “some tough choices”. Too often, this turn of phrase is another way of saying ‘we have no choice but to cut’. In other words, it’s not a choice (because they’ve already ruled out tax increases) and it’s not tough. Tough is what we do during blizzards, floods, and fires. Tough would be getting everyone to pitch in for the sake of our state. Asking the wealthiest Minnesotans to pay higher income taxes may not be easy, but it’s necessary. Our economy and our future depend on it.