How Can Minnesota Stay Above Average?

Louis D. Johnston

Presentation at theRegional Economic Development (RED) Group Forum

“Designing the Future: What's the Next Minnesota Going to Look Like”

June 23, 2010

Nobel Laureate, 1976

Nobel Laureate, 1982

Close friends

''Milton's out to save the world and I'm out to understand it.''

George Stigler

NY Times, October 21, 1982

Quick overview:

• Economic growth in Minnesota since World War II: The data

• Economic theory: The sources of economic growth

• Economic policy: what role for policy in promoting and sustaining economic growth?

Economic growth in Minnesota since World War II: The data

0.60

0.70

0.80

0.90

1.00

1.10

1.20

Rel

ativ

e to

U.S

. ave

rage

Year

Income per person: by region, relative to the U.S. average

Minnesota

0.60

0.70

0.80

0.90

1.00

1.10

1.20

Rel

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e to

U.S

. ave

rage

Year

Income per person: by region, relative to the U.S. average

Minnesota

Great Lakes

0.60

0.70

0.80

0.90

1.00

1.10

1.20

Rel

ativ

e to

U.S

. ave

rage

Year

Income per person: by region, relative to the U.S. average

Minnesota

Great Lakes

Plains

Economic theory:Output per person (Per capita income)

output per person = participation rate · output per worker

Growth of participation

rate

Growth of output per

worker

Growth of per capita income

Economic theory:Growth of per capita income

Economic theory:Growth of output per worker

Growth of resources

per worker

Growth of total factor productivity

Growth of output per

worker

Growth of participation

rate

Growth of resources per

worker

Growth of total factor productivity

Growth of per capita

income

Economic theory:Growth of per capita income

Economic theory:Two types of growth

• Catch-up growth• Endogenous growth

Economic theory:Catch-up growth

Total factor productivity is lower than other

areas

Total factor productivity can be increased by adopting institutions

and technologies from leading areas

Rapid growth of participation rate

Rapid growth of resources per worker

Adoption and improvement of

existing institutions and technologies

Growth of per capita

income

Economic theory:Catch-up growth

Minnesota, 1950s through 2000s:Catch-up growth

• Higher-than-average growth in participation rate- Married women with children- Young people from surrounding

states

Minnesota, 1950s through 2000s: Catch-up growth

• Higher-than-average growth inresources per worker Human capital Physical capital

Minnesota, 1950s through 2000s: Catch-up growth

• Increases in human capital Education: grew faster than national

averageoHigh school graduation rates roseoRates of post-secondary education

attendance rose

Minnesota, 1950s through 2000s:Catch-up growth

• Increases in human capital HealthoPublic health (vaccination rates,

infant and maternal mortality)oMedical care (including dentistry)

Minnesota, 1950s through 2000s:Catch-up growth

• Increases in physical capital Private capitaloBroad and deep local financial

markets and institutionsoHigh rates of return attract out-of-

state capital investment

Minnesota, 1950s through 2000s:Catch-up growth

• Increases in physical capital Public capitaloTransportation (roads, river

transport)oWater and sewer systems

Minnesota, 1950s through 2000s:Catch-up growth

• Adoption and improvement of existingtechnologies Computers Medical devices

Minnesota, 1950s through 2000s:Catch-up growth

• Government effort to make Minnesota “big league” Human rights efforts Public amenities

Economic theory:Endogenous growth

• Total factor productivity growth is driving factor

• Endogenous: total factor productivity comes from intentional application of resources towards innovation

• Participation and resources per worker grow relatively slowly

Economic theory:Endogenous growth

Total factor productivity is higher than almost all

other areas

Total factor productivity must be increased by new innovations and

improved input quality

Slow of growth of participation rate

Slow growth of resources per

worker

New innovations and improved input quality

Growth of per capita

income

Economic theory:Endogenous growth

Minnesota, 2010 onward

• Participation rates have stabilized• Quantities of human capital and

physical capital are growing more slowly

• Innovation has picked up• Medical devices• Retailing

Minnesota, 2010 onward

• Growth depends on increasing total factor productivity through improved quality of inputs, not just quantities

Minnesota, 2010 onward

• EducationoEarly-childhood educationo Improved graduation rates for non-

white studentsoLifelong learning

Minnesota, 2010 onward

• HealthoFor young: preventionoFor adults: wellnessoFor older adults: ability to treat

illness outside of hospitals and nursing homes

Minnesota, 2010 onward

• Public capital and governmentoBetter transportation, not just moreo Improve productivity of water and

sewer systemsoGovernment services: competition

and community

How Minnesota Became Above Average

1950s-2000s (Catch-up growth)

• Growth in quantity of resources

• Adoption and improvement of existing institutions and technologies from the technological frontier

2010 onward(Endogenous growth)

• Growth in quality of resources

• Development of newinstitutions and technologies that expand the technological frontier

The big questions for public policy:

Do people follow jobs?or

Do jobs follow people?

How Minnesota Became Above Average

1950s-2000s(People follow jobs)

• Public policy focus: – Accumulate and attract

more human and physical capital

– Technology transfer

2010 onward(Jobs follow people)

• Public policy focus:– Improve quality of

human and physical capital

– Technological innovation

Thanks for your attention and participation!

Questions?