Minnesota is strong at the core

While one month's data do not make a trend, the positive July job numbers (10,300 new jobs and a decreased unemployment rate of 8.1 percent) have people at least cautiously optimistic that Minnesota is climbing out of the recession. Hopefully we will get more good news when the August numbers are released this week. But regardless of whether the state's recovery officially begins in July or later this year, this recession will end -- and likely soon. Following historical patterns, Minnesota's economy should track the nation's economy and approach trend growth sometime next year.

Everything will be back to normal, right? Well, not according to some analysts and state officials who worry that Minnesota has been falling behind the national economy in recent years. The current recession has only reinforced such fears, as these analysts fret that Minnesota will come out in worse shape than before and will likewise fall even further behind the rest of the country. Purveyors of the Minnesota-is-falling-behind view point to the state's unemployment rate, which was as low as 4 percent in 2004 (well below the U.S. rate of 5.7 percent) and climbed to a high of 8.5 percent by early 2009 (which matched the U.S. rate).

While these data are certainly true, they are too little information in too brief a time to tell a clear story. In particular, by focusing on the unemployment rate, analysts miss the broader economic forest for the few data trees. Minnesota's economy is too big and too diverse -- and has been growing too consistently for so many years -- to simply write off after a relatively short-run blip in this measure of economic well-being.

Besides, Minnesota's growth potential should be measured with a review of as many data as possible to get a more complete picture. And that type of review finds that at its core the Minnesota economy is still very strong and shows every sign of continued strength for many years to come. For example, when considering the health of the state's labor markets, it is useful to consider more than unemployment rates, which require a difficult-to-measure concept of how many potential workers are actively seeking employment. A better measure of the health of the state's labor market is the employment rate -- the actual number of people employed per working-age population -- and here Minnesota has remained consistently strong. As of July, the employment rate in Minnesota stood at 66.8 percent, well above the 59.4 percent rate for the nation. And Minnesota has maintained this relatively strong employment profile for well more than 30 years. Another important measure of an economy's health is per capita income, and here Minnesota has also remained strong, coming in roughly 6 percent to 9 percent above the national average for more than 10 years.

Based on these measures, Minnesota's economy has not only been tracking the national economy in recent years, it is arguably growing at a stronger pace. And while it is certainly true that Minnesota could experience slow growth rates coming out of this recession, there is little reason to believe that such an event would be anything other than a short-run phenomenon.

Minnesotans need to remind themselves of the underlying strength of the state's economy, which is its diversity -- everything from natural resources to high tech to biotech and food processing -- as well as the state's commitment to quality infrastructure, most notably, education. It is no accident that Minnesota is home to so many Fortune 500 companies (19). They're not here for the weather. They're here because of the workforce, which is one of the most highly educated in the country, and because of the state's general commitment to public infrastructure, which is the backbone of an economy.

Often when such matters are discussed, the issue quickly devolves to whether government is too big or too small and whether taxes are too high or too low. People start making assertions with little analytical backing, relying instead on their own emotional or political convictions. That's not a good basis for policy. Instead, the real focus of public expenditures should be on return on investment (ROI). On one hand, if a program is earning a high ROI and has not maximized its reach, then it could very well be extended, regardless of its size. On the other hand, a well-intentioned small program with a low or negative ROI should be seriously restructured or scrapped, even though it uses relatively few funds. Tax levels should reflect the number of well-run government programs with a high ROI.

And speaking of ROI: Minnesota's economy has historically been very strong, in large part, because of the state's commitment to education. However, with growing numbers of children in poverty who are entering kindergarten without basic learning skills, the state may soon find itself with a big problem -- young adults with little or no future who will only become a cost to society. This doesn't have to happen. Careful academic research demonstrates that tax dollars spent on early childhood development provide extraordinary returns. Some of these benefits are private gains for the children involved in the form of higher wages later in life. But the broader economy also benefits because individuals who participate in high-quality early childhood development programs have greater skills than they otherwise would, and they're able to contribute productively to their local economies.

And that's how Minnesota can maintain its place as one of the strongest state economies in the nation. Back in the late 1950s and early 1960s, when Minnesota was an economic laggard, the state made a long-term commitment to upgrade its education system. That kind of foresight helped forge a strong economy that has lasted for decades. With similar foresight and commitment, this economy can continue on this path for decades to come.

Arthur J. Rolnick is senior vice president and director of research at the Federal Reserve Bank of Minneapolis.