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MN2020 - Local Cuts Put Economic Recovery on Shaky Ground
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Local Cuts Put Economic Recovery on Shaky Ground

April 01, 2010 By Lee Egerstrom, Economic Development Fellow

Which comes first, a new job and new home, or a lost job and a foreclosure?
Put another way, can federal programs stimulate a recovery of the economy while state and local government layoffs and budget cuts are dragging the economy down?

This is the delicate predicament that confronts federal, state and local leaders and, indeed, business people who must assess the health of the economy before deciding to hire employees and expand businesses and services. The contradictory flow of economic news this spring makes such decision making little more than a roll of the dice.

Let's step back a moment and assess where we are, giving a nod to the structure of the U.S. and Minnesota economies that will influence whether public and private decision making will bring desired results.

Signs of hope were evident as recently as in yesterday's business news. Christopher Snowbeck, writing in the St. Paul Pioneer Press, reported Wednesday that building permits jumped in March, when compared with recession-flattened March 2009, mainly from a big project in Woodbury. At the same time, he reported that S&P Chase-Schiller Home Price Indexes for the Twin Cities increased nearly 13 percent in January from the bottom of the metro housing market in April last year.

But such promising news comes as other national data gathering groups report that one in five Minnesota mortgages may be in some stage of foreclosure, and that the 13-country metro area has 39 percent of its single family mortgages "under water," or carrying a higher mortgage obligation than current market values say the property is worth.

The latter makes the Twin Cities the seventh most underwater housing market in the nation, by Forbes and Msn.com reckoning.

What stabilizes and strengthens housing markets? Jobs. And that brings up another round of recent public policy actions that work at cross-purposes.

On March 29, the Minnesota Legislature approved a state budget that the Star Tribune described as "Budget Cuts Make a Dent in $1B Deficit (March 30)." This comes days after Michael Moore wrote in the St. Paul Union Advocate that Governor Pawlenty's line-item vetoes had already cost the state 7,000 jobs.

Dan Heilman, Scott Carlson and Brian Johnson wrote in Finance & Commerce on March 15 that the Governor's line item vetoes were eliminating $300 million in public projects, including one in Rochester that would have created 400 jobs ("Pawlenty veto pen slashes like a sword.")
 
Those job losses are mounting Cutbacks in state aid to schools and local governments means public service positions continue to fall by the wayside, putting more stress on private jobs in retail and services that are part of the multiplier effect found throughout the economy.

In July last year, Jenna Ross wrote in the Star Tribune that the Minnesota State Colleges and Universities were cutting 550 jobs while raising tuition ("MnSCU approves tuition hike, job cuts," July 23.) The University of Minnesota and the state universities are back at it again, coping with the worsening budget crisis. Tim Post, with Minnesota Public Radio, reported Tuesday that Minnesota State University at Mankato was cutting 28 academic programs and letting 80 full-time faculty go, and St. Cloud State University will cut 26 programs ("Colleges cut programs, staff to cope with budget woes.")

Minnesota 2020 education fellow John Fitzgerald on Wednesday wrote about the Rosemount-Apple Valley-Eagan school district laying off 140 teachers and staff to cope with shrinking state assistance to K-13 public education.
      
How have such cutbacks weakened the state's economy? That isn't known for sure, since it hasn't been properly measured. Townships, cities, counties and school districts all across the state have made similar cuts in budgets for at least two years, and this does knock the air out of local commerce and local housing markets.

To offset some of this state-inflicted damage, although it isn't cast that way, the Legislature did approve a state jobs bill on Monday that the Governor is expected to sign. Bill Salisbury, writing in the Pioneer Press ("Legislature OKs jobs bill backed by Pawlenty"), said backers of the bill hope it may produce 20,000 jobs over time.

Some provisions of the bill seek to encourage Bloomington and the Mall of America to expand the nation's premier retail shopping center. What negative impacts this might have on other Minnesota mall centers and strip malls isn't known, but an expansion of MOA might produce retail jobs for laid off schoolteachers and college professors.

Going forward

Clearly, the old economist's standby expression, "on the other hand," is in need of recycling. What one hand giveth, the other can take away. It is happening at different levels of government.

Some attention to the structure of the economy must be given in the months and years ahead to avoid undercutting at the state level what the federal government is trying to do for the economy.

We now appear to have the start of a national health care system that might help  rationalize health care costs, but economic benefits from this system won't come in time to help the nation through the current economic mess. It's a start, however, and an important one; the commonwealthfund.org reported a year ago that 2009 would mark the biggest year-over-year increase in health care's share of Gross Domestic Product in history, taking 17.6 percent of the GDP pie. Studies since peg the amount between 17.3 percent and the higher projected number; regardless, it is sopping up the economy as health spending was increasing by 5.5 percent while the overall GDP declined by 0.2 percent.

What exactly is GDP? Bill Gunther, and economist and research director at the University of Southern Mississippi who writes columns for public understanding like St. Paul's Ed Lotterman, addressed that question in a March 14 piece for the Hattiesburg American ("Some thoughts about consumer spending"). There is great confusion, he noted, between retail spending and personal consumption.

By some government statistical counts, Personal Consumption Expenditures (PCE) now account for more than 70 percent of the nation's GDP, or the sum of all expenditures and income. Rising health care costs keep taking larger shares of this activity.

Retail expenditures are often mistaken for the PCE, he further noted. In 2009, he said, retail spending actually accounted for 29 percent of GDP. Spending on housing, health care and financial services and insurance are not considered a part of retail expenditures.

With this framework in mind, budget cutting efforts at state and local levels should weigh the impact such activity will have on the broader economy.

Laying off workers scores a direct hit on the housing market, retail sales and expenditures on services. Poverty and unemployment keep people out of the housing market and much of the financial services market. And retail sales--30 percent of the broader economy--is vulnerable to consumer disposable income.

Whatever stimulus may come from Washington can be checked in St. Paul or city hall. If a recovery is underway, it is in spite of, rather than the result of, local efforts.
 
 

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