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It's Time to Ask: Rebuild an Old Minnesota or Shape a New Economic Future?

May 25, 2010 By Lee Egerstrom, Economic Development Fellow

With the Minnesota Legislature closing its session and Minnesota's state and local budget problems ignored or kicked forward to next year, it would be timely to ponder just what the heck it is we think we are doing.
It would be a helpful exercise for advancing public understanding of where Minnesota sits in the present national and global economies. That could give us guidance on whether we are trying to rebuild an economy like we had before the financial market crash of 2008, or build a new economy from the ashes of the old, like we did in the 1980s.

Most steps to counteract the recession at the national level are aimed at stimulating the economy to get back to where we were, observes Roger Prestwich, the professor of international business at Metropolitan State University in the Twin Cities.

At the same time, he recalls, a new Minnesota was created after the national recession of the early 1980s and the prolonged recession or depression for the commodity and basic industrial sectors that followed.

For purposes of refreshing memories, that latter period is best remembered as the "farm financial crisis" of 1982-1987 that wiped out the commercial base of small Minnesota towns and toppled more banks that the current financial crisis. But far from the farms, that same crisis shut down forestry and forest product operations in northern Minnesota and cut mining employment in half, reducing Iron Range population by nearly the same percentage.

Census takers are again learning which small agricultural towns recovered from that earlier crisis and which Iron Range and forestry communities are experiencing regeneration. But it is known that technology replaced human labor in the mines, from 40,000 positions to 20,000. The mining jobs didn't come back.

"This is why economists warn we can expect a 'jobless' recovery," said Prestwich. "I fear that is what's ahead."

Anecdotal evidence shows that such a transformation is underway. For instance, Julie Forster wrote in the May 6 St. Paul Pioneer Press ("Laid off - and out of luck") about a new Rutgers University study showing unemployed workers who do find new jobs aren't receiving comparable wages and benefits that match their prior compensation.

Shaping the discussions

Such studies and reports are helpful. They do show the thoughtful, at least, that public policy issues about health care reform are part and parcel of national economic policy initiatives. They also should point state and local policy makers towards constructive ways to building a new, sustainable economy for Minnesota and its various communities-urban and rural, resource-based and technology-driven.

This need is easier to recognize than resolve. Policy makers must pay attention to economic arguments, and economists tend to be among the most argumentative of all our thinkers.

For instance, are the global, national and state recessions simply part of a "business cycle," or do they represent the harsh results of an "economic shock" that means we are in a "transformative stage" from one economic structure to a new?

Most economic literature split hairs over business cycle concepts between "neoclassical" economics (Smith and Ricardo) and variations of "Keynesian" theory, with much grunting and head scratching in between and subsequent to Keynes.

Part of this hair-splitting is over what constitutes an "economic shock." Most literature views it as an external influence (exogenous) that topples the existing economic order, such as natural disasters, wars, political disruptions among trading partners, and major technological change. In the earlier 1980s deflationary period, radical change in U.S. monetary policy aimed at fighting U.S. inflation created economic shocks for Third World countries that traded goods and services with U.S. dollars and had international debt denominated in dollars.

In contrast, self-inflicted economic wounds or internal disorder can be part of internal, or endogenous causes, responsible for a recession. That may describe the U.S. and Minnesota economies of the 1981-82 recession, but the aftermath period (the farm financial crisis) was an external shock to basic industries and resource-based economies at home and abroad that had no control or influence on monetary policy.

For these reasons, Helsinki economist Samuli Skurnik chooses to refer to economic change now underway as a "transformative" economic period. "What we are dealing with now in our economies is something of a transformation, or rather a system failure, in our economic fundamentals," he said in a recent exchange of emails. 

This is not new to Finns. Finland underwent a severe economic shock in the 1990s after the collapse of its primary trading partner--the former Soviet Union (1989)--and as it readied to join the European Union, requiring it to dismantle many of its domestic and protectionist "safety net" programs.

Thus, that crisis had both external and internal influences. As Skurnik notes in a paper presented at a Canadian economic conference, the Finns responded to that crisis by building an entire new generation of entrepreneurial businesses targeted to global markets. This response had both short-term and long-term objectives and restructured a new Finnish economy built around its natural and intellectual resources.

The mix of these resources and general population size offers useful comparison between Minnesota and Finland. They give reasons why we should pay attention to economic policies in that Northern European country as we grapple with ways to shape Minnesota's economy for the future.

Going forward

That makes an even newer study useful for Minnesota thinking and planning. Massachusetts Institute of Technology's Bengt Holmstrom joined earlier this year with leading economists from Northern Europe to analyze the current global recession and recommend policies for coping and economic restoration.

In their report, the economists make several recommendations regarding monetary policy and the policing and regulating of financial markets. That is public policy at the national level in America, but it is also becoming a multinational (EU) matter in Europe, making Finland and neighboring countries more like Minnesota than the other way around.

Regardless, the economists make several observations that should be noted in Minnesota. Among them, they insist, "Not all shocks are external, and domestic vulnerability can be reduced." And, they further state, "Jobs lost in a recession are often gone forever - adjustment is unavoidable."

Fiscal policy is an important buffer for the Nordic countries, they note. It would be for Minnesota as well.

Strong government finances allow public policies to stabilize the economy in times of recession, soften blows to households and firms alike, and help restore consumer confidence, they write.

Instead, Minnesota competes with other states in undermining national efforts to stimulate the economy by adding to unemployment and disinvesting in human capital and the labor force while insisting on weak government finances. The latter guarantees that state and local governments are part of the problem, not part of the solution.

The disinvestments in human capital and infrastructure play out all across the socio-economic climate of the state. Or, as Metropolitan State's Prestwich wryly phrases it,

"Are you thinking your next car should be an off-road vehicle?"  

Instead of disinvesting in our state by cutting funding for critical programs and shrinking public employment, let's focus on shaping and building a better, stronger Minnesota with a bright economic future.

 Further reading

Gylfason, Thorvald; Bengt Holmstrom, Sixten Korkman, Hans Tson Soderstrom and Vesa Vihrlala. Nordics in Global Crisis: Vulnerability and Resilience. Helsinki: Yliopiscopanio 2010. An introduction and summary can be found here.

Skurnik, Samuli and Lee Egerstrom. The Evolving Finnish Economic Model: How Cooperatives Serve as "Globalization Insurance." Saskatoon, Sask.: A paper presented at the joint conference of the Canadian Association for the Study of Co-operation (CASC), the International Co-operative Alliance Research Committee (ICA) and the Association of Cooperative Educators (ACE). May 29, 2007.
It can be accessed here.


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