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Will Budget Cuts Contribute to Another "Jobless Recovery?"

July 22, 2009 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Minnesota's unemployment rate hit 8.4 percent in June, the highest seasonally adjusted monthly state unemployment rate in over 25 years.  Measured in terms of the unemployment rate increase from the start of the recession, the current recession has become the worst of any recession since compilation of data began in 1976 and possibly the worse of any recession in the post-World War II era.

Until the current recession, the worst recession in Minnesota measured in terms of the unemployment rate increase was that of 1981.  From the start of the 1981 recession to its peak, the jobless rate in Minnesota increased by 3.5 percent (the light blue line).  The unemployment rate increase since the start of the current recession hit 3.6 percent based on recently released June numbers (the red line).

The term "jobless recovery" originated in the early 1990s as a description of the recovery to the 1990 recession.  Four years after the start of the 1990 recession, the national unemployment rate was still higher than at the beginning of the recession.  However, this was not the case in Minnesota.  Four years out from the start of the 1990 recession, Minnesota's unemployment rate was considerably below what it was at the beginning of the recession (the yellow line).  Bolstered by a diverse economy and a sustained level of public investment, the recovery to the 1990 recession was not "jobless" in Minnesota.

However, Minnesota was not so fortunate during the recession of 2001 (the dark blue line).  The state's unemployment rate remained relatively high during the recovery to the 2001 recession and never returned to the rate at the start of the recession.

Minnesota's weak recovery to the 2001 recession has been attributed to our light dependence relative to other states on industries that have boomed (e.g., defense, energy) and our heavy dependence on industries that have done poorly (e.g., wood products, airlines).  While these have been contributing factors, a Minnesota 2020 analysis indicates that they do not explain the full extent of the state's underperformance relative to the national average.

Minnesota's "no new tax" regime promised to deliver improved economic performance relative to the rest of the nation.  Instead, the opposite has happened, as the state's economic performance in terms of the unemployment rate, job growth, median household income, and poverty rate have all deteriorated relative to the national average.

Nobel prize winning economist Joseph Stiglitz has pointed out that cuts in direct government spending have a more harmful short-term impact on a state's economy than do tax increases.  Tax increases on high income earners are the least damaging of the budget balancing alternatives available to states, according to Stiglitz.

The massive unilateral budget cuts recently announced by Governor Pawlenty using his unallotment authority will lead to further job losses in Minnesota.  Analysis from State Economist Tom Stinson lends support to Stiglitz's conclusion; Stinson estimates that the unallotments will lead to 3,300 to 4,700 job losses, far greater than the estimated 1,000 job losses that would have resulted from the tax increase proposed by the legislature.  Recent research from Growth & Justice (PDF) lends further support to the view that government spending cuts cause more job losses than tax increases.

If Minnesota policymakers want to avoid another "jobless recovery," they should heed the recommendations of Stiglitz.  While spending cuts are unavoidable, there is no sound justification for emphasizing spending cuts to the exclusion of increases in progressive state taxes. Pawlenty's unilateral budget slashing needs to be rethought and the sooner, the better.

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