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Minnesota 2020 Journal: Chewing on the Numbers

March 18, 2011 By John R. Van Hecke, Executive Director & Fellow

Three recent reports should give Minnesotans pause and Minnesota policymakers direction. Consumer debt is down as are state housing starts while Minnesota continues sliding toward greater tax regressivity. Conservative “no new taxes” policy is failing Minnesota.

Last week, the U.S. Federal Reserve Board released its G.19 consumer credit report. Consumers now have more credit capacity because they’re carrying, on the average, less consumer debt. This turnaround was achieved through debt discharge; in other words, personal bankruptcy. People have less debt because they walked away from debt-ladened mortgages, leaving homes worth considerably less than the mortgage loan amount.

On paper, this means that increased credit capacity should presage increased consumer spending. Think about it. If I’m paying a $2500 monthly mortgage when my home’s value should put that payment at $1250 and I walk away from the loan, assuming that I haven’t been laid off and can continue paying a mortgage, I’ve just freed $1250 in additional consumer credit capacity.

Under most circumstances, people with an extra twelve hundred bucks a month in their pockets will find a way to spend it. Assuming they could afford the $2500 mortgage in the first place. These are not, however, most circumstances. People—consumers—remain insecure about the economy despite the stock market’s rebound. Accumulating corporate cash reserves aren’t translating into job growth. Without job growth, people still don’t feel good about borrowing and spending money.

Traditionally, people borrow to purchase homes but that’s not happening to the degree expected. According to recent U.S. Department of Commerce figures for February newly issued home construction permits—better known as “housing starts”—are down. Significantly, the total number of issued February permits failed to match same-month projections gleaned from a Bloomberg News survey.

Fewer people building new homes tells us that consumer insecurity remains pretty strong. The recent collective experience with the sub-prime mortgage housing crisis legitimately makes potential home purchasers nervous. Compounding this feeling, the mortgage lending community, reacting to increased regulatory oversight, demands a higher level of lending scrutiny and loan security confidence. Slow job growth combined with consumer insecurity means that we shouldn’t be surprised that people aren’t borrowing money to build new houses.

Except, that’s exactly what needs to happen for sustained economic recovery and growth.

As consumer credit availability data reveal, people have more credit capacity because they’ve reduced consumer debt through bankruptcy and debt discharge. That same phenomenon further informs the low new housing starts because home inventory remains strong. In other words, all of those homes that people left are still there, waiting to be resold. Excess inventory, even if tied up in foreclosure snarls, acts as an additional damper on new construction.

Roughly seventy percent of America’s economy and, by extension, Minnesota’s economy, is driven by consumer spending. That’s the consequence of creating the largest, wealthiest middle class in history. It also means that our economy is especially susceptible to consumer insecurity. While everyone agrees we need to spend less and save more, we still need to spend regularly. If we don’t, recovery slows. And, if conservative public policymakers succeed in laying off 15 percent of Minnesota’s public workers, we could very well tip back into recession because unemployed workers don’t spend remotely as much money as employed workers.

Adding to the sense of Minnesota disquiet is the annual tax incidence study, based on 2008 tax data and the 2011 economic forecast. Issued by the Minnesota Department of Revenue’s Tax Research Division, it finds that “lower- and middle-income households paid a substantially higher percentage of income in state and local taxes than high-income households.” Meanwhile, Minnesota’s highest income earners pay a lower percentage of their income in taxes than lower- and middle-income earners.

Did you catch that? If you earn more than a $130,000 per year, you’ll pay a lower percentage of your income than if you earn less than $130,000 per year. Households earning over $130,000 pay an effective tax rate of 10.3 percent. Households earning less than $130,000—90 percent of Minnesota households—pay 12.3 percent. That’s a pretty good deal for the highest income earners; for the other 90 percent of Minnesota? Not so much.

The conservative public policy solution is to preserve this policy while creating regular legislative distractions, hoping that the 90 percent of Minnesotans don’t notice that whole “better deal for high income earners” policy. It’s not fair and it needs to change.

Linking these three studies suggests that Minnesota public policy functions best when it focuses on the needs of middle-income earning Minnesotans. Getting the economy moving, growing jobs and investing in long-term infrastructure creates a path forward. Minnesota needs Minnesotans working good jobs, saving regularly and spending wisely. We need people borrowing money to buy correctly-priced homes. We need strong schools, affordable healthcare, robust transportation infrastructure and effective economic development. Fair, responsible public policy creates a rosy Minnesota future; conservative “no new taxes” policy fails Minnesota. The numbers bear it out.

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