This article appears in the Spring 2015 issue of The American Prospect magazine. Subscribe here.
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Minnesota and Wisconsin offer something close to a laboratory experiment in competing economic policies. Since the 2010 elections of Democratic Governor Mark Dayton in Minnesota and Republican Governor Scott Walker in Wisconsin, these neighboring states with similar populations and economies have pursued radically different strategies. Dayton embraces good government, progressive taxation, and high-wage policies, while Walker has chosen shrunken government, fiscal austerity, and a war on labor.
More than four years later, the two states' achievements in population growth, jobs, pay, and quality of life offer a clear contrast. (See "The Politics of Offense and Defense," by Sam Ross-Brown, part of this package from The American Prospect magazine's 25th Anniversary issue.) Minnesota's economy has outpaced Wisconsin's. These results suggest that Walker, in his expected run for president, may have difficulty promoting a "Wisconsin Miracle" as a model for national policy. This story also offers a cautionary tale to newly elected conservative governors like Bruce Rauner in nearby Illinois: An attack on government and workers' wages is not a prescription either for prosperity or for political success.
While the "experiment" is not perfect-there are minor differences in urban and industrial structure between the two states-it is clear that imposing fiscal austerity and undermining residents' standards of living are not successful prescriptions for economic prosperity. As the presidential election ramps up, the hard economics of these two states offer us evidence on the choice between markedly different futures.
The fall 2010 elections reversed partisan leadership in both states. Minnesotans, after 20 years of independents (Jesse Ventura) and Republicans (Arne Carlson, Tim Pawlenty), elected the Democrat Dayton. Wisconsinites elected Walker, the first Republican governor since 2002. Since taking office in early 2011, both have had to work with bipartisan legislative leadership for some part of their terms. Minnesota's Senate and House were Republican-dominated until 2013, when the Democrats won majorities in each. Wisconsin's legislature has been Republican-led except for the single year of 2012, when its Senate went Democratic by one vote following midyear recall elections. Both governors have actively used budgetary and administrative policies to achieve their goals. Both were re-elected last November.
Walker's initial slogan, "Wisconsin Is Open for Business," conveys his broad view that government should be smaller, deficits are categorically bad, the private sector is the only wealth and job creator, lowering taxes will automatically create jobs, and public-sector employees (and by association, many other workers) are too highly paid, which in turn hurts the state's economic competitiveness. Walker promised to reduce Wisconsin's deficit, create 250,000 new jobs in his first term, and get government out of the way of private-sector growth. His policies include reducing regulation generally and fast-tracking permitting for new environmentally problematic mining in the state. Walker also proposes to increase tuition at the state university by 13 percent and to change its mission from broadly educating the citizenry to serving the labor-market needs of business.
By contrast, Dayton's gubernatorial agenda has been solidly liberal. As he did while serving as U.S. senator from 2001 to 2007, Dayton embraces an activist government role, believing that well-run programs supporting education, infrastructure, fair and healthy workplaces, health care, progressive taxation, and a social safety net not only benefit Minnesota businesses and families but nurture economic prosperity.
While Dayton supported a popular and successful campaign for a higher statewide minimum wage, Walker opposed any increase. Dayton supported the Affordable Care Act and developed a state exchange, while Walker refused an initial $38 million in federal funds to set up a Wisconsin exchange and $11 million to improve Medicaid enrollment, also rejecting federally funded expanded Medicare coverage for the state. (On health care alone, Dayton's embrace of Obamacare has brought new federal dollars that are spent almost fully within the state, creating good-paying health-sector jobs.) On another front, Walker successfully fought teachers' unions, while Dayton led an increase in teachers' salaries paired with reductions in class size, which proved a stimulus to the Minnesota economy.
In sum, Minnesota's policies on wages, health care, and unionization have improved the quality of life for large numbers of state residents. Outpacing Wisconsin, Minnesota's jobs and pay have expanded, and health care and education have improved. Dayton's progressive taxation has not scared off business, but has funded better public services, besting Walker's fiscal strategy of regressive tax cuts and deficit reduction. It's worth a closer look to see why this was the result.
Ideology versus Smart Economics
To appreciate why the high road delivers better outcomes, consider the fallacies in several conservative assumptions about the way regional economies work.
Good Government and Business Climate. Walker's approach presumes that government spending financed by progressive taxes is necessarily a drag on the economy. But if government programs improve business viability by efficiently providing services such as infrastructure (rail, highway, airports) and competent regulatory oversight, they contribute to job creation and prevent out-migration to lower-cost regions. If government support of K-12 and higher education results in better-trained workers, more jobs will be created and maintained. If corruption is kept to a minimum, which arguably is the case in Minnesota compared to most other states (including Wisconsin, where close associates of Walker are under indictment), the competitive private sector will thrive. Minnesota, for instance, experienced less of the phony real estate boom than most other states in the mid-2000s, and recovered more quickly and sustainably during the Great Recession.
The Value of a Living-Wage Economy. Walker's strategy assumes that decent wages must raise costs to entrepreneurs and discourage businesses and job creation. Yet a 2013 study by John Schmitt of the Center for Economic and Policy Research that summarizes economists' research on bordering states where one raises the minimum wage and the other does not found no reliable evidence of net job loss in the former. Why? Because workers at the low end of the pay scale spend almost all of their income, fast and locally. Employers adjust in other ways-by using employees more efficiently, by modestly lowering their profit take, or by small increases in product and service prices. Opposing trade unions runs the same risk. Lower paychecks mean less consumer spending in a state, so that wage cuts and stagnation trickle down to hundreds of thousands of retail and service businesses. And contrary to theory, lower wages do not necessarily induce employers to hire more workers. If low-wage workers are a paramount goal for a business that is mobile, it can move south, or to Asia. Most service businesses-hospitals, retailers, restaurants, day-care providers-need to be close to their customers, and their competitors all face the same small wage-bill hike.
Accepting or Disdaining Federal Money. New federal funding for health care can be a boon to local economies. A refusal to take federal money for expanded Medicaid and health-care coverage under Obamacare has the opposite effect. Health providers in the low-road state will not be able to expand services and create the jobs that their neighbors can generate. Forgone jobs means lower consumer spending.
Quality of Life. One of government's jobs is to make the state a nice place to live and work. Companies make decisions on start-ups, growth, expansions, and decampments on much more than a small change in taxes or minimum-wage levels. And the same is true for households making decisions about where to live, pursue an education, and work. Government programs that improve the quality of life in a state will yield enduring dividends.
Migration and Workforce Growth as an Economic Tonic
State economies grow for three reasons: Companies start up, prosper, and expand jobs; people move to (and stay in) a state and bring or acquire good educations; and governments efficiently provide public services that improve business profitability and households' standards of living.
From 2010 through 2014, Minnesota's population growth rate of 2.9 percent outpaced Wisconsin's of 1.2 percent. The two states are very close in population size: At last count, 5.8 million people live in Wisconsin and 5.5 million in Minnesota. From 2013 to 2014 alone, Minnesota gained 7,300 residents from net migration (those who arrived minus those who left), while Wisconsin lost a net 3,300 residents. Minnesota gained twice as many net international arrivals, a mix of professionals and political and economic refugees. Natural increase-population growth through births minus deaths-was 50 percent higher in Minnesota than in Wisconsin. While new births in both states were comparable (69,000 in Minnesota and 67,000 in Wisconsin), Wisconsin's death totals were considerably higher. Compared with Wisconsin, the high-road Minnesota was the preferred destination for workers and their families in this era.
Population growth through net migration generates new jobs, as people bring their savings and skills to their new homes-some staffing high-tech companies and higher education, some starting small specialty grocery stores in their ethnic neighborhoods, others doing the dirtiest work at low wages. A large share of new migrants to Minnesota are young people pursuing college educations or seeking post-college work. The state benefits from a large, diversified Twin Cities economy that offers many work opportunities and draws graduates from the surrounding states' (including Wisconsin's) excellent public land-grant universities. A recent study by Jason R. Jurjevich and Greg Schrock found that over a two-year period, Minneapolis-St. Paul gained a net 2,413 post-B.A. graduates aged 25 to 39, compared to Milwaukee's net gain of 197.
A Closer Look at Jobs in the Two States
Upon taking office in 2011, Walker pledged to create 250,000 additional jobs in his first term, a period of national economic recovery. He failed, creating only about 100,000. With an employment growth of 4.8 percent, the modestly smaller Minnesota economy added 130,000 jobs, besting Wisconsin's growth rate of 4.4 percent.
Both states have comparable numbers of employed workers: 2.87 million in Minnesota and 2.95 million in Wisconsin. But it's not just employment that matters. High labor force participation-the share of working-age residents who have jobs or are actively looking for work-signals a strong economy. It means fewer discouraged workers and fewer working-age people living in poverty or dependent on welfare and social services. Minnesota has higher rates of labor force participation than Wisconsin. Both states' rates (Minnesota at 70 percent; Wisconsin at 69 percent) are high compared to the nation's, at 62.7 percent. Minnesota's rate has been among the highest in the nation for some years, exceeded recently only by North Dakota with its now slowing oil-fracking boom.
Wisconsin suffers from persistently higher unemployment rates than Minnesota, and Minnesota's rate has fallen much faster than Wisconsin's since the beginning of the two governors' terms. From 6.8 percent in January of 2011, Minnesota's unemployment rate fell to 3.7 percent by November of 2014. Wisconsin's initial rate of 7.7 percent fell to 5.2 percent in the same period. Slower job growth and higher unemployment rates have encouraged net out-migration from Wisconsin: Fewer workers are encouraged to move to or stay in the state.
The divergent job-growth consequences of dueling state economic philosophies is not just a peculiar Midwestern phenomenon. Research by University of Wisconsin economics professor Menzie Chinn correlated the conservative ALEC-Laffer State Economic Competitiveness Index-an amalgam of 15 business-friendly state policy features (such as tax rates, public employees per capita, minimum wages, anti-union "right to work" laws, estate taxes)-with private nonfarm job growth in California, Wisconsin, Kansas, and Minnesota from 2011 (when all four got new governors) through early 2014. The newly conservative-led states, Kansas ranking 15th and Wisconsin 17th on Laffer's index, did equally badly relative to U.S. employment growth, while Laffer's least-favored states, Minnesota (46th) and California (47th), both posted superior job growth rates.
Higher Incomes in Minnesota
It's not just having a job that matters to residents, but how much the job pays. Divergent labor policies hurt Wisconsin earnings and incomes while boosting them in Minnesota. In addition to rejecting a higher minimum wage, Walker's administration vigorously and successfully attacked the teachers' unions and other unions representing government employees. His Act 10, passed in 2011, gutted the state's long-standing public-sector union laws. The result, as detailed in a 2014 Center on Wisconsin Strategy (COWS) report, was to dramatically cut public-sector union membership and extract wage and benefit concessions from teachers and other public-sector workers.
The act prohibits bargaining over anything but wages-no health and safety issues, no benefits. It stipulates that no negotiated wage increase may exceed the rate of inflation. It prohibits paycheck union dues, even if workers sign a card authorizing them. It requires that every bargaining unit must annually recertify through a vote of 51 percent of all members of the unit, whether they vote or not.
In contrast, Dayton supported a robust, statewide minimum-wage increase, passed by the Democratic legislature in the spring of 2014. While the national minimum wage of $7.25 an hour still prevails in Wisconsin, Minnesota raised its minimum to $8.00 an hour on August 1, 2014, to rise to $9.50 by August of 2016. For the first time, Minnesota's minimum will be indexed for inflation. Dayton also embraced a proposal to authorize unionization of home-care and child-care workers subsidized by the state; this measure was passed by the legislature in 2014. (Unionization of home-care workers in California has demonstrated the win-win results for that state: According to economist Candace Howes's research, workers' wages rose substantially, prompting a significant decline in turnover and a large shift-as much as 20 percentage points-in the shares of needy home-care clients who elect to remain in their homes, rather than in expensive nursing facilities, saving the state many millions.)
Dayton also authorized the state's Department of Trade and Industry to pursue a two-year investigation of the misclassification of Minnesota construction workers as contractors, resulting in agreements with many firms to put these workers on payrolls and pay them benefits. As a COWS study demonstrates, the positive income effects of unionization decline dramatically as union membership declines. Union wages, especially in public-sector jobs, often informally establish a prevailing wage level for comparable workers in regional economies.
After four years of diverging labor policy regimes, Minnesota's wages are both higher and have increased modestly faster. In 2013, Minnesota average annual wages were $47,370, up 4.2 percent from 2010. Wisconsin's gains were more modest, with the annual average wage of $42,310, up 3.4 percent.
Minnesota's better wage rates are largely responsible for superior household incomes. From 2010 through 2013, Minnesota's median household income jumped from $52,300 to $60,900, a growth rate of 16.4 percent, while Wisconsin's comparable median moved from $50,400 to $55,300, expanding 9.7 percent. Higher wages and incomes mean a more prosperous local-serving economy, especially at a time when "buy local" is a growing consumer pattern. The differences are not huge, but are nonetheless significant. They demonstrate that policies that help working families also help the regional economy.
Diverging rates of unionization help explain the two states' economic performance. Union coverage has been declining nationally, a product of a vigorous business attack on all fronts. But it is still higher in some states than others, and state policy matters. In 2005, when Wisconsin's governor was a Democrat, union coverage reached 17.2 percent, exceeding Minnesota's rate of 16.4 percent under its Republican-led government. In 2010, when the two new governors were elected, the rate was 16.1 percent in Minnesota and 15.1 percent in Wisconsin. Since then, it has diverged more dramatically. Minnesota's coverage rate was 15 percent in 2014 and is apt to go up with the new unionizing drives in home care and child care. Wisconsin's had dropped by 53,000 workers to 12.5 percent by 2014, a four-year attrition rate of 13.9 percent-more than triple that of Minnesota's 4.2 percent coverage decline. Unionization contributes to the fact that Minnesota's hourly median wage is currently 10 percent higher than Wisconsin's.
State unionization coverage is strongly correlated with median wages for all workers. In a graphic produced for Minnesota's Select Committee on Living Wage Jobs in 2013, Economic Policy Institute's Doug Hall showed how strongly the two track together. Though Wisconsin was not included in the set, at its current unionization and median wage rates it would fall right in line, close to Missouri. Minnesota's rate significantly exceeds those of its upper Midwest neighbors, Wisconsin included.
Social Investment versus Stunted Government
Walker ran as an anti-tax, anti-government-spending candidate, while Dayton vowed to increase tax fairness, to adequately fund critical public investments, and to solve the state's budget deficit without shifts or accounting gimmicks.
In his first term, Dayton inaugurated his governorship with a strong commitment to creating jobs. Though stymied by a Republican legislature that preferred a Walker-type, business-friendly agenda, Dayton was able to navigate his $497-million bonding bill into law. The program created thousands of new jobs in shovel-ready projects, many for construction workers who were suffering from high unemployment rates. The new budget also included more funding for workforce development initiatives and a $3 million increase-the first since 2005-in the Minnesota Investment Fund, which helps firms add new workers and retain high-quality jobs.
In early 2013, with a newly all-Democratic legislature, Dayton proposed expanding the sales-tax base, other progressive tax reforms, and changes to the state's property taxes. His sales-tax proposal would have raised $2.08 billion for the state by extending coverage to Internet services, business services, and expensive consumer goods and services (food and clothing being untaxed in Minnesota) in exchange for lowering the overall rate from 6.875 percent to 5.5 percent. It foundered on widespread business and Republican opposition. He proposed reforms to individual income tax that would raise an additional $1.13 billion, chiefly by asking the wealthiest 2 percent of Minnesotans to pay their fair share. (Currently, this group pays 20 percent less in state and local taxes per dollar of income than do middle-income households.) And he proposed lowering the corporate income tax rate but broadening the base by eliminating inefficient tax breaks, especially those that apply to overseas operations of corporations, a reform that would neither raise nor lower the corporate tax take. Dayton successfully proposed broad property tax relief that lowered state property taxes by $49 million, or 0.6 percent, from 2013 to 2014, reducing the state's most regressive form of taxation. In his second term, he is again pursuing progressive and efficient tax reforms, but with a Republican House, this will be an uphill battle.
After his re-election, Dayton again proposed a biennial bonding bill to make investments in public-sector capacity while creating thousands of private-sector jobs. It passed in May of 2014, with $850 billion for infrastructure projects and an additional $200 million in supplemental cash appropriations for construction projects.
In contrast, Walker began his 2011 governorship with an austerity budget of spending cuts and tax relief. During his first term, he attempted to close a $3 billion budget gap by cutting revenue-sharing to local governments and schools, and slashing benefits and take-home pay for teachers, state workers, and other public employees. In a highly touted tax-relief package, Walker and the Republican legislature cut business taxes and income and property taxes across the board. But the supposed stimuli of wage restraint and lower taxes did not induce Wisconsin businesses to expand and add jobs at the hoped-for rates. The negative economic consequences, including lagging state tax revenues, left Wisconsin facing an estimated $2 billion budget imbalance going into 2015.
In his recently released post-election budget, Walker accelerates his travel down the low road. He proposes a 13 percent cut of $300 million in state funding for the University of Wisconsin system for 2015 to 2017. This means more jobs lost, and a deterioration in the quality of education and in the ability of the system to produce good research. It also means a speed-up, as more work is piled on teachers. Walker suggests that faculty should teach more classes (one more per semester, as much as a 25 percent increase in workload) and work harder. He seems not to understand that faculty can and will move elsewhere, and student enrollments, already down at some campuses, are likely to decline more rapidly. Walker has also authorized outsourcing of university custodial services-layoffs are already taking place. Again, this means further cuts in working people's income, undercutting the state's economy and budget.
Thus Minnesota's public investment and fairness-oriented fiscal path since early 2011 has not hurt its ability to produce superior job, population, and income growth, while Wisconsin's aggressive austerity has not enabled it to outperform its neighbor. Interestingly, both state and local public spending and debt patterns remain basically similar. Minnesota enjoys superior reserves-the Pew Charitable Trusts report on the number of days states can run on reserve funds places Minnesota at the national median, 25th, while Wisconsin ranks 41st. Thus on fiscal grounds, Minnesota, despite its more progressive pattern of taxing and spending, does just as well as Wisconsin. Why? Because the macroeconomic and long-term growth-stimulating effects of good government policies nurture education, human capital, innovation, and livability, in contrast to wage-lowering strategies and miserly postures toward education and research which hope, fruitlessly, that the private sector will take up the slack.
Similarities, Differences, and Divergent Performance
Of course, the two states are not perfect matches for testing fiscal policy and political philosophy. But they are remarkably similar. Both have traditionally been relatively liberal since the Progressive era, moving from Lincoln Republicanism in the 19th century to New Deal advocates during the Depression. Both have similar climates and topography, with important swaths of Lake Superior shoreline that attract retirees and visitors.
The two states' industrial structures, at least at an aggregated level, are similar. Wisconsin is more manufacturing-intensive, 16 percent compared to Minnesota's 11 percent, while Minnesota's education and health-service job share of 18 percent exceeds Wisconsin's at 15 percent. Minnesota posts modestly higher job shares (18 percent versus 15 percent) in education and health services and in professional and business services (13 percent versus 10.5 percent).
Underneath these parallel structures, however, sectoral differences partly account for Minnesota's stronger economy. Wisconsin's manufacturing is reliant on heavy-equipment sales to developing nations. In addition, small, low-wage, rural manufacturing plants have been dispersing for decades from the greater Chicago area. These small plants may offer jobs and pay that are inferior to Minnesota's, where manufacturing jobs are more diversified, from food processing to high tech to iron ore. Both states also host mining, logging, and farm jobs that vary by region and quality.
The two states' metropolitan structures are shapers of population and economic growth paths. The Twin Cities metro of Minneapolis and St. Paul hosts the state's capitol, the flagship public university, several highly ranked liberal arts colleges, many corporate headquarters, the state's top arts and cultural institutions, the bulk of the region's non-storefront financial sector (including the Ninth District Federal Reserve Bank serving Minnesota, northern Michigan, northwestern Wisconsin, and three states to the west), and the state's major philanthropic foundations. The region may benefit from what economists call agglomeration economies, where the density of labor markets and employers attracts and hold jobs and incomes. In contrast, Wisconsin's major private, nonprofit, and public employers are split between Milwaukee and Madison, with the state capitol complex and the state's top-rated university (arguably superior to Minnesota's to date) in the latter, and the state's financial, manufacturing, and philanthropic leadership in Milwaukee.
While these structural and geographic features may differentiate the two states' economic challenges, it is unlikely that they can explain most of the divergence in growth and pay rates over the past four years. The macro and secular growth effects of markedly distinct fiscal and labor-market policies are clearly playing a major role. It is implausible that a continuation down the low road will bring Wisconsinites the relatively greater prosperity enjoyed by Minnesotans.
High-Road and Low-Road Civic Life
It's not just economics that shape a state's culture. In general, a majority of Minnesotans have favored and voted for expansive and inclusive civic policies benefiting people of all income levels. The 2014 Minnesota Legislature passed, and Dayton signed, a Women's Economic Security Act that expands paid sick leave and unpaid family-care leave (covering men as well), requires gender pay-equity reports of private-sector companies bidding for state contracts, and expands leave and unemployment insurance access for victims of domestic violence. It also forbids companies from demanding pay secrecy of their employees, a widespread practice that makes it more difficult for women, men, and minorities to find out if their wages and salaries are comparable with co-workers'. In the public sector, salaries and wages are published, resulting in much lower pay-equity gaps.
Minnesota voters, by 53 percent to 47 percent, rejected a 2012 constitutional amendment banning gay marriage. In 2013, the legislature passed, and Dayton signed, a same-sex marriage bill, the first state in the Midwest to do so by enactment rather than court order. Wisconsin banned same-sex marriages in 2006 when 59 percent of Wisconsin voters supported a constitutional amendment, but the U.S. Supreme Court has since ordered gay marriages to be allowed to proceed. Minnesota voters in 2012 rejected a constitutional amendment to require photo identification to vote, but a Walker-supported voter-ID law in Wisconsin is currently on hold, awaiting decision by the Supreme Court.
Minnesota citizens' positive support for state spending that serves broad populations was dramatically demonstrated in 2008, when voters passed by a 56–39 margin the Clean Water, Land and Legacy Amendment to the state's constitution. The amendment, first sanctioned by the state's legislature and supported by a coalition of environmental, arts and culture, and hunting groups, increased the state's sales tax by three-eighths of a cent, hiking it to 6.88 percent. This revenue is dedicated to such uses as state parks, wildlife management, clean water, arts and artist support, and library and historical society operations. These groups coalesced because session after session, they felt that their issues were losing out to bigger categories like infrastructure, education, and social services. Revenue from the 2008 initiative has amounted to about $300 million a year, and over its 25-year lifetime will total $7.5 billion. Although difficult to track where it all goes-more seems to be channeled to the nonprofit Pheasants Forever than to any other nonprofit-the benefits are widely distributed and are favorably viewed by most Minnesotans. They help to boost quality of life, from inner cities to small rural communities. Under the current political regime in Wisconsin, such an initiative is a nonstarter.
The High Road and the Low Road as Politics
In Minnesota's November 2014 election, Jeff Johnson, the Republican candidate for governor, promising to "go all Scott Walker on Minnesota," claimed that Minnesota's private-sector job growth from March 2013 to March 2014 was the slowest in the Midwest, and 41st in the nation. These claims were roundly refuted by economist Louis Johnston in Minnesota's online daily MinnPost. Johnson was defeated at the polls-Dayton received 50.1 percent of votes and Johnson 44.5 percent-even as the state's House of Representatives swung Republican. Walker was re-elected with 52.3 percent to Democrat Mary Burke's 46.6 percent. In an off-year election, neither policy position seemed to be a solid winner with the voters, at least with those who showed up to vote. Though Minnesota's more progressive approach to economic policies clearly out-performs Wisconsin's conservative one, these are complex issues that are dwarfed by the usual fodder of personality and campaign rhetoric.
Economists, trade-union leaders, and other policy experts have much work to do to clarify how state economies really work and where there is room to improve both economies and standards of living. This comparison does show that high-road economics are sound economics: They encourage innovation and entrepreneurship, boost purchasing power, attract federal government dollars, discourage corruption, and improve the quality of life which in turn attracts and retains employers, workers, and residents. As we go into the next presidential election cycle, with Scott Walker touted as a role model and potential first-tier candidate, it's good to keep the nation's eyes on the details of his disappointing track record.
This article is based on research and testimony for the Minnesota House of Representatives' Select Committee on Living Wage Jobs, Making Work Pay, 2014.
