1. How Can Minnesota Stay Above
Average?
Louis D. Johnston
Presentation at the
Regional Economic Development (RED) Group Forum
“Designing the Future:
What's the Next Minnesota Going to Look Like”
June 23, 2010

2. Nobel Laureate, 1976

3. Nobel Laureate, 1982

4. Close friends

5. ''Milton's out to save the world
and I'm out to understand it.''
George Stigler
NY Times, October 21, 1982

6. Quick overview:
• Economic growth in Minnesota since
World War II: The data
• Economic theory: The sources of economic
growth
• Economic policy: what role for policy in
promoting and sustaining economic
growth?

7. Economic growth in Minnesota
since World War II: The data

9. Income per person: by region, relative to the U.S. average
1.20
1.10
1.00
Relative to U.S. average
Minnesota
0.90
0.80
0.70
0.60
Year

10. Income per person: by region, relative to the U.S. average
1.20
1.10
Minnesota
1.00
Relative to U.S. average
Great
0.90
Lakes
0.80
0.70
0.60
Year

11. Income per person: by region, relative to the U.S. average
1.20
1.10
Minnesota
1.00
Relative to U.S. average
Great
Lakes
0.90 Plains
0.80
0.70
0.60
Year

13. Economic theory:
Output per person
(Per capita income)
output per person =
participation rate · output per worker

14. Economic theory:
Growth of per capita income
Growth of
participation
rate
Growth
of per
capita
Growth of
income
output per
worker

15. Economic theory:
Growth of output per worker
Growth of
Growth of Growth of
resources
total factor output per
per
productivity worker
worker

16. Economic theory:
Growth of per capita income
Growth of
participation
rate
Growth of Growth of
resources per per capita
worker
income
Growth of
total factor
productivity

17. Economic theory:
Two types of growth
• Catch-up growth
• Endogenous growth

18. Economic theory:
Catch-up growth
Total factor productivity
is lower than other
areas
Total factor productivity
can be increased by
adopting institutions
and technologies from
leading areas

19. Economic theory:
Catch-up growth
Rapid growth of
participation rate
Rapid growth Growth of
of resources per capita
per worker
income
Adoption and
improvement of
existing institutions
and technologies

20. Minnesota, 1950s through 2000s:
Catch-up growth
• Higher-than-average growth in
participation rate
- Married women with children
- Young people from surrounding
states

21. Minnesota, 1950s through 2000s:
Catch-up growth
• Higher-than-average growth in
resources per worker
 Human capital
 Physical capital

22. Minnesota, 1950s through 2000s:
Catch-up growth
• Increases in human capital
 Education: grew faster than national
average
o High school graduation rates rose
o Rates of post-secondary education
attendance rose

23. Minnesota, 1950s through 2000s:
Catch-up growth
• Increases in human capital
 Health
o Public health (vaccination rates,
infant and maternal mortality)
o Medical care (including dentistry)

24. Minnesota, 1950s through 2000s:
Catch-up growth
• Increases in physical capital
 Private capital
o Broad and deep local financial
markets and institutions
o High rates of return attract out-of-
state capital investment

25. Minnesota, 1950s through 2000s:
Catch-up growth
• Increases in physical capital
 Public capital
o Transportation (roads, river
transport)
o Water and sewer systems

26. Minnesota, 1950s through 2000s:
Catch-up growth
• Adoption and improvement of existing
technologies
 Computers
 Medical devices

27. Minnesota, 1950s through 2000s:
Catch-up growth
• Government effort to make Minnesota
“big league”
 Human rights efforts
 Public amenities

28. Economic theory:
Endogenous growth
• Total factor productivity growth is
driving factor
• Endogenous: total factor productivity
comes from intentional application of
resources towards innovation
• Participation and resources per worker
grow relatively slowly

29. Economic theory:
Endogenous growth
Total factor productivity
is higher than almost all
other areas
Total factor productivity
must be increased by
new innovations and
improved input quality

30. Economic theory:
Endogenous growth
Slow of growth of
participation rate
Slow growth of Growth of
resources per per capita
worker
income
New innovations and
improved input quality

31. Minnesota, 2010 onward
• Participation rates have stabilized
• Quantities of human capital and
physical capital are growing more
slowly
• Innovation has picked up
• Medical devices
• Retailing

32. Minnesota, 2010 onward
• Growth depends on increasing total
factor productivity through improved
quality of inputs, not just quantities

33. Minnesota, 2010 onward
• Education
o Early-childhood education
o Improved graduation rates for non-
white students
o Lifelong learning

34. Minnesota, 2010 onward
• Health
o For young: prevention
o For adults: wellness
o For older adults: ability to treat
illness outside of hospitals and
nursing homes

35. Minnesota, 2010 onward
• Public capital and government
o Better transportation, not just more
o Improve productivity of water and
sewer systems
o Government services: competition
and community

36. How Minnesota Became
Above Average
1950s-2000s 2010 onward
(Catch-up growth) (Endogenous growth)
• Growth in quantity of • Growth in quality of
resources resources
• Adoption and • Development of new
improvement of institutions and
existing institutions technologies that
and technologies from expand the
the technological technological
frontier frontier

37. The big questions for public
policy:
Do people follow jobs?
or
Do jobs follow people?

38. How Minnesota Became
Above Average
1950s-2000s 2010 onward
(People follow jobs) (Jobs follow people)
• Public policy focus: • Public policy focus:
– Accumulate and attract – Improve quality of
more human and human and physical
physical capital capital
– Technology transfer – Technological
innovation

39. Thanks for your
attention and
participation!

40. Questions?