The Minnesota shutdown

by philg

The Minnesota shutdown highlights the poor quality of journalism in the U.S.

I haven’t seen any newspaper article that provides the following information:

  • how much tax revenue does Minnesota raise compared to other states? (the governor wanted higher taxes)
  • how does the $2.5-3 billion/year budget gap that caused the shutdown relate in size to the total state budget? (are we arguing about 1% , 10%, or 50%?)

These numbers aren’t that hard to get. http://www.taxfoundation.org/research/topic/37.html indicates, for example, that Minnesota rakes off 10.3 percent of residents’ income, which is above the U.S. average. Tax rates are among the highest in the nation in many categories, e.g., 3rd highest for corporate income tax (consistent with their overall business environment being 43rd in the nation; neighboring South Dakota is #1). http://www.mmb.state.mn.us/budget shows that the total revenue for the state is about $2.3 billion per month, so the budget gap is about 10 percent of total spending.

The articles on the consequences of the shutdown are interesting because they show just how much paperwork and hassle the government creates, e.g., around the distribution and sale of alcohol. (see this Atlantic article).

Finally the proposed restart of Minnesota state government is interesting because they’re doing it with an Enron-style accounting scam. Instead of raising taxes or cutting spending, the politicians are going to fix this year’s numbers by delaying writing checks to school districts and pulling (tobacco lawsuit shake-down) revenue in from future years.

Minnesota, like Greece, provides evidence that democracy depends on economic growth. To ensure their own reelection, politicians ladle out so many promises to cronies and interest groups that if the economy doesn’t grow as forecast the choice becomes bankruptcy/default or such high taxes that businesses flee, taking the jobs with them, and the most capable workers emigrate.

20 thoughts on “The Minnesota shutdown”

  1. “Minnesota, like Greece, provides evidence that democracy depends on economic growth”.

    How can I thank you enough for that penetrating – nay, dazzling – insight? As so often, Benjamin Franklin put his finger accurately on the problem:

    “When the people find they can vote themselves money, that will herald the end of the republic”.

    Note that he said “herald”. Not that the republic would immediately crumble to dust; but it would begin to lose its virtue. Of course, the people (or at least, those of them so disposed) discovered that they could vote themselves money very early.

  2. Tom: What’s your source for Franklin having said that? It doesn’t make sense that anyone of Franklin’s day could have said something like this. In Franklin’s time, money was backed by precious metals such as gold and silver. It wouldn’t have made sense to “vote themselves money” any more than it would have to “vote themselves tables and chairs”. Also, the federal government until around 1915 was tiny (http://en.wikipedia.org/wiki/Federal_Reserve_Act notes that the Federal Reserve system wasn’t created until 1913). So if people were voting for a government to give them money it would have had to be a state government.

  3. That quote sounds suspiciously like this one:

    “A democracy cannot exist as a permanent form of government. It can only exist until the voters discover they can vote themselves largess out of the public treasury.”

    Usually this is credited to Alexis de Tocqueville or Alexander Fraser Tytler. However, as far as I can tell both these citations are questionable and so is the one for Franklin.

  4. What I never understand about these stories, and you pointed this out in an earlier post about the federal government wasting so much time arguing over what amounts to very little, is that they never mention that compromises amount to little and nothing at all substantial gets done (and god forbid you dive into the comments sections of these stories like I do). The same thing appears in this story. Even with the deceptive accounting, the deficit will still be $3.7 billion. Not much to “declare victory” about in my opinion, and the governor himself is still displeased about the compromise.

    http://www.csmonitor.com/USA/Politics/2011/0714/Minnesota-governor-proposes-end-to-shutdown-but-will-Republicans-bite

    Also note there’s no tax comparison data in this article, either. (In fact, there is nothing on *any* of the chain-of-links of any of the Minnesota story.)

  5. You raise a good point: Context is an informational nutrient sorely lacking from a news diet supplied by the modern press. Personal blogs have helped mitigate the effects of this deficiency but it is sad how much energy is put into collecting minor scoops and finding unique angles vs. providing the basic information a reader needs in order to understand a particular situation.

    My current theory as to why this is happening is that the news industry was for so many decades sheltered from competition and simply lost the ability to empathize with its customers and what their needs are. Then again, for most of the news industry the customer is the advertiser. Sadly that bit doesn’t seem to be changing, but hopefully the heightened competition for readers/viewers will provide some context.

    Actually, the best provider of context these days tends to be Wikipedia. Very useful in some cases but not really designed for most news scenarios like the one you bring up.

  7. Phil,

    Maybe you’d agree with this:

    “The American Republic will endure until the day Congress discovers that it can bribe the electorate with it’s own money.”
    — Alexis de Tocqueville (Democracy in America)

  8. Tim: That quote appears in http://en.wikiquote.org/wiki/Alexis_de_Tocqueville under “Misattributed”. The U.S. was the ultimate free market economy until the early 20th century, with a federal government whose total revenues were smaller than some companies. There wasn’t any way to predict that one day the federal government would spend 1 out of every 4 dollars spent in the U.S.

  9. “Instead of raising taxes or cutting spending, the politicians are going to fix this year’s numbers by delaying writing checks to school districts and pulling (tobacco lawsuit shake-down) revenue in from future years.”

    This is a slippery slope, and California has already shown what happens. That’s how my former state ended up with a 30 billion dollar gap. Borrowing money from future lottery revenues! How crazy is that?

    For the life of me I’ll never understand an American that puts his own need for personal employment ahead of the interests of a state or nation. I’m not wired that way. Phil hit it right with his sentence that begins “To ensure their reelection…” It’s both sad and incredibly arrogant.

  10. I can’t believe nobody here knows how to “Search Inside This Book” on amazon.com. “vote themselves money” in “Democracy In America (Penguin Classics)” pops up two results. Neither of them has that exact phrase. But on page 257 you will find “I have never heard it said that in the United States wealth was ever used to bribe the populace; but I have often seen doubt cast upon the integrity of public officials. More frequently still, I have heard their success attributed to underhand intrigues or criminal practices.”

    This chapter is only two and a half pages long and is worth reading.

  11. “Tax rates are among the highest in the nation in many categories, e.g., 3rd highest for corporate income tax (consistent with their overall business environment being 43rd in the nation; neighboring South Dakota is #1”

    Tax rates maybe high but it would be helpful to know what they get for those taxes – NYC taxes are terribly high, but somehow people still live here and open businesses. Tax Foundation ranking might not be that reliable as they are not very transparent or efficient: 1 of 4 stars in charity navigator, no audited financials or form 990: http://www.charitynavigator.org/index.cfm?bay=search.summary&orgid=11291, makes it hard to trust them.

    http://www.census.gov/econ/susb/ has statistics on businesses and S.D. still hasn’t managed to steal all those businesses yet even though S.D. was #1 or #2 for the last 5 years and MN #39-#43 (TaxFoundation) in the same time, and they are next door so the cultural shock would presumably be pretty small. Business growth in MN is less than SD, but then there are almost 6x as many businesses in MN.

  12. Seconding Mark Lutton. See Volume 1, Chapter 13. Tocqueville discusses taxation in the section titled “Charges Levied by the State.”

    Before we can tell whether a democratic government is economical or not we must establish a standard of comparison. The question would be of easy solution if we were to draw a parallel between a democratic republic and an absolute monarchy. The public expenditure in the former would be found to be more considerable than in the latter; such is the case with all free states compared with those which are not so. It is certain that despotism ruins individuals by preventing them from producing wealth much more than by depriving them of what they have already produced; it dries up the source of riches, while it usually respects acquired property. Freedom, on the contrary, produces far more goods than it destroys; and the nations which are favored by free institutions invariably find that their resources increase even more rapidly than their taxes.

    … When an aristocracy governs, those who conduct the affairs of state are exempted, by their very station in society, from any want: content with their lot, power and renown are the only objects for which they strive; placed far above the obscure crowd, they do not always clearly perceive how the well-being of the mass of the people will redound to their own grandeur. They are not, indeed, callous to the sufferings of the poor; but they cannot feel those miseries as acutely as if they were themselves partakers of them. Provided that the people appear to submit to their lot, the rulers are satisfied and demand nothing further from the government. An aristocracy is more intent upon the means of maintaining than of improving its condition.

    When, on the contrary, the people are invested with the supreme authority, they are perpetually seeking for something better, because they feel the hardship of their lot. The thirst for improvement extends to a thousand different objects; it descends to the most trivial details, and especially to those changes which are accompanied with considerable expense, since the object is to improve the condition of the poor, who cannot pay for the improvement. Moreover, all democratic communities are agitated by an ill-defined excitement and a kind of feverish impatience that creates a multitude of innovations, almost all of which are expensive.

  13. Mark, Russil: I’m not sure of the relevance of Tocqueville and other ancient worthies. How could they have imagined that one day government (local, state, and federal) would spend 40 percent of the dollars earned by Americans? They were writing about something that has the same name (“government”) but is of a totally different character than what we have today.

  14. Reading through Chapter 13 (“Government of the Democracy in America”), I think many of Tocqueville’s observations of how democratic government works in practice–and more importantly, his explanation of their causes–still hold true today.

    “Freedom, on the contrary, produces far more goods than it destroys; and the nations which are favored by free institutions invariably find that their resources increase even more rapidly than their taxes.” You might think that this is no longer true, but take a look at long-term real growth in US GDP per capita, and this graph of income taxes paid.

  15. Russil: Now Tocqueville is also an expert on economics and has figured out that we should pay higher taxes to ensure GDP growth? The guy was smart enough to predict the 6% annual real per capita GDP growth rates that Japan and the “Asian Tigers” (Singapore, Taiwan, South Korea, and Hong Kong) were able to sustain for decades and now tell us how to be like those growth champions?

  16. I certainly wouldn’t claim that Tocqueville can tell us how to be richer! To me, Tocqueville’s work is interesting because it’s primarily descriptive (this is how American democracy circa 1830 works), not prescriptive. A surprising amount of it is still relevant today – to take one example, Tocqueville’s observation about the continuous demand for greater government action to tackle particular problems.

    For economics, I would look to someone like Paul Krugman. Short answer to your question: Delayed gratification. Hold down consumption, increase investment. (Of course the most important problem facing the US today is not long-term growth, but lack of demand for existing capacity.)

  18. Thanks for the link to the Summers article, Russil. I don’t find it convincing. In writing about unemployment in the U.S., the guy talks about the economic “potential” of the U.S. without looking at any of the factors that a business person would look at before deciding to hire a person. http://philip.greenspun.com/blog/2010/08/08/unemployed-21st-century-draft-horse/ might not be correct, but at least it look at the reality on the ground, not a fantasy world where anyone with a college degree is worth hiring.

    Thanks for the reference to the 1994 Krugman article where he says that the Asians were “paper tigers”. Singapore has grown from poverty and obscurity circa 1950 to having a per capita GDP (purchasing power adjusted) that is 30 percent more than the U.S.’s per capita GDP. Hong Kong hasn’t done quite as well, growing from poverty to rough equality with the U.S. (though the city’s infrastructure seems much newer and better than any American city’s). I guess the Asian tigers don’t crank out as many articles for economic journals and newspapers as Krugman and his pals, but otherwise they seem to be pretty capable.

  19. LT wrote: “Tax rates maybe high but it would be helpful to know what they get for those taxes – NYC taxes are terribly high, but somehow people still live here and open businesses.”

    What you get for those taxes is being able to live or do business in the middle of all those other New Yorkers. Some of that consumer or producer surplus is sopped up by a city government collecting taxes and fees while delivering mediocre services of lesser value, but not all.

  20. Phil,

    Keep up with your scrutiny of the U.S. economic situation. It’s terrible right now. Just look at California, all that coast line, that farm land, that climate, still a horrible unemployment rate. Govt can’t create economic gains, there is not much low hanging fruit for govt to pick anymore. It’s amazing that CA could have an unemployment rate only second to Nevada during the recession. A desert forced to adopt the smallest govt plans to sustain its economy.

    In the UC system I found this out-of-state student:

    “Ali estimates she will be paying about $56,000 to attend UCLA when school starts. Had she known that her tuition would go up by about 50 percent in her first two years at UCLA, Ali said she would have chosen a private school.”

    http://www.dailybruin.com/index.php/article/2011/07/students_react_to_9.6_fee_increase

    And this out-of-state student will enter a CA economy that is still shedding employment opportunities: http://articles.latimes.com/2011/jul/17/business/la-fi-hiltzik-20110717

    Meanwhile, Krugman tries not to shoot himself in the foot by criticizing states that are more favorable to business:
    http://krugman.blogs.nytimes.com/2011/07/18/texas-tales/

    Govt can either hinder economic development or get out of it’s way in my opinion.

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