How Can Minnesota Stay Above Average?
Louis D. Johnston
Presentation at the Minnesota Renewable Energy Roundtable
Action Team Leadership RetreatJanuary 10, 2011
Nobel Laureate, 1976
Nobel Laureate, 1982
Close friends
''Milton's out to save the world and I'm out to understand it.''
George Stigler
NY Times, October 21, 1982
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?
Economic growth in Minnesota since World War II: The data
Economic theory:Output per person (Per capita income)
output per person =
participation rate ∙ output per worker
Growth of participation rate
Growth of output per worker
Growth of per capita
income
Economic theory:Growth of per capita income
Economic theory:Growth of output per worker
Growth of resources per worker
Growth of total factor
productivity
Growth of output per
worker
Growth of participation rate
Growth of resources per
worker
Growth of total factor
productivity
Growth of per capita income
Economic theory:Growth of per capita income
Economic theory:Three types of growth
• Resource-based growth• Catching-up growth• Endogenous growth
Economic theory:Resource-based growth
Natural resources per
worker are higher than in
other areas
Attract labor to create high
ratios of natural resources to
labor
Rapid growth of participation rate
Rapid growth of natural resources
per worker
Minimal adoption and improvement of existing
institutions and technologies
Growth of per capita income
Economic theory:Resource-based growth
Economic theory:Catching-up growth
Total factor productivity is lower
than other areas
Total factor productivity can be
increased by adopting institutions
and technologies from leading areas
Rapid growth of participation rate
Rapid growth of resources per
worker
Adoption and improvement of existing institutions and
technologies
Growth of per capita income
Economic theory:Catching-up growth
Minnesota, 1950s through 2000s:Catching-up growth
• Higher-than-average growth in participation rate- Married women with children- Young people from surrounding
states
Minnesota, 1950s through 2000s: Catching-up growth
• Higher-than-average growth in resources per worker Human capital Physical capital
Minnesota, 1950s through 2000s: Catching-up growth
• Increases in human capital Education: grew faster than national
averageoHigh school graduation rates roseoRates of post-secondary education
attendance rose
Minnesota, 1950s through 2000s:Catching-up growth
• Increases in human capital HealthoPublic health (vaccination rates,
infant and maternal mortality)oMedical care (including dentistry)
Minnesota, 1950s through 2000s:Catching-up growth
• Increases in physical capital Private capitaloBroad and deep local financial
markets and institutionsoHigh rates of return attract out-of-
state capital investment
Minnesota, 1950s through 2000s:Catching-up growth
• Increases in physical capital Public capitaloTransportation (roads, river
transport)oWater and sewer systems
Minnesota, 1950s through 2000s:Catching-up growth
• Adoption and improvement of existing technologies Computers Medical devices
Minnesota, 1950s through 2000s:Catching-up growth
• Government effort to make Minnesota “big league” Human rights efforts Public amenities
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
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
Slow of growth of participation rate
Slow growth of resources per
worker
New innovations and improved input quality
Growth of per capita income
Economic theory:Endogenous growth
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
Minnesota, 2010 onward
• Growth depends on increasing total factor productivity through improved quality of inputs, not just quantities
Minnesota, 2010 onward
• EducationoEarly-childhood educationo Improved graduation rates for non-
white studentsoLifelong learning
Minnesota, 2010 onward
• HealthoFor young: preventionoFor adults: wellnessoFor older adults: ability to treat
illness outside of hospitals and nursing homes
Minnesota, 2010 onward
• Public capital and governmentoBetter transportation, not just moreo Improve productivity of water and
sewer systemsoGovernment services: competition
and community
How Minnesota Became Above Average
1950s-2000s
(Catching-up growth)• Growth in quantity of
resources• Adoption and
improvement of existing institutions and technologies from the technological frontier
2010 onward
(Endogenous growth)• Growth in quality of
resources• Development of new
institutions and technologies that expand the technological
frontier
The big questions for public policy:
Do people follow jobs?
or
Do jobs follow people?
How Minnesota Became Above Average
1950s-2000s
(People follow jobs)• Public policy focus:
– Accumulate and attract more human and physical capital
– Technology transfer
2010 onward
(Jobs follow people)• Public policy focus:
– Improve quality of human and physical capital
– Technological innovation
Thanks for your attention and participation!
Questions?
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