Minnesota’s Nice Economy
Minnesota has a better-than-average unemployment rate and per capita GDP. It also has a top-tier employment-to-population ratio and the third-lowest rate of poverty.
The state’s economic numbers are so consistently excellent that the political class gushes about “the state’s unique economic success story,” giving credit to state policies on taxes and economic development.
That sounds reasonable until you notice that all of Minnesota’s neighbors also have the same “unique economic success story” despite having a diverse array of tax and economic development policies. North Dakota, South Dakota, Wisconsin, and Iowa consistently appear in the same upper echelon of economic indicators.
Maybe it’s in the water: Perhaps there’s something about proximity to the headwaters of the Mississippi and Missouri rivers that causes high employment-to-population ratios.
More likely is that public policy is a minor factor in the strong economies of America’s “Nordic” states and that the prime determinant is culture, which is fairly similar across the Dakotas, Wisconsin, and Iowa.
Economists and other academics dislike culture as an explanation because culture can be hard to measure. However, economist John Phelan took a stab at tracing the correlation and connection between the economic health of these five states and their culture. Sure enough, he found that Minnesota and its neighbors excel in measures of “social capital,” or community cohesion.
Strong communities, he argues, cause strong economies. In a quantitative paper titled “The X-Factor?” Phelan lays out the case that even after controlling for other factors, social capital, as measured by Congress’s Joint Economic Committee, explains most of the success of these states.
Phelan also drills down and looks at Minnesota’s counties and the various components of the Joint Economic Committee’s social capital index. He finds “a positive relationship between the levels of the Family Unity, Community Health, and Collective Efficacy components of social capital and levels of economic well-being.”
At the same time, Minnesota has fairly high economic equality. That inequality seems driven largely by inequality in family stability: Counties with more single mothers and more children raised without a father are counties that do worse economically.
The big conclusion: Stronger communities cause stronger families, which, in turn, cause stronger economies. In other words, Minnesota “nice” might actually be profitable.