No, Minnesota Government Has Not Gotten Cheaper

(And more importantly, the Minnesota "Price of Government" can't tell you this.)

The June 10 Sunday edition of the Star Tribune featured an article on Governor Dayton's budget legacy.  A portion of the story compared changes in government spending and revenues under the current administration to the Pawlenty years.  The print version featured a graph showing Minnesota’s Price of Government (POG) from 2004 through 2017 with the accompanying comment “by one measure, government is getting cheaper.”

The problem is that the Star Tribune’s graph showed forecasted estimates for what the Price of Government would be for 2012 through 2017.  We’ve plotted the actual Price of Government for 2004-2017 along with the Star Tribune’s graph below.  (You can access the most recent Price of Government report, from Minnesota Management and Budget’s February economic forecast here.)  As you can see, the actual Price of Government for those years was higher than projected and ended the period higher, not lower, than where it started.  MCFE brought this to the attention of the Star Tribune and a correction appeared in yesterday's edition.

Unsurprisingly, this article – particularly the incorrect Price of Government chart – was very popular and gained significant traction on social media.  But this reporting error allows us an opportunity to again comment on a far bigger annoyance than misrepresentation from inadequate fact checking.  The bigger problem is the continued use of and reliance on the POG as the authoritative, final word on how cheap, expensive, or affordable government is.

The problem lies in using “personal income” as the POG’s denominator.  The federal government has defined “personal income” to measure overall economic activity, and so it includes a host of items that can’t be used to pay taxes or fees to government.  This includes the value of employer health care contributions and our personal wonky favorite, the earnings a home owner forgoes by living in his or her own house instead of renting it. As a result, the Price of Government report significantly understates state and local government’s claim on money income – the stuff actually available to pay taxes.  If you substituted the household income measure used in the state’s Tax Incidence Study, the Minnesota Price of Government would be 20%-35% higher in any given year.

But that’s not even the most distorting aspect of the POG.  As we have discussed here, the fastest growing piece of personal income in Minnesota comes from government itself.  Since 1990, government transfers have grown about 25% faster per year than personal income overall and about 30% faster per year than salaries and wages.  These government transfers include about $20 billion worth of Medicaid and Medicare services consumed in the state – $20 billion of “income” that doesn’t go toward making anyone’s April 15 income tax payment.  Take out these transfer payments, and Minnesota governments are claiming about 7% more of personal income than in 2004 and about the same share as in 1991.

In its current form, the Price of Government measures governments’ claim on the economic activity of the state.  But here’s the problem: nobody actually talks about, interprets, or uses the POG in this abstract way.  It’s used to argue whether government is getting “cheaper,” whether or not we can “afford” to pay more, or how much more or less government “costs” than before.  None of those questions are informed by this measure.  Instead, we get claims that government in Minnesota somehow costs less because state and local revenues haven’t kept up with the growth in the value of government benefits.

Government’s scope and complexity begs for a simple, easy to understand tracking measure on government’s claim on resources that can be used to actually support government.  The current POG is most definitely not it.  We can fix it or kill it, but let’s not let a bad measure continue to confuse the debate.