Minnesota and the New Normal

Tom Stinson, University of MinnesotaMay 2010

Recent Economic and Demographic Events Have

Changed the Outlook for as Far as We Can See

This Recession Was More Severe Than Those of 1990-91 and 2001

The U.S. Economy Lost 8.4 Million Jobs in the Great Recession

Total U.S. Wages Fell in 2009Quarterly Year-Over-Year

Percent Change

Household Net Worth Fell by More Than $17 Trillion Dollars

Minnesota Saw a 30 Percent Jump in Workers Turning Age 62 in 2008

0

10,000

20,000

30,000

40,000

50,000

60,000

7/05 to7/06

7/06 to7/07

7/07 to7/08

7/08 to7/09

7/09 to7/10

7/10 to7/11

7/11 to7/12

Year Turning Age 62

Wo

rke

d W

ith

in P

as

t 5

ye

ars

2005 ACS

The Age Distribution Has Changed

From 2010 to 2020, Minnesota Will

See Large Increases Age 50s and 60s

20,15036,190

47,3305,050

-30,680-9,980

47,95061,920

-2,680-63,650

-42,31054,240

102,960112,540

91,37041,400

8,44016,500

0-45-9

10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-7980-84

85+

Source: Minnesota State Demographic Center, rev 2007Numbers are rounded

Labor Force Growth Is About To Slow Sharply

1.52%

1.12%

0.75%

0.43%

0.10% 0.13%

0.27%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1990-2000

2005-10 2010-15 2015-20 2020-25 2025-30 2030-35

Ave

An

nu

al C

han

ge

The Old Normal+ The Great Recession

+ Long Run Demographic Changes= The New Normal

The “New Normal” Probably Means

• Higher interest rates

• Slower economic growth

• Increasing numbers of retirees

• Less consumption; more saving

• A more diverse population

• A shift in the balance between private and public sectors

• More uncertainty in our personal & national futures

More 65+ Than School Age by 2020

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1950 1960 1970 1980 1990 2000 2010 2020 2030

18-24

65+

5-17

Census counts & State Demographer projection, revised 2007

Health Care Spending Jumps After 55U.S. Health Care Spending By Age, 2004

$1,855$1,074 $1,445

$2,165$2,747

$3,496

$6,694

$9,017$9,914

$3,571

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

<55-

14

15-2

425

-34

35-4

445

-54

55-6

465

-74

75+

Avera

ge

Source: Agency for HealthCare Research and Quality, Medical Expenditure Panel Survey,data for per capita spending by age group in the Midwest. Excludes spending for long-term care institutions.

The “New Normal” Probably Means--2

• A shift in the balance between private and public sectors

• Chronic government deficits & cuts in service

• Worries about how to pay for past promises

• Creative destruction/disruptive innovation will change the way we deliver services

• A whole new way of looking for opportunities

FY 2012-13 Budget Gap Now $5.8 Billion

($ in millions) FY 2012-13

Resources $32,906

Spending 38,695

Difference ($5,789)

Inflation $1,181

Planning estimates assume:•Complete repayment of the K-12 aid deferral. Delaying repayment would save $1.163 billion•.No repayment of the K-12 Property tax recognition shift. Repayment would cost 564 million.•No continued GAMC spending. Restoring the GAMC to its former level would cost $928 million. Current agreement costs $214 million.

If State Health Care Costs Continue Their Current Trend, State Spending On Other Services Can’t

Grow

3.9%

8.5%

0.2%0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Revenue Health Care Education & AllOther

An

nu

al

Av

e G

row

th 2

00

8-2

03

3

General Fund Spending Outlook, presentation to the Budget Trends Commission,August 2008, Dybdal, Reitan and Broat

Minnesota Faces a Fiscal Trap• The issue is a long run, structural one—

short run solutions will not solve the problem

• Trend growth alone will not be sufficient. Fundamental changes are necessary

• Revenue growth will slow. Efforts to increase it will be met with resistance

• Spending pressures will increase driven largely by issues of aging and health

• State spending will shift its focus from education, infrastructure and higher education to care and support of the aging

The Great Recession Has Been The Great Recession Has Been Blamed for Raising the Level of Social Blamed for Raising the Level of Social

AngstAngst

But What Is Really HappeningBut What Is Really Happening

Is That We Have Entered A Is That We Have Entered A

““ NN ee ww NN ormal”ormal”

Grieving For The “Old Normal”• Denial – “This is not happening.” “Just wait, things will

return to normal.”

• Anger -- “Who is to blame?” Rage and gridlock rule and anyone who symbolizes life, energy, progress, success, happiness, etc. is treated with resentment and mistrust.

• Bargaining – “I’ll change if this just goes away.” Somehow, we can get back to the old normal if we just return to good, ole fashioned (conservative/liberal) values.

• Depression (emotional, not economic) – “What’s the point in trying?” “We are all doomed anyway.” The certainty/finality of events is finally recognized.

• Acceptance – “It’s going to be okay.” Looking for opportunities begins.

But Why Fear The New Normal?It Plays To Our Strengths!

• Future economic growth will depend increasingly on increasing productivity and less on labor force size

• Education has been the key to Minnesota’s productivity and prosperity

• Future productivity increases will depend on decisions and the investments we make now

• Public Sector Productivity Growth Will Be Essential

Productivity Is Not Just Producing at a Lower Cost

Increasing Productivity Also Means

Making things better

(improved quality)

Making better things

(innovation, new products)

Making Better Things May Be The Area Of Greatest Potential

• Efficiency efforts have focused on transformational and transactional jobs

• Largest future productivity gains are likely to come from entrepreneurial innovations– Seizing opportunities offered by disruptive

innovations– Improving the quality of existing processes,

products, and services– Developing new products and services– Adapting business plans to the “New Normal”

Education Is The Key To Productivity

Minnesota High School Graduation Ratio

57%

85%

60% 62%

89%85%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

AmericanIndian

Asian Hispanic Black White Total

2 Y

r A

ve R

ate

2004-05 through 2005-06 graduates. Based on 10th grade enrollment three years earlier.

The Fiscal Catch-22

If we don’t make the necessary public investments in human capital, research and infrastructure, then we won’t have the productivity gains needed to provide the resources to make those investments.

“If something can't go on forever, it will stop.”

Herbert Stein, Chair President Nixon’sCouncil of Economic Advisors

“I skate to where the puck will be, not to where it has been.”Wayne GretzkyHockey Great