An Economic Experiment Between Neighboring States

November 24th, 2013 at 12:28 pm

This piece from today’s NYT comparing outcomes in neighboring states with quite different approaches to economic policy caught my eye for two reasons.

First, some of the best empirical research in economics exploits these sorts of natural experiments.  The idea is that neighboring states, in this case Wisconsin and Minnesota, face roughly similar economic forces, so there’s a built in control of sorts.  That means we can—again, roughly speaking—consider differences in outcomes a function of their quite different approaches to policy (this pseudo-experimental technique has been used to great effect in minimum wage research).

Second, as I’ve stressed in recent writings, it’s hard to imagine much good in terms of economic policy coming out of Washington for a while, so we should be paying a lot of attention to what states and cities are up to.

The article compares the conservative, anti-union, tax-and-spending-cut strategy in WI against the more progressive policy agenda in MN, where tax increases are paying for more investment in public goods and human capital.

Which side of the experiment — the new right or modern progressivism — has been most effective in increasing jobs and improving business opportunities, not to mention living conditions?

Obviously, firm answers will require more time and more data, but the first round of evidence gives the edge to Minnesota’s model of increased services, higher costs (mostly for the affluent) and reduced payments to entrenched interests like the insurers who cover the Medicaid population.

The lion’s share of Minnesota’s new tax revenue was sunk into human capital. While the state’s Constitution required that half of the new revenue balance the budget in 2013, [Gov.] Dayton invested 71 percent of the remaining funds in K-12 schools and higher education as well as a pair of firsts: all-day kindergarten and wider access to early childhood education. Minnesota was one of the few states that raised education spending under the cloud of the Great Recession.

By contrast, [Gov.] Walker’s strategy limited Wisconsin’s ability to invest in infrastructure that would have catalyzed private-sector expansion, and he cut state funding of K-12 schools by more than 15 percent. Per student, this was the seventh sharpest decline in the country.

MN took the ACA’s Medicaid expansion and set up their own exchanges; WI did not.  Though time will tell, early evidence shows, obviously, more coverage in MN.

Speaking of state variation, this part of ACA implementation is particularly important to watch and evaluate.  The economics quite clearly points states toward accepting the Medicaid expansion as the Feds pick up all of the costs for the first few years and at least 90% after that.  Governors are usually a pragmatic lot; they typically can’t afford to take the ideological positions of their DC contingent.  Even Tea Partiers want the snow ploughed.  So comparing both coverage and costs in take-up vs. non-take-up states will be increasingly important.

The Times piece documents the usual pushback and squabbling.  Some MN businesses are complaining about the policy climate, and I’m sure the governor will have to pay attention to that.  Gov. Walker’s supporters predictably blame his predecessor for lousy outcomes on his watch.

Such noise is to be expected.  What’s important here is some hard-nosed evaluation of outcomes.  My economics brothers and sisters need to follow-up with rigorous tests across states and cities, controlling for any relevant differences between areas.  The laboratories are out there–they are where the action is and will be for a good while, I suspect.

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9 comments in reply to "An Economic Experiment Between Neighboring States"

  1. Tom in MN says:

    No grid lock here, Dems have Gov and both chambers of state legislature. Our unemployment rate is now 4.8%

    and the number of uninsured children is also dropping (but is a weak spot for us):

    One of our biggest problems is the racial achievement gap in school and the additional spending on pre-K, allday K and K-12 is meant to address that.

    But U of MN lost to UW yesterday, so can’t win them all. A separate research topic is whether a highly ranked football program is good or bad for a university.

    • Jared Bernstein says:

      Damn–MN wins on gridlock, loses on gridiron.

      • Tom in MN says:

        Update: Vikings are leading the Packers, so we might salvage 1-1 for the weekend.

        • Jared Bernstein says:

          Based on allegiances of certain family members, I cannot neither confirm nor deny my approval of this development.

          • Tom in MN says:

            Then you have no problems: they tied.

            We need more ties between states. The race to give the largest corporate tax breaks is a race to the bottom.

  2. Brett says:

    That doesn’t surprise me. I remember the Mercatus people did a “50 states” project measuring how economically free the states were, with California and New York predictably near the bottom. And at the top was the economic and technological dynamo that is . . . Oklahoma. Seriously.

    I tend to think that as long as you’ve got a reasonably good legal system, credit system, reasonably free market, and reasonable returns to investors/entrepreneurs, other stuff matters more than additional degrees of economic liberty. Stuff like concentrations of skilled people, concentrations of technology, lots of firms competing together, and so forth. Minnesota thrives because it has much more of that than Wisconsin, which is undermining it to try and get an additional degree of economic liberty.

  3. jonathan says:

    Read Menzie Chin’s posts at Econbrowser about this topic. He has many about WI Gov. Walker’s promise of 250k jobs and if you go back in time there is information about WI versus other states in the region.

    The real point is that the promises of growth from following substantially “conservative” economic policy are nonsense. The defenders of Gov. Walker – read the idiots in the comments – are reduced to arguing about how it isn’t so bad or that it would be worse when the point is the policies were supposed to make it a lot better. I put “conservative” in quotes because I believe actual conservative policy, not this nonsense, places value on actually conserving, which means investing in infrastructure and education.

  4. Jill SH says:

    Let me offer another natural experiment: Vermont vs. New Hampshire.

    Vermont has embraced the reform in healthcare and is moving toward a single payer system by 2017.

    New Hampshire actually passed a law in the 2010-2012 term to prohibit a state based exchange, and just this past Thursday, Medicaid expansion was blocked by a 13-11 partisan vote in our Republican-controlled Senate. The Democratic majority in the House and our Democratic governor had been strongly for it.

    It will be interesting to see in a few years time which state has the best healthcare environment, and which state is the best place to start a business.

  5. Th says:

    Washington and Oregon comparisons offer a chance to test sales tax vs. income tax effects. One big difference shown in the data is that total revenue grows more slowly than the general economy in sales tax oriented tax systems than in income tax dominated systems. I wonder if there is enough savings data by state to test the savings hypothesis?