Toby Madden began his presentation with the disclaimer that the views
expressed in the discussion with the Civic Caucus are his and not
necessarily those of the Federal Reserve Bank in Minneapolis or those
of the Federal Reserve System.
It may not feel like it, but the country and
Minnesota are in an economic expansion. Madden defined economic
recession, recovery and expansion in terms of economic output, real
Gross Domestic Product adjusted for inflation:
- Recession: We're going downhill, producing less than we
produced last month or last quarter.
- Recovery: We're producing more than last quarter, but still
producing less than the previous peak.
- Expansion: We're producing record amounts of output,
adjusted for inflation.
He then asked the 11 members of the Civic
Caucus interview group who were present whether right now the U.S.
economy and the Minnesota economy are in recession, recovery, or
expansion. One answered recession, eight recovery, one expansion and
one didn't answer.
He said the people he talks to currently are
usually divided into five percent recession, five percent expansion
and 90 percent recovery, approximately how the Caucus interview group
But, Madden said, we're actually in an
economic expansion. We're producing more goods and services than any
country has ever produced in the history of the world. The U.S. and
Minnesota and world economies are producing record amounts of output.
Why, then, he asked, doesn't it feel like an
He gave five reasons for the country as a
- Output per person hasn't recovered to the previous peak;
- There are still a lot fewer people working than during the
previous peak of jobs;
- The economy is very uneven across the country: half the states
are in a recovery; half the states are in an expansion;
- Economic growth has been uneven among sectors: some sectors are
booming, while others are hurting;
- Economic growth has been very uneven among different
socio-economic groups: some people have gotten hurt a lot more
during the recession than others.
Madden said we've been in an economic
expansion for nine months plus, although the mass population thinks
we're still in recovery or recession. "I don't know how much more
economic output would happen," he said, "if everybody realized we're
in an expansion and said, 'Oh, I guess we don't have to hunker down.
We're really in a slow economic expansion.'"
He said even most economists still call this
recovery, but it's an expansion. Minnesota, the U.S. and the world are
producing at record levels. The Ninth Federal Reserve District, which
includes Montana, the Dakotas, Minnesota, northwestern Wisconsin and
Michigan's Upper Peninsula, is doing very well compared to the rest of
Madden noted that North Dakota is in a
tremendous economic boom. They were 30 percent above their previous
peak at the end of 2011 and even further above it in 2012. "They're in
a crisis up there in that they're growing too fast. They're trying to
control growth. They can't find enough people to work or places to
Two conditions must be met for a job to be
created. An interviewer asked, if we're seeing record output with
fewer people working, will we see a permanent uptick in unemployment?
Madden responded that a job is created when
two conditions are met:
- The wage must be higher than the "reservation wage," i.e., the
wage where people are indifferent between working and not working.
The reservation wage level can fluctuate based on policies or
- The value to a business must be positive for it to hire someone;
the benefits have to outweigh the costs.
He said the market will adjust by throwing
different wage levels out there, based on the value being added by a
He noted that unemployment in the U.S.
dropped down to 7.7 percent on December 7, 2012, and that the economy
added 146,000 jobs in November. He said he disagrees with the premise
that we're in a long-term period where we have a bunch of people who
can't be very productive in society and are therefore unemployed.
Economy of the Ninth Federal Reserve
District is diversified and doing well. The economy is doing
pretty well in the Ninth Federal Reserve District, Madden remarked,
especially in North Dakota, which is booming. The district has a very
diversified economy: mountains in the West with some mining activity,
plains with cow/calf operations, oil patches, fertile land, the North
Woods, mines and the very diverse economy of the Twin Cities, which
accounts for a major portion of economic output in the district. Some
areas in the district are very dependent on commodity prices, others
are very dependent on rainfall and still others are very dependent on
"The beauty of our district," Madden said,
"is a pretty highly educated and healthy workforce. That's a very
solid foundation and can drive the economy forward." Minnesota has
higher than average income, showing that investments in education are
paying off. Minnesotans have about 8.5 percent more in average income
per person than the rest of the country.
Fifty to 60 years ago, Minnesota's income
was less than the average nationally. "We're reaping returns on
investments in education and health care 50 years later," he said.
"Because we're educated and healthy, we're able to produce a lot,
which means our income grows.
Some Ninth District industries are
declining, while others are growing. Madden outlined trends in
industries in various parts of the Ninth District:
- The iron ore industry, located in northern Minnesota and the
Upper Peninsula in Michigan, is in decline. Iron ore demand has
fallen and mines are starting to shut down or reduce production.
Other types of metal deposits, such as copper, are being mined,
where the price from selling them is more than the cost of getting
them out of the mine.
- The only palladium platinum producer in the country is located
in Montana. There are also gold and copper producers there, so the
area is doing very well.
- Minnesota had decent agricultural yields this year, combined
with higher commodity prices because of the drought elsewhere in the
country. But now the drought has intensified in the Ninth District,
which is a concern for next year.
- Manufacturing is an important part of the economy, both
nationally and in the Ninth District, and contributes about 15
percent of output value-added. However, it consumes less than 10
percent of the workforce. Manufacturing jobs aren't leaving the
country; they're actually disappearing. If we can produce lots of
stuff with fewer inputs, then we need fewer inputs. Productivity
growth in the manufacturing sector is five percent per year.
Education technology is changing. Madden
discussed growth in education technology. If that technology allows
teachers to teach five percent more students every year, in five years
teachers could teach 25 percent or 30 percent more kids. Or,
presumably, we could spend 25 percent less teaching the same number of
kids. He said he didn't think that would actually happen, "not in
public education, anyway."
But market-based education has seen that
happen, he suggested. Khan Academy can put a video on YouTube and
millions of kids and adults can watch it and learn from it. Education
technology is changing and that can be replicated through many aspects
of the economy, "including for economists." When he started at the Fed
10 years ago, there were 2½ people doing what he does alone now. "I'm
doing more because I have technology at my fingertips and I can find
out quicker what's going on," he said.
Increases in productivity can free up people
to produce other things. Responding to a question about whether
increases in productivity mean we'll need fewer people to do the work,
Madden said economists say there's scarcity out there in providing the
unlimited wants people have. As an example, he noted that there are
now 3D bio printers that can print out cartilage or arteries. And the
cost of traditional 3D printers has come down to $1,000 to $1,500 per
printer. If one person can produce so much more, then other people
will be free to produce other things. We used to need 95 percent of
the population to produce our food and now it only takes a few
Early childhood education can increase
people's productivity throughout life. An interviewer asked how we
can provide the necessary education and training for constantly
changing jobs. Madden responded that there is a huge change in
education technology and that companies are embracing this new
technology to train their people. If the basic educational system
teaches people to learn quickly and to find information quickly, that
makes the technological advancement even more rapid.
"Really you need to start at a younger age,"
he commented. "There are huge private returns and public returns for
investing early in life, especially for at-risk kids that are three
years old and under. If we can hit them at that level, we can really
have them increase their productivity throughout life." He said it's
tough for kids to recover from serious damage done before they're two
Economies in both low tax states and high
tax states can do well. In response to a question about whether
Minnesota's tax rates are too high relative to other states, like
South Dakota, Madden said Minnesota is considered to be a high-tax,
high-service state, while South Dakota is considered to be a low-tax,
low-service state. Both economies are successful in terms of
increasing output and income and both are doing well. People can move
between states to where they think they're better off. Both Minnesota
and South Dakota can create jobs by meeting the two conditions
discussed earlier: the job must pay more than the reservation wage and
the benefits of hiring someone must outweigh the costs.
Gas tax should be much higher. An
interviewer commented that an advisory committee to Governor Mark
Dayton has recommended increasing the gas tax to 40 cents over next 20
years and adding half a percent to the sales tax to fund transit in
the metro area. Madden responded, "My personal belief is that the gas
tax is a lot lower than socially optimal. We should be taxing at a
lot, lot higher rate. Society would be better off with a lot higher
gas tax." If we increase the gas tax, there will be less pollution,
less congestion and less road use.
It's tough to determine how the public can
share in the windfalls from a public policy decision. An
interviewer asked if there is a way for the public to obtain part of
the capital gains from landowners whose land values increase markedly
because a freeway exchange or transit station is placed near their
property. Madden replied that any public policy decision has winners
and losers. It's tough to figure out the exact point where we could
hit the winners up for windfalls from that policy. They might have
bought the land in the belief that they would get benefits in the
Immigration benefits far exceed the costs.
In response to a question about the impact of the changing
demographics of Minnesota, Madden said the Ninth District's share of
the country's population is decreasing and the district is not that
culturally diverse. The country's population growth is happening in
the nonwhite populations. "Immigration has costs and benefits," he
said. "My personal belief is that the benefits far exceed the costs."
We would have millions more jobs if we brought in millions more
people, because there would be more people who need things. If we get
stuck in the old ways of doing things, we won't have as much
innovation as if we're exposed to new ideas. "Extra creativity in the
Letting economic changes happen allows
productivity gains and increases in the standard of living. In
response to a question, Madden pointed out that less and less of the
population is involved in agriculture and manufacturing, while natural
resources are seeing huge increases. Manufacturing was growing at a
fast pace for three years before it began to slow down this summer.
There have been huge contractions in real estate and construction,
which are still in recovery, but now picking up at a decent pace. Some
other sectors are into strong expansion.
We can see the changes going on, he
continued. One reason the U.S. is so successful is that we pretty much
let those changes happen. Other societies that don't want change fall
behind pretty quickly. In the U.S. we pretty much let winners win and
losers lose. As a result, we see huge productivity gains and huge
increases in our standard of living, even though there may be income
and wealth diversity, as well.
In response to a question about whether
income disparity will grow wider than it's been this last decade,
Madden replied that because we have a free system, we might over time
have income and wealth disparities. "If we restrict economic growth
and creative destruction (newly created things destroying previous
things), we will have less income disparity, but less income to
despair over," he said.
Whether the federal government should give
states money as an additional economic stimulus is a political
question. An interviewer asked Madden if he thought this would be
a good time for an additional financial stimulus by the federal
government giving states some money. Madden said he couldn't answer
the question, because it's a political question. He did say that
states and local governments "got clobbered" during the recession and
began cutting their budgets, because, unlike the federal government,
they need to balance their budgets. Government employment is down at
both the local and state levels. People are wondering how much
government services we can afford. But if lots of the services people
want aren't happening, then society would say, "let's pay more taxes."
In conclusion, Madden responded to a
question about fiscal vs. monetary policy by saying that the Federal
Reserve has two primary objectives regarding monetary policy: low,
stable prices and full employment. He said we're doing well on low and
stable prices overall, but we're not achieving full employment.