The Relentless Mathematics of an Aging Society

Governor Canute and the Tides of Tax Revenue

Yesterday, I introduced into the discussion the idea that Minnesota Governor Mark Dayton’s new proposed “post-modern” budget floats unmoored to the state’s underlying demographic reality.

His budget has been praised in all the expected precincts.  “Dayton's budget is big, but balanced,” concludes the headline in a recent piece on the Minneapolis Star Tribune Opinion page.[1]  Big it is, as the budget seeks raise an additional $2.1 billion in revenue.  Not everyone agrees with this approach, though.

At the budget’s unveiling, the Governor attempted a preemptive strike on his critics.  Minnesota Public Radio quoted Dayton as saying,

"Everybody who's not paying taxes or is not paying their fair share of taxes and is being asked to pay more or start paying taxes--'it's devastating, it's ruinous, everybody's going to leave the state,'" Dayton said. "I've heard this for 30 years. You've got to tax somebody. So are we going to tax just the few, the middle-income taxpayer and families, or are we going to ask everybody--businesses and high-income earners as well as everyone else--to pay a fair share?"[2]

Sorry Governor, it’s not the “greedy rich” who are telling you that your plan is ruinous:  it’s the relentless mathematics of an aging society.

All of the Blue Ribbon Panels and éminences grise in the world have been busily solving the problems of the 1980s.  No a soul has developed a solution for the 2010s.

It’s sad but true that Bismarckian-style welfare states in aging societies are most in need of higher tax revenues at the very moment they are least equipped to generate them.  To have made such a scheme work, you needed to have followed the advice of Joseph from Genesis 41 and put aside some from the seven years of plenty to tide us over during the seven years of famine.  Everyone knows that Al Gore’s Social Security lockbox never really existed.  Speaking of Social Security, the program began paying out more than it takes in back in 2010, years ahead of schedule.

No government would have had discipline to set aside enough surplus--during the years our society was young--to have available for payout during the golden years of the baby boom.  Even less likely would be a government having the discipline not to touch the reserves during intervening years of economic recession.

I’m sure that someone will look at the Governor’s budget, divide his number by the state’s GDP, and declare that we are still under-taxed compared to some past year.  Truth be told, Minnesota has never had a society as old as today’s, with a median age above 37, certainly not at a time that the economy has been this fragile.  It’s hard to imagine that we will be able to lift the numerator by $2.1 billion, without doing serious damage to the denominator.

We are embarking on an experiment never before attempted.  We are trying to raise government’s share of the economy within a middle-aged society.  California has tried, for the past decade or so, to solve each budget crisis by dutifully adopting a “balanced” solution.  Sure enough, the new spending occurs with 100 percent certainty.  But the new revenue?  It never arrives as expected. 

And so it will be in Minnesota.  The expected new revenues will disappear into an early retirement here, a business not opened there, a planned expansion that happens instead in Wisconsin.  Those aspiring to join the rich will discover their aspirations are better rewarded in Texas, Florida or somewhere else.  Those snowbirds who carefully schedule fewer than 182 days of in-state time will see it more convenient to let that number drift toward zero. 

With a median age of 37.4 in Minnesota, it’s been left too late to try more revenue as the cure for the state’s budget ills.  What we needed this week was bold thinking on entitlement reform and government redesign.

Bottom line, Governor Dayton, you can sign a bill raising revenue by $2.1 billion, but the economy, like King Canute and the tides, may not obey.

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[1] Kiedrowski, Jay.  “Dayton’s budget is big—but balanced,” Minneapolis Star Tribune, January 24, 2013, p. A-ll.

[2] “Dayton's budget plan includes higher taxes, spending,” Minnesota Public Radio, January 22, 2013.  See http://minnesota.publicradio.org/display/web/2013/01/22/politics/dayton-releases-minnesota-state-budget-plan