Metropolitan Institutions and Economic Performance: Is Minneapolis Saint Paul a Model?

CGG- St Paul (Minnesota)

Cynthia Ghorra-Gobin, Martine Azuelos

This article is based on the assumption that metropolitan institutions contribute to the economic performance of a city-region as well as to that of the state to which it belongs because of its concern for equity.  It is centered on the case study of Minneapolis Saint Paul in the state of Minnesota.

After a brief presentation of Minneapolis as a second city, the analysis will focus first on Minnesota and its economic performance since the end of the ‘Great Recession’ and second on the invention of the metropolitan institutions by the state.

I-Minneapolis as a Second City

In the language of urban studies it is becoming common to differentiate “superstar cities ” from “second cities ”. The first category refers to what people used to call “global cities” after Saskia Sassen, while the second includes cities which participate in the global economy but which do not have the power to control and command it.  The distinction between these two categories was largely used after Richard Florida during Amazon’s search for a city where to build a second headquarters.

The tech company announced in the summer 2017 that it wanted to expand its corporate presence and make its second headquarters ‘a full equal’ to Amazon’s existing home in Seattle (Washington).   And it set out some of the parameters that it wanted to follow: the city it would select must have a population of more than 1 million people, offer a “stable and business-friendly environment”, and be an “urban or suburban location with the potential to attract and retain strong technical talent.”

Amazon received a large number of proposals from cities in the United States and Canada and had a difficult time picking the best location.  Thus in January 2018, it released a list of metro areas being considered for its second HQ.  The list included superstar cities such as New York, Los Angeles, or Washington, D.C., and second cities such as Pittsburgh, Denver, Dallas and Columbus (Ohio).  Even though Amazon finally picked Crystal City in the Washington metropolitan area, urbanists and researchers came to realize that the world is not only made up of superstar cities.

Second cities are defined as cities which have around 400,000 inhabitants and are located in a metropolitan area of more than 1 million inhabitants.  Among those second cities one may think of Seattle (Washington), Portland (Oregon), San Diego (California), Pittsburgh (Pennsylvania), Minneapolis (Minnesota) in the USA, or Lyon, Toulouse, and Lille in France.

The interesting thing about these second cities is that some of them have gone through institutional changes along with economic and social metropolization processes.  Metropolitan institutions administering various programs have been set up by a metropolitan council.  This is the case of Minneapolis Saint Paul (Minnesota) which is not only known for its Mall of America but also perceived by social science researchers as one good example of a metropolitan government in the US.

II-The Economic Performance of Minnesota

Spatial heterogeneity of economic performance is a prominent feature of the United States economy, as illustrated by the experience of the ‘Great Recession’ of 2007-2009 and the recovery that has occurred since 2010.

Thus while the Plains region in the Midwest, in which Minnesota is located, was not spared by the Great Recession, it suffered less severely than other parts of the country.  More specifically, if the pace at which growth contracted in Minnesota in 2008-2009 was exactly the same (-1.8%) as the national average, the rise in unemployment was less severe in that state than nationally. And even if its unemployment rate remained lower than the national average from 2010 to 2017—a trend which appears as a long-term characteristic—the state nevertheless recorded slower than average yearly real economic growth (1.9% vs. 2.2% in the country as a whole).

Nationally, heterogeneity is also stronger within states than across states and regions, with divergence between metropolitan and non-metropolitan regions widening over time. Thus, while the Great Recession hit the Twin Cities harder than rural areas in the state, from 2010 to 2017 growth was slightly faster (2.1%) in MSP than in the whole of Minnesota (1.9%). The 0.2% difference may appear small, but if one takes into account the fact that 55% of the state’s population live in MSP, which accounts for over 62% of state employment, it reflects the greater economic dynamism of the Twin Cities region within the state.

How can the specific features of MSP metro area been accounted for?

Borrowing from the work of economists, historians and geographers in the past few decades, three sets of factors can be identified to account for the specific performance of MSP within Minnesota and within the United States: 1. Its industry mix and openness to globalization; 2. Its demographic and social structure; and 3. The role of metropolitan institutions impacting education, tax and fiscal policy, the labor market and the health care system.

1-The industry mix of the MSP economy

A region’s industry mix not only explains its dynamism but also its resilience to shocks. More particularly, a diversified economy can help reduce volatility in growth rates. The Twin Cities’ diversified industry mix is apparent in its industry clusters in such sectors as Health, Science, and Water Technology; Finance and Insurance; Information Technology; and Food Manufacturing and Wholesaling. Its Headquarters and Advanced Business Services cluster accounts for one in eight jobs in the metropolitan area, with 19 companies in the Fortune 500 list and Cargill, the nation’s largest privately-held company. This concentration is unique in the United States in a metro with a population of 3.5 million.

Openness to globalization is also one of MSP’s strengths. In addition to hosting the headquarters of global companies, it is a strong exporter of advanced business services, financial services, and high-tech manufactured goods. Although its main trade partner is Canada, trade with Mexico, Europe and Asia has increased in the past few decades. Its international airport, which is located within 10 miles of both downtown Minneapolis and Saint Paul is a Delta Airlines hub and the largest and busiest airport in the six-state Upper Midwest region. Close to the airport, the Mall of America, the largest shopping and entertainment complex in the United States, receives roughly 40 million visitors a year, and is the number one tourist destination in the Midwest.

2-Its demographic and social structure

Regional and local variations in demographic and social structure deeply impact economic conditions. Industries with high intensity of Science, Technology, Engineering and Math (STEM) occupations as well as research and development investments account for 7.2% of jobs in the MSP metro region, which has about 80 percent of the state’s computer and mathematical, legal, and business and financial occupations. The high concentration of employment in higher-skilled and higher-paying occupational groups translates into higher wage levels, which boosts consumption in the local economy.

Higher wage levels also explain why the poverty rate, which is lower than the national average (12.3%) in Minnesota (9.5%), is even lower in MSP (8.1%). Yet poverty is unevenly distributed among ethnic groups, with African, Latino, Asian and Native American communities—who have made Minnesota’s population more diverse in the past half century—harder hit than whites, and the districts where they are concentrated poorer than average.

The state and metro authorities are committed to fighting economic inequalities and making society more inclusive. Yet despite the redistribution implemented thanks to “fiscal equalization”, inequality has been widening in the past decade.

3- The role of State and metropolitan institutions

The influence of institutions on the long-run performance of economies has often been highlighted since Douglass North’s seminal contribution (1990). In the United States both formal and informal institutions create sub-national “rules of the game,” i.e. institutional environments which constitute the framework within which markets function, resulting in a diversity of economic “ecosystems,” as Minnesota illustrates.

While individualism largely prevails in the United States, the culture of Minnesota (informal institutions) is characterized by strong family ties and a sense of community. Whether this is grounded in the cold weather, the history of what was first a mining state, or the Scandinavian origins of many of the immigrants who peopled the state from the mid-nineteenth century on, “Minnesota Nice” is not wholly a thing of the past, as conveyed by the police chief character in the Fargo film and TV series.

MSP’s distinguishing formal economic institutions are the following:

  • A heavy tax burden. Minnesota is one of the 43 states to have its own income tax, and its top rate of income tax is higher than anywhere else apart from California, Maine, and Oregon, while its lowest income tax rate is higher than than the highest rate in 23 states. It also has the third highest rate of corporate taxation in the country.
  • An actively redistributive policy. Since 2000 Minnesota has experienced much stronger growth in transfer income—g., SocialSecurity, Medicaid, Medicare, welfare, and other government program distributions—than in other categories, compared to the nation as a whole. While labor income (wages) increased by 8.2% in real terms in Minnesota between 2000 and 2017, transfer income increased by 69.7%, well ahead of the national rate of 59.9%.
  • Labor laws that provide greater protections to employees than federal law, including pregnancy accommodation rights, a higher minimum wage, and health care continuation coverage obligations for smaller employers.
  • An excellent public education system. Minnesota has the highest percentage of adults with a high school degree (93%) in the United States, and ranks ninth for college attainment. MNS boasts a highly educated workforce and its Twin Cities campus is by far the largest in the University of Minnesota system, with a total enrollment of 51,853 students.

III- The Invention of the Metropolitan Council

In Minnesota, the cities of Minneapolis (420,000 inhabitants) and Saint Paul (304,000 inhabitants) represent the core area of a metropolitan territory which includes seven counties (Anoka, Carver, Dakota, Hennepin, Ramsey, Scott and Washington).  The Metropolitan Council serves 3 million of inhabitants, which represents 60% of the population of Minnesota.

In the 1960s urbanization around the two cities created major challenges such as inadequately treated wastewater, a failing privately-owned bus company, development on sensitive natural areas, and fiscal disparities that left some communities unable to provide essential services and intensified competition for development.  At the urging of civic and business leaders as well as some local governments, the Minnesota Legislature created the Metropolitan Council to deal with regional issues that transcended local boundaries (1967).

As the Republican Governor Harold LeVander then said: “This Council was created to do a job which has proved too big for any single community”.

As mentioned on the website of the Metropolitan Council “50 years of partnership give our region a competitive advantage”.

The Council was directed to plan for the orderly economic development of the seven-county metro area, and to coordinate the delivery of services that couldn’t be provided by any one city or county.  And between 1967 and 1974, additional legislation created the Metropolitan Transit Commission (MTC); a regional sewer system; a unique tax-base sharing system; the regional park system and social housing.

When the Legislature created the MTC in 1967, the agency acquired an aging and declining bus system and bought 500 new buses.  Over time, it has grown into the modern, efficient Metro Transit system providing an extensive network of convenient and reliable buses and light-rail vehicles throughout the region.  In 2016, Metro Transit was honored as Transit System of the Year by the American Public Transportation Association.  Metro Transit’s ridership topped 82.6 million rides in 2016.

In recent years the Council’s policies and strategies in support of transit-oriented development have contributed to new additional investments in housing and businesses along transit routes and increasing regional competitiveness.

In 1969, the wastewater systems operated by the Minneapolis Saint Paul Sanitary District and suburban communities were inadequate to meet the needs of developing suburbs.  Groundwater was being contaminated by failing septic systems, and inadequately-treated wastewater was discharged into the Mississippi River and local lakes.  The Legislature created the Metropolitan Sewer Board to develop a modern regional wastewater collection and treatment system.

The Legislature created the Regional Parks system in 1974, encompassing city and county parks, and committing $40 million in bonds to acquire land to develop parks.  At the time many of the proposed park sites were being eyed for other purposes, such as shopping malls or landfills.  The Regional Park System now includes 54 parks and park reserves.

The Metropolitan Land Planning Act of 1976 directed the Council to prepare a long-range development plan for the region every ten years, as well as “system plans” for transportation, wastewater and water.  The law also requires all local governments to adopt their own comprehensive plans consistent with the regional plan, and to share their plans with neighboring communities to facilitate regional cooperation.

In 1995, the Legislature created the Livable Communities Act (LCA) grant program, to assist communities in implementing their local plans. These funds help communities throughout the region clean contaminated lands for redevelopment, improve transportation options, expand affordable housing and develop thriving neighborhoods.

Concerning social housing and the federal Section 8 voucher program (1974), the Legislature directed the Council to administer the rent subsidy program for smaller suburban communities. In its first year, Metro HRA provided 550 vouchers in 13 communities.  Today it administers 6,502 vouchers in 96 communities, winning the highest rankings for efficient program operations for 13 straight years.

In 2015, the Council adopted a new Housing Policy Plan, the first in nearly 30 years, to assist local communities plan for and create housing options that give people of all incomes and life stages viable choices for safe, stable and affordable homes.

One of the most important inventions resulted from the law of 1971 which established the region’s unique tax-base sharing system.  The Council then redistributes a certain amount of the local taxes among the different municipalities.  Thus all the inhabitants of MSP benefit from the taxes collected by Bloomington for the Mall of America.

Does Minneapolis Saint Paul represent a model for second cities?

The Twin Cities’ ‘institutional thickness’ largely explains the metropolitan area’s distinctive features within the United States and within Minnesota as well as its economic performance during and after the ‘Great Recession’.

It largely confirms the theory of Douglass North (co-recipient of the Nobel Prize in economics in 1993) who argued that neoclassical economy overlooks the institutions that create efficient markets with low monitoring and transaction costs.

MSP (and Minnesota) represent a perfect illustration of his theory and its metropolitan institutions may serve as model for other second cities.

References

Martine Azuelos, « A U.S. National Model of Capitalism? Lessons from the Great Recession » in Laurence Cossu-Beaumont, Jacques-Henri Coste et Jean-Baptiste Velut (eds.), The Crisis and Renewal of American Capitalism. A Civilizational-economic Approach (New York, Routledge, 2016), p.119-145.

Economic Innovation Group, The New Map of Economic Growth and Recovery, 2016.

Cynthia Ghorra-Gobin, « Inscription territoriale d’un équipement et légitimité politique à l’échelle de la région urbaine : le cas du ‘Mall of America’ », Flux N°50, 2002, p.44-53.

Douglass North, Institutions, Institutional Change and Economic Performance, Cambridge University Press, 1990.

Myron Orfield and Tom F. Luce Jr., Region: Planning the Future of Twin Cities, University of Minnesota Press, 2010.


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