America’s economic crisis is hitting hard in Minnesota, a one-time model of a progressive and well run state that has lately become a byword for cultural and fiscal dysfunction. John Phelan, an economist at the Center for the American Experiment, joins the Overton Window Podcast to explain what is going wrong with the dollar and how Gopher State leaders are making the problem worse.

“We hear lots of misdiagnoses, and this leads to proposals for bad remedies, non-remedies, and remedies that aren't remedies but will make things worse,” says Phelan. “Very often what we find is that the issue is a supply-side question. So I think it’s worthwhile to kind of separate out a kind of maybe macro picture from the supply-side issues that we face. In the last few years has been a huge surge in inflation after a kind of four-decade period when inflation was quite subdued. And I believe a lot of that is down to the Federal Reserve printing money to finance the massive federal government spending during the COVID-19 pandemic. You've got to kind of separate that out. A lot of what people feel in terms of the affordability squeeze is that inflation and its ongoing effects.”

Instead of easing up economic pressures in other areas, leaders in Minnesota and other states respond with regulations that drive up prices, restricting supplies of housing, childcare, medical treatment, and energy. The response to these price hikes — providing assistance programs to help residents cope — only make the problem worse.

“If you dump money, purchasing power, via these subsidies into a market where supply is constricted, like housing, for example, then all you're going to do is actually push prices up,“ Phelan says. He points to the popular nonfiction work “Abundance“ by Ezra Klein and Derek Thompson as eveidence that some left-leaning liberals have begun to recognize the problem.

“I testified in the Minnesota State House Ways and Means Committee earlier this year,” he says. “I was talking about housing and exactly this issue, and as soon as I mentioned the book ‘Abundance,’ half the Democrats on the committee rolled their eyes and like, God, here he comes with that neoliberal claptrap again. So there's a kind of civil war on the left between the old-fashioned ‘let’s just throw more money at things’ side and a more sensible supply-side approach. That book should just have been called you know ‘Left-Wingers Discover Supply-Side economics.’”

The Center for the American Experiment has compared state policies to see how those lead to different results, but responses from politicians have been mixed at best.

“I mean, they're the people who’ve made it more expensive in the first place,” says Phelan. “The question for state lawmakers is not why a house in Minnesota is expensive now relative to 1995. The question is: Why is it more expensive in Minnesota than somewhere else? The Housing Affordability Institute did a really good study where they looked at what it would cost to build a house in Lake Elmo, Minnesota, which is just kind of just north of the Twin Cities. And then they looked at what it would cost to build exactly the same house in Hudson, Wisconsin, which is like 20 miles away across the St. Croix. They found that it’s something like a $48,000 difference. There's a huge difference between the construction costs of these two houses.

“Now what’s really interesting is I’ve gone in front of city councils and talked about this issue. And when I talk about these differences, I say that's the difference you have to explain. Everyone in America says housing is expensive, but the question for you, local policymaker, is why it is more expensive here than it is 20 miles across the state line in Wisconsin. And you get all these kinds of crazy answers. You’ll get some people who tell you lumber’s expensive. Well, they’re buying the same lumber in Hudson, Wisconsin, 20 miles away. They say labor’s expensive. Well, they’re drawing from the same labour pool. Hudson, Wisconsin is even in the Twin Cities metropolitican statistical area.”

Does the message get through?

“Once we knocked through all these crazy explanations, one of the council members said to me, well, you know, we have more green housing here, we have more green mandates, our houses are more environmentally friendly than they are in Hudson, Wisconsin,” Phelan says. “And I thought, well, there you go. Now we’ve finally got to it. We finally got to something. One of the reasons that affordable housing is so rare in Minnesota is because you people have made it rare. You people have effectively amputated the bottom of the supply curve with these taxes, fees and regulations that you pile on.”

Phelan discusses how other limits on supply, including certificate of need laws, zoning restrictions, and punishing taxes, drive up costs but still get support from both parties.

Listen to the full conversation on the Overton Window Podcast.

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