March 12, 2023
It began with the abolition of the state sales tax on groceries.
Then came a blanket reduction in the state’s general sales tax rate.
Then I started hearing about property tax refunds to homeowners.
And then I heard about Neel Kashkari.
The President of the Federal Reserve Bank of Minneapolis recently spoke at our first CEO Summit. While it was a timely conversation on many levels, his comments on state budgets in our region sounded particularly relevant in the context of what was being discussed simultaneously in our State Capitol.
“Government budgets in our region are generally very well stocked,” Kashkari said.
For example, his home state of Minnesota has a state budget of about $50 billion and a “monster surplus” of $17 billion, he said.
Other states are in similar situations, he continued, routinely looking at 30 percent surpluses. In South Dakota it’s over $400 million.
“On one hand, that’s great. The state governments are fine. Municipalities are doing well,” he said.
“Some of these states are talking about returning that money to taxpayers. As a taxpayer, that sounds pretty good to me. But as a monetary policymaker, that sounds like more stimulus.”
And that’s how, in large part, we got to this level of inflation — and the associated price increases — in the first place.
Do you remember the pandemic-related government controls? People were spending them, the supply chain was glued together, and suddenly prices went up.
Now that we’re all paying more, it’s tempting for elected officials to try to ease the pain.
But does it?
“If that puts more money in people’s pockets to go out and spend on plane tickets and food and buy things, again it’s hard to say that’s bad, but it feels like more incentive,” Kashkari said. “And it gives me pause and says there may be more impetus to come, even if it doesn’t come from the federal government.”
I do not claim to follow closely the day-to-day drama that can unfold during the legislature. But every time I heard talk about returning money to taxpayers, Kashkari’s words echoed in my head.
Now going to the governor’s desk for final approval, legislation that would cut the overall sales tax rate from 4.5 percent to 4.2 percent by 2027.
Honestly, apart from trying to find some political arguments and undoing some sort of bizarre approach to justifying internet sales taxation, I don’t get the reasoning.
Inflationary pressure on prices is a problem that money cannot solve. Conversely, it is a problem caused by excess money.
The harsh truth is that there will be some pain to be endured as the Federal Reserve tries to keep inflation under its 2 percent target. Consumers will start to cut back on spending. There will be job losses. Wages are not going up anytime soon.
These things have to happen because the alternative is actually worse. And as Kashkari noted, “Once the central bank has caused a recession by raising interest rates, the recovery can usually be very quick.”
In South Dakota, as in general, the economic downturn is unlikely to be as severe.
“Basically, the economy of Sioux Falls is booming. Of course there are challenges, but overall business is very good in this community,” said Kashkari.
In short, we don’t need a token tax cut. We must spend—or save—wisely our surplus to address today’s challenges and position ourselves for tomorrow’s challenges.
Ask almost any business leader in this community what the most pressing challenge is today, and the answer will likely be the same as it was three or 30 years ago: workforce.
While the nation has acute issues related to the workforce — from people dying during the pandemic to people retiring early — in Sioux Falls, “you have a structural problem,” Kashkari told us. “The long-term structural problems that monetary policy can’t do anything about.”
Another problem that money cannot solve.
In advanced economies, Kashkari said, people are having fewer children. This is a problem for the workforce and a problem for the future consumer base.
“The only real solution to this … the only answer is immigration. This is a structural issue that we need to address as a country, a sensible immigration policy that meets the needs of our economy.”
It’s not a political issue, he continued.
“It’s just math.”
I’ve seen some promising examples of South Dakota companies trying to both use temporary work visas and reach out to new Americans to meet labor needs. But there must be many more of them and I haven’t felt much desire to promote it in this state. However, we could use public money to offset the cost of training or upskilling workers in those in-demand jobs or new technologies.
One of the most interesting insights also came with the final question Kashkari answered at our summit – about the need to improve access to childcare.
“This affects the labor market because it affects people’s ability to work, but it also affects our future workforce,” he said. “The more educated our young people are, the more productive our economy will be. This results in productivity. It’s hugely important.”
Kashkari then compared the challenges of funding childcare to agriculture, which almost every country subsidizes.
“Governments want low prices for consumers and high prices for farmers. These two things are in conflict, and the only way to achieve both is through government subsidies,” he said.
“Now look at childcare. If we want decent wages for childcare workers and affordability for families, these two things are at odds. And so, ultimately, as a country, we have to decide: is this something we prioritize or not? There is no way to balance these two things without some form of government support. … This is a fundamental tension that cannot be addressed in any other way.”
A study by the Sioux Falls Childcare Collaborative last year identified a more than $600 million gap in childcare affordability. Whether that’s the “right” figure could certainly be further analyzed, but Kashkari’s point is hard to dispute: Competitive wages for childcare workers and families’ ability to pay them are at odds. And “helping all our citizens participate in the economy” seems an appropriate role for government.
It’s a problem that money could solve.
In the discussion about reducing the sales tax from 4.5 percent to 4.2 percent, it was reported that 0.3 percent of the statewide sales tax brings in more than $100 million. Think about it, and maybe even consider a slight increase rather than a reduction in the rate, and how a public-private partnership could help close this childcare gap. Think about how South Dakota might try an approach that uses a combination of state, federal, and private dollars to do exactly what Kashkari mentioned.
And maybe it’s also about abolishing sales tax on groceries. I understand this moral argument. But the broader reality is that in places with growing populations, sales tax is generally higher. When I return to my hometown in Ohio, I don’t pay sales tax on groceries, but I do pay a general sales tax of 8 percent, of which 5.75 percent goes to the state. Population growth alone is not sufficient to finance the corresponding growth costs for the state. But much like controlling inflation, the alternative – not to grow – is worse.
It’s undoubtedly a complex environment to navigate. But as I listened to this appointed official in charge of monetary policy, I realized that it might help if the elected officials in charge of fiscal policy thought a little more about the problems that money can and cannot solve .
Minneapolis Fed President discusses inflation and economic conditions at the SiouxFalls.Business CEO Summit
