Minnesota Shows Washington What Might Happen

The budget squabble between the governor and his opposition in Minnesota ended with many agencies shutting down. It’s a fatal signal for Washington.

They cheered as if they had just won the World Cup finals for the United States. They’ve been standing on Lafayette Road for three hours listening to the cheers, applause and horn-blowing coming from passing cars. Bus drivers raise their fists in victory as they drive by, and fire trucks sound their sirens in salute. “The support is huge,” yells Steven Kuehl over the din. He and his friends are only holding a couple of placards above their heads. One reads, “Tax the Rich!” and the other makes the plea, “We Want to Work!” They have been demonstrating in the state capital, St. Paul, almost constantly for several weeks, demanding that the government finally negotiate. They know that the whole country has its eyes on the absurd budget fight in the usually peaceful state of Minnesota. And now President Obama can get a preview of what may be coming soon to Washington.

Minnesota has been bankrupt since July 1. The budget has a $1.4 billion deficit. Numerous agencies have since closed their doors, and two-thirds of the government workforce has been furloughed without pay. Alcohol and driver’s licenses are no longer being issued, lottery tickets are not being sold, and all work on state construction sites has ceased. Even national parks and racetracks are closed to the public. Could the United States also go bankrupt?

“The state treasury will pay a big price for this shutdown,” says State Economist Tom Stinson. “The lottery took in around $10 million per month and the parks took in another $4 million.”* Since the employees who collected unpaid back taxes are now also idle, that costs the state another $50 million. In addition to that, revenues from income and sales taxes have decreased noticeably. The fact that Gov. Mark Dayton and several in his cabinet have voluntarily foregone their normal paychecks is a largely symbolic gesture, hardly making any practical difference.

Another thing adding to resentment on the streets of Minneapolis and St. Paul is the growing scarcity of beer and liquor. Since bar licenses must be renewed each year, and those offices are now closed, bars have no option but to close their doors. Even brewing giant MillerCoors can no longer sell any beer — their sales license has expired.

“The damage to our reputation is worse than the financial damage,” said Stinson. “10 years ago, Minnesota was considered economically healthy and financially stable. The people here all have German or Scandinavian roots. We were known for the quality of our education systems and high productivity. But these recent events may well deter even private investors.”*

Since the politicians could find no way out of the state’s misery, a six-person panel of experts was formed months ago. “We make specific recommendations for spending cuts and moderately higher taxes for the top income brackets,” says Jay Kiedrowski, who served as Minnesota’s commissioner of Finance in the 1980s and later joined the Wells Fargo banking group. “Unfortunately, Republicans refused to accept our recommendations,” Kiedrowski added.*

Kiedrowski says that conservatives are mainly to blame for the problem, both in St. Paul as well as in Washington. “The tea partiers aren’t interested in saving the state. They are ideologues and fundamentalists like Michele Bachmann. Higher taxes are just plain sinful to them. The Minnesota shutdown is exactly what they wanted: Stop all spending and lay off the state employees.”*

It’s exactly that attitude that drives 59-year-old Steven Kuehl into a rage. He is one of the organizers of the daily St. Paul demonstrations. He wears a T-shirt emblazoned with the words “Give Blood — Save Lives.” He grimly says that the slogan can be taken two ways, applying to the wealthy and their money. Kuehl has worked for the transit authority for years, but now that the agency is shut down, he has ample time to demonstrate. He vows they will hold out until the politicians finally reach an agreement, regardless of how long that may take. That was Wednesday evening. 24 hours later, Dayton announced a tentative agreement with the opposition. Republicans in the state house who had rejected any compromises up to that point did, in fact, feel the public pressure and gave way. “None of the parties is really happy with this deal,” said Dayton, “but that’s the way it is with compromises.”*

23,000 civil servants, 16,000 construction workers and a few dozen bar owners breathed a sigh of relief. They all want to finally get back to work and hardly any of them had any sympathy for the conservatives’ total blockade. Dayton hopes to get a deal with the Republicans through the state assembly within a few days and promised they will work around the clock so the lights can be turned back on, and everyone can get back to work — provided the compromise holds, of course.

President Obama, who has been trying in vain to get a majority of conservative representatives to compromise, can hardly use the Minnesota agreement as an example. What Dayton is trying to sell as a “compromise” is actually nothing more than a ploy to gain time and a triumph for the Republicans who saw their main demand met: No new taxes. Not one red cent for anyone! But at the same time, neither will any social services be cut. Instead, they’ll get themselves out of the problem by using bookkeeping tricks. Factions on both sides have already announced they intend to oppose the deal.

Independent budget experts have already warned of dramatic pressure in the coming years. Minnesota intends to sell $700 million worth of bonds to investors to be funded by the tobacco industry. The cigarette companies have to contribute around $180 million annually to a state fund for medical treatments. Since these will be interest-bearing bonds, a significant portion of the revenues they generate will be passed on to investors. Plus, the $700 million that won’t be given to the schools this year will have to be funded in next year’s budget. In the United States, this is called “kicking the can down the road.” Postponed, not abandoned.

Up to now, President Obama has rigorously opposed such gimmicks, but the fudging in Minnesota sends a deadly signal: Republicans are at the helm. With their majority in the House of Representatives they can string the president along as they see fit. They don’t need to compromise because time is on their side.

And time is getting damnably short, for Obama and for the United States. Just like their colleagues in Minnesota, the Republicans in Washington are demanding deeper cuts in social programs. Like Dayton, Obama is prepared to make concessions, and also like Dayton, he is demanding significant tax increases on the wealthy. Finally, Dayton was elected governor after campaigning on his intention to raise taxes on the top 2 percent of Minnesota earners. It’s a promise he has now broken.

And just as in Washington, where former President George W. Bush bequeathed his successor a mountain of debt, the Minnesota misery also goes back to the preceding administration. Kiedrowski says Republicans governed alone for eight years, successfully pushing their anti-tax policies. With the tea party movement successes in the 2010 elections, the situation has been exacerbated. Minnesotans are conservative and place a good deal of value on freedom, he says, but this has gone over the top, and that’s why they elected Dayton governor.

The stalemate has thus been cast in concrete. The two parties are blocking one another, pressing problems are being ignored, and new elections are not permitted. Kiedrowski says that Dayton doesn’t have to run again until 2014, but Obama is running already next year. For Obama the situation is now all or nothing.

Political analysts are united in saying that Dayton didn’t do Obama any favors with his rotten compromise. Professor Stinson at the University of Minnesota warns that he thinks the Washington negotiations may well collapse. That will cause interest rates to rise, growth will be seriously impeded, and markets will be adversely affected. The insurance rates for credit defaults have already started to rise, he says.

Kiedrowski says the pain threshold has now been reached. As he remarked, if the lights go out in St. Paul, it’s a regional problem, but if the United States is no longer able to pay its bills, that will reverberate through the entire global economy. The Republicans, he says, really shouldn’t push things that far.

*Editor’s Note: These quotes, while accurately translated, could not be verified.