Critics question wisdom of a Minnesota walleye and other bailouts

First turkey farmers. Now walleye resorts.

Gov. Mark Dayton's insistence on a bailout for Lake Mille Lacs resort owners hurt by the state shutting down walleye season is the latest effort by the governor to help an industry hit by unforeseen disaster or hardship.

Months after Dayton and the Legislature approved special funding for turkey farmers decimated by avian flu, he's back making an expansive argument for aiding businesses that are seen as bedrock to the state's economy or central to Minnesota's character.

"Government exists to serve the people and when people are, through no fault of their own especially, put in dire straits, that's when our government needs to be as responsive as it can be," said Dayton, who calls the Mille Lacs walleye crisis a cut-and-dry issue of helping people in need.

Dayton has called for a special legislative session to approve a package of no-interest loans with deferred payments for two years, property tax abatements and more state money spent on marketing the region. A working group comprising legislators, administration officials and Mille Lacs residents will meet again Thursday to discuss the issue.

Even as the state is sitting on a giant budget surplus, some legislators and economists say the state should be wary about bailing out favored industries.

"I think the issue is, if we have a special session for this group of businesses, will we for others?" said Sen. David Tomassoni, DFL-Chisholm, a co-chairman of the walleye working group and whose district recently suffered hundreds of mining layoffs.

"There are unintended consequences to protecting companies from bad outcomes," said Art Rolnick, a senior fellow at the Humphrey School of Public Affairs.

Back in 1998, Rolnick, then the director of research for the Minneapolis Federal Reserve Bank, wrote a paper in which he argued "too much government protection encourages banks, often the largest in a country, to shift funds into high-risk projects …" It was a prescient warning: Many analysts say the 2008 financial crisis that crashed the nation's economy was caused by explicit and implicit protections afforded to banks that were considered "too big to fail," which led to reckless behavior requiring a massive government bailout.

In Rolnick's view, Dayton's plan to help Mille Lacs resorts hit by a walleye decline are, in a much smaller way, like protections for those big banks.

How's that again?

The scale may be different, but the idea is the same: With state government promising to help the walleye resorts, those companies are being offered a cushion from business risk, which could cause them to take on more risk or fail to adapt to the changing market. Plus, businesses in other sectors might rightfully assume that if they are hit with an unfortunate event, they will also receive government help, encouraging them to take on too much risk.

The National Flood Insurance Program was enacted to help homeowners buy affordable flood insurance. It did, but it also encouraged developers and consumers to build and rebuild in flood plains or areas prone to natural disasters. Losses from a string of disasters, like repeated hurricanes, sent the program into a fiscal tailspin in recent years.

In the case of the walleye tourism industry, the argument made by Rolnick and others can seem unforgiving: Businesses must be free to fail. Otherwise, an economy's resources will be wasted on firms propped up by government instead of more productive endeavors.

"It is a concern when you are backing or providing subsidies to businesses in trouble. We do have to be careful," said Myron Frans, the commissioner of Minnesota Management and Budget and a member of the working group. But Frans went on to say there are exceptions and that the walleye shortage qualifies. "We think this rises to that level, akin to a natural disaster," he said.

Frans likened the walleye situation to turkey farmers whose flocks were wiped out by the threat of avian flu. The Legislature gave the Minnesota Rural Finance Authority $10 million for cheap loans to help poultry producers replace commercial flocks, make building improvements and cover revenue losses. Administration officials are talking about spending as much as $20 million on the walleye relief.

Legislators of both parties, from House Minority Leader Paul Thissen, DFL-Minneapolis, to Rep. Pat Garofalo, R-Farmington, have said the state should consider helping the tourism businesses because they are unwitting victims of state action. Specifically, the state Department of Natural Resources declared an end to the Mille Lacs walleye season last week once anglers hit the walleye quota for the season of 28,600 fish.

"This weather really affected my business this year. Is that a natural disaster? I think you have to be careful with that," Rolnick said.