Categories
Economy Research Tax and Budget

Reform This! Coherent Tax Strategies for New Mexico

Executive Summary
The report begins with the premise that tax reform ought to remove faults and defects that impede our prosperity. Given that premise, three major faults and defects now exist with New Mexico’s tax system. The report documents these three faults and defects and assesses where we are now in correcting them.
Problem One: Excessive Government Spending
The first major fault and defect is overspending. Spending drives the need for tax revenue. Since spending to too high, taxes are too high. The report documents specifically how smaller, less intrusive government will increase prosperity.
The bias toward excessive spending is likely to undermine the only growth-oriented piece of legislation yet passed-the five-year phase-in of reductions in income tax rates. Without fiscal discipline, it is all but inevitable that these cuts will be rescinded; or they will be replaced by other tax increases.
One way to control spending is to constitutionally prevent the legislature from excessive spending. New Mexico should copy the good limits that Colorado enacted over 10 years ago.
Problem Two: Gross Receipts Tax on Services
The second major fault and defect is our gross receipts tax. The main problem is that New Mexico taxes services and other states do not, putting service producing businesses at a gross disadvantage compared to other states. Goods producing businesses are also harmed by this tax, since many of them must procure taxed services (legal, accounting, roof repair and so on) as part of their business activity. These taxes raise their costs compared to comparable businesses in other states. Many adjust away from New Mexico as a result.
We have many options to improve the gross receipts tax situation. We can reduce the overall statewide rate of tax. Or we can reduce the rate of tax on services. Either option would greatly improve New Mexico’s economy by making our tax structure much more friendly compared to other states.
Problem Three: Ineffectiveness of Welfare Programs
The third fault and defect is the wishful thinking that our tax-transfer programs actually help the poor. The reality is that these programs are counterproductive. Our welfare system is an abomination. While the overall tax-transfer system is progressive, the poor actually suffer from effective marginal tax rates of 50 percent on earned income. The report clearly documents that in its assessment of the bigger picture of federal and state tax and transfer programs in toto. In fact, perhaps the biggest contribution of the report is that it brings overall welfare incentives into the light of day.
Since incentives faced by the poor are all wrong and conventional wisdom about taxes and transfers is all wrong, the usual proposals purported to help the poor (higher taxes on the “rich” to fund additional transfers to the “poor”) amount to wishful thinking. What we need to do is lower effective tax margins at all levels of earned income. Medicaid reform would be a good place to start.
Prospects for Reform Now Are Dim
Unfortunately we now seem poised to make things worse under the guise of “reform.” Rather than providing for “maximum economic development benefits,” which was the charter of the recent “Blue Ribbon Tax Reform Commission,” most of the “reform” proposals will do just the opposite. Moreover, nothing is being done to address the three problems documented in this report “Tax reform” has become code for net tax increases.
We need to change our mindset about the proper scope and funding of government in New Mexico. Until we do, we will continue to be ranked near the bottom for everything good and near the top for everything bad.
Click here to download the entire report in PDF format.
Categories
Economy Energy and Environment

Economic Aspects of Water in New Mexico

The water crisis in New Mexico is overblown. We actually have a reasonably lively water market, and it is superior to those in most states. Professor Micha Gisser discusses the development of our water rights, impediments to improving them and ways we might reduce those impediments. Micha Gisser is senior fellow at the Rio Grande Foundation and Professor Emeritus of Economics at University of New Mexico. He has written extensively on energy and natural resource economics.

a. The Water Market in New Mexico

It is unfortunate that during the drought we suffer from inordinate attention from politicians and laymen given to a “water crisis” that does not exist. In what follows I attempt to first show that we have a sound water system in New Mexico which is based on water markets in which private water rights are traded, and, second, to shed light on some of our problems that are basically minor.

New Mexico has superior water rights when compared to all other states in the Southwest United States. During most of the 20th century, farmers, manufacturers, miners and municipalities have traded thousands of water rights in a lively market. Economic growth will undoubtedly intensify the future demand for water. Since water is a scarce resource, the “bad” news is that with a relatively fixed water supply facing New Mexico, water prices have only one way to go-up. The “good” news is that users can easily incorporate the trend of rising water prices in their benefit-cost calculations and adjust accordingly. While water is scarce as indicated by its rising price, there is no way government could legislate away the scarcity.
The prior appropriation doctrine was adopted by New Mexico when the state enacted the Surface-Water Code in 1907. The Surface-Water Code permits an appropriator to sell his surface-water rights, quantified by consumptive use, in whole or in part, and apart from his land, to any user provided the use is not detrimental to existing water rights in the stream. For example, a user upstream may attempt to purchase water rights from a user downstream. Such a transaction may be detrimental to a third user located between the two users. Twenty four years later, in 1931, the legislature of New Mexico enacted the New Mexico Underground Water Law, which adapted the state’s surface-water law to groundwater. The groundwater law restricts users by imposing an annual aggregate consumptive water use. If the aquifer is fully appropriated, potential users may only acquire water rights by purchasing existing rights. The State Engineer has jurisdiction over all surface waters and groundwater in declared underground basins. In New Mexico, an appropriator desiring to sell a water right must make formal application to the State Engineer. The State Engineer approves the application for transfer provided it is not a detriment to existing rights. Consumptive use is the measure of the transferable right, and hence both diversion and return flows are closely monitored by the State Engineer. For example, A, with a return-flow-coefficient of 0.5 can sell B with a return-flow-coefficient of 0.75, fifty acre feet of consumptive use according to the following rule:

100 acre-feet(1 – 0.5) = 200acre-feet(1 – 0.75)

Implying that A decreases his diversion by 100 acre feet, and B increases her diversion by 200 acre feet. Interestingly, basing water rights on consumptive use is efficient from the standpoint of economic theory. Users are guided by the price of water, which indicates its scarcity. When they voluntarily exchange rights in the market, water tends to flow towards the highest value use. This promotes conservation and economical use of water.

b. Adjudication

Adjudication is a legal process of determining the relative priority dates of water rights, and their quantification. Seniority gives the user a better priority. Quantification is an on going process, mainly because it is based on the farm practices of the day. For example, in the late 1940s and early 1950s, in the Ogallala, farm land was adjudicated consumptive-use water rights at a rate of 2.5 acre feet per acre and a return-flow coefficient of 1/6. Later, the State Engineer raised the adjudicated consumptive use to 3 acre feet per acre and the return-flow coefficient to 1/3. The adjudication of Pueblos’ water rights is another relevant illustration: In the wake of the New Mexico v. Aamodt (1976), the Tenth Court of Appeals speculated that, on one hand, the United States gave the Pueblos a quitclaim deed to lands recognized by the Treaty of Guadalupe Hidalgo, but, on the other hand, that the Pueblos may have reserved Winters rights. Either way, the Pueblos probably have the most senior rights in New Mexico. Since on the issue of quantification the court failed to provide any clear answer, the Pueblos filed their claims at various district courts, and the adjudication cases are still pending. Obviously there is a backlog of adjudication cases waiting their turn in the district courts. Our courts are over loaded with a backlog of water cases, and they could use additional judges, mediators and clerks. But a Water Court should be created only if a further study could demonstrate that a Water Court is the best way to handle the current backlog.

c. Domestic Wells

Owners of existing domestic wells pump water whose legality derives from a permit issued by the State Engineer. In the past, this procedure was justified by the smallness of the fraction of domestic wells in total water depletion. With the rapid economic growth leading to intensification in the demand for water, owners of domestic wells tend to treat water as a free good. They should be treated like all other users of the scarce water in New Mexico. Owners of existing domestic wells should be assigned water rights based on past use, say five-years average, so that they incorporate its price into their personal calculus of how much to use, trade or conserve.
The water law should also be amended to require persons who intend to become owners of domestic wells to purchase existing water rights from other users, subject to the rules and regulations as promulgated by the State Engineer. The water law should be amended to require that all owners install in their domestic wells water meters acceptable to the State Engineer, for the purpose of monitoring their annual use.

d. Use it or Lose it

The current “use it or lose it” provision in New Mexico’s water law doe not make any economic sense, because it leads to wastefulness, and it should be eliminated. An owner of water rights who for some economic reason cannot use his or her water today, but expects to resume using it in the future, should be allowed to maintain ownership. He or she should be able to either rent the water to other users, or simply curtail using it in the short run and resume using it whenever he or she pleases. The idea of “water banks” is welcome but may not always work: As an illustration, it will work if by reducing the pumping of groundwater by 100 acre feet, the associated aquifer would be enriched by the same amount (adjusted by consumptive use consideration). It will not work in the case of surface-water, unless the owner has access to a reservoir, like Albuquerque.

e. Relationships With Contiguous States and Mexico

I. Background Information. In New Mexico water rights are well defined based on consumptive use, and are traded efficiently in a lively market. Unfortunately, however, The market for water, however, stops at the border. Contiguous states have different water laws, and their water rights are defined differently. Private water rights are traded neither between Mexicans and New Mexicans, nor among users in New Mexico and users in the contiguous states. The surface water of the two major international rivers, the Rio Grande and the Colorado River are apportioned by treaties. In 1906, the U.S. and Mexico signed a treaty that committed the U.S. To deliver to Mexico 60,000 acre-feet annually from the Elephant Butte Dam. The Elephant Butte Reservoir was constructed at the time for storage and regulation of the Rio Grande so that the terms of the treaty could be met. In 1944 the two countries entered another treaty that (a) guarantees to Mexico 1,500,000 acre-feet per annum from the Colorado River and (b) apportions equally between the two countries the surface waters of the Rio Grande between Fort Quitman and the Gulf of Mexico.

Surface water is apportioned among states within the U.S. by compacts that in essence are like international treaties. Some seven compacts were signed between New Mexico and contiguous states. Here we mention only the most important four compacts:

The 1922 Colorado River Compact (approved by a presidential proclamation in 1929) divided equally the Colorado River’s water between the upper basin states – Utah, Wyoming, Colorado and New Mexico – and the lower basin states – California, Nevada and Arizona.

The 1938 the Rio Grande Compact signed by New Mexico, Colorado and Texas (approved by Congress in 1939.) This compact produced water-delivery agreements from Colorado to New Mexico and from New Mexico to Texas.

The Upper Colorado River Basin Compact of 1948 (approved by Congress in 1949), apportioned a fraction of the Colorado River water among Colorado (51.75%), Wyoming (14%), Utah (23%), Arizona (50,000 acre-feet) and New Mexico (11.25%). This compact eventually produced the Navajo Dam and the San Juan-Chama Diversion Project.
The Pecos River Compact was signed by New Mexico and Texas in 1948 and approved by Congress in 1949. The compact was intended to provide for the equitable division and apportionment of the use of the Pecos River’s water between the two states and secure and protect existing developments within the states. In particular the compact guaranteed for Texas a quantity of water available to it under the 1947 conditions. Following the 1974 Texas complaint submitted to the U.S. Supreme Court, the Pecos River Compact was revised.

Water laws prevailing in the Southwest vary from state to state. To eliminate the impediments to inter-state tradable water rights, contiguous states must adopt a uniform water law, and allow private sales of water rights across state borders. The following section illustrates how users in both New Mexico and Texas lost an opportunity to increase their water supply, respectively, for 150 years.

II. Particular Problems with Texas. Once, when New Mexico had a realistic chance to enhance its water supply, bureaucrats and politicians squandered it. In the late 1980s El Paso, a border city in Texas, submitted applications to drill 266 wells in the Mesilla Bolson and 60 wells in the Hueco Bolson, both in New Mexico. The bolsons are huge mines of water, and hydrologists had argued that El Paso’s return flows back to the Rio Grande would more than offset the pumping effects on the river, for 150 years. The project would have provided additional water to El Paso and New Mexico. Since El Paso is on the “wrong” side of the border, New Mexico resisted, and the project was lost in a lengthy legislative and legal process. Later, Texas returned the favor. In 1974 Texas filed a complaint against New Mexico in the U.S. Supreme Court. Texas alleged that New Mexico had breached the Pecos Compact during the period extending from 1950 to 1972 by depleting stateline flows by 1.2 million acre feet of water more than the compact allowed. New Mexico lost the case, had to compensate Texas to the tune of $14 million and had to accept an unfavorable restrictive delivery obligation. Since our water market stops at the border with Texas, only interstate negotiations can resolve this conflict. With a considerable political effort and luck, the two states could work out a compromise that would enhance the supply of water available to both states by reviving the El Paso project in exchange for updating the Pecos formula based on hydrological data that has accumulated since 1947. If we want to reduce the flow of Pecos water to the Red Bluff Reservoir, we should let Texas pump water from the Mesilla and Hueco Bolsons. In the long run, the users in the two contiguous states would benefit greatly from adopting a uniform water law and adopting free water rights trade.

f. Schemes to Enhance Water Supply

Schemes to enhance water supply may represent economic boondoggles. In the early 1980s, a study commissioned by the High Plains Study Council elaborated on a proposal to recharge the Ogallala aquifer by hauling water to the High Plains from distant rivers. The expected cost of importing one acre foot was in the range of $226 to $569. It did not bother those who produced the report that the net value of crops produced on an acre in Lea County would be less than the cost of importing water to irrigate that acre. For example, salt cedars, originated in parts of Eurasia and China, have been blamed for water quantity and quality problems. The roots of salt cedars stretch out in order to find water, and consequently they dry up aquifers and lower water tables. The evapotranspiration rates of salt cedars by far exceed those of native species-cottonwood, willow and arrowweed. Proposals to remove salt cedars in order to enhance our water supply should be studied. Unless a comprehensive and serious study can demonstrate that the economic benefits of salt cedars removal exceed the economic costs, a project of salt cedars removal should be dismissed. In other words, we should investigate whether the net value of crops produced on an acre in some valley along the Rio Grande would exceed the cost of removing salt cedars to free up the water required to irrigate that acre.

g. Municipal Water and Mandated Conservation

In an ideal market many consumers would buy water in the marketplace from many producers, subject to perfect water laws. Because of the complex hydrologic aspects of water grids in densely populated areas, as well as the large scale economies of treatment plants, municipal water systems, like local telephone providers, are natural monopolies. Under these conditions an enlightened municipality should set the price of water equal to the marginal cost of pumping and delivering plus the annualized cost of water rights. If at such a price a municipality has an excess supply over the quantity demanded, it could either store, rent to others or sell some of its water rights. Alternatively, given a water shortage, it could either store, rent from others or purchase some water rights on the open market. Normally, economic growth leads to municipal demand intensification and politicians, instead of purchasing water rights from farmers, tend ride on popular tides generated by water conservation advocates.

We should resist social engineering , e.g. proposing a comprehensive conservation efforts that will outline specific plans to install efficient plumbing fixtures in our bathrooms and invest in low water-use landscaping in our backyards. Such conservation mandates result in economic losses. Suppose, to use an illustration from simple Economics, that a mandated replacement of your current lush landscaping by xeriscaping would save you $150 worth of annual lawn watering. Assuming an investment of $5,000 in xeriscaping. Then, at an interest rate of 4 percent and a life of 20 years, it will cost you annually $368-a net loss of $218. Moreover, you value the elegance of xeriscaping relative to the charm of lush landscaping at less than $218: otherwise mandated conservation would be superfluous for you. Note finally that public water use accounts for a minute fraction of the total water depletion in New Mexico. The abundance of water use in agriculture indicates that a small transfer of water from agriculture to municipalities will sustain economic growth in our cities at a lower price increase far into the future.

h. Instream Flows

New Mexico’s water law is imperfect in that it does not recognize rights to instream flows. The demand for instream flows is derived from various recreation activities. The problem has become acute in recent years because the demand for instream flows has intensified with a rising standard of living, and also the need to protect the endangered Silvery Minnow. When drought conditions are mild, opportunities exist to manage the water in upstream reservoirs to help the Silvery Minnow without thrusting the entire burden on a singled-out group of irrigators. This may not be the case in low-flow years. Whether or not we accept the endangered-species philosophy, we should resist putting the burden of protecting the Silvery Minnow on a singled-out group of irrigators, or other groups of users. One possible solution is to upgrade the water law in New Mexico to allow a limited state acquisition of water rights on the open market for the purpose of enhancing stream flows during drought years. In high-flow years, the state could either store its water, or rent it to private users.

Another solution would be for the state government, or better the federal government, to purchase from water users low-flow options on the open market. A low-flow options for one acre-foot is a legal contract requiring the participating water user to diminish his or her diversion from the stream (Rio Grande) by one acre foot when the snow pack in March is below a level which is specified by the option contract.

Categories
Economy

Lack of Economic Freedom Means Anemic Growth for New Mexico!

As a consequence of its differentially high tax rates and excessive regulation and government spending, New Mexico has under performed all other states in growth of one important indicator of economic health: per capita income. Over the past 15 years we have fallen behind the U.S. average by 25.4 percent. That means we have grown at an annual average rate of 1.5 percent less than the nation as a whole. In 1986 the U.S. average for per capita income was 14.0 percent higher than NM. In 2001 it is 39.4 percent higher than NM. Had New Mexico grown at the same rate as the national average our average income would be $6000 per person higher today ($29,600 vice $23,600)!
Our comparatively slow rate of growth means we are being caught by states usually considered poor. Mississippi, which has long been last in annual per capita income rankings, was 17.6 percent behind us in 1986. Today Mississippi is only 0.9 percent behind us. Our average annual income would be $3,700 per person higher today had we grown as fast as Mississippi over the past 15 years. Alabama, a state that had roughly the same per capita income as NM in 1986, has outpaced us by $1,900 per person.
As shown in the table, we don’t fare any better over the past 15 years when compared to states in our region:
Where NM’s per capita income would be today had we kept pace with each of these states in our region:
If we had kept up with AZ
Our income would be $ 1,698 higher
If we had kept up with CO
Our income would be $ 5,448 higher
If we had kept up with OK
Our income would be $ 637 higher
If we had kept up with TX
Our income would be $ 3,561 higher
If we had kept up with UT
Our income would be $ 3,514 higher
One wonders at what point our anemic growth becomes a crisis. Only Mississippi and West Virginia are behind us now, and they are closing the gap. How much longer will we put up with the promises of big government when those promises don’t deliver? It is innovation and risk-taking that lead to prosperity, not more government. How much longer will it be before we legislate the kind of economic freedom that encourages innovation and risk-taking?
The reader may wonder about my assertion that economic freedom, in the form of lower taxes and less regulation and government spending, leads to prosperity. When you examine incentives in private and government spheres, you can see that the high correlation between economic freedom (limited government) and economic well-being is no accident. Those who administer the government apparatus, in their roles as politicians and bureaucrats, have less incentive to be responsive to consumers of public services than do their counterparts in the private sector. Private sector consumers have much greater choice. Their choices are voluntary and alternatives exist. If a consumer does not like a particular product, then she can decline to purchase it and purchase another instead. For example, you have many alternatives for today’s lunch; but you have no choice in the budgets, education objectives and research objectives of your state universities.
Each consumer cannot influence public sector choices without great individual effort on his or her part. For example, the budget, education objectives and research objectives of your state universities cannot be altered by you, no matter how much effort you exert to change them. Unless you decide to “vote with your feet,” you are coerced into accepting government policies.
Choices in the private sector, on the other hand, are quite different. Individuals therein personally bear the costs and enjoy the benefits of their own decisions. Consequently individuals have greater incentive to acquire information about prospective choices in the private sector. You will get more personal benefit from the effort of deciding where to have lunch than from trying to influence some unmovable government monolith. Responsiveness to consumer wishes is much more forthcoming in the private sector than in government sector.
More economic freedom means innovators and risk-takers will be able more easily to satisfy consumers’ wishes. Then our prosperity would grow at a rate more like those states that now have greater economic freedom.
Categories
Economy

See What Big Government Costs in New Mexico!

The purpose of this paper is to understand and estimate the cost of big government in New Mexico. We have a grand opportunity to make New Mexico prosperous, and we are not taking advantage of it. Perhaps the cost estimates contained herein will aid in changing our mindset.
Change in Mindset Needed
As has been well documented, New Mexico has one of the worst economic climates in the nation. Over the long haul we have tried to make ourselves prosperous by increasing government programs. As a result we are overly taxed and regulated. Government programs and high taxes and regulations have actually reduced our prosperity. If claims about all the magic of economic multipliers from more government were true, we would be one of the most prosperous states in the nation.
But these claims are not true. Messenheimer (2000) provides statistical evidence of the relationship between smaller, less intrusive governments and greater prosperity across the states. Professor Richard Vedder (2002) and the Karabegovic, et.al. (2002) independently confirm the same statistical relationship, including comparable economic benefits of smaller, less intrusive government.
Why is our state government not getting the picture? Assuming that we really would like to have a prosperous state, recent initiatives to increase government are counterproductive. They are the result of what economists call “concentrated benefits and widely dispersed costs.” Those who receive the concentrated benefits are clearly defined, and they are grateful when politicians show up for ribbon cutting ceremonies and take credit. But those who pay in terms of lost jobs and wages are unseen and unheard, since the effects on them are individually imperceptible.
We now can think about the costs borne by the unseen and unheard due to spending and economic development initiatives. By looking at their effects on our economy in terms of tax reductions forgone, we can see what might have been for the unseen and unheard. It is important to understand that additional spending, subsidies or tax credits all have the same effect. In each case the fisc uses revenue that could have been given up for overall tax reduction. In that spirit, we have developed a simple calculator that shows the costs of more spending or economic development initiatives in terms of lost jobs, wages, total earned income and revenue received by local tax jurisdictions.
Empirical Estimate of Costs of Bigger Government
Using estimates from our tax reduction model (see Messenheimer, 2002 for a complete explanation of the model) our calculator that shows the effects of more spending, subsidies or tax credits in terms of their alternative: the tax reductions forgone.
For each million dollars of spending per year we predict (relative to FY2004 as a baseline):
  • An average loss of 212 jobs per year statewide for four years
  • An average loss of $15 per year per wage earner for four years
  • An average loss of total income for all wage earners of $12.3 million per year for four years
  • An average loss of tax revenue to local jurisdictions of $0.35 million per year for four years
Now you can see what we mean when we say the victims of increased spending are without a voice. They don’t realize they are getting ripped off little-by-little as spending increases. “Bring in some movies,” they say in Santa Fe, “it will only cost us $10 million to help poor little unfortunate Shirley McLain and the other poor folks from Hollywood.” The loss spread among regular people in terms of the alternative of $10 million in tax reduction is imperceptible to them. Who can tell where the 2120 jobs went? They are impossible to trace. Similarly, what worker will understand that on average they could be making another $150 per year?
The table below displays the unseen and unheard costs of more government in increments of $10 million.
Spending Increase, Subsidy or Tax Credit (millions annually)Loss of jobsChange in Average WageChange in IncomeChange in Revenue for local jurisdictions (millions)
$10

2120

$(154)$(128,706,634)$(3)
$20

4240

$(307)$(256,762,018)$(7)
$30

6359

$(461)$(384,166,153)$(10)
$40

8479

$(614)$(510,919,040)$(14)
$50

10599

$(768)$(637,020,677)$(17)
$60

12719

$(922)$(762,471,065)$(21)
$70

14839

$(1,075)$(887,270,205)$(24)
$80

16959

$(1,229)$(1,011,418,095)$(28)
$90

19078

$(1,382)$(1,134,914,736)$(31)
$100

21198

$(1,536)$(1,257,760,128)$(35)
$110

23318

$(1,690)$(1,379,954,271)$(38)
$120

25438

$(1,843)$(1,501,497,165)$(42)
$130

27558

$(1,997)$(1,622,388,810)$(45)
$140

29677

$(2,151)$(1,742,629,206)$(49)
$150

31797

$(2,304)$(1,862,218,352)$(52)
$160

33917

$(2,458)$(1,981,156,250)$(56)
$170

36037

$(2,611)$(2,099,442,899)$(59)
$180

38157

$(2,765)$(2,217,078,299)$(63)
$190

40276

$(2,919)$(2,334,062,449)$(66)
$200

42396

$(3,072)$(2,450,395,351)$(70)
Spending Increase, Subsidy or Tax Credit (millions annually)
Categories
Economy Energy and Environment

Why We Have a Water Crisis

As our economy and population have grown, media and policy makers have shown increased interest in water allocation. That interest has further intensified because of last year’s drought. What to do about scarcity of our “precious” water?
Although scarcity is characteristic of all goods, few other goods draw the attention received by water. When it comes to water we have a “crisis.” Water is being used faster than it is being replenished. We are urged to solve our crisis by improved planning. An expanded public forum would accomplish that planning, according to the various proposals being floated. These planners would decide who gets water for what uses and how to conserve it.
That we don’t need such planning for other goods seems obvious. There is no crisis in pencils, or personal computers, or televisions, or tomatoes, or gasoline. So, what is it that is so different about water? To answer that question, let’s compare water to another good, oil. Oil is scarce, but we don’t have an oil crisis (as least not since the government got out of the business of trying to regulate oil by means of price and import/export controls). Notice also that states with a relatively greater natural scarcity of oil than New Mexico, such as Colorado, don’t have an oil crisis.
The reason we don’t have an oil crisis is that well-defined, tradable property rights exist. When such property rights exist, the market for oil resolves conflicts over the uses of oil, whether those uses be for current use such as transportation or heating or for future use (current conservation) of oil. The owners of oil have an incentive to be good stewards of their resource, because if they are not, they are the losers. The price of oil determines who purchases it for what purposes. Since oil has a price, it tends to be allocated to its highest valued use as determined only by the users themselves as they value it (personally and individually) for its alternative uses. Anticipation of the future price of oil ensures that it will not all be used up in current consumption. There is no crisis in oil today, and there will be no crisis tomorrow.
Now contrast oil and water. The reason that we have a crisis in water is the absence of well-defined and enforceable property rights in water. Who has the right to what water is determined in a bewildering process by the State Engineer in conjunction with competing political interests. Interstate compacts and international treaties complicate that process. That process is not working. And the type of expanded planning operation being proposed cannot solve the water crisis, because the incentives are all wrong.
Only by establishing property rights in water will the crisis evaporate. Only then will price insure that water flows to its highest valued uses, whatever those uses may be (recreational, habitat, drinking, agriculture, industrial, new development, etc.). Only then will water flow unimpeded by dams of coercion or the politics of special interest. Only then will water flow from where it is relatively less scarce to New Mexico. Only then will individuals have an incentive to conserve, catch or recycle water.
In order to establish property rights in water, policy makers must navigate around a few small bars linked to two unique characteristics of water: its sources and quality. Sources are above ground streams and lakes and underground aquifers. The quantity of water available from one source may affect the quantity available from other sources. Polluters may affect quality of water. The quantity of water in an aquifer may affect the quality of the land above it. So, property rights to water must contain a quality dimension and allow compensation from those who do harm to those harmed. Preferably these compensations would take place in markets for the right to harm.
This is not just theory; it works in practice. Water marketing has really matured in the past several years, particularly in the Northwest. The Oregon Water Trust and Washington Water Trust are full-fledged non-profit organizations that have done hundreds of water purchases and leases to benefit fish and wildlife.
Terry Anderson and Pamela Snyder explore the issues in some detail in their 1997 book Water Markets: Priming the Invisible Pump (Cato Institute 1997). They cite additional empirical evidence supporting the success of property rights in water. Let’s not stick ourselves with Soviet-style planning for water when there is a much more efficient alternative.
Categories
Economy

The Demise of Public Employee Unions in New Mexico: One Less Obstacle to Freedom and Prosperity

“Public services are never performed better than when their reward comes only in consequence of their being performed, and is proportional to the diligence in performing them.”
Adam Smith
The public sector in New Mexico is broken. As a percentage of income our combined state and local taxes are highest in the region (Texas, Oklahoma, Colorado, Arizona and Utah), ranging from 35 percent higher than Colorado to 20 percent higher than Utah. Yet we get far less in government services than do those states. For example, our spending per pupil is highest in the region, and our test scores for proficiency in reading and math (as measured by the National Assessment of Education Progress) are lowest. As a consequence of high taxes and low public sector productivity, ordinary New Mexicans are much poorer than citizens in surrounding states (of the states mentioned above per capita income ranges from 32 percent higher than ours in Colorado to 2 percent higher than ours in Utah). Our bloated public sector stifles private economic activity, and it is the private sector that must eventually generate prosperity in this state.
While the blame for our dismal economic performance relative to other states can be attributed to bad public policy (e.g. higher taxes, regulation, litigation and less public sector output than other states), the fundamental problem in New Mexico is a political process that generates bad policy. It is difficult for the voter to understand or act on the cronyism that leads to our bad policies. As a result there is practically no connection between public sector compensation and public sector output. The main problem is that entrenched legislators control the policy agenda. They use their agenda power to broker wealth transfers from the general public to special interests.
One of the most powerful of those special interests is public employee unions. In the past they have had a cozy relationship with our entrenched legislators, and that relationship deters potential reform of our broken public sector. They are the ones (along with the entrenched legislators and lobbyists) who benefit directly from government spending. Since they have a stake in seeing that government revenue and spending grow (at the expense of the rest of us), they have tended to campaign strongly against fiscal reform. One stark example has been teachers’ unions’ absolute opposition to school choice. At the same time they insist on restricting entry only to those who have “education” qualifications based on their failed establishment. If they are so confident about their schools and their methods, why are they so afraid of school choice?
There is some bad news: the right for public employees in New Mexico to bargain as a unit with their employers is about to reappear in proposed legislation. Governor Johnson should veto this legislation, just as he allowed the existing law to expire two years ago. A veto will mean one of the main hurdles to process reform will stay lowered. As is evident from the past two years this interest group will not disappear along with their right to bargain, but much of their state-sponsored credibility and power will be diminished. The costs of achieving fundamental reforms will be decreased. Governor Johnson should take advantage of these decreased costs to initiate reform of the political process in New Mexico.
Incredibly, economist Lawrence Waldman of UNM’s Bureau of Business and Economic Research argued recently for reinstating the right of public sector employees to bargain as a unit. He asserted that “we all” will be “worse off” without the law. Are we making footprints on the same enchanted land? Given existing incentives, I would predict just the opposite. And not surprisingly, he ducked the issue of productivity gains in the public sector. There is a reason for that: Arguing that public employees’ collective bargaining has led to productivity gains in New Mexico would be like arguing that water flows uphill.
Mr. Waldman went on to argue that collective bargaining is “fair” because it will lead to higher wages for public sector employees such as himself. At whose expense? You guessed it, private sector businesses and employees who pay taxes that are too high and who receive government services less productive than in neighboring states. Even Mr. Waldman points out that in New Mexico “the average wage… is continually falling further behind” the national average. If we want to see New Mexico’s wages gain on the national average, the public sector must become more efficient and so enable the private sector to grow the economy. That means lower taxes and greater public sector output. It means curtailing the power of special interest groups such as public employee unions.
That is not to say that reemergence of collective bargaining should not be a part of reforming the process. But, it seems to me, collective bargaining agreements must tie compensation of public employees to meaningful measures of public sector output. If you don’t produce, you don’t get paid. We need public servants who are responsive to the voter/taxpayer who pays their salary. Maybe then our political process will generate more output and lower taxes.
Other potential process reforms are term limits, super-majority votes to raise taxes, and constitutional limits on spending to name just a few. Obviously, there are high hurdles to overcome; our entrenched legislators (who have a vested interest in the status quo) will fight process reform tooth and nail. But we must try. The demise of public employee unions may be the opportune time to begin reform of our big-government biased political process. So far that process has not worked; we are one of the poorest states in the union.