Really want to harm the poor? Try the ‘Living Wage’

The proposal for a “living wage” is an ineffective way to help the poor. In fact, it is more likely to harm the poor. The reasons why are grounded in fundamental economics.
You don’t have to be an economist to understand that “living wage” proposals do not meet the test of common sense. Why not raise the wage floor much higher than is proposed? For example, why not raise the wage floor to $100 per hour? It does not take much reflection to understand that $100 per hour wage floor would not work. Why is it that common sense fails when the proposed wage floor is a mere $7.15 per hour? Principles of economics textbooks show clearly that wage floors result in surpluses of workers (unemployment). How does being unemployed help the unskilled poor? Actually, the wage floor for those unlucky persons who can’t find work as a result of the wage floor is ZERO dollars per hour. ZERO is the actual wage floor; and there is nothing government can do to prevent it. Unfortunately, minorities are more apt to find themselves in this situation as a result of “living wage” laws.
“Living wage” will be quite ineffective at helping the poor, even for the lucky workers who do find jobs. Firms will always find ways around the wage floor. The market for unskilled labor is highly competitive. As a consequence an unskilled worker’s effort must result in value of product equal to the worker’s total compensation, including that part of compensation that goes to training.
One way around the wage floor is for the firm to substitute capital for labor where possible. Repetitive tasks can often be automated in some way. A second way around it is for the firm to substitute higher wage for lower benefits where possible. It is the total compensation package that matters; and the firm will have wiggle room when that package includes non-wage benefits. A third way around it is to substitute non-wage labor for wage labor where possible. For example, the firm may move to piece rate compensation or contract separately for the needed function. A fourth way around it is to move outside the wage floor jurisdiction where possible; and potential firms can choose not to locate within the wage floor jurisdiction. A fifth way around it is to reduce or eliminate training of the unskilled where possible. At the higher wage floor more skilled workers will be attracted to previously unskilled jobs. If these ways of coping with the wage floor are not available, the firm can go out of business.
Much of the “living wage” argument is fueled by what proponents cite as evidence that it works. Unfortunately even a few economists have tried to prove in effect that water flows uphill. Prime among these has been the study by economists D. Card and A.B. Krueger (1994). David Neumark summarizes that study and the avalanche of evidence refuting it in his research summary “Raising Incomes by Mandating Wages.” Even though Card and Krueger have been thoroughly refuted, wishful thinkers advocating living wages continue to cite them as “proof” that water flows uphill. Fortunately, the vast majority of economists do not agree with them.
Some have claimed that the higher living wage will be spent, thereby stimulating the economy. This is pure nonsense; the higher wage floor will actually have a depressing effect. The money that goes to pay higher wages has to come from somewhere, such as from company profits or from consumers who have to pay higher prices and don’t spend as much elsewhere. The net depressing effect will come from the kinds of adjustments enumerated above.
Finally, I wonder about the morality of the living wage. What business does government have preventing voluntary trade between two individuals when no one else is harmed? Surely the individual worker, not the nanny state, can decide what is best for him or her. Moreover, if there is a principle that unifies the last three hundred years of economic research it is this: When two adults voluntarily consent to trade, each gains. The process of trading itself is what leads to prosperity for the traders. Why would we want to further reduce economic freedom to trade when the overwhelming evidence is that economic freedom is the real key to prosperity?
“Living Wage” Hurts the Poor
Subsequent to my statement of May 20, 2005 I have seen several more empirical claims that the living wage will not hurt the poor. These claims constitute voodoo economics in the extreme.
Many factors (such as tax climate, regulatory climate, education, local entrepreneurial opportunities, what is happening in other states and localities, what is happening in other countries, business cycles and so forth) in addition to the “living wage” determine whether a local economy expands or contracts. In order to tease out an economically sound estimate of the effect of the “living wage,” the empirical economist must account for all the factors. Empirical studies that purport to show that the “living wage” does not hurt the poor and perhaps even expands employment and helps the poor do not account for all factors.
Studies that do account for all factors show overwhelmingly that wage floors hurt the poor. And those hurt are the least effective interest group in society (minorities, low skilled, relatively uneducated). They have no voice in the matter. All many of them know is that there is no job available when they go looking. For them the legal living wage becomes ZERO.
An excellent summary of the history and all the empirical evidence of wage floors may be found in: David Neumark in his research summary “Raising Incomes by Mandating Wages.” There are lots of things we can do to help the poor. The “living wage” idea is not only ineffective; it is counterproductive.

Government Should Not Set Wages

Hope must spring eternal! Despite the universal failures of socialist regimes, lefties continue to mouth the siren song of economic salvation by the government.
Albuquerque City Councilor Martin Heinrich has joined the choir. He wants Albuquerque to follow in the ruinous footsteps of Santa Fe with an elevated minimum wage law. Heinrich is pretty much a piker, though. His Fair Wage proposal would set the minimum at “only” $7.15 per hour, while Santa Fe’s so-called “living wage” is already $8.50 and slated to grow to $10.50.
This being such a terrific idea, why not $50?
You have to give the left an “A” for spin. “Living wage” is as warm and fuzzy as motherhood and apple pie.
Then follow with an “F” for economics.
With each passing day, communities in the United States find themselves in greater competition with each other, and with other countries’ economies. One doesn’t need Econ. 101 to understand that a rational employer will do whatever it must to avoid paying more than a particular job contributes to whatever the employer is selling in a competitive market. This cost avoidance can include automation, out-sourcing, moving to a less anti-competitive location and myriad other strategies.
When a community like Santa Fe – well known for elitism from the get-go – adopts a super minimum wage, it telegraphs to everyone its decision that lower-paying jobs are simply unwelcome. That leaves nearly unemployable the young, who are eager for career starts, and others who are simply unskilled.
Sure, a hotel, restaurant or retailer wanting to sell in the Santa Fe market has to bite the bullet and pay, but the result must be higher prices with the risk of driving customers away.
Or the result could be driving customers ever more into labor-efficient operations like Wal-Mart. More on that below.
Some considerations go beyond labor cost. One employer recently moved his business from Santa Fe to Pueblo, Colorado. When asked if the “living wage” law were the cause, he replied, “Not directly … but I don’t want someone coming in and telling me how to run my business.” I know from personal experience in Santa Fe that his wasn’t the first to leave for exactly the same reason, and no one will ever know how many businesses refused to consider Santa Fe on this account.
One morning last October, I debated “living wage” with former Albuquerque District Court Judge Anne Kass. Supporting her anti-capitalistic view of the world – in debate and a subsequent column – Kass went all the way back to slavery, then fast-forwarded to an unnamed family in Arkansas that “has amassed a shocking fortune … the old-fashioned, American way – by exploiting workers …”
That would be the family of Sam Walton, who invented Wal-Mart. Kass’ spin appeals to the typical knee-jerk liberal, but in fact she ineptly picked a stunningly inapt example to support her case.
For one thing, Wal-Mart employees already do exceptionally well when compared with others employed in retailing.
For another, Wal-Mart’s sales per employee are astronomical. It can pretty easily swallow any increase that might result from a “living wage” law, and happily collect customers driven to it by price hikes other retailers must enact to cover government-mandated labor costs.
Lastly, I can think of no business that should be less a target of the left than Wal-Mart. Name a single business anywhere that has made it possible for more people of limited means to live better than has this product of Sam Walton’s genius. Of course his family is wealthy: that’s a highly prized result of business success in free-market economies.
Heinrich’s upbeat statements to the press notwithstanding, a case simply cannot be made that Santa Fe’s “living wage” law has been good for its economy. Now he’s backing off, saying only that “the sky has not fallen.”
Well, a bit of patience on that is warranted. No one claimed the sky would fall in the ten months the law has been in effect. Further, anyone acquainted with Santa Fe’s economy for at least 50 years knows it is not a reasonable test bed for Albuquerque or any other New Mexico community.
An economy remaining at the U.S. bottom has no need of more bleeding-heart meddling.
Economy Energy and Environment Oil & Gas

Economic Aspects of Energy in New Mexico

a. The Issue of Electric-Power Deregulation

PNM successful campaign to pull the plug on the state Legislature’s plan to deregulate electric utilities in 2007 portends nothing but high prices in the long run. Our politicians should study the California’s electricity-crisis case. The California debacle is used by those who favor electricity regulation as a demonstration that free markets are inappropriate for electric-power markets.

At the turn of the 20th century in state after state throughout the country public utility commissions were established with the responsibility to regulate the utilities. The consensus was that public utilities are natural monopolies, and, unless regulated, would charge the public monopolistic prices. Today, at the turn of the 21st century, we challenge the need to regulate electric public utilities for two reasons: First, the technology of wheeling electricity over long distances has improved dramatically: High voltage transmission lines and improved alloys used in their production lowered the transmission costs significantly. Consequently, electric power can be wheeled from the Four Corners Power Plant to California at a relatively very low cost. Second, over the years, economists realized that state regulatory agencies became captives of utilities to the point that regulated prices, even if not set at monopolistic levels, are higher than what alternatively would be competitive prices. In 1995 the country was ready to embrace the open power markets. What happened in California changed everything.

In 1996, the California legislature voted to restructure its electric industry. All retail customers were allowed to buy power from electric service suppliers of their choice. The monopoly of the local California utilities was thus broken and utilities were transformed into middlemen. But, unfortunately, politics of different interest groups played a bigger role in the restructuring process than economic analysis. Consequently there were two fatal flaws in the deregulation plan: First, for stranded costs considerations, retail prices were capped at a level that had been then above the anticipated wholesale price. Second, the utilities were required to acquire power for their customers solely on the spot-wholesale markets. The new market structure became effective in April of 1998.

In the Spring of 2000 Four factors combined to push wholesale prices way above the expected $25/Mwh: (1) demand for electricity intensified due to unanticipated economic growth and unseasonable weather; (2) drought reduced the supply of hydroelectric power; (3) rising natural gas costs increased wholesale prices on the spot market instantly; (4) rising prices of emission credits increased the variable costs of generation. As a result, from the early spring of 2000 to the early summer of 2001, spot wholesale electricity prices soared to unprecedented levels. Since the retail price remained capped, the utilities absorbed the difference and eventually became bankrupt.

At the beginning of summer of 2000 the utilities could have saved Californians money and blackouts by entering into long-term contracts. At that time, the utilities had known that gas prices were expected to rise and the water level behind the dams were expected to recede because of the drought. But, the California regulatory agency, guided by the bogus deregulation of 1996, ignored the requests of the utilities to purchase future electricity at reasonable prices. The electric-power market collapsed, and the state took over purchasing wholesale and selling retail power.

Finally, in June of 2001, the factors that initially caused the crisis reversed course. In particular, the demand for electricity began to abate and natural gas prices were falling across the Unites States. The wholesale prices of electricity returned to a reasonably low level. The crisis passed, but California’s lost billions of dollars in the process and will continue to pay high prices far into the future. It is ironic that out of desperation, at the beginning of 2001, Governor Davis instructed the California Department of Water Resources to negotiate long-term contracts with wholesale suppliers of power. It is likely that, since wholesale prices were still relatively high, he saddled California residents with obligations to pay $40 billion for electric power with a market value of only $20 billion.

The lesson from California to New Mexico: There is no alternative to the discipline of competition in an open market. If, and when, New Mexico decides to deregulate its power market it should take the following steps: (1) break the monopolies of utilities in their respective service areas by allowing users to access electricity from out-of area and out-of-state suppliers of their choice; (2) allow electric-power prices, both wholesale and retail, to move freely, up and down, in the marketplace such that supply and demand are always in balance; (3) allow users to freely choose between buying electricity on the volatile spot market, or, alternatively, enter bilateral long-term stable contracts with power suppliers.

At the end of the day the choice is between the regulated local monopoly with relatively stable but very high prices or a completely deregulated electricity market with more volatile, but, on average, significantly lower prices. Rational users will always prefer the latter.

b. Natural Resources

New Mexico is rich in natural resources: It ranks 13th in the production of coal (third in reserves) and third in the production of natural gas (second in reserves). It exports almost half of its generated electricity, over 80 percent of its natural gas and 40 percent of its coal. Both natural gas and coal are sold on very competitive markets. Our policy recommendation is simply to leave the decisions of how much to produce, and of that what fraction to export, to the entrepreneurs on the open market. Some pro-development New Mexicans lament the fact that much of our natural gas and coal are exported as raw materials rather than electricity. Environmentalists oppose converting these natural resources into electricity because water is a factor of production in the generation of electricity. Orders of magnitude are relevant here: Annual depletion of water in New Mexico is in the order of magnitude of 2.5 million acre feet. Irrigation accounts for 75 percent of the total depletion. Currently, water consumed in the generation of electric power is about 70,000 acre feet, a mere 2.8 percent of the total annual depletion. In the future, electric generating firms could purchase additional water rights in the marketplace without raising water prices appreciably.

Last, but not least, our elected leaders should not be tempted to raise the tax rates on our exhaustible natural resources for the simple reason that, although up to a point higher tax rates will yield more revenue, higher taxes will also result in a reduction of employment and weakening of economic activity.

c. Wind and Other Green Power

Generating electricity by burning coal, natural gas or using nuclear reactors on average costs between 3 and 4 cents per kwh. Of the three, the additional external cost to society and the environment is highest from coal and lowest from nuclear power. Once the federal government resolves the issues of nuclear waste, catastrophic insurance and who bears the decommissioning costs, nuclear generation of electric power will be revived. New Mexico, which is rich in uranium will definitely benefit from this trend.

PNM and Florida based FPL Energy built a 204-megawat wind-generation facility, or what is otherwise known as a wind farm. This deal was undoubtedly stimulated by New Mexico’s legislature endorsement of a rule mandating that five percent of utilities’ energy must come from green sources by 2006, and ten percent by 2011. Any minimal environmental gain from this project will “spread” over the entire southwestern states-it will be gone with the wind. According to the Wall Street Journal (August 27, 2002), although wind energy is clean, its cost is still 5.84 cents per kwh in good wind sites, and 3.89 cents in optimal wind sites. We cannot be sure if PNM embarked on this project because of federal subsidies (1.8 cents/kwh), or because wind farms politically endear PNM to the environmentalists who, in return, might support its battles to retain monopoly. It is difficult to conjecture what motivated the Public Regulation Commission (PRC) to dream up such a grandiose plan. Could it be the increasing instability in the Middle East? War in the Middle East could cause another energy crunch that might affect the transportation sector that depends on foreign crude oil, but not the electric-power sector that depends on plentiful domestic natural resources, such as coal, uranium and natural gas.

Could it be concerns for clean air? Probably. But, first, applying renewable energy in the generation of electricity in New Mexico would reduce the use of coal by the San Juan Generation Station near Farmington. The blessed wind does not recognize state boundaries. Consequently, the air pollution-reduction at the San Juan Generation Station would be spread over Arizona, Utah and Colorado: It will be gone with the wind within days. Do we, New Mexicans, like to pay higher prices for electricity to give our neighbors a free ride on clean air? I believe the answer is a resounding “no”, and this is why clean-air policies should be initiated at the federal level.

Second, mandates, known otherwise as social engineering, are arbitrary and economically inefficient. The decision as to when renewable sources should be used in the generation of electricity is best left for the marketplace. Of course, external costs from air pollution are involved in the generation of electricity. The external costs of using coal, gas turbines, nuclear reactors or even wind cannot be dismissed. But, clean air and water policies should be left for the federal government.

The federal energy policy is far from perfect. The energy industry enjoys outrageous subsidies and market distortions. Advancing renewable energy through subsidies is a bad idea. Such subsidies, like the 1.8 cents tax credit per kwh generated by wind, lead to political-pressure groups that invest time and money in lobbying for higher subsidies. The subsidy to ethanol is an example that has not met the test of time. The subsidy to ethanol, which is derived from corn, is alive and well even after it has been shown that it generates less energy than it takes to produce, and other gasoline-cleaner-supplements are available in the marketplace. Since it takes more energy to produce ethanol than ethanol produces, it probably causes more pollution than we would have with no subsidy at all. But it seems that the farm bloc has the political power to perpetuate a bad subsidy forever. Instead of subsidizing green energy resources, the federal government should tax natural resources that, in the process of producing electricity, generate conventional pollutants (sulphur dioxide, nitrogen oxides and mercury) and carbon dioxide.

As an illustration, a unit federal tax should be imposed per kwh of electricity derived from coal, and the revenues from this tax should be used in the development of clean coal technologies. Nuclear energy does not release any greenhouse gases, but its price does not reflect its true marginal cost. A permanent nuclear-waste facility in the Yucca Mountain should begin serving all nuclear reactors in the United States as soon as possible. Nuclear waste and decommissioning costs should be borne by owners of nuclear reactors. Also, the Price-Anderson Act which provides unlimited government insurance for nuclear reactors in case of catastrophic accidents should be rescinded. Electric utilities should pay for nuclear catastrophic insurance, and they should generate nuclear energy and sell it in the marketplace at a price that covers its true costs.

Mandating renewable energy in the generation of electricity is a tax on New Mexico citizens as rate payers-we don’t need higher taxes. California is mandating these senseless green initiatives in spades. In the unlikely event California mandates really do lead to discoveries producing long-term benefits, New Mexico will benefit without having to tax our citizens. Last, but not least, The New Mexico legislature is urged to guide the PRC to focus on its only logical mission, namely to protect New Mexico consumers from natural monopolies.

Economy Tax and Budget

TOPS 1: New Mexico Taxpayers’ Opportunity-Prosperity Safeguard (TOPS) Amendment

Prosper (prŏs’per) v. to fare well
To be prosperous, to have our friends and neighbors be prosperous is our aspiration. Economic opportunity and the prosperity that evolves from it should be New Mexico’s future. It is not far fetched to foresee average annual incomes in New Mexico up by $6,500 per person. How do we achieve such an increase in prosperity?
The key to prosperity is to instill more discipline in and control over New Mexico’s state government. More discipline and control enable tax rates to be reduced. Reduced tax rates spur economic growth by allowing hard earned money to be spent or saved by those who earn it.
The Rio Grande Foundation is pleased to document state government’s spending and taxing problems in detail and offer solutions that generate prosperity. Your comments are welcome. Please send email to
Economy Tax and Budget

TOPS 2: Executive Summary

Ensuring liberty, opportunity and prosperity for all New Mexicans begins with curtailing the growth of government. Ineffective and unnecessary government growth means that our tax rates have remained too high. What to do? Taxpayers themselves must take control. Except when the approved by a vote of the people, the legislature would be limited by Constitutional Amendment to annual spending increases equaling the rate of population growth plus the rate of inflation. In other words, absent explicit taxpayer approval real per capita spending would remain constant.
Taxpayer Controlled Government Growth
Over the past 13 years spending by New Mexico state government, adjusted for inflation and population growth, has increased by 28%. 13 years ago, as measured in today’s dollars, our state government spent $1,783 for every man, woman and child in New Mexico. Today, however, that figure is $2,285.
Assume that in 1992 state government was spending enough money to provide essential government services to its residents. To maintain this level of service, government spending would need to grow to accommodate inflation and the increase in population. As mentioned above, New Mexico state spending has far exceeded this basic maintenance level.
And for this increased spending we ask – are our children receiving better education than in ’92? Is there less poverty, fewer uninsured individuals, or improved health care in New Mexico? Overall, can we even notice any increase in government services compared to ’92?
Sadly, the answers are NO. And, since our taxes have funded this ineffective and unnecessary government growth, tax rates have remained unnecessarily high. The problem is that unnecessarily high tax rates have significantly retarded our prosperity. How high are our tax rates? The graphs nearby depict comparative 2005 tax rates for the major revenue sources for which our tax rates are way out of line1. The gross receipts tax rate on services is a disaster. It creates a wedge between consumers and service providers that is some 40 to 50 percent higher than in other states. This wedge has the effect of doubling the damage done by the tax. This tax might better be called the “send higher wage jobs to other states” tax. Likewise, our excise tax rates (except for gasoline) tend to be way higher than the national median; and the tax wedge reduces economic activity similarly. Recently many other minor tax and fee rate increases will do even more damage to our well-being.
We can fix the problem with smaller government. Smaller government leads to lower tax rates and increased prosperity. We call this phenomenon “economic freedom.” Liberate a people from the burden of a growing government and they will take advantage of increased opportunity and produce greater prosperity for all. The Rio Grande Foundation calls it Liberty, Opportunity, Prosperity. It really works.
The link between the size of government and the relative prosperity of that government’s constituents has been well documented. The National Center for Policy Analysis and Canada’s Fraser Institute found that if New Mexico had average economic freedom, then its per capita gross state product would be $2,329 higher than it is today. And Professor Richard Vedder (2002) finds that if New Mexico only took the average amount of taxes as a percentage of income, then its per capita income would be roughly $1,500 higher than it is today. Additionally, Messenheimer in a 2000 RGF study summarized what might have been for New Mexico: If New Mexico now had state and local governments that were only slightly more coercive than the lower 48 average (instead of significantly more coercive as is the case now), then the median income for 4-person families is predicted to be $9,797 higher and per capita income $6,462 higher than they are today in today’s dollars.
Still not convinced? Ask the following question. If claims about all the magic of economic multipliers from increased government spending were true, shouldn’t New Mexico with its high per capita government spending be one of the most prosperous states in the nation?
How do we get control of the growth of government? How do we ensure liberty, opportunity and prosperity for future generations of New Mexicans? The people of Colorado asked themselves the same question 13 years ago; and they came up with the right answer. They took control.
The Taxpayer Bill of Rights
In 1992 Colorado voters passed a constitutional amendment that required that tax increases be approved directly by the states voters. Without this explicit approval, the amendment limited growth of taxes and spending to the previous year’s spending multiplied by a factor of inflation plus population growth, thereby keeping real spending per capita at a fixed rate year-to-year. This amendment was aptly named, the Taxpayers Bill of Rights (TABOR). In just five years, 1997 – 2001, TABOR forced the Colorado state government to return $3.25 billion of over-collected taxes to the taxpaying citizens of the state. This equals to $800 for every man, woman and child in the state. By limiting the growth of government to a bearable level, Colorado’s economy experienced one of the nation’s fastest growth rates. In fact, prior to TABOR government jobs grew slightly more than business or total employment. Since TABOR, business job growth has nearly doubled that of government job growth.
Problems With the Political Process
We cannot trust the political process to carry out this mission. The process itself creates too much pressure to increase spending. New Mexico’s citizens must take control as they did in Colorado. What if New Mexico had done so in 1992? Our state government budget would be $3.4 billion. Compare that to the $4.3 billion budget of today. $932 million would have been returned to the pockets of New Mexico taxpayers. This works out to $491 for every man, woman and child in New Mexico. Thought about another way, this would allow for a reduction of 2.5 percentage points in the New Mexico gross receipts tax. This is only half the story, of course, because the greater economic prosperity unleashed by lower tax rates will also increase incomes.
We are not saying that government can’t grow. We simply want to limit the rate of growth, unless the people give their explicit approval to exceed the limit. Under TABOR, the nominal annual rate of growth of New Mexico’s state government would have been 4.1% for 13 years (1.6% population growth rate plus 2.5% rate of inflation). As it was, government actually grew at 6.0%. Because of compounding over time this small difference has a tremendous impact.
Why can’t we rely on the political process to generate spending control? The reason is simple: The various pressures exerted by spending interests are too great. Consider our experience from 1995 to 2002. New Mexico had a governor who said that if government was reduced by one-third none of the residents of New Mexico would notice. He vetoed over 750 individual pieces of legislation. He was overridden only twice. Several times he vetoed the entire budget bill, threatened to allow government to shut down and regularly played a game of brinkmanship with the legislature.
To say that he held the line on government growth is not adequate to describe the depth of his fiscal discipline. However, even he was only able to hold average annual spending increases to 5% (0.9% greater than TABOR limited increases annually). This equated to a total real per capita spending growth of 7.5% during his eight years in office.
The need for a constitutional amendment in New Mexico is dire. Per capita spending on Medicaid is up 210% over the past 13 years. In public education, per capita spending is up 19%. Despite all the pronouncements that taxes have been cut in the last few years, the reality is quite the opposite. It is true that the personal income tax is on a five-year glide path that will put New Mexico in line with our surrounding states. The bad news is that tax increases enacted over the last two years will offset tax decreases by $70 million in 2004, by $124 million in 2005, and by $106 million in 2006. A quick scan of news headlines reveals that Santa Fe is not prepared to take any steps to control spending. In fact, On September 17, 2004, it was reported that the upcoming Medicaid costs are projected to increase by $100 million over this year’s level.
In a TABOR controlled environment, state government would be forced to deal with the reality that for all the money we throw at various government programs, Medicaid, education and the like, no real improvement has resulted. How much spending is enough?
Given a multi-generation track record of more and more spending, the solution is not money. However, as long as government is unrestrained in its ability to raise tax revenue, real solutions to our most pressing problems will not be found. Further, our economy will be forced to languish under a stifling and ever growing government.
A constitutional amendment would limit the growth of government and thereby enable tax reductions and increased prosperity. The people need to take control.
If we can prevent the government from wasting the labors of the people, under the pretence of taking care of them, they must become happy.
Thomas Jefferson 1802
The gross receipts rate of tax on goods and the top rate on individual income are more in line with other states.
Written by Kelly S. Ward and Harry Messenheimer, PH.D

Santa Fe’s ‘Living Wage’ Misguided

On June 24, a New Mexico District Court judge upheld Santa Fe’s “living wage” law. Businesses and their employees should appeal the judge’s ruling because the law will benefit a few workers but will overwhelm these benefits with costs that others would bear.
Santa Fe’s Living Wage Ordinance was enacted in 2002. It initially applied to city employees, employees of firms with service city contracts of $30,000 or more, and certain recipients of economic development assistance from the city. Now the city council has extended the ordinance to every business in town employing 25 employees or more.
Minimum wages would initially rise to $8.50 an hour, to $9.50 an hour in January 2006, and $10.50 in January 2008. For comparison, note that the federal law sets a minimum wage of $5.15 an hour, or $2.13 an hour for tipped employees. By contrast, the Santa Fe ordinance would boost the minimum wage for tipped employees to $5.50. Most of the unskilled workers in Santa Fe are in hotels, restaurants, shops, supermarkets and grocery stores.
The major negative impact of minimum wage laws is unemployment among unskilled workers – mainly teenagers, women and minorities – leading to heavy economic losses to these groups. This has been documented many times for minimum wage laws at the national level.
These impacts are likely to be even greater for small towns that enact “living wage” laws because many firms can avoid the extra labor cost simply by moving to another town. Two factors will cause unemployment among the unskilled workers to rise:
  • First, the substitution between labor and capital. Faced with a higher minimum wage rate, employers would invest in less labor-intensive machinery that would enable them to hire more-skilled workers at the expense of less-skilled workers.
  • Second, the rise in the price of services rendered by the affected industries would drive up prices, thus inducing consumers to purchase less – resulting in worker layoffs. For example, higher prices charged by hotels would induce some opera fans to return to Albuquerque rather than spend the night in Santa Fe after the opera. Some number of tourists from around the country would change their plans too.
The smallest businesses aren’t covered by the new law, but some of those in the 25 to 100-employee range may not survive. For example, The Marketplace Natural Grocery in Santa Fe has some 80 full-time employees. Of those, the majority are clerks, stockers and baggers who earn less than the proposed “living wage.”
This small store faces competition from chain stores like Whole Foods and Wild Oats that could absorb temporary losses until they invested in labor-saving machinery. For their smaller competitors, the increase in labor costs might be fatal.
There will be other economic disruptions, stemming from poor targeting, that are less visible. For example, some firms might counteract the higher wage by reducing the fringe benefits they offer. Thus, the “living wage” in these cases would have no net benefit to workers. Indeed, since wages are taxable and fringe benefits aren’t, workers might well be made worse off. Other examples of poor targeting are tipped employees and employees from a family of two or more earners.
First, even with a minimum wage of $5.50, a tipped waiter may be earning something like $15 an hour. This tipped employee is likely not poor, just a student who earns some extra money during the summer that would help defray his tuition and room and board while attending college.
Second, poor targeting will increase the incomes of teenagers and unskilled women in two or three-earner families. The worst case scenario is that of a household of two wage-earners, where one member earns $40,000 annually and the other earns $7 an hour. Together they earn $54,560. Raising the minimum wage rate from $7 to $9.50 in 2006 would add $5,200 to their annual income.
The logic of the “living wage” or, more correctly, the mandatory minimum wages, is flawed. Basically, it is the philosophy that a government can force producers to pay employees more than the value of their contribution to production. Economic theory is very straightforward in this issue: If we want to raise the wages of unskilled laborers we should induce them to become more productive by acquiring more schooling and better skills – either on the job or at schools.
Gisser is UNM professor emeritus of economics and a senior fellow at the Rio Grande Foundation. Brown is a research director for the foundation.

Let New Mexican Business In On Tax Breaks

New Mexico tries to lure new businesses into the state with a menu of financial incentives. The state offers tax breaks galore, loans, equity investment, and more. Forty-seven different incentive programs, according to the Economic Development Department.
But does this approach work? I certainly have my doubts, and I don’t believe that anyone can prove that it has any substantial benefit.
Business-luring policies are widespread. All 50 states and thousands of cities and counties give location incentives to firms that might “create jobs.” But these efforts are seldom evaluated, and what evaluations as exist tend to ignore such central questions as how long the jobs last.
I’d like to see a rigorous study of New Mexico’s benefit-cost record in attracting industries, but none is likely to appear. More likely, we’ll see claims of success whenever an out-of-state firm accepts a tax break and, coincidentally, moves here.
The first problem with subsidizing selected companies is that governmental operatives are assumed to know more about prospects of targeted firms than do private investors, and this is hard to believe.
Recently the state planned to spend $15 million buying into Mesa, which took over the closing Phillips semiconductor plant. Given the chancy nature of the semiconductor industry and the almost complete lack of interest by private capital, this was a high risk long shot. Fortunately, taxpayers were saved from probable losses when the lone private investor pulled out and the state blanched at the prospect of putting up even more money. But it was a close call.
One well might question whether such ventures are even “investments” in the usual sense of the word. If I invest in GM stock, I always have the option of selling my shares. But when the state “invests” in some venture, it’s stuck for good; rarely does the state ever sell its interest in the company it’s put money into.
Another problem with targeted tax breaks is that the state is driven into supporting risky ventures. There’s no point in investing in sound companies, because they would do fine anyway.
The target, therefore, must be the marginal firm, the one that needs just that extra jolt of help from the state. But these are precisely the companies that are teetering on the brink of failure. Either that or they are so mobile (like call centers, for example) that before long they will succumb to the enticements of some other state.
Third, much of the benefit goes to currently out-of-state businesses and job seekers. We shouldn’t be running a charity for discontented Texans and Californians. Some New Mexicans will get jobs when an out-of-state business move in, but that is offset by higher tax bills for those of us funding this largess.
Finally, most prospective newcomers will insist upon tax breaks, even if they don’t really need them. Identifying such pretenders is doubtful.
Some of this lure-a-company policy is reasonable. Advertising New Mexico’s business advantages makes sense (although plastering Times Square with a huge picture of the governor was a bit much). The state’s web site does a good job of outlining our tax structure and gives a glowing depiction of New Mexico’s business climate. It features the planned reductions of top marginal income tax rates, while discretely avoiding mention of recent increases in several excise taxes. .
But it’s one thing to advertise the current climate for business, and quite another to guarantee against tax increases in the future. Companies will look past the immediate inducements and size up the prospects for taxation five or ten years in the future. In New Mexico, this is worrisome at best, with unresolved budget pressures (from Medicaid, for example) and tax increases looming.
The best way to promote business confidence in New Mexico would be with a constitutional amendment holding future state spending growth rates to the sum of population growth and inflation. We should copy Colorado’s “Taxpayers Bill of Rights,” which has brought a marvelous improvement in that state’s economy.
Lower taxes across the board, not just for newcomers, and the promise of stable, reasonable taxes in the future, will do more for the state’s economic development than targeted incentives.
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.
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.


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.