Category: Economy

Categories
Economy Research Tax and Budget

The Tax Man and the Moving Van: Fiscal Policy and State Population

This Rio Grande Foundation study, “The Tax Man and the Moving Van” examines U.S. Census data from 1995 to 2000 in an effort to determine the factors that drive Americans to relocate to other states. The study’s findings suggest that people exercise their options by moving into states with low tax burdens and favorable business climates, and exiting states with high tax burdens, poor business climates, and higher relative costs of living. New Mexico, a state which has historically had relatively high taxes and an unfriendly business climate, lost significant numbers of citizens – especially the young and educated – to other states during this period.

Click here to download the entire study.

Categories
Economy Public Comments and Testimony

Rio Grande Foundation President Paul Gessing’s Comments to Governor Bill Richardson’s Task Force on Eminent Domain Use

Chairman Bullington and distinguished Members of the Task Force, thank you for inviting me to address you on the issue of eminent domain in New Mexico and what, if anything should be done about it. My name is Paul Gessing. I am President of the Rio Grande Foundation. The Foundation is registered as a 501c3 in the state of New Mexico. Our mission is to promote the ideas of Liberty, Opportunity, and Prosperity here in the state. We do this by informing New Mexicans of the importance of individual freedom, limited government, and economic opportunity. We receive financial support from over 200 donors and foundations and the approximately 1,000 people who have signed up to receive our regular updates.

Although the Rio Grande Foundation is an independent organization dedicated to New Mexico, we are part of a nationwide network of like-minded policy organizations called the State Policy Network. A bulk of our work deals with economic policy, but we also support reforms that promote fair, competitive elections and greater participation in the political process on the part of the people of New Mexico.

While we had a number of concerns about the eminent domain bill that Governor Richardson vetoed earlier this year, we believe that its limited protections would have been better than nothing. However, if this task force’s recommendations assist Governor Richardson and the Legislature in creating stronger protections for property owners than last year’s bill would have achieved (with specific language along the lines of what Ms. Perkins described to you last week), then we will be extremely pleased.

Property Rights and the Harm of Eminent Domain Abuse

Although eminent domain was not at the top of many Americans’ agendas prior to the Supreme Court’s decision in Kelo, which was handed down in June of 2005, government’s use of the power has been controversial since the founding of the Republic. Back in 1795, in fact, the Supreme Court, ruling in the case of case of Vanhorn’s Lessee v. Dorrance, called eminent domain “The despotic power” and urged states not to exercise that power “except in urgent cases.” The justices went on to say that they could not imagine a situation “in which the necessity of a state can be of such a nature as to authorize or excuse the seizing of landed property belonging to one citizen, and giving it to another citizen.[1]”

We at the Rio Grande Foundation agree with the Court’s 1795 ruling. That is because it is our strong belief that private property rights constitute the foundation upon which all other human freedoms are based. Respect for private property is one of the major differences between America and less-free nations.

As I will explain later on in my testimony, those concerned with promoting long-term economic growth have a significant interest not only in maintaining individual property rights, but in protecting themselves against the often misguided and expensive plans of government officials and politically-connected developers.

First, let me briefly describe the situation as it stands now. Despite the explicit prohibition against taking private property for public use without just compensation found in the Fifth Amendment to the United States Constitution (and despite the precedence provided by the Court’s 1795 ruling), the Supreme Court’s 5-4 decision in Kelo throws the door open for eminent domain as long as government officials have a “plan” and believe that there will be some economic benefit from the taking. Thus, in just over 200 years we have moved away from using eminent domain to facilitate the construction of roads and bridges (which clearly fulfill the “public use” requirement), to allowing eminent domain to pave the way for a shopping center or new corporate offices. In the post-Kelo world, as long as government officials believe that tearing down a Motel 6 and giving the land to the Ritz Carlton will generate greater tax revenue, the use of eminent domain is perfectly acceptable (this example was used by Justice Sandra Day O’Connor to clarify the arguments being made by the City of New London lawyers during the Kelo hearing).

Although the Kelo decision put eminent domain front-and-center in American public opinion, the fact is that the habit of using eminent domain to force private-to-private property transfers had become all too commonplace in many states even prior to Kelo. In New York alone between 1998 and 2002, there were 146 instances of eminent domain for private use – and these are just those instances that the media publicly documented; we have no way of knowing how many so-called consensual or voluntary takings occurred where property owners were threatened with eminent domain. These takings were primarily based on precedents set by two court decisions. The first case was the U.S. Supreme Court’s 1954 Berman v. Parker decision, which allowed governments to use eminent domain to seize private property in order to tear down so-called “blighted” areas.

For those of you who are familiar with the neighborhoods of Washington, DC, it was Berman that is largely-responsible for the Southwest quadrant of the city. Unlike much of the city which has managed to retain its charming brick row-houses and is now in the midst of a tremendous revival, the Southwest quadrant – which was home to a predominantly black population – was bulldozed in the 1950s to make way for 1960s and 70s “redevelopment” using massive slabs of concrete that have proven inhospitable to the urban life so prevalent in the rest of the City.[2]

The second decision – the one that really began the trend of eminent domain for private use – was made by the Michigan Supreme Court and is known as the Poletown decision. In this 1981 ruling, the Michigan Supreme Court allowed the city of Detroit to bulldoze an entire neighborhood, complete with more than 1,000 residences, 600 businesses, and numerous churches, in order to give the property to General Motors for an auto plant. That case set the precedent, both in Michigan and across the country, for widespread abuse of the power of eminent domain. It sent the signal that courts would not interfere, no matter how private the purpose of the taking.

New Mexico and Eminent Domain

Thankfully, despite the broad power given to it by the federal government and a State Constitution that offers relatively few protections for New Mexicans, governments in this state have not engaged in the kind of massive abuses of eminent domain found in other states. But, that is not to say that as more people move to New Mexico and as the state continues attracting more businesses and heavy industry – with requisite calls for “economic redevelopment” – that eminent domain abuse will not become a greater problem.

Now, as Rio Rancho Mayor Kevin Jackson discussed last week, there are some specific problems relating to the platting of land in New Mexico and our state’s history that have created added pressure for eminent domain in certain areas. Given a situation in which so many land owners in the areas affected by poor platting have not developed their land and that so many of these parcels of land are owned by individuals residing elsewhere, I can understand why city officials were willing to delegate their eminent domain power to a developer. After all, they had been presented with a seemingly reasonable and generous offer and since “obsolete platting” technically creates conditions of “blight” as defined in New Mexico law, this may have seemed like the simplest option.

Obviously, we’re not dealing with a situation as we saw in Connecticut where Susette Kelo and many of her neighbors had been living in their houses for upwards of 50 years. While Rio Rancho’s use of eminent domain to resolve its platting problem is unlikely to stir up that kind of backlash from the American people or even a majority of New Mexicans, it is not necessarily the best policy either. More importantly, it is vital that opponents of eminent domain reform not use what amounts to a historical anomaly to derail strong eminent domain protections for all New Mexicans.

The Problem of Platting and Blight

I want to stress to this panel that the Rio Grande Foundation is concerned about the likelihood for abuse contained in any “blight” exemption that might be contained in any new eminent domain restrictions. Prior to the Kelo decision, blight was used and abused regularly by state governments in their uses of eminent domain. In fact, in Lakewood, Ohio, the City attempted to condemn homes using eminent domain by calling the area blighted. Why was this community considered blighted? Well, some homes didn’t have an attached two-car garage or they had less than two full bathrooms. Other than that, the homes were well taken care of.[3] My point is that even the most innocent and well-intended blight definition will inevitably be twisted, expanded, and even redefined by special interests over time, so I urge you to keep that in mind when making your recommendations.

I’d like to discuss the specifics associated with the platting issue that was discussed last week and offer some ideas for ways in which legitimate economic development in a poorly-platted area like Rio Rancho might occur without resorting to abusing eminent domain. First and foremost, as was touched on yet not elaborated upon last week, if any property poses a specific physical danger to any nearby other property, there are existing police powers that can be used to address the problem. The fact is that whether the situation is a crack house down the street or the potential for massive flooding, governments can and do have the power to act to protect citizens.

Now, as I understand it from last week’s discussion, Rio Rancho has in the past struck deals with Pulte homes to allow Pulte to essentially “borrow” the city’s eminent domain power in order to develop specific parcels of land that were poorly platted. At the same time, Pulte has provided significant infrastructure to the city and to residents of the new development. This may sound like a win-win deal, but what about those people who wanted to build their retirement homes on that land? Also, did those property owners really get fair market value for their land or was Pulte able to use the eminent domain club to get the land at a reduced cost with enough left over to provide the added infrastructure and still make a tidy profit? I don’t have all of the answers to these questions, but I can tell you that allowing private entities to use government power – even if it appears to be for the good of the community – is likely to be abused.

It is the Foundation’s belief that ultimately a free or at least less coercive environment could have led to a similarly beneficial result. Here I will outline some ideas on how things might have been handled differently and how they might be handled in other similar situations in the future.

  • A private developer ie. Pulte works with individual landowners to assemble parcels of land large enough for development. This is the most logical and simplest of all choices. Why hadn’t it been done before? Possibly, Pulte and other developers, cognizant of the eminent domain threat at their disposal decided against the more difficult and possibly more costly method of assembling parcels of land and decided against this method because they felt they could get the land cheaper with the City’s help.
  • The City could contact landowners throughout the parcel of land and explain to them that if they agree to sell their land which, in its current ownership structure is worth far less than its real market value if assembled, they can cash in on the opportunity to sell for a decent price. As the city assembles those voluntarily willing to part with their parcels of land for a fair price, developers could then bid on the right to develop that particular area.
  • Additionally, Rio Rancho could look to the example the city of Anaheim, California provides, where the Mayor has chosen to solve platting problems as well as stagnant development without resort to eminent domain. In Anaheim, the city used a strategy of overlay zoning and also announced a sort of first-come first-served policy on applications for residential permits.  So, developers who sought approval for 200 condo units would get it, up to whatever the city determined was the maximum. Rio Rancho could do something like that, perhaps with utilities or other permits. That encourages developers to buy and people to sell while it’s still saleable.
  • Lastly, and only in areas that are considered threats to other areas, the city could indeed use its powers of condemnation in order to construct flood control ponds and other tools to ensure the livability of already-developed areas. It is unclear to me exactly how developing particular parcels of land protects adjacent land, but in the likelihood that this is the case, the legitimate use of eminent domain for flood protection is indeed a public use and would be legal under even the most restrictive eminent domain abuse protection legislation. If the City felt it necessary to recoup the costs of these outlays, it could easily do so by taxing existing and future residents to pay for these flood control services.

While it is possible that the City could indeed leverage the resources of private developers in order to improve flood protections and protect homeowners in existing developments (with or without abusing eminent domain), it is hard to see why existing homeowners should have the right to force development of a particular parcel of land in order to protect their homes. These people clearly purchased their houses without the adjacent land being developed. If their properties need additional protections from the ravages of Mother Nature, it is ultimately their responsibility to pay for it.

More “Typical” Eminent Domain Abuse

While it is worthwhile to spend a significant portion of my time discussing the platting issue which is admittedly somewhat tricky, I believe that the more “traditional” forms of eminent domain abuse will become increasingly common in New Mexico. In fact, current efforts to create a “city center” in Ranchos de Albuquerque may fall into this category. Although the village has, to my knowledge, not yet used eminent domain to condemn any property owned by existing landowners, the threat of eminent domain has been made in the pages of the Albuquerque Journal.

Should the village ultimately resort to using eminent domain to take land from one group of private property owners for the benefit of other private individuals or entities and, at least theoretically, the people of Ranchos de Albuquerque, this would qualify as eminent domain abuse. This is exactly the type of development that we believe must be prohibited under New Mexico law.

While Jennifer Perkins covered many of the policy prescriptions and legal changes that New Mexico can implement in order to prevent this type of abuse from occurring, I’d like to point out exactly why governments should refrain from becoming intimately involved in economic development issues in general and why eminent domain is especially ripe for abuse. These are not simply moral arguments; rather they are economic and moral. Time and again, the economic evidence has shown that the economies of nations, states, and cities are improved when governments protect property rights and create an even playing field without picking favorites.

I have already mentioned Michigan’s Poletown decision. In 1981, the Michigan Supreme Court allowed the City of Detroit to seize and bulldoze an entire neighborhood so that General Motors could build an auto plant. More than 4,200 people were displaced from their homes, 140 businesses were lost, as were 6 churches and a hospital. GM paid Detroit $8 million for the property, while the City paid more than $200 million to acquire and prepare the land.[4]

Although Detroit Mayor Coleman Young and GM had promised the project would create 6,000 jobs, when all was said and done, the plant employed only 2,500 people. It is estimated that the Poletown taking resulted in a net loss of jobs and it is clear to me that along with the substantial loss of property tax revenue, the city was ultimately worse off from a revenue standpoint than it was before.

There are dozens of similar examples all across the country.[5]

Conclusion

Simply put, eminent domain for the supposed benefit of economic development is the most significant rationale for abusive use of eminent domain and, if Governor Richardson and the Legislature fail to act, it will become a problem here. To that end, I urge you to use the model legislation and language provided by Ms. Perkins in your recommendations and to keep in mind that when we as a nation have been at our best it has been due to our respect for the rights of the individual. The times at which we have been at our worst have unfortunately been the times when we have forgotten the inalienable rights the Founders set forth in the Constitution in favor of some collectivist agenda.

There is no doubt that eminent domain has a role to play in our political and economic system. Without it, the Interstate Highways would never have been built and countless utility and other projects that are used by all of us on a daily basis would never have been created. Yet, I hope I have clearly illustrated the very real problems that arise when governments at any level abuse or even delegate their powers to private entities.

As Justice O’Connor noted at the end of her dissent in Kelo:

Any property may now be taken for the benefit of another private party, but the fallout from this decision will not be random.  The beneficiaries are likely to be those citizens with disproportionate influence and power in the political process including large corporations and development firms.  As for the victims, the government now has license to transfer property from those with fewer resources to those with more.  The Founders cannot have intended this perverse result.  “[T]hat alone is just government,” wrote James Madison, “which impartially secures to every man, whatever is his own.”

In closing, I would like to remind you that the purpose of this task force is to consider, not whether eminent domain for private benefit can be useful, but whether or not eminent domain is a necessary tool for state and local economic development. While there are situations in which it might be simpler to use government power to quite literally steamroll the opposition, we must create a legal framework deferential to individual property rights, lest those rights be abused.

Thank you for your time and attention this afternoon. I look forward to answering your questions.

[1] Jeff Jacoby, “Abusing Eminent Domain,” The Boston Globe, September 30, 2004,http://www.boston.com/news/globe/editorial_opinion/oped/articles/2004/09/30/abusing_eminent_domain/.

[2] Charlotte Allen, “A Wreck of a Plan: Look at How Renewal Ruined Southwest,” The Washington Post, July 17, 2005,http://www.washingtonpost.com/wp-dyn/content/article/2005/07/15/AR2005071502199.html.

[3] 60 Minutes, “Eminent Domain Being Abused?” July 4, 2004, http://www.cbsnews.com/stories/2003/09/26/60minutes/main575343.shtml.

[4] Castle Coalition, “Redevelopment Wrecks,” June 2006, http://www.castlecoalition.org/publications/redevelopment-wrecks/index.html.

[5] Paul J. Gessing, “Eminent Domain Abuse: If they Can’t Tax It, They’ll Just Take It,” National Taxpayers Union, August 24, 2004,http://www.ntu.org/pdf/ib_ntu_148.pdf.

Categories
Economy Oil & Gas Transportation

Hysteria Over High Gas Prices is Pumped Up

The hysteria surrounding the spike in gasoline prices has risen to the level of the late 1970s and early 1980s “oil-crisis” madness. Most of the media is actively participating in the doomsday chorus, and the House of Representatives recently voted 389-34 to make gasoline “price gouging” a federal felony. It is time for some serious economic analysis.

First, let us examine gasoline prices expressed in today’s dollars from 1971 to 2005. During the first three years of the 1970s the price has been about $1.50 a gallon, then, because of the OPEC disruption and the Iran-Iraq war, it soared to unprecedented high levels, hitting a peak of $2.70 a gallon in 1981, and then receded gradually, returning to its early 1970s price of $1.50 in the mid 1980s. Until 2003, gas prices fluctuated around $1.50 a gallon. In 2003 gasoline prices began a climbing trend, reaching an annual average of $2.31 in 2005.

Surprisingly, today our economy is robust despite the spike in oil prices. There are two reasons for this: First, at a price of $1.50 a gallon, due to personal income growth and increased automobile efficiency, the percentage of average household income spent on gasoline fell from 4.5 percent in 1971 to 3.1 percent in 2001.

Second, President Bush’s tax cut in May of 2003, supported by accommodating monetary policy, gave the economy a huge boost that easily swamped the impact of rising gasoline prices. Politicians who advocate restoring taxes to their pre-May 2003 level should think again.

The present spike in gasoline prices— surprise, surprise— occurred because supply and demand for a change have not been going hand-in-hand. Demand for oil has intensified since the economies of China and India have at long last taken off. But the growth in oil supply slowed down considerably in the wake of Katrina and Rita, the instability in the Middle East and in response to the new ethanol legislation fiasco. That policy forced oil companies to shoulder the distorting 54-cent a gallon tariff to protect ethanol producers.

In the short term Congress could alleviate the market pressures by rescinding the ethanol tariff, abolishing— or at least relaxing— the “boutique” regulations that hinder gasoline mobility across the United States, and doing something about the NIMBY (not in my backyard) activists who are responsible for the freeze in the number of oil refineries.

Politicians who incite against the oil companies are working for re-election, not for American consumers. In particular they have launched a witch hunt for price gougers.

Economic theory is very straightforward on this issue: Price gouging is possible only if producers collude. For example, a lonely wheat farmer in Minnesota cannot raise the price of wheat over the prevailing price in the marketplace. But, if all wheat farmers colluded they could conceivably become a cartel of gougers. Hypothetically, since the oil and gas industry is somewhat concentrated, oil and gas companies could conspire and raise the price to a monopolistic level.

However, this is very unlikely: First, charges of price fixing may send oil executives to jail. Second, if oil executives were willing to take the legal risk involved in price fixing, they would collude when the price is $1.50, not $3 -a-gallon, when everybody wants to stick it to them. It is safe to assume that oil executives’ brains do not shrink when gasoline prices rise.

Some oil industry bashers advocate slapping the oil companies with profit taxes. Economic theory is also straightforward on this issue: Initially such a tax will not affect the level of production because it will not modify the conditions for profit maximization. In the long run, however, oil companies will have less profit available to reinvest in new drilling and better technologies. The impact on future oil and oil-substitute production will be devastating. So, what to do in the long run?

The long run begins in Alaska. The first step to accelerate the supply growth of oil should be taken by drilling in the Arctic National Wildlife Refuge. The environmentalists continue to argue that drilling in ANWR and shipping oil via pipe across Alaska will devastate caribou and other wildlife. Fact is that the caribou herd in the Prudhoe Bay oil field has grown more than sevenfold since the Prudhoe Bay project started in the mid-1970s.

Last, but not least, there is a danger in the free world’s relying on the turbulent Middle East for its huge exports of crude oil. Advancing alternative energy resources through selective subsidies or regulations is a bad idea— it leads to economic inefficiencies and political pressure groups that invest time and money in lobbying for even higher subsidies for their specific product.

To reduce our reliance on oil from the Middle East we must eliminate the anxiety stemming from oil-price instability. For this end, Congress should initiate setting a floor for the price of oil at a relatively high level, maybe something in a range of $40-$55 per barrel. This could be implemented by imposing a flexible duty on imported crude oil. This is a bad idea whose time, unfortunately, has come.

Micha Gisser is professor emeritus of economics, University of New Mexico, and a senior fellow, Rio Grande Foundation.

Categories
Economy Education

Shift Burden of Financing Schools to Private Sector

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The recent agreement between the Albuquerque Public Schools and the Home Builders Association of Central New Mexico was a real head-scratcher for several reasons.

After all, who gave the home builders and the school district the power to tax? Even if this action is found to be legal, a questionable proposition at best, $2,000 per new home seems rather arbitrary (the number will rise to $3,000 in the third year). What exactly are the home-buyers who will ultimately pay this new tax getting out of the deal?

Some would argue that forcing new homeowners to pay for new schools is similar to a “user fee” because new homeowners demand additional services. But, this is not the case because buyers of new homes pay the same taxes as everyone else. It is simply not fair to charge retirees (or anyone else without kids in public schools) yet another tax, simply for the “privilege” of purchasing a newly-constructed home.

Nearly as important as the fairness question is whether the schools really need the money they say they do. APS claims it needs an astounding $1.7 billion for two new high schools on the West Side and renovations to existing school buildings. Rather than simply raising taxes though, with a little creativity, APS could avoid this tax increase and transform schools into thriving community centers that can be used on weekends and during summers.

The key is to put an incentive structure in place that creates maximum benefits at a minimal cost. This can most effectively be done by shifting the burden of financing new schools to the private sector. It works like this:

# School districts ask private developers to bid on a contract to construct (or renovate) a school from start to finish.

# The district converts the cost of the project into a 20-year lease with annual rent payments equal to 85 percent of the cost of the project (based on the winning bid).

# The developer completes the school with furnishings (such as desks and chalkboards), computers, administrative offices, landscaping, and athletic facilities.

# The district effectively gains use of a school building for 15 percent less than it would cost to construct on the district’s own accord.

Private developers receive an additional bonus: They get control of the buildings and classrooms when they are not in use by the school. During evenings, weekends, and (possibly) summers, the developer may lease classrooms to for-profit trade schools and approved civic, political, or religious groups.

Projects like this have been undertaken in Florida, Nova Scotia, and Britain. APS should consider similar financing efforts both for constructing new schools and renovating existing schools.

An additional way to cut school construction costs is to exempt public school construction projects from New Mexico’s Davis-Bacon “prevailing wage” law. If the Legislature were to approve such a measure, taxpayers and school districts would likely save an additional 15 percent on school construction.

A 1995 study by the National School Boards Association demonstrated that over 60 percent of school boards found that federal or state Davis-Bacon laws had increased the cost of a recent construction project, and over half had increased as much as 20 percent.

Lastly, Albuquerque must work in concert with the governor and Legislature to better rationalize its school funding system. If East Side taxpayers refuse to pay for new schools on the West Side, perhaps the district should be split in two. And, rather than pouring taxpayer money into the construction of additional schools, perhaps money should be given to parents themselves so they can decide whether charter, private or traditional public schools are best for their child.

Throwing more money at Albuquerque’s troubled school system is not a recipe for success. Instead of abdicating their taxing authority to APS, our elected officials need to come up with innovative ways to save money.

The Rio Grande Foundation is an independent, nonpartisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.

Categories
Economy Energy and Environment Oil & Gas

Drilling for Votes: N.M.’s Representatives in Washington Have No Business Accusing Big Oil of Price Gouging

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Price gouging can be defined as “pricing above the market when no alternative retailer is available.” Sure, gas prices are higher than most of us might like, but this recent talk about collusion among oil companies to gouge consumers is rubbish, and our elected officials know better.

Unfortunately, rather than admitting their own recent mistakes are at least partially to blame for high gas prices, Sens. Pete Domenici and Jeff Bingaman, along with Rep. Heather Wilson, are pointing their fingers at big oil.

First, the facts on so-called price gouging. Unlike the U.S. Postal Service, Amtrak and public schools, oil companies face real competition. Why else would gas stations display their prices so publicly? If these companies could really manipulate prices at will, why wouldn’t they have colluded to sell gas for $3 a gallon five years ago, when prices were low?

In a competitive environment, if you choose to purchase a product or service from someone, whatever the cost, price gouging is simply not taking place. If it were, then those of us who purchased homes when prices were low and are planning to sell for double and even triple the original price are gouging, too.

The real wild card is, of course, Congress. While talking up the gouging issue, our elected officials seem unwilling to face up to their own mistakes, so they have chosen to demonize the oil industry.

In an effort to promote policy solutions instead of useless name-calling, New Mexico’s congressional delegation, especially the ringleaders on price gouging – Domenici, Bingaman and Wilson – should consider the following ideas provided by the Competitive Enterprise Institute:

Open a small portion of the coastal plain of the Arctic National Wildlife Refuge to oil and gas production. If there is as much oil as the U.S. Geological Survey’s estimate shows, this would increase America’s proven domestic oil reserves by approximately 50 percent. There is majority support in both the House and Senate for opening the refuge, but an obstructionist minority blocked enactment last year. The Senate again voted 51 to 49 earlier this year to open the refuge.

Open the Pacific, Atlantic and eastern Gulf of Mexico offshore areas to oil and natural gas production. America’s deep-sea reserves are potentially enormous, but – except for the western Gulf of Mexico, which is the United States’ largest producing oil field today – they have been put off limits by the federal government. Environmental concerns about deep-sea production are unwarranted. The last significant offshore oil spill in the United States was in 1969. Hurricanes Katrina and Rita last summer destroyed many oil rigs and platforms in the gulf but did not cause any significant spills. Congress should enact legislation this year to open offshore areas currently under moratorium and share federal royalties 50-50 with the states involved.

Repeal the new ethanol mandate included in the energy bill passed last year. The new mandate requires refiners to double their 2005 use of ethanol to 7.5 billion gallons per year by 2012. Higher demand is causing ethanol prices to soar. The mandate will require 22 percent of the U.S. corn crop to provide 4 percent of gasoline supplies. Repeal the current 54-cents-a-gallon tariff on imported ethanol. Domestic ethanol producers already receive 51 cents per gallon in federal subsidies. They don’t need any more protection.

All-too-often, our elected officials look for short-term electoral gains at the expense of sound policy objectives. We are now reaping the consequences of an energy bill that has failed economically and politically. Rather than enacting unwise price-gouging legislation, New Mexico’s elected officials should use their influence to promote a healthier debate focusing on real solutions.

Gessing is president of New Mexico’s Rio Grande Foundation, which describes itself as an “independent, nonpartisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.”

Categories
Economy

ACORN’s Agenda Falls Far From the Local Tree

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Albuquerque’s City Council is now considering whether or not to pre-empt an expected ballot measure campaign by the Association of Community Organizations for Reform Now (ACORN) on behalf of a $7.50 minimum wage for the city.
Given the mountains of economic evidence that government wage mandates harm economic growth, some elected officials are uncomfortable voting for a higher wage. Perhaps that is why Mayor Martin Chávez and several city councilors have, when pressed on the issue, passed the buck off to Congress, indicating that minimum wage rates are a federal responsibility.
Unfortunately, since ACORN already came close to success at the ballot box last year, Albuquerque politicians and the city’s Chamber of Commerce are working to pre-empt ACORN by passing their own “reasonable” minimum wage hike.
But bowing to ACORN’s demands without so much as a fight is exactly what this radical outfit wants and, like an unruly child who throws a tantrum until his parents give in, ACORN will view this “compromise” as a sign of weakness. It will quickly move to impose the rest of its far-left agenda on Albuquerque residents and businesses.
First and foremost, ACORN and its activists are, by and large, not locally based, so most of them don’t really care what happens to Albuquerque’s economy once they have their “victory.” ACORN was founded in Little Rock, and has offices spread around the country and Latin America.
While portraying itself as a humble advocate for the poor, ACORN actually promotes an agenda of anti-capitalism, central planning, victimology and government handouts.
ACORN’s political agenda includes unionizing welfare recipients, micromanaging banks’ lending practices under a federal law known as the Community Reinvestment Act, and passing laws to prohibit foreclosure, according to its Web site. Not only does ACORN wish to make doing business in big cities more difficult than it already is, it would like to trap businesses should they wish to leave, according to the site, Acorn.org. It proposes forcing them to obtain “an exit visa from the community board signifying that the company has adequately compensated all its employees and the community at large for losses due to relocation.”
ACORN is not even consistent when it comes to the group’s own radical notions of right and wrong. In fact, the group regularly takes actions that appear blatantly self-interested or hypocritical, as if its pure motives and laudable ends might justify less-than-elevated means. For example, even while pushing for living-wage legislation in California, ACORN was paying its workers less than the existing minimum wage — and arguing when the state sued it that the minimum-wage law infringed its First Amendment free-speech right, since paying workers more would hinder it in spreading its message.
The main factor in ACORN’s success is that local interest groups like the Albuquerque Chamber and local politicians lack the courage to stand up to the group. Instead, faced with the threat of Jesse Jackson-style direct-action, corporations often give generous donations to the group in order to buy peace.
In the same vein, rather than forcing ACORN to organize and run costly campaigns, local governments often cave to the group’s pressure by pre-emptively giving in to a majority of their demands.
If Albuquerque’s City Council caves to ACORN’s demands, they certainly won’t be the first to do so. But if they tell the group to take its recipes for urban decay elsewhere, they will be defending the interests not only of small businesses, consumers and taxpayers, but of those on the very bottom rungs of the economic ladder. For them the only alternative to working for unskilled wages is unemployment.
ACORN doesn’t really care what happens to Albuquerque, so we’d better start caring ourselves.
The Rio Grande Foundation is an independent, nonpartisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.
Categories
Economy

Human Events Panel Chooses ’10 Worst Government Programs’

Recently, I had the privilege of serving on a panel convened by Human Events Magazine that was assigned with the task of naming the 10 worst government programs. Other panelists included such luminaries as Larry Kudlow of Kudlow and Cramer fame, Walter Williams, one of the best-known economists in the country, and former House Majority Leader Dick Armey (among others) . The votes are now tallied and here is what we came up with. This was a weighted vote that included some 50 federal programs. I don’t necessarily agree with all of the panel’s choices, but it is a good listing and should provoke discussion.

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Economy

Federal Spending Hinders New Mexico Economy

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The humorist Will Rogers once said, “Be thankful we’re not getting all the government we’re paying for.” When it comes to federal spending in New Mexico, we’re not only getting all the government we’re paying for, we’re getting more.
This trend was revealed in a recent report by the Washington-based Tax Foundation. The study analyzed the distribution of federal spending on a state-by-state basis and found New Mexico to be the nation’s single greatest recipient of federal spending relative to how much the state’s taxpayers send to Washington in federal taxes. According to the study, New Mexico receives $2 in federal funds for each $1 we pay in federal taxes.
Some would say that New Mexico’s status as a net recipient of federal spending is a good thing. Our elected members of Congress might even say it is a sign that their efforts to bring earmarks and federally funded projects home (the Air Force’s recent decision to station the FA-22 fighter jets at Holloman Air Force Base being one recent example) are paying off for their constituents.
There are, of course, many reasons for New Mexico’s disproportionate level of federal largesse. The state has a number of military installations, scientific and research facilities, and as a western state, it is home to several National Forests and Parks. Thus, thousands of New Mexicans are employed in various federal jobs within the state. While these high-paying jobs might seem like an obvious economic boon to our economy, an analysis by the Rio Grande Foundation found that high levels of federal spending in a given state actually correlates with weaker economic growth.
Specifically, while our neighbors in Colorado and Texas receive less from the federal government than is taken from their taxpayers ($0.79 and $0.94 per $1 in tax respectively), Colorado’s gross state product (GSP) per person (the total market value of all the goods and services produced within its borders during a specified period) is 11th in the nation and Texas ranks 20th, New Mexico’s gross state product, on the other hand, is 44th in the nation per person. Since productive economic activity closely mirrors the creation of wealth and higher standards of living, Coloradans and Texans enjoy higher standards of living than New Mexicans even though the federal government takes from them and gives to us!
The trend of federal money flowing to poor states and out of wealthier states is not limited to the west. Vermont and New Hampshire are similar in geography and resources, yet New Hampshire receives $.67 for every dollar it sends to Washington while Vermont gets back $1.12. Despite this, New Hampshire has the 17th-highest GSP per person while Vermont lags behind in 35th place.
While federal transfer payments in the form of welfare and Social Security do skew the data somewhat, stark differences also illustrate two development patterns, one that relies on outsiders for support and another that derives wealth and economic strength from within. In a government-driven environment, benefits are limited to recipients of government largesse while innovation and entrepreneurship are not cultivated. In a low tax, low regulation environment, on the other hand, creativity is nurtured and the benefits of this creativity are spread throughout the economy.
Colorado, Texas and New Hampshire are wealthier than New Mexico due to their economic policies. Coloradans strictly limit state spending and taxes under their constitution, while Texas and New Hampshire lack prosperity-sapping income taxes (New Hampshire goes Texas one better and also refrains from taxing sales).
New Mexicans have little or no control over the location of military bases, Indian reservations and other national lands, but we must disavow ourselves of the notion that federal spending contributes to prosperity. We can get off the dole and improve our economy by passing our own constitutional taxpayer protections and eliminating taxes on income. The sooner New Mexicans realize that there is no such thing as a free lunch, the better off we’ll be.
Paul Gessing is the president of New Mexico’s Rio Grande Foundation, an independent, non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.
Categories
Economy Local Government

State Treasurer’s Office Needs a Dose of Free Market Principles

The multi-million dollar scandal in the state Treasurer’s office opened the door to much needed reforms. The problem is not merely some sticky fingered officials, but rather the way the operation ignores some obvious lessons of economics. Incentives really do matter.

The most straightforward and obvious reform would be to make the job of treasurer appointive rather than elective. This would prevent a repeat fiasco of an indicted Treasurer who can’t be fired except by impeachment. This change would also open the job up to financial experts who don’t want to run for office. Moreover, it would make the governor share in the responsibility for any further corruption, giving him a greater incentive to oversee treasury operations.

But more reforms are needed to eliminate what was the main vehicle for corruption, namely the dependence on “consultants” who compete for the chance to collect fat commissions and hence can be pressured into giving kickbacks to the Treasurer. With kickbacks adding up into the millions of dollars, one can only imagine just how much money has been forked over in consultant fees.

Given the tremendous competition in securities markets, it is doubtful that these consultants have any profitable advice to offer. How great could these consultants be if they find it expedient to bribe their way into business deals? But even if they were honest, their advice isn’t going to be worth much.

Burton Malkiel’s classic book, A Random Walk Down Wall Street, explains why stock pickers almost never outperform the market, and his analysis applies in spades to the motley crew of consultants picked by shady state officials. Information flows so quickly in the stock market that any piece of valuable information almost immediately is absorbed into the price of related securities.

Much of the work of the office is simply to manage short term income and outgo of monies. Rules of operation should be established, so that when the state has, say, $20 million to invest for 30 days the rules say “buy U.S. Treasury bills.” No, or very small, commissions, no self-serving portfolio-churning tips from consultants, and a sure rate of return. Treasury securities don’t have the pizzazz of whatever the consultants have probably been pushing, but they are as safe as you can get and tend to move with inflation.

Another way to dispense with consultants is to build more expertise within the Treasurer’s office (but without a net increase in the size of the staff). Former Governor Johnson was quoted as saying that the office would do fine with half as many people. If outside advice is really needed, then sign up with one reputable nationally known company on a negotiated fee-for-service, non-commission basis.

The spirit of these reforms also applies to the state investment officer and council with a few modifications. A sizable portion of the permanent funds under their management is in long-term investments. Again, hiring a whole raft of consultants makes little sense. Rather, go with one or two big investment firms like T. Rowe Price or Vanguard, and stick to their broadly based index funds of stocks and bonds.

Above all, resist the pressure to “invest” in New Mexico firms for some nebulous goals of economic development or jobs creation. The payoff will be slim or negative. Any firm that can’t attract funding in the private market is unlikely to be a sound investment of taxpayers’ money. Moreover, such an investment strategy is a magnet for favoritism and corruption on a large scale. (And in this context, the word “invest” probably should be replaced by “spend” or “squander.”)

In summary, organize the treasurer’s office and the investment council in a way that takes out the incentives for corruption, and taxpayers will get at least a little more of the good government they deserve.

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Economy

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.