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.

See What Big Government Costs in New Mexico!

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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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

Why We Have a Water Crisis

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

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

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