Local Government

Cable and Internet Costs Would Come Down If We’d Just Get Modern and Institute a Competitive System

It is a widely known economic fact that in the absence of competition, consumers are stuck paying too much for too little in the way of goods and services. Nowhere is that truer than it is in the cable TV market.
New Mexico consumers are stuck with overpriced, inferior-quality video services, because federal and state regulations have failed to keep up with fast-changing technologies.
Unfortunately, New Mexico is not alone – almost every state in the Union regulates cable providers under outdated statutes written when the industry was in its infancy, before the word “Internet” even existed. In those days, there were only three TV networks, and no one had conceived of new, modern interactive video technologies that combine entertainment and advanced communications capabilities.
But we live in a much different world today. High-speed broadband service can give consumers access to video, voice and data communications, all wrapped in one package. New technologies promise to completely revolutionize home entertainment, education, business and health care in ways that we can only imagine.
But if regulations are left unchanged, it will be years before these technological benefits are available to consumers and states and nations that fail to update their laws will be left behind.
The fact is that while the United States and most states plod along on the regulatory equivalent of dial-up, other countries are enthusiastically adopting these modern communication technologies and seizing upon their benefits.
China is aggressively moving forward to provide these next-generation technologies to their citizens and workers. With an annual growth rate of 90 percent in broadband subscribers, China will surpass the United States in total subscribers sometime later this year. The United States also is losing ground in the percentage of households with broadband service as we sit at a lowly 19th in the world. Slovenia is expected to surpass the United States in broadband penetration by 2007.
The problem is simple: Our outdated laws make it almost impossible for new companies to enter the market.
Companies could offer high-tech Internet, TV, phone and more video services over new cables, but they must wade through quite a process to obtain a franchise for video service – though cable companies can sell anything they want with just one franchise. They are required to negotiate individual contracts with every city government in each service area. It is estimated that this cumbersome process will slow the deployment of broadband services in the United States by as much as 15 years.
In the meantime, our overly restrictive franchise system is making consumers pay through the nose for plain old cable TV.
In Albuquerque, Comcast increased its most popular package by $3 in August, raising the total price including tax to more than $50. This increase took place a mere 11 months after the last increase, a jump of $3.05 the previous September. Over the past six years, Comcast’s rates have shot up 60 percent. If there is any consolation, it can only be that we are not alone. Nationally, prices have increased upwards of 45 percent.
Unfortunately, we shouldn’t expect any real relief from rapidly rising cable bills until regulations are rewritten to allow for a competitive market.
Not only would prices come down – Texas has seen an average 25 percent decline in cable rates since it adopted needed reforms, including adoption of a statewide franchising system – but the benefits of greater competition would soon be felt.
The Standard Bureau of Economic Analysis estimates that each $1 of capital spending generates $2.86 of output in the telecom sector. Additionally, 18.2 jobs will be created by each $1 million telecom investment.
Many companies are ready to enter the market. They are prepared to invest billions of dollars in high-tech communications infrastructure. All that is stopping them is our counterintuitive franchise system.
Several states are attempting to modernize their laws, and some members of Congress are talking about changes at the national level, but these needed reforms can’t happen fast enough. We need New Mexico’s elected officials to push forward with franchise reform as well.
Our monopolistic system has run its course. Let’s try a competitive market, for a change.
Today’s Byline
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.”
Local Government Notable News

Condemnation Bill Veto Is Shocking

In a move that can only be described as “shocking” for both political and moral reasons, Gov. Bill Richardson became the first governor in the country to veto legislation aimed at protecting individual property owners from the abusive use of eminent domain.
According to the Institute for Justice, the nation’s leading authority on the use of eminent domain, abuse primarily occurs when the government takes one person’s property and gives it to another private party.
In June 2005, the Supreme Court’s decision in Kelo v. New London made eminent domain abuse constitutional by interpreting the Fifth Amendment to mean that any eminent domain taking, even for the express benefit of another private entity was legal as long as the condemning authority had a “plan” and officials believed that some public benefit would result from the taking.
Although the court’s decision was a tremendous blow to property owners everywhere, the court explicitly allowed for the possibility that states could place restrictions on the use of eminent domain. That is exactly what had been happening nationwide as more than 40 states have bills under consideration and six states had already passed bills to address the court’s decision. In fact, until Richardson’s veto, no governor had opposed efforts to limit Kelo’s reach.
It is surprising that the governor sees no problem in allowing state and local governments unfettered power to take people’s homes and small business. Even more surprising is that a man faces re-election this year and who, by all accounts, wants to run for president in 2008 would choose to take such an unpopular stand.
All available polling data shows that Americans of all walks of life are strongly opposed to the Supreme Court’s broad interpretation of eminent domain and would thus disapprove of Richardson’s veto.
While it is rare to find any issue on which more than 80 percent of Americans agree, poll-after-poll clearly shows that large majorities of Americans of all income levels, ethnic backgrounds and from all geographical regions oppose the use of eminent domain to further private development initiatives. In one recent survey by the American Farm Bureau, when respondents were asked about the Kelo ruling, an overwhelming 95 percent expressed disapproval; of those respondents, 87 percent said they disagreed strongly with the ruling. As a means of comparison, “only” 64 percent of Americans opposed the Dubai port sale.
Not only is opposition to Kelo remarkably broad, but Americans are demanding that something to be done to protect homeowners.
Conservatives and libertarians tend to believe constitutional limits on government power should be obeyed, but Richardson’s own base is even more directly impacted and mobilized. After all, Richardson calls himself a “business friendly progressive,” thus implying that much of his support comes from middle and working class New Mexicans.
The impact on the poor was explained by former Justice Sandra Day O’Connor in her Kelo dissent. O’Connor explained that “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.”
Despite his professed concern for poor and working class New Mexicans, Richardson has taken the side of the rich and influential developers on this issue. It will be interesting to see what the fallout from this move is for property owners – and for the governor’s political career.
Paul Gessing is the president of New Mexico’s Rio Grande Foundation. The Rio Grande Foundation is 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.
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.

Local Government

Let’s Make the Speediest Internet Access Available to Everyone in New Mexico

Right now the fastest and easiest way to connect to the Internet, the so-called “broadband spectrum,” is only available via cable or digital subscriber line (DSL) to those who populate the largest cities. Wouldn’t it be nice if rural areas could use the technology too? All that’s needed is a pizza sized satellite dish and a company willing and able to provide broadband service at a reasonable price. Unfortunately, if a coalition of lobbyists has its way, rural areas may never see broadband. Rupert Murdoch’s News Corporation and its allies are currently petitioning the Justice Department and the Federal Communications Commission to stop a merger that would finally bring those satellite dishes at a reasonable price to the countryside.

Maybe you have not yet heard much about broadband.  Unlike conventional phone-line connections, broadband is always on. It is also faster and more reliable than dial-up services. It can deliver voice, video and data across the globe.

Broadband has great potential in rural areas:

  • Farmers can use it to monitor field-specific conditions such as weather. They can also use it to keep abreast of pest alerts, prescriptive irrigation schedules and new crop models.
  • Now physically isolated from medical care, rural New Mexicans might one-day benefit from a budding telemedicine industry. Chronic conditions might be monitored from hundreds of miles away and diagnoses might be made without a visit to a doctor’s office.
  • Students also stand to gain. There are currently a number of interactive education programs available on broadband television.  Students can take courses in English as a second language, earn a graduation equivalency degree, or even receive college credit.
  • Perhaps the biggest benefit to rural users is the entrepreneurial uses not yet developed, uses that will help our rural areas prosper.

The problem is that these benefits and others may not be realized. For two years, the New Mexico Corporation Commission kept US West’s DSL lines out of New Mexico while connections were being set up in other states. The Commission refused to let US West in until it relinquished what the company saw as proprietary information. In December of 1999, the state finally relented, and DSL construction was soon underway.

Qwest has since bought US West. They and a number of other firms are now slowly making their way into the New Mexico market.  Understandably, it is logistically difficult and at times prohibitively expensive to run DSL lines to the far reaches of the state. That is why, nationwide, broadband is only available in five percent of rural communities. Since regulators delayed New Mexico’s deployment considerably, it is likely that far less than five percent of the state’s rural poor have the technology.

That is where satellite broadband comes in. Orbiting high above, satellites can theoretically beam broadband anywhere in the country. They don’t, however, because of an unfortunate combination of economic reality and political machination. The satellite industry is a perfect example of what economists call an imperfect market. Its cost structure is dominated by large fixed costs – that is, expenses incurred whether or not the firm actually churns out a product. In this industry, it costs millions to buy up broadband licenses and send a satellite into space. Once up, the marginal cost – that is, the expense of bringing the service into another home – is literally pennies. Because competitive firms must price at marginal cost, the satellite industry would not survive if it were perfectly competitive. Pennies simply won’t launch satellites. But if allowed to consolidate their efforts, firms can share the costly satellites and pool their broadband licenses. By joining up, these companies can serve people who otherwise would go without.  Economists call that efficient. Consumers call it service.

As it happens, the nation’s two major digital satellite television providers, EchoStar Communications and Hughes Electronics want to merge. They currently run the DISH Network and DIRECTV, respectively. But given their cost structures, they can only provide local network channels in one New Mexico market, Albuquerque. If merged, however, they can go from serving 42 television markets nationwide to all 210.

But just as New Mexico regulators once stood in the way of DSL lines, some want the Federal Communications Commission to thwart satellite broadband. Rupert Murdoch’s News Corp. sells programming like Fox News and FX to both cable and satellite operators. He worries that a merged buyer will have a stronger negotiating position than two buyers. Consumers, however, should not share his concern.  What Rupert Murdoch is worried about is losing his own market power, he isn’t worried about rural New Mexico’ economic development.

From the viewer’s perspective, the fundamental products are paid television and Internet service. Both are available through a number of other competitive sources so concerns about market power are mostly unwarranted. Since the companies have promised to price uniformly, rural users will benefit from this urban competition. The truth is that over a million New Mexicans outside the greater Albuquerque area stand to gain from the merger. These are people who, on average, make less than 70 percent of the typical Duke City resident’s salary.  They stand to gain from an open market. Let’s hope that Federal regulators listen to them and not Mr. Murdoch. If New Mexico officials were able to come to their senses, surely Federal regulators will.

Constitution and Criminal Justice Local Government Research Tax and Budget

The Pros of Privately-Housed Cons: New Evidence on the Cost Savings of Private Prisons

Rio Grande Foundation finds that private prisons mean big cost savings. New Mexico is in the vanguard of prison reform.
The Rio Grande Foundation has released a new study comparing the per-prisoner costs of incarceration across 46 states. Research economist Matthew Mitchell used regression analysis to isolate the factors that affect per-prisoner department of corrections spending.
He found that states with a large percentage of prisoners in private custody spent less per-prisoner than other states. States like New Mexico, for example, with forty-five percent of their prisoners under private management, spent $9,660 less per-prisoner in 2001 than non-privatized states. Given New Mexico’s prison population, that is an annual savings of over $50 million.
Other factors being equal, an increase in privately-housed prisoners was found to lower per-prisoner costs markedly. On average, states with five percent of their prisoners in private custody spent 14 percent less per-prisoner than non-privatized states. States with forty-five percent privatization, meanwhile, spent 32 percent less per-prisoner than non-privatized states.
New Mexico was one of the first states to privatize its prisons and has a higher percentage of prisoners in private custody than any other state in the union.
Mitchell’s study takes its place among a growing body of studies suggesting that private prisons are both cheaper and safer than public prisons.
Though not the focus of his research, Mitchell also found that states that enjoy right to work legislation spent $9,365 less per-prisoner in 2001 than states without such legislation. The evidence seems to suggest that if New Mexico joined the 22 other states with right to work laws, it would reduce per-prisoner spending even more.
Click here to download the full report in PDF format.