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.
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.