Santa Fe’s ‘Living Wage’ Misguided
- First, the substitution between labor and capital. Faced with a higher minimum wage rate, employers would invest in less labor-intensive machinery that would enable them to hire more-skilled workers at the expense of less-skilled workers.
- Second, the rise in the price of services rendered by the affected industries would drive up prices, thus inducing consumers to purchase less – resulting in worker layoffs. For example, higher prices charged by hotels would induce some opera fans to return to Albuquerque rather than spend the night in Santa Fe after the opera. Some number of tourists from around the country would change their plans too.
Gov. Bill Richardson promises to try again in 2005 his plan to put some 600,000 public employees and retirees into a single health-insurance purchasing pool. While this plan would create a huge state institution that will not do much, if anything at all, for state and public employees, it does not address some of the serious health care problems we face in New Mexico.
The aims of any down-to-earth health care policy for New Mexico should be first to attract more physicians and other care providers to New Mexico; second to remove the vestigial gross receipt tax on out-of-pocket medical expenditures; and, third, examine the issue of the high rate of the uninsured in New Mexico.
The national rate of uninsured steadily, but slowly, increased from 12.9 percent in 1987 to 16.3 percent in 1998. Then it made a sharp turn and moved downward to 14.2 percent in 2000 and upward to 15.2 percent in 2002. The apparent cycle in recent years is mainly in response to changes in unemployment and health care costs. In the near future, when the unemployment rate will continue to decline, the national rate of uninsured will change course and turn southward. It is too early to make predictions about the long-run trend. In what follows I focus on interstate insurance comparisons.
The proportion of persons without medical insurance in New Mexico is one of the highest in the United States. Indeed, according to the U.S. Census Bureau, 14.6 percent of all Americans were without any insurance in 2001. Iowa , with 7.5 percent, had the lowest rate; Texas, with 23.5 percent had the highest rate; New Mexico, with 20.7 percent was the second highest.
I applied statistical procedures using Census 1999 and 2000 data for all the states for estimating the impact of economic and social variables on the rate of uninsured. First, I found that an increase of average personal income by $1,000 is expected to reduce the rate of the uninsured by 0.45 of one percentage point. Second, a one percentage point increase in the number of Hispanics is expected to result in a rise of one-third of one percentage point of uninsured persons. Third, a one percentage point increase in the ratio of blacks in total population is expected to result in only one-tenth of one percentage point increase in uninsured persons.
Why Hispanics are less likely than non-Hispanic whites to be covered by health insurance is a puzzle. New Mexico should support a study to explore this issue. Additionally, policy-makers should focus on the uninsured who are extremely poor, chronically ill or disabled. For starters, not all uninsured persons deserve subsidized medical care even when they earn low incomes. Consider young adults who just graduated from college. In general, these young adults are relatively more likely to contract HIV, suffer violent injuries in car accidents, and, if they are females, become pregnant. But, between their feeling of invincibility and small bank accounts, graduates shun inexpensive short-term plans.
Or, consider adults who are temporarily unemployed or in job transition and being aware of the de facto subsidized health care for the uninsured, fail to continue insurance by COBRA (Consolidated Omnibus Budget Reconciliation Act). Or, how about those who retire before qualifying for Medicare but decide not to buy an individual health plan because it is surprisingly more expensive than they imagined.
Finally, there are the risk lovers for whom gambling, no matter in what form, is fun. It is likely that the availability of Health Saving Accounts (HSA) signed into law by President Bush in 2003 will induce some of the above to insure themselves: HSA will give them the same tax advantages now granted to mostly all other groups.
But we cannot ignore the truly needy. Medicaid in New Mexico is very generous to children, including medically fragile children, the disabled, the aged who require institutional care and a variety of other needy persons, such as the blind. There is a subgroup, however, of extremely poor, chronically ill, or a combination of the above, adults who are uninsured and do not qualify for Medicaid. As an illustration, consider a single parent- a mother with two children- earning $20,000, or a married couple earning $20,000 in which one spouse is chronically ill. Instead of rushing to embrace a grandiose plan creating a huge pool for state and local government employees, our elected leaders should focus on the extremely poor and chronically ill. We need a solid economic study, based on a fresh survey of uninsured persons in New Mexico. Such a survey should sort the uninsured not only by the traditional explanatory factors- income, ethnicity, age and education- but also by Medicaid eligibility, unemployment status, job transition, recent graduation from college, being chronically ill and so on. The order of magnitude of the number of the truly needy among the uninsured is essential before any sound policy regarding the medically uninsured can be considered.
A Statistical Estimate of the Average Number of Physicians per 100,000 Residents in 1998 as a Linear Function of Personal Income, Medicare Expenditures per Enrollee and Medicaid Expenditures Per Recipient and per Capita
|Medicare Expenditures per Enrollee2000||Medicaid Expenditures per Recipient2000
|Medicaid Expenditures per Capita2000||Adjusted R2|
A Statistical Estimate of the Percentage Uninsured as a Linear Function of Personal Income, Hispanic and Black as Percents of Total Population, Educational Attainment and age
The Data are for 51 States
|Constant||Personal Income 1999||Persons of Hispanic or Latino Origin as Percent of Total Population2000||Black or African American as Percent of Total Population2000||Educational Attainment2000*||People 18 to 24 Years Old: Percent of Total Population2000||Adjusted R2|
Those who advocate the nationalization of the American health-care system often cite the trend of rising national health expenditures as percentage of gross domestic product. From 1960 to 2000, health care’s share of GDP in the United States increased from 5.3 percent to 13.2 percent. Rising personal income, higher quality care and insurance that insulates individuals from health care’s real costs are the main factors behind this trend. From 1960 to 2000 real GDP per capita, has increased from $13,155 to $32,670 (expressed in 1996 prices). During the same period, real GDP per capita devoted to non-medical services increased from $12,458 to $28,3588. Put differently, the so-called explosion in medical-care expenditures reduced the average annual rate of growth of real GDP per capita devoted to non-medical goods from a potential 2.30 percent to 2.08 percent.
American consumers are wealthier than ever: The more than doubling over four decades of real GDP per capita excluding medical expenditures is reflected in real consumption. The “explosion” in medical-care expenditures ate a bite of our salad, but hardly the whole lunch. And for that increase in health spending, we receive better high-tech care that was not available at any price in 1960.
In that light, the present looks pretty good. The future looks even better, mainly due to the surge of American productivity and the Health Savings Account Act that President Bush signed into law in 2003.
Traditional medical insurance covers two dissimilar events: minor ailments and catastrophic illnesses. If a consumer faces a 5 percent probability that she will contact a catastrophic illness in a given year requiring $20,000 of medical care, she would be willing to purchase a policy for $1,000 (plus transaction costs). She will not use more of the heart-surgeon’s services just because her out of pocket spending is zero.
This consumer also faces some probability of suffering the run-of-the-mill headaches, sniffles, backaches etc. Assume that she would be willing to purchase a policy for additional $1,000 for sniffles, etc. Under the tax law she is allowed to exclude $2,000 from her taxable income. Her demand for care for minor illnesses is inversely related to price: At the true high price she would consult the medical encyclopedia and use over-the-counter drugs. At a low price- zero if her insurance pays the entire cost- she would consume much more care.
The problem with the prevailing medical insurance is that the third-party payment of health care bills insulates the consumer from the real costs of medical care services for non-catastrophic illnesses.
The new Health Savings Account law basically allows the consumer in our example to set aside $1,000 in an HSA that is tax exempt, and can be used for sniffles and headaches at her discretion. If this year she spent only $300, she can use the remaining $700 for next year’s sniffles, or save it for retirement.
HSAs thus eliminate “moral hazard” by separating catastrophic from minor illnesses and injuries. Additionally, it is designed to enhance competition by eliminating managed-care-third-party restrictions. It is also likely that availability of HSAs would induce many of the uninsured to insure.
Furthermore, under the HSA law, it behooves our individual to convert a high-cost-$2,000 premium, low-deductible policy into a low-cost-$1,000 premium, high-deductible policy. Before the HSA option was enacted, such a transition would have resulted in a loss; turning the $1,000 premium saving into taxable income would have resulted in a loss of roughly 40 percent (income and payroll taxes.) But now, the individual can use the sum of $1,000 to fund a health savings account, and the contribution to this account will be fully deductible, whether she itemizes deductions or not.
Because of the contribution of the new HSA law to competition and efficiency, the next four decades look even brighter than the previous four.
There are two additional legislative modifications that should be initiated at the federal level in order to further reduce the future costs of medical care:
- Congress should change the Medicaid formula for matching state funds to making block grants. With block grants, states will have stronger political incentives to distribute Medicaid money more efficiently.
- In July 2003, the U.S. Senate could not muster the 60 votes needed to pass the medical liability reform to cap medical malpractice damage awards. They should try again, because such a reform would go a long way to reduce the cost of physicians’ services all over the United States.
The New Mexico Legislature removed the gross-receipts tax on payments to physicians from commercial managed care companies. But, the gross-receipts tax will continue to be imposed on the kind of out-of-pocket medical expenditures that would be made from health savings accounts. The 2005 Legislature should remove that vestigial gross receipts tax, an act that will make HSAs more attractive to consumers and help attract more physicians to New Mexico.
Let New Mexican Business In On Tax Breaks
Medicare Needs a More Logical Formula
The water crisis in New Mexico is overblown. We actually have a reasonably lively water market, and it is superior to those in most states. Professor Micha Gisser discusses the development of our water rights, impediments to improving them and ways we might reduce those impediments. Micha Gisser is senior fellow at the Rio Grande Foundation and Professor Emeritus of Economics at University of New Mexico. He has written extensively on energy and natural resource economics.
a. The Water Market in New Mexico
It is unfortunate that during the drought we suffer from inordinate attention from politicians and laymen given to a “water crisis” that does not exist. In what follows I attempt to first show that we have a sound water system in New Mexico which is based on water markets in which private water rights are traded, and, second, to shed light on some of our problems that are basically minor.
New Mexico has superior water rights when compared to all other states in the Southwest United States. During most of the 20th century, farmers, manufacturers, miners and municipalities have traded thousands of water rights in a lively market. Economic growth will undoubtedly intensify the future demand for water. Since water is a scarce resource, the “bad” news is that with a relatively fixed water supply facing New Mexico, water prices have only one way to go-up. The “good” news is that users can easily incorporate the trend of rising water prices in their benefit-cost calculations and adjust accordingly. While water is scarce as indicated by its rising price, there is no way government could legislate away the scarcity.
The prior appropriation doctrine was adopted by New Mexico when the state enacted the Surface-Water Code in 1907. The Surface-Water Code permits an appropriator to sell his surface-water rights, quantified by consumptive use, in whole or in part, and apart from his land, to any user provided the use is not detrimental to existing water rights in the stream. For example, a user upstream may attempt to purchase water rights from a user downstream. Such a transaction may be detrimental to a third user located between the two users. Twenty four years later, in 1931, the legislature of New Mexico enacted the New Mexico Underground Water Law, which adapted the state’s surface-water law to groundwater. The groundwater law restricts users by imposing an annual aggregate consumptive water use. If the aquifer is fully appropriated, potential users may only acquire water rights by purchasing existing rights. The State Engineer has jurisdiction over all surface waters and groundwater in declared underground basins. In New Mexico, an appropriator desiring to sell a water right must make formal application to the State Engineer. The State Engineer approves the application for transfer provided it is not a detriment to existing rights. Consumptive use is the measure of the transferable right, and hence both diversion and return flows are closely monitored by the State Engineer. For example, A, with a return-flow-coefficient of 0.5 can sell B with a return-flow-coefficient of 0.75, fifty acre feet of consumptive use according to the following rule:
100 acre-feet(1 – 0.5) = 200acre-feet(1 – 0.75)
Implying that A decreases his diversion by 100 acre feet, and B increases her diversion by 200 acre feet. Interestingly, basing water rights on consumptive use is efficient from the standpoint of economic theory. Users are guided by the price of water, which indicates its scarcity. When they voluntarily exchange rights in the market, water tends to flow towards the highest value use. This promotes conservation and economical use of water.
Adjudication is a legal process of determining the relative priority dates of water rights, and their quantification. Seniority gives the user a better priority. Quantification is an on going process, mainly because it is based on the farm practices of the day. For example, in the late 1940s and early 1950s, in the Ogallala, farm land was adjudicated consumptive-use water rights at a rate of 2.5 acre feet per acre and a return-flow coefficient of 1/6. Later, the State Engineer raised the adjudicated consumptive use to 3 acre feet per acre and the return-flow coefficient to 1/3. The adjudication of Pueblos’ water rights is another relevant illustration: In the wake of the New Mexico v. Aamodt (1976), the Tenth Court of Appeals speculated that, on one hand, the United States gave the Pueblos a quitclaim deed to lands recognized by the Treaty of Guadalupe Hidalgo, but, on the other hand, that the Pueblos may have reserved Winters rights. Either way, the Pueblos probably have the most senior rights in New Mexico. Since on the issue of quantification the court failed to provide any clear answer, the Pueblos filed their claims at various district courts, and the adjudication cases are still pending. Obviously there is a backlog of adjudication cases waiting their turn in the district courts. Our courts are over loaded with a backlog of water cases, and they could use additional judges, mediators and clerks. But a Water Court should be created only if a further study could demonstrate that a Water Court is the best way to handle the current backlog.
c. Domestic Wells
Owners of existing domestic wells pump water whose legality derives from a permit issued by the State Engineer. In the past, this procedure was justified by the smallness of the fraction of domestic wells in total water depletion. With the rapid economic growth leading to intensification in the demand for water, owners of domestic wells tend to treat water as a free good. They should be treated like all other users of the scarce water in New Mexico. Owners of existing domestic wells should be assigned water rights based on past use, say five-years average, so that they incorporate its price into their personal calculus of how much to use, trade or conserve.
The water law should also be amended to require persons who intend to become owners of domestic wells to purchase existing water rights from other users, subject to the rules and regulations as promulgated by the State Engineer. The water law should be amended to require that all owners install in their domestic wells water meters acceptable to the State Engineer, for the purpose of monitoring their annual use.
d. Use it or Lose it
The current “use it or lose it” provision in New Mexico’s water law doe not make any economic sense, because it leads to wastefulness, and it should be eliminated. An owner of water rights who for some economic reason cannot use his or her water today, but expects to resume using it in the future, should be allowed to maintain ownership. He or she should be able to either rent the water to other users, or simply curtail using it in the short run and resume using it whenever he or she pleases. The idea of “water banks” is welcome but may not always work: As an illustration, it will work if by reducing the pumping of groundwater by 100 acre feet, the associated aquifer would be enriched by the same amount (adjusted by consumptive use consideration). It will not work in the case of surface-water, unless the owner has access to a reservoir, like Albuquerque.
e. Relationships With Contiguous States and Mexico
I. Background Information. In New Mexico water rights are well defined based on consumptive use, and are traded efficiently in a lively market. Unfortunately, however, The market for water, however, stops at the border. Contiguous states have different water laws, and their water rights are defined differently. Private water rights are traded neither between Mexicans and New Mexicans, nor among users in New Mexico and users in the contiguous states. The surface water of the two major international rivers, the Rio Grande and the Colorado River are apportioned by treaties. In 1906, the U.S. and Mexico signed a treaty that committed the U.S. To deliver to Mexico 60,000 acre-feet annually from the Elephant Butte Dam. The Elephant Butte Reservoir was constructed at the time for storage and regulation of the Rio Grande so that the terms of the treaty could be met. In 1944 the two countries entered another treaty that (a) guarantees to Mexico 1,500,000 acre-feet per annum from the Colorado River and (b) apportions equally between the two countries the surface waters of the Rio Grande between Fort Quitman and the Gulf of Mexico.
Surface water is apportioned among states within the U.S. by compacts that in essence are like international treaties. Some seven compacts were signed between New Mexico and contiguous states. Here we mention only the most important four compacts:
The 1922 Colorado River Compact (approved by a presidential proclamation in 1929) divided equally the Colorado River’s water between the upper basin states – Utah, Wyoming, Colorado and New Mexico – and the lower basin states – California, Nevada and Arizona.
The 1938 the Rio Grande Compact signed by New Mexico, Colorado and Texas (approved by Congress in 1939.) This compact produced water-delivery agreements from Colorado to New Mexico and from New Mexico to Texas.
The Upper Colorado River Basin Compact of 1948 (approved by Congress in 1949), apportioned a fraction of the Colorado River water among Colorado (51.75%), Wyoming (14%), Utah (23%), Arizona (50,000 acre-feet) and New Mexico (11.25%). This compact eventually produced the Navajo Dam and the San Juan-Chama Diversion Project.
The Pecos River Compact was signed by New Mexico and Texas in 1948 and approved by Congress in 1949. The compact was intended to provide for the equitable division and apportionment of the use of the Pecos River’s water between the two states and secure and protect existing developments within the states. In particular the compact guaranteed for Texas a quantity of water available to it under the 1947 conditions. Following the 1974 Texas complaint submitted to the U.S. Supreme Court, the Pecos River Compact was revised.
Water laws prevailing in the Southwest vary from state to state. To eliminate the impediments to inter-state tradable water rights, contiguous states must adopt a uniform water law, and allow private sales of water rights across state borders. The following section illustrates how users in both New Mexico and Texas lost an opportunity to increase their water supply, respectively, for 150 years.
II. Particular Problems with Texas. Once, when New Mexico had a realistic chance to enhance its water supply, bureaucrats and politicians squandered it. In the late 1980s El Paso, a border city in Texas, submitted applications to drill 266 wells in the Mesilla Bolson and 60 wells in the Hueco Bolson, both in New Mexico. The bolsons are huge mines of water, and hydrologists had argued that El Paso’s return flows back to the Rio Grande would more than offset the pumping effects on the river, for 150 years. The project would have provided additional water to El Paso and New Mexico. Since El Paso is on the “wrong” side of the border, New Mexico resisted, and the project was lost in a lengthy legislative and legal process. Later, Texas returned the favor. In 1974 Texas filed a complaint against New Mexico in the U.S. Supreme Court. Texas alleged that New Mexico had breached the Pecos Compact during the period extending from 1950 to 1972 by depleting stateline flows by 1.2 million acre feet of water more than the compact allowed. New Mexico lost the case, had to compensate Texas to the tune of $14 million and had to accept an unfavorable restrictive delivery obligation. Since our water market stops at the border with Texas, only interstate negotiations can resolve this conflict. With a considerable political effort and luck, the two states could work out a compromise that would enhance the supply of water available to both states by reviving the El Paso project in exchange for updating the Pecos formula based on hydrological data that has accumulated since 1947. If we want to reduce the flow of Pecos water to the Red Bluff Reservoir, we should let Texas pump water from the Mesilla and Hueco Bolsons. In the long run, the users in the two contiguous states would benefit greatly from adopting a uniform water law and adopting free water rights trade.
f. Schemes to Enhance Water Supply
Schemes to enhance water supply may represent economic boondoggles. In the early 1980s, a study commissioned by the High Plains Study Council elaborated on a proposal to recharge the Ogallala aquifer by hauling water to the High Plains from distant rivers. The expected cost of importing one acre foot was in the range of $226 to $569. It did not bother those who produced the report that the net value of crops produced on an acre in Lea County would be less than the cost of importing water to irrigate that acre. For example, salt cedars, originated in parts of Eurasia and China, have been blamed for water quantity and quality problems. The roots of salt cedars stretch out in order to find water, and consequently they dry up aquifers and lower water tables. The evapotranspiration rates of salt cedars by far exceed those of native species-cottonwood, willow and arrowweed. Proposals to remove salt cedars in order to enhance our water supply should be studied. Unless a comprehensive and serious study can demonstrate that the economic benefits of salt cedars removal exceed the economic costs, a project of salt cedars removal should be dismissed. In other words, we should investigate whether the net value of crops produced on an acre in some valley along the Rio Grande would exceed the cost of removing salt cedars to free up the water required to irrigate that acre.
g. Municipal Water and Mandated Conservation
In an ideal market many consumers would buy water in the marketplace from many producers, subject to perfect water laws. Because of the complex hydrologic aspects of water grids in densely populated areas, as well as the large scale economies of treatment plants, municipal water systems, like local telephone providers, are natural monopolies. Under these conditions an enlightened municipality should set the price of water equal to the marginal cost of pumping and delivering plus the annualized cost of water rights. If at such a price a municipality has an excess supply over the quantity demanded, it could either store, rent to others or sell some of its water rights. Alternatively, given a water shortage, it could either store, rent from others or purchase some water rights on the open market. Normally, economic growth leads to municipal demand intensification and politicians, instead of purchasing water rights from farmers, tend ride on popular tides generated by water conservation advocates.
We should resist social engineering , e.g. proposing a comprehensive conservation efforts that will outline specific plans to install efficient plumbing fixtures in our bathrooms and invest in low water-use landscaping in our backyards. Such conservation mandates result in economic losses. Suppose, to use an illustration from simple Economics, that a mandated replacement of your current lush landscaping by xeriscaping would save you $150 worth of annual lawn watering. Assuming an investment of $5,000 in xeriscaping. Then, at an interest rate of 4 percent and a life of 20 years, it will cost you annually $368-a net loss of $218. Moreover, you value the elegance of xeriscaping relative to the charm of lush landscaping at less than $218: otherwise mandated conservation would be superfluous for you. Note finally that public water use accounts for a minute fraction of the total water depletion in New Mexico. The abundance of water use in agriculture indicates that a small transfer of water from agriculture to municipalities will sustain economic growth in our cities at a lower price increase far into the future.
h. Instream Flows
New Mexico’s water law is imperfect in that it does not recognize rights to instream flows. The demand for instream flows is derived from various recreation activities. The problem has become acute in recent years because the demand for instream flows has intensified with a rising standard of living, and also the need to protect the endangered Silvery Minnow. When drought conditions are mild, opportunities exist to manage the water in upstream reservoirs to help the Silvery Minnow without thrusting the entire burden on a singled-out group of irrigators. This may not be the case in low-flow years. Whether or not we accept the endangered-species philosophy, we should resist putting the burden of protecting the Silvery Minnow on a singled-out group of irrigators, or other groups of users. One possible solution is to upgrade the water law in New Mexico to allow a limited state acquisition of water rights on the open market for the purpose of enhancing stream flows during drought years. In high-flow years, the state could either store its water, or rent it to private users.
Another solution would be for the state government, or better the federal government, to purchase from water users low-flow options on the open market. A low-flow options for one acre-foot is a legal contract requiring the participating water user to diminish his or her diversion from the stream (Rio Grande) by one acre foot when the snow pack in March is below a level which is specified by the option contract.
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.