Before the Senate Finance Committee, Jan. 20, 2016

Jim Peach

 

In the short run, the New Mexico economy faces considerable uncertainty. A few things to watch:

Employment growth is the key to sustaining personal income growth and

            • State job growth has been modest during the recovery.

            • Although Albuquerque has shown some strength in recent months, the rest of the state is much weaker.

 

Oil and Gas:

Many oil analysts expect a protracted period of low oil prices. … Without a substantial reduction in world production in 2016, there is little reason to anticipate a rebound in oil prices. … The big players in the industry continue to reduce capital expenditures and lay off workers. …Rig counts are falling both nationally and in New Mexico. … The assets of many oil firms consist mainly of Estimated Ultimately Recoverable Reserves (EUR). …EUR at $30–$35 per barrel are much lower than at $100-plus per barrel. [Editor’s Note: In June the price was between $48. and $50.] … The financial sector faces losses from the energy sector. Can these firms continue to have access to capital markets with drastically reduced assets? Probably not, and this could easily result in additional cuts in capital expenditures, further layoffs and, ultimately, in reduced production.

There is simply so much natural gas available in the United States today that it is difficult to imagine substantial price increases in the next couple of years. …New Mexico production has been fairly stable at about 1.2 trillion cubic feet. … It is reasonable to expect a decline in [oil] production in FY17 from the forecasted 155 million barrels unless prices recover.

New Mexico can do better.

New Mexico has a failed economic-development strategy. For as long as anyone can remember, New Mexico has pursued a strategy of economic development by theft; that is, economic-development officials and private-sector organizations try to “steal” a firm from some other state. Should the state do this? Probably. And we should all celebrate the success stories in this game. But development by theft has not, in general, been a successful strategy. The numbers from a long-term perspective provide strong evidence of the failure of our economic-development strategy.

New Mexico’s per capita income in 2014 ($37,605) was 82 percent of the national average ($46,129), and the state ranked 45th among the 50 states. In 2014, New Mexico’s per capita income was the lowest of any of our neighboring states. In 1964, New Mexico’s per capita income was 82 percent of the national average, but New Mexico ranked 38th among the 50 states. I don’t think that this committee wants to hear from some other economist 50 years from now saying that the state’s per capita income remains at 82 percent of the national average and that we rank in the bottom five of all states.

At the county level, per capita income in 2014 ranged from $23,789 in McKinley County to $62,619 in Los Alamos County. Clearly, New Mexico has a problem with economic-development issues that is geographic.

New Mexico has been slow to recover from the Great Recession that began in December 2007. New Mexico’s slow recovery is related to New Mexico’s long-term economic-development issues.

As of November 2015, New Mexico had 17,300 fewer nonfarm payroll jobs than it had in December 2007. Jobs in the state increased by 4,400 in the last year (November 2014 to November 2015), but it will be a long time (2017 or 2018) before New Mexico has as many jobs as it did in September 2010 (797,000). Since then, the state has added 34,800 jobs, with 40 percent of those in education and healthcare services. Leisure and hospitality has also seen job increases (10,900). Mining, which includes oil and gas, has also shown increases, even with the rapidly falling price of oil. The job gains in education and healthcare services are generally attributed to increases in Medicaid and other payments received through the Affordable Care Act (ACA).

For the last two years, Census Bureau estimates indicate that New Mexico lost population. Between 2013 and 2014, more people left the state (11,482) than were added due to natural increase (9,942). The same general pattern occurred between 2014 and 2015. While the total population decreases are small, this is the first time since the late 1960s that Census Bureau estimates indicate a decrease in the state’s population. Those leaving the state probably did so mainly for economic reasons.

On a county level, 14 New Mexico counties lost population between 2000 and 2010. From 2010 to 2014, 21 of the state’s 33 counties lost population. These demographic trends are not the sign of a healthy economy.

New Mexico continues to rank high in terms of poverty. In 2014, 20.3 percent of the state’s population was below the poverty level, a figure exceeded only by Mississippi’s 20.5 percent. In October 2015, 460,000 New Mexicans received Supplemental Nutrition Assistance Program (SNAP) benefits according to USDA (U.S. Department of Agriculture) data. As of October 2015, 735,391 New Mexicans were enrolled in Medicaid or the Children’s Health Insurance Program (CHIP).

None of this is pretty. New Mexico can do better.

There is no economic justification for poverty. For more than a century, the world has had the technology and resources to eliminate hunger, to provide decent housing, education and medical care for everyone. Poverty is a policy decision. No nation has ever produced as much as it could. The dismal science of economics shares much of the blame. For the most part, economists continue to perpetrate the 19th-century scarcity story when we live, or could live, in a society of abundance.

What economists often teach is that if we produce more of one thing, we must produce less of another. Under almost all circumstances, this is nonsense. If more beer is produced in Germany, there is no reason why oil production in the Permian Basin must decrease. It doesn’t even matter if the beer and the oil are produced in the same region. More of one does not necessarily imply less of the other. People are not hungry because we cannot produce more food. In the United States, the agricultural problem for more than a century has been low prices and the inability to produce more. We do not have homeless people because we cannot produce more housing. People are not thirsty because we cannot produce more beer and wine or milk or coffee or tea.

All nations have excess capacity. This is particularly true in the 21st century as technological change is increasing our capacity to produce in sometimes unbelievable ways.

In this case, what is true for the world and the nation is also true for New Mexico. There are no technological or resource constraints prohibiting us from doing better. In the economic-development game, there are no natural laws or predetermined outcomes. New Mexico is not condemned to lead the nation in poverty.

New Mexico can do better, but how? No one can solve this in only a few minutes, but here are a few things we can and cannot do.

There are some things New Mexico—or other states—can’t do. An individual state cannot conduct monetary policy. Like Greece, we do not issue our own currency, and federal law says the Federal Reserve Board will conduct monetary policy. New Mexico does not conduct fiscal policy; that too is a federal government function. New Mexico does not and cannot control the prices of or demand for its main exports. The prices of oil, natural gas, copper, potash and Intel chips are determined in national and international markets. But there is a lot that we can do.

New Mexico needs an economic-development strategy that recognizes the difference between economic growth and economic development.

Economists make important distinctions between the concepts of economic development and economic growth. In the academic world, these subjects are usually taught in different courses—and for good reason. Economic growth is a relatively simple area defined to be increases in key economic variables such as employment, income or Gross Domestic Product. Often, these measures are presented in per capita terms. Economic growth is easily quantified, and success or failure of efforts to achieve growth can easily be determined. Economic growth can be achieved by producing more goods and services, perhaps in all sectors of the economy without significant structural changes.

Economic development, on the other hand, is one of the most dangerous ideas ever conceived. Economic development cannot occur by doing more of the same. Economic development necessarily involves significant structural change. An example is the kind of change that took place as the nation shifted from being predominantly rural and agricultural to a mainly urban and industrial economy. Such changes are inevitably accompanied by changes in economic and political power, as well as social changes such as the structure of families, birth rates and the role of women in the economy.

Economic development destroys old ways of doing things. That is why economic development is dangerous, and that is why economic development and policies designed to achieve development are so often resisted. Simply stated, change is scary, and so is economic development.

The distinction between development and growth is not trivial. All too frequently, the phrase “economic development” is used in policy discussions when what is being discussed is economic growth. Policies designed to encourage economic development are not the same policies designed to promote economic growth.

New Mexico needs a systemic approach to evaluating and rank-ordering all economic-development expenditures and projects, including our dozens of tax expenditures. We have never asked the right questions about the state-led or subsidized development projects. The question to ask is whether or not the spending on the project under consideration is the best expenditure we could make for long-run economic development. Consider, for example, Spaceport America, which cost the public about $200 million to construct plus an annual subsidy for operating expenses. Was this really the best development project we could undertake? Perhaps the money could have been spent better by improving our state parks, museums or genuinely pitiful rest areas. We will never know the answer because the question was never asked.

Education is a key element. A 21st-century, high-tech and internationalized economy requires a 21st-century workforce. High school dropouts have few opportunities in the 21st-century labor market. New Mexico needs to have education and workforce training that is world-class—or at least as good as what is found in our neighboring states. This will require substantial investment in education, and only the state is capable of doing it. One of my favorite educational goals would be to have every high school graduate be truly bilingual, and I don’t mean passing Spanish 1. New Mexico, in a few years, could be the first state to be able to brag that its workforce is bilingual. The particular language does not matter. Arabic, French or Chinese would work as well as Spanish.

Infrastructure investment is obvious. Broadband everywhere in New Mexico is essential. New Mexico is the least-wired state in the nation—an unacceptable position if we want industry and innovation to thrive. The private sector cannot and will not be able to provide the needed investment on its own. The state and perhaps the federal government will need to help. There are many other infrastructure investments that need to be made, and each of us has probably lobbied for our favorites. But lobbying is not the way to get the job done most effectively.

Personally, I would eliminate all economic tax incentives—expenditures—and use the money for long-term investments in the state economy. In the short term, this is only a small sample of what needs to be done. The main point is that it can be done. Other states and regions have had reasonably successful development strategies; North Carolina, Austin, Texas, and Silicon Valley come to mind. The success stories were not accidental. They were deliberately planned and organized. New Mexico can do better, but it must change how it approaches economic development. Otherwise, the New Mexico economy 50 years from now will look much like the New Mexico economy today.

 

Jim Peach, Ph.D., an accomplished economist and author, is a regents professor in the Department of Economics and International Business, College of Business, New Mexico State University.