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posted on 29 June 2017

New Mexico's Economic Trends are Not Favorable and Result in a 20% Beauty Tax

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Random Thoughts from the High Desert

Sometimes when trying to understand a nation, it is useful to look at parts of a nation. Since I live in New Mexico and love my state, I take an interest in what goes on in New Mexico and believe it is instructional to look at a state like New Mexico which is not part of the original 13 Colonies and does not border one of our great oceans. New Mexico is favorably endowed with mineral wealth, an agreeable climate, and natural beauty but is currently suffering from insufficient participation in the great technological transformation sweeping over the entire World resulting in per capita income in New Mexico being twenty percent lower than for the U.S on average.

New Mexico

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Per capita personal income in New Mexico is $40k versus the $48k average for the U.S. That is a 20% (17% if you calculate it as in the retail industry) penalty/tax for living in Paradise. It appears that the disparity might increase. That is the reason for this article.

It is not a topic that suddenly has become of interest to me. In 2014 I wrote this article:

The Nation of New Mexico

January 21st, 2014
in Op Ed, syndication

The reason for writing that article was my recognition that New Mexico was not viable as a State but like Puerto Rico to some extent was existing only due to the largess of the Federal Government. Oil and gas were still good in 2014 but as described in that article the writing was on the wall that the oil and gas sector would not be able to carry New Mexico much longer. That has occurred and thus New Mexico is having problems balancing its budget.

Make no mistake about it, New Mexico is not broke as it has a collection of Sovereign Wealth Funds (usually referred to in New Mexico as the Permanent Funds) with a value of over $20 billion dollars mostly resulting from a wide range of fees from private activity utilizing non-renewable resources on State-Owned Lands and a narrower minerals severance (depletion) tax on all other than Federally owned land. There is revenue sharing with the State of New Mexico on Federal Land but that revenue goes directly into the General Fund rather than into the Wealth Funds. So there is no need to pass the hat for NM but there is a question of what sort of future there is for those who live in New Mexico and those contemplating moving to New Mexico.

That is the reason for this new article which can be considered an update to my 2014 article. The data in a 2014 article of course is less current today. Information mostly from the Dallas Federal Reserve Bank and other government agencies has been used to update (and expand on) what I included in my 2014 article. This is a particularly useful report: "New Mexico Lags". I have also used information from an earlier article on New Mexico.

Below is an overview from the Kansas City Fed using Philadelphia Fed data of how New Mexico compares to other states with respect to recent growth in economic activity.

Change in Economic Activity Philadelphia Fed circa 2016

I could probably find even more recent data but you get the point. NM is not doing that well especially compared to its neighbors.

It is not the only metric of interest but employment is a very important metric related to economic activity.

New Mexico Employment Growth

Something changed in 2007. Until then, New Mexico employment tracked U.S. employment. But after the 2007 recession, New Mexico employment ceased to track U.S. employment while a key competitor, Texas, accelerated their employment growth.

The proposed and in some cases implemented solutions to this problem by State and Local Government in New Mexico includes raising minimum wages, taxing soda, raising the tax on gasoline, raising property taxes, raising our equivalent of sales tax (Gross receipts tax as the fiction is that the seller pays it but look at your invoice) and other efforts to make doing business in New Mexico more difficult and raising costs for the elderly and the lower and middle classes. New Mexico is very Progressive meaning progressing towards non-viability for those not in the Control Group. The below model will illustrate how the proposed and in some cases implemented actions actually make the situation worse.

Now the reason that the choice of responses is important is that economics is not well understood in New Mexico although one can get an advanced degree in economics at at least two universities in New Mexico. But the curriculum is kind of old fashioned. That means that few in New Mexico would recognize or understand this graphic.

Two sector model

It is the modern way of looking at things (one resource for understanding the approach can be found by clicking here) but really it is simply high-school bookkeeping. The way it is set up above is to consider New Mexico versus the combination of the rest of the U.S. and the rest of the World. The general concept is that New Mexico has its economy and money transferred in allows the New Mexico Economy to grow and money transferred out forces the New Mexico Economy to shrink. It is not rocket science. For a variety of reasons, outflows relative to inflows have increased. If New Mexico was a separate nation with its own currency, it would have a balance of payments problem and would solve the problem by devaluing its currency. Because New Mexico is not a separate Nation with its own currency, the net outflows show up as either increased debt or reduced economic activity. It is similar to the situation faced by the Southern nations in Europe compared to the Northern more productive nations. Austerity is not politically acceptable so there is no way for them to become more competitive. For a long time, Quebec faced this problem.

For the World, all current period transactions cancel each other out. Some places have a surplus, others a deficit. New Mexico runs a structural deficit at least with respect to close to 75% of the population. I will explain the 75% later.

There is another way of using a two-sector model to look at this which is to divide the New Mexico economy into a New Mexico Non-Government Sector and a New Mexico Government Sector. In new Mexico, these two sectors are out of balance and interact in ways that are destructive to the performance of the economy of the State. The reason for this is that the compensation levels for State and Local Government employees although not great are higher than the median compensation level outside of State and Local government. I do not have data on that but I am presenting it as a fact that the prevailing wage in New Mexico is about $12 to $15 an hour in much of the Non-Government Sector but far higher in the State and Local Government Sector. Of course there are high compensation occupations in the Non-Government Sector such as doctors and attorneys and others with specialized education and licenses. But the number of individuals with these higher paying occupations tends to be correlated with the size of the overall population and can not be easily increased without a growth in population. An exception to this is when there is specific expertise sought by out-of-state clients or if the provision of services, usually health related, can be combined with tourism as they do in Costa Rica very successfully. There is the potential for that in New Mexico but so far the exploitation has been fairly minimal. That was not the case historically.

Part of the U.S. Federal Government is based in New Mexico so the question comes up how to account for this group. In general, U.S. Federal Government employees based in New Mexico are paid by the Federal Government but they and their offices spend money in New Mexico. So although it may not be intuitive, the best way to handle that group is to include them in the New Mexico Non-Government Sector. For the U.S., the funding of these Federal employees may be a problem. For New Mexico, they represent an in-flow of cash. They may create problems in other ways i.e. policy decisions, but on a cash-flow basis they are a plus.

When we extract money from those earning $12 to $15 an hour (e.g. the proposed but defeated soda tax) to maintain the jobs of those earning far more than $12 to $15 an hour, what would one expect the result to be? It sounds like an increase in income inequality to me. At some point, the lower-income people return to their nation of origin, move out of state, or turn to crime. Again, it is not rocket science. It is not even calculus. It is not even is second-grade math? If you need to do multiplication it becomes third-grade math. if you need division, it is fourth grade. Oops, negative numbers are fifth grade. How come Government in New Mexico is not able to figure this out?

One can combine the two concepts discussed above and create a three-sector model namely: New Mexico Government, New Mexico Non-Government (which paradoxically includes Federal employees based in New Mexico) and the External World which is the rest of the U.S. and the rest of the World outside of the U.S. I hesitated to draw a graphic with three circles and lines (current period money flows) between them as my software tools are not adequate for creating such a complex graphic with readable labels, but that is what one does. It can help in understanding the extraction of purchasing power out of New Mexico and the deliberate shift of purchasing power from the low-income majority in the Non-Government Sector to the moderate-income minority in the Government Sector and those who provide services to the Government Sector. It is not the 1% that is the problem in New Mexico, it is the 25%.

When a static current period model explains the problem, there is no need to go to the next step of a dynamical model showing the changes from one time period to the next. That is not to say the one could not supplement the static current period model for forecasting purposes.

We have four major problems in New Mexico:

  • Much money (purchasing power) is being extracted from the NM Economy. This is mostly because we import more than we export. Almost everything consumed is produced outside of New Mexico. Federal Government transfer payments and outright subsidies are generous but not enough to make up the difference.
  • Purchasing power is being transferred from the Non-Government Sector to the Government Sector thus impoverishing the Non-Government Sector.
  • Purchasing power is sequestered in the Wealth Funds which are invested out of state. These funds pay a very good dividend but they still represent a transfer, if only temporarily, of purchasing power out of the New Mexico economy.
  • What is interesting perhaps is that historically that was the arrangement between Mexico City and Santa Fe and now it is the arrangement between Washington D.C. and Santa Fe. The identity of the "Occupier" has changed from Mexico City to Washington D.C. but the local enforcement agent of the Occupier has not changed its location. It remains Santa Fe. I list this as a problem in that it is Santa Fe which then and now favors the Government Sector over the Non-Government Sector. So this is not a new problem (It caused the Pueblo Revolt in 1680) but an ongoing situation. Only Wyoming, Alaska and the District of Columbia have a higher percentage of government employees.

Short History of New Mexico

The land area which today we call New Mexico was part of the new nation of Mexico which gained its independence from Spain in 1821. Northern Mexico was transferred out of Mexico first by the Texas War of Independence ending in 1836 and then on a larger scale by the Mexican War which was resolved by Mexico being forced to cede in 1848 a large area for some compensation not related to the value of the land ceded but for damages incurred during the war. Part of the ceded area became the United States Territory of New Mexico in 1850 and a State in 1912. Along the way one small piece was added by the Gadsden Purchase in 1854 which mostly benefited the future State of Arizona. New Mexico is the fifth largest state by land area in the U.S and has abundant natural resources and an ideal climate especially for those who prefer low humidity.

Most do not realize it but the Civil War and the conflict over slavery then and today still shapes New Mexico. Of great important was the Compromise of 1850. A key result was "Texas dropped its claim to land north of the 32nd parallel north and west of the 103rd meridian west in favor of New Mexico Territory". Thus Santa Fe is the Capital of New Mexico not part of Texas.

Read more about the Compromise of 1850 here.

For various reasons which have changed over time, the Territory of New Mexico eventually proceeded to Statehood as two states: New Mexico and Arizona. That most likely made sense then but may not make as much sense today.

One curiosity is the Battle of Glorieta Pass. Texas, a part of the Confederacy, was defeated (read more here) and prevented from using New Mexico as a springboard for further adventures perhaps including marching to Pikes Peak to cut off the Union's Gold Supply. But this battle was part of a broader conflict. Read more here. It highlights the continue cooperation and competition between New Mexico and our neighbor to the East and South.

I bring all of this up because although I am certainly a newcomer to New Mexico (you have to be here about 13 generations to be fully accepted), I recognize that it is a very different place from where I grew up and I do believe that our Federal Government in Washington D.C. is making a big mistake trying to view all of the U.S. as a homogenous place. It simply is not. Every part of the U.S. is different and not recognizing the differences reduces the opportunity for progress.

The map below shows how the U.S. was cobbled together.

How the U.S. was formed

I wonder how many High School students have seen that map. How about Members of Congress? And yet there is this assumption that we will all think alike or should think alike about issues. And of course the area shaded brown was not formed as a single entity at a single point in time.

There is not time and space to track the subsequent history of New Mexico. Most do not realize that Statehood involves a process of transformation from Occupied Territory to Statehood status. Prior to Statehood many key officials are appointed by the Occupier and their actions are not automatically assumed to be in the best interests of the Territory but of the Occupier. In theory all prior decisions are reviewed as part of the process and the terms of the assumption of Statehood and are determined by an agreement often called an Enabling Act.

In some ways, New Mexico made out well but apparently our water law of 1905 and possibly the revision in 1907 was written by the Occupier. One might observe that the Rio Grande, the major river in New Mexico, continues to be operated by the Federal Government which is kind of strange. How can you be considered a fully functioning State when your major river (which is non-navigable) is operated by the Federal Government? So to me, New Mexico never really became a bona fide State but rather has always been some sort of hybrid Territory/State and that remains an overriding issue that impedes New Mexico from become a viable State.

For States within the U.S., it is a residual sovereignty (as the Federal Government has Supremacy) but States are expected to be sufficiently independent that they are not Wards of the U.S. as a Territory usually is. States are expected under normal circumstances to carry their own weight and contribute to the Common Welfare of the Nation not be areas that need to be perpetually subsidized. It has been well over 150 years since the U.S. acquired the Territory which included New Mexico. It has been over a hundred years since New Mexico obtained Statehood. But New Mexico has not matured to the point where it is economically viable.

New Mexico was a burden on Spain when it controlled Mexico, then a burden on an Independent Mexico and now is a burden on the U.S.

The U.S. Federal Government has tried hard to turn desert into a self-sustaining Territory and later a State. It turns out that 160 acres and a mule does not get the job done when you have a semi-arid area. Given the size of the population of the area then and now, the infrastructure investment needed for the land to be inhabitable dwarfed the potential tax revenues to be received by the Federal Government. That situation has not changed and today New Mexico requires more than it can contribute.

In many ways, population and population growth both measures the success of a State and determines the success of a State. I have condensed the spreadsheet available here to show neighboring and similar states and I calculated the percent increases 2040 over 2010.

Population Growth Projections.

Population growth may be important if one assumes that the cost of operating a state consists of relatively fixed costs as well as variable costs i.e. Total Costs = Fixed Costs + b(Population), where b is the variable cost per capita. It that is even approximately true, then the other states on this list will have a declining net cost per capita while New Mexico's cost per capita will not decline or may increase. This could result in the perpetuation of slow growth in NM or negative growth.

This problem also impacts quasi-governmental entities such as regulated utilities for the same reasons. When demand is static or declining, the fixed costs become harder to apportion and the costs per capita tend to increase. It makes modernization additionally difficult.

The slowdown in population growth for New Mexico is is a change from the perspective at the turn of the Century.

New Mexico Population Trends and Projections

There are similar population projections made in 2001 at this link for each of the Western States. I guess it was reasonable to assume that the historical population growth of New Mexico would continue. But it hasn't but it has accelerated for some neighboring states. What changed?

Many in New Mexico are happy with such a situation (especially those whose income is not very related to the strength of the economy of Mexico) as the beauty of New Mexico is more likely to be preserved and water resources are less likely to be overtaxed etc. Others may find such a situation troublesome. Certainly the details of the characteristics of the population are very important. But sometimes a simple framework can be very useful.

Here is a very interesting chart. It adds a geographical dimension to the analysis of the problem.

North versus South

I wish I had data beyond 2011 and perhaps I could generate it but what this is showing is that employment in the Northern part of New Mexico which includes Albuquerque tapered off in 2007 and 2008 and then had a big decline in 2009 and has not recovered. But the Southern part of New Mexico had a growth spurt prior to the 2007 recession and has more rapidly recovered from the decline.

The below graphic may shed some light on this. It is just one indication that Southern New Mexico is doing better than Northern New Mexico. Southern New Mexico has many problems but in some ways its economy is more connected to El Paso than to Albuquerque. I realize that I have not presented a very complete analysis of North versus South and most likely one needs to look at more than two geographical areas to really have a good geographical analysis.

Trade through Santa Teresa

While Albuquerque was losing jobs, the Southern Part of New Mexico was gaining jobs.

This is just a minor example but where state and local government is not able to keep up with what it takes to deal with modern crime, those areas quickly become known to those who make it their business to know where there are opportunities. It is not surprising that Albuquerque is rated number one for per capita car theft (read more) but when one is not able to keep up with overhead costs, problems show up in some cases adding insult to injury.

I believe that population growth is a sufficient indicator to identify when there is a problem. For those who like more detail, one can look at the changing demographics and how that relates to the earning capacity of the different groups within the mix.

The following four quadrant graphic provides a lot of insight into how the changing mix of activity by sector is working against New Mexico.

Sector Growth.

This is a very interesting graphic. Notice the horizontal line at "1". Above that line, New Mexico has a higher concentration of that activity than the rest of the United States. Notice where "Government" is on that chart. It is also to the left of the zero growth line so it is shrinking but still over-represented in the New Mexico Economy. Notice that Manufacturing and Business and Financial services are under-represented. Also notice that Biomedical looks like it is in the "Star" Quadrant. How interesting!!!

Few realize that construction was a larger part of the NM economy when it was growing and that graphic does not show it very well but transportation and logistics may not have provided a lot of growth in jobs but the decline in that sector probably due to technology has changed the compensation mix unfavorably for New Mexico.

There is another reason with broader implications which may be quite surprising. Most know that there is only one city of any size in New Mexico. When New Mexico first become populated it was necessary to produce that which was consumed as transportation was difficult and dangerous. Yes early on there was the Royal Road to Mexico City, the main Camino Real, as it was the interior road as opposed to the coastal Mission Trail in California and other roads into what is today Texas. The El Camino Real de Tierra Adentro connected Mexico City to Santa Fe its Administrative Headquarters in Northern Mexico.

Interior Camino Real Possible Map of Mexico when Owned by Spain

Later there was the Santa Fe Trail which was a trading route to Missouri and hence to much of the Eastern U.S. But neither route could handle large volumes so New Mexico was forced to be independent in the sense of having a high ratio of what was consumed to what was produced. This continued even beyond World War II resulting in substantial economic activity in Albuquerque and other locations. But improvements in transportation and the Internet have gradually made self-production less cost effective.

The size of the population leads to many services being procured from out of state because the critical mass is not here to support those services. There is a movement to increase self-production with respect to government purchases but it most likely will result in higher prices. Certain companies and their employees will benefit but it is not clear that the larger group not associated with Government will benefit. It is a very interesting initiative that I am not able to assess at this point. A consulting firm for which I used to work did a study prior to me joining them of the impact of Brazil deciding to self-manufacture their own computers and that did not work out well for Brazil. Europe also has suffered historically from attempts to self manufacture when they did not have the critical mass to make it economic to do so. On the flip side, the U.S. lost out by attempting to make its own factory automation equipment and lost out to Europe and Japan. When you do not have sufficient critical mass, self-supply often has negative ramifications. Adam Smith wrote "The Wealth of Nations" for a reason.

As you look at the data, it is not all bad. It is just that it does not balance out as being good on balance and relative to its neighbors, the comparative advantage of New Mexico has declined and probably will continue to decline.

Learning/Experience Curve and the Impact on a State that Has Declining Population Growth Compared to Neighboring States.

It might be useful to think about the concept of the Experience/Learning Curve and how it impacts competitiveness.

There is much literature on this but from this Wikipedia write-up

"Learning curves" were first observed by the 19th century German psychologist Hermann Ebbinghaus investigating the difficulty of memorizing varying numbers of verbal stimuli. Subsequent learning about the complex processes of learning are discussed in the Learning curve article.

Experience shows that the more times a task has been performed, the less time is required on each subsequent iteration. This relationship was probably first quantified in 1936 at Wright-Patterson Air Force Base in the United States, where it was determined that every time total aircraft production doubled, the required labour time decreased by 10 to 15 percent. Subsequent empirical studies from other industries have yielded different values ranging from only a couple of percent up to 30%, but in most cases it is a constant percentage: It did not vary at different scales of operation. The Learning Curve model posits that for each doubling of the total quantity of items produced, costs decrease by a fixed proportion.

I could also talk about "clusters". Based on my research, there has never been sustained economic development anywhere in the World without a cluster meaning a number of companies or individuals doing similar things in close proximity to customers, parts and services suppliers, and sources of labor. Customers like to have a choice of suppliers. The suppliers like to have a choice of those who supply parts, raw materials and services to them and they want to have a choice of employees who in turn like having a choice of employers. it is risky to be isolated and vulnerable to a disruption in the value-added-chain. It is not just that New Mexico has few clusters but it is also that states that are growing are able to expand their clusters and their clusters benefit from the experience/learning curve. It is not that New Mexico has not had opportunities to develop such clusters but in too many cases (Bill Gates is the most famous example and there are many others) the development of the cluster was cut short. Fortunately, there are always new opportunities but the research on clusters suggests that they are difficult to predict, impossible to intentionally create, and easy to explain after the fact. Research also shows that investment to create clusters is a waste of money (I can provide that research) and the most sensible thing to do is to avoid impeding those that for some reason seem to wish to develop in your area.

When one sees a situation like this, the natural question to ask is why, which can be further broken down to what is the impact of:

A. External Drivers?

B. Internal Drivers?

External Drivers

Being humans we tend to focus on the Internal Drivers. But it seems that the key driver for New Mexico is the decline in the productivity of the oil and gas industry re other states.

You see that in the 2014 data and clearly NM is less competitive in oil and gas today than it was in 2014 except in one geographical area which geologically is part of the Permian Basin and in particular the Delaware Sub-basin of the Permian Basin i.e. Texas. It would be a distraction to go into that issue in a lot of detail but a simple explanation for the decline in oil, gas and copper in New Mexico is that these activities started earlier in New Mexico than most places and thus New Mexico is further along the depletion curve. If you look at my bio at the end of this article, you might conclude that I have some knowledge that applies to that topic.

In a way, negative growth in construction is related to the slow-down in population growth. I am sure that the defense and security sectors will be thoroughly debated relative to the U.S. so I will not focus on them in this article but the participation of New Mexico in those sectors is very relevant. Health services in one sense is a great creator of jobs but it can be related to transfer payments from taxpayers so there are limits imposed on the growth of that sector. Biomedical is exciting. Recreation and food services are low-paying jobs. Many of the sectors with job loses in New Mexico are moderate to high-paying jobs. So the dynamics here are not great.

Another external factor is that for a certain period of time basically in the first decade of this Century (if my research is correct perhaps 2001 through 2013), the two Senators from New Mexico took turns being the Chair and Ranking Minority Member of the Senate Energy Committee. Talk about bringing home the bacon for New Mexico's National Labs! It is not that the current New Mexico Congressional Delegation is totally ineffective, but they certainly can not match the effectiveness of controlling a U.S. Senate Committee from both sides of the Aisle. Again, size matters. A State with five electoral votes does not have a lot of clout. There is also an amazing disconnect between the New Mexico Congressional Delegation, the New Mexico Legislature, and the Governor's Office.

The diversity of the population may not result in synergy or serendipity but in the need for parallel processes to provide public services. This is a form of fragmentation.

Is it all external? Is any of this related to government policy. One hopes so as government policy can change.

Internal Drivers

I now will suggest some areas to consider re internal causes of slow growth.

A. Probably the biggest is the impact of the Permanent Fund "tax" on the people of New Mexico. Payment for depletion of resources and use of state land is essentially sent to an out-of-state investment company that actually has offices in New Mexico and which pays a very decent dividend. But very little of the net asset value of this investment entity, the NMSIC, is invested in New Mexico. That is a hefty "tax" although for sure the NMSIC views their activity as "savings" and it is but it is a savings account with no withdrawal provision other than interest earned. I am not questioning the wisdom of the NMSIC to invest primarily out of state. That may indeed be their fiduciary duty to do so i.e. obtain the highest returns. I am just assessing the impacts. It is looking to the future when the ship is sinking today. But it is not clear that the alternative approach of increased distributions or forced investment in New Mexico is preferable as it may result in reducing the future without having a measurable improvement in the current situation. It is a difficult issue.

B. Some believe NM has an anti-business attitude. Many studies including the 2015 Fraser Institute Report referred to by the Dallas Fed suggests that this is the case and many doing business in New Mexico believe that it is the case. But the Fraser Institute Report which ranks New Mexico #46 really is simply a restatement of the 20% Beauty Tax that is discussed a few paragraphs below. When you apply tax rates to 80% of U.S. Personal Income, the result is not so good in terms of Disposable Income and this makes New Mexico a difficult place for the average person to live well. The problem as usual is not the ranking but the comparison with neighboring states.

Fraser Report

Another way of looking at this to try to understand why there is a 20% Beauty Penalty for living in New Mexico. Many in New Mexico feel that only certain types of economic activity fit with the overall character of New Mexico. NM is environmentally friendly which greatly benefits the tourism industry. But New Mexico is also a Sanctuary State for Non-Profits that are opposed to essentially all development. In a real sense, New Mexico is the Land of "Don't Bother Me". Given the success of the oil and gas industry and the ability to send a dollar to Washington D. C. and receive three dollars back, New Mexicans have become very picky about what kind of economic activity is acceptable. It is difficult to think of examples of economic activity that have no downside. Thus the general attitude in New Mexico re economic activity is not starting from a working hypothesis that such activity would be beneficial and ruling it out if the public approval process uncovers reasons why it is not a good idea. Instead, the working hypothesis by many is that economic activity is harmful and should only be permitted if absolutely necessary which includes as a special case being advantageous to those in Government making the decision. I don't have comparative data on this for other States but there are close to 1,000 political subdivisions of the State of New Mexico required to file audit reports. That is one political subdivision per 2,000 people (of course in many cases people are served by multiple political subdivisions). That is a lot of political subdivisions and a lot of government and volunteer time overhead and a lot of approvals required to do anything. Thus New Mexico ranks towards the bottom of the list not because of high prices but because of low incomes which in many cases are not allowed to increase through the process of New Mexico becoming more competitive.

C. There appears to be a brain drain in New Mexico with a lot of residents gaining their education in New Mexico and leaving for greener pastures. Perhaps this might be considered an external factor. I am not sure why so many want to get their education in New Mexico but apparently that is the case. Education is partially a chicken and egg situation. If there are jobs, education systems will produce graduates able to perform those jobs. If there are not sufficient jobs, the motivation of the community is not there or the strategy is to learn and leave. To some extent the University System in New Mexico has as Job #1 the creation of work for construction companies and university employees. At some point, declining head counts chokes that off. Education can not be primarily a form of economic activity. The primary focus needs to be education.

I thought this was interesting.

Comparison with Texas

Quality of education is not shown here but as measured by educational attainment, New Mexico actually out-competes Texas and is not that far off from the overall U.S. situation. There is certainly room for improvement. But what is off by a larger percentage than educational attainment is the resulting per capita personal income. That is a big difference: $40K versus $47K for Texas and $48K for the U.S. overall. And the $40K is inflated by the 25% of employment being in the Government Sector. The other 75% are clearly averaging under $40K. And per capita personal income includes transfer payments. You can't get blood from a stone so you can't expand Government jobs in New Mexico based on taxing those with low-paying jobs who work in sectors that support tourism and immigrants and work in sectors that provide low-value-added services which are proportional to population e.g. retail which can not grow faster than population and which in many cases are becoming less labor intensive due to the Internet and automation. But those who work for Government, vote reliably so the Dictatorship of the Bureaucracy is alive and well in New Mexico but the subjects who are governed are restless and leaving. The large size and low population density of New Mexico creates a need for a lot of Government per capita but if the ratio of Government employment to non-Government employment is high, the ratio of Government compensation to non-Government compensation can not also be high unless you want to hear that giant sucking sound of purchasing power being transferred from the Non-Government Sector into the Government Sector (including those companies and individual contractors which are Friends of the Government Sector).

The data is showing that the penalty for living in New Mexico is a 20% reduction in per capita personal income. That is a large number. There are many explanations for this and I am not blaming anyone for this. But it does limit the flexibility to do certain things. In particular, schemes to tax the poor to improve the standard of living of the Middle Class are problematical. I do not understand what part of that equation is so difficult for Government in New Mexico to understand. Looking to adopt strategies that work in high income areas to a state where per capita income is 80% of the National Average is not likely to work out.

But the 20% is an average and the differential between the Government Sector and Non-Government sector leads to some studies like this one showing that New Mexico is the 38th most difficult State to make a living by averaging the situation for those working in the Government Sector with those working in the Non-Government Sector. Unfortunately, it is not possible to grow the Government Sector in New Mexico to improve the average but most Government entities are in abject denial on this.

D. Many in New Mexico attribute the under performance of the economy of New Mexico to the failure of the education system to work well with the diverse ethnic composition of the State of New Mexico. New Mexico records last on reading proficiency among fourth-graders. I am in a minority that concludes that the poor educational achievement in New Mexico is a result of the disarticulated nature of the economy of New Mexico rather than a cause of the poor performance. The low levels of test scores provides a good excuse to increase the size of the Government Sector. So my assessment is that the proposed cures are actually part of the cause of the problem. It is certainly a vicious circle and extends into the university system. But a vibrant Government Sector alone does not provide sufficient motivation for parents and kids to value education. As long as New Mexico points to Government jobs as the proper goal for kids, it will be very difficult for New Mexico to participate in the Modern Economy which is replacing the Industrial/Farm/Ranching Economy.

E. New Mexico appears to be somewhat senior citizen unfriendly. In theory there are special provisions in State of New Mexico and local tax law that benefits those 65 or over. In practice the state tax provisions are mostly a chimera as if your income is low you don't need the exemptions and if your income is moderate you lose the exemptions. It is a big tease. But if you make it to 100, right now you are safe from income tax unless you are married and your spouse is not 100 years old. We see that attitude towards seniors clearly in the drivers license renewal procedures see below table. One might also interpret it as a general attitude towards seniors which is reflected in the drivers license requirements. I ran into that recently and was not amused. It is strange that this attitude would have developed within the New Mexico culture which otherwise would be expected to show reverence to senior citizens.

Normal Duration of a Drivers License 4Y for 8Y at drivers Option 12Y 5Y 8Y 4Y 6Y 5Y 4Y
Special Require-ments for Senior Citizens 4Y at age 67, 1Y at age 75 or is it now 79 and if so why is my last year's 1Y License about to expire? 5Y at age 65

Every other renewal by mail at age 66

4Y at age 75 No change

In person after 79

2Y at age 85

No Change No Change

* In 2011, the New Mexico Legislature turned away a proposal to test older drivers's reflexes and reaction times starting at age 75.

So one concludes that New Mexico has a problem with those over 75 driving. The one-year license is at no charge but I guess that starts at age 79 now as I had to pay $10.50 today for a one-year extension. I am not sure when the one-year renewal starts now as it may have been increased to age 79 but those who have one-year licenses did not have those licenses extended by the State of New Mexico as I believe would have been appropriate. The need to reappear each year and receive a one-year renewal continues and that is annoying but much less so than the Real ID aspect. There probably are other ways to verify that a person's eyesight remains acceptable such as input from the driver's eye doctor. That might even be automated.
The Real ID requirements are very difficult but it appears that although the NM MVD web site was not updated to show the change made in November of 2016, it will not be necessary to bring the documents one needs now to get a Real ID license at the time of renewal but I am not sure that change will stand up as people do move. I am not commenting on the appropriateness of Real ID but will say that it may be more difficult for senior citizens than others for a number of reasons including not keeping good track of the documents needed to meet the requirements and sometimes living in situations where many bills are paid by family members and they may simply not have proof of address. I am sure there are workarounds for all of these contingencies but it makes for a process that can be very confusing and upsetting. I hope that what I was told today is correct and I do not have to appear with sensitive documents each year and risk losing them. A piece of advice to everyone is to get their passport while they are able to be obtained. A passport is one of the accepted forms of identification as you need to be able to both identify yourself and confirm your ID number. The use of social security numbers for identification is a complex issue beyond the scope of this article but I do believe that Real ID can contribute to identity theft.

The thing about seniors is they use more health services and do not perform well at menial jobs that require stamina and strength. But many of them bring their retirement accounts with them. Some States like Florida and Arizona quickly recognized that seniors were an asset. New Mexico has an advantage that it is a "Judicial" state so the threat of foreclosure is less in New Mexico than in Arizona where you can go to work one day and come home and someone else is living in your house. In NM, foreclosure requires a court process and is not at the sole discretion of the lender. So NM should be of great interest to seniors. It is far more scenic than Arizona (other than Sedona) and in NM 105F is really hot and triggers a heat alert but in Arizona, 115F is a warm day in June. But not being sure if your vehicle will be in the driveway and having to get a new drivers license each year is not a turn on it seems for seniors. If you do not attract retirees and the kids move away you have a bad set of dynamics. This seems like a marketing problem to me but I will tell you that I was very frustrated a week or so ago when I tried and failed to get my Real ID drivers license. I went back today better prepared (which took some doing) and the process took less than an hour but was nerve-racking. In NYC it is an all day affair rather than a couple of hours here.

E. Most are familiar with the concept of Six Degrees of Separation (read more here) In New Mexico it is probably three degrees of separation due to the demographics and tendency of people to have remained in New Mexico for multiple generations. It is hard to say if this is a plus or a minus as it might be both. Use your imagination!


I did not start this article with a conclusion in mind other than the State was in trouble. I was not sure why it was in trouble or if the future might be better or worse. I think I have convinced myself that most of the major issues are external. That is good with respect to not having to blame anyone. But it is bad in that it is easier to change internal drivers than external drivers.

The good news is that in fifty years New Mexico will retain its charm. The bad news is that incomes also are likely to remain fairly constant or decline. On the other hand an analysis made at a particular point in time even if prepared well (and many will take exception to my analysis) is not etched in stone. The purpose for such an analysis is not to enhance despair but to recognize that more of the same will keep the economy on its current path unless the external factors change in ways that are beneficial to New Mexico which could happen. It might be wiser to decide to address the internal factors and based on my experience expecting those who established those factors to correct them is fairly unrealistic. But that is the culture of New Mexico which makes forecasting so much more reliable.

For those who do not themselves or their children need to have an income related to New Mexico sources, New Mexico is a glorious place to be other than the issue with drivers licenses. For most, the income opportunities in New Mexico are limited unless one can work for Government, Regulated Utilities, or Non-Profits. The ratio of Government compensation to Non-Government Sector compensation in New Mexico is favorable. State and local is good, Federal jobs are highly prized. Certain professions do quite well in New Mexico and are often well protected by regulations.

And then there are the Permanent Funds. At this point they provide a substantial contribution to the running of the State and if liquidated would produce $10,000 per capita. Using the stated desired rate of return of 7% and assuming that inflows to the funds would approximately equal the dividend paid to the beneficiaries and using the rule of 72 which suggests that the value of the Permanent Funds might double every ten years, if a person moves to NM at age 20 by age 70 their share of the Permanent Funds might have grown from $10,000 to $320,000 which is not bad. It is unlikely that these funds will be distributed to residents but if the dividend paid to the beneficiaries were to remain at 5% that would be a $16,000 contribution per capita to the beneficiaries which are mostly organizations such as schools both "Common (public) Schools" and universities. This would create a very favorable situation for New Mexico in fifty years from now to have a 32-fold increase in the distributions to the various beneficiaries.

Of course this could trigger another wave of immigration which could revitalize New Mexico since a 7% return is a lot higher than the COLA adjustment many people receive on retirement accounts and it sure beats the 0.02% interest you can earn in a savings account.

In the long term, New Mexico may not need an economy as the Government may be able to be fully funded from the Permanent Funds (it may take a Constitutional Amendment or perhaps a school tax to move the distributions in the General Fund for purposes other than the use of the 21 identified beneficiaries. But New Mexico may need to change its nickname from The Land of Enchantment to the Rentier State. On the other hand, New Mexico may decide to use the Wealth/Permanent Funds if they grow sufficiently to purchase the United States. If the U.S. is $20T in debt and if that might be considered a fair price to pay in bankruptcy court i.e. making the creditors whole, and NM is $20B in the plus, then it needs a 1,000 fold increase in the value of the Wealth Funds (Permanent Funds). If they double in value every 10 years, that would require about ten doubles or about 100 years to pull that off. But if the National Debt keeps increasing, more time may be needed and there are other assumptions which are not likely to hold up. A key assumption is the ability to achieve the target rate of return consistently. The 7% target rate of return has not been accomplished consistently due to occasional declines in the value of assets but the performance has not been very much less than the targeted 7% return so perhaps a bit more than ten years would be required for each double. It is an interesting mathematical exercise to leave you with.

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