People who think about New Mexico’s long list of economic failings seem to be reaching a consensus that our state’s long dependence on government spending has probably damaged our economy. This insight leads to the question of how bad is the damage?
Pretty bad, according to Matt E. Ryan, an associate professor of economics at Duquesne University in Pittsburgh.
Reasoning that the history and cultural development of Arizona and New Mexico were fairly similar going into the middle of the 20th century, Ryan examined why the economies of the two states diverged so widely after 1963.
Ryan found that Arizona’s economy was 1.45 times larger than New Mexico’s in 1963. By 2008, Arizona’s economy was 3.11 times the size of ours. Arizona’s population grew from 1.3 million people in 1960 to 5 million by 2000. Our population grew from 950,000 to 1.8 million people in the same period.
Arizona’s economy grew at a 5.3 percent annual rate from 1963 to 2008. New Mexico’s grew at 3.5 percent per year.
Both economies began in about the same place. In a draft paper he provided the Journal, Ryan said that, in 1963, Arizona had the 33rd largest state economy in the United States at $24.7 billion in 2008 dollars. New Mexico was 36th largest at $17 billion.
“Moreover, neither economy had a natural advantage to grow over the other,” Ryan wrote. “Both economies experience similar climate and have similar terrain. Neither has an inherent geographical advantage in trade or migratory issues.” Both have strong Native American and Hispanic cultures, and they became American states within a month of each other.
By 2008, Arizona had the nation’s 20th largest economy, with gross state product of $216.5 billion, while New Mexico had slipped to 37th place with $66 million in GSP.
In an email exchange, Ryan cautioned, “Comparing different areas and their different growth rates can make you pull your hair out. It’s impossible to control for everything and there always seems to be another factor to explore, whether it’s causing change or the result of it.”
Ryan believes the difference in the states’ performance is that Arizona relied on private markets to generate wealth and New Mexico relied on public spending.
In 1963, 2.5 percent more of Arizona’s gross state product came from private sector activity than did New Mexico’s. That difference fluctuated over the years, but in every year except 1992, more of Arizona’s gross state product was the result of private sector activity compared with New Mexico. The difference grew to more than 8 percent in 2002 and was more than 4 percent in 2008.
Assuming this difference explains our relatively poor performance against our neighbor, why does public sector reliance produce worse economic results?
Ryan said in an email that private sector entrepreneurship is more productive than public sector entrepreneurship.
“Entrepreneurship, as I like to define it, is simply the creativity to make yourself better off,” he said. “That can occur in the market sector – new products, new businesses, doing things better, etc. – and we call that productive entrepreneurship since the economy as a whole grows with this activity.”
Public sector activity requires unproductive entrepreneurship and causes an economy to shrink, Ryan said.
Back in the day I used to find myself at business association meetings at which the entire subject of conversation was how someone could get a meeting with former Sen. Pete Domenici to get him to move more federal activity to New Mexico. That sort of lobbying is what Ryan means by unproductive entrepreneurship. Nothing is created, and no productive entrepreneurial skills are honed.
In his paper, Ryan said societies allocate resources in an economy by employing the market system or the political system. New Mexico, more than Arizona, favors the political system.
“The political process does not generate value for society as voluntary trade does,” he wrote. “In fact, losses to society are often the result of transfers of wealth, lobbying, interest groups and the like.”
Fortunately, even a small shift away from the political to the free market process would produce significant results. Arizona’s growth rate from 1963 to 2008 was less than two percentage points faster than ours per year and still produced a significantly larger economy.
“That such small changes in growth rates can have such remarkable impacts is a godsend for policymakers,” Ryan wrote. Policymakers don’t need to hit a home run, he said, just get on base. “Marginal, continual changes in the right direction can lead to non-trivial outcomes.”
New Mexico is being forced into that change regardless. Government employment is down, and budget cuts have lowered federal spending here.
Still, there are policy changes that could foster more free market activity, including tax simplification, regulatory reform and better workforce development.
As a state, we tend to think about making changes that will encourage out-of-state companies to locate here, but these are changes that would help any business.
UpFront is a daily front-page news and opinion column. Comment directly to Winthrop Quigley at 823-3896 or firstname.lastname@example.org. Go to www.abqjournal.com/letters/new to submit a letter to the editor.