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Monday, November 15, 2010
State's Economic Structure Is Flawed
By Winthrop Quigley
Of the Journal
In 2008, before the recession really hit us hard, New Mexico's gross domestic product was valued at $80 billion. More than a third of that — $26.3 billion — was attributable to two sectors of our economy: mining ($12.4 billion), which includes oil and natural gas production; and government ($13.9 billion).
As of September, 810,100 New Mexicans held jobs, almost a quarter of them (199,100) in federal, state, local or tribal governments.
When I say New Mexico's economy has a structural problem, that's what I mean. Too much of our economic activity depends on highly volatile commodities markets, like copper and natural gas. Too many of our workers depend on unreliable revenue sources, like taxes and sales of commodities. If you count the 123,100 workers employed in the health and educational services sector, which relies heavily on government spending, the structure is even more rickety.
The growth in an economy that depends on commodities and the zero-sum allocation of a finite stream of taxes is uncertain. A surge in OPEC production or the closure of a single Air Force base are enough to strangle New Mexico's economy.
New Mexico keeps trying to emulate the economies of Boston's Route 128 corridor and Silicon Valley in California, and for good reason. Businesses there add proprietary value to high profit-margin products that can be sold into broad global markets. Those regions are prosperous and, though they are not recession-proof, they are resilient.
New Mexico has some wonderful companies playing in the same league, companies like Emcore, Miox and Applied Technology Associates, which have local origins and offer proprietary technologies in the world market. The number of those companies, the value of their exports and the jobs they create have grown slowly but surely for several years.
Even so, there are thousands of those companies in Silicon Valley and only dozens in New Mexico. What's the difference?
History plays a role. Many of the nation's most successful economies have significant navigable waterways, which were essential to trade and to involvement in the Industrial Revolution. A commercial culture developed early in places like the San Francisco Bay area and Boston. The financing, transportation, communications and legal infrastructure business requires grew up along with the entrepreneurs. New Mexico began developing that infrastructure after World War II.
Population plays a role. The Albuquerque metropolitan statistical area contains 860,000 people. The San Jose MSA, which includes only a portion of Silicon Valley, has a million more people than we do. The odds of a Steve Jobs appearing are just that much better in a highly populated place.
Critical mass is enormously helpful. The high concentration of technology companies in a single area means young people have entry-level jobs in a growth industry available to them without leaving home. Disgruntled employees have a host of alternative employers within blocks of their current job. People with ideas begging to be cross-fertilized routinely find each other at the same yoga classes, bars and kids' soccer games. Entrepreneurs wanting to start a new company can find all of the talent they need in a single county just by flipping through a Rolodex.
Regulation is easier. Any time Intel wants to do something new that requires a government permit in New Mexico, it has to spend a lot of time training smart, well-intentioned but inexperienced regulators about its business. There is only one Intel in New Mexico. A regulator in Santa Clara County sees hundreds of companies in the same business asking for the same approvals every year.
Great science and engineering universities are essential to a Silicon Valley-style success. Our three research universities have some excellent programs and brilliant instructors and researchers, but Silicon Valley offers Stanford, San Jose State and UC Berkeley. Boston has MIT and Harvard.
I think our strategy is flawed as well. Much of New Mexico's effort involves finding interesting technology at the national laboratories that might have some chance of finding a commercial market. That's a supply-push strategy. We hope that we might find something sitting on a shelf in Los Alamos that, with the right tweaking, could become a product.
Steve Jobs started Apple to make computers for the millions of people who wanted a simple, fun device that didn't require an IBM-certified technician to operate. That's a demand-pull strategy.
A lot of our local companies hope to build a product they can sell to the national labs. Sandia National Laboratories is by far the most important customer of tenants in the Sandia Science and Technology Park. That puts those companies at the mercy of the Department of Energy and the federal budget and limits their customer base.
New Mexico's economic future depends on weaning ourselves away from commodities sales and government employment. Nurturing a technology sector is the smart way to go. But let's not kid ourselves. This is going to be a long, slow, hard slog.