Why Prosperity Stops at New Mexico’s Border and How to Fix it

Although the focus of this great new book is about the relative absence of prosperity in West Virginia, it could just as well be about New Mexico. The book is receiving lots of attention in WV. Maybe we could get the authors to write about New Mexico too, since it ranks right down there with WV and gets lots of attention in the book.
The first four chapters explain why economic freedom (rather than government) promotes prosperity. Chapters 5 thru 14 lay out specific policy measures that promote prosperity. Notice, however, that New Mexico has been doing just the opposite of what these scholars recommend — NM emphasizes playing favorites (chapter 8), does not emphasize tax competitiveness (chapter 5), does not reduce labor restrictions (chapter 10), does not quit punishing the working poor (chapter 11) and so forth.
This is a good read for those of you who want a better understanding of the relative weakness of NM’s economy. Hat tip: Professor Lawson at Division of Labour.

New Mexico Sprouts New Credit Claiming

In today’s Albuquerque Journal Rick Homans is claiming that he and the Richardson Administration have created new jobs. It is easy to see the results of government action when it creates government favors for particular interests whether they be movies, spaceports or what not. The people who get jobs as a result of the government favors are readily identifiable and happy about it.
But how about the jobs that have gone begging because we do not have a good tax and regulatory climate? Government does not create jobs. Unfortunately our bad economic climate makes it easier to dish out favors and then claim credit. Despite Homan’s claim about our low unemployment, New Mexico remains consistently above the nation and region over time when it comes to the rate of unemployment and the rate of labor force participation and below the nation and region when it comes to per capita personal income. And our situation will not improve relative to other states until we get out of the big-government, dishing-out-of-breaks to favored interests and get into lower tax rates, less regulation and equal tax treatment under the law.
BTW did you happen to notice an irony? While touting governments success on the opinion page, the front page contains news of the difficulty of making jobless claims to the government. A labor department spokesman is quoted as saying: “the call volume has increased dramatically compared to last year, although the number of new claims filed still remains at about 1,400 to 1,600 a week.

Making Sense of Things That Don’t Make Sense

Thomas Sowell does a great job of teaching us economics in four recent, short articles (one, two, three and four).
The articles explain sources of value and knowledge in human interaction and how values and knowledge translate into wages, prices and progress. I won’t attempt to summarize Sowell here, since he is one of the best economics teachers on the planet. If you are a bit puzzled about how economists think you should read them all carefully — he provides lots of examples of the functioning of markets and politics familiar to our daily lives.
Many of us think by casual observation that some prices or incomes are too high (low) or grossly unfair or unjust. Since most of us cannot make sense out of prices or incomes, he urges us not to make matters worse by “doing something” about what we cannot comprehend in the first place. For that reason he entitles his articles “dangerous obsession.”
Sowell is author of two superb books accessible to anyone who can read: Basic Economics and Applied Economcs. I highly recommend them.

The Seductive Snowballing of Government

So far I have not noticed any local mention of Saturday’s New York Times article featuring greedy, villainous, predatory payday lenders in New Mexico. At least that is the impression you get from reading the article that is not on the editorial page (“Seductively Easy, Payday Loans Often Snowball”):

While such lending is effectively banned in 11 states, including New York, through usury or other laws, it is flourishing in 39 others. The practice is unusually rampant and unregulated in New Mexico, where it has become a contentious political issue. The Center for Responsible Lending, a private consumer group, calculates that nationally payday loans totaled at least $28 billion in 2005, doubling in five years.
The loans are quick and easy. Customers are usually required to leave a predated personal check that the lender can cash on the next payday, two or four weeks later. They must show a pay stub or proof of regular income, like Social Security, but there is no credit check, which leads to some defaults but, more often, continued extension of the loan, with repeated fees.
In many states, including New Mexico, lenders also make no effort to see if customers have borrowed elsewhere, which is how Mr. Milford could take out so many loans at once. If they repay on time, borrowers pay fees ranging from $15 per $100 borrowed in some states to, in New Mexico, often $20 or more per $100, which translates into an annualized interest rate, for a two-week loan, of 520 percent or more.

I have no doubt that some of the borrowers get into the kind of trouble such as that of Mr. Milford of Gallop:

Mr. Milford is chronically broke because each month, in what he calls “my ritual,” he travels 30 miles to Gallup and visits 16 storefront money-lending shops. Mr. Milford, who is 59 and receives a civil service pension and veteran’s disability benefits, doles out some $1,500 monthly to the lenders just to cover the interest on what he had intended several years ago to be short-term “payday loans.”

But the article raises a lot of unanswered questions:
Specifically with regard to the situation of Mr. Milford’s seeming dilemma, why doesn’t he get a bank loan to extricate himself from his “ritual?” Someone with a stable income (civil service retirement and veteran’s disability payments) should easily qualify for such a loan. Why wouldn’t the reporter dig a little deeper? It looks like there may be something else going on here.
Did Mr. Milford and others like him encounter some kind of fraud on the part of the payday lender? Was there something about his side of the voluntary transaction that was misrepresented? After all, it is a government function to protect us from fraud.
Economists always want to know about the road not traveled. What would have been the consequences had Mr. Milford not gone in debt to the payday lender? What did he need the initial loan for in the first place? It seems to me that would be a logical question for the reporter to ask.
With regard to the bigger picture:
If some 90 plus percent of these borrowers are responsible and do not get into trouble, then why do we want to penalize them for the irresponsible behavior of New Mexicans like Mr. Milford? Would we rather have them bouncing a check for a much higher fee? Would we rather have their heat turned off. Would we rather have their car repossessed? Would we rather they enter the black market for loans when they are desperate?
If the rates charged by payday lenders are so outrageous, then why don’t entrepreneurs enter the market and charge lower rates? This would be a great opportunity for Diane Denish and her feel-good comrades to show their concern without having to legislate more New Mexico style government coercion. They say that payday loans should be capped at a 36 percent annual interest rate. That means she should be able to satisfy the demand for these loans for a fee of only one dollar and thirty-eight cents for a two-week loan of $100. That is quite a saving over the $15 to $20 (or “sometimes more”) currently charged by these lenders.
People tend to do much better when they make decisions for themselves even if, in retrospect, a mistake may have been made. The New York Times is obviously pushing for government to keep us from obtaining payday loans. They think the government knows better for us what we need (or don’t need) than we do.
To the contrary, prosperity results when government does not snowball, because people tend to make much better decisions for themselves (even accounting for all the mistakes we make).
Here is something that really annoys me about this whole thing:

He said the association supported “fair regulations,” including a cap on two-week fees in the range of $15 to $17 per $100, a level now mandated in several states, including Florida, Illinois and Minnesota. This translates into effective fees of about a dollar a day for those who repay on time, which he said was reasonable given the risks and costs of business.

That is a quote from Don Gayhardt, president of the Dollar Financial Corporation, which owns a national chain of lenders called Money Marts. Mr. Gayhardt is also a board member of the Community Financial Services Association of America, a trade group that represents about 60 percent of payday lenders. Mr. Gayhardts’ freedom to contract voluntarily is under attack. Yet, rather than defending his freedom, he kowtows to the seductive big-government snowballers by supporting “fair regulations” that amount to price controls.