Risky Business

Today’s Sunday Journal reports on the failure of one of the state government’s many ‘investments.’ TCI Medical, which was to build a nuclear medicine plant in Carlsbad, has ceased business after receiving $7 million from New Mexico’s taxpayers.
The immediate cause of TCI’s closure? Private investors realized the company simply wasn’t competitive with others in the industry, and pulled their financing. New Mexico’s taxpayers have all lost money on an investment they never chose to make.
If an endeavor is unable to generate private financing, this is likely because investors have decided the risk of losing their own money is greater than the potential returns. With personal wealth at stake, those with money to invest must be cautious, targeting their investments towards those enterprises most likely to succeed. Even an investment firm working on behalf third-party clients is held to this constraint, for any such firm that doesn’t find profitable returns will lose customers to those that do.
Politicians and bureaucrats, on the other hand, face little personal risk in investing other peoples’ money. Brian Birk, vice president of New Mexico Co-Investment Partners, which funnels tax-payer money to companies who haven’t earned it in the marketplace, laments the failure of “an opportunity that people thought could bring high-paying jobs to rural New Mexico.” Mr. Birk himself mustn’t be too sad at his failure, however, as he is unlikely to find his own job and salary at risk as a result.
Simply put, “thought” and “could” are not sound investment principles. With the risks of investments minimized, Mr. Birk and his colleagues are more susceptible to making decisions based on wishful thinking, how they think and hope things might turn out, rather than any underlying economic reality that actually does bear on the success of such investments.
Meanwhile, the economic harm from stripping this money from the state economy is hard to measure. That $7 million, which could have supported 140 salaries of $50,000 each if left in the hands of the businesses and residents of New Mexico, has simply fizzled away.
The Journal assures us, however, with a meaninglessly broad figure, that “from 20 percent to 90 percent of an investor’s equity portfolio will likely fail.” Often, a few big successes will make up for many individual losses. Given the incentives in play, it would be safe to assume that investments from personally uninvested bureaucrats and politicians lie closer to that 90 percent failure rate.
The verdict is still out on the other technology companies receiving these massive subsidies from tax payers. The state’s dabbling in the film business, however, has shown more rapid results. Of the 4 state funded productions as yet released, none have reported any profits from which New Mexico taxpayers can claim a share, and the state isn’t expecting profits from 9 other productions any time soon. 100 percent failure rate so far.
The use of forcibly confiscated tax dollars in such ‘investments’ is typically justified for ‘creating jobs’ or ‘economic development.’ Never mind the impact on jobs and economic growth of stripping money from productive earners in the first place. Politicians can’t take credit for jobs the private sector creates, and usually escape blame for the jobs they destroy. A politician can count as a victory the hidden destruction of two jobs in creating one high-profile job.
$7 million in state funds wasn’t enough to keep this unprofitable firm in business. You might ask, how many tax dollars would have been required to keep TCI operating in NM, producing pharmaceutical radioisotopes less efficiently than its competitors? In this case, we may never know, but with other investments, in tech companies, movie productions, etc., we’ve so far seen no limit to what Santa Fe is willing to throw into this risky business.
The surest way to see that New Mexicans’ money ends up investing in successful, profitable, job-creating businesses is to simply allow New Mexico’s residents and businesses to keep more of their own money, which they can spend and invest as they see fit.

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Bringing the Death Tax Back from the Dead

As Harry mentioned, a majority of Senators sought today to permanently end the federal death tax, but could muster only 57 of the 60 votes needed to advance the measure.
New Mexico tax law links the state’s death tax to the federal one. By 2005, recent abatement of the federal estate tax effectively eliminated the state death tax. If nothing is done in Washington, however, New Mexico’s death tax will return, along with the federal tax, in 2011.
New Mexico’s Jeff Bingaman spoke out on the floor of the Senate against killing the death tax, before voting against the tax’s repeal. Given the strong tradition of family-owned businesses in New Mexico, one would think all of our representatives in Washington would know better.
Bingaman excuses the confiscation of the fruits of a lifetime of effort, effort that has already been subject to income and other taxes, because before the reductions, “there were only 200 people dying with any estate tax liability” in NM in 2001. That’s 200 of our favorite restaurants, our historic tourist-drawing ranches, our most productive family farms, even many of the funeral homes New Mexico families have relied on for generations.
And that’s only taxed deaths occuring in one year. The number of New Mexicans who will be subject to the death tax at the end of their lifetimes is much greater, unless the current federal law is changed.
It’s time the death tax itself took a trip to the funeral home.

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Some Major Issues — an Economic Perspective

This morning I was pleased to receive the following links from John Goodman, President and Ph.D. economist for National Center for Policy Analysis. If you would like to be enlightened on the “death tax,” international trade, the connection between social security and high tax rates on the elderly, the benefits of Roth IRA’s and/ or the harm done by minimum wage laws, then check out these links:
We All Pay for the Estate Tax
Who would benefit from a Roth IRA?
Taxing the Elderly
Trade & Economic Growth, Part I
Trade & Econmic Growth, Part II
The Negative Effects of The Minimum Wage

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End of the Estate (aka “Death”) Tax?

The U.S. Senate will be debating permanent repeal of the so called “death” tax this week. I am seeing a lot of misinformed opinion about the effects of its repeal. For example, the SEATTLE POST-INTELLIGENCER thinks the true cost will be a trillion dollars in lost revenue over the next decade. WAPO has a similar view.
What these views miss is the dynamic effects of the tax. There is massive avoidance of the tax. That massive avoidance would vanish with repeal; and the net effect would more than replace the lost revenues via more tax collections on capital gains and increased incomes. Here is an economically literate debate on the merits of repeal.

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Universal Pre-K — A Massive Boondoggle

Unfortunately, this is one bad idea that has already oozed out of California and into NM. According to my former professor Jennifer Roback Morse:

The proponents of universal preschool consistently overstate its benefits. Their favorite study is a Rand Corporation study that extrapolates the benefits obtained by a program in Chicago in the 1980’s. The results of that particular preschool study have nothing to do with the results the average family could expect, or with the results the entire state of California would be likely to achieve.
The Chicago preschool program was targeted at low-income, high-risk children, most of whom had unmarried parents. Finding that high quality preschool helped this group of people says absolutely nothing about the impact of preschool on the children of middle class, married-couple households. Most of those kids are already in preschool programs anyway;overall, 65% of California children are in some form of preschool. It is pointless to spend taxpayer dollars subsidizing kids who are already well-provided for by their own parents.
These same kinds of studies are used to browbeat stay at home mothers into placing their kids in preschools or daycare centers. “Am I harming my child by depriving him of the enriching preschool experience?” mothers ask me all the time. No, I always reply. Just pay attention to what your child needs, and trust your instincts. Ignore the studies, unless they apply to your situation very specifically. The studies touting universal preschool are based on non-universal samples and have nothing to do with the experiences of most families.
Furthermore, the Chicago program was more than an academic program. It also required parental involvement, and taught parenting skills. Some of the program’s benefits are surely attributable to the improved parenting the mothers used throughout the child’s formative years. Yet the supporters of universal preschool assign all the credit to the one year the child spent in their precious preschool program. After all, we wouldn’t want to give credit to parents. Everyone knows parents are the problem. The sooner we get kids away from their parents and into government run schools, the better off everyone will be.

She also points out the state politics and mandates that will insure that it is a total waste of your money. You should read the whole thing.

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School Funding in NM

Today’s ABQ Journal attempts to clarify (sr) how our money is distributed to schools in NM. Excerpts:

Under a formula developed in response to a lawsuit by a tiny, rural school district, the state cannot simply allocate the money to the overcrowded districts. It doesn’t matter how much it’s needed or how much the governor or legislators want to do it. At best, a council set up to administer the formula could “loan” the district some of the money, which would be repaid in the form of offsets from future allocations.
District Judge Joseph Rich of Gallup ruled that New Mexico’s system for awarding capital outlay money to public schools was unfair and unconstitutional. He told the state to draft a more equitable system.
The state came up with a uniform system for distributing construction money. It is based on various factors, including need, how much local tax potential existed and how much of that potential was being tapped. The system was designed to equalize opportunity statewide when it came to building projects, rather than penalize or reward kids depending on where they lived.
New Mexico’s natural resources provide money to build and improve public schools. The state sells supplemental severance tax bonds and the proceeds go into the Public School Capital Outlay Fund. The bonds are paid off by revenue generated from taxes imposed on the extraction of natural gas, oil and other minerals.
The state Public School Capital Outlay Council, a nine-member board, is charged with identifying critical construction and renovation needs and decides which schools will receive awards from the capital outlay fund. Awards are based on districts’ applications and district visits. The council’s administrative arm, the Public School Facilities Authority, runs the day-to-day operations of the capital outlay program. The authority has construction managers around the state to help keep projects on track.
Every year, staffers visit a certain percentage of the state’s approximate 750 schools to assess construction and renovation needs. The facilities authority maintains a list in which every school is ranked according to construction need. Late in the school year, districts submit applications to the council, then make presentations before the council early in the summer. If a project the district is requesting money for ranks high on the priority list, then chances are fairly good it will be approved. In 2005, the council approved the top 98 projects on the list.
Once the council agrees to fund a project, a formula devised by the Public School Capital Outlay Task Force is used to determine how much money the district will receive and how much the district must pay.
State and district student population, the previous year’s taxable value for the entire state and the district, and the property tax mill levy in the district are all factors considered in the formula. The formula determines how much of their own money districts must contribute for a construction project in order to receive state funding. For example, Zuni is the only school district that receives 100 percent funding from the state under this formula. There are 15 districts that must pay for 90 percent of their construction projects. APS is required to pay 53 percent of its construction.
The Legislature recently approved a new funding program called the High Priority Project Grant Assistance Program. Districts that are experiencing high levels of growth are able to receive large awards to construct new schools. But while the program’s title implies a grant, districts have to pay back what is a loan.
APS officials said it hoped for the full $90 million available in the new program [for new schools on the West side]. What it got was $67 million, of which it must pay back $52 million.

That clarifies the school funding situation for you, right? Yeah, right. Here is how funding is determined according to the Department of Educations website. Enjoy.

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A Fine Primer on Gasoline Prices

From the Economist comes economic sense about gasoline prices. Excerpts:

…petrol prices in America depend, first and foremost, on the price
of crude oil. This is determined by global supply and demand, something over
which American politicians have only marginal influence. A gallon of petrol
at an American pump costs $2.85 on average, according to the American
Automobile Association (AAA), 75 cents more than it did a year ago.
Taxes account for a mere 18% of the price of filling an American car, compared with, say, 67% in Britain. So a surge in the price of oil leads toa proportionally bigger rise in the price of American petrol. Americans could reduce volatility by raising taxes, but not even Al Gore, who calls global warming “the most dangerous crisis we have ever faced”, is suggesting that Americans should pay just under $7 a gallon, as Brits do.
Although the global oil price is the main cause of American motorists’ woes, local factors also matter. Oil wells and refineries around the Gulf of Mexico have not yet fully recovered from last year’s hurricanes, and petrol stocks are low. Weathermen predict another busy hurricane season this year. And all this bad news comes at the start of the summer driving season, when holidaying families hit the road and prices traditionally rise to annual highs thanks to the increased demand.
However, prices were already at high levels in mid-May. In part that was due to the cost of crude oil. The hangover from last year’s hurricanes, which knocked out 10% of America’s refining capacity, also contributed, as facilities that had deferred maintenance work to compensate for (and profit from) the shortfall belatedly shut down. Furthermore, refiners around the world are struggling to adapt as crude supplies become more viscous and sulphurous, and so harder to turn into petrol.
Another crucial local problem arose from the removal of a chemical called methyl tertiary-butyl ether (MTBE) from petrol in Texas and several eastern states. The addition of MTBE helps to reduce smog from car engines. But researchers began to worry that it might be carcinogenic and was certainly seeping into groundwater, making it undrinkable. Retailers, fearing lawsuits, decided to switch to ethanol, which has similar properties. But petrol blended with ethanol, unlike MTBE, cannot be shipped by pipeline, since the two are prone to separate in transit. So distributors had to invest in new facilities to transport ethanol and mix it with petrol near the point of sale. Moreover, ethanol is in short supply, and therefore expensive.
At one point in late April, a handful of petrol stations actually ran out of fuel as a result of these accumulated woes. But by now, says John Felmy of the American Petroleum Institute (API), an industry group, distribution networks are up and running. The high price, meanwhile, has helped to attract imports of petrol, which have been running 36% above their normal level in recent months. Stocks are rising again, and prices have fallen on the futures markets as well as at the pump. The government now predicts that petrol will cost an average $2.71 a gallon over the summer-less than it does at the moment.
A similar story unfolded in the wake of last year’s hurricanes, when high prices attracted imports, which compensated for curtailed local supply. Members of the International Energy Agency, a club of oil-consuming countries, helped by releasing some petrol from their strategic reserves. Even if hurricanes wreak havoc in the Gulf of Mexico again this summer, Mr Felmy argues, America’s drivers should have no trouble refilling their tanks, as long as they can stomach the price.
Not all can, of course. According to most surveys, demand for petrol is atlast beginning to soften, as the poor or thrifty move about less or take the bus. The API reckons that America’s consumption fell by 0.7% in the first four months of the year. The Department of Energy calculates that it has risen, but at a fraction of the normal pace. Sales of the most gas-guzzling cars have also been falling for several years, which may have a more lasting effect.
In the long run, growth in America’s refining capacity (or the world’s) should also help to lower prices. But that will take time. Refining capacity in America rose by almost 300,000 barrels a day last year, a small fraction of 9m daily barrels of petrol consumed. It will take two or three years, according to Aaron Brady of Cambridge Energy Research Associates, a consultancy, to construct enough extra refining capacity for comfort.
For the most part, Americans are responding rationally to the high price of petrol. Suppliers supply more; consumers consume less. Politicians, however, take it as an opportunity to bluster. The House of Representatives has passed a bill barring “price-gouging”-that is, making it a criminal offence to charge more for petrol than some bureaucrat deems appropriate. This is popular; 69% of Americans even favour price controls. But in the long run, it would reduce the incentive for firms to invest in supplying petrol to Americans, and so would raise prices at the pump. With luck, the bill will die in the Senate.
Both parties tout their determination to free America of its dependence on jihad-fuelling foreign oil by some conveniently distant point in the future. Neither, however, proposes anything that might plausibly accomplish this. House Republicans passed a bill last week to allow oil drilling in Alaska’s Arctic National Wildlife Refuge, which would help a tiny amount at best, and in any case is highly unlikely to get through the Senate.
Both parties say they wish to promote ethanol, not just as an additive, but as a fuel in its own right. In practice, this means a futile attempt by government to pick promising new technologies, plus fat subsidies for midwestern corn farmers while cheaper Brazilian ethanol is kept out with tariffs. Lawmakers could free the ethanol market, but many would rather drive their SUVs to a petrol station a block away from their offices for a photo-op denouncing Mr Bush and Big Oil.

HT: Carroll Cagle

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A Little Spending Arithmetic

Paul’s New Mexico government “Spend-o-meter” is spinning away and will soon reach $11 billion dollars for the fiscal year ending June 30 (yes, that’s billion!). That is almost 23 thousand dollars per second or nearly 1.4 million per hour. How does this relate to us as individuals? The government spends your money at the rate of $115 per person per week.

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