Wednesday, January 9, 2013

Supply and Demand in the High Desert

Just a Bit About
 Supply and Demand Economies

Because this post is one of a series of ideas about the development of New Mexico's state economy, we will need to set a few "landmarks" right away.

Both the State of New Mexico and the City of Albuquerque have folks with the words "economic development" in their titles.  Bernalillo County may even have someone charged with "watching over" economic development.

Further, these efforts by local and state governments have initiated all manner of "economic development" proposals, spent plenty of public money, made a few well connected folks -- not all New Mexicans -- rich and ultimately delivered New Mexico to its questionable notoriety as the "poorest state in the United States."

The idea here is that there is clearly something fundamentally wrong with the approach we have taken.

 Given the incredible amount of money we have spent on "economic development," New Mexico should be literally crawling with success stories.  If we were looking for those successes, we would need go no further than spotting pockets of new jobs the "economic development" had created around our state.

New jobs.  There should, by this time, be lots of new jobs -- all made possible by the money we've spent for "economic development."

Now, instead of seeing all manner of new jobs around the state, we are left with a little more than the $1.3 Bn dollars -- per year -- which has been spent on "economic development."  This pile of public money has been transferred to the "economic developers" via a variety of channels.  Most notable are:

1. tax expenditures -- occurring when the taxes on the "start up" businesses organized for "economic development" have been temporarily "forgiven,"


2. infrastructure "give aways" -- occurring when roads, sewers, water supplies and the like have been provided as incentives to the businesses lured here by the "economic development."

There are, undoubtedly, others as well.

A few brave souls in the Round House actually asked Governor Martinez for an accounting of both the costs and results -- that is, the jobs created -- by these "economic development" expenditures.  The Governor's response was predictable.  She decided that the "accounting" would have to be conducted by staff in her office and not by the state's governmental accountability legislators.

[You can read about the Governor's "tax expenditure bait and switch" on a MeanMesa post: ]

MeanMesa assumes that this "accounting task" will ultimately be contracted to an "accounting" firm in Texas because the "expertise" cannot be found here in New Mexico.  This has been the almost unalterable pattern for such matters so far.  It "solves" a lot of problems for the Governor.

However, it doesn't solve many problems for the citizens of New Mexico -- still the poorest state in the union.

A "Demand Economy:"
 One for Growth in New Mexico

MeanMesa's main criticism of the types of "economic development" we've tried here so far are not rocket science.  Naturally, with more than a billion dollars per year being spent with such bad results, the first criticism is that our current policy is both expensive and not very effective.  But even this leaves a few other issues which are also worthy of consideration.

1. A "demand economy" is not called that because everyone goes to the streets demanding something or other.  A demand economy is one which helps sustain itself because there is a demand for things being produced in that economy.

The components are simple.  On one side, there must be something produced which is "in demand" for consumption here in the state.  On the other hand, state citizens must have a chance to put enough money into their pockets to purchase whatever that is.

Not many New Mexicans can afford a personal jet, expensive German solar panels or equally expensive computer gear -- even if these products were made in New Mexico.

If the citizens are able to work to produce that "something," they may very well have money to spend to purchase it if it is, indeed, something they want or need.  Further, the state government -- if it can ever slip away from ALEC long enough -- can play a part in both the production and the "money in the pocket" [disposable income] parts of the plan.

2. The current programs have, actually, created some jobs, but not all that many.  However, the skilled machinists working in a solar panel factory or assembling private jets probably already had jobs before their current employer was "enticed" into New Mexico with "economic development" incentives.  Getting jobs for this type of New Mexicans has never been too difficult.

However, once we move beyond this population of skilled workers to the types of folks who are more common here, the "economic development" plans start to fizzle right away.  In fact, some "economic development" programs in recent years were based on the idea that all sorts of really skilled workers were here, not working and available at really low wages.

Predictably, these have not turned out "roses, simply roses."

3. The "economic development" plans have all touted themselves as "job creation" schemes while the funding for their respective incentives was being put together in Santa Fe or City Hall.  The projects which have been successful have put New Mexicans to work, but there has never been one of these plans which even offered the prospect of putting lots of New Mexicans to work.

Because we are the poorest state in the union, a few good paying jobs are always welcome, but our real problem isn't going to start being solved until we begin "job creation" on a much more massive scale.  Here, MeanMesa is proposing thousands of new jobs, not dozens.

Immediately we face the next dilemma.  There are just not many businesses roaming around the country looking for a state with thousands of unskilled, unemployed laborers.  Our "economic development" guys can look high and low for that kind of company to "entice" into investing in New Mexico, but the odds are not good.

In fact the odds are not good at all.  These days there is an abundant supply of unemployed workers everywhere.  Thanks to the Great Republican Recession of 2008, all those unemployed workers are now desperate.  They will all work for low wages and no benefits in crappy conditions.

New Mexico doesn't offer any particular advantage to this other than possibly even lower wages.

4.  These imported "job creation" businesses do not arrive alone.  Whenever one of these incentive laden "move to New Mexico" schemes unfolds, that company arriving to set up shop brings with it a demand -- a market for whatever it intends to produce here.

A demand.

A market.


If there are two salient features of the failures of these imported companies, one is that, upon closer examination, there really wasn't the labor skill here that the business plan called for, and the other is that the, generally, out of state demand and  markets for the imported companies' products faltered.  The latter happens all the time in a national economy like this one.

At this juncture the "economic development" incentives face the same devaluing as the new car experiences when it's driven off the lot.  The road that was built with public money to the now empty building sitting on land made available as an incentive now goes no where.  The public school a mile closer to town -- the one which could have used that new road itself -- is still not getting the property tax money which was thrown in to "sweeten the pot" while the imported company was being wooed there.

The day after all this settles, New Mexico has successfully invested public incentive money in a road that goes to a plant that has been abandoned.  All that's left is for the "economic development" folks to patch together enough excuses to "explain" what happened to the Round House.

A Quick Glimpse at "Supply Economics"
Just for comparison

The idea of the supply economy hatched from its egg most recently during the Reagan administration.  It also "hatched" during a time when the national economy was doing much better than it is now.  The "hatchling" has received loving care every day since Reagan laid the groundwork for the conversion of the US economy into a "supply side" paradise.

The "supply side" idea is based on policies which lower production costs for consumer purchases which, more or less, remain constant through the changes. The increased profits which result from these lower costs of production flow to those who have managed to lower the costs.  The idea that levels of discretionary income remain constant -- even though consumers are now either earning less or nothing by working to produce the consumer goods they are consuming -- lasted for a while.

However, the intrinsic wealth "surplus" which existed in the country during the Reagan era was gradually depleted to maintain consumer purchasing power. That "wealth" was no longer being replenished by pay checks from working at the manufacture of those goods.  Profits remained high for what was still being sold, but the constantly diminishing purchasing power of consumer -- the constantly diminishing demand -- inevitably resulted in fewer and fewer sales and caused an economic contraction.

The rate of "economic contraction" at the end of the Bush W. autocracy was 9.6%.  The 2008 annual rate of GDP growth was

Of course, the interim solution to this economic contraction was an expansion of credit access for consumers.  Consumers, still plagued by the habit of consuming at the same rate as when things were better, found that they could borrow money to sustain their standard of living.

This development was reckless when it first began, but when the scam ultimately fell completely apart, "reckless" became way too optimistic a term to describe what came next.

Way, way, way too optimistic.

"Supply Side" Policies in New Mexico's
"Economic Development"
Being strangled by 1960.

The "economic development" plans which have been implemented in New Mexico have almost all had rather unimaginative "supply side" underpinnings, and, consequently, also very predictable, very shallow, negative "supply side" results.  We can lay plenty of blame on the "economic development" folks for proposing such a moribund collection of failed efforts -- at the very time the same policies were "growing horns" in the national economy.

It's almost as if someone had prevented every one of them from reading a news paper or a junior high school economics text any newer than the 1960's.  The world hadn't ever even seen anything like this then. This series of failures, each one lubricated by too much state money, was literally strewing mounds of abandoned "development" residue all over the state.

The central "incentive" for out of state businesses to come here has, aside from the "economic development" checks, of course, a proffered opportunity to increase profits by reducing costs -- especially labor.  The problem has been that there has not been a "demand" incentive. The "demands," customers and "markets" have consistently been located elsewhere.

The quality of the businesses attracted here has been, further, strangely associated with  very fickle demands, customers and markets.

All this may not sound all that bad, but there is, unavoidably, a darkly "stained streak" running through each one of these "economic development" projects. 

If there were to a "metric" by which the success of these proposals might be evaluated, it would consistently be the increased or decreased profitability which resulted from the move here.  The point is that if business profits increased because of a relocation to New Mexico, those would be a "supply side" success, and those increases would be attributable to decreased expenses of production.

Our State of New Mexico would have been, effectively, transformed into nothing beyond a low cost "labor source" -- not a market, not even a stake holder who might receive some of that profit.

The State's efforts for job creation and general prosperity have turned out to be an empty, hollowed out, worst case scenario as far as "economic development" goes.  Such results are typical of the "supply side" development model.

A frank, sober look at the results of New Mexico and Albuquerque "economic development" projects bears out MeanMesa's depressing appraisal.

Let's Get To Work
Not Eddie Schultz -- New Mexico

The NMW logo at the top of this post is labeled "Creating New Mexico's Demand Economy."  If MeanMesa intends to put forth alternative ideas to what has been so roundly criticized above, we'll have to get that done right here.

Let's describe "New Mexico's Demand Economy" -- how we can really develop it and where, exactly, we need to start.  Naturally, there are a few "moving parts," and those "moving parts" have not been "parts" of what we've tried so far.

1. The scope of job creation

When we speak to job creation through economic development, we need to be talking about thousands of jobs, not dozens.  New Mexicans are suffering just about every kind of poverty driven mischief right now.  When we look at the larger picture, the shortage of jobs here is causing everything from larger inmate populations, higher drug addiction, more teen age pregnancies, more high school drop outs -- you name it.

Worst of all, it's creating a social wrecking ball called hopelessness.

2. Keeping demand close to home

Generally, but especially in this economy, the demand market for what those jobs will produce needs to be a local, New Mexico demand market.  At first this seems to be an almost impossible requirement, but MeanMesa intends to hit this nail "squarely on the head" in the following posts.  New Mexicans do, actually, need things -- things which can be made and marketed right here in the state.

We're not talking turquoise belt buckles or bad water color paintings of imaginary mesas here.

3. Government has a role

Government is already playing a role in all of this.  Our problem is that the "role" the governments are playing isn't directed toward the right goals.  It's hard to imagine that the folks in the Round House have really separated themselves from day to day life here to such an extent that they continue to think that this is working.

What will be proposed here may, in fact, be rather frightening to our State legislature.  We need to move into the shaky new territory of taking risks, making investments, toughing our way through a few failures -- stepping up to the plate.  This also means not handing off responsibilities and not hiding behind consultants from Texas.

People who have been elected to operate the state are going to have to do just that.  New Mexico can't just keep "waiting patiently" for better days.

4. "Job Creation" vs. "Economic Development"

Preparing a foundation for a new prosperity in the state involves more than creating jobs -- lots more.  It involves creating demand.  

Sure, the well paid, high tech employee in the semi-conductor factory buys groceries, new tires and a better washing machine -- all of which create a "second cycle" of economic development.  But real economic development means that many thousands of New Mexicans get to participate in this.

Many thousands of New Mexicans will see not just a few specific opportunities for improving their economic conditions but instead, a steadily growing tide of improved opportunities.  One where more and more money is gradually becoming available -- everywhere -- all around them.

Not only that, either.  It means that all those "participants" get to continue to participate in this.  It means that the aggregate of discretionary income throughout all the regions and populations of the state continues to increase.

It means that New Mexico moves away from its current "poorest state in the union" status because New Mexicans have more money in their pockets.  And not just that.  It means that New Mexicans can spend that money in an economy which doesn't immediately simply drain all that money out of the state.

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