Crony Capitalism, Corruption and the Economy in the State of New Mexico A Summary and Action Plan for Business Leaders Crony Capitalism, Corruption and the Economy in the State of New Mexico A Summary and Action Plan for Business Leaders

University of New Mexico Professor Overview Michael Rocca and the Committee for Economic Development (CED), New Mexico’s economy is stagnant, largely because a Washington, DC-based non-profit, of the state’s reputation for corruption and crony capitalism and an environment that fosters pay to non-partisan, business-led public policy play behavior. Crony capitalism is defined as the organization, just released a study unhealthy relationship between some private outlining concerns about the rise of crony interests (such as business, anti-business interests, capitalism in New Mexico. Produced in professions, or specific social groups) and government, creating situations that meet the partnership with the University of New interests of a few at great cost to many. Mexico, the comprehensive report provides definitions, analysis, research findings, case In the case of New Mexico, the misbehavior of a histories, and recommendations. few unscrupulous public officials has harmed the many who adhere to a higher standard. Several Speaking specifically to the state’s business factors have created what might be called a “perfect storm.” Several incidents involving corruption – leaders, this summary defines crony and cronyism, in particular – have tarnished the capitalism, outlines its impact on the New reputation of public officials in New Mexico at Mexico economy, and lists actions that can great cost to the state and those who operate with be taken to mitigate the negative effects integrity. New Mexico has been ranked the nation’s most dependent on federal dollars, next to last and create a climate that fosters positive in economic growth, and received a D- from the economic growth to benefit the state’s Center for Public Integrity. Although New Mexico residents and businesses. has attributes that should allow its economy to thrive, our report concludes that: Our report provides actionable •  High public corruption and cronyism are to blame for the state’s lackluster economic recommendations that require little or no performance; change to existing law. All are designed • To regain stability and foster growth, cronyism to efficiently and effectively help New and corruption must be rooted out of state Mexico prevent and expose cronyism and government. corruption. We intend our report to offer a platform from which the business community can lead change.

2 Crony Capitalism: A Working We have identified three key types of crony capitalism, all amplified by big government such as Definition New Mexico’s: • Rent seeking: when businesses seek favors from Crony capitalism exists on a continuum. On one government officials in return for providing end (sometimes beneficial) are legal transactions political support. where the government distributes benefits to • Regulation capture: when regulatory policies powerful interest groups in return for their are established by industries to benefit those that political support. The middle ground includes are regulated. transactions that, while legal, come at the great • Interest group politics: when interest groups expense of many New Mexicans. Most nefarious become so intertwined in the political process – and completely illegal – are public/private that firms gain more from political activity than relationships with a quid pro quo, often known as from their own economic productivity. “pay to play.” • Some public-private sector relationships (such as However, other factors also contribute to New some tax subsidies) are legitimate policy choices Mexico’s corruption problems, including: that can, under the right conditions, successfully grow the economy. A poorly compensated citizen legislature. • Some, like predatory lending practices, clearly According to the National Conference of State benefit only a small sector of society while Legislatures, New Mexico is one of just 16 states spreading significant economic costs to the with a “citizen legislature” (part-time elected general public. officials whose primary occupation is other than • Some, like pay-to-play scandals, are corrupt and in the legislature). Paid less (under $20,000 on illegal and have tremendous short- and long- average vs. over $80,000 for full-time legislators) term economic consequences. and provided fewer resources, citizen legislators are susceptible to interest group politics and lobbyists because they lack staff and resources to do their Big Government Fuels own research and depend on lobbyists for basic Corruption in New Mexico information on issues.

In New Mexico, government is the largest Rising election costs. Election costs grew 211% employer. Its enormous spending power brings from 1998 to 2012. Not surprisingly, spending on vulnerability to corruption, in general, and crony lobbying also climbed and continues to rise: By capitalism in particular. For perspective, here’s May 2015, lobby spending had already reached how New Mexico’s government compares to other $519,000, higher than total spending had been in states: each of the prior four years. • 23% of the state’s non-farm workers are on the state government payroll – well above the Corruption is self-perpetuating. The state’s long national average of 16%. history of corruption, dating back hundreds of • New Mexico’s governmental workforce ranks years, continues unabated in the 21st century. With 13th in total expenditures per capita in 2012 and spectacular scandals erupting every few years, the 6th highest in the direct-spending growth rate state’s reputation feeds on itself. Recent statistics from 2001 and 2011. show a sorry state of affairs: • Of total revenues in New Mexico, 38% are • In 2014, only 15% of New Mexico residents said derived from federal subsidies, higher than 41 they would trust a state government official, other states. compared to 45% nationally. • Business leaders in New Mexico are alarmed by

3 Crony Capitalism, Corruption and the Economy in the State of New Mexico

the influence of money in politics and the lack Many states don’t evaluate tax subsidy programs. of campaign finance reform and transparency, Also, job growth estimates are based on anticipated with 84% describing the ethical behavior of hires, not actual jobs created. It’s estimated that in state elected officials over the past 20 years as a New Mexico, it takes $31,000 in tax subsidies to “somewhat serious” or “very serious” issue. attract a job with an average salary of $43,000. • A recent analysis conducted by professors of economics and political science ranked New Our report offers detailed analyses of several Mexico as the fifth most corrupt state in the tax subsidy programs, with a range of results. nation. What all have in common, however, is that the industries and companies that receive the subsidies contribute to the campaigns of the public officials 3 Case Studies: Crony who write the subsidies. Capitalism in New Mexico Case 2: Predatory Lending (Payday and Installment loans) Case 1: Tax Subsidies Predatory lending practices victimize vulnerable The New Mexico government issued 860 tax consumers who cannot afford the high interest subsidies between 2011 and 2013, for a total of rates and other costs associated with money they $262,699,040. Private companies can apply for 34 borrow to cover the disparity between low wages different tax credits in seven industries – or the and their needs. Unable to pay back their loans, state legislature can create “targeted” credits by many take on more debt: according to the New passing legislation. It’s therefore unsurprising that Mexico Regulation and Licensing Department, so many take advantage of the opportunities. payday loan consumers end up taking out, on average, between five and seven such loans But, measured against leading economic annually. indicators, research shows, at best, mixed support for the efficacy of these subsidies. An independent More than 20% of New Mexico’s residents live party recently concluded that “tax incentives are below the national poverty level. The state of little benefit to the states and localities that offer presents a ripe market for these “storefront them and they are actually a drag on national lenders,” so-called because of their walk-in retail economic growth.” Reasons why include: spaces. For a variety of reasons (poor health, no health insurance, older cars, and housing stock), Companies don’t base major decisions on tax low-income households are more likely to face subsidies. A combination of factors, including unexpected expenses but, research shows, typically variables such as regulations, energy cost, have only about nine days of liquid assets (or employment pool, and available technical expertise less) in their bank accounts. Also, education and are typically weighed in making a decision. language barriers present further obstacles, since many consumers don’t fully understand the terms Politicians use tax subsidies as political currency. of their loans. Motivated to find opportunities to do “good” things to make a case for being elected, attracting Nationally, the burden of repaying payday loans and retaining tax packages is electorally profitable costs the U.S. economy approximately $943 million for politicians, even if those packages don’t work. per year. Though no available figures reflect New Mexico’s specific contribution, it is clear that the Without evaluations, we can’t understand the state offers a lucrative market to predatory lenders, true impact and actual value of tax subsidies. at massive cost to everyone else, because of:

4 • A poor and often financially illiterate population Treasurer Ken Johnson, convicted of conspiracy • L ittle regulation on storefront lending to commit extortion in 1984) that “this is how • Low-cost lobbying and a political climate where business is done” in New Mexico. small contributions can make a major difference • Non-transparent lobbying and campaign How Crony Capitalism Hurts financing laws Business New Mexico’s 2007 Small Loan Act was an attempt to address some of this industry’s abusive practices, The central problem with crony capitalism is that but the lenders found ways to sidestep the law. Our it benefits the few at great cost to the many. The report details how the industry organized itself research supports clear links between a state’s and, exhibiting all three of the crony capitalism corruption ranking and its economic growth behaviors (rent seeking, regulation capturing, and rate, connecting corruption to lower economic interest group politics), circumvented the laws – performance and a greater disparity between for instance, by inventing new products, changing the wealthy and the poor. Both outcomes hurt loans’ payback period, or redefining the type of business. loan. Other ways that crony capitalism hurts economic Case 3: Pay to Play growth include the following direct or indirect effects: The most obvious and egregious form of crony • Reduces local investment capitalism, “pay to play” arrangements, are • Discourages foreign and interstate direct transactional and clearly illegal. It’s a simple investment equation: Officials extract payments (campaign • I nflates government spending donations and/or direct bribes) in exchange for • S hifts government spending away from health, considering or awarding government contracts. education, and infrastructure and toward less efficient, more malleable public projects New Mexico has become infamous for its scandals • Distorts the proper functioning of the market implicating high public officials in pay to play economy for the benefit of the few transactions. Two recent, high-profile cases are: • H urts consumer spending (predatory lending) • Th e 2008 investment scandal during Governor • Hurts investment returns on government Richardson’s bid for the presidency, when spending (pay to play) corruption charges were filed for allegedly • M akes the state an unattractive place to do awarding public contracts on the basis of business donations to his political action committee (PAC). Still playing out, estimates vary as to Long-standing research shows that citizens’ level what this will cost the state – the low estimate of trust in one another (as well as in government) is $90 million and, at the high end, as much as is closely tied to economic growth, in large part $200 million. because economic transactions depend on trust. • S enator Phil Griego ushered a bill through the That’s a key reason why the state’s future economic committee process devaluing state land and growth may hinge on the ability to reign in crony then acted as the real estate agent accepting an capitalism. unusually large commission for the sale of the recently devalued land.

Under indictment, it has been a contention of several office-holders (including Deputy State

5 Crony Capitalism, Corruption and the Economy in the State of New Mexico

How Can Business Leaders Campaign Reporting Act. 4. Demand development of a user-friendly website Combat Crony Capitalism? providing full and open access to vital campaign finance and lobbying information, in real time, A multipronged effort to eliminate corruption with tools that enable study of how particular and crony capitalism would enhance the business types of donors contributed to particular climate in New Mexico. Establishing a system candidates and offices. that requires transparency and holds government officials accountable for their actions will provide Recommendation 2: Establish an Independent a framework upon which a more successful state Ethics Commission. The commission should be economy can be built. independent, adequately funded, able to protect complainants, have subpoena power, and have the Primarily, the benefit to the business community power to discipline violators. would be a fairer, more competitive marketplace that rewards merit over influence, a key facet of Recommendation 3: Conduct Regular and a capitalistic economy. In turn, this levels the Rigorous Evaluations of Tax Subsidy Programs. playing field, offering all an equal opportunity to Ten states and the District of Columbia have succeed based on what they can do, not who they recently passed laws requiring regular evaluation know – fueling economic growth while promoting of economic development tax incentives or an clarity and predictability. Over time this will create improved evaluation process. We recommend that a stable environment and a more accountable NM pass a similar law and charge an appropriate government, attributes that strengthen economic committee or agency (likely in either the legislative growth and well-being. or executive branch or both) with conducting regular and rigorous evaluation. The programs Our report lays out three specific need to be studied often enough to provide up-to- recommendations. date data while also allowed the time to produce thorough, detailed studies. Recommendation 1: Require greater disclosure of campaign finance and lobbying. Hold public Action Items for New Mexico Business Leaders officials accountable for providing full, timely and free access to relevant information. Four ways to Here are ways that you, your colleagues, and peers strengthen New Mexico’s laws include: can help shape a fairer and more prosperous New 1. Require that financial disclosure statements Mexico: identify the donor’s employer. • Advocate for greater and more complete 2. Require lobbyists to disclose bills/issues for/ disclosure of campaign contributions and against which they are lobbying. lobbying expenditures and efforts. 3. Expand the scope of the Campaign Reporting • Generate demand among peers to establish an Act of New Mexico to require public disclosure Independent Ethics Commission. of as much information about the campaign • Demonstrate support for policy change that spending of PACs and other non-candidate requires regular, rigorous tax subsidy program campaign participants as is possible, without reviews. crossing constitutional boundaries. We believe SB 384, which was sponsored by Senator Peter Wirth (D) and Representative James Smith (R) during the 2015 legislative session, represents the best policy practices and provides an excellent foundation for reforming the

6 CRONY CAPITALISM in the State of New Mexico

CRONY CAPITALISM EXISTS AT DIFFERENT LEVELS HOW CRONY CAPITALISM HURTS LOCAL BUSINESS

TAX SUBSIDIES • Benefits individual PRACTICES LIKE companies PREDATORY LENDING • May help grow • Benefits a an industry PAY TO PLAY small industry • Costs everyone BEHAVIOR Anti-competitive Cronyism distorts Corruption • Costs taxpayers • Illegal deal making the market so creates a and the public • Benefits a few rewards only those with climate individuals influence influence can that inhibits • Costs everyone over merit succeed growth

A PERFECT STORM FOR CRONY CAPITALISM AND A DISENGAGED ELECTORATE

Large reliance Public distrust in Long Reliance on external Campaign on state government history expertise, like lobbyists, funding government and of because legislators are presents spending business leaders corruption not paid opportunities

Continue the ACTION ITEMS FOR BUSINESS LEADERS conversation on Twitter @cedupdate • Advocate for greater disclosure regarding campaign contributions and lobbying. #campaignfinance • Generate demand among peers to establish an Independent Ethics Commission. www.ced.org • Support policy change for regular, rigorous tax subsidy program reviews. Crony Capitalism, Corruption and the Economy in the State of New Mexico A Summary and Action Plan for Business Leaders

First printing: January, 2016 Printed in the United States of America

Committee For Economic Development 1530 Wilson Blvd, Suite 400 Arlington, VA 22209 202.296.5860 www.CED.org