Watch Out for Stimulus Profiteers

By Anthony Shorris, The Nation. Posted February 25, 2009.

With a slimmed-down but much-needed stimulus package now in place, and with a substantial portion of it still aimed at rebuilding America's aging infrastructure, we need to act sensibly as well as quickly and dramatically. Unless we ensure the program reflects the realities of the marketplace for construction services, we risk being unable to implement the programs we need, or worse, handing billions of taxpayer dollars over to stimulus profiteers.

Spending as much as the additional $150 billion for infrastructure that is included in the new legislation (still well below what is needed for the nation's aging systems and less than what many economists had hoped for) would still mean a substantial increase in total annual U.S. investment, potentially as much as a one-third hike in activity over the next year. The Congressional Budget Office reports total infrastructure spending as around $400 billion annually.

The bill requires that half the transportation projects be underway within a few months, so any sudden surge in demand for building of that size is going to run up against some serious limitations in the supply of construction services, at least over the short run. While commercial office building and home construction has certainly virtually collapsed, different kinds of builders handle these kinds of projects. When rising demand meets limited supply, the result can be higher prices, higher profits and potentially the very same kind of speculative bubble that served us so poorly in the high-tech and real estate sectors.

We've seen it before. In the New York region, a public and private sector construction boom in the years just before the crash drove building prices up by as much as 50 percent over three years. The same phenomenon was seen in markets as far away as Malaysia and China, and as close to home as Atlanta and Seattle before the global economy went into a nosedive.

The potential impact of a demand-driven surge gets pretty big pretty quickly. Unless we think hard about this, the sudden increase in demand for building will almost certainly begin to raise prices in the particular sectors involved with these kinds of projects. After all, there is no reason to believe there is enough idle capacity lying around to raise U.S. infrastructure spending by one-third within a year. Total U.S. unemployment is still under 8 percent -- a figure likely underestimated through the exclusion of many who have given up even looking or who are under-employed. Not many of those out of a job are skilled construction trades people who work on projects like these. Even if this increase in demand were to drive up prices by just 10 percent -- and we have experienced spurts in construction demand doing much more than that -- as much as $15 billion could be at stake, an amount that used to pass for a big number.

Publicly funded infrastructure projects are executed by private contractors; the larger the project, the more often they are run by large corporations, not all of them even based in the United States. Like other firms, these public works enterprises use the proceeds from the sale of their services to governments to pay their own workers, buy their materials and create profits for their owners and investors. When there is a surge in demand, these firms will certainly be able to raise their prices. The question is, where does the money go?

If higher construction prices go to pay construction workers, that's generally a good thing -- after all, the point of the stimulus is to inject money into our economy so more people can have jobs that pay better. The problem on the labor side is simply a shortage of skilled workers. The U.S. Labor Department should engage the major construction unions and public universities across the country right now in expedited programs to train current low-skilled workers to move into higher-skilled jobs, to quickly hire and train new workers where needed, and to retrain workers from other, related fields to be ready to handle big machinery of construction. Auto workers might be a good place to start. Former Labor Secretary Robert Reich has called for projects using stimulus dollars to be required to dedicate 20 percent of the jobs to long-term unemployed workers or those with incomes below 200 percent of the poverty level, and for states to use 2 percent of the money they receive to support training to help women, minorities and others often excluded from the construction workforce to benefit from the publicly funded boom.

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Anthony Shorris is a fellow at The Century Foundation. He has served as executive director of the Port Authority of New York & New Jersey and as New York City's finance commissioner.

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