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Watch Out for Stimulus Profiteers | The Nation

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Watch Out for Stimulus Profiteers

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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.

About the Author

Anthony Shorris
Anthony Shorris is a fellow at The Century Foundation. He has served as executive director of the Port Authority of...

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 US 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 US infrastructure spending by one-third within a year. Total US 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 US 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.

But the higher prices charged by contractors could go elsewhere. If bids for construction work start coming in higher because prices for commodities like oil, cement or steel are rising, then the government must act; otherwise all we will be doing is transferring taxpayer dollars into the pockets of those who speculate in extractive industries through their investing in companies that sell raw materials. There are limited supplies of these materials, of course, and some increase in pricing appropriately reflects the cost of finding the additional raw materials we'll need, but there is risk here of real price-gouging. Even though price controls are generally an ineffective tool, during this stimulus effort the federal government should explore setting temporary caps on the prices of key raw materials or, at a minimum, creating a monitoring mechanism. The United States has tried such emergency interventions for gas prices or during wartimes, and if they are very brief and well-administered, they may be effective against profiteering.

This piece of the puzzle is not entirely a domestic matter, either. Other nations are also considering stimulus packages along these lines--and we know that several EU and East Asian nations are doing just that--then the international market for raw materials will be dramatically affected. The US Trade Representative and the Commerce Department should be engaged with their counterparts overseas to make sure large portions of the entire global stimulus effort do not end up lining the pockets of those who own or speculate on raw material prices.

Finally, higher prices for construction could simply represent increased profits for the builders of these kinds of projects. Here again, the signs are already beginning to appear: market analysts are already advising "buys" on construction-related stocks. Government has already interceded in the operations of major segments of the US economy as part of this emergency. In this case, monitoring to protect against profiteering is in order (or we could just let the taxpayer share in the upside they have helped create--the government could require that construction companies profiting from federal stimulus dollars offer shares to the public sector).

These are not easy steps to take, but unless we act now, just as the stimulus begins, we risk re-learning the hard lessons of the first Wall Street bailout, when taxpayer dollars went into the pockets of those who knew how to play the game rather than into the paychecks and mortgages of their victims. We need to act quickly, boldly, and, just this once, wisely.

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