Highway to Nowhere

The new governor of West Virginia has proposed a massive tax increase to fund a huge bond issue for use in a push to complete a number of road projects in the near future.  The stated upside is more jobs, more money into the economy and a separate “bucket of money” to use for other things.  Before we even get into the downside of this proposal, let’s examine each of the positives.

This major infrastructure plan is touted as a jobs plan.  It certainly will result in a lot of work, but will it result in a lot of jobs?  First we need to consider what would happen if we did not engage in this stimulus program.  These road projects would still get done, but they would be done over a longer time period.  So from a sustainable jobs perspective, spacing the work out over  a longer term provides more employment stability.  Of course, the goal of the governor is not long-term sustainability but an immediate increase in employment.  One could argue the issue of short term employment growth verses long term employment stability, but let’s just table that for now and focus on the short term issue.

To really consider the number of jobs created in the short term, we have to review our capacity and expansion capability.  In other words, how much highway construction work can the current WV construction companies complete in a year and how much more work could they reasonably expand themselves to complete?  As it is, the construction firms within the state are of a size compatible with the average market needs of the construction sector.  They’re as big as they can be given the amount of work available.  If we double the amount of work available, can these companies double their workload?  Unfortunately, it’s not that simple.  It isn’t just a matter of hiring more people (even if the people exist).  These road projects would be all over the state and happening during the same construction season.  So, you need not only more workers, but also all the equipment, engineers, logistical support, etc. to run additional projects in other areas.  That’s a lot of investment to make on a short term prospect.  If it were just people, as bad as that may sound, it would be less of an issue because those can just be laid off.  But, equipment isn’t cheap and there are taxes on inventories and equipment that make the idea of investing into those things without a clear long term revenue return very precarious.  Clearly, there would be some companies that expand but expecting them to expand to double their current size, taking into account the skilled labor needed, would be a stretch.  There are jobs for general laborers, but the real driver is skilled labor of which this state has a finite supply after decades of industrial decline.

The limited expansion capability of the WV construction contractors means that there will necessarily be an influx of out of state contractors.  Not only will they likely be needed in order to perform so much work in the compressed timetable, but they may even be able to underbid the internal contractors (who, if they intend to expand, would have the expense of acquiring more equipment).  The existing WV contractors have a slight price advantage now due to reduced mobilization costs, their base of operations being already in the state.  Once a large amount of work is dumped on the market in a short time frame that exceeds the capacity of the internal contractors, out of state contractors will by necessity move in and then, because they are already here, they will be able to bid on subsequent projects as part of this multi-year stimulus at the same lower mobilization rate as existing contractors.  If those out of state contractors are using cheap imported labor and also have the same mobilization costs because they’ve temporarily located resources within the state, we could even see the event of existing WV contractors’ workloads decline in the subsequent years of this program.  Any WV citizens who might be hired by the out of state contractors would know that their jobs are short term unless they follow the company out of state when the work ends.  In short, the impact on employment for WV workers is at best minimal and short term and at worst may even cost jobs due to increased competition from larger out of state firms.

That brings us to the second “benefit” of the plan: more money into the WV economy.  There is no doubt the government will be spending more money.  In order to do that, it will be taking money out of the economy in taxes and fees to cover bond payments.  Considering that the bond repayment includes interest, once can clearly see without the aid of an abacus that the amount of money taken out of the economy will be greater than the amount of money put into the economy by WV.  There is however, the federal money that will come for road projects.  Assuming WV can get a full match for its dollars (a dangerous assumption given the leanings of the majority in Congress), then there would be more money being spent on contracts than had been taken out in taxes, fees and interest payments.  Score one for the governor?  Not so fast.  We need to consider how much of the proposed work will be won by out of state contractors, how much will be spent on imported construction supplies and how much will economic activity will be lost in areas that see increased taxes and fees but do not benefit from a road contract.  It would take an army of eggheads with calculators and theories to estimate all those things, but let’s take a general look at it.

The governor proposed to do ten years’ worth of road projects in the next five years.  Assuming that is possible (engineering, design, permits, etc. aside) and assuming a best case that existing WV contractors can expand in size by 50% using all in-state workers, that still leaves 25% of the work going to out of state contractors.  So far, assuming half the money is federal and interest on the bond is low, WV is still ahead of the curve with only 25% of work going to out of state contractors as 75% of the money spent would be to WV contractors.  The next determination is how much of the supplies needed will be made in WV.  We need structure steel shapes, preform concrete shapes, wiring, light fixtures, signs, concrete, rebar, asphalt, gravel, etc.  Unless there is a major industrial center hiding somewhere in the state just waiting to jump out, yell “surprise” and disgorge a plethora of material, much of that construction material will be coming from out of state.  Since materials are a large cost of construction projects, the numbers now turn grim.  If we can’t keep all the professional services, skilled labor, day labor and associated profits in the state, there is no way to balance the amount of money exported to suppliers.  Since the capacity isn’t there to do this much work in the proposed time-frame, there isn’t any chance of keeping all the non-material expenses in state.  The money will flow out and not into the WV economy.

In order to balance out the money removed from the economy in taxes and fees to fund the bonds, there has to be at least as much put back in.  Assuming a full federal match (again a big assumption), we’d need a little over half the money spent (to account for bond interest) to remain in the state.  Given the need to import so much of the material for construction and our limited capacity and natural limits to sudden expansion, the numbers just don’t work out – unless you only care about the next couple years.  That is the secret.

The WV economy in the next few years may see a net increase in money even if a quarter of the work goes to out of state contractors and much of the supplies are imported.  If you dump $2 billion into projects during a five year period in which you suck out only $1 billion of the cost in taxes and fees during that period, there might be a net gain in the WV economy.  However, as the taxes and fees that continue to be drained away to pay back the debt is coupled to the revenue lost to out of state contractors and suppliers, the net effect is a huge loss.  That only matters if you’re going to still be in office when the pain comes or if you’re an average taxpayer.

The theory that if you borrow some money and match that with federal money, you get back more than you put in only works if you actually get back more than you put in.  The work would have to go only to WV contractors, only to WV workers and primarily to WV suppliers.  Otherwise, the amount that bleeds out exceeds the amount of federal money that comes in and there is a net loss to the economy.  That’s why capacity matters.

The numbers get a bit more complicated due to the proposal by the governor of putting a 5% tax on the winning bidder.  Let’s just all get on the same page first.  If you announce a 5% tax on the winning bid, all bidders will pad their bids to absorb that cost, so the state isn’t getting any money back from contractors – it is just having the contractors take more in order to give a little of the excess back.  So after it drives up the cost of the work by at least 5% so that at least 5% less work can be done, there will be a “bucket of money” that is “generated” by this kickback scheme.  That money is proposed to be used to build drug treatment centers and who knows what else (no one knows as it hasn’t been said).  Since the amount of road work that can be done will be reduced by at least 5% due to this skimming of the funds, it is ludicrous to consider that skimmed money as “additional revenue” to be counted towards economic activity.  There is a popular economic theory that contents that if you pass the same dollar to Person A who gives it to Person B who gives it to Person C who gives it to Person A that the one dollar became three.  By that theory, the 5% extra charged by the contractor that is then taken as a 5% tax means 10% of increased economic activity but in reality nobody got anything except the lawyers, accountants and bureaucrats who each took a cut as the money passed from the government to the contractor and then back again.

Worse than there being no real benefit from the “bucket of money” generated by taxing inflated bids which results in a net loss of spending money (due to the processing costs), the whole scheme is a violation of the law – in spirit, if not in letter.  The people have to vote to issue bonds for a specific purpose, i.e. road construction.  By playing this little game of announcing a 5% tax on the winning bidder so that the bids are inflated to absorb it, all that is really being accomplished is the siphoning off of funds from a constitutionally limited bond issue to use to do things not permitted by the bond issue.  It’s like a guy that sells a copy of a $1 newspaper for $500 and gives the buyer two complimentary tickets and then claims not to be scalping tickets.  Putting a targeted tax on a bid funded by a constitutionally limited bond issue is just semantics for the misappropriation of funds.  It may be technically legal but it’s crooked.

All the benefits touted by the governor for his over-tax and way over-spend infrastructure plan have been reviewed and none of them hold up to even cursory inspection.  There are potentially some very short term benefits for the state as a whole, but many long term detriments.  Only politicians with no long term prospects of staying in office and owners of contracting firms really benefit from the plan.  Sure, existing WV workers and some additional WV people who will be hired will get paychecks but, for the most part, they’d be getting those anyway if the construction work were done at the regular pace.  The acceleration of the pace of work and additional projects crammed into a construction season doesn’t increase the number of hours in the day nor the number of hours a WV worker can work in a season.  It just invites external competition.  That’s just how the market works.

The short term benefits may be worth it given the current economic difficulties of the state if: 1. the work could legitimately be considered a definite driver of future economic growth such that it would negate the long term costs and 2. there will be enough construction contracts in the immediate post-stimulus years to sustain the contracting industry.  Fixing roads is important, but does doing it all at once impact economic growth?  There doesn’t appear to be any evidence that suggests doing 10 years worth of projects in 5 years has any positive effect on economic growth; only that not doing projects at all (deferred maintenance) has a negative effect on economic growth.  If all a state or nation had to do in order to spur long term economic growth was borrow some money and build roads ahead of schedule, we’d all be living in an economic boom time already.  The feds tried it and it did nothing.  Well, that’s not true.  It did worse than nothing.  That’s because of condition number two listed above.  If the state does a decade’s worth of necessary projects in five years, what work is there to do in the next five years?  There will be some work that is always needed like repaving, but if all the bridges are fixed and will last decades, then what bridge work will there be?  Some projects from more distant years may be able to be moved up, but why replace or repair something that hasn’t reached its lifespan?  The fact is that if the work of ten years is done in five, there isn’t much work to do in the next five.  The WV workers will find that their steady construction jobs disappear when the stimulus is over because the work is done.  The WV worker only made five years of wages, the same he or she would have made without the stimulus.  Now, the workers will face layoffs or the need to go out of state to find work whereas, without the stimulus, the work for years six through ten would still be there for them to do.

Maybe the long term welfare of the state’s skilled construction workers doesn’t matter.  Maybe the long term loss to the state’s economy doesn’t matter.  Maybe doing an end around the constitutional limits of a bond issue doesn’t matter.  Maybe all the economic growth that was lost in other sectors due to the increase in taxes in fees doesn’t matter.  Maybe the economic hardship for every citizen of WV who isn’t in the construction industry or related support businesses who has to pay extra taxes and fees from an already limited income doesn’t matter.  Maybe all that matters is that one man can dream big, tax bigger, spend even bigger and then invite all the owners of contracting firms that profit from the venture to come stay at his hotel when they’re all done draining the economy.

Published in: on February 28, 2017 at 5:02 PM  Leave a Comment  
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