Multitasking, Washington Style

Posted by & filed under CGR Staff, Rochester Business Journal.

Kent GardnerWhen I was a child, my grandparents hosted a gift orgy on Christmas Eve—the whole family gathered in Chicago and every aunt & uncle brought something for ME. My cousins and I had eyes only for the pile of gifts under the tree.

Remind you of the American Recovery and Reinvestment Act (ARRA)? The ARRA orgy begins with the reasonable assumption that the economy needs a healthy dose of Christmas cheer. Congress and the Administration joyfully decreed that we could save the world and spend money, too. Every lobby and interest group joined in the happy chorus. Presto! Christmas in February.

Yet “killing two birds with one stone” only works if you’re a very good shot. ARRA is riddled with Congressional multitasking, using the occasion of the stimulus (and its virtually unlimited spending) to implement specific social goals.

Consider the weatherization program. What’s not to like?  We improve the energy efficiency of millions of homes while putting people to work all across America.  Pre-ARRA, the weatherization program got $250 million. Now it is slated to receive $5 billion. And why not? The Department of Energy declares that weatherization saves $1.83 for every taxpayer dollar spent on the program.

As it turns out, however, the program is ramping up more slowly than intended. Is it surprising that expanding a program by a factor of 20 might take some time? And we might wonder if the measured “return on investment” will hold up as we rush through a massive expansion of the program.

Congress also chose to specify that the Davis-Bacon Act, which mandates the payment of the “prevailing wage” on federal construction projects, will apply to weatherization spending on private homes supported by stimulus dollars. While in some states the difference between prevailing wage and market wage is small, in NYS the prevailing wage is roughly synonymous with union scale, far above the wages paid by many small contractors for this kind of work.

In Monroe County, prevailing wage for carpenters in general construction is about $42 per hour ($27 in wages and $16 in benefits).  By contrast, the median hourly wage for all Monroe County carpenters (as reported by the Bureau of Labor Statistics) is at least one-third lower at $18/hour in wages.  The Department of Labor does not report benefits by occupation, although they are surely lower than benefit rates required under prevailing wage, probably more than a third less. In the past, Davis-Bacon’s main impact was on public construction, not private construction supported by federal programs.

This is a tremendous victory for organized labor, of course. Yet it cuts the impact of the ARRA funds and permanently increases the cost of federally-supported weatherization. When the ARRA money is gone, presumably the weatherization program will shrink back to its pre-ARRA size. But with spending covered by Davis-Bacon, the money will cover far fewer homes and benefit a narrower group of workers and firms.

The automaker bailouts have also fallen prey to Washington multitasking. “If we’re going to save domestic auto manufacturing, let’s turn GM and Chrysler into Toyota at the same time!” Not a press release goes by without a reference to the fuel-efficient small cars that Fiat Chrysler and the New General Motors will be building. Here’s the mystery: I wasn’t aware that buyers of the Dodge Ram and Cadillac Escalade have been secretly yearning for a Fiat 500 or a Chevy Volt. If the Escalade buyer wants a fuel efficient car, he or she can already buy cars like the Honda FIT, Toyota Yaris or Ford Focus. This is a market segment that is crowded with inexpensive cars that earn little profit for their makers. Domestic automakers have only been making real money on larger vehicles.

A significant increase in CAFE standards—mandatory average fuel efficiency for the manufacturers’ motor vehicle offerings—was also pushed through Congress as part of the economic recovery effort. Desperate for Congressional votes and a Presidential blessing, the automakers put up nary a fight. Yet stricter CAFE standards put GM and Chrysler at a tremendous competitive disadvantage vis-à-vis Toyota, Honda, Nissan and Hyundai.

If Congress and the Obama Administration want U.S. automakers to be competitive and profitable, let them sell the vehicles Americans want to buy. If lawmakers want Americans to buy fuel efficient cars, raise the gas tax and consumers will respond appropriately.

I support improving energy efficiency and environmental quality. Hey, I installed a 96% efficient furnace and ride my bicycle to work. I even bring CGR’s coffee grounds home for composting. But we jeopardize the economic recovery plan when we combine it with other social goals. Must weatherization grants come with permanent wage mandates that reduce its effectiveness?  Can we restore domestic automakers to solvency if we impose new expectations for energy efficiency at the same time? The suggestion that we’ll need “ARRA the Sequel” fills me with horror. Let’s hope the economy turns around before Congress gets back into the holiday spirit.

Kent Gardner, Ph.D. President & Chief Economist
Published in the Rochester (NY) Business Journal July 17, 2009