February 26, 2009
Recent headlines tell a pretty scary story: Caterpillar, 20,000 jobs, eliminated; Home Depot, 7,000 jobs, gone; Sprint Nextel, 8,000 positions, axed; "Lending Drops at Big Banks;" "Recession Batters Law Firms," "Economic pain to be 'worst in 60 years'." The list goes on.
The bottom line is that the national and global economic downturn is worsening and there is very little evidence that private sector spending alone can reverse the downward spiral. In response to the economic emergency, on February 17, President Obama signed into law H.R. 1, the $787 billion "American Recovery and Reinvestment Act (P.L. 111-5) ("the Act"). Two-thirds of the Act's spending will be dedicated to direct spending in the form of public works, energy infrastructure, social spending, broadband deployment, health information technology, and entitlements (expanded health care for the unemployed, state Medicaid assistance, and other social programs.) The remaining one-third will be dedicated to individual tax cuts and business tax incentives. The plan is to collectively spend out approximately $185 billion in the remainder of 2009 and $399 billion by the end of 2010, meaning that about 75 percent of the entire stimulus package will be front-loaded in 2009 and 2010. The purpose is to cushion the blow of what is shaping up to be a deep and severe economic recession. To put the $787 billion spending package in perspective, consider that in fiscal year 2008, the total regular discretionary budget of the entire United States Government (excluding mandatory entitlement spending accounts for Medicare and Social Security) was $931 billion.
This article addresses various issues associated with the American Recovery and Reinvestment Act, including the type of public works spending envisioned in the bill, the expected impact of emergency public works spending on the construction industry, and whether the legislation was being drafted in such a way as to maximize economic and job creation impact.
The Stimulus Package
The following areas will probably have the greatest impact on the construction industry. Below is a list of the broad categories of programs and activities for which direct public works stimulus funding will be provided under the Act (the amounts are approximate).
- $48.1 billion in U.S. Transportation Department spending, including $27.5 billion for the Federal-aid highway program, $8.4 billion for mass transit rail and bus programs, $1.1 billion in airport construction funds and $1.5 billion in discretionary spending for all types of surface transportation projects.
- At least $8.3 billion in funding for the U.S Army Corps of Engineers, Bureau of Reclamation, and USDA for construction and maintenance of flood and watershed projects, dams, inland waterways, harbors, and rural waste water facilities.
- Approximately $6.9 billion in clean water, safe drinking water, brownfields remediation, Superfund and leaking underground storage tank improvements.
- About $16.3 billion in military housing and HUD-related housing rehabilitation initiatives.
- At least $3.5 billion for rehabilitation and construction of veterans' hospital facilities and community health centers.
- At least $1.6 billion in construction, maintenance and repair of roads, parks and facilities maintained by the National Park Service, the Fish and Wildlife Service, the Bureau of Land Management, and the Bureau of Indian Affairs.
In addition to these funding categories, monies are being made available under the Act for traditional direct federal contracts, such as information technology upgrades and the rehabilitation and repair of federal buildings and assets, as well as the construction and rehabilitation of public schools awarded by local school districts. But the Act could also provide non-traditional contracting opportunities, such as alternative "green building" retrofit programs to make existing public and private sector facilities more energy efficient, utility "smart grid" modernization, and the deployment of broadband services in currently underserved areas.
In the infrastructure area, the Act relies on statutory formulas that distribute the bulk of federal funds to the states, which in turn reallocate the funds to project sponsors or to municipal governments for final contract awards. The precise methods of funding distribution and allocation are determined on a program-by-program and statute-by-statute basis, but broadly speaking, state governments are expected to receive a largest share of the public works stimulus funds for reallocation to project sponsors and lower levels of government.
The Impact on the Construction Industry
By any measure, the construction industry has suffered disproportionately since the subprime housing crisis afflicted the economy starting in 2007. By one estimate, between December 2007, when the current recession began, and November 2008, construction firms have cut more than a half-million jobs while other estimates suggest that construction employment has plummeted by 1.3 million workers, from 9.3 million to 8.0 million. The major home builders that profited so handsomely during the housing boom are now teetering, and industry suppliers are suffering as well, including steel, asphalt, concrete, fabricated metals, and the plastics and rubber sectors.
The Problem of Timing – Economists and policy makers have long debated the precise impact of direct public works spending on job creation in the construction industry. Analysis of public works spending in the post-World War II period suggests that such spending tends to spend out at low rates due to the delay between the time federal funds are "obligated" and project sponsors are able to hire workers, order equipment and supplies, and obtain the necessary permits. While such slow spend out rates are contrary to the intended purpose of so-called "countercyclical" strategies, this is not problematic for lengthy recessions. Assuming for the moment that the recession that began in December 2007 will be as long as forecasted, enactment of a major emergency public works program today would have the intended purpose of producing a countercyclical effect – government-induced demand for goods and services through increased spending in order to create and preserve jobs. If, however, the recession that began in December 2007 is of short duration, enactment of a major emergency public works program today would actually have a pro-cyclical effect by increasing demand for labor after the economy has hit bottom, thus driving up wages and the inflation rate. Since practically all economists predict at least another year to 18 months of recession, Democrats consider the Act to be a well timed injection of critical stimulus spending.
However, to counter the slow spend out rates associated with traditional public works spending, the Act includes language intended to speed up the public works spend out rate. Under current budgetary procedures governing the expenditure of federal highway funds, the "obligation" toward a project agreement between the Federal Highway Administration (FHWA) of the U.S. Department of Transportation and state governments gives the states authority to enter into contracts that lead to job hiring and the ordering of supplies and equipment. The normal time frame between obligation (project agreement) and contract award is 60 to 120 days. For many of the federal transportation programs funded by the Act, Congress attempted to accelerate the obligation process through a carrot approach. The Act's "use it or lose it" provision requires that states obligate 50 percent of all stimulus funds no later than 120 days after states receive the funds and the remaining 50 percent be obligated within one year of receipt or risk returning the money to the U.S. Treasury for reallocation to other states that are ready and willing to obligate funds within the prescribed time frames. The thinking behind this provision is that states will be under extraordinary pressure to spend down the stimulus funds if they know they are at risk of forfeiting it to other states.
In addition, the Act requires that all funds for "infrastructure investment" be given preference for "activities that can be started and completed expeditiously, including a goal of using at least 50 percent of the funds for activities that can be initiated not later than 120 days" after enactment. The Act also requires that project environmental reviews under the National Environmental Policy Act (NEPA) be completed on an "expeditious basis" and the "shortest existing applicable process under NEPA be utilized" for such project reviews.
To help guide state and local authorities in the disbursement of funds, the National Governors Association (NGA) has identified $43 billion in "ready to go" infrastructure projects and the U.S. Conference of Mayors has prepared a list of such projects totaling $63 billion.
The Multiplier Effect – The Bureau of Economic Analysis (BEA) of the United States Department of Commerce employs input-output and "employment requirement" models to measure the impact on job creation by a particular economic activity. Essentially, the direct and indirect employment associated with economic activity under these models is expressed by the number of jobs per billions of dollars of expenditures spent on the particular economic activity in question. These job creation estimates are divided into three measures:
- The number of jobs directly attributable to the activity;
- The number of jobs indirectly attributable to the activity; and
- The number of jobs induced through the economy as a result of the activity.
The "induced jobs" metric is part of a phenomenon of what social scientists call the "multiplier effect." As an example of this effect, the FHWA estimates that for every $1 billion spent on highway and road construction projects, 27,822 jobs are created. But of those 27,822 jobs, 13,962 are classified as "induced" jobs, which is over 50 percent of the total number of jobs created. One reason some analysts are skeptical of the job creating potential of public works spending is over-reliance on the multiplier effect; they prefer a much stronger direct linkage between federal expenditures and actual job hiring associated with public works projects.
Conflicting Job Creation Data – Federal experts are not in full agreement on the precise number of jobs created by federal expenditures on road and highway projects. For example, the FHWA estimate of 27,822 jobs for every $1 billion noted above shows that 13,860 jobs are directly or indirectly created, with 9,500 attributable to the construction industry and 4,300 attributable to supporting industries. The Bureau of Labor Statistics (BLS) of the U.S. Department of Labor, however, calculates that for every $1 billion in federal highway funds, only 11,768 jobs are created, with 6,900 attributable to direct construction jobs. The difference between FHWA and BLS in direct construction employment lends credence to critics of public works spending that even the most expert of federal officials in the field of econometrics appear to lack objective, uniform performance measures on which to calculate the impact of stimulus legislation.
Still, regardless of whether one uses the FHWA or BLS to calculate potential job creation, anywhere from 210,000 to 285,000 "direct" construction jobs could be created assuming the House and Senate agree to spend $30 billion in FHWA highway projects as contemplated under the current legislation. These numbers would be much higher if the "indirect" job impact predicted by both agencies is included in the calculations. Indeed, if the FHWA's multiplier effect on "induced" jobs is taken into account, the number of jobs created by $27.5 billion in FHWA spending under the American Recovery and Reinvestment Act would exceed the number of construction jobs lost between December 2007 and November 2008. Overall, the Act's supporters claim that the legislation will create or preserve some 3.5 million jobs.
In addition to jobs creation, the Act will affect the construction industry in other ways. The legislation requires that projects funded in whole or in part by the Act adhere to the local prevailing wage rate requirements of the Davis-Bacon Act. In addition, the Act requires that all iron, steel, and "manufactured goods" used in projects funded by the Act be produced in the United States. However, the relevant federal department or agency can waive the so-called "Buy America" requirement if the exclusive use of U.S. manufactured goods would increase the cost of the overall project by 25 percent, would not be in the public interest, or there exists insufficient domestic quantities of such manufactured goods. The Act also stipulates that while the Federal Acquisition Regulations (FARs) shall govern goods and services directly procured by the federal government, specific contracting procedures applicable to specific programs funded by the Act shall apply, such as rules governing state and local acquisition under the Federal-aid highway program.
Given the importance attached to the stimulus bill by political leaders, the American public has high expectations that the Act will have the intended impact of reviving the economy in the coming months. Under extraordinary pressure to meet these expectations, the Obama administration is moving quickly to adopt procedures required for releasing the funds. Federal departments and agencies with responsibility for administering the lion's share of funding, such as the departments of Transportation and Energy, have set up internal task forces to oversee program implementation, while the White House has created a website – www.recovery.gov – that would allow the public watchdog groups to carefully monitor deadlines under the Act and ensure program transparency. Whether or not spending envisioned by the American Reinvestment and Recovery Act will have the intended stimulative effect is the $787 billion question that Congress, the White House, economists and Americans are asking themselves during these troubled economic times.
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John H. Kinney
Senior Public Policy Advisor