Wednesday, March 18, 2009

The new economic boom

Andrew Sullivan prints a letter from a reader who has just been laid off. He's not a financial executive or a realtor, he's in the new "boom" industry of infrastructure improvement:
Some construction companies, including the biggest names in the D.C. area, have reduced their workforces by over 90% just to stay afloat. Others have gone bankrupt.

With the collapse in residential construction, and with commercial construction struggling badly, contractors have directed their focus on government projects. For instance, my company bid a small ($600,000) project to demolish an existing government building, haul the material offsite, and restore the work area with new topsoil and grass -- a two, maybe three month-long project. How many contractors bid for this project? THIRTY-SIX! THIRTY-FRIGGING-SIX! Three years ago there probably would have been no more than six or seven bidders, because everybody was so busy. My company cut our bid to the absolute bone, then cut some more. I think we came in 7th or 8th place.

Every bid for government or public authority work we've submitted as a general contractor over the past year has been at cost, meaning break-even. Right now, as my boss told me yesterday morning, we can't even buy jobs (i.e. bidding contracts) at a loss just to keep revenue coming in and the field guys busy.
Competition is a wonderful thing, it really is, and we can see why from this story. With 36 bidders for every project, all these new initiatives that will be generated from the stimulus money will be done at the absolute lowest cost. Our public funds will get the biggest possible bang for the buck.

But there are potential downsides as well, and they may undermine the supposed advantages. The first is quality. I would love to think that all these firms that are winning these bids are doing so while upholding quality, but experience tells me otherwise. Either they're cutting corners somewhere, or they're lowballing the bid to win the contract, and we'll end up paying the overage.

The second is the actions that will be taken to keep costs low, each of which will seem justifiable when we're "spending the taxpayer's money." In this environment, offshoring begins to look downright patriotic, even though it undercuts one of the main reasons we want to embark on this stimulus - that of helping stimulate consumer spending through renewed employment.

We've already seen GM invest a billion dollars, money that was backed up by us, in Brazil. We can bet that the bulk of the modernization of health care systems will be done in other countries.

Thus, we need to temper our expectations for this stimulus. I don't know how it will end up shaking out, but it could well lead, not to a V- or U-shaped output pattern, but to an L, in which we end up stagnant for a long time (while we rebuild the rest of the world). I know that any measures that try to counter this will be labeled as that filthy word "protectionism," but I also know that the last thing we need is an ineffective outlay of public funds.

1 comment:

Greg Glockner said...

I imagine that the lowest bidders might not be so cheap once they hit the taxpayers for cost overruns. I seem to recall some academics have found that it's better to select the Nth lowest bidder rather than the lowest bidder - it causes people to bid their costs low but not down to the bone.

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