House Stimulus Bill -- State Department follies

Continuing with the analysis of the House Stimulus Bill, HR 1, it is interesting to look at particular department appropriations to see how vague and unconstrained the spending is. For example, Title XI of the Act provides $276 million to the State Department"Capital Investment Fund"in the following language:

"For an additional amount for ‘Capital Investment Fund’, $276,000,000, of which up to $120,000,000 shall be available for the design and construction of a backup information management facility in the United States to support mission-critical operations and projects, and up to $98,527,000 shall be available to carry out the Department of State’s responsibilities under the Comprehensive National Cybersecurity Initiative: Provided, That the Secretary of State shall submit to the Committees on Appropriations of the House of Representatives and the Senate within 90 days of enactment of this Act a detailed spending plan for funds appropriated under this heading."

Note that the House bill gives the State Department this money without any understanding of where it will be spent,but simply requires State to provide a list of projects within 90 days after the adoption of the legislation.

$120 million it is provided for construction of a backup data processing center. First, there is no way that such a data center is going to be constructed within the time necessary to provide stimulus to the economy (unless the State Department already has detailed blueprints on the drawing board).

Secondly, this is supposedly for mission-critical operations and projects, but there is no showing that the State Department itself has to construct and own this facility. The Department of Defense and other intelligence agencies contract out all sorts of intelligence-related activities. Operation of a data center would presumably be something that companies like IBM or EDS could do quite well and much more efficiently than a government agency.

House Stimulus Bill -- Regulatory Follies

I have downloaded the House Bill, H.R. 1 -- the American Recovery and Reinvestment Act of 2009, and will start going through it to analyze the innumerable regulatory follies contained in it. Some of these may never survive in negotiations with the Senate, but many are likely to be adopted. I will focus on single follies in each post. This one will discuss the provision requiring public works to use iron and steel produced in the US, even if it costs 25% more than imports. Thus the Bill provides:

SEC. 1110. USE OF AMERICAN IRON AND STEEL.
(a) IN GENERAL.—None of the funds appropriated
or otherwise made available by this Act may be used for
a project for the construction, alteration, maintenance, or
repair of a public building or public work unless all of the
iron and steel used in the project is produced in the United
States.
(b) EXCEPTIONS.—Subsection (a) shall not apply in
any case in which the head of the Federal department or
agency involved finds that—
(1) applying subsection (a) would be incon-
sistent with the public interest;
(2) iron and steel are not produced in the
United States in sufficient and reasonably available
quantities and of a satisfactory quality; or
(3) inclusion of iron and steel produced in the
United States will increase the cost of the overall
project by more than 25 percent.

Is this a sop to the steel unions? How many billions will this increase the cost of public works created under the program.

The Unintended Consequences of the Stimulus Bill

David Brooks has a good column today on the unintended consequences of the stimulus bill. His basic conclusion is that by trying to do everything, the bill does nothing well. He states:

"But they’ve created a sprawling, undisciplined smorgasbord, which has spun off a series of unintended consequences. First, by trying to do everything all it once, the bill does nothing well. The money spent on long-term domestic programs means there may not be enough to jolt the economy now (about $290 billion in spending is pushed off into 2011 and later). The money spent on stimulus, meanwhile, means there’s not enough to truly reform domestic programs like health technology, schools and infrastructure. The measure mostly pumps more money into old arrangements."

He goes on to list several other unintended consequences. The whole column is well worth reading.

THE UNINTENDED CONSEQUENCES OF THE AUTO BAILOUT

Saturday's Wall Street Journal contained an excellent essay by Shikha Dalmia and Henry Payne, entitled "Detroit Bets Its Future on Washington", which argues that General Motors is not taking the bailout money in order to be competitive, but to become the government's partner in developing green technology. They note that:

"By accepting government welfare, GM rejected the chance to transform itself into a worthy competitor to foreign manufacturers. That would have required making too many hard decisions, such as confronting unions, cutting legacy costs, and slashing dealerships under a Chapter 11 filing…. But GM is not counting on market success for its comeback. It has neither the cash reserves nor the brilliant product line needed for that in a down economy, when sales are expected to be 40% lower than two years ago (the lowest volume since the 1973 Arab oil embargo.)”

Rather, they argue that GM is counting on the government to stay alive and that its new green priorities are intended to ensure another round of government funding. They expect that Washington will have to continue to give them funding in order to support such boondoggles as electric cars. This thesis may be a little far-fetched -- it seems doubtful that GM management could actually think in such a Machiavellian manner. However, it seems clear that the bailout is not going to help them succeed in the marketplace.

Before examining unintended consequences, we have to analyze Washington's intended consequences for the bailout. The Bush administration lent $17.4 billion to General Motors and Chrysler, but required them to extract concessions from workers, suppliers, dealers and other stakeholders by March 31 in order to demonstrate their economic viability. Now that the Democrats are in charge, it seems clear that renewal of the loans and further grants will require further development of green vehicles, such as the Chevrolet Volt electrical car.

The Bush administration intended to have a viable American car industry as a result of its largess. It is not at all clear that the Obama administration would be nearly as concerned about the viability of the industry, as about protection of union jobs and development of green technology.

Are the results of this bailout likely to achieve the government’s goals? The answer is undoubtedly negative -- GM and Chrysler simply do not have the leverage to negotiate the thorough reforms that are necessary to make them truly competitive. There are three major areas of the bailout at which GM and Chrysler are unlikely to succeed.

Unions -- The nature of unions is to extort as much as possible from management, and to protect the lifestyle of the worker as much as possible. The UAW will undoubtedly concede in a few areas -- moving up the implementation of the health-care changes negotiated last year, and giving up the truly amazing provision under which the automobile companies continue to almost entirely full pay to laid off workers. However, to be successful, GM and Chrysler must achieve a complete change of environment on the factory floor. An e-mail recently circulated on the Internet from an automotive supplier commented on what he had seen in the automobile factories – “our factories have been filled with the worlds most overpaid, arrogant, ignorant and laziest entitlement minded "laborers".” Will General Motors be able to get rid of the numerous petty work rules and other union impediments to efficient production? It is highly unlikely.

Dealers -- The consensus of numerous articles appears to be that GM should reduce its dealer force by about one third. However, its hands are tied by the "Dealer Day in Court” laws adopted both by the federal government and by numerous states, which make it impossible to terminate dealerships without enormous buyouts. If the government really wants the auto companies to achieve liability, it should amend the federal law and preempt state laws to encourage consolidation is dealerships, and to allow the car companies to terminate dealers on more reasonable terms.

Environmental Cars -- The constant theme of Democrats, in particular, is that the automobile companies should do more to create small, environmentally friendly cars and to ultimately get rid of the gasoline engine. However, by forcing Detroit to build these machines, the government will simply make them noncompetitive. The proposed Chevrolet Volt will cost $40,000 for an underpowered automobile they can't be used for anything except local, around-town driving. Who in their right mind would pay this much money when they could buy a comfortable small car for half the price. For political purposes, GM obviously has to build a car. However, it will lose enormous amounts of money and divert scarce engineering talent from more productive projects.

What, therefore, are the unintended consequences of the bailout -- American manufacturers will not achieve viability, and will continue at a competitive disadvantage to foreign companies that make their own cars in the US. The American taxpayer will continue to pour funds into sustaining companies that can no longer operate without government interference. And electrical cars will again be failures in the marketplace.

The recent spike in gasoline prices demonstrated that consumers react in an economically logical manner. When prices went up over four dollars per gallon, they drove less, and began switching their SUVs for smaller cars. If the government lets gasoline prices achieve such levels again in the normal marketplace, it can expect consumers to act in the same way. There will be a natural marketplace for cars that use less gasoline, and perhaps, someday, even for electric automobiles. However, the government cannot force this change -- it must be the result of the normal development of the market.