Hurricane Harvey Rebuild Won't Create Jobs, It Will Divert Them
The notion that a massive infrastructure program will yield a net direct increase in jobs is in the process of being demolished, another economic casualty in the path of Hurricane Harvey. No doubt, there will be some news accounts in the future of how massive reconstruction after Harvey boosted local GDP. But the direct economic impact will be net zero: The capital and workers deployed will just draw away resources from other places, other uses and other infrastructure projects that will have to be put off or ignored.
Rebuilding after Hurricane Harvey is a matter of running just to stay in place. There are times when one must do that. But is it a net job-creation opportunity? It brings to mind the satirical proposal of the 19th-century French economist Frédéric Bastiat to hire gangs to rove Paris breaking glass windows to create work for glaziers. Hurricane Harvey is like those glass-breakers. Rebuilding afterwards will lead to little, if any, net increase in jobs, much less wealth. Any growth in GDP will be illusory, merely restoring existing sources of wealth. Increases in Houston’s GDP will simply be diverted from growth that would have occurred elsewhere.
The siren song of infrastructure spending has prompted many a stock market rally and drawn the outstretched palms of construction and equipment companies, state and local governments, and union leaders. Donald Trump played on the allure by promising a trillion-dollar infrastructure program to create “millions of jobs.” The stock market rewarded this promise, with construction and construction materials one of four sectors to post large gains in the immediate wake of the election, led by companies like Caterpillar and U.S. Steel – shifting capital from other uses. Not to be outdone, the Democrats tried to one-up the GOP in their “Better Deal” policy proposal released in July, promising a $1 trillion federal infrastructure program that would create 15 million high-paying jobs. (They didn’t say where they would find 15 million skilled construction workers and tradespeople among the seven million unemployed.)
The i-word and its job-creating potential has also been heard in the wake of Hurricane Harvey. For example, the chief economist for Moody’s Analytics, Mark Zandi, said that rebuilding roads, homes and other physical infrastructure could generate 10,000-20,000 temporary jobs. But the question is not whether rebuilding after the storm will generate jobs. The questions are: Will those jobs just displace those that the same capital would have created if deployed elsewhere? Where will the capital be diverted from, and what impact will that have? And how will Houston find the people they need to perform the work? We are about to witness a game of economic whack-a-mole, with resources deployed in Houston simply drawn from elsewhere.
Even a quick look at the economic data dispels the notion that the economic cost of Harvey will be offset by a bonanza of jobs. Like most industrialized countries, the U.S. economy – with 7 million unemployed and six million job vacancies – is not short of jobs. What the construction industry and related trades need is not more work as much as more skilled workers. The Great Recession cost the industry a third of its labor force, which is still 11 percent off its pre-recession peak – a labor shortage deepened by baby boomer retirements and the crackdown on undocumented workers. By drawing workers from all over Texas, and even across the United States, the reconstruction effort will drive worker shortages, job delays and soaring construction and infrastructure costs all over the country.
Zandi pointed out that reconstruction efforts might be slowed by tight labor conditions in the Houston region. It is easy to see why. Even before Harvey hit, more than two-thirds of Texas construction companies said they were having a hard time filling hourly craft worker positions, in a survey conducted by the Associated General Contractors of America (AGCA). The worker shortage has driven Texas construction companies to raise their pay scales, offer bonuses, prolong estimated completion times, and even pass on some projects. Unquestionably, rebuilding Houston will also draw on workers nation-wide. But there too it will face a literal and figurative brick wall. Construction sector employment grew in 258 out of 358 metro areas between July 2016 and 2017. About 225,000 construction jobs went unfilled in June. A survey by the National Association of Home Builders found that 70 percent of builders reported difficulty hiring carpenters, over 60 percent attracting masons, and more than half finding electricians, plumbers, painters, and roofers. General contractors who repair roads, bridges and other large infrastructure projects face the same challenge. A national survey released in the midst of the hurricane by the AGCA found 70 percent of respondents had a "hard time" filling skilled labor positions. Try as mightily as it can, one law that government can never repeal is the law of supply and demand. Inflate the demand for infrastructure rebuild and repair, without expanding the supply of labor and capital, and all you do is bid up the price.
Those who believe that infrastructure spending leads to a sudden avalanche of jobs seem to have their head stuck in the 1930s, when unemployment rates were high and public works programs weren’t slowed by environmental assessments, workplace safety regulations, competitive bidding requirements and often rigorous labor licensing requirements. Pumping taxpayer capital into direct job creation seemed more productive when private investment was scarce and industrial utilization levels were low. Infrastructure spending seemed more effective when government could draw on a huge army of unemployed, rather than scraping to find skilled people in a tight labor market – and when hiring construction crews was simply a matter of handing them shovels, rather than finding people qualified to operate earth movers.
It may be necessary and humane to rebuild Houston. But it will not create capital, it will simply divert it. Like all infrastructure programs, it will not create jobs, just move them around. The efforts to restore Houston after Hurricane Harvey will demonstrate there is no pot of jobs at the end of the infrastructure rainbow.