Testimony to Senate Select Committee on Economic Growth and Employment, Feb. 11

Uncategorized

| February 13, 2011

Anyone following the development of a “Nevada Jobs Bill” that could siphon money from taxpayers in order to benefit a narrow interest group like the construction lobby, should take note that legislative leaders have said they would like to pass the first component of this effort out of the Assembly Governmnt Affairs Committee tomorrow morning. I will be there providing live coverage.

Also, my testimony before the Senate Select Committee on Economic Growth and Employment on Friday, I believe, provides a well-rounded critique of this policy effort:

My name, for the record, is Geoffrey Lawrence and I am the deputy director of policy at the Nevada Policy Research Institute.

I wanted to speak to you today to clarify some of the issues regarding projections for potential job-creation that might exist if the state is to commit public money into a “jobs fund” to finance public works construction projects. I believe that most of the estimates I have seen are dramatically overstated due to a series of specific methodological errors that led to their calculation.

All of the estimates that I have seen rely on the existence of a “multiplier effect” that would lead to new job creation across the economy as the new construction money drives up demand, not only for construction labor, but also for labor in related industries. While this may be true, the analyses that I have seen fail to account for any supply-side constraints.

There are two major supply-side constraints that must always be considered in any credible econometric analysis. This is because there is a definite limit to the supply of both labor and capital. Certainly, the constraint on the supply of available construction labor in Nevada is not extremely significant at this time. However, there is always a constraint on the amount of available capital.

In order to finance a dramatic expansion of public works projects, the state will have to extract capital either directly from citizens through taxation or it will have to resort to private capital markets. When public agencies borrow capital, that capital is not available for alternative projects and entrepreneurial ventures that might yield higher returns on investment.

Perhaps the greatest weakness of the estimates that I have seen is that they account for the positive “multiplier effect” of new government spending, but fail to account for the off-setting negative “multiplier effect” that will result from higher taxation or reduced access to capital due to government borrowing. As taxpayers are left with less disposable income, demand across all sectors will be depressed, leading to economy-wide job destruction in order to benefit a specific sector: in this case, construction. If this off-setting multiplier is considered, then the aggregate impact of new government spending on job growth is likely to be minimal or non-existent.

Certainly, Nevada’s construction industry was acutely impacted by the effects of the recent global recession – leaving a disproportionate share of workers unemployed. There are many interpretations as to why this happened.

NPRI follows the Austrian School of economics which holds that prolonged expansion of artificial credit worldwide over nearly a 20 year period – driven largely by easy-money policies at the Federal Reserve – reduced financing costs for construction and fueled a consequent bubble in real estate development.

One result of this bubble was that the artificially high demand drove up labor demand within the industry – siphoning more laborers away from other industries and into construction. However, since this resulted from an artificially-imposed distortion, there were more workers drawn into the construction industry than market fundamentals would have justified.

The recent recession has imposed a market correction to this industry. However, government policies intending to put off this correction and retain laborers in the construction industry will only perpetuate the imbalance that led to recession.

If lawmakers are intent on using government policy to put displaced construction laborers back to work – beyond the establishment of a favorable tax and regulatory environment – then a far better policy would be to provide job training so that these workers can acquire the skills to work in alternative industries which market fundamentals determine to be more sustainable. I believe that the policy direction currently being discussed will fail to realize the result desired by lawmakers.

Thank you.

Geoffrey Lawrence

Geoffrey Lawrence is director of research at Nevada Policy. Lawrence has broad experience as a financial executive in the public and private sectors and as a think tank analyst. Lawrence has been Chief Financial Officer of several growth-stage and publicly traded manufacturing companies and managed all financial reporting, internal control, and external compliance efforts with regulatory agencies including the U.S. Securities and Exchange Commission. Lawrence has also served as the senior appointee to the Nevada State Controller’s Office, where he oversaw the state’s external financial reporting, covering nearly $10 billion in annual transactions. During each year of Lawrence’s tenure, the state received the Certificate of Achievement for Excellence in Financial Reporting Award from the Government Finance Officers’ Association. From 2008 to 2014, Lawrence was director of research and legislative affairs at Nevada Policy and helped the institute develop its platform of ideas to advance and defend a free society. Lawrence has also written for the Cato Institute and the Heritage Foundation, with particular expertise in state budgets and labor economics. He was delighted at the opportunity to return to Nevada Policy in 2022 while concurrently serving as research director at the Reason Foundation. Lawrence holds an M.A. in international economics from American University in Washington, D.C., an M.S. and a B.S. in accounting from Western Governors University, and a B.A. in international relations from the University of North Carolina at Pembroke. He lives in Las Vegas with his beautiful wife, Jenna, and their two kids, Carson Hayek and Sage Aynne.