Saturday, January 24, 2009

Why the "Stimulus" Won't Stimulate

I think the easiest way to look at why the "stimulus" package won't actually stimulate anything is that all of the money they are intending to be injected into the marketplace will be directed at the construction industry.

Everybody is hemming and hawing over how huge the unemployment rate is in the construction business. What nobody wants to point out, however, is that the construction business had an artificially high number of people working in it over the past few years, due to the amount of overlending taking place and the housing bubble.

So what does the government do about this "emergency situation?" They see an unemployment rate in construction that is very high, and decide to inject money into construction.

Nobody thought to ask about why the rate was so high in the first place. The answer is that demand for new jobs in construction was made high by the housing bubble. That bubble burst and so too did the construction bubble. One leads the other. For the government to inject money into the construction industry does nothing but attempt to prop up the construction industry that had boomed on the heels of the housing bubble, by creating a government construction bubble.

But here's the major problem: Government construction is NOT residential construction and the companies, therefore subsequently the people they hire, that do government construction DON'T DO residential construction. Government work is very paperwork intensive, and very oversight intensive. Therefore the companies that do government work are very adapted to doing it. They are staffed up for it, and have experience doing it. They have also done prior government work, which wouldn't you know it, is a proposal requirement for doing new government work.

Many of the companies that sprang up to do residential construction throughout the country were what we call "pickup truck contractors." They are guys that see the opportunity to make a fast buck doing simple construction work, and they get in on the business. They don't look to do quality work, nor do they care to grow a real business, but rather they care to take advantage of a glut market.

You will not find any pickup truck contractors doing government projects. Government requirements simply won't allow it to happen. Neither will you find the people they employed ending up building government buildings. The certifications that must be produced and the background checks that must be performed before a worker is allowed on a government site are many. Needless to say, the workers that have clean backgrounds and the required certifications are already employed by contractors that do government work. They are valuable resources and therefore likely are not standing in unemployment lines.

The gist of it is that the stimulus money for government projects will be going to companies and people that are either already doing other government projects, and will simply be moving on to the next ones, or had expanded their businesses to do commercial and large residential as well as governmental work.

The governmental work is only going to end up going to the companies and people that already do governmental work. Perhaps over the course of the next several years, those companies will train and hire more people in the realm of government work. However, the problem then becomes, after the government work goes away, what comes next?

The government bubble has to burst eventually. They can't expect to dig a hole and then fill it back up again forever. At some point they have to stop, lest they bankrupt the country completely.

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