Economic pause or paws?

Robert Wright Contributor
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Has the economy stalled temporarily or do government and market bear paws have it in a death grip? Alan Greenspan suggested the former this week on CNBC but I’m leaning toward the latter. For decades, the U.S. economy has been weighted down by increasingly dysfunctional sectors like construction, higher education, health care, and retirement savings. High finance provided hope for awhile but probably will not do so again anytime soon thanks to bearish investor sentiment and new, far-ranging (but ultimately flawed) financial regulations. And there is no sign that policymakers will fix the other FUBAR (fouled up beyond all recognition) parts of the economy anytime soon.

One big barrier to effective reform is conceptual. Most people think economic problems arise from markets or governments. It’s one of the litmus tests that separate liberal from conservative thought. What I’ve discovered is that most dysfunctional sectors lag because of what I call hybrid failures, or complex combinations of market and government failures. To have a shot at fixing problems, policymakers have to understand them and the only way to do that is to trace the history of FUBAR sectors over decades and occasionally centuries, carefully noting the appearance of both market and government failures. The path to reform then often becomes quite clear.

Consider construction, for example, a huge sector (“construction put in place” > $1 trillion per year) where productivity has been flat for half a century. Productivity stagnation manifests itself in a built environment that, holding quality constant, costs more than it should and takes longer to construct than it needs to. That will sound familiar to the millions of Americans given the run around by a homebuilder or remodeling contractor or who have recently waited in a 3-mile-long line to merge into a highway construction site manned by three guys sipping coffee.

Unions, myriad labor laws, outdated building codes, and other government failures certainly don’t help to improve construction productivity but neither do the market failures that plague the industry, especially the weak management of its millions of tiny firms. But all those problems are secondary to the core issues of asymmetric information and monopoly that conspire to destroy the efficacy of the bidding process. Basically, contractors bid low to win the contract and become a near-monopolist, then jack up costs with “change orders,” or price increases forced onto owners.

Due to the gaming of the bidding process and the ability of contractors to pass costs onto owners, construction firms generally do not compete on the major economic variables of cost, time, and quality and hence unsurprisingly become an unproductive drag on the economy. In addition to reducing the impact of its own failures, the government could help the situation by creating databases that track construction project outcomes, thus allowing owners to opt for the best rather than the lowest bidder.

Even modest improvements in construction productivity would add hundreds of millions of dollars to GDP. Similar improvements in higher education, healthcare, retirement savings, and finance would do likewise, breaking the economy free of its paws and simultaneously reducing the chances of future employment, fiscal, and financial crises. Life will still be a female dog, but more like a terrier than a Great Dane.

Robert E. Wright is the author of Fubarnomics: A Lighthearted, Serious Look at America’s Economic Ills (2010).