Taxpayers Are Hit Twice by Anticompetitive Government Construction Contracts
DECEMBER 01, 2005 by GEORGE C. LEEF
After Hurricane Katrina ravaged much of the Gulf Coast, President Bush ordered the suspension of the federal Davis-Bacon Act, which mandates that workers on all federally financed construction projects of more than $2,000 (virtually all, that is) be paid the “prevailing wage” of the project location. The suspension would have covered only the parts of the coast devastated by the hurricane.
Big Labor and its leftist allies howled that this move would be “anti-worker” because it would lift their “wage protection.” The howling worked: Bush in late October reinstated Davis-Bacon as of November 8.
The truth, however, is that Davis-Bacon and all the state prevailing wage laws are price-fixing schemes, enforced by government, designed to shield high-cost unionized workers against competition from more efficient nonunion contractors. By preventing those more efficient contractors from underbidding the union rates, prevailing-wage laws ensure that union workers will get most government construction work. A union electrician, for example, is thus able to work at the set union scale, which may actually be more than he often gets in the market, while the nonunion electrician cannot be employed at the rate he is willing to work for. Prevailing-wage laws are special-interest legislation pure and simple, benefiting some workers at the expense of others—and the taxpayers.
Davis-Bacon is an ugly relic of the legislative hysteria that gripped Washington during the Great Depression. It was passed in 1931 and signed into law by the emphatically non-laissez faire President Herbert Hoover. Hoover was convinced that prosperity could be restored if wages were kept high. With its guarantee that construction wages on federal projects would be taken out of competition, Davis-Bacon seemed to be a good idea to the president.
Its congressional sponsors, however, were not thinking about its supposed macroeconomic effects. They were carrying water for the overwhelmingly white construction unions, which were complaining that contractors were underbidding them by using lower-paid nonunion black workers. Construction unions are labor cartels, seeking to keep wages artificially high by suppressing competition, and just like other cartels, they succeed only if they can have government stifle the competition that naturally occurs in the free market.
Imagine a parallel situation, where the auto dealers in some state want to enjoy higher profits. They get together and agree that no one will sell a car for less than its sticker price. Sadly, they soon discover that their prices are being undercut by nasty outsiders who will negotiate better deals with customers. Their solution? They lobby the legislature for a “prevailing price” law that makes it illegal for anyone to sell below the “official” price. The law sets up a new government office to determine what the official price of each car is and to enforce compliance.
If we had “prevailing price” laws to “protect” auto dealers, almost everyone would see that it was just a price-fixing conspiracy. I say “almost” because the dealers would attempt to make it seem as though their conspiracy was actually in the public interest. They might claim that by promoting “price stability” they were actually protecting the public against unsafe cars, since a study (of course, they’ll be able to conjure up some piece of “research”) shows that cars purchased from “cutthroat” dealers have a bad accident record.
The construction unions have done exactly the same thing. They use the government to suppress competition, and their public argument for doing so is that union workers are safer on the job. The safety argument is entirely bogus, but it gives the unions and their political allies a place to retreat to when their competition-stifling law is questioned.
Prevailing-wage laws largely, although not entirely, shut nonunion construction firms out because their work is not organized around the rigid and inefficient job classifications the unions use. Trying to fit a nonunion firm’s round peg into the square hole of prevailing-wage regulation is usually too troublesome, so government construction overwhelmingly goes to unionized contractors. That’s exactly what the unions want. Economist Morgan Reynolds made the point clearly in his book Making America Poorer: The Cost of Labor Law. He wrote, “Eventually, construction unions will be confined to federally financed construction, where union inefficiencies are protected by the Davis-Bacon Act. In open competition, the building-trades unions—with their exorbitant wages, inefficient work practices, and strikes—cannot survive.”
Taxpayers are hit twice with needless costs due to Davis-Bacon. First, the costs of federal building projects are inflated. It’s impossible to say exactly how much so because we can’t know how much lower the bids would have been if the cost of labor weren’t fixed by government edict. In 2003 the House Budget Committee, in recommending repeal or at least curtailment of Davis-Bacon, concluded that application of the law typically increases costs by 5 to 15 percent, and sometimes as much as 40 percent. A lot of tax dollars are wasted due to the prevailing-wage law. And of course, some of those dollars end up being paid back to union treasuries in dues, to be used in lobbying for more federal construction.
Rigging the Game
The second hit on the taxpayers is for the Department of Labor (DOL) bureaucracy that’s necessary to determine the “prevailing wage” rates. That function isn’t even done honestly much of the time; DOL bureaucrats have been known, for example, to say that the rate “prevailing” in a rural area is actually the union scale in the nearest large city. But even if every prevailing-wage determination were done “accurately,” it would still be a complete waste of time since we can (and should) rely on competition instead. There is no need for government officials to determine the cost of any part of a construction bid.
Suspending Davis-Bacon for the construction work done in the aftermath of Hurricane Katrina would have been perfectly sensible. It would be more sensible yet if Congress would just repeal this anticompetitive relic. As long as we have to put up with government construction, at least we ought to get the benefit of full competitive bidding.
There is, however, a solution that’s better still. Back in the Red Scare of the 1950s, when people were frantic over the prospect of communists in government jobs, former Freeman editor Frank Chodorov said, “If you’re really worried about communists in government jobs, why not just get rid of the government jobs?” Similarly, if you’re worried about excessive federal spending on government construction projects—and you should be—why not stop, or at least greatly curtail, government construction projects?