Mixing Keynes and mercantilism

Legislative ‘jobs’ initiative would benefit few, injure many

By Geoffrey Lawrence
  • Friday, February 11, 2011

Nevada legislative leaders are trotting out a new government make-work scheme and justifying it with faulty economic analysis.

In a press conference on Feb. 10, 2011, lawmakers Steven Horsford, John Oceguera, Marilyn Kirkpatrick and Ruben Kihuen teamed with the governor's chief of staff, Heidi Gansert, to announce support for the "Nevada Jobs Fund." Legislators want to commit as much as $1 billion to this fund for construction projects, which would pay inordinately high prevailing-wage rates.

The construction lobby, not surprisingly, developed the outline of the plan. Calling itself the "Building Jobs Coalition," the group's website calls for a .25 percent increase in the statewide sales tax or a 10-cent increase in property tax rates to create a dedicated revenue stream against which to bond for construction projects. 

The group also calls for an elimination of all sunsets on taxes that are used to pay off construction bonds so that bonds can be issued indefinitely to fund construction projects, and calls for slight increases in motor fuel tax rates.

Beyond taxes, the group is also asking for less regulation of the industry, through a streamlined permitting process. There is merit to this component. As the Nevada Policy Research Institute has noted in the past, the best way for government to encourage development without burdening taxpayers is to remove government-imposed obstacles to development.

Gov. Sandoval is reluctant to support the tax increases sought by the construction lobby, but his staff has indicated a willingness to consider diverting funds to construction workers by using some form of accounting gimmick — creating a new fiscal hole somewhere else.

Supporters rationalize these actions by claiming that new state spending on construction jobs will provide government "stimulus," which will reverberate throughout the economy. Sen. Horsford claims that for every 100 new construction jobs financed by the state, the increase in demand will create an additional 88 jobs in services, mining and other industries. Using a similar line of thinking, the construction lobby claims that its proposals would generate $3.7 billion in total "economic activity" and create 100,000 jobs.

What this flawed analysis ignores is that if the construction lobby receives $1 billion today, that amount of money must first be taken from taxpayers and private capital markets. As the higher tax burden would take money from taxpayers over the coming years, consumer demand in the private economy will decline — leading to the destruction of jobs and a negative "multiplier effect" that will more than off-set any proclaimed positive "multiplier effect."

Pointing out this major analytical fault reveals that the current "jobs bill" does not have the broad interests of Nevada families at heart. Instead, the proposal would benefit a well-organized, highly visible and union-dominated constituency to the obvious detriment of the public at large.

Not only have lawmakers used defective Keynesian analysis — even Keynes recognized that government money had to come from the private sector — to justify their proposed union payoff, they have also dressed up their scheme in the attire of mercantilism. Lawmakers plan to insert language into their proposed legislation requiring that workers employed on public works projects financed through the "jobs fund" be Nevada residents — excluding labor from outside the state.

This blatant beggar-thy-neighbor policy is a virtual engraved invitation for lawmakers of neighboring states to discriminate, in turn, against Nevada workers. Indeed, it is questionable whether such an approach is even legal, considering that the Interstate Commerce Clause was written into the body of the U.S. Constitution explicitly to prevent this type of short-sighted state mercantilism.

To justify their planned union payoff, legislators have dredged up a bogus version of Keynes, twisting and deforming his theories, slathered with a thick layer of mercantilism. These pseudo-intellectual offerings provide no honest justification for the proposed policies.

Just call it what it is: a payoff.

Geoffrey Lawrence is deputy director of policy at the Nevada Policy Research Institute. For more visit http://npri.org.

Update: After this commentary was published, the governor's office contacted NPRI to clarify its position on the "Jobs Fund" bill. The governor's office said they would "look at Senator Horsford's bill on how the fund would operate, but we are opposed to new taxes."

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