The Heritage Foundation

Issue Brief #4630

November 22, 2016

November 22, 2016 | Issue Brief on

Congress Should Not Let Concrete Block Growth

Producers of concrete blocks have gone to Congress to get authorization for a new federal program to advertise and promote their product.

If the authorization is passed and works as intended, it will increase the demand for concrete blocks, the price of construction, and the profits of block manufacturers, as well as lower the profits of other building material producers.

A reasonable response from other building-supply manufacturers will be to petition Congress for a similar check-off program to fight back against the concrete block cartel. Each new check-off program would increase costs to builders and consumers, hurting U.S. investment—currently a major weakness in the U.S. economy.

As conceived by the Concrete Masonry Products Research, Education, and Promotion Act of 2015,[1] a check-off program for concrete blocks would be funded by a mandatory assessment from all U.S. block producers—a production tax, in economic terms—that would be used for advertising and other promotional purposes. Producers will be compelled to participate even if they would prefer to opt out. By contrast, the existing legal framework freely allows the National Concrete Masonry Association or other voluntary groups to raise funds, advertise, and lobby policymakers.

Industry Effects of Check-off Programs

A modest body of academic research has concluded that check-off programs, mostly in agriculture, work to the benefit of producers.[2] However, the programs are reported to have “beggar-thy-neighbor” effects, by which one industry’s check-off program hurts industries that produce substitutes. Julian Alston, John Freebairn, and Jennifer James estimated that check-off programs in beef and pork led to excessive advertising[3] as “the other white meat” and “it’s what’s for dinner” battled it out on television screens during the 1990s.

If demand for concrete blocks really can be supercharged by an ad blitz (skepticism is warranted), competing industries are sure to take notice. One logical response is to fight fire with fire and ask Congress to approve check-off programs for the industries that are hurt by the concrete check-off program.

All that advertising is not free. It is funded by the taxes that create the check-off programs, and it would raise the price of construction materials and thus make investments and new homes more costly. However, construction trade magazines would be awash in new ad spending.

Potential Economic Effects of Check-off Programs in Construction Materials

The U.S. economy currently suffers from extremely low investment. From 1939 to 2008, annual net investment never fell below 5.6 percent of net domestic product (NDP), averaging 10.4 percent of NDP over the era.[4] Since 2009, net investment has never once reached 5.6 percent of NDP, averaging a paltry 3.9 percent of NDP. Chart 1 shows that gross investment in structures, including residential investment, has followed the same pattern, with post-recession investment lower than in any year since World War II. Low investment means low labor productivity growth, which means low wage growth.

 

Concrete blocks thus have an important role to play in growing the American economy. Whereas the costs of check-off programs in foodstuffs mainly hurt consumption through higher prices, a concrete check-off program would lower investment throughout the economy.

The extremely low net investment of the post–Great Recession economy has puzzled and worried economists of all stripes. Jason Furman, Chairman of the Council of Economic Advisers, documented the problem extensively in a 2015 speech at the Progressive Policy Institute.[5] A 2012 Heritage Foundation report noted that investment had failed to keep pace with profits.[6]

A variety of potential explanations have been offered, among them rising regulation, global uncertainty, and decreasing competition. The shocking drop in new start-ups is probably related to the lack of investment.

Regardless of the causes, increasing the price of investment materials can only lower investment further. Concrete blocks are just one item and a penny-per-block tax will not put many builders out of business, but prices have consequences and the new tax will push a few proposed building projects from the black into the red. State and local government investment would be especially hard hit because construction accounts for an even larger share of their investment budgets than in the private sector.

“Some Contrivance to Raise Prices”

The federally mandated check-off board would create a natural meeting place for industry insiders to quietly defuse competition among themselves. As Smith wrote in The Wealth of Nations, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”[7] Such coordination, although usually illegal, is difficult to police. By creating a legitimate space for large producers to meet regularly and in person, Congress tempts honest citizens to illegally collude.

Stretching Government Thin

If the concrete check-off program fails to have its intended effects, the worst outcomes for workers and consumers will be averted. But check-off programs still have a cost, including the requirement that the Government Accountability Office oversee and study them.

Conservatives who worry that government is doing too much and not doing it very well should be skeptical of adding a new role for bureaucrats in Washington.

Going Backwards

In a rare consensus of left and right, economists of all stripes agree that the U.S. economy is suffering from a lack of competition and investment. Congress ought to be shutting down the existing federal advertising cartels, not creating new ones.

If Congress and the President choose to create a new check-off program for concrete blocks, they will be responsible for lower American economic growth and lower American wages.

Alternative Approaches

However, policymakers do have tools at their disposal that can help the concrete block industry (and many others) without hurting anyone. Policies that address the root causes of low investment will be an enormous boon to construction suppliers in their crucial role as enablers of American investment and growth.

For example, corporate tax reform, and investment expensing in particular, would boost corporate investment spending and foster an investment boom. There are many other ways to deregulate the American economy and foster competition, such as easing land-use restrictions[8] or removing restrictions on which workers can be hired for federally funded projects,[9] either of which would help concrete block producers.

Congress faces a choice: Is it in the business of auctioning off slices of a shrinking pie, or will it pull up its sleeves and start rolling out a bigger crust?

—Salim Furth, PhD, is Research Fellow in Macroeconomics in the Center for Data Analysis, of the Institute for Economic Freedom and Opportunity, at The Heritage Foundation.

About the Author

Salim Furth, Ph.D. Research Fellow, Macroeconomics
Center for Data Analysis

Show references in this report

[1] Concrete Masonry Products Research, Education, and Promotion Act of 2015, H.R. 985, 114th Congress, 2nd Sess., https://www.congress.gov/bill/114th-congress/house-bill/985 (accessed November 21, 2016).

[2] See, for example, the literature review in Julian M. Alston, John M. Crespi, Harry M. Kaiser, and Richard J. Sexton, “An Evaluation of California’s Mandated Commodity Promotion Programs,” Applied Economic Perspectives and Policy, Vol. 29, No. 1 (Spring 2007), pp. 40–63, http://aepp.oxfordjournals.org/content/29/1/40.short (accessed November 16, 2016).

[3] Julian Alston, John Freebairn, and Jennifer James, “Beggar-Thy-Neighbor Advertising: Theory and Application to Generic Commodity Promotion Programs,” American Journal of Agricultural Economics, Vol. 83, No. 4 (November 2001), pp. 888–902, http://ajae.oxfordjournals.org/content/83/4/888.abstract (accessed November 16, 2016).

[4] Net domestic product is used rather than the more familiar gross domestic product for appropriate comparison to net investments. Both net domestic product and net investment exclude investment that is merely needed to replace previously installed capital that has depreciated.

[5] Jason Furman, “Business Investment in the United States: Facts, Explanations, Puzzles, and Policies,” remarks at Progressive Policy Institute, September 30, 2015, https://www.whitehouse.gov/sites/default/files/page/files/20150930_business_investment_in_the_united_states.pdf (accessed November 16, 2016).

[6] Salim Furth, “Why the Slow Economic Recovery?” Heritage Foundation Issue Brief No. 3746, October 3, 2012, http://www.heritage.org/research/reports/2012/10/why-the-slow-economic-recovery.

[7] Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (London: Methuen & Co., Ltd, 1776), I.10.82, http://www.econlib.org/library/Smith/smWN4.html#I.10.82 (accessed November 21, 2016).

[8] Salim Furth, “Costly Mistakes: How Bad Policies Raise the Cost of Living,” Heritage Foundation Backgrounder No. 3081, November 23, 2015, http://www.heritage.org/research/reports/2015/11/costly-mistakes-how-bad-policies-raise-the-cost-of-living.

[9] James Sherk, “Davis–Bacon Wage Provisions Depress the Economy,” Heritage Foundation WebMemo No. 2253, January 28, 2009, http://www.heritage.org/research/reports/2009/01/davis-bacon-wage-provisions-depress-the-economy.