06.30.2009 0

Economic Indicators: Keeping the Skyscrapers Erect

  • On: 07/01/2009 11:27:06
  • In: Economy

  • By Justin Williams

    The study of economics has been around for over 200 years. And during that time, economists have had about two million theories as to what causes booms and busts. As the pundit George Bernard Shaw once quipped, “If all economists were laid end to end, they’d never reach a conclusion.”

    Yet theories abound, and one of the roles of the new, weekly Barstool Economist is to take a look at some of these theories, vivisect them into layman’s terms, and see if we can separate the quick from the dead. One such theory is the “Skyscraper Index.” Developed by economist Andrew Lawrence, states that when some of the tallest skyscrapers were being built, they were followed by a large economic collapse.

    This may seem surprising, but the construction industry is highly correlated with the rate of interest. For example, the Federal Reserve creates a market boom with artificially loose money through low interest rates. When the interest rates adjust, businesses realize that they made a malinvestment in projects they shouldn’t have, thus causing a recession. The Federal Reserve then does it all over again to “recover” from the recession, starting the cycle all over again. This is also known as the Austrian Business Cycle Theory (ABCT).

    The construction of skyscrapers is a long-term investment requiring a lot of capital, and when interest rates are low, business owners find it most attractive to get loans to buy long-term investments. This is a perfect recipe for a “Skyscraper Index.”

    The evidence for the most part is clear. For example, Economist Mark Thornton finds that the index correctly predicted the Great Depression. The 40 Wall Tower, the Chrysler Building, and the Empire State Building were all planned and begun production right before the Great Depression.

    Now, the Council for Tall Buildings and Urban Habitat has put the current economic recession to the “Skyscraper Test” and found that 2008 was one of the most successful years in skyscraper construction. The tallest ten buildings constructed during that year were 31 meters above the previous highest average, which includes the Shanghai World Center and the Almas Tower.

    Of course, the evidence is not perfect and this doesn’t this mean that economists and investors should always look at skyscraper construction to predict recessions. As this would turn the index into a self-fulfilling prophecy much like what is believed to have happened to the “January Effect,” which begun as a stock market predictor and has now become widespread knowledge making it worthless.

    What should be learned from this is that the Federal Reserve’s policy of loose credit and low interest rates causes businesses to shift into long-term investments, as the low interest rate is supposed to be a signal of increased savings by the populace. Savings is another way of saying “delayed consumption” and businesses want to prepare for this.

    But since the Federal Reserve falsifies savings, it causes business owners to malinvest. Now, this does not necessarily mean that the skyscraper is necessarily a malinvestments. What it means is that artificially loose credit makes skyscrapers more attractive for capital owners who, because of the low interest rate, seek higher returns on their money. And they then build when they should be sitting on their shovels.

    The “Skyscraper Index” is a step in the right direction proving that the Austrian Business Cycle Theory is accurate, which will rightly put the blame on the government and Federal Reserve for many of history’s recessions.

    In short, the “Skyscraper Index” actually does more than just predict market behavior, it portends what happens when government regulators usurp free market prerogatives. As experience has taught as time and again, when that occurs, all the economists laid end to end can’t keep America’s financial edifice erect.

    Justin Williams is a Contributing Editor of ALG News Bureau.  He can be reached at [email protected].

    Copyright © 2008-2021 Americans for Limited Government