What Malinvestment Looks Like: Forever Empty Office Buildings

Mark Thornton has justly received notoriety for his work on the Skyscraper Index as a harbinger of recession following an inflationary boom. His thesis is that record-breaking skyscrapers are most often undertaken toward the end of an inflationary boom and the beginning of their construction is a good sign that recession is not too far around the corner. He provides empirical evidence as well.

Well, Bloomberg News just published a piece about the Dubai commercial real estate scene that corroborates Thornton's theory. The global boom fueled massive office construction, including the newly-christened tallest building in the world, The Burj Dubai. Presently office space in Dubai is only 40% occupied with another 20 million square feet of space that is scheduled to be complete over the next four years. There is so much office space available that some buildings will be vacant forever. Ladies and Gentlemen, THAT's malinvestment.

Responding to Economic Recession: Like Japan, Like the United States

Last week, markets zoomed upon receiving the news that Japan was committed to "quantitative easing" or what we used to simply call inflation. What should give everyone pause is the reminder that we've been through this all before. 

In a very accessible article, "U.S. Recession Policies: Nothing New Under the (Rising) Sun" in the Fall 2009 issue of The Intercollegiate Review, Benjamin Powell expertly compares and contrasts the response of Japan to their earlier recession that led to the infamous "lost decade."

Powell documents that the central banks of both Japan in the late 1980s and the U.S. in the 2000s increased the money supply and greatly lowered interest rates. In both situations housing and stock bubbles were inflated and then burst leaving a plethora of economic devastation in their wake. He uses Austrian business cycle theory to rightly identify the massive capital malinvestment that is at the root of the economic problems of both Japan and the United States.

Powell notes that the response in the U.S. has been both monetary and fiscal stimulus. He does an expert job explaining why it was just this sort of monetary and fiscal intervention that prolonged Japan's recover into what became known as the lost decade. Powell's article is an excellent piece of economic history documenting how not to recover from the Great Recession. 

Nobel Prize in Economics

This year's Nobel Prize in Economics has been awarded to Peter A. Diamond, Dale T. Mortensen, and Christopher A. Pissarides for their work extending the concept of search costs to labor markets.

The press release includes the following explanation of the award winning contribututions:

This year's three Laureates have formulated a theoretical framework for search markets. Peter Diamond has analyzed the foundations of search markets. Dale Mortensen and Christopher Pissarides have expanded the theory and have applied it to the labor market. The Laureates' models help us understand the ways in which unemployment, job vacancies, and wages are affected by regulation and economic policy. This may refer to benefit levels in unemployment insurance or rules in regard to hiring and firing. One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times.

Incidentally, that last observation is similar to something I've said on this blog before about unemployment.

Perhaps the best take I've read so far about this year's prize  is by Peter Klein:

It is said that when the Nobel Prize in economics was first established, prizes were given for using economics to teach people things they didn’t already know, e.g., that economic growth might increase inequality, that depressions are caused by central banks, that macroeconomic stabilization policy doesn’t work, etc. Now, prizes are given to economists who teach other economists things that regular people already know — politicians are self-interested, you shouldn’t put all your eggs in one basket, institutions matter, different people know different things, etc.

Government Regulation of Business Reduces Mutually Beneficial Exchanges

It is shocking what details of our lives the government regulates. They have already fined four companies for doing the unspeakable--producing shower heads that are too big. This has prompted John Steigerwald to warn us all to "beware the shower police."

The idea that we need the state to regulate the size of shower heads in order to control how much water people use smacks of economic fascism. The reason the state feels compelled to regulate the quantity of water used through draconian shower and toilet regulations is that it refuses to allow water to be allocated rationally via the price system. If so, when the demand for water increased relative to supply, its price would increase, creating the incentive to economize and voluntarily conserve usage. No one would have to send the state's regulatory apparatus into our bathrooms. No one would be fined, sent to jail for not paying the fine, or shot escaping from jail.

Additionally, this sort of regulation always reduces the number of mutually beneficial exchanges and thus leaves more citizens worse off compared to how they would be without the state intervention. As I put it in Chapter 17 of my book Foundations of Economics:

. . .the free market tends to maximize the satisfaction of society. Intervention in the market, however, hinders this process and necessarily creates conflict. Instead of an exchange which is mutually beneficial, one party benefits at the expense of another party.

I end the chapter pointing out the legitimate way Christians can work to regulate economic behavior:

The Christian ethic of private property does not allow them to use the coercive state to achieve their ends for a better society. Instead Christians are called to evangelize and disciple converts in the paths of righteousness. As the church does what it is called to do, people will change their preferences. They will begin to be more loving and kind to their neighbors. If Christians really want different market outcomes, they should be obedient in their calling and have faith that God can transform the hearts and minds of men and women.

Wilhelm Röpke: A Humane Economist

On this date in 1899 German economist Wilhelm Röpke was born. I've always had a soft spot for Röpke because of his insistence on calling attention to some of the bigger issues such as how a society's moral fabric is related to its political economy. He was a great critic of fascism, Soviet-style socialism, and mass society fostered by statism. Over a decade ago I contributed  a chapter about Röpke to the book Great Austrian Economists, edited by Randall Holcombe. The chapter begins with the following paragraph:

Wilhelm Röpke devoted his scholarly career to combating collectivism in economic, social, and political theory. As a student and proponent of the Austrian School, he contributed to its theoretical structure and political vision, warning of the dangers of political consolidation and underscoring the connection between culture and economic systems. More than any other Austrian of his time, he explored the ethical foundations of a market-based social order.

As he explained in the first chapter of his most famous work, A Humane Economy, his ethics were rooted in the Christian tradition.

My picture of man is fashioned by the spiritual heritage of classical and Christian tradition. I see in man the likeness of God; I am profoundly convinced that it is an appalling sin to reduce man to a means (even in the name of high-sounding phrases) and that each man's soul is something unique, irreplaceable, priceless, in comparison with which all other things are as not. I am attached to a humanism which is rooted in these convictions and which regards man as the child and image of God, but not as God himself, to be idolized as he is by the hubris of a false and atheist humanism. These, I believe, are the reasons why I so greatly distrust all forms of collectivism.

These ethical convictions are what led him to stridently oppose both Soviet and National socialism. He was well aware of the dangerous attraction centrally planned economies had for Mid-Twentieth-Century Christians who did not like some aspects of free markets. In the same book he wrote

People may be led by Christian and humane convictions to declare themselves in sympathy with socialism and may actually believe that this is the best safeguard of man's spiritual personality against the encroachments of power, but they fail to see that this means favoring a social and economic order which threatens to destroy their ideal of man and human freedom.

Röpke was in some ways a complicated thinker. In his book The Social Crisis of Our Time, for example, he tried to distinguish between state intervention that is compatible with the market  and what he called incompatible state intervention in the market economy. Calling for a "third way" between socialism and laissez-faire capitalism, he had a sentimental streak that longed for a way to intervene in the economy to produce more humane results.  At the same time, however, he was too good of economist not to recognize that, like it or not, any intervention in the market brought with it costs that cannot be avoided.

For some of the best of Röpke's economic work, I recommend his Economics of a Free Society and Against the Tide.

Women, Wall Street, Work, and Compensation

Here we go again. Bloomberg News has a story by Dawn Kopecki on how the Great Recession has heightened pay disparities between men and women on Wall Street. It is the financial industry version of the "76 cent statistic." As Kopecki tells the story:

Women managers in finance, a group that includes bank tellers as well as executives, earned 63.9 cents for every dollar of income men earned in 2000, based on median salaries, according to Government Accountability Office statistics analyzed by Bloomberg. In 2007, the last year for which data are available, the figure was 58.8 cents. The 41-cent gap was the biggest in any of 13 industries surveyed by the GAO, and only two others had a widening disparity.

Kopecki then goes on to provide a number of various possible explanations for the persistent disparity. The first cited is, not surprisingly, the supposed male-dominated sexist culture inside the financial industry. Susan Estrich, law professor at USC in LA, is quoted as saying

“In the old days, the problem was conscious, explicit discrimination -- the doors were literally closed and we had to put our heads against them and pound them in. . .[now] people who are doing the judging unconsciously prefer people they’re comfortable with, people they know, people who look like them, people whose experience they recognize.”

Joan Williams, another law professor from Hastings College of Law says:

“The gender bias faced by female traders is open, dramatic and pervasive compared with other professionals. . .It’s all about masculine signaling -- mine’s bigger than yours. But in this case, it’s measured by salary and fueled by risk.”

 There is a LOT of psychologizing going on here. As the end of the Estrich quote suggests, however, their may very well be rational economic reasons for such disparity. There is good reason to hire someone who you know and whose experience you recognize.

Williams offers another explanation that makes most sense--the consequences of motherhood.

Studies have found that mothers are less likely to be hired or promoted and receive lower pay for similar jobs, Williams said. Becoming a mother is one of the leading reasons women leave Wall Street, she said.

I've written on this issue as it relates to the entire economy many years ago in an article "Women and Work." As I explain it

The big difference between men and women is how they react to marriage and child-birth. Marriage tends to increase men's participation in the labor force and decrease women's. The hours men work tend to increase with the birth of a child. Hours that women work tend to decrease when a child is born. Mothers tend to work less overtime and take fewer jobs that will require that they work long hours in return for high pay than fathers do.

I conclude with the following:

Whether egalitarians like it or not, for the "average" woman her family life trumps other concerns on the margin. Employers and employees are merely recognizing this fact of nature: women and men are not equal in the sense of being identical. They are different and have different comparative advantages when it comes to work outside the home versus child rearing.

Vienna and Her Children

Recently, my review of Guido Hulsmann's great biography of Ludwig von Mises was published on Mises.org.

Jason Jewell, who writes a wonderful blog The Western Tradition, has posted his thoughtful review essay discussing Guido Hulsmann's Mises: Last Knight of Liberalism published by the Ludwig von Mises Institute and Robert Weldon Whalen's Sacred Spring: God and the Birth of the Modern in Fin de Siecle Vienna published by Eerdman's. It was originally published in the Spring 2008 Journal of Faith and the Academy.

Jewell summarizes Whalen's work, noting that the book

. . .is a refreshing look at the fin de siècle period from a perspective Christians will appreciate. Whalen does not announce any Christian presuppositions affecting his analysis, despite having Eerdmans as his publisher, but the subtext of his work seems clear enough. The Viennese avant-garde for the most part lived a tormented existence characterized by ennui, alienation, adultery, and suicide. Their quest for spiritual rest is presented sympathetically despite its unsatisfactory conclusion.

He then proceeds to discuss the importance of Mises, explaining

Fin de siècle Vienna produced not only edgy artists but also level-headed, no-nonsense economists who profoundly altered the received wisdom in their field. Had Ludwig von Mises (1881-1973) been an apologist for socialism, his gripping life’s story would have long since been made into a Hollywood film starring Warren Beatty and Barbra Streisand. A decorated war hero who almost singlehandedly saved his native Austria from economic ruin through his influence on policymakers, he astounded his friends and enemies alike with his path-breaking contributions to economic theory before fleeing from the Nazis, arriving in America with no connections or support at age fifty-eight and, undaunted, going on to publish what some consider the twentieth century’s greatest treatise in the social sciences, Human Action. However, Mises was an advocate of laissez-faire classical liberalism, a fact which made him an outcast among fashionable intellectuals throughout his life and denied him numerous career opportunities open to lesser men.

The entire essay is worth a thoughtful read and is an outstanding example of how Christians should respond both critically and charitably to great modern thinkers.