Saturday, January 11, 2014

The Skyscraper Index

Scholars belonging to the rogue Austrian school of economics have posited that, as the height of skyscrapers increases, so does the threat of imminent economic disaster. A skeptic will – quite appropriately, I may add –retort that correlation does not imply causation. Nonetheless, if there is a compelling theory to explain why the association between skyscraper height and impending economic disaster is meaningful, then it is a whole other story. 

A skyscraper from the city of Metropolis (Lang, not D.C. Comics)
If one looks more closely at the data regarding the skyscraper index, it appears that rapid economic booms do, in fact, precede an increase in the construction of skyscrapers that are of record-breaking height. History indicates that, when a speculative bubble grows quickly and achieves gigantic proportions, one may worry about an equally quick and equally catastrophic bursting. As Isaac Newton said, to every action there is always an equal and opposite reaction.

The Skyscraper Index

The scholars who’ve given attention to the so-called “skyscraper index” often focus on Gross Domestic Product when conducting their analyses. I agree with Alex Marshall that this is probably the wrong approach. Instead, attention ought to be focused on economic inequality, i.e., the gap between rich and poor. The reasoning behind this is such: when a large gap exists between rich and poor, it implies that income is being taken from the many poor and placed in the hands of a few very wealthy individuals. When a few very wealthy individuals are entrusted with the national wealth, a bad decision by one very wealthy person will have repercussions across the entire economy. 

Before pursuing that thought further, let’s look at some concrete examples. Just as the newly completed Empire State Building opened its doors to tenants, the Great Depression began. The construction of New York’s World Trade Center and Chicago’s Sears (now Willis) Tower presaged the early 1970’s economic downturn. Even more graphic examples can be found in Bangkok, Thailand. When I visited that city, I was impressed by the large number of skeletal, half-completed skyscrapers dotting the skyline. On closer examination, I noticed that the apparatus of construction was disused and rusting, and a lot of tarps were left behind to flutter in the wind. Apparently, these are the visible remnants of the economic crisis which had swept Asia in 1997. 

The abandoned skyscrapers of Bangkok

Closer to home, the city of Providence, RI had been promised a skyscraper but all it received was the demolition of a historically significant building and a fenced-in patch of debris. Rhode Island is conspicuous because its frail local economy (or so it has been claimed) has encouraged politicians to shovel massive amounts of taxpayer dollars into the maw of smooth-talking entrepreneurs who take the money and run.

There are, of course, instances in which the Skyscraper Index fails to offer accurate predictions. South Korea has abundant skyscrapers (although no record-breakers) and, according to economists, wealth is distributed fairly equitably in that country.* Brazil suffers from an appalling gap between rich and poor, and has for the most part eschewed the construction of skyscrapers. Clearly, there are additional variables in the equation that have not been identified. All the same, a steady accumulation of clouds does not guarantee a rainstorm, but the prudent individual will note the atmospheric conditions and carry an umbrella.

The theory behind the skyscraper index would be strengthened if it could be shown that extreme inequality in wealth damages the economy. Thus, economic disaster is not a matter of chance alone, but is causally linked to inequality. As it happens, there is good evidence to suggest that inequality – and particularly the concentration of vast wealth into the hands of a very few – is damaging to the economy. This wealth is removed from the economy and sits unused. It is not lent out to support small businesses and low-level entrepreneurs. However, lending does occur. Plutocrats create opportunities for themselves to invest when (a) there is a high certainty of profit and (b) there is little risk of losing money in the event that the investment fails (for further reading). The very wealthy learned how to buy and sell mortgages and hedge against the risk of defaults, and that brought us the cataclysm of 2007-2008. 

When Goldman Sachs decided to erect a 43-story glass and steel skyscraper in Lower Manhattan (abutting the site of the World Trade Center), the company received $49 million in taxpayer subsidies in the form of grants and tax exemptions.  So, in other words, money was taken from the hands of taxpayers and given to a corporation that, in 2007, set a world record in terms of the most profits ever earned in a single year: $11.6 billion (source). 

The only conceivable explanation for a situation in which taxpayers are subsidizing billionaires during a time of massive unemployment and shrinking wages is this: political corruption. Political corruption, in the Whiggish sense of the term, is government acting to benefit private interests when it ought to be acting on behalf of the public interest. It is reasonable to suspect that concentration of wealth in the hands of a very few is a strong indication of endemic political corruption (source). 

And, based on my unscientific survey, the most corrupt places on earth also have some of the most conspicuous architectural examples of hubris. Saudi Arabia is planning a skyscraper that will be one mile high (source). Of the 100 tallest buildings under construction anywhere in the world, 60 are located in China (source). In Dubai, you can visit the top floor of the Burj Khalifa and look down on the cloud cover (source). Malaysia, a world leader in corruption (source), has its Petronas Towers, named after an oil producer (apparently the ExxonMobil of Southeast Asia).

In case there is any validity to the skyscraper index, it bears noting that four of the largest skyscrapers in the United States are set to be built within blocks of each other in Manhattan, overlooking Central Park. This means a lot of people who used to have views of Central Park won’t. A condo in one of these planned towers will set you back $90 million. It is expected that most residents will only spend a few weeks out of the year in their vertically privileged digs. Unsurprisingly, the developers of these spires are the beneficiaries of generous tax-breaks. The economic forecast looks grim. 

* recent "free trade" deals with South Korea will likely spell the end of their fair distribution of wealth

Saturday, January 4, 2014

On Lyndon B. Johnson’s “Great Society”

For many liberals, it is a sin to speak ill of LBJ’s “Great Society” initiative. To cherish the Great Society is to be an idealist who believes that society ought to help the poor, support the arts, and promote public health. For many conservatives, the Great Society marks the point at which the United States went to hell in a hand-basket. The Great Society, they say, ushered in an era of profligate federal spending, single-parent families, promiscuity, riots, and Welfare Queens. 

To set the record straight, the Great Society is an umbrella term which encompasses a large number of laws and programs, some of which were imperfect but on the whole beneficial to society. The scrupulous critic will review each of the laws and programs on their individual merits, and demure from blanket statements praising or condemning the Great Society as though it were a single monolithic entity. 

Having said that, there are legitimate reasons looking at the Great Society overall as an example of what conservatives refer to as Big Government. The federal government extended its influence into affairs that had previously been left to the states. In at least some instances, this intervention went horribly wrong.  

Before expanding on that thought, it is important to state clearly what the Great Society laws and programs were. On January 4th, 1965, LBJ gave a very idealistic speech (without a trace of conviction) heralding the advent of initiatives aimed at ending poverty, protecting the environment, addressing civil rights issues, improving the quality of life in urban areas, and promoting public health.

Some of the highlights are listed below. 

-    Medicare
-    National Endowment for the Humanities
-    Medicaid
-    National Institutes of Health (NIH) expansion

Before Medicare was enacted, nearly half of America’s elderly lacked health insurance. It is hard to defend the argument that the country would be better off without Medicare. One could, however, quibble by pointing out that the legislation helped enshrine a “fee for service” payment structure that rewarded physicians based on the number of medical procedures they performed, which has the entirely predictable result of increasing the number of procedures that are performed. 

Most of the programs listed above have been of benefit to the American people, or, at the very least, are not as egregious as other programs that come to mind. And they are all public programs.

The Great Society was also intended to address the grotesque situation in urban centers. To understand the dimensions of this problem, Detroit stands as a prime example. Going back to the World War II era, African Americans were drawn to Detroit to take jobs in the automobile industry. 

However, frictions arose. Whenever the number of African Americans in a particular neighborhood rose, property values were lowered (a phenomenon referred to as “redlining”). If whites remained in the neighborhood, they would continue to lose equity in their homes. If they left the neighborhood, African American homeowners would lose equity in their homes. Mostly, whites left. Riots ensued.

Detroit in the 1940s.

White flight was well-underway during the 1960s. As the tax base shrunk, the costs of owning a home rose. Many poor people, and especially African Americans, found it next to impossible for find decent housing. And, because de-industrialization had already started in the 1960s and racial discrimination was still running strong, they found it next to impossible to find decent jobs.  

How did the Great Society address the so-called urban crisis? In part, it did so through federal funding for “slum clearance,” or the wholesale demolition of neighborhoods. Usually, the neighborhoods that were slated for destruction were populated by African Americans, who had to find new places to live after their homes were cleared.
Even as federal funds went toward the destruction of homes, other money was spent building new homes. This is fair: once a building reaches a certain level of disrepair and old age, it is past the point where renovation is the most economically sound decision. But the salient issue here is HOW the federal government went about subsidizing the construction of housing.

A Top-Down Approach

The Housing Act of 1968 ushered in an age of increased reliance on “public-private partnerships.” The concept of public-private partnerships had come to flower in the 1950s. Then, as now, the country was divided between liberals and conservatives. Liberals sought public housing for the poor and conservatives flatly opposed the idea. More to the point, powerful lobbying groups such as the National Association of Home Builders (NAHB) and the National Association of Real Estate Boards (NAREB) opposed public housing because they feared that it might cut into their profit margins. 

Involving leaders of construction and real estate businesses in making decisions about how to address the housing crisis was very successful in putting an end to their opposition. It bears noting that the people who lacked housing weren’t given much of a role in the decision-making process. And the housing that appeared in the 1950s was precisely the kind of housing one would expect to see.
The most infamous example of the fruits of a 1950s public-private partnership was the Pruitt-Igoe apartment complex in St. Louis. Originally, it had been planned that the Pruitt section would house African Americans and the Igoe section would house whites. This changed after the Supreme Court ruled it unconstitutional. When completed, 33 high-rise towers were arrayed in ranks and files on a 50 acre plot of land. The elevators only stopped on the 1st, 4th, 7th, and 10th floors. The elevator shafts were in some cases left exposed. The wiring and plumbing were substandard. These shortcomings were the result of corrupt contractors' demanding more money and, when the demands weren't met, cutting corners. Muggers and rapists camped out in the stairwells. A few whites moved in but soon left.

By the time LBJ took office, the Pruitt-Igoe complex, riddled with crime, crumbling, and in the process of being evacuated, was held up as an example of the urban crisis. This did not, however, cause LBJ to question the wisdom of letting the construction and real estate industries run the show.  

Public-private partnerships advantage a small number of businesses that are large enough and sufficiently well-resourced to bid on large urban development projects. The owners of small businesses will see large-scale housing projects underway and decide that it is a bad time to invest in building additional housing. Thus, in Detroit, “when the Great Society urban renewal programs began, private sector construction fell ... Strikingly, the Detroit Economic Fact Book of 1971 reported that in 1969, Detroit had 32 percent less residential construction spending than in 1965 (Corey & Taylor, 2010, in Essays in Economic and Business History).” Well-connected private developers benefited from this arrangement, because fewer homes meant increased demand for homes. But it did not benefit the people that were ostensibly supposed to benefit from urban renewal.

Johnson's urban renewal projects repeated the mistakes of the past. The neighborhoods that were obliterated in the name of ill-conceived highway projects were places like Paradise Valley and Black Bottom, which were home to successful African American-owned businesses and an emergent African American middle-class.

Some civic leaders at the time, Martin Luther King among them, asserted that LBJ was far more invested in prosecuting the Vietnam War than in improving the plight of the underclass. He famously declared, "One of the greatest casualties of the war in Vietnam is the Great Society... shot down on the battlefield of Vietnam."
LBJ: The question of priorities
The Bottom-Up Approach

Senator Robert Kennedy was critical of LBJ’s urban renewal programs because they failed to address urban blight and unemployment. He implemented an alternative approach: he supported the creation of the non-profit Bedford Stuyvesant Restoration Corporation (BSRC) to combat concentrated poverty in one predominantly African American Brooklyn neighborhood. Leadership was shared by neighborhood residents, who would plot the course of the corporation, and by members of the business community, who would attract investment in the neighborhood. 

RFK in Bed-Stuy

At the time, Kennedy commented, “No-one, as far as I know, is presently thinking about using their housing or jobs programs as a lever for fundamental social change—for the building of the community, for the reintegration of the Negro family, for the integration of the slum Negro into the ethos of private property, of self-government, of doing what is necessary instead of asking the government to do it.” Kennedy was alluding to a concept of local self-government that is reminiscent of a commonwealth

Because the neighborhood had not been targeted by Great Society urban renewal efforts, it had an intact stock of sumptuous turn-of-the-century brownstones, and one of the early aims of the corporation was to clean and waterproof these buildings. Admittedly, the story of Bed-Stuy’s revitalization does not fit easily within a redemption narrative. As was the case throughout the boroughs of New York, it had become a very frightening place during the 1970s and 1980s. But today, Bed-Stuy has for the most part resisted gentrification, has a high rate of home-ownership (particularly among minorities) and relatively stable property values (source, source, also Botein, 2013, in Housing Policy Debate).

Nonetheless, Bed-Stuy was particularly hard-hit by the financial crisis of 2007. Nationwide, relatively high numbers of sub-prime mortgages were sold in neighborhoods that had, in the past, been redlined. Bed-Stuy was one such neighborhood, and many of its residents became the victims of foreclosure. Evidently, the public benefits of localism would be strengthened considerably if local ownership and control were extended to banks. But that is the topic of another column.


The Great Society continues to benefit Americans through programs such as Medicare. However, its legacy is mixed. Robert Kennedy’s critique remains valid: efforts to provide affordable housing that are not accompanied by efforts to create local jobs and keep the housing stock in good repair will ultimately fail. The wider implication is this: efforts to improve the lives of Americans require an appreciation for the fact that the various ills that confront the nation are intertwined. As it relates to the present situation, the problems of unemployment, massive deficits, the trade deficit, off-shoring, socio-economic inequality and the desolation of cities such as Detroit are inextricably linked. Making government “bigger” or “smaller” is probably irrelevant, but making government more responsive to the needs of the people is essential.