Small housekeeping note: thus far, the new morning briefing format of article, followed by links, followed by chart of the day and meme of the day seems to have met your approval, dear subscribers. All the feedback we’ve gotten on it has been positive. So our current thinking is we will continue with this format for the foreseeable future. Are you part of a silent majority that disagrees? Is there anything you’d like us to change or improve on? You can always, always write to us.

Is The Cost Of Housing Driven By The Boom-And-Bust Cycle In The Construction Sector?

During his Convention speech, Republican Vice-Presidential nominee JD Vance had this to say about the rising cost of housing (from the text of the speech): “The absurd cost of housing is the result of SO MANY failures of America’s leadership class. And I can tell you exactly how it happened. Wall Street barons crashed the economy and American builders went out of business. As tradesmen scrambled for jobs, houses stopped being built. The lack of good jobs led to stagnant wages. Then Democrats flooded the country with illegal immigrants. So citizens had to compete – with people who shouldn’t even be here – for precious housing.”

Most of the commentary focused on the controversial question of the link between immigration and housing costs.

But another part was controversial and consisted of an argument we don’t recall hearing before: “American builders went out of business. As tradesmen scrambled for jobs, houses stopped being built.”

This got some of the people we talk to agitated, because if you are a conventional policy wonk, you mainly attribute the cost of housing to macroeconomic factors such as interest rates and growth, and also to things like regulation (since so many policy wonks are “YIMBYs”).

A paragraph in a convention speech is hardly a treatise on public policy or economics, but still, we found it interesting and filed it away in a corner of our mind.

Until we ran into this report from the Center for Public Enterprise titled “Smoothing the Housing Investment Cycle.” This flags the famously boom-and-bust nature of the construction industry as a big reason why not enough multifamily housing gets built. The report proposes creating a national construction fund to smooth out the housing investment cycle. The fund would focus on providing mezzanine loans covering 10-20% of project costs, which could significantly lower average capital costs.

So, if housing experts believe that the boom-and-bust nature of the construction industry is a significant bottleneck to building new housing (which would, all else equal, raise prices), could Vance’s assertion be better than we remember?

We checked some numbers from the time of the financial crisis. Housing starts (new residential construction projects) dropped from a peak of about 2.2 million in 2006 to a low of 554,000 in 2009, according to the U.S. Census Bureau. The construction industry lost about 2.3 million jobs between 2006 and 2011, according to the Bureau of Labor Statistics.

Construction is skilled manual labor. Qualified stonemasons, electricians, plumbers, don’t fall off the proverbial coconut tree. If you think about it, what Vance said actually makes sense. As the CPE report puts it: “The multifamily housing sector finds itself trapped in a vicious cycle: rising rent and housing costs induce the Federal Reserve to raise interest rates, thereby shrinking the supply of financing for housing, in turn contributing to higher housing prices. Financing bottlenecks cause otherwise economically viable units to sit unbuilt or delayed, contributing to our national housing shortage and affordability crisis.” This is basically the story Vance told.

And it’s a powerful reminder that “the macroeconomy” isn’t some sort of Platonic realm of theory, it is simply the addition of concrete economic transactions. A residential construction project that stops because the contractor went bankrupt. Multiplied by thousands.

In short, while there are countless factors affecting the price of housing, including regulatory barriers to supply, interest rates set by the Fed, and immigration, the boom-and-bust cycle in the construction industry does seem to be one of these factors, and an underrated one as that.

But this got us to thinking back to the CPE proposal. Perhaps there is some sort of market failure here, but we would have to understand what it is.

Plenty of industries have boom-and-bust cycles and don’t need a public investment fund to meet demand. Usually the way the marketplace solves this is through consolidation and economies of scale. During the bust, the few healthy companies that remain buy up their bankrupt competitors, building up a strong enough financial base to survive the next bust.

Why hasn’t this happened in construction? The construction industry seems to be dominated by small business. Why hasn’t someone built the “Walmart” of construction?

There must be a policy component. It could be regulation. Or it could be the fact that the construction industry depends on local politics and local “connections.”

Whether through deregulation leading to consolidation or some sort of public subsidy or something else (new technology like 3D printed houses?), it seems that getting the construction industry in order would be an underrated way to bring down the cost of housing. Worth thinking about.

Policy Links

#FreeSpeech – Have you heard of a man who goes by the name “Raw Egg Nationalist”? He is actually Dr. Charles Cornish-Dale, an Oxford- and Cambridge-educated medieval historian and anthropologist. We know this because he was recently doxxed by a British activist leftist NGO. Except their account of his doxxing doesn’t make sense–there is no way, it seems, that they could have divined Dr Cornish-Dale’s identity from the publicly-available evidence they cited–which leads to suspicions that government intelligence agencies are involved in the doxxing. Dr Cornish-Dale writes about this for American Mind, a publication of the Claremont Institute, and the journalistic and law enforcement practice of “parallel construction”, ie obtaining information illegally and then retrospectively reconstructing a plausible legal scenario by which the information has been obtained, so that it can be used. We have written before about how doxxing is a threat to free speech and should be criminalized.

#Legislation – As you know, we try not to do horserace politics stuff here, but we were arrested by this eye-opening thread by Heritage’s Amalia Halikias: “Took a leisurely e-stroll through the legislation Kamala Harris introduced or sponsored during her time in the Senate. It is not an exaggeration to say the vast majority of it is inane race equity stuff, squatter’s rights, and mandating useless environmental reports.” It really needs to be read to be believed.

#InternationalTax – Very good flag by Cato’s Adam N. Michel: the OECD, an international organization which is really just supposed to be a think tank and club for the world’s richest economies, keeps trying to tax everything. OECD keeps pushing proposals for tax “harmonization” which would really mean increased taxes in many cases. This oversteps its role.

#FamilyPolicy – EPPC’s Patrick T. Brown: “Child care in Canada is starting to look a lot like health care in Canada – nominally universal, but with long waiting lines acting as the implicit form of rationing, particularly for low-income parents” This is the problem with public provision of such services, and another reason why it makes more sense to empower parents through direct transfers.

#Veterans – One of the things we very much appreciate RAND for is data-rich reports on niche subjects (that often shouldn’t be niche). Thus their new report on “Respiratory Health Among U.S. Veterans Across Age and Over Time” Basically: young veterans have respiratory health as good as civilians, but it gets progressively worse as they age, and most of the effect is caused by higher rates of smoking.

#ClimateChange – Speaking of RAND reports on overlooked subjects that shouldn’t be overlooked: RAND has looked at all of the basic infrastructure and functions underpinning modern life in America, and rated how they are likely to be affected by climate change.

#Agriculture – Fascinating from R Street’s Caroline Melear: “Eutrophication: What It Is and How Crop Insurance Makes It Worse.” In case you’re wondering, “Eutrophication is the process of higher than normal loads of nutrients entering waterways, most commonly nitrogen and phosphorous.” (We knew that, of course.) Apparently it’s a big problem, and policy is making it worse.

#Crypto – Cato’s Nicholas Anthony with the case against central bank digital currencies. The implications for privacy, in particular, do seem very serious and troubling.

Chart of the Day

From the Economic Innovation Group, Americans are vastly wealthier than Europeans:

Meme of the Day