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Source link: http://archive.mises.org/15362/can-austrian-theory-explain-construction-employment/

Can Austrian Theory Explain Construction Employment?

January 19, 2011 by

We are now on our third (and counting?) attempt by the Keynesians (and their occasional Chicago School comrade, Sumner) to use statistics to beat the Austrian theory. Here I once again shown that the data match the Mises-Hayek story pretty well. FULL ARTICLE by Robert P. Murphy

{ 21 comments }

Gregory January 19, 2011 at 10:16 am

I completely agree that housing-starts are not the proper measure to compare to unemployment because of the temporal considerations.

To illustrate, let us say that a house takes 6 months to complete and utilizes 50 laborers. If at T0, 1000 homes are being built, 50,000 laborers are employed. Then let’s say one month later at T1, 1000 more homes are started, increasing the workforce to 100,000! At T2, 1000 more starts, swelling the workforce to 150,000 laborers.

However, at T3, housing starts drop to 100. However, laborers are still added to the workforce (now 155,000 laborers) despite a drop of 90% in housing-starts. Let’s say new construction completely stops and 0 homes are started from T4 through T6. It won’t be until the T6 that employment shrinks.

To review:

T0- – 1000 starts, 50,000 employed
T1 – 1000 starts, 100,000 employed
T2 – 1000 starts, 150,000 employed
T3 – 100 starts, 155,000 employed
T4 – 0 starts, 155,000 employed
T5 – 0 starts, 155,000 employed
T6 – 0 starts 105,000 employed
T7 – 0 starts 55,000 employed

The very crude example above shows time considerations play a huge role and why housing-starts are not an accurate barometer to gauge against unemployment. As shown above, housing-starts precipitously declined in T3, and shrank to 0 in T4, but it took 3-4 months for employment numbers to fall.

I would like to see data on housing completion, if there are any. I believe this would be better gauge than housing-starts.

greg January 19, 2011 at 12:29 pm

Yes a house takes about 6 months to build a house, but on average there is only 6 people working on the house at any one given time. The reason for this is the time required by each trade, over the six months the following is an example of the labor breakdown:
- Framers, 4 men, 3 weeks.
- Plumber, 2 men, 1 week.
- HVAC, 2 men, 1 week.
- Electrician, 2 men, 1 week.
- Insulation, 2 men, 2 days
- Drywall, 4 men, 1 week
Anyway, my point is your labor requirements are inflated.

You need to understand the make-up of construction labor force. In 2000, we had about 15% of the workforce was Hispanic and were primarily in the drywall and insulation business. During the peak in 2006 about 60% of the workforce was Hispanic and they expanded in the higher skilled jobs like finish carpentry, HVAC, foundations, framing, masonry, painting, etc… Then today, most of the Hispanic workers have left construction with many of them returning to their home countries.

Another way to look at construction labor and the boom is to look at the cost of labor. In 2000 I was paying about $3.00 a square foot to frame a house, at the peak in 2006 my cost was $5.80 and the last house I had framed 5 months ago cost me $2.80. The funny thing is that I had the same framers I hired in 2006 frame the house 5 months ago.

Most of the direct unemployment in construction was the loss of the transient employees and most of the construction workers that remained are performing work for “cash” jobs that are off the books. What is killing the local economies is the indirect employment that is loss. All the service industries and suppliers that were built around construction worker spending is huge since most construction workers spend every dime of their pay, every week.

The problem everyone is having is drawing any conclusion to the relationship of construction to the economy based on a spike in activity in 2006. If you look at national housing prices from 2000 to 2010, you will find prices have increased 54%. You will also see only a slight increase in labor and materials over the same period. The problem is everyone went stupid in 2006 and a lot of people got caught holding the bag.

What caused the problem, well there are many views, but I go back to supply and demand. When I had investment groups coming up to me, offering me to finance building a house, paying me 12% fee and then they would sell the house, I knew we were headed for trouble. These investors made money at first and more investors entered the market. What all these guys failed to realize was that it takes 6 months to build a home and when the market started to fall, they were not in a position to liquidate the home. And because they paid 12% over cost, they could not cut their prices as much as the builder that was willing to sell their home with a slight margin.

There was many other factors such as the increase number of inexperienced builders, homeowner builders, banks lending to these people and the general concept that all real estate was going to rise. Was the Fed responsible for that, I don’t know, but I do know there was a lot of people chasing returns greater than what they can earn in the bond market.

Where is housing headed? That I do know, demand will increase, the current supply will get absorbed and housing will return to a moderate growth industry. Just like it was in 2000.

Anthony January 20, 2011 at 12:25 am

The fed was responsible for lowering interest rates, and the government was responsible for compelling banks to make dubious loans…. That should just about suffice to explain the situation.

jimmsparks February 3, 2011 at 12:52 am

Great intellectual points.

Ryan January 19, 2011 at 10:18 am

I don’t understand why they don’t get it, but they don’t. It’s like they have a mental wall, where if you don’t say something about AD or NGDP, then they think you just fail to understand what they’re saying.

Christopher January 19, 2011 at 10:52 am

I wonder how many “off the books” construction workers lost their jobs? I would think you can look to AZ, Nevada, and Calif to see how that turned out.

Bob Roddis January 19, 2011 at 11:01 am

Why don’t they ever get it?

My simple theory is that they absolutely refuse to become familiar with basic Austrian concepts like ignorant acting man, subjective value and distortion of economic calculation and the pricing process. Ultimately, there is NO ROLE for their technocratic personality in “managing” the “economy”, which is more than they can stand. So they ignore the entire Austrian insight. As Hayek said on “Meet the Press” in 1975:

Will: “Dr. von Hayek, capitalism and particularly American capitalism would seem to have a good record at giving people a rising standard of living. Why are so many intellectuals, and particularly so many economists, skeptical about and even hostile to capitalism?”

Hayek: “Well, I’ve been puzzling about it for a long time, particularly about the economists who ought to understand better. It’s very difficult to know why they don’t. I think it’s the intellectual attraction of a system you can deliberately control, which is fascinating to the intellectual.”

http://mises.org/daily/3311

http://mises.org/media/2773

Unfortunately, Hayek made some statements supporting “the printing money” by “the Ben Bernank” in his later years.

John James February 13, 2011 at 7:06 am

That’s really interesting. I had never heard that interview. It appears he became more sympathetic to such people only a few years later…In this interview with Judge Robert Bork in 1978 Hayek literally says he’d “give them the benefit of the doubt”…stating that:

…that dislike I think is due to it being unintelligible to them. They want to make it intelligible—translucent to them; they think nothing can be good unless it is demonstrated to you that in the particular case it achieves a good object. And that of course is impossible. You can only understand the structure as the principle of it…but you couldn’t possibly demonstrate that in the particular event a particular change has a purpose, because it always is connected with the whole system, which, as a rule, you can only understand in principle but not in detail.

So i think I would give them the benefit of the doubt at least—I think in most instances it’s a deeply ingrained intellectual attitude which forces them to disapprove of something which is unintelligible to them and to prefer something which is visibly directed to a good purpose.

Nikolaj January 19, 2011 at 2:17 pm

Murphy: “So what is wrong with Sumner’s approach? Well, part of the problem is encapsulated in Kling’s critique — Sumner isn’t viewing the economy as a complex capital structure, with various lines of interlocking production processes that have to “mesh” in order for the finished output to keep popping out of the terminal. Rather, Sumner and his Keynesian allies are thinking of the economy as a bunch of masseuses or stand-up comedians, in which there are not dedicated capital goods that must augment the laborers in each field. In their world, when consumer spending switches (or freezes up altogether), the production structure just turns on a dime; there’s no “memory” in the capital stock of what the patterns of output were before the sudden disruption”.

In this Murphy’s brilliant popular exposition of the capital theory we can see the world of difference that separates it from the Keynesian notion of an economy as a GDP factory with simultaneous production and consumption. It is as if someone were to compare the 19th century theory of “ether” with David Witten’s M theory of strings. :)

Captain_Freedom January 19, 2011 at 2:44 pm

Well it’s 1…..2…..3 strikes they’re out at the old….ball….game!

Greg Ransom January 19, 2011 at 2:48 pm

Construction workers are in a home _after_ move-in fixing things.

There are also many construction jobs still to be done, decks, landscaping, rain gutters, shutters, cabinets, etc.

None of this is imagined by Sumner.

Also, average construction time foor custom built homes is 2 years …

greg January 19, 2011 at 4:30 pm

Many construction people that are laid off are collecting unemployment and working side jobs for cash. The extension of benefits to 99 weeks only keeps these guys “unemployed” longer. Furthermore, they are able to undercut employed contractors for the few jobs that are out there adding to the problem. I know of several individuals in the trades that have turned down employment at places like Lowes and Home Depot because they are making more working on the side for cash with no overhead. If unemployment coverage was limited to 6 months, the construction industry would have recovered sooner, and the economy.

Construction times are as follows:

Less than 1500 square feet: 4 months
1500 to 2500: 6 months
2500 to 3500: 9 months
3500 to 7000: 1 year
over 7000: 18 months

Much of the time is based on availability of sub contractors, today they are easy to get and the last house I built was a 7200 square foot custom that took 11 months.

Greg Ransom January 20, 2011 at 1:08 pm

Thanks Greg.

There’s other “after move in” stuff I failed to mention — including color paint and wall paper for the wall, finishing the garage, and all sorts of other stuff.

I remember the streets being full of contractors for 2 years after folks had moved in.

Michael A. Clem January 19, 2011 at 3:23 pm

Now that I have once again shown that the data match the Mises-Hayek story pretty well, I’m assuming they will be converted to our way of thinking.
Wishful thinking, Robert, wishful thinking. ;-)

Sione January 19, 2011 at 8:15 pm

I never have been able to understand why Keynesians ignore the fact that many people have particular skills and that those skills take time to learn, develop and master. They seem to believe that a man can instantly change from a plumber (say) to an electrician, then to an engineer, then a fitter/turner/welder, then a maintenance man, back into an electrian, onwards into a mover, back into a plumber again, then a line worker, then……. Not only do Keynesians behave as though such is real world occurance, they also insist that people can instantly move from place to place without cost or effort or delay and without ever making the error of getting stuck in the wrong locale. It all occurs faster than light.

I have also not been able to understand why it is that Keynesians pretend that productive activity and processes take no time to occur. They seem to believe that goods are finished the instant they are started. They behave as though machinery for making cars can transform into machinery for producing pharmaceuticals, then into plant for generating electricty and back again. They appear to believe as though such machines are called into existence instantly, perfect and without fault or error. Again, this all occurs without effort or time delay or error. It really is faster than light stuff.

Why faster than light? Let time run backwards. Pretend that is happening and it becomes possible to pretend there is a way for Keynesianism to work!

Sione

Anthony January 20, 2011 at 12:28 am

Not only do they ignore the time it takes for people to retrain, they assume that factories, heavy equipment and the like will just appear instantly when they are needed. It’s baffling really.

J. Murray January 20, 2011 at 7:22 am

That’s what happens when your observational “science” is limited to staring at lines on paper.

Matt C. January 19, 2011 at 11:43 pm

Murphy has the rare genius of a clear mind that knows what is significant and how to present it.

Walter January 20, 2011 at 9:33 am

This article crystallizes a fundamental flaw I have with any expert who posits an argument about the economy;

A priori, for any decline in the economy the consumer is to blame.

It doesn’t matter how precisely and accurately the data is gathered or whether the data is put into a micro or macro economic model or whether its interpreted through the Keynesian or Austrian theory. When the price of houses rose the Agents and Brokers, Mortgage Lenders, Developers and their Financiers were considered geniuses and when prices fell it was the fickle consumers fault.

publius January 22, 2011 at 3:51 pm

Christoper is spot on. Illegal immigrant labor (blush…. oh, my incendiary language) fueled housing construction, but less so labor data, especially in AZ, NV and FL — precisely where housing boom-busts were biggest. Shadow illegals poured in, then with housing completions dribbled out, of the construction workforce without accurate, timely reflection in conventional employment data and, especially, in unemployment insurance totals (where their illegal status was at high risk of detection if state applications were fill out honestly and completely). Hayek wins, Keynes loses.

Sione January 24, 2011 at 3:33 pm

Walter

You need to learn how to read.

Sione

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