 My topic this afternoon is Is there such a thing as a skyscraper curse? probably one of the most unusual topics at Mises University certainly just by looking at The titles of the talks. They're sort of more standard ones like I did the one on the minimum wage Is there a skyscraper curse Well, there better be because I just published a book on it And if there's not I'll see y'all later. Have a good life. I'm gonna have to retire to a foreign country Got my Myself extended with a printed book Okay, well the skyscraper curse is defined as When a world record-setting high skyscraper Sets a record The curse is The economic crisis that follows and the skyscraper curse comes to us From what's referred to as the skyscraper index? So if you go to Wikipedia, they have an entry on the skyscraper index Not the skyscraper curse because the curse is really just the culmination of what's going on During the building of a record-high skyscraper This first came to light when Andrew Lawrence published a report in 1999. He's a real estate analyst for major Investment houses and when this came out it actually made the financial press So it was in investors business daily the Wall Street Journal business week East Asian review and many other publications Discussed it and they usually tossed it off the side as a Story of the day kind of cute thing But they didn't take it very seriously The skyscraper index is focused only on record-setting tall buildings and Specifically I've narrowed it down so that the height of the building is measured by the top height of livable space so if you put an antenna or a tower or Some kind of architectural feature that doesn't count so Livable space is what really matters Putting an antenna or something on top of a building doesn't represent an engineering challenge but building livable space 1500 feet in the sky does cause engineering architectural Challenges that have to be met in order to build that livable space So for example To build a new record-high Skyscraper you might need new concrete pumping Technology to get the concrete up that high in the air in a Efficient manner Or you might need some kind of new elevator or in the case of the current record building a new Elevator cable The record-setters are begun during a long boom in the economy And the curse is that record-setters are typically completed and open during economic crises So the general timeline here is that there's a long boom in the economy The record-setting skyscrapers are started They achieve a record height and Then the economic collapse or crises begins and Then of course the building is only finished or completed and open to the public in tenants much later And as a result they often open during economic crises So it's not overall construction or investment statistics that we want to look at here We're looking at unique events that don't happen very often So that we might have say if you saw Patrick Newman's presentation, we might have you know 20 some odd recessions in the 20th century We might only have a handful of economic crises And so we'll look at that history the first one that Lawrence recorded was the Panic of 1907 the Singer building Sony machines Metropolitan life building were both begun prior to the Panic of 1907 They reached record heights around the time of the Panic And they opened in the aftermath or crises The Woolworth building set a new record in 1913 40 Wall Street, which I think is now the Trump building the Chrysler building and the Empire State Building opened in late 1929 1930 and early 1931 and that was followed of course by the collapse of the stock market and the Great Depression Which lasted more than a decade So three you notice that these things tend to will tend to come in groups and Then the World Trade Towers and the Sears building were completed in 1973 in 1974 The economic crises known as the stagflation of the 1970s Began while these buildings were under construction some of them hadn't set record yet But all three were under under construction the stagflation of the 1970s Fortunately, you didn't have to live through that. I did It was a deck a nasty decade of the Vietnam War America's first losing war Inflation unemployment is where the word stagflation comes from we had the oil crisis Right about the time these buildings set records so It was really a nasty decade that the stock market lost more than half of its value and we had what would amounts to an economic depression in the early 1980s when Interest rates and unemployment exceeded 10% One of the few times it's done that outside of the Great Depression and then we have a curious situation here in 1997 The Patronas Tower set a new record and there was an Asian financial crisis Taipei 101 Sets another record around 2002 That coincides with the dot-com bubble or the tech stock bubble But in more recent times I've come to realize that this was one group of crises In my reading of the history of this period what was happening was in the late 1990s with Japan down the East Asian countries We're having a boom And the boom was related to technology and then with the Asian financial crisis The technology meltdown in Asia started in the rise of the tech bubble in the United States Began and so there was a transfer really of the tech bubble from Asia to the United States And then in 2007 The housing bubble came to an end and the financial crisis began and that was related to the bourgeois Calafi Tower in the United Arab Emirates Specifically in the emirate of Dubai The tower was originally the bourge Dubai tower But the leader of Dubai ran out of money during this crisis. He had to borrow the money from his cousin And so they renamed the building after the cousin and right now there's the kingdom tower under construction in Saudi Arabia That's projected to be a tower that's one kilometer tall Which is amazing, but it's only going to exceed the livable space of the bourge calafi tower by about eight floors So it's going to have one of these spires on the top of it Okay, so when I saw that skyscraper index in 1999 I realized that While the financial press was dismissing it That it was really intimately related to the Austrian business cycle theory And so I began research After a couple of years, I published a paper called skyscrapers and business cycles in 2005 I submitted the paper to A bunch of mainstream journals and they didn't know what to make of it and they rejected it because it it didn't have a testable hypothesis Didn't have a testable hypothesis I love that And usually the the editor would write back almost like just one line Rejecting the paper and finally it was published in the quarterly journal of austrian economics in 2005 And what we're going to do is look at the austrian theory that connects the skyscrapers with business cycles And basically here what we have is the abct theory being applied Where artificial interest rates artificially low interest rates over an extended period of time can cause Are referred to as canteone effects Which are structural changes in the economy induced by artificially distorted interest rates The first canteone effect which is named after Richard canteone Who I also have a book That you can buy really inexpensive too Um interest rates lead to increases in land prices Every real estate person knows this Every big land owner knows this But the general public is largely unaware Because the general public typically doesn't buy land During their lifetime They only buy land when it has a house on it and they're not even really thinking about the cost of the land Uh and very few people engage in buying large amounts of land and selling large amounts of Mounts of land but basically The effect here is you have interest rates and land prices And if interest rates go down land prices go up If interest rates go high Land prices will go down And you can always tell When interest rates are artificially low and this is This is something that the theory doesn't tell us But I can sense that interest rates are low Simply on the basis of how many signs Go up along highways and so forth that says land for sale Because the land owners realizing that land prices are land is in demand and prices are up So Interest rates low interest rates lead to higher land prices That's the first effect the second effect is that lower interest rates increase the size of companies This is also something that the general public is largely unaware of But economists have actually studied this And other in other disciplines as well And They've come to realize that there's a pattern here that when interest rates are low or in our world artificially low It leads to increases in the size of companies Yes, sir What's the uh, how does that work? Do they buy out the competitors? That's one of the mechanisms It could be as simple as an industry evolving from mom and pop firms To franchise corporations But with respect to your point, which is a very good one economists have also found that Mergers and acquisitions When two companies merge together to form a larger company Or acquisitions where one company buys another and integrates it into themselves So Exxon buys mobile and they become one company There's a pattern to these uh to mergers and acquisitions Right now that it's of course, they're it's very high And at other points in time it's very low or non-existent Um and that pattern matches up quite well With changes in interest rates So lower interest rates allows companies to Merge and to acquire and it also allows For this mom and pop to franchise corporations For that process to be sped up And when you go from mom and pops To franchise corporations, you're changing you're not changing the product very much What you're doing is you're changing the way the company works Okay, so with mom and pops, you know how that goes basically Mom does x y and z and pop does a b and c In their kids take out the garbage or whatever Um So What's the difference between the firms while they're bigger? The the new firms are going to be bigger But also they have to have research and development Offices they have to have human resource offices. They have to have accounting offices They have a strategy and marketing department And so these larger corporations instead of being Spread out all over the economy And independent now it's all under one roof And they become the modern corporation with all of these different Centers and so they need much more office space Okay, so a mom and pop have an office space the equivalent of a of a large closet Big corporations need huge amounts of space typically in central business districts And outside of the kingdom tower most of these Record-breaking skyscrapers are in major metropolitan central districts Most of them have occurred in new york city Or chicago And then of course there's not record-breaking skyscrapers, but there's skyscrapers all over the major cities Of china someone sent me a list of 20 cities i think in china That are larger than new york city, but you know you've never heard of them before And you certainly can't pronounce the name Okay, and the third and final one is that record-breaking projects create nuke construction technologies and building systems um, and this is where This last one shows how these higher buildings Influence the entire economy So new construction technologies are things like the size and capacity of the cranes The size and capacity of the cement pumping technology um All sorts of things that are about The construction so these tall cranes in auburn I've been here for 36 years never saw one before until two years ago in auburn. I mean building systems Uh, this is like heating and air conditioning It's like elevators escalators Water and sewage every building has literally dozens of systems including You know fire alarms, you know just everything that goes into building this building um Goes into building record high buildings but because The height is so high You have to adapt you have to create new technologies. You you have to make elevators go faster If you I estimated that if you Used our elevator here at the institute In the bush calafi tower Um, even if you'd never stopped on any of the floors it would take almost 15 minutes to get to the top And you know, so you're the higher you go the more people you have to move up and down And you can't just add more elevators The reason you can't Just have more elevators more air conditioning duct work is because every square foot of system Is a square foot on say 140 stores Stories, you realize that that's costing you way too much And so they have to invent brand new things brand new technologies brand new factories and delivery systems So this is where We show that The record breakers Are causing Changes in technology changes in the structure of production in the economy. And so this is an illustration Of what's going on throughout the economy Even in arbor in alabama So the record breaking skyscrapers skyscraper index and curse Are an illustration of what's going on in the economy more broadly Then we had the housing bubble the most recent bubble crisis And because I was working on this topic I was also more keenly aware of what was going on In the american economy at that moment So remember the article on skyscrapers and business cycles came out eventually in 2005 So I just happened to be working on this subject and paying keen attention to it. So that um In june of 2004 I published an article on mesis daily called housing too good to be true Where I basically explained not what only was happening and why it was happening But what would eventually happen A couple of years later in the economy And most of well not most of my friends A few of my friends thought I was crazy Maybe a couple of them are here this week Or we're we're here. That's another hit And then a little bit later Uh, actually my first article on the housing bubble was in february of 2004 on lou rockwell dot com and then in August of 2005 I wrote an article is is the housing bubble popping And I showed stock market data And using technical analysis I identified that the stock the stocks of home construction companies Had popped Significantly enough to indicate that it was likely a topping of The housing market and the how in the housing bubble This wasn't Clear to anybody else At the time In fact like peter shift. I think didn't mention any of this until 2006 The economics of the housing bubble I published In june of 2006 I was asked to write a paper For a chapter in a book on housing construction in the united states Mine was the only chapter that really had to do with the macro economics of it. Everybody else was talking about zoning and land use planning and all that and um Because of the popping of the housing bubble this book project Sputtered and they lost the publisher And when they got a new publisher The editor asked me to take out some of the more gory details In my article, which I was willing to do Um because I wasn't sure if I was right Absolutely sure Yeah, we told you so Which is sort of a compilation of some of these things on lou rockwell dot com And then uh august 7th 2007 I made a blog post of all things And it was titled new records skyscraper and depression in the making About dubai and the bougie calafi tower And of course this wasn't really evident to anybody at the time And so I was giving public lectures here in auburn and elsewhere and one that came out In um, I think it was june of 2007 that I did it was for auburn university students at the university And um It turns out all these bankers and construction people showed up And they weren't very happy at all what I was saying And I was a little concerned too because I was like in the back of the room and the doors Were on on the other end And the place was packed So I felt trapped And you know other things One interesting paper that I did much later It was called transparency or deception what the fed was saying in 2007 And uh very interesting I think basically I went back Into the speeches of major figures in the federal reserve And quoted them as to what they thought was going on in the economy in 2007 And they thought it was all great that they had mastered the business cycle That they um Were right there They denied bubbles ever existed um One fellow randy crowshner who was uh Vice chairman of the fed I think at one point Is at the university of chicago And his speech was about how all these collateralized debt instruments Uh were such a great thing That they increased transparency that they increased liquidity You know and that turned out to be so 100 wrong Nobody had any idea What was inside those Financial instruments so transparency that's ridiculous In liquidity well We saw what happened to the liquidity of those things As soon as the uh something hit the fan They were completely illiquid completely So on 2010 january 8th when the bush calafi tower Opened cnn had this uh report about what was going on on the ground In dubei and thankfully they actually Mentioned me and in my blog post. They got my name spelled correctly You know a lot of times And I don't really care too much but a lot of times people will use my work And not cite me at all And I'll come back to that issue Uh a little later in my talk Several times actually But noteworthy is that the there is a literature that has developed and is developing On this topic greg kaza in the quarterly journal of austrian economics looked at The skyscraper index in the his home state of michigan and his adopted state in arkansas Verifying the skyscraper index gunter lawfler a prominent financial economist Working on that but notice he's saying that's overvaluation and confidence that's causing this And this is where the confusion enters this literature Uh jason bar who's very prominent in this literature. He's a real estate economist from Rutgers university That's jason bar again Real factors and builder competition or ego So they're they're trying to embed Irrational variables in their models And again he comes down here with real and psychological Variables In here the height competition he changes the word from paper to paper, but it's basically the same paper Height competition only occurs at peaks and height by height competition What he's referring to is if somebody builds 120 story building the next person's going to do 125 and then 130 and then 135 And that's that's irrational and he says that only occurs at peaks Interesting that you can only be irrational at certain phases of the business cycle And then he and two other Rutgers economists came in with skyscraper height and business cycle separating myth from reality Guess who's responsible for the myth? Yours truly And the reality is represented by jason bar They looked at announcement dates and opening dates And whether or not they were correlated with gdp and they find the answer is no well the announcement date can come very early like the The trade towers in new york city were announced in 1960 Five years before they began construction They weren't finished for 12 or 13 years later Opening dates are when they're open to the public in tenants Uh, which is too late So they're too early and too late and there's no scientific way of dating these things perfectly They also use data from the u.s. Canada china and hong kong versus real gdp And they did a granger causality test Which shows that gdp causes height So the bigger the gdp the bigger the buildings And their co-integration test Show that gdp and height are co-integrated and share a common pattern Not that they're cause and effect, but they simply Share a common pattern. So if a person the lady is walking her dog on a leash You know the dog may be in front of her on the side of her behind her ahead of her And that may change several times along their walk, but they're basically following the same path And they conclude therefore height does not predict cycles They move together with temporary deviations due to builder competition again the irrational Builder competition near the peaks So basically they dismiss my work because height the skyscraper going up Does not predict the skyscraper curse Lucas Engelhardt in 2005 working paper Why skyscraper is a spatial economic approach? Shows that lower interest rates increase land prices and wages Higher opportunity cost of commuting leads to taller buildings Supporting my original paper to a certain extent and actually extending the analysis more along Economic lines than along Strictly real estate economics. So what can we say about this paper? Well, there seems to be some general agreement that we need to test The relationship between lower interest rates and economic expansion higher stock prices and skyscraper construction Some of the authors use different data sets To do this But there's still a general notion behind the skyscraper whether or not it's real Or whether or not it's irrational They haven't decided And let's see again you have The builder competition status social status and ego But only near the peaks in the business cycle amongst the bar type Jason bar type analysis The important point that from austrian business cycle theory is that austrians do not deny deviations or changes in psychology even at the social level Okay, we don't deny the fact That during a boom people become exuberant And we don't deny the fact that when you have a crisis people become depressed and less interested in Entrepreneurship and investment and things of that nature. We don't deny that we it's part of our theory Really, we don't talk about it much Um, but actually I do in this book Which is only $18 for students by the way Okay, so the latest paper by bar at all Which is where he tries to You know undermine the skyscraper curse theory With his various with their various statistical testing And and by the way the one exception did you remember the exception that I On the history of the curse In the index, what was the Woolworth building? And the original formulator of this Andrew Lawrence said that was a mistake of the skyscraper index Because there was no economic crisis After the Woolworth building set the record But in fact if you went back and looked at the actual data you'll see that After that building set A new record the American economy Went did go into a crash But within several months We were saved from a big crash big lengthy crash By world war one. So when world war one started Europe simply could not get enough of our grain products our steel products our munitions All sorts of things europe was importing from the united states and it put the us back into an expansion So it's not really a mistake of the index It really when you put it into historical context It's it's a correct Signal and I would argue That the war really is responsible for us not having A label placed on that In the absence of world war one We would have had a long lengthy Correction in the economy that probably would have been Referred to in history as the post world one Depression or something along those lines Okay, so our response Was that there's no particular date that should be used to time the skyscraper curse Uh, and you certainly should not use announcing Dates and opening dates Uh, we prefer to use When the project gets off the ground Okay, so when somebody starts a new project that's going to break a record That's when I issue a skyscraper alert and when the Skyscraper itself reaches new record height That's when I issue a skyscraper signal That there is an imminent danger of an economic crisis Right before our eyes So the fact that they couldn't match up The wrong dates doesn't really have any negative impact on our analysis And we also agree that record setting skyscrapers do not cause economic crises Which is exactly what their statistical analysis Says they they said that height Does not determine gdp And we've never said ever That just the building of a building somewhere in the world is going to cause a world economic crises So they either didn't read the paper at all Or they have like a fifth grade education And believe me five years of math and stat can do that to you So remember back to the Granger causality test where the dog and the lady are walking along On a sit on a the same path essentially That's what the skyscraper index argues is that artificially low interest rates cause A record setting skyscraper and an economic crisis So that's exactly their findings are exactly Backing up the theory And yet The journal that they published this in We asked for an opportunity to Offer a correction. They denied it. We offered them a comment Several pages of explanation of this They rejected that And not only that But their article got picked up by the editors of the Economist magazine And they published an edit unsigned editorial March 28th If the skyscraper curse suggests the decision to build the biggest towers Happened near the peak of a business cycle Then you could use record-breaking projects to predict the future path of GDP However, the range of months between the announcement of the towers and the business cycle peak is large varying from 0 to 45 months And only seven of the 14 Open during the downward phase in the business cycle In other words, you cannot accurately forecast a recession or financial panic By looking either at the announcement or the completion of the world's tallest building And of course they didn't mention me in the article They mentioned the article in the references to skyscrapers and business cycles They got the wrong year I sent them a letter Explaining all this and asked them to change the year of the reference and add my name And I got an email back 90 days later That said my letter had been misplaced and they didn't print the letter either And despite what you just saw from the Economist, this Is the graphic that they used So you've got the panic of 1907 and the buildings opening up here at singer building You've got the three buildings in new york city and the depression But actually of course the fact that you had three led the depression out until the early 1940s and then trade Tower centers and the willis which was the seers building Then they put the oil shock in there, but actually the economy was hurting from 1970 to 1982 And then the asian financial crisis and the financial crisis and housing bubble And so the building is situated Where it's being completed. So it's sitting right over here 2010 I don't know how you could put that graphic together And the editorial and put them in the same issue So the skyscraper curse it illustrates what the fed is doing to the economy Those technological changes the changes in the structure production Are happening throughout the economy. It's just more visible And better illustrated by these record settings skyscrapers The index has a good record of prediction. We went back into the 19th century found several other record setting buildings Main streamers resort to psychological factors, but failed to explain them Where do these psychological changes? Why do they occur? I've always found that puzzling that economists Would refer to psychological things causing it rather than some economic cause And um The kingdom tower Has also been renamed the jeta tower And it was on schedule to set the record late this year And then they threw the builder of the building and one of the big financial backers in the building into custody related to The corruption scandal in Saudi Arabia. And so that that building has been on hold Since november of 2017 So I expect the skyscraper index to be incorrect here because Either that building is never going to be completed or it's going to take several more years To complete the project that I don't think the economy I think the economy is set up more to coincide with the anticipated Record setting date rather than the actual record setting date Okay, so thank you very much