 my lecture this afternoon is entitled is there such a thing as a skyscraper curse and I'd like to begin by handing out my new business card for I didn't realize how many people are going to be here today so I might be running short of cards but I have more of them in my office be available during office hours or some other time I came to graduate school at Auburn University because I really liked the Oz the Austrian business cycle theory I discovered it when I was an undergraduate the economy was in a depression and eventually I would read Murray Rothbard's great book America's Great Depression which I can highly recommend to everybody it's still a great contribution amongst many of his contributions in so many different areas as you've seen this week and I got to Auburn University I'd met Roger Garrison the Austrian macro theorists who first told me about the Austrian business cycle theory and so I thought that's great you know and then I found out that the senior macro professor at Auburn University considered the Austrian business cycle theory a grisly embarrassment and so that's when I decided to do my dissertation on prohibition basically and so I'd given that up and then in 1999 I got a job as a macro economist at Columbus State University and it was then that I discovered the skyscraper curse it was published in an editorial in investors business daily and basically what the writer was saying was that there was this association between the building of a world record-setting skyscraper and an economic crash and that appeared in all the major business media of the day and most of them just simply laughed it off as something they could write up for today's story however I saw the Austrian business cycle theory embedded in this skyscraper curse so I began to study that association and I finally was able to publish an academic paper on the subject in the quarterly Journal of Austrian Economics explaining this correlation between the skyscraper curse on the one hand and Austrian business cycle theory on the other and then on August 7th 2007 I wrote a blog post on mises.org quote quoting myself there is a new economic record setting skyscraper in the making in the United Arab Emirates the skyscraper curse predicts economic depression and or stock market collapses to occur prior to the completion of the skyscraper so I've already explained what the skyscraper curse involves Andrew Lawrence was the writer who first developed this association he focused only on record setting buildings and but basically he described the curse as record setters are typically completed and opened during an economic crisis and so this is not about normal business cycles it's not about overall construction or investment statistics but let's go back and examine the history of the curses the first set of record setting skyscrapers were the singer building they used to make sewing machines and the metropolitan life building which of course they sell insurance those were both started in 1906 and they were both completed roughly in 1908 the panic of 1907 which was a significant event it's not usually talked about very much but it's the justification for the Federal Reserve Act in the founding of the Federal Reserve in 1913 so it was a it was a big issue then the Woolworth building was built and completed in 1913 but Andrew Lawrence thought there was no curse associated with this so he considers the Woolworth building to be a mistake during the Great Depression 40 Wall Street which is now Trump Tower the Chrysler building and the Empire State Building were all started prior to the stock market crash and all opened after the crash in the beginning of the America's Great Depression 1973 crash in crisis the World Trade Towers and the Sears Tower were begun before that and both set new world records at over 100 stories and this eventually resulted in a stock market crash in the whole decade really from 1971 through 1982 was called the Great Stagflation and as I mentioned I was in college when there was a depression that was 1980 through 1982 America had several months where the unemployment rate was greater than 10% and where in the inflation rate was over 10% and interest rates were over 15% if you can imagine that and then at the turn of the century we had an interesting situation here the financial the Asian financial crisis occurred in 1997 which was in line with the building of the Patronus Towers in Asia and then we got the stock market bubble and then Taipei 101 was constructed and opened in Taiwan and the interesting thing about this particular cycle was that the bubble originated in Asia and it was a technology bubble and then when the financial crisis hit which was really a currency crisis the technology bubble transferred itself from the Asian Tigers of Southeast Asia to Taiwan sorry about that it was President Trump calling I just can't take that call and so the technology bubble that was in Asia was transferred both to Taiwan to the north and to the United States and it was because of that currency crisis that occurred in 1997 in places like Vietnam and Thailand and so forth and then we have the housing bubble and the financial crisis which coincided with the building of a new world record setting skyscraper in the Middle East and it was called the bourge calafi in Dubai setting a new world's record the Kingdom Tower is yet another new record setting skyscraper that's being built in the deserts of Saudi Arabia and the construction has been delayed for quite some time but that doesn't really matter too much in terms of the skyscraper curse itself so skyscrapers and business cycles this is where I went in and analyzed why how in the world just building a single building could result in a severe business cycle so I provided the links from the curse to the theory and basically artificially low interest rates caused three different canteone effects all of which if you're reducing interest rates below the market level all three of these effect effects will result in people wanting to build higher and those are termed canteone effects after the first economic theorist Richard canteone basically he was the first person to describe economic theory in a very complete and comprehensive way so lower interest rates causes land prices to increase does that make sense it's something that every everybody in real estate for example knows that's the case as you lower interest rates you lower the opportunity cost of land and so the price of land increases now what impact is that going to have well if you lower interest rates and land prices go up than any entrepreneur or any developer has to consider that to pay that higher price of land you're going to have to build more space to rent okay so and we see this in Auburn today with the last 10 years being basically near zero interest rates the building of buildings in town has obviously gone up if you look around town you see the old buildings in downtown they're typically one or two stories tall but now the ones that are under construction are actually six or seven stories high and then four stories below our parking decks so and then there's one building that was built during the housing bubble it's the large white building that's five stories no underground parking and it was built right before the housing bubble crashed and under similar circumstances lower interest rates increases the size of companies this is something that you may not be familiar with but it's something that people who work in industrial organization well understand okay and the idea here is that with low interest rates companies can engage in mergers or two companies combined to become a bigger company acquisitions where a large company buys up smaller companies in order to become bigger under normal conditions companies would grow just by growing their business but with interest rates are low those low interest rates or the cost of acquiring companies are merging with companies goes down and so you'd see a different type of economic growth pattern as a result and anytime interest rates are low you see lots of mergers and acquisitions which we've been doing the last few years actually along with general economic expansion and the third well let me back up to the second one if you have larger companies you also have the demand for large amounts of office space in the central business district okay if you think of a lot of mom and pops out there operating you know they do their own accounting and they do their own ordering you know everything is done by mom and pop basically but as companies in that particular industry get bigger and bigger and bigger all of a sudden you need offices for accountants you need offices for managers for whoever's in charge of the company you need a board room for the board and so all of those features that mom and pop do in a business now have to be done by specialists working full-time in a particular area so you have a marketing department an HR department and as a result all of those people are going to be located in a corporate office building in a central business district so also lower interest rates result in canteone effects in the sense that they create new construction technologies and new building systems okay so these are some more technical aspects of this process but basically what you see is that you have to come up with new ways of constructing buildings you have to come up with new ways of designing these buildings you can see that in Auburn as well the amount of technology and heavy equipment that's being used to build those taller buildings is nothing like what it would be if you were building a single story building in the same place so you have to come up with new ways of pumping concrete you know try to imagine the idea of pumping concrete up to the 100th floor of a building okay it's hard to imagine how that could possibly be but in essence new technology has to be created it has to be designed it has to be created it has to be manufactured in order to go higher and every time you go higher you create more building systems and more building systems require taking up more space on every single floor so if you think of the building systems you're talking about staircases elevators escalators you're talking about air conditioning you're talking about plumbing you're talking about electricity internet cables all of that and every time you go up further you know the air conditioning ducts have got to get bigger to pump the air higher as you go higher you need more elevator space in order to get people from the bottom to the top in a reasonable fashion so you can't just do the same old thing you've got to come up with new ways of doing things a couple examples of that a Japanese company came up with a whole new way of doing air conditioning heating instead of big ductworks which would have to be like six feet by six feet wide to pump enough air up to the 100 story they've come up with a way where instead of you know metal vents they've come up with just a little teeny pipe that's one inch in diameter and this pipe doesn't contain cold air or hot air it contains a frigid that takes heat or cold from one place in the building to another so you're not pumping it you know massive amounts of air you're pumping up a small amount of refrigerant and that refrigerant can actually be go from one floor to the next and it can actually go from one side of the building to the other so if you've got one side of the building that's hot and one side of the building that's cold it can actually move cold air from the cold side to cool off the hot side and that's almost free heat basically or free air conditioning so they had to come up with something entirely different and you can imagine going from one floor up to a hundred floors how many elevators you'd need and how much cable would be necessary in order to get that uh elevator uh from the bottom to the top and back again well it turns out that the latest round of buildings in excess of 120 stories uh a company in europe came up with an idea uh that basically they had to uh the cable the steel cable that was going to be necessary to move those elevators was uh weighed 22 000 pounds you get your mind around that and uh so all of the energy that would be necessary to just pull the cable up and down would be enormous and so this european company came up with was tasked with coming up with a new cable which they did which could hold the same and pull the same elevator up 120 stories but only weighed 2000 pounds okay so you had you know scientists and researchers and engineers working to come up with that advanced technologies things that we could do but weren't necessarily efficient to do at the present time but it was necessary to to facilitate these uh record-setting buildings uh and so they expended the resources in order to do that so it's new construction technologies and new building systems and this is the important point record-setting skyscrapers are merely an illustration of what is going on in the economy more broadly so again it's not that skyscrapers cause business cycles that's very important most people have actually got that wrong including some of my fellow economists and people in the media i don't get any respect basically but hopefully you'll understand it it's not that skyscrapers cause business cycles it's just that skyscrapers are an illustration of what's going on in the economy more broadly so yes there's new advanced technologies for construction there's new advanced technologies for building systems but there's new technologies that are being developed in advance that are going on throughout the entire economy but very often we can't see and identify and separate out all of those things okay so for the housing bubble because i had been well prepared doing this research on Richard Cantione and the skyscraper curse and business cycles uh i was able to spot the housing bubble uh for a variety of reasons but one of them was the new record-setting skyscraper in the middle east but there were also other signs of exuberance in the American economy and stock markets being at record levels and and then of course housing prices being extremely high and a lot of housing construction throughout the united states so i started that with article on mesis daily june 4th 2004 is the housing bubble popping or topping august 8th 2005 that's really when the the top was actually uh average housing prices in the united states basically topped out around this week actually and then i published a wrote the economics of the housing bubble and uh that was submitted in june first week of june 2006 it wasn't actually ultimately published until 2009 and then on lou rockwell dot com on 2007 that's lose title i didn't i didn't put that title on there i can't remember what my title was but it really was that with the housing bubble a lot of austrians were very aware of the fact of what was going on and so when we would you know write an article or give a lecture in public people were stunned they couldn't believe it they wanted to know what i'd been smoking and uh you know so there was widespread opposition to even saying there might be a housing bubble going on right now now the new record setting skyscraper um in the making august 7th 2007 on the mesis blog regarding the skyscraper curse and then another lou rockwell dot com article and then another article that was published in the quarterly journal of austrian economics i think this would be something well worth you uh looking up getting a copy and reading because what i do is i report on what the leaders of the federal reserve the main body that sits in washington dc what they were saying to the general public in the year 2007 and basically they thought everything was great in the economy they told us that that they were on the scene they were ever vigilant they were extremely powerful and they had every bit of information you could possibly believe one fellow from the university of chicago who was in charge of regulating financial markets actually said that credit default swaps mortgage back securities and the like were a great new invention that they caused liquidity in the markets and they caused transparency in the markets those are two things that the fed just loves to talk about is transparency which means they show you what they're doing right and liquidity means well the markets are very large and liquid and so every little event is only going to have a small effect on the overall economy and of course those new financial instruments were precisely the reason why the liquidity in the market evaporated and those things were the reason why we didn't have any transparency none of us knew really that there was these trillions of dollars of new assets in the economy where banks would take their loans their mortgages and package them into tranches so that if you take you know say 60 percent of them and say you know this is rated instead of being rated C or B this tranche is now going to be rated triple A and this other tranche will be the first mortgages that will go bad and so we're going to rate this you know unrated or very low rated financial assets and so that was going on behind the scenes within the banks within the Fannie Mae and Freddie Mac and all that they were creating these products and telling us that hey the banks have got nothing but triple A rated stuff when they actually had less you know like triple C rated stuff so when the douche bougie calafi tower renamed the bougie Dubai in honor of the chic of Abu Dhabi one person well that's that's the day that the building officially opened January 8th 2010 and CNN reports one person who wasn't surprised by the economic woes greeting the dedication of the tower was Auburn University economist Mark Thornton he predicted tough times for the emirate two years ago in a blog titled new record Scott skyscraper so I finally got some respect there unfortunately that wasn't going to last too long I I report on the recent literature but that's really not terribly important for our purposes here today it's just that a lot of other people have been writing on this phenomenon most notably an economist in New Jersey named Jason Barr and he is always statistically testing the idea that record setting skyscrapers are a psychological phenomenon it's just that you know the builder gets it and said that why not just go 10 more stories and set a new record so here's more papers by Barr and his co-authors okay and in 2015 he published a paper with two his co-authors skyscraper height and the business cycle separating myth from reality and then other papers they find that therefore height does not predict cycles they move together with temporary deviations due to builder competition or the psycho the psychology of wanting to build the biggest building out there near peaks Lucas's paper which is incorporated into my book well there is a general consensus in favor of the skyscraper curse the idea that lower interest rates coincide with economic expansions higher stock prices and skyscraper construction some authors try to expand this analysis to other variables but there's all there still is a general consensus here regarding the skyscraper curse okay the reporting on my paper lawfuler's paper believes that optimism in the economy leads to this building Barr believes that builder competition social status and ego are the reasons people build these record settings skyscrapers so this brings us to a very important methodological point austrians do not deny psychological factors particularly in business cycles but we expect to be able to explain why the psychology has changed and Keynesians don't explain the change in psychology they just say it's there and then use that as a causal factor austrians use an economic variable the interest rate to show that those low interest rates make everything more profitable at least temporarily so everybody's making money everybody's got a job everybody's filling up their 401k everybody's buying toys boats uh in all sorts of things so yes when artificially low interest rates goose the economic economy people do become more optimistic and more speculative in their economic activities and yes i mean once the crisis starts and everything goes bad everybody's losing money stock prices are going down land prices are going down people are losing their jobs people are going bankrupt it's not surprising that the psychology of people the social mood turns negative so we don't deny psychological factors we try to explain them and the best way to explain social psychology is the interest rate okay so bar et al 2015 he's referring to psychological factors such as builder competition social status and ego and so that for two reasons they say the skyscraper curse doesn't work so one is that psychological factors play a role and the other is date of announcements and date of opening of these record setters does not empirically fit the pattern of changes in GDP growth third he actually showed empirically that sky skyscrapers do not curse but that some third factor or factors causes both skyscrapers and curses you know it's hard to believe that he could write this paper if he had seen my paper and he must have seen it so i have to wonder about uh where he's coming from here first of all as i just mentioned we don't deny psychology we embed it in our Austrian business cycle theory second of all neither andrew lorenz nor myself said that there's any precision with respect to announcement dates construction start dates opening dates completion dates there's a lot of dates surrounding these things but there's nothing that you would expect to be causally related because again the skyscraper curse the skyscraper does not cause the business cycle in fact what it says at the bottom skyscrapers do not curse but some third factor or factors cause both hmm i wonder what that could have been again he's written you know many many papers on the subject and uh has yet to see the light so we tried to change his mind on that we wrote lucas and i wrote a comment for his paper in the same journal and uh they didn't accept it and uh turns out he was one of the referees of the comments unbelievable i feel like someday i'm gonna turn in the mirror and see rodney dangerfield okay so um basically these are all the reasons um by bar's paper is wrong uh basically uh he more or less proved the skyscraper curse by using this granger causality test and and some other econometric uh testing to show that skyscraper curse does not cause the business cycle it's some other third factor so on march 28th 2015 the economist ran the following uh editorial quote if as the skyscraper curse suggests the decision to build the biggest towers happens near the peak of the business cycle then you could use record-breaking projects to predict the future path of gdp however the range of months between the announcement and of the towers and the business cycle peak is large varying from zero to 45 months and only seven of the 14 opened during a downward phase of the business cycle see the chart in other words you cannot accurately forecast a recession or financial panic by looking at either the announcement or the completion of the world's tallest buildings and then this right here is the chart which you know basically shows the skyscraper and the economic crisis in orange lineup pretty darn good as a matter of fact this crisis is right in between the towers these are the world trade towers and sears tower and then of course the oil shock in the beginning of the stagnation of the 1970s and then you go back to the great depression where they have the price of the building and the empire state building there was another record as well here um and uh of course it lines up with the beginning of the great depression this is just the beginning of the great depression um the unemployment rate when the empire state building opened was 25 percent and of course it continued that was 10 or so years and then the panic of 1907 here lines up very well with the singer building 1806 meters in new york opening in 1908 but also the metropolitan life building also set a record at about the same time so that's their that's their proof that there is no skyscraper curse which is um which is hard to believe thank you very much