Housing and Jobs

I’ve never been a big  fan of home construction as a driver of economic growth.  Way back in 2005 I wrote a piece for BusinessWeek entitled “The Cost of All Those McMansions” :

whether prices level out, crash, or even keep going up, the housing boom is already having pernicious economic effects. The real problem: the incredible amount of resources — workers, materials, and money — being sucked into home construction and renovation….Residential investment has become a black hole, absorbing a staggering 5.8% of gross domestic product….. housing-driven growth, while creating jobs and lifting wealth, is also distorting the economy, benefiting low-tech commodity sectors rather than the high-tech industries at the heart of America’s competitive strength.

(I know it’s chintzy to self-quote, but please forgive me for now).

Housing construction, although it counts as investment in government statistics, has much less positive impact on long-term growth than other types of investment.

However,   spending on home construction does have one virtue–most of the money goes to domestically-produced goods and services. A calculation by two BLS economists, Carl Chentrens and Arthur Andreassen  (in  a  paper they presented at the 2009 Federal Forecasters Conference) suggests that only 7% of spending on residential investment ‘leaks’ into imports. By contrast, they find that about 21% of nonresidential investment leaks overseas (that makes sense, since so much business investment goes for IT and transportation equipment, much of which has a heavy import component).

That makes new home construction a much better generator of domestic jobs, in the short-run, than other types of spending.   For example, American consumers went shopping for more clothing in the first quarter of 2010. But that uptick of consumer activity sure as shooting didn’t create many clothing production jobs in the U.S.

So if we want job growth–and we do, we do–it’s  going to be tough to get a job recovery without at least some improvement in the housing market.

Comments

  1. CompEng says:

    But at what cost? I remember listening to Schiller early this year on NPR saying that government subsidies were propping up much of the the housing market, and so the correct response was more government subsidies. That just seems wrong. With roads and bridges we at least get something for our money that benefits all of us.

    There are so many services out there: it would be interesting if some were dedicated to topics of innovation and competitiveness: figuring out where the jobs will be.

  2. The other area has been healthcare but how much of this voluntary and how much involuntary? Would we be spending anything like what we do if we paid for it out of pocket? And while domestic markets face less competition internationally, they don’t pay as well as markets that do compete successfully internationally. Yet there are few such markets, finance probably being the leading one.

  3. Isn’t a large part of the problem with the housing sector that they were building homes in the wrong places? I mean, there really aren’t any good economic reasons to build more homes in Arizona, Nevada, Florida, and ex-ex-urban L.A. But if it were actually possible to build homes within N.Y.C., or within L.A., or San Francisco, such that more workers could benefit from the network effects of those regional economies, that would significantly boost long term productivity growth.

  4. It was indeed such a burst of construction activity that countless people who were lured to partake of the jobs will surely never again see similar demand for their skills, so that is yet another point against construction as it was played. It is a shame that higher efficiency standards were not imposed, so there remains some future opportunity in rectifying that, albeit sometimes prohibitively difficult in comparison to integrated.

    Even health care reform that could have aimed toward single payer as a cost reducer would have tended to reduce employment, not what we need right now.

    I find it very difficult to conjure up the jobs that are needed within the economic structure that we have. Certainly, any suggestion that ever greater productivity stemming from technology is anything but good, in spite of its workforce punishment, would be viewed as regressive at best.

    I remain fixated on the Deloitte “shift index” report that showed steadily declining return on assets for nearly every U.S. sector since the 1960′s (health care being a notable and unsurprising exception). Returns have become so low as to presume that the explanation must be that consumer/employee wage constraint prevents originally projected returns from being generated.

    Though I have trouble believing that business as a whole has no concept of such a possibility, I can believe it just from one personal experience. An MBA market analyst acquaintance cleared the path to her promotion to vice president when she proved that the price reductions granted at the demand of the sales force resulted in a revenue reduction exactly equal to the price reduction — it seemed a revelation to management that demand can be constrained by factors other than price, such as market saturation. All this leaves me with the sense that today’s business management is looking in the wrong places for market revitalization. Perhaps they are content with young markets that probably do respond to price with profitable volume increases. No one company, after all, can fix the U.S. structural problem.

    It is too easy to suggest greater profit sharing with employees as the key, because it would necessarily be inflationary and it is not clear that other counter inflationary forces would emerge. In lieu of business’ refusal or inability to share productivity gains with the workforce in order to pump their ability to provide greater returns, the only easy solution that comes to mind to address unemployment is reducing the work week — 30 hours perhaps? I can imagine the howling no matter how it might be deployed, but at some point, something has to be done. Meanwhile, let’s hope that somebody is working on something that will enable individuals rather than institutions to ratchet up their own net income generation.

  5. A lot of buyers in the exurbs couldn’t even afford them and costs in the exurbs ran about $100/sf, in the city upwards of $1000/sf. So much for it being cheaper to build up.

  6. The Fifth Horseman says:

    The solution is simple, except that both our government and citizens are too stupid and shortsighted to see it :

    a) Grant greencards to 5 million SKILLED workers. Again, SKILLED. That many are in the 6-year greencard process as it is, so most of this 5 million would be people who already live and work here, but are still in the tortuous process.

    b) Proceed to build another 2 million houses.

    Problems solved. US dominance in knowledge-based industries will sustain, social security will be saved, and jobs will remain here.

    • Ad infinitum? 20 households provide on the average 1 retail job and small fractions of logistics, transportation, advertising, management, etc. jobs. The ratio of transportation workers to retail workers is about 1/5. Since health care is as big as retail, assume very roughly 1 health care worker per retail worker. Five million new workers will leave 5 million more unemployed unless they break away and become independently entrepreneurial. If they set up 5 million independent households, they could be expected to support about 250,000 retail jobs, maybe 250,000 health care industry jobs, about 50,000 transportation jobs, and some miscellaneous others. The net job loss, if nothing else changes, would be over 4 million.

    • Interpolating from this article,

      http://www.richmondgov.com/Stimulus/Beckstoffers.aspx

      2 million new houses would require 5 million man-years of employment, that is, 5 million people would be employed for 1 year, or 1 million for 5 years.

  7. The Fifth Horseman says:

    LAO wrote :

    the only easy solution that comes to mind to address unemployment is reducing the work week — 30 hours perhaps?

    My god. Do you have ANY idea why European socialism failed so miserably? Do you have ANY idea what it is to be an entrepreneur?

    I am stunned that some people can be this stupid.

    • Let’s see. Take one of the European nations with the least resources and per capita income, suffering the largest economic blow of any EU nation with the burning of 250,000 acres of productive vegetation, take from them the ability to independently manage their currency, and condemn all of Europe for any socially responsible schemes. How do you explain away the outstanding performance, exceeding that of the U.S. by most measures prior to and during the global meltdown, of the social democracies, i.e. Scandinavia?

  8. The Fifth Horseman says:

    LAO,

    I can imagine the howling no matter how it might be deployed, but at some point, something has to be done.

    The ‘something’ that has to be done is to lay off a major portion of all useless, overpaid public sector workers.

    There is no reason the government shoud be any larger than it was in 1960. No program devised after 1960 is any good, so all post-1960 government expansions have to be repealed, and the number of Government workers should be the same, in relation to the total population, as it was then.

    • If I recall correctly, the number of federal government workers has not increased significantly for some time — 10 years at least, I believe. A great deal of the tremendous increase in spending has apparently been achieved primarily through outsourcing to private companies. I’ve not been able to find their numbers, but from the cost, I would assume that it is substantial, and I have seen reports indicating that their cost tends to rise. If you push them onto the unemployment roles, this would not create an obvious solution to unemployment.

  9. Mike Reardon says:

    I‘m not at all in favor of a haircut for the main Gov Agencies supporting constructions, but if Congress is moves only a little against the Administration, there a strong chance, that Fannie and Freddie will have funding issues raised in the next Congress after the coming Nov. election. It’s would not be a plus for home ownership.

    It would put home lending in the hands of banking. And stand alone bank standards for home loans have to be more restrictive. It looks to me like home prices still have possible deflationary issues.

    Also currency and everything, foreign investors may stay out of bundled US montages as investments for sometime going forward. They can’t be seen as a safety investment, now.

Trackbacks

  1. [...] Michael Mandel evaluates home construction as an investment for long-term economic growth and a generator of new jobs: “So if we want job growth — and we do, we do — it’s  going to be tough to get a job recovery without at least some improvement in the housing market.” [...]

  2. [...] on its face is contradicted by evidence that homebuilding is a superior driver of employment. Michael Mandel pointed this out in a post earlier this week: Housing construction, although it counts as investment [...]

  3. [...] increase U.S. imports very much, then construction is a great area to subsidize. Lindmark cites Mike Mandel in support of his argument, which is always a good sign, but it’s worth noting that Mike [...]

  4. [...] increase U.S. imports very much, then construction is a great area to subsidize. Lindmark cites Mike Mandel in support of his argument, which is always a good sign, but it’s worth noting that Mike [...]

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