The Dollar and the Tower Get in Bed

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Economist Mark Lawrence created the Skyscraper Index in 1999. That index showed the correlation between economic crashes and tall buildings. The correlation can be unnerving, especially for those in the architecture profession, such as myself. But the past 100 years show strong evidence for Lawrence – almost every time the tallest building in the world is built, there is an economic crash to follow. 1907 brought the Singer Building and the Panic of 1907, 1931 brought the Empire State Building and the Great Depression, the early 1970s brought the Sears Tower and seventies stagflation, and the late nineties brought the Petronas Towers in Kuala Lumpur and the meltdown in the Asian markets. Today is no different. We have the tallest building in the world going up, the Burj Dubai, at the same time that the economy is coming down. The suggestion is that while city skylines are often seen as a symbol of a city's prosperity, they are also an implication of depression, each of the highest peaks likely representing a crash.

Skylines are like line graphs.

Mark Thornton describes why this is so in an article which appeared in the Quarterly Journal of Austrian Economics, "Skyscrapers and Business Cycles." When the government-regulated central bank sets artificially low interest rates and creates money at will, the cheap dollars lead to more borrowing. Thornton describes three factors which turn these cheap dollars into tall buildings. 1. Cheap money leads to more investment in land, therefore driving up land prices and requiring taller buildings to recoup the cost. 2. Cheap money drives new investment in advanced technologies which aid in making the world's next tallest building possible: advanced structural systems, more efficient mechanical equipment, etc. 3. Cheap money leads to larger investment in companies, and consequently, companies grow and require larger buildings.

The boom caused by these factors has local indicators as well. It is not only the tallest building in the world, the Burj Dubai, which is indicative. Each locale has its own, smaller-scaled version of the boom. Chicago is currently putting up its tallest tower, which will be the tallest in the U.S. Being based in Portland, Oregon, I have witnessed Portland's own version of the boom. It is building its tallest tower in the last 25 years, among many others.

At first sight, this does not look bad: tall buildings, growing companies, and advanced technologies are all signs of a prospering economy. But it is not a healthy economy – the supposed prosperity came from false signals of regulated rates and money creation by the Fed. Malinvestment always follows closely behind such false signals, which trips the boom.

But architecture firms, like all businesses, have no option but to participate in the boom, lest they be left by the wayside as their competitors take all the jobs. They are making decisions to stay competitive, which is exactly what they should be doing. They are being smart. Businesses are not to be blamed for that. But rather the false signals of the Federal Reserve are to be blamed, for they foster a euphoria which encourages the building.

Despite the euphoria, people are intelligent. I recently spoke to a woman who runs an arts group for at-risk youth in Portland, and, knowing my line of work, she said, "Why so many towers? Can't they see the empty office space all over the city?"  She was right. Oregon's flagship newspaper, The Oregonian, recently reported that the Portland-area vacancy rate in the second quarter of 2008 was 11.3%, more than double what a healthy rate is considered to be. Similar things are happening across the country.

Condominiums are empty too. Portland State University released their quarterly real estate report recently, showing condo vacancies almost twice as high, and condo sale times twice as long, as they were last year. Such can be expected when an excess of condos have come on the market the past several years, including the tallest all-residential building in Portland's history, the John Ross Tower. It lost 45 committed buyers after it opened, and it has closed only five sales in 2008. Many other towers, unable to sell units, have switched to apartments as they are being built.

For the sake of the architecture profession, and for the sake of the economy as a whole, I hope these trends do not continue in Portland, or anywhere else.  But history does not have kind things to say about what the Bush/Obama administration is doing right now. The current inflationary bailouts and mortgage protection policies mimic the inflationary practices and price-fixing of the 1930s.  As we know from Murray Rothbard's America's Great Depression, it was government intervention which prolonged that horrible decade, because artificially-set prices restrained the economy by skewing the entire economic picture, which disallowed investments and purchases from operating at real prices. The economy continued to struggle. This has been known to Austrians such as Rothbard for a long time, and recently similar research made its way into UCLA. Harold L. Cole and Lee E. Ohanian, economists at that school, did a study in 2004 which concluded that Franklin Roosevelt’s New Deal prolonged the Great Depression by seven years. Ohanian puts it well: "High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns. As we’ve seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market’s self-correcting forces.” In other words, the economy was not helped by the New Deal, so it would be encouraging if we had something different coming from the White House in January. But unfortunately, Barack Obama is already being compared to FDR – rightfully so, as his plans sound like FDR, and it looks like the same power structure will be in place in Washington when he takes office. After all, Obama had a Goldman Sachs-backed campaign, the U.S. Treasury is Goldman Sachs-headed (and Obama has chosen another insider as secretary), he is taking advice from yet another ex-Goldman Sachs CEO, and he never addresses the critical issue of the gold-less Federal Reserve.

Rem Koolhaas, though not an economist, unknowingly helps us in understanding the prevailing economic theory. He is arguably the most important architect today, and for certain is the most influential thinker on the architectural scene. His manifesto, Delirious New York, still tops the pile of architecture theory books, 30 years after it was published.

Even if architects have not read it, it is no matter. It depicts where we are today, what Koolhaas calls the "Culture of Congestion." Manhattan is the poster-child, a dense metropolis pressed into an island, repeatedly stacking multiple copies of itself, towers shooting up, floor upon floor upon floor. Our goals as a society are crammed onto the streets and into these towers, fighting for space and rubbing against one another. There are multiple and opposed ideals inside the tower – a non-profit and an oil company on opposite sides of a six-inch wall. There is no thesis. Unlike a building such as the Notre Dame Cathedral in Paris, whose spires and soaring arches define it as a church, and therefore create a relationship between the form of the church and what is inside, the skyscraper loses that relationship. There is no tie between the face of the tower and what is behind it, as there is just a mass of shifting tenants. So instead of the tower becoming a symbol of what is inside, Koolhaas notes that the tower becomes, through its sheer size, a self-referential symbol, a symbol of itself.

The dollar today has a similar fate. It has no thesis, no backing, no symbol other than itself, and it too falls victim to the culture of congestion. We should make a distinction between Koolhaas' congestion and the dollar's. Koolhaas rejoices in his congestion, a congestion with which I sympathize, because it offers continual and stunning juxtapositions. But the reason why it works in the world of architecture is because architecture must bow to the laws of physics. Even in an intensely congested city, the worst you can do is put things close to each other – a thousand tenants in a skyscraper, a thousand buildings on an island. Commuters bump into each other on the street, and physics resolves the issue: two people cannot occupy the same space at once. But in banking, these laws no longer apply. Dollars can occupy two spaces at once due to fractional-reserve practices – banking's culture of congestion. Dollars bump into each other on asset sheets, problematic because logically one dollar bill cannot occupy two bank accounts at the same time. Yet this is what is allowed today, and it exacerbates the already dangerous false signals sent by the Fed. It also cuts away further the relationship the dollar has with what is supposed to be behind it. Perhaps it is not a coincidence that Koolhaas published his book in 1978, just seven short years after the U.S. severed any tie to gold, and turned the dollar into a symbol of itself.

There are few signs, if any, that this thinking will stop. Both major-party presidential candidates in the recent election enthusiastically supported the bailout, and Obama continues to talk of more, and prolonged, intervention. On a November 7th press conference, he claimed that he would push through more economic stimulus legislation as his first act in the White House, if it is not done before he gets there. To quote him, "More action is undoubtedly going to be needed…The one thing I can say with certainty is that we are going to need to see a stimulus package either before or after inauguration." He is calling for more regulation and more fiat money. This will only make the problems worse, as we learned from Rothbard's analysis of Hoover, and from Austrian theory in general.

Obama's promise of more fiat money will continue to devalue the dollar. So if his message is "Change," that word likely refers to some amount of coins which a dollar will be worth tomorrow.  People criticized him for being vague about the slogan. To be more precise, perhaps it should have been "Eighty-Two Cents." But a better change would be back the dollar with gold again. It does not look like this is going to happen.

Instead, the crises will fell both the dollar and the towers it built.

The cover of Koolhaas' Delirious New York is iconic – an image of the Empire State Building and the Chrysler Building, lying in bed together. Yet I think it more appropriate if the dollar was the Empire's bed mate. For I assume they would get along, as they both continue to share a common idea, and might whisper it in the other's ear as they fall asleep:

"I am symbol of myself."

December 5, 2008