The Skyscraper Curse: And How Austrian Economists Predicted Every Major Economic Crisis of the Last Century

As of November 2013, it was official. New York City had won the title of having the nation’s tallest structure. The heated controversy between New York and Chicago was settled when the Council of Tall Buildings and Urban Habitat, based in Chicago, decided that the 408-foot spire sitting atop One World Trade Center could be included in the total height of the building.

The revised height of 1,776 feet made One World Trade Center the tallest structure in the United States. We are told that One WTC is more than a building. It both serves as a monument to those murdered on 9/11 and honors our Declaration of Independence. Not to disrespect those who died, but this “record” is a sham because the useable, productive height of the building is only 1,368 feet. The remaining 400-odd foot difference is just uninhabitable window dressing.

This dubious record should nonetheless be a kind of warning to us that the skyscraper curse, the forerunner of economic crisis, is lurking near.

The Shard Building, in London, broke ground in 2009 and was completed in 2012, becoming the tallest building in Europe. This was a clear signal of the European economic crisis, the PIIIGS fiscal disaster — in Portugal, Italy, Ireland, Iceland, Greece, and Spain — and the grave and ongoing concerns over the long run viability of the euro. Japan joined the fraternity with the Tokyo Skytree broadcasting tower, which was completed in 2012 and is now the tallest structure in Japan. Not to be outdone, China set a new national skyscraper record with the Shanghai Tower, which opened in 2014. China also broke ground but suspended construction on Sky City tower in part because of fear of the skyscraper curse. It  too would have set a new world record.

World-record-breaking skyscrapers are a signal of economic crisis. Like world-record-breaking art prices, such as the $142 million selling price of a painting by Francis Bacon of his friend Lucian Freud at Christie’s in New York in 2013, such records are signs of economic excess. Just remember that such excess usually occurs in markets manipulated by central banks.

These are the spectacular results associated with the skyscraper curse, but you also might be able to see signs of it at work in small-town America. For example, there are no true skyscrapers being built in Auburn, Alabama, home of Auburn University and the Mises Institute. But there has been a great deal of building big and tall for this small city in eastern Alabama.

Luxury student-apartment building leads the way, followed by high-end restaurants and retail space. Recently two student-apartment buildings were torn down to make room for yet bigger buildings. The city government is also spending truckloads of money on street improvements and a state-of-the-art high school. More recently, old single-floor buildings have been demolished downtown to make room for multistory high density apartments.

What are people thinking? Don’t they realize we are in one of the weakest recoveries on record and headed for another recession? Has no one in Auburn realized there is an enormous amount of student debt and that the job market for holders of college degrees is weak? Is it greedy bankers and construction companies run amuck? Is it out-of-control architects and chefs that are to blame? Or is it the spoiled rich college kids who demand luxury apartments and locally grown veggies at the high-end restaurants they frequent?

The rush to build bigger, taller, and more luxurious buildings actually has little to do with any of these groups, but it has divided us as a city. On the one hand, there are many people upset because all this construction is changing “the loveliest village on the plains.” Local residents are seeing “Keep Auburn Lovely: Save Our Village” signs popping up all over town. They oppose the building spree.

On the other hand, construction workers, cement dealers, building-supply companies, and heavy-equipment operators must love the fast-paced business and full-time jobs with overtime. They love it while heavy dump trucks and cement trucks rush their loads through town.

The problem actually starts in Washington, DC, in an unremarkable building at Twentieth Street and Constitution Avenue NW that houses the Board of Governors of the Federal Reserve. The board, along with the president of the New York Fed, and a rotating selection of regional Federal Reserve Bank presidents, forms the Fed’s Open Market Committee (FOMC), which sets the policy targeting the interest rate that banks charge other banks for very short-term loans — the federal funds rate.

When the Federal Reserve’s Open Market Committee sets the target lower, it sets off a tendency for interest rates to fall across the economy. When it raises the target for the federal funds rate, interest rates tend to rise across the economy. For the last seven and a half plus years they have kept the target under a quarter of 1 percent. This type of policy has never been pursued before. This explains the ultralow rates on your savings account and home mortgage over the last several years.

It also explains the luxury-building mania. When the Federal Reserve first lowered rates, bankers who were burned by bad mortgages after the collapse of the housing bubble, along with luxury game-day condo builders, would not take the bait. Once bitten, twice shy. However, eventually low interest rates become too tempting to resist, especially as new bankers and construction companies come onto the scene.

Lower rates have several effects, including less saving and more spending. Low rates also increase stock market prices because lower rates increase the value of corporations, reduce the cost of borrowing, and induce individuals to move money from bank accounts to stock market accounts and to be more fully invested in stocks. When the policy is successful at increasing stock prices, people reduce savings further and spend more on luxury goods. Lower rates also boost borrowing and investment.

If you think that the combination of reduced savings and increased luxury spending sounds contradictory and dangerous, you are correct.

In any case, lower interest rates also tend to increase the price of land, particularly in the central business district. In contrast, higher interest rates encourage land and real estate owners to part with their properties at lower prices. Higher land prices make development deals harder to generate profits. The solution is to build more intensively and to make buildings taller. A $1 million piece of land could be made profitable by building just one story, but if that same lot is $2 million then you might have to build three stories to make it profitable. A one-story building is relatively inexpensive to build compared to a three-story building, which requires stairways, elevators, and sturdier construction techniques. However, the three-story building also produces two and a half times more rentable space.

Is it better to just build something, even if it is the wrong something? Well, even if interest rates could stay near zero forever, it would still mean we are deploying our resources incorrectly. The things we are building will not be as profitable as originally projected, and the excess capacity means that long-existing projects will also become less profitable. In other words, eventually, their economic values will be less than the amount invested in them. It will also make it more difficult to pay back the loans, especially if you reduce savings and increase your borrowing and luxury spending.

These circumstances are in no one’s long-term best interest. But apparently, eliminating the cause in Washington is currently beyond our collective ability.