Is There Such A Thing As A Skyscraper Curse

Elizabeth Boyle

Auburn University

Lucas M Engelhardt

Kent State University – Stark; Ludwig von Mises Institute

Mark Thornton

Ludwig von Mises Institute

October 26, 2015

Abstract:

There is an emerging literature on the subject of skyscrapers and business cycles. Lawrence (1999) first noticed the correlation between important changes in the economy and the building of record-breaking skyscrapers. Thornton (2005) established a theoretical link between the two phenomena. Several papers have subsequently examined the impact of skyscraper building on the economy and in particular on the role of psychological factors on the building of record-breaking skyscrapers. Not surprisingly, most people scoff at this notion and Barr et al (2015) presents extensive empirical evidence that skyscrapers do not cause changes in GDP, but precisely the opposite. Here we show what the skyscraper curse actually is and show that the entire empirical literature on this subject supports the existence of a skyscraper curse, including most of Barr et al. (2015).

Is There Such A Thing As A Skyscraper Curse – Introduction

The Economist magazine recently (March 28) published an article that is the title of this paper. They came to the conclusion that there should be great doubt about the existence of the skyscraper curse. “In other words, you cannot accurately forecast a recession or financial panic by looking at either the announcement or the completion dates of the world’s tallest building.” The Economist article is just the latest installment of the increasing fascination of the financial and news media with the skyscraper curse.

There has also been an increasing attraction of economists to the relationship of skyscraper building and economic crises. Several economists have examined the data and tried to make sense of the suggested correlation to determine the underlying causes and relationships. This all began with Andrew Lawrence (1999), the founder of the skyscraper index who coined the phrase “skyscraper curse.” He believed building booms were the result of easy credit conditions and expansionary monetary policy. Lawrence focuses on “over investment, monetary expansion and speculation” as the basis of building record-breaking skyscrapers and that when this pattern cannot be sustained the economy falls into economic crisis. Thornton (2005) provides both a theoretical model for the skyscraper curse and additional evidence in support of the curse.

In contrast, another tread in this literature is based on the idea that skyscraper building is rational and that skyscraper construction does not cause economic crises. In particular Barr et al (2015) presents extensive empirical evidence that skyscraper construction is rational and that skyscraper construction does not cause changes in GDP. The argument presented here is that all the empirical evidence in this literature actually confirms the same thing: the existence of the skyscraper curse. This in turn provides for a more complete understanding of just what the skyscraper curse means, as well as its cause.

History and Debate

Lawrence (1999) bases his correlation on an examination of the record-breaking skyscrapers that occurred over the previous 100 years. He begins with the Singer Building and the Metropolitan Life Building which were completed in 1908 and 1909 respectively. These new records occurred concurrently with the Panic of 1907. He notes that there is a remarkably accurate relation between the two variables over the next century, with the exception of the Woolworth Building which was completed in 1913.

Lawrence’s article and research was the jumping off point for many economists to follow. Thornton (2005) shows how artificial interest rates1 link skyscraper height and economic crises. Artificially low interest rates and sustained easy credit conditions allow for both a booming economy and record-breaking skyscrapers. The causal link is based on three different Cantillon effects involving artificial induced structural changes that occur throughout the economy. The three effects work together to both cause an abnormally large expansion in the economy and the building of record-breaking skyscrapers.

The first Cantillon effect is the impact of the rate of interest on the value of land and the cost of capital. A lower interest rate causes land values to increase, especially in high-value areas such as metropolitan cities. Lower rates increase land prices due to, among other things, the decreased opportunity cost of owning land. Higher land prices lead builders to build taller, more capital intensive structures in order to better maximize profits. This is a well known through theory and experience (Capozza and Li 1994) and this effect is also confirmed empirically in some of the papers reviewed below.

The second Cantillon effect from artificially low interest rates is an increase in the size and scope of firms. A lower cost of capital encourages firms to grow in size and to become more capital intensive and to take advantage of new technologies and economies of scale. In particular, it encourages firms to engage in more roundabout production processes. An example of adopting a more roundabout production process would be when local dairy firms are replaced by regional dairy firms. As local firms are replaced by regional firms and regional firms are replaced by national and international firm, there will be an increased demand for office space for corporate headquarters, especially in central business districts of major metropolitan cities. Empirical support for this effect can be seen in Harford (2005) who shows that merger waves are dependent on “sufficient overall capital liquidity” and that such waves do not occur in the absence of this liquidity.

Skyscraper Curse

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