There are a whole bunch of puzzles related to changes in the economy after 1973:
1. Why did productivity growth slow after 1973?
2. Why did growth in real wages slow after 1973?
3. Why has labor productivity growth in construction stalled, while labor productivity growth in manufacturing has remained quite robust?
Undoubtedly, there are many factors that contribute to these trends. A recent post by Matt Yglesias points to one that has received too little attention. In the period up until 1973, construction of manufactured homes was soaring:
Because the manufactured home competed directly with low-end conventional construction but could be executed more quickly, it started to take over. And as of 1973, the Commerce Department was expecting manufactured housing shipments to continue to rise on the simple logic that productivity was rising in factories but not really on constructive sites.
Yglesias points out that this boom was killed by regulation:
the code explicitly prohibits homes from being transported on a chassis and then placed on a standard chassis-less foundation . . .
Mechanically, the chassis requirement adds costs. Even worse, from a banking standpoint, it means that financing a small manufactured house is more like getting a car loan than getting a mortgage. The chassis is also a target for exclusionary zoning. Towns can (and do) make rules against chassis-mounted homes (or against placing them in certain areas), knowing there’s a federal rule against removing the chassis. So instead of spending the 1980s and 1990s watching small manufactured single-family homes become an increasingly significant player in the non-apartment market, we strangled them.
Meanwhile, productivity in the American construction sector went from stagnant to negative.
Yglesias points out that there is a bill in Congress to repeal this regulation:
Fortunately, there’s a good bill from John Rose (R-TN) and Lou Correa (D-CA) to repeal the chassis requirement.
The manufactured homes regulations are just the tip of the iceberg. The 1970s saw a huge surge in other productivity killing regulations, such as the EPA and OSHA. The various environmental bills ended up hurting the environment in all sorts of ways. Because of requirements such as “environmental impact statements”, it is now far more difficult to build clean infrastructure. It is also much more difficult to build multi-unit housing. Reason magazine points out that a wind farm capable of powering 500,000 New Jersey homes was recently killed by regulation—the Jones Act made it too expensive to build.
It is also more difficult to get permission to build single-family homes, which has also slowed the growth in living standards.
There’s an alternative reality where large firms could achieve enormous economies of scale building manufactured homes, and selling them in all 50 states. But that would require the elimination of the various zoning laws and building codes that distort the market.
I am old enough to remember 1973. We had recently experienced several decades of fast economic growth and fast rising living standards. The public, politicians, and even professional economists began to take for granted the idea that growth was almost limitless. We were so overconfident that we enacted a set of regulations that killed the golden egg-laying goose.
I see parallels to recent events. Decades of low inflation convinced policymakers that reckless stimulus would not trigger high inflation. Those who warned of inflation were likened to the boy who cried wolf. It turns out that bad regulations really can hamper productivity. And excessive monetary and fiscal stimulus really can create high inflation.
PS. Many other factors have slowed the growth in living standards. These include rapid growth in the highly inefficient (and subsidized) health care sector and rapid growth in spending in the highly inefficient (and subsidized) education sector. Labor legislation also led to growth in non-productive “human resource” jobs. Excessive litigation has reduced productivity. The list is endless.
READER COMMENTS
Carl
Dec 7 2023 at 12:51am
Nixon closed the gold window around the same time. Do you rule that out as a factor?
Scott Sumner
Dec 7 2023 at 1:34am
Yes, I rule that out. Monetary policy doesn’t affect long run growth to any significant extent.
Carl
Dec 7 2023 at 8:02pm
On the one hand, I defer to your research on monetary history. On the other, I can’t help wondering why the effects of monetary policy would be quantized. Certainly monetary policy that contributes to hyper-inflation(e.g. present day Venezuela) or severe deflation caused by a drop in AD(e.g. US in the early 1930s) must lead to a drop in productivity. Or am I wrong on that score? If I’m right, where is the threshold between really bad monetary policy that has an effect on productivity and just plain bad monetary policy that doesn’t affect productivity? And, why wouldn’t just plain bad monetary policy being maintained long enough add up to really bad monetary policy?
Scott Sumner
Dec 7 2023 at 9:09pm
Even the early 1930s policy didn’t permanently affect GDP growth–we recovered by the early 1940s. And monetary policy in the decade before 1971 was more inflationary than during the 1990s, 2000s, or 2010s. So I doubt it explains much.
For any single digit inflation rate, the long run effect on productivity will be very small.
JenniferRM
Dec 8 2023 at 7:16pm
I have no PhD in the field, but my working theory is that wage inflation should have kept pace with productivity growth, such that labor participated in the “rising tides life all boats” prosperity.I think fed policy caused a recession any time “inflation” happened, and this also nerfed wage inflation over and over, via active cybernetic control of the economy. Hence the famous gap between productivity and wages when we gave up on metal dollars and switched to nixonbucks?
In makes sense to me that intentionally suppressing unskilled wages via intentional control of the overall price levels would hammer young people early in their career, when they need to learn to cooperate with a manager in exchange for a wage. If young people have a harder economic time it would have predictable effects on birth rates… which we see! And since human hands and human brains are the source of all wealth in this world, we should expect to see material declines relative to expectations… and we do!
In the long run, I’d expect the policy to liquidate the “experience of prosperity” among Americans and that would also depress birth rates, eventually liquidating the laborers themselves, and it would just get worse over time… and it is!
In this theory, you’d have to import laborers to replace the ones who weren’t born because their hypothetical dad was unemployed and their mom didn’t marry him because he was a scrub, and the US has done this, and everyone else is copying us, but now the demographic pyramids EVERYWHERE is inverted and inverting harder each year, and it is getting harder to import laborers to replace the suppressed domestic births…
I’m not actually sure this overall picture is 100% true, but it hangs together beautifully and explains most of “the decline in humanistic vibrancy” everywhere in the world, even though humanity has the tech to trivially build castles and flying cars for everyone (like if nuclear power was legal and home construction was legal and there stopped being a terrible recession every time things started to look bright again). We could have been living in The Jetsons, and instead we got Always Sunny In Philadelphia, and a world full of childless urban scammers.Clearly I’m not an expert here. I have no PhD and that means I can’t be an expert, right?
But I and many people I know basically think that “90% of federal, state, and local policies since 1969 have been fucked, and I want it most of it to go away (including changes to the inheritance tax, I want that to be really really high like it used to be) and instead I want prosperity for everyone normal, and I call myself a YIMBY, and I like bitcoins, and it all sorta goes together probably”.
Is there any coherent positive defense of how the fed operates that should make me stop saying over and over and over that wage inflation is good, and the fed fights it, and therefore the fed is evil?
Surely the experts have written up a good counter-argument, if a good counter-argument is true.
Where is this counter-argument? What am I missing? What should keywords should I search for?
john hare
Dec 7 2023 at 3:26am
This post sings to me working construction. I see so many processes identical to what I saw in 1977 when I started. And as an inventor/entrepreneur I see resistance to new ideas.
Some of the tools and techniques in my company are apparently unique to the area, and if crew age was in the 20s-30s as when I started instead of 40s-60s as it is now, we could be making a serious profit.
I remember mobile homes were an excellent starter home at under $10k. Now they start at $70k and take many months in permitting. To the point that conventional is competitive on the low end.
Dylan
Dec 7 2023 at 10:12am
I’ve been seeing lots of startups in the construction space the last couple of years. Drones for site inspection. Computer vision companies that claim to be able to identify safety problems. Roofing robots… Any of this tech actually making it into the field yet?
robc
Dec 7 2023 at 10:22am
The company I used to work for was using drones to inspect roofs of factories 5+ years ago, so that exists.
And that was in Honduras, where I am sure the safety regulations are less strict than here. And even there, they didnt want someone climbing onto the roof if it could be avoided.
And that company wasnt cutting edge on anything, so that had to be well established by that point.
Dylan
Dec 8 2023 at 8:56am
Yeah, I figured that drones had been used in some capacity for a while. The companies I spoke with were using drones in more advanced ways. One had drones that could be used indoors, and one of the markets they were targeting was commercial construction, like high rises. Others were using drones with CV to try and spot problems earlier. I was new to the field, but there seemed to be lots of activity going into construction. Was just curious if any of this was sneaking in and showing up in better productivity yet.
john hare
Dec 7 2023 at 5:54pm
Concrete block work and concrete flatwork is almost identical with tools and techniques from the 70s. Better concrete trucks and pumps on the high end, but stagnation below that. Local carpentry and several other trades seem to be in the same situation.
I can visualize improvements possible, and am in the process of trying to get some of them operating. One of my problems is that the experienced people resist to a degree, and trainees aren’t showing up.
spencer
Dec 7 2023 at 8:38am
The long run neutrality of money is fallacious.
According to Corwin D. Edwards, professor of economics [Edwards attended Oxford University in England on a Rhodes scholarship and earned a doctorate in economics at Cornell University. He spent a year teaching at Cambridge University in England in 1932. He taught at New York University in 1954, the Chicago School from 1955-1963, the University of Virginia, and the University of Oregon from 1963-1971.] – – the U.S. Golden Age in Capitalism was driven by “increased money velocity which financed about two-thirds of a growing GNP, while the increase in the actual quantity of money has finance only one-third.”
robc
Dec 7 2023 at 8:52am
The crash in manufactured homes leads the recession by a bit, was the crash enough to cause and/or significantly contribute to the recession?
Killing off a fast growing sector seems like a good way to crash GDP.
MarkW
Dec 7 2023 at 9:25am
the code explicitly prohibits homes from being transported on a chassis and then placed on a standard chassis-less foundation . . .
I’m all for getting rid of the ridiculous chassis regulations, but there must be a bit more to the story that this. There are many vendors (look on Youtube) that sell manufactured homes intended to be installed on standard foundations. These manufactured homes are shipped in kits or modules, but assembling them on site require far less labor than a traditional stick-built house. And yet these kinds of manufactured homes are not taking the market by storm either.
Scott Sumner
Dec 7 2023 at 12:13pm
The chassis rule is just one of many regulations that killed this industry. Yglesias’s article discusses some others
spencer
Dec 7 2023 at 9:32am
As the economic syllogism posits:
-#1) “Savings require prompt utilization if the circuit flow of funds is to be maintained and deflationary effects avoided”…
-#2) ”The growth of commercial bank-held time “savings” deposits shrinks aggregate demand and therefore produces adverse effects on gDp”…
-#3) ”The stoppage in the flow of funds, which is an inexorable part of time-deposit banking, would tend to have a longer-term debilitating effect on demands, particularly the demands for capital goods” (CAPEX)
Knut P. Heen
Dec 7 2023 at 10:04am
The formation of OPEC and the energy crisis happened in 1973.
Todd Ramsey
Dec 7 2023 at 10:35am
Spot on, and far too neglected in discussions of the decline in productivity.
steve
Dec 7 2023 at 4:51pm
I would think the regulation argument is mixed. We were actually already pretty heavily regulated in the 70s and before. Carter engaged in pretty significant deregulation and then Reagan also did a little bit (and got the credit). I can buy that they had some effect but the very heavy regulations of the 50s and 60s still left us with rapid productivity growth. I think the energy crisis was a factor as noted above and also at that point the rest of the world had recovered from WW2 and our period of growth absent competition was over.
Steve
Todd Ramsey
Dec 8 2023 at 9:53am
The Code of Federal Regulations expanded from about 25,000 pages in 1962 to 135,000 pages in 1994. Every page required some amount of effort be expended understanding and complying with regulations, resulting in more labor input for unchanged output. Furthermore, many regulations resulted in tasks being performed in a more labor-intensive (less productive) way.
It is possible, as a matter of opinion, to believe that the results were “mixed” in that the benefits of regulations outweighed the costs. However, it is fact that regulations necessitate increased labor hours without any corresponding increase in output: a decline in productivity.
steve
Dec 8 2023 at 11:02am
Take beer as an example. Before the deregulation under Carter we had less than 100 breweries in the US. We had one regulation that forbid home brewing. That one regulation was taken away. Since then we have had many regulations added to home and craft brewing. The end result? We have many cities that individually have over 100 breweries. One blunt, broad regulation can have a lot more effect than smaller, targeted ones.
https://reason.com/2023/02/22/jimmy-carter-sparked-a-craft-beer-explosion-by-getting-government-out-of-the-way/
Steve
robc
Dec 8 2023 at 3:35pm
On the other hand, US beer consumption ( and I would also assume production, as exports are a tiny fraction), peaked right around 1981-82.
More breweries doesnt mean more productivity. Carter getting rid of one regulation did expand the number of small breweries in existence, but the many smaller regulations are at least part of the reason for the overall decline in productivity.
Todd Ramsey
Dec 9 2023 at 9:44am
Accepting what you say at face value, “That one regulation was taken away” is the essence of my argument.
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