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.