Booms, Busts, and Construction Cranes
I've traveled to many cities the past 12 months for work and play, and if there was one sight viewed virtually every place I went it was the high-rise construction crane. They are everywhere, all over the world: from housing projects under construction in Jerusalem to casino resorts underway in Macao.
Even in mega-sprawl Phoenix, cranes are in high demand commanding rents of $25,000 to $65,000 per day, according to the Arizona Republic. Those looking to buy one must wait 18 months. Over 60 cranes dot the Las Vegas skyline with two-dozen on MGM's CityCenter project alone.
A recent article in the Las Vegas Review Journal dubbed the high-rise crane Nevada's state bird. At the same time, while in Beijing, our guide quipped that the national bird of China is officially the Red-Crowned Crane, but that it should really be the construction crane. According to the Beijing Lonely Planet City Guide there are 2,000 high-rise buildings under construction in the city. It looked to be all of that and then some.
However, the tallest building we saw has been the tallest in the world since its completion in 2004 — the Taipei 101 in downtown Taipei, Taiwan. Taipei 101 will lose its tallest title when the 164-floor Burj Dubai is completed in 2009. James Grant wrote in The Trouble With Prosperity, "Skyscrapers were the architectural expression of optimism." Indeed, standing on the 88th-floor observation deck of the Jin Mao Tower in Shanghai, any capitalist gets an exhilarating rush, looking down upon over 5,000 high-rise buildings (all built over the past two decades) in a teeming city of 18 million people. But, the building under construction next door, the Shanghai World Financial Center, must be looked up at – it will be 101 floors and features a distinctive hole near the top to allow "dragons to pass through." That building is finally scheduled for completion next year after the foundation stone was laid over a decade ago, on August 27, 1997.
Another mega-skyscraper that is under construction is the 102-floor Union Square Phase 7 building in Hong Kong, due for completion in 2010. Another six buildings, each over 90 stories are in the planning stages to be built in Russia, Korea, Taiwan and China.
So what does all this skyscraper building tell us? Mark Thornton of the Mises Institute examined the connection between the completion of the next tallest-building and the business cycle in "Skyscrapers And Business Cycles" which appeared in the Spring 2005 edition of The Quarterly Journal of Austrian Economics. Using economist Andrew Lawrence's skyscraper index, combined with Austrian Business Cycle Theory, Thornton finds that the skyscraper index is a good predictor of economic crisis and "that both the cause of skyscrapers reaching new heights and severe business cycles are related to instability in debt financing…"
The first skyscraper cycle began in 1904 in New York when the 47-story Singer Building and 50-story Metropolitan Life buildings began construction. This building boom was quickly followed by the Panic of 1907. In the late 1920's with Wall Street booming three record-setting towers — 40 Wall Street, Chrysler Building, and the Empire State Building — were started, only to be completed after the stock market crash of 1929 and the onset of the Great Depression.
The third cycle began with the commencement of construction of the Sears Tower in Chicago in 1970 and the World Trade Center in New York, which broke ground in 1966. By the time these projects were completed the US economy was mired in stagflation.
The 88-story Petronas Tower in Kuala Lumpur, features twin "cosmic pillars" spiraling endlessly towards the heavens. Petronas was completed in 1997, the same year as the Asian Financial Crisis.
These four cycles, Thornton points out, share common characteristics: A period of cheap, easy money, leading to stock market booms and increases in capital expenditures. This new capital leads to technological advances and employment growth. During the booms, the next tallest building is planned and construction begins. But, prior to completion, negative information leads to market panics and the value of capital goods falls.
The coordinated and constant creation of liquidity by the world's central banks, especially since the Greenspan era, has led to not only more contenders for the tallest building title all over the world, but also frenzied high-rise construction everywhere.
Thornton's work shows us that before the construction party ends, the economy wakes up with a bad hangover. Better stock up on aspirin, there is a lot of pain coming.