The Skyscraper Curse Th e Mises Institute dedicates this volume to all of its generous donors and wishes to thank these Patrons, in particular: Benefactor Mr. and Mrs. Gary J. Turpanjian Patrons Anonymous, Andrew S. Cofrin, Conant Family Foundation Christopher Engl, Jason Fane, Larry R. Gies, Jeff rey Harding, Arthur L. Loeb Mr. and Mrs. William Lowndes III, Brian E. Millsap, David B. Stern Donors Anonymous, Dr. John Bartel, Chris Becraft Richard N. Berger, Aaron Book, Edward Bowen, Remy Demarest Karin Domrowski, Jeff ery M. Doty, Peter J. Durfee Dr. Robert B. Ekelund, In Memory of Connie Th ornton Bill Eaton, Mr. and Mrs. John B. Estill, Donna and Willard Fischer Charles F. Hanes, Herbert L. Hansen, Adam W. Hogan Juliana and Hunter Hastings, Allen and Micah Houtz Albert L. Hunecke, Jr., Jim Klingler, Paul Libis Dr. Antonio A. Lloréns-Rivera, Mike and Jana Machaskee Joseph Edward Paul Melville, Matthew Miller David Nolan, Rafael A. Perez-Mera, MD Drs. Th omas W. Phillips and Leonora B. Phillips Margaret P. Reed, In Memory of Th omas S. Reed II, Th omas S. Ross Dr. Murray Sabrin, Henri Etel Skinner Carlton M. Smith, Murry K. Stegelmann, Dirck W. Storm Zachary Tatum, Joe Vierra, Mark Walker Brian J. Wilton, Mr. and Mrs. Walter F. Woodul III The Skyscraper Curse And How Austrian Economists Predicted Every Major Economic Crisis of the Last Century M ARK THORNTON M ISESI NSTITUTE AUBURN, ALABAMA Published 2018 by the Mises Institute. Th is work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 4.0 International License. http://creativecommons.org/licenses/by-nc-nd/4.0/ Mises Institute 518 West Magnolia Ave. Auburn, Ala. 36832 mises.org hardback edition: 978-1-61016-683-6 paperback edition: 978-1-61016-684-3 large print edition: 978-1-61016-685-0 epub edition: 978-1-61016-688-1 Contents Foreword by Th omas E. Woods, Jr. 9 Introduction. 13 Section 1: Th e Skyscraper Curse Chapter 1: What Is the Skyscraper Curse?. 25 Chapter 2: Th e History of the Skyscraper Curse Reexamined . 31 Chapter 3: Do You Have a Th eory?. 43 Chapter 4: How to Get Milk . 55 Chapter 5: Cantillon Eff ects. 59 Chapter 6: Cantillon Eff ects in Skyscrapers. 65 Chapter 7: Th e Curse Misses New York. Is Auburn, Alabama, Next? . 77 Chapter 8: When Will the Next Skyscraper Curse Come? . 81 Chapter 9: It Is Not the Skyscraper’s Fault. 85 Chapter 10: Should I Stay, or Should I Go? . 95 5 6 The Skyscraper Curse Chapter 11: Razorbacks and Wolverines . .101 Chapter 12: Th e Curse of the Federal Reserve . .105 Section 2: And How Austrian Economists Predicted Every Major Economic Crisis of the Last 100 Years Chapter 13: Who Predicted the Great Depression? . .111 Chapter 14: Th e “New Economists” and the Depression of the 1970s . .121 Chapter 15: Th e Return of the Austrians . .131 Chapter 16: Bubble-Bust in Japan. .137 Chapter 17: Who Predicted the Bubble? Who Predicted the Crash? . .145 Bubble Predictions. 148 Conclusions. 165 Appendix: Some Other Predictions. 169 Chapter 18: “Bull” Market? . .173 Chapter 19: Housing: Too Good To Be True. .177 More Greenspan. 178 Th e Housing Bubble. 179 Price Infl ation Follows Monetary Infl ation . 181 Th e Dirty Secret . 182 Do Housing Bubbles Burst? . 183 Chapter 20: Th e Economics of Housing Bubbles . .185 What Causes Housing Bubbles?. 186 What Goes Up ... 195 ... Must Come Down . 201 Summary and Conclusions. 203 Postscript — August 8, 2009. 204 Chapter 21: Is the Housing Bubble Popping? . .207 Chapter 22: Making Depressions Great Again . .211 Contents 7 Chapter 23: String Th eories . .215 Chapter 24: What Is Wrong with ABCT? . .221 Criticisms of the Hydraulic Version of ABCT . 223 Th e Rational-Expectations Critique — Why Can’t Entrepreneurs Learn? . 225 What about Nineteenth-Century Panics?. 226 What about Robert Murphy’s Prediction of Double-Digit Infl ation? . 226 Chapter 25: Summary and Conclusion: End the Fed. .229 Bibliography. .241 Index. 261 Foreword n the wake of the fi nancial crisis of 2008, the economics profession suff ered a blow to what reputation it had. But unlike most of his col- Ileagues, Mark Th ornton was vindicated by 2008. Mark has been a voice of sanity at times when the wild interventions of the Federal Reserve have caused otherwise sensible people to lose their minds. One rule of thumb I’ve adopted is: whenever the idea that the business cycle may have been tamed forever starts to become mainstream, the bust is around the corner. Aft er reading this book, you’ll see why. Mark discusses the very diff er- ent records of Irving Fisher and Ludwig von Mises in the 1920s, with the former saying (in late 1929!) that stock prices had reached a “permanently high plateau” and Mises warning that all the artifi cial credit creation of the world’s central banks meant a reckoning was coming. At the end of the 1960s, presidential economic adviser Arthur Okun announced that wise fi scal and monetary policy was making boom and bust a thing of the past. One month aft er his book on the subject was released, the United States was offi cially in recession. Th e dot-com bubble of the 1990s continued the pattern. Federal Reserve chairman Alan Greenspan even speculated that we had entered an age in which booms no longer necessarily had to be followed by busts. I trust you know what happened next. 9 10 The Skyscraper Curse Th e most recent fi nancial crisis, which was connected to an especially destructive housing bubble, yielded the same kind of crazy commentary: why, real estate prices never fall! I trust you know what happened next. In fact, Mark Th ornton was one of a handful of economists to warn — as early as 2004 — of a housing bubble and its inevitable consequence. Th at was a lonely position to adopt in those days. Nobody wanted to hear the words “unsustainable” or “bubble” when buying multiple properties and sitting on them seemed to be a path to certain riches. Of course, Mark was the voice that would have done them the most good had they both- ered to listen, because they might thereby have limited their exposure to the bust that was surely coming. But when all so-called respectable voices are assuring everyone that all is well, it is the wise man who appears to be the crank. Now had Mark been known for nothing more than being a conscien- tious historian of these earlier business cycles and an accurate prognosti- cator of the housing bust and fi nancial crisis, that would be ample reason to respect him as a scholar worthy of our attention and respect. But of course Mark has done much more than this. In this book, for instance, you will encounter Mark’s work on the so-called “skyscraper curse.” I shall not here disclose Mark’s thesis on the matter; the author of a foreword ought to know his place, and stealing the author’s thunder is rather unbecoming. For now, I can say this: although a correlation between the setting of new skyscraper records on the one hand and plunges into recession on the other had been noted by certain writers, the connection had been gen- erally dismissed as little more than a curious coincidence. Mark, on the other hand, has shown how the two phenomena are connected — not that tall skyscrapers cause the business cycle, of course, but rather that they embody numerous features of the boom period described by Austrian business cycle theory. Austrian business cycle theory, in turn, is probably the most impor- tant piece of economic information and understanding for Americans and indeed the world to understand right now. Again I shall leave the full exposition to Mark. For now, what matters is that according to economists of the Austrian school, the familiar pattern of economic boom and bust is not an inherent feature of the market economy, but instead the product of intervention into the economy by the monetary authority. When the cen- tral bank lowers interest rates below what they would have reached on the Foreword 11 market, it sets in motion a series of responses by investors and consumers that will prove to be incompatible. Th e result is the recession, which is the economy’s return to health: the economy’s unsustainable confi guration is unwound, and resources (including labor) are reallocated to lines of pro- duction that make sense in terms of resource availability and consumer preferences. In the pages that follow, Mark explains the theory, applies it to various historical (and present) cases, and rebuts the most common objections. In short, this collection serves the valuable purpose of defending the market economy against the conventional view that freedom has failed us and we need still more controls. We had plenty of rules and bureaucrats on the eve of the fi nancial crisis. A lot of good that did us. Pretty much none of them saw any problems on the horizon, and the sheafs of rules and regulations were aimed in the wrong direction: while the private sector operated in the equivalent of a Kafk a novel, the Federal Reserve was able to carry out its mischief unimpeded. Here’s a crazy thought: maybe this time we might consider a real free market, with sound money and market interest rates, and abolish the giant bubble machine once and for all. Read Mark Th ornton and you’ll entertain this and other forbidden thoughts. Th omas E. Woods, Jr.