"Here’s something odd: We’re getting worse at construction.
Think of the technology we have today that we didn’t in the 1970s. The new
generations of power tools and computer modeling and teleconferencing and
advanced machinery and prefab materials and global shipping. You’d think we
could build much more, much faster, for less money, than in the past. But we
can’t. Or, at least, we don’t.
Throughout the 1950s and 1960s, productivity in the
construction sector — how much more could be done given the same number of
workers and machines and land — grew faster than productivity in the rest of
the economy. Then, around 1970, it began to fall, even as economywide
productivity kept rising. Today, the divergence is truly wild. A construction
worker in 2020 produced less than a construction worker in 1970, at least
according to the official statistics. Contrast that with the economy overall,
where labor productivity rose by 290 percent between 1950 and 2020, or to the
manufacturing sector, which saw a stunning ninefold increase in productivity.
In the piquantly titled “The Strange and Awful Path of
Productivity in the U.S. Construction Sector,” Austan Goolsbee, the newly
appointed chairman of the Chicago Federal Reserve and the former chairman of
the Council of Economic Advisers under President Barack Obama, and Chad
Syverson, an economist at the University of Chicago’s Booth School of Business,
set out to uncover whether this is all just a trick of statistics, and if not,
what has gone wrong.
Their paper works by process of elimination. First, they
look at whether there has been less capital investment in construction than
elsewhere in the economy. Nope.
Then they examine whether we’re mismeasuring construction —
which would mean that sometime starting in the 1970s we began overestimating
the labor or materials the construction industry used or underestimating how
much it built with them, or both. They test this a few different ways, but the
most interesting is to look at how many houses were built per worker, adjusted
for square footage. There, the trend looks more flat than negative, and maybe
slightly positive for single-family homes, but it’s far from bringing
construction productivity anywhere near level with the rest of the economy.
Adding weight to the idea that this isn’t a quirk of
American record keeping is that the slowdown is international. The Organization
for Economic Cooperation and Development tracked construction productivity in
29 countries between 1996 and 2019. In 40 percent of them, productivity fell during
that time. Syverson sent me the underlying data, and the only countries in
which productivity rose at more than two percentage points per year were the
Slovak Republic, Latvia, Estonia and Lithuania — poorer countries rebuilding
after the crackup of the Soviet Union and the Soviet bloc.
So if it’s not underinvestment and it’s not a statistical
illusion, what is it? Here, Goolsbee and Syverson seem stumped. The Wharton
School of Business, for example, tracks building regulations across cities, and
Goolsbee and Syverson tested regulatory burden against construction
productivity. There was a slight relationship, but nothing impressive. They
looked at which states saw the highest and lowest rates of productivity
increases. The worst performers, Syverson said, were Alaska, Idaho, Wyoming,
Delaware and Michigan. The relative stars were Georgia, North Carolina, South
Carolina, Virginia and Colorado. That doesn’t lend itself to a clean story of
red states and blue states, or urban states and rural states.
Syverson, for one, is skeptical that there’s any single
answer. “I don’t know how you get 50 years of decline without having multiple
problems,” he told me. “Everyone has their pet theory. But everyone has a
different pet.”
But Goolsbee and Syverson are economists. Maybe the cause is
obvious to industry insiders. I called Ed Zarenski, who worked in construction,
largely as an estimator, for more than 40 years and now runs the market
analysis firm Construction Analytics. Zarenski, who tracks constructions costs
and business volume closely, agrees that there has been a slowdown. And he
agrees that there is no single cause for it. But when he thinks back on what
the construction industry looked like when he began his career, and what it
looks like now, the anecdotes tumble out.
“When I first started back in the ’70s, you did one estimate
on a project,” he told me. “You put it in, you got your bid, and if you won,
you began construction. By the time I left in 2014, you did three estimates for
every job before you even put the bid in. That becomes part of the cost of the
job.”
Or take the job site, he said. “The safety features on jobs
when I started in the industry were not even noticeable. Safety on a job today
is incredibly different. You don’t walk across a beam, you walk around on a
pathway marked for you to stay safe so you don’t fall off the side of the
building. By the time I retired, one thing that took place every day, on every
job site, was a mandatory 15 minutes of calisthenics before you start your
workday. That’s totally nonproductive, but it led to fewer work site injuries
during the day.”
And behind all that is paperwork, and paperwork, and more
paperwork. “The work we do today takes hundreds more people in the office to
track and bring to completion,” he told me. “The level of reporting that you
have to send to the government, to the insurance companies, to the owner, to
show you’re meeting all the requirements on the job site, all of that has
increased. And so the number of people you need to produce that has increased.”
Zarenski’s point isn’t that any of this is bad. If 15
minutes of daily calisthenics helps prevent a lifetime of back problems, it’s
well worth it. The problem is that there’s more work at every level of the
process, from the analyses done in the back office to the rules followed
on-site.
Talking to Syverson and Zarenski left me thinking about
Mancur Olson’s famous 1982 book, “The Rise and Decline of Nations.” Olson’s
book begins with its own productivity mystery: After World War II, Germany and
Japan’s cities were bombed out, their people dispirited, their economies
wrecked. The question of the age, Olson writes, was “whether these abjectly
defeated societies would be able to provide themselves with even the rudiments
of survival.” Instead, West Germany and Japan thrived, growing far faster in
that era than Britain, which had emerged victorious from the war.
Olson, an economist, was known for seminal work on the
conditions under which groups would, and would not, cooperate. Here, he turned
it into a theory for why nations often stagnate amid affluence and thrive in
the aftermath of chaos.
His key insight is that it’s not easy for groups capable of
collective action to emerge. But once they do emerge, they tend to stick
around. And so, Olson suggests, “if organizations and collusions for collective
action usually emerge only in favorable circumstances and develop strength over
time, a stable society will see more organization for collective action as time
passes.”
The more organized groups you have, Olson thinks, the more
fights over distribution you’ll have, the more lobbying and complex regulation
you’ll have, the more intergroup bargaining and negotiation you’ll have, the
more complexity you’ll have. Or as he puts it, “special-interest organizations
and collusions reduce efficiency and aggregate income in the societies in which
they operate and make political life more divisive.”
“The Rise and Decline of Nations” is a classic economics
text, but that’s not to say it’s correct. Japan, for instance, has gone from
economic poster child to growth laggard. Olson’s argument would seem to imply
that the United States, with its geographic protection against invasion and its
long history of continuity, would be far more sclerotic than Germany, but
that’s not the case. And Olson has no real answer for why so few countries that
fall into crisis subsequently grow into affluence.
But Olson’s biggest miss, in my view, is his assumption that
groups organize around redistribution. Olson almost completely missed the
post-materialist turn in the politics of affluent countries. Some groups
organize to get more of the pie, but many others organize to protect the
environment, or to increase safety standards, or to preserve the feel of their
communities, or to express their values. And much of this is good. It’s a gift
of affluence, not a disease of affluence.
But Olson, who died in 1998, is right when he tells us that
this gift comes with costs. And those costs concentrate in the areas of the
economy in which the number of groups that have to be consulted mount. From
this perspective, the productivity woes in the construction industry don’t seem
so puzzling. It’s relatively easy to build things that exist only in computer
code. It’s harder, but manageable, to manipulate matter within the four walls
of a factory. When you construct a new building or subway tunnel or highway,
you have to navigate neighbors and communities and existing roads and emergency
access vehicles and politicians and beloved views of the park and the
possibility of earthquakes and on and on. Construction may well be the industry
with the most exposure to Olson’s thesis. And since Olson’s thesis is about
affluent countries generally, it fits the international data, too.
I ran this argument by Zarenski. As I finished, he told me
that I couldn’t see it over the phone, but he was nodding his head up and down
enthusiastically. “There are so many people who want to have some say over a
project,” he said. “You have to meet so many parking spaces, per unit. It needs
to be this far back from the sight lines. You have to use this much reclaimed
water. You didn’t have 30 people sitting in a hearing room for the approval of a
permit 40 years ago.”
Some of this is expressed through regulation. Anyone who has
tracked housing construction in high-income and low-income areas knows that
power operates informally, too. There’s a reason so much recent construction in
Washington, D.C., has happened in the city’s Southwest, rather than in
Georgetown.
When richer residents want something stopped, they know how
to organize — and they often already have the organizations, to say nothing of
the lobbyists and access, needed to stop it.
This, Syverson said, was closest to his view on the
construction slowdown, though he didn’t know how to test it against the data.
“There are a million veto points,” he said. “There are a lot of mouths at the
trough that need to be fed to get anything started or done. So many people can
gum up the works.”
This also helps explain the curious finding that ends
Syverson and Goolsbee’s paper. After looking at the states with the highest
construction productivity, they note that the more productive states don’t seem
to gain market share in the construction industry. That doesn’t make much sense
if you assume that the difficulties of construction are primarily the
organization of manpower and materials. It makes more sense if you assume that
the frictions are in navigating local regulations, community considerations,
neighbors’ qualms and politicians’ interests.
In the cities where I’ve covered politics closely,
developers are fixtures in the local political scene. They have to be.
“My feeling is the guys that know the system have a much
easier time getting through the system,” Zarenski said. “They know ahead of
time what they have to come into the party with and how to speak to those
people and how to satisfy them, and so it goes a lot smoother for them.” But a
thorough knowledge of one city or state, and establishing relationships with
its key stakeholders and decision makers, won’t necessarily translate to
success in another.
How do we get construction productivity rising again? I have
no idea. Construction should become safer, more respectful of community
concerns, and more environmentally sustainable as countries become richer and
less desperate for growth. But it’s also true that many of the problems America
faces — from decarbonization to affordable housing — would be a lot easier to
solve if we were getting better at building, rather than worse."
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