A study came out recently from University of Chicago economists Austan Goolsbee and Chad Syverson showing that productivity in the construction sector has actually decreased over the past several decades, unlike nearly every other sector of the economy. This is a cause célèbre among the "just build more" crowd. There are even entire Web sites devoted to trying to understand the reasons why it happened and how to “fix” the problem.
Recently Ezra Klein summarized the paper in the New York Times. Klein summarizes the paper this way:
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.
The slowdown in productivity could be due to underinvestment in construction, but they looked at that and found that it's not the case—investment consistently kept going up. They also speculated that it's a measurement error. But they found that this is not likely either. One reason why it's unlikely to be a measurement error is that the slowdown is not confined only to the United States, but is also seen across developed countries:
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...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.
As I noted previously, this slowdown across national borders indicates that it's unlikely that regulation alone is the cause of the housing shortage or building slowdown. Every country has a different regulatory environment, so it's hard to believe that every country in the world simultaneously began regulating construction too heavily, not to mention every locality inside the United States as well. In fact, the economists tried to correlate construction productivity slowdowns with the regulatory atmosphere and came up short:
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.
Klein wisely realizes that economists are useless in answering any real questions about the world, and decides to consult people actually working in the industry. He calls up a construction estimator who tells him the following:
“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.”
Klein notes that building things out in the real world is a lot different that cranking things out of a factory or writing a bunch of code in virtual world of the computer:
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.
Klein misses some of the ramifications of this issue. Buildings are built outdoors. Even prefabricated components have to be installed outdoors. Climate change will affect this process, and in some places that will have negative consequences. For example, it’s already anticipated that it will be too hot to work outdoors for much of the summer in the Sun Belt—ironically the place where most U.S. construction has been concentrated for the last 50 years. Floods and wildfires will present similar hazards. That’s not really an issue for manufacturers or computer programmers.
Klein ponders the work of the late economist Mancur Olson. Based on Olson's ideas, he considers the possibility that maybe there are just too many stakeholders and vested interests in the construction process today who must be appeased and mollified at every step of the process, and this has only grown over time. Armed with this hypothesis, he once again consults his friend in the construction industry, who agrees:
“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.”
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...
https://archive.is/GLbrD#selection-843.0-847.561
There are a couple of points I want to make here. First and foremost, it confirms the point I made over and over again in my previous two posts: housing is not a commodity like other commodities. That last paragraph especially drives the point home.
To reiterate what it says: if buildings were really just another commodity, you would expect businesses which construct them more efficiently to out-compete their rivals in other states. That's what happens with ordinary products. If I can make cars or appliances or frozen pizzas twice as efficiently as my competitor, I can lower my price and claim market share. But it doesn't work like that in the construction industry because buildings aren't widgets rolling off an assembly line that sit on a shelf. It's not like making cars or furniture or appliances or clothing. It’s unique every time, and specific to place. Treating buildings like any other commodity and expecting the same market dynamics to apply is a complete and utter fiction, and always has been.
It's refreshing to see a diehard neoliberal like Klein acknowledge this fact (even if it's not stated explicitly). But of course he can't bring himself to fully articulate the ramifications of this. Instead he just kind of shrugs his shoulders. But the implication is profound—if houses aren't just another commodity, than it's clear that impersonal market dynamics alone cannot—and should not—be relied upon to solve the housing shortage. This is anathema to neoliberals, so it goes unsaid. It's economic wrongthink.
As for the second point concerning how much more complex the construction process has become, how much red tape there is to navigate and how many hoops you have to jump through; well, as a construction industry professional, I have to agree with that assessment. But, of course, this just once again confirms the same point: buildings (including houses) aren't just like other commodities.
Once you comprehend this idea, it’s clear why productivity isn't rising in the construction sector like it is in other market sectors, and why that shouldn't come as a surprise. The fact that is is a surprise to economists is a sad reflection on the mental myopia and bounded thinking of today's neoliberal economists (note that the study came out of the University of Chicago—the crucible of neoliberalism).
The building process and buildings themselves are a lot more complicated than they used to be. Navigating the complex regulatory environment is a mind-boggling and baffling task for everyone involved, even for professionals like me who've been doing it for almost their entire career. Every architect I've worked with has felt the same way.
Klein invokes Mancur Olson (a favorite of neoliberals), but reading the article I'm much more reminded of the work of Joseph Tainter. Tainter's thesis is that civilizations gradually develop more and more complexity over time. They develop this complexity to solve various problems. It works in the beginning, but eventually more complexity gets you less and less results—less bang for your buck, so to speak. Eventually it even leads to negative consequences. That is, complexity brings diminishing returns over time.
But it's important to note that Tainter's doesn’t blame this on some singular villain or scapegoat. Rather it’s a self-directed cultural process that unfolds over time and has affected numerous cultures throughout history.
I think that's a reasonable explanation for the construction productivity stagnation. But if you think it's confined to that sector alone, you're missing the picture. I was thinking about that when I heard this statement from Art Berman on Nate Hagens' podcast:
"I've been in the oil business now for over forty years, and what I see is that this business has gotten increasingly complex, just like all other human systems. And what that has meant is that oil is harder to find, and when we do find it, it is much more complicated or complex—they're not the same thing—to produce, and of course that has implications for cost."
"But about halfway through my career, which is to say, in the Eighties, the industry became incredibly risk averse. In other words, it started getting a lot of pressure from investors, so we stopped taking risk. That ultimately led to the shale plays, which were viewed as a no-risk proposition: the oil's there, all you have to do is drill it..."
"The problem obviously with that is twofold: 1.) These are incredibly complicated reservoirs to drill and produce; and 2.) Once you're done with the shale plays, you haven't been exploring for 25 or 30 years, so what are you going to do?"
What's that got to do with construction? Berman's is talking about oil specifically, but as he notes, just about every process in our society has gotten considerably more complex, and construction is no exception. Berman notes the difference between complicated and complex. According to a quick search, “Complicated problems can be hard to solve, but they are addressable with rules and recipes. Complex problems involve too many unknowns and too many interrelated factors to reduce to rules and processes.”
Based on that definition, I would classify construction as both complicated and complex. Building construction is just about the most complicated activity we undertake as a society on a regular basis—I liken it to filmmaking or space exploration. Of course such an activity has to be highly regulated. Like it or not, a new building really does affect everyone around it. It has a big impact on everything from the traffic congestion, to the environment, to property values, to the density and character of the neighborhood.
Buildings are also a lot more complicated today than in the past. Buildings have multiple overlapping systems—structural, thermal, mechanical piping, air circulation, water delivery and disposal, natural gas, electricity and grounding, telecommunications, waterproofing, fire protection, landscaping and erosion control. Every building—except for maybe the most simple vernacular ones—is in effect, a "living building" with lungs, bones, nerves, a circulatory system, and waste products. If we were building the exact same buildings as we were sixty-plus years ago with no insulation and massive boilers with only windows for ventilation and no parking or handicapped provisions, we probably would be more efficient like other sectors of the economy. But we couldn't do that even if we wanted to.
The aversion to risk Berman mentions is also applicable to construction. As the complexity of modern construction has gone up, risk has risen in tandem. That's also different than a product which sits on a shelf, and this will affect productivity too. An enormous amount of time and effort is dedicated to dealing with risks and covering your ass when the shit hits the fan. Everyone wants to protect themselves, especially when there are lots of unknowns as there are with, for example, existing conditions. As a result, the construction process is much more drawn out than it used to be, and requires much more documentation. That’s just a feature of our economy, not some imaginary bureaucratic villian.
In other words, complexity is built into the construction process and we can't wish it away. Everyone wants to look for scapegoats here, but I don't think there are any. Of course, libertarians think that if we can just strip away all the regulations and red tape caused by evil government bureaucrats, that will solve all our problems—in other words, that we can turn back the clock. But that would just cause another set of problems that we would have to deal with. Reality always pushes back.
Another way of putting this is that you can't externalize the costs of the building process the way you can with other industries. Therefore, the costs are much more incorporated in the process and the externalities are much more apparent—and therefore easier to regulate—than in other industries. The makers of iPhones, for example, don't have to worry about the child labor and environmental destruction caused by cobalt mines in Africa, and plastic manufacturers don't have to worry about the forever chemicals they’re putting in our bloodsteams. If they did, would they be as “efficient?”
In fact, high energy costs and the regulatory atmosphere are related. One of the reasons buildings are a lot more complicated nowadays is that we've got to make sure they are insulated, airtight, and much more energy efficient than buildings of yore. We are also more concerned about the environmental impacts—and for good reason. We're forced to extensively document all of this by the authorities for compliance. That takes time. This was less of an issue in the past when energy was cheap and population was smaller, and it’s sure to only become increasingly strict as time goes on.
An extreme example is the LEED process, a voluntary protocol designed to produce more environmentally-friendly “green” buildings. I've never personally worked on compliance for a LEED project, but I am a LEED accredited professional, so I can tell you that the amount of information collection and documentation required for both the designer and the contractor is daunting. As just a single data point: all of the construction waste disposal must be documented by the contractor on a LEED project in order to determine how much waste was diverted from landfills. Nobody cared much about this before 1970.
Similarly, the accessibility requirements are much more onerous, but we as a society have decided that this is socially necessary. Buildings are also a hell of a lot safer. Sprinkler systems that were rare fifty years ago are now virtually standard. Far fewer people die in buildings than in the past, and when they do, it’s usually an older house that was not up to today’s standards. Plus we know about more issues that affect buildings and occupants like like radon, mold, and indoor air quality. Structural requirements are also more strict. If you want to know what happens without proper enforcement, take a look at what happened to people in Turkey when the earthquake hit. As the saying goes, “codes are written in blood.”
Turkey earthquake: Why did so many buildings collapse? (BBC News)
As buildings become more complicated, it takes ever more regulation and more inspection to ensure compliance, even as the ability of governments to do so is hampered by budget cuts and reduced tax revenue, which slows down the process. People need to remember that building codes are complex because buildings themselves are more complex and the expectations for them (safety, comfort, accessiblity, energy and water efficiency, etc.) are much higher than at any time in the past. As already noted, buildings built before 1970 (when productivity slowed down and energy costs increased) could not be built today.
While the design and construction process has benefited from advanced technology, it seems like increasing demands and complexity have eaten up all the productivity gains in something of a rebound effect. We used to marvel at the fact that the computer tools we were using were unimaginable to architects of past generations, yet it seemed like we were working harder than ever. The reason was because the demands of owners, the amount of documentation required, and last-minute changes just kept going up in tandem. In the old days, once the pencils hit the vellum, that was pretty much the end of it, and everything else would have to get solved in the field. Once again, the fear of risk (architects are one of the most sued professions) has forced down productivity (and profits).
This is sure to get worse as current industry professionals retire while the cohort coming in behind them is much smaller due to demographic changes. I'm already seeing increasing turnover and newer staff who lack the tacit knowledge and experience of their predecessors. Tacit knowledge is important, as Michael Polanyi pointed out. I don’t see it as anyone's fault, however, except perhaps the industry itself. They just took workers for granted due to the huge demographic windfall of the Baby Boom, got lazy and complacent, and failed to put in place appropriate mechanisms to properly train and equip the next generation. That’s true at all levels of the construction field, from architects to engineers to project managers to estimators to the guys working in the field. This will only become more acute in the future, I’m afraid.
I don't want to go into much more detail here because that would run to book length and bore readers (more than they already are). So to sum up, in reality the slowdown in construction productivity should not have been a surprise to anyone. It's only a surprise to simple-minded economists who see everything through the lens of idealized markets described in textbooks, even fictitious commodities like housing. Buildings have an impact on everything around them, unlike widgets or computer software. Productivity is going down because complexity is increasing society-wide, and lot of other industries can externalize their costs in ways that construction cannot. A lot of regulations exist because we live in a more complex society in a multitude of ways than even a few decades ago. We also expect more out of our buildings, including energy conservation. This process is under it's own control and not caused by any singular "villain" who can be identified, therefore it cannot be rectified, only dealt with, as is the case with so many of our other societal problems.