Gary Becker on Productivity – Homebuilder Applications?

September 14, 2009

by Scott Sambucci

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The Becker-Posner Blog draws attention to the role of innovation and new technology in overcoming the current recessionary environment. Gary Becker, Nobel Prize laureate for Economics, suggests that innovation will lead the economy back to positive ground.

I’m calling attention to Becker’s post because it directly relates to some perspectives I offered on economic output and its affect on the homebuilding industry. In summary, I suggested that homebuilding industry has structural impediments to developing new technologies for increased productivity gains.  These impediments will hamper the industry’s ability to grow out of the recession as quickly as other market segments.

As Becker writes:

Typically, measured productivity falls during serious recessions because of excess capacity of capital and the many employed workers who are underutilized. Basic arithmetic indicates that for any given fall in output, the greater the rise in measured labor productivity, the greater the fall in employment, and the greater the increase in unemployment.
Unemployment is typically a lagging indicator in the sense that it usually begins to fall only months after output has started to increase again. Since I expect output to rise only a little in the US during the third quarter that will be over at the end of September, unemployment should continue to rise for a while, almost certainly surpassing 10% at its peak. However, if, as I expect, the growth in productivity will continue into the future at a good pace because of the many innovations and inventions coming on line, that will lead to greater, not a lesser, growth in employment. For at some point, the economics of the positive relation between productivity and employment becomes more powerful than the short-term arithmetic negative relation that occurs during recessions.

Typically, measured productivity falls during serious recessions because of excess capacity of capital and the many employed workers who are underutilized. Basic arithmetic indicates that for any given fall in output, the greater the rise in measured labor productivity, the greater the fall in employment, and the greater the increase in unemployment.

Unemployment is typically a lagging indicator in the sense that it usually begins to fall only months after output has started to increase again. Since I expect output to rise only a little in the US during the third quarter that will be over at the end of September, unemployment should continue to rise for a while, almost certainly surpassing 10% at its peak. However, if, as I expect, the growth in productivity will continue into the future at a good pace because of the many innovations and inventions coming on line, that will lead to greater, not a lesser, growth in employment. For at some point, the economics of the positive relation between productivity and employment becomes more powerful than the short-term arithmetic negative relation that occurs during recessions.

Becker points out that the diffusion of new technology and innovation is precisely what will lead the economy of out of recession.  Here’s the conundrum – innovation is a key factor in economic growth but the homebuilding industry may lack the ability to implement.

I found a report released in 2005 by the Department of Housing and Urban Development – “Overcoming Barriers To Innovation in the Home Building Industry.”  In this study, HUD suggests that the homebuilding industry suffered from several key risks that inhibit innovation, including fragmentation, education factors, and risk management. While the report is a few years old now, I think it’s reasonable to suggest that the challenges presented in the study have not been wholly addressed by the homebuilding industry.

(Of course the report also states that “Market volatility is not a risk factor for housing innovation since financing innovations have dampened the variability of housing starts across the United States.”  Not exactly proven true since 2005.)

In any case – just a wanted to share the economic argument for innovation as presented by Gary Becker and point out the HUD paper for those interested in reviewing it. Commments and counterpoints are always welcome.  If I’ve missed an update to the HUD report or rebuttles that dispute its claims, I’d be interested to hearing about those as well.

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