Skip to main content

a009d10346f86f380ea0751a_pa3026c.jpg

Built to Bust

In 2007, it was reasonable to expect that construction spending in the US would be depressed for some time to come. But the extent of the subsequent fall-off in construction spending relative to long-run trends has dwarfed the level of excess spending in 2003-2006.

BERKELEY – In the mid-2000’s, the United States had a construction boom. From 2003-2006, annual construction spending rose to a level well above its long-run trend. Thus, by the start of 2007, the US was, in essence, overbuilt: about $300 billion in excess of the long-run trend in construction spending.

When these buildings were constructed, they were expected to more than pay for themselves. But their profitability depended on two shaky foundations: a permanent fall in long-term risky real interest rates, and permanent optimism about real estate as an asset class. Both foundations collapsed.

By 2007, therefore, it was reasonable to expect that construction spending in the US would be depressed for some time to come. Since cumulative construction spending was $300 billion above trend, it would have to run $300 billion below trend over a number of years in order to return to balance.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Subscribe

Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.

https://prosyn.org/E3WY3wD;
  1. benami155_ Ilia Yefimovichpicture alliance via Getty Images_netanyahu Ilia Yefimovich/Picture Alliance via Getty Images

    The Last Days of Netanyahu?

    Shlomo Ben-Ami

    In Israel's recent parliamentary election, voters stopped Prime Minister Binyamin Netanyahu's leadership of the country toward xenophobic theocracy. But Israel now faces a period of political deadlock, and it remains to be seen whether Netanyahu really will be politically sidelined.

    2
  2. oneill66_getty images_world Getty Images

    The Return of Fiscal Policy

    Jim O'Neill

    With interest rates at record lows and global growth set to continue decelerating, there has rarely been a better time for governments to invest in infrastructure and other sources of long-term productivity growth. The only question is whether policymakers in Germany and elsewhere will seize the opportunity now staring them in the face.

    1

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated Cookie policy, Privacy policy and Terms & Conditions