Since the US 18-year business cycle went into depression in 2008, and the projected next depression is forecast for 2026, it is worthwhile to check on the status of the US economy as we approach the midpoint. In the last cycle phase, 1990 to 2008, there was a midpoint recession in 2001, but this time around, no half-time recession is imminent. The recovery has been sluggish, commodity prices are down, and interest rates have been kept low, so that the elements of recession are not yet in place. Real estate prices have recovered, but the speculative boom still looms in the future.

The two variables to watch during the real estate cycle are construction and selling prices. The construction of commercial real estate in the USA is booming so much that the cost of glass for office buildings has been rising rapidly, as manufacturers that had reduced production are now ramping output back up. The Associated Builders and Contractors reports that nonresidential construction was up by 8.8 percent during the past year. Total construction spending rose to over $1 trillion, the highest level since 2008, according to the U.S. Census Bureau. In New York City, the construction of new office space is at a 25-year high. Construction employment has also been rising nationwide.

According to the American Institute of Architects Consensus Construction Forecast Panel, spending on buildings is projected to increase almost 9 percent in 2015. The forecast for 2016 is for an 8 percent rise in nonresidential construction. Growth in institutional spending will increase to 6 percent, with gains expected in both education and healthcare. With rising rental prices, much of the growth in residential construction has been in apartment buildings, but job growth, income gains, and looser lending restrictions, will induce many renters to buy houses.

The downturn in the economy of China has rattled the stock markets in the US and Europe, but there is little effect on the real economies of both areas. Real estate construction is more important than Greek debt and a reduction in Chinese growth. Indeed the end of the real estate construction boom in China will be good for the US economy, as the trend in China moves towards more consumption, which provides a greater market for American and European exports.

The downturn in the economy of China has rattled the stock markets in the US and Europe, but there is little effect on the real economies of both areas. Real estate construction is more important than Greek debt and a reduction in Chinese growth. Indeed the end of the real estate construction boom in China will be good for the US economy, as the trend in China moves towards more consumption, which provides a greater market for American and European exports.

According to the Summary of Commentary on Current Economic Conditions published by the Federal Reserve Board (the Beige Book) in July 2015, home sales have increased and house prices have risen in most districts. Vacancies have been declining, and lending has gone up.

The higher cost of regulations, such as the 2010 Dodd-Frank Act that increased reporting requirements for financial firms, hindered the recovery by imposing costs greater than benefits. This Act imposed 64 million paperwork hours on financial firms. The Affordable Care Act also imposed higher taxes on employers, producers of medical devices, drugs, and medical insurance. As of 2014, the Obama Administration issued over 150 new major rules.

One reason why the ever increasing cost of taxes and regulations have not crushed the economy has been that land rent has absorbed some of the costs. Just as land rent captures much of the gains from economic expansion, so too does land rent fall as an economy contracts. As greater productivity increases land rent, lower productivity, such as from costly regulations, decreases land rent. 

One reason why the ever increasing cost of taxes and regulations have not crushed the economy has been that land rent has absorbed some of the costs. Just as land rent captures much of the gains from economic expansion, so too does land rent fall as an economy contracts. As greater productivity increases land rent, lower productivity, such as from costly regulations, decreases land rent. Thus land values have risen more slowly due to these higher costs.

While economists have recognized that higher minimum wages in states and cities are reducing the growth of employment, economists have not generally analyzed the effect of higher wages on land rent. Owners of enterprises such as restaurants and shops will, over the long run, bid less for the rental of real estate, faced with higher labor costs, while residential landlords raise their rentals as their low-income tenants can now afford to pay more.

Market dynamics in the USA are so strong that the private sector, especially real estate construction, is growing despite the higher costs imposed by government. Without the imposed costs, growth would be so high, and employment so strong, it would make us dizzy.

Thus now the US economy is entering the expansionary phase, as unemployment is falling to the pre-recession level and real estate prices and construction enter the next speculative boom. The US fiscal system will once again misdirect economic growth towards excessive real estate construction and price rises. Governmental public works, civic services, and subsidies become capitalized into ever higher land rent as they are paid for mostly by taxes on labor and capital. Land rent is the greatest redistribution and subsidy in the US economy. The subsidy to real estate is the generation of higher land rent from public goods plus the financial subsidy of cheap credit.

Land speculation will once again escalate real estate prices, while towards the end of the boom, the Federal Reserve will have raised interest rates step by step until the high cost of borrowing plus high prices for purchasing will again make real estate unaffordable for households and enterprise. Then comes the next financial crash as real estate prices collapse and loans default.

The real estate cycle will once again lead the business cycle to a peak. Land speculation will once again escalate real estate prices, while towards the end of the boom, the Federal Reserve will have raised interest rates step by step until the high cost of borrowing plus high prices for purchasing will again make real estate unaffordable for households and enterprise. Then comes the next financial crash as real estate prices collapse and loans default.

None of the financial regulations confront the basic problem: massive subsidies to land values. The only remedy that will prevent the next depression is a prosperity tax shift, the replacement of all taxes with levies on land values. But as the German philosopher Hegel observed, governments have not learned the proper lessons from history, let alone from theory.

© Text Copyright Fred Foldvary, Ph.D. rights reserved.
Click here to participate in a community survey and enter a raffle.