Can An Economy Based On Construction Really Work?

Some of the latest reports in the media are focusing on statistics associated with new home construction and foreclosures.  The news points to a slight rise in new home starts and a fall in foreclosures while homebuilder expectations are dropping and consumer confidence is on the decline.  One of the common trends you will find in all these reports is a heavy reliance on construction and home ownership in the U.S. economy.  Sadly, these two acts constitute a major portion of the foundation of our economy, and thus way of life.  The basic premise goes like this: money spent on new home construction is injected near the bottom of the socio-economic hierarchy.  The people who work construction-labor jobs pay for goods and services, allowing the money to filter “up” to those who hold higher socio-economic positions.  This money that they accumulate is then spent on larger investments, like high rises or shopping malls, again injecting the money at the lowest level where it can begin its climb back up the social ladder.  This is the general idea of how our economy works.  It is further buttressed by the notion that everybody should own property.  After all, the American Dream tells you to own a house and have some kids.  By buying that house, you become an essential part of the money cycle.  The Circular Flow Diagram has been created to visualize this cycle.

So, if home construction lessens, that means fewer people are buying new homes, which means less money is flowing through the cycle, which ultimately means an economy is contracting in some manner.  Furthermore, in many states, the taxes paid for property constitute a major portion of funding for local schools.  This is beneficial in good times but becomes a major problem when real estate prices sag.  If property values go down, taxes paid go down and the funds a school receives drop, meaning quality of education declines.  Without quality education, the whole cycle is bound to repeat because those who experience the lower level of education will be less likely to escape menial employment and lower social position.

The housing bubble bust of the past few years was the result of the deregulation of banks and lenders over the past decade, there is no doubt about that.  (For more info, check out the documentary Inside Job)  Some people in power realize that the regulation of the financial markets exists to protect consumers from predatory financial institutions and thus seek to strengthen them and maintain them.  However they are missing the greater lessen in the Great Recession: an economy dependent on home construction and ownership is not a stable economy.  Regulating or deregulating the financial system will produce very different results, but neither option can change the fact that as long as our economy depends on new home construction for its lifeblood, we will never be safe.

If this is true then what are the alternatives?  For one: manufacturing.  The United States was at its strongest in the twentieth century when it was a grand industrial power.  Manufacturing provided many jobs, both in resource extraction and output.  However, as our industrial output has slackened, so has our inflation adjusted wages, our health and retirement benefits, our overall wealth, and our position in the world.  Expanding our industrial base would also fuel new home construction and public and private investment by adding another layer to the economy.  Our industrial capacity has declined with the rise of the Free Trade Agreement.  Though it is pointed out that U.S. exporters do more business with countries that have FTAs with the U.S., we consequently do less business with other nations, not to mention that many manufacturing jobs are exported to the FTA countries because their labor costs are so much cheaper.  So, protecting our industrial capacity is one step to breaking our reliance on construction.  What else?

I see 6 major areas that can be changed or modified to reorganize our economic structure: education, research, energy, information, manufacturing, and agriculture.  I list education first because it is the most important aspect of our society.  An under-educated populace cannot strive for freedom; they have fewer opportunities for work or recourse.  A highly educated populace makes change in the other areas listed possible.  Research can expand as an aspect of overall employment with a higher level of education in this country.  Let china manufacture happy meal toys, we will seek cures to disease and answers to our social problems.  A highly educated populace will provide more people to develop the renewable, alternative and clean energy solutions we need to interact responsibly with the world we live on.  The promise of the clean energy sector is demonstrated by the facts present in this article on the ever expanding solar industry.  Well educated people will expand the knowledge economy as well.  But the old staples of manufacturing and agriculture will benefit when an intelligent populace exists to improve and defend them.

I know the above paragraph is lacking in logical defense but this is getting too long.  Ultimately we see that changing the emphasis of our economy provides myriad new opportunities to ensure each citizens financial and personal security.  Home ownership, while a dream for some, is not the key to stabilizing the United States, education  and a strong industrial foundation are.  These are changes that can come about not through revolution but through political will.  If only there was a party out there with the strength to represent the people rather than the special interests.

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