566. Why Is It So Hard (and Expensive) to Build Anything in America? | Freakonomics Radio

this episode is about a problem it's a problem that has to do with how we build things in the US but it's not a new problem the Department of Housing and Urban Development saw it coming more than 50 years ago there's a report called a decent home from 1968 which was commissioned by the Johnson Administration that basically said that construction productivity in the US had grown uh about 2% per year in the 40s and 50s and had in the 60s flatlined that is Ivan rupnik he is a professor of architecture at Northeastern University productivity as you probably know is how economists measure the relationship between the resources that go into a process money time labor things like that and what comes out the other end humankind has become much much much more productive over time although not always and not in every situation let's say you get a new software program that helps you work faster maybe even better that might lead to a gain in productivity but if that same program is too complicated or glitchy you might not get a gain in productivity or maybe the new software is fantastic and fantastically fun and you spend hours doing something other than the work you're supposed to be doing then your productivity might fall so the productivity Arrow doesn't always travel in the direction you anticipate and what happens if productivity declines in an industry that is absolutely essential to our economy here is what that Johnson Administration report said there was a potential for major societal impact not just for the construction industry but for Citizens if that productivity either continued to Flatline or declin the concerns expressed in that report turned out to be valid according to a new paper by the economists Austin gouby and Chad Severson productivity in the construction sector has fallen significantly over the past 50 years the value added by a construction worker today is about 40% less than it was in 1970 this is exactly the opposite of how productivity has changed in most other Industries like agriculture manufacturing information technology so the construction industry has a big problem but it's our problem too because when productivity Falls prices often rise here is Chad Severson it's more expensive for everybody who lives in a house drives over a bridge every company that builds a factory every school board that builds a school today on fre economics radio why why has construction gotten so expensive in the US there's some things that are really sticky because the risk risks are so high and what's to be done about it we need to rethink what we are doing everywhere because it is not working could part of that rethink mean prefab people still look at modular and think of containers they don't realize that you can build a festar hotel with modular construction if you build it they will complain we will deal with all the complaints right after the here W it with me w w [Music] this is fre economics radio the podcast that explores the Hidden Side of Everything with your host Steven [Music] Dubner Chad Severson grew up in North Dakota and trained and worked as a mechanical engineer before becoming an economist now he's at the University of Chicago where he studies how companies function or don't function with a special interest in labor productivity in the US over a long history call it over 120 years or so as best we can measure it on average labor productivity goes up by about 2% per year I mean I'm not an economist but that sounds like an awful lot over time well what it means practically is every 35 years a given worker hour is able to produce twice as much as they did before so we're kind of doubling income per capita every generation now that 2% moves up and down it's been kind of low lately it's been more like 1% for the last 15 years or so but again over the Long Haul 2% is a pretty typical number at least as best we can measure that's not been true for the construction sector construction represents about 4% of GDP in the US that is a lot for one industry certainly enough for an economist like Severson to be concerned if productivity is not growing along with his colleague Austin gouby who recently became president of the Chicago fed and stopped answering my emails by the way Severson has published a working paper called the strange and awful path of productivity in the US construction sector I asked Severson what is it that's so strange and so awful productivity has been falling in the construction sector for about 50 years that is not something that I think anyone's seen anywhere else before and to be negative for decades on end is strange and awful because if it's right it means we're getting worse and worse at doing something that's such an important part of the economy is there maybe something unique about construction that makes it immune to productivity gains one interesting thing is we know it's not just something immutably bizar about productivity and construction because it actually did have positive productivity growth from 1950 to about the late 1960s so it was going up it was actually going up a little faster than the economy as a whole then something turned around in the late 1960s and hasn't stopped since then so why did construction productivity start falling and why hasn't it recovered it turns out those questions aren't easy to answer you're exactly right everyone has their own favorite Theory when presented with the facts in the paper and they're all quite different I think I've received an email about each one of them from different folks some people might think what's going on is overstated because of measurement issues there's a set of people it's regulation it's this regulation it's that regulation then there's others about oh it's a problem because the way the industry works the labor market is all messed up for this that and the other reason or the incentives are bad because the way contracts work are such and such so there's folks offering explanations that are in some sense external to the sector and others more internal to the sector and your tone of voice implies that you don't put a ton of stock in at least any single explanation for being a big lever here am I reading you right yeah I think that's right my view is to have a sector this big to have so many problems for so long it just seems odd that it would be one thing that if you just turned that off everything would magically get better I asked severon if he could read me one or two of the emails he received um I got I think I can find one here indulge me while I search through my email here's one thanks for your work on this long overdue topic I've lived my entire life in and around this industry my father was a builder before he retired I've been a builder and developer the construction industry is the place that exhibits all of the maladies of the development planning design and construction Industries combined and then let me see if I can find one like about incentives and then I'll see if I can find one about regulation all right let's skip those emails I think we get the picture I asked Severson if it might be useful to list some of the factors that he thinks aren't causing the problem sure one way that labor productivity goes up is through increases in capital intensity the amount of capital per worker so we looked at that we looked at how much investment the sector has done over the long run and the measured growth in its Capital stock per worker and it's kept up with the rest of the economy all right so lack of capital investment you're kind of Crossing off your list yeah exactly then we look to see whether the prices of inputs that construction uses are going up faster than the prices of inputs that other sectors use so have wages in the construction sector gone up faster than wages in other sectors or the intermediate materials that they're buying are those getting expensive more quickly and the answer in each case is no there's no real evidence that the input prices that the sector faces is going up so it's not that either okay another possibility is that basically everything's been taken in profits they're not getting more efficient but they're pulling out a lot of margin you don't see that that's not going up one thing that you do see is that the average price of construction output is going up faster than the average price level in the economy as a whole the average price of construction output is going up faster than the average price level in the economy in other words construction workers today are building more expensive buildings than they were 50 years ago now that might not sound like a bad thing maybe the newer buildings are nicer or bigger safer Severson says that's part of the story but only part of it you might say well okay maybe houses are changing over time their quality is going higher well if they're getting bigger fine let's look at square feet so we'll count square feet or we'll get really fancy we'll use data calculated from the American housing survey to adjust for all the changes that we can observe in average housing what's it size and number of bathrooms etc etc and you can adjust for all that and there you don't have a negative growth anymore in that sub sector but it's basically flat over 50 years one way to think about is the number of square feet of housing that a worker in the housing construction sector builds now is the same as it was in the mid1 1970s let's talk about the nature of the business itself when you bid for a job you're usually bidding a against a couple others so there might be some competition there once you get the job however your incentives shift a little bit and a lot of your attention needs to go on the next Bid And if you win that next bid then you may have a little bit of a labor shortage and then slow down job one in order to get job two going can you just talk about that as a problem inherent to construction what you described I know folks think happens and I find it believable you might think most sectors like well if you get more orders you hire more people rather than let's take some of the people we have now making stuff for this customer and move them over it but I think it just gets to the broader issue of the way the sector Works in average is you can make a lot of money when things aren't going as smoothly as possible you just might not have the incentive to make things go smoothly or you're trying to get that next contract and so the most important thing rather than being good at what you're already doing is to just get started even in an efficient way at the next thing look there are a lot of let's call them frictions for lack of a better word things that drive allocation of where construction happens just have other motives than let's get this done as effectively as possible okay so let's look into some other factors that might account for the construction puzzle for that we will need another Economist I'm Ed Glazer I'm the Fred Andel glimp professor of Economics at Harvard University where I also chair the economics Department Glazer is well known for studying the economics of cities with a particular angle much of my work in the policy side is focused on land use regulations and their pernicious effects on the affordability of American housing in other words Glazer is in the camp that Severson mentioned earlier who think regulation has played a major role in the conr construction problem and the consequences of this problem have been severe Freddy Mack or the federal Home Loan mortgage Corporation estimates that the US is nearly 4 million housing units short of where we ought to be so what is that mean it means prices that are higher than they otherwise would be particularly in the most dynamic parts of America it means that the most productive parts of America are much smaller than they otherwise would be so in previous epics in American history Americans moved by the millions to those parts of America that were more productive whether or not it was the Ohio River Valley in the 1810s and 1820s or California in the 1930s and 1940s or African-Americans leaving the Jim Crow South to find both Economic Opportunity and a little human dignity in the cities of the north this is the traditional way that America has dealt with technological change is by moving to it that doesn't become possible if it is impossible to build and Silicon Valley or greater Boston housing shortage also means an intergenerational transfer of wealth because you know people who bought in 1972 in Los Angeles have done very very well their children's generation or their grandchildren's generation they still need to buy a home but they're not going to be able to afford that home at least not unless they've gotten very very lucky and so this sort of massive harming of the young and in some sense this is a larger phenomenon that's related to the things maner Olson wrote about 40 years ago in the rise and decline of nations in which in a stable Society insiders basically figure out how to rig the game for themselves and in some sense that's what I think of as being behind this housing shortage that incumbent owners have figured out how to use a maze of rules and regulations to protect what they have and to make sure that they don't have any sort of inconvenience but people do pay a cost for it and the cost is paid by Outsiders and why does Glazer think that regulations are behind this problem I will certainly not claim that the evidence for that is Ironclad but I will push what I think is my preferred hypothesis which is that what all the regulation did was it ensured that it became very very difficult to focus on mass production the most obvious is just minimum lot size a rule in a suburb that says you cannot build on less than one Acres or two acres or heck there parts of Greater San Francisco where it's a 60 acre minimum lot size those are going to be you know the most obvious limitations on building now there are also a variety of more subtle ones so for example in Greater Boston almost universally there are limitations on building next to Wetlands that go beyond the state's already fairly rigorous rules on protecting Wetlands so it's very easy to sort of think of wetlands and oh think this is the Everglades this is a great natural thing wetlands are defined basically so that anything that's at all swampy means that you can't build on it in fact one town in the survey that we did 15 years ago actually defined Wetlands as a wicked big puddle so you talk about all those regulations as if they have a pretty sizable negative component on the other hand I could say hey Ed more labor regulation means there's greater safety and work life balance more building regulations means our buildings are safer maybe have you know cleaner utilities and are better for the environment so is that maybe the cost of doing business in the modern world where we want everybody to be well taken care of there are plenty of regulations that we want so in the 19th century New York became healthier not just because it built the croen aqueduct because it built sewers but because it actually required tenement owners to connect to those sewers and I am certainly in favor of regulations that actually make sure that workers die less often on construction projects and regulations that make sure that buildings don't fall down but you do want to have some sense of cost benefit analysis and you also want to understand that even from purely environmental perspective restricting building particularly restricting building close to an urban core has costs as well as benefits the more that I restrict building near to Boston it means I'm going to get more building farther away from Boston which is also going to eat up land and is going to involve a more carbon intensive lifestyle which is going to impose its cost on the planet so you really want to be balanced about these things Glazer points to another unintended consequence of tougher regulations if you think about a world between 1960 when you know levit could just build thousands of houses and there wasn't anyone to say no versus the world of 2010 or 2020 when you know everyone got to say no to everything the levit he's talking about is William J levit of levit town Fame levit towns were huge Suburban developments with affordable homes in lots of parts of the world the projects got smaller and smaller the Lots got smaller and smaller and what that means Glazer says is that most construction firms are also small or construction establishments as he calls them so in construction there are almost 600,000 establishments with fewer than five people by contrast there are exactly 101 establishments with more than a th people compare that with manufacturing which has 171,000 establishments with fewer than five so less than a third and 990 establishments with more than a thousand so almost 10 times as many really big ones and less than a third really small ones so a completely different skew of the size of the entity a similar way of seeing the small size of this comes from the co-star data which is about residential Parcels being developed so out of their sample of about 3,700 Parcels the median parcel is 7.3 acres and has 3.2 units these are tiny things you're not getting any benefits from scale economies there little firms are you know figuring out how to fit little things inside little spaces and are being wedded to this sort of tiny firm model is is symbolized by what California has tried to do to increase the supply which is to make it easier to add a second unit on an existing parcel so if I own a thing I can add an extra unit now I'm cheering for that I think it's great that they're doing something not at all a Critic of that but you know this is not mass production this is not levit this is not Henry Ford this is not the sort of thing that makes products genuinely affordable to middle-class people let's say I want to build a 12-story office building and I want to do it in either Austin Texas or Boston Massachusetts how much difference is there in the process in those two places I'm going to revert to the Turner and Townsend data on this which comes from a survey of Builders it's about $700 a square foot in New York and San Francisco it then goes closer to 500 in Chicago and then Houston is closer to 300 I'm sure there will be developers who will then say that's absolutely crazy it cost me a lot more than this it cost me a lot less than this and I'm sure that is true depends on the nature of the product and so forth but that's the Turner in towns and data that shows a sort of twofold difference between LA and Chicago and then even more in New York and San Francisco and what would you say are the top three drivers of that cost difference so the beauty is again this is supposed to be actually the physical costs and the turn towns and data actually has elements of the things that go into the physical cost they're going to highlight just the generic labor costs which are just a lot higher in New York material costs which are slightly higher in New York and then what they call Daily plant cost which is the day to hire a 50ton mobile crane plus an operator and of that the New York versus the average and this is a global average of cities New York versus the average in their data 50% of that's labor then 20% is the combination of material and plants and the rest is sort of a residual unexplained component in New York which may be something about zoning it may be something else part of that residual unexplained component not just in New York but anywhere that makes it hard and expensive to build may be explained by a rise in what is called citizen voice the economists Leah Brooks and Zachary lisco recently published a paper about the rise in infrastructure costs in the US they found that when it comes to building highways spending per mile increased more than three-fold from the 1960s to the 1980s one cause they argue is the rise of Citizen voice which they Define as a combination of social movements legislation and judicial doctrine that expand the opportunity for citizens to influence government Behavior directly to reflect their concerns you can certainly see the upsides of more citizens having more voice when it comes to big decisions like where to put a highway or Housing Development or an office building but you can also see how building anything can quickly become more complicated and more expensive when there are more public hearings more fights about land use and so on so there is a lot to complain about when it comes to how things are built today in the US does anyone have anything good to say about it if we think about 100 or even 50 years ago your air conditioning was your window and your heating was your fireplace but now we have much more complicated systems and we're computerizing our building systems that is Carrie sturs dosik I'm facult in the department of construction management at the University of Washington dok has a PHD in engineering and she worked in the construction industry for several years before going into Academia she admits that the productivity problem is real and she says that people in the industry knew it well before Chad severon and Austin gouby published their paper every presentation every conference I went to had that productivity curve where all the other Industries are going up and construction is going down what is wrong with us how can we fix it and there was a lot of conversation around inefficiencies of designers creating drawings creating information and knowledge and then passing it over the wall to construction and construction running with it but losing information and recreating information so Carrie on the one hand I personally am just in awe of construction I've done just enough minor construction carpentry and so on to know how hard it is to get things right it's just a complex and difficult thing to do well and more often than not it is done well on the other hand from my lay person's perspective at least the construction industry and the Building Trades generally seem to operate very much like they did 30 or 50 or more years ago like you know if Rip Van Winkle came he'd say oh yeah I recognize that much more than he might recognize other Industries is that the case or am I under appreciating the change in in construction using various Technologies I think it's a yes and question I think there's some things that are really sticky because the risks are so high you're spending lots of money to build very big things we have big toys and we're building big projects with big toys those big toys are expensive if you have a crane on the site you're spending thousands of dollars a day so you got to get it right when the people and the equipment and the materials show up so that you're ready to build and spend that time effectively I think there's a reluctance to try different things and do something new because on the job site the risks are really high it's hard to introduce new tech because it feels risky and people want to just do what they know because that's more reliable you know I think back to the building of the Hoover Dam which was done before computer modeling plainly and what I've read about it two noteworthy things I remember when I read about it was that one it was over engineered to a great extent because without computer modeling you didn't know how thick was safe enough and so better safe than sorry but like it's still working really well so plainly it worked but also was the danger like a lot of people died during the building of that and I can't imagine that we have the public appetite for that kind of Danger on any construction project now yeah yeah no our safety goals in the industry are very very high you know zero fatality low major accidents is the goal on all construction projects in the us and we're still not there what have been some important Innovations in construction over the past few decades that most people don't appreciate or know about my really extreme example is cell phones I would suggest if we looked back at it that cell phones were probably adopted almost immediately by field superintendents who are out on the job site you mean I could call the office from the job site where things are going wrong and I can contact the designer I can contact the owner's rep and we can have a chat right here right now because time is of the essence so when technology makes their job faster easier it's immediately adopted the challenge is when the value of that technology isn't clear or it's complicated and the adoption is spread across multiple companies or multiple team members then they have to coordinate their Innovation is there something in particular you're thinking where the value isn't clear or is complicated something you think might have real value but the adoption is the problem because of that complication well that's what happened to Bim Bim stands for building information modeling it is a class of software and protocols that allow the various parties involved in a big construction project to work on a shared Digital model bim's Advocates hoped that it would make the construction process more efficient but when you are building a skyscraper or a bridge the pursuit of a efficiency can seem risky I was at a conference a few years ago and we were talking about this for civil work for making roads and the designer said oh my gosh you mean that my line that I make on my drawing is going to operate a bulldozer like the idea of that really scared the heck out of them because it was challenging the rules and separations of the contractor has the means and methods of production and the designers have the design in of like I want the road to go this way at this angle you figure that out Builder right and the Builder holds the risk of making it happen but if you connect digitally the drawing to the making you've just broken that separation part of the challenge with construction is that every project is unique and that most of the work has to be done in a specific space and within the constraints of that space you can't get the kind of controlled Precision you get in a factory that makes semiconductors or cars or dishwashers but what if you could Chad Severson again there are a lot of commonalities between construction and Manufacturing you're taking physical elements and combining them in different ways to make a final product for sale it's just one you do under a roof and they tend to be smallish and the other you don't have a roof and they tend to be biggish but why do you have one of these sectors that's famously fast productivity growth and the other one going the wrong way why can't we make construction more like manufacturing okay maybe we can that's coming up after the break I'm Steven Dubner and this is Freakonomics radio in the US nearly all construction happens on site building the frame laying down the floors and raising the walls routing the electrical wiring and plumbing painting on and on but it doesn't have to be that way at least according to this man I'm vaugh Buckley founder and CEO of the volumetric building companies also known as vbc Buckley started the company in 2009 in Philadelphia when vbc first started we were building single family homes and town homes primarily now we build apartment buildings and hotels but vbc their Construction in factories not at the site of the eventual building they build modules that are then shipped to the site for assembly Buckley says vbc is one of the three largest commercial modular construction companies in the world a largest projects today have included the world's tallest modular Hotel in New York City 20 plus story Citizen M Hotel in the bowy and one of the largest unit count buildings of modular Construction in the US which was a 410 unit apartment building here in Philadelphia we're also working on projects that include up to a, units and some really exciting projects in new mega cities around the world especially in the Middle East modular construction has some obvious benefits speed for instance on average we produce buildings in half the time less than 50% of the time that it takes to build it on site the biggest factor in why modular construction is just so much quicker than siteb built is because we have a dual timeline so think about it as while the parking garage is being dug underground all of the floors above are being simultaneously built in a factory some distance away from that job site when those modules arrive on site and are installed they're almost completely finished for example if we were to build a hotel room about 90% of the work that goes into that hotel room is complete at the time that it's delivered right down to the Furniture mattress and all of the components that are necessary to use the room most of the work that occurs on site is foundation facade roof all of the connections to put those Lego pieces together but the Lego themselves is almost completely finished Buckley also points to a labor Advantage the work is easier which means more people can do it when you think about this from a factory environment perspective you eliminate the demographic restrictions that are preventing folks from entering this industry people that can't lift a whole sheet of drywall by themselves and carry it upstairs people that don't want to hang heavy things above their head and would rather work in an office job they can now join a factory work on a floor use computers and Robotics to help them and be in a safe environment with the access to the tools that they need to do their job more efficiently and the efficiency of factory building means less waste and pollution one independent analysis found that modular construction produces 40% less emissions than conventional Construction Construction is the highest of all industries from an impact perspective resulting in almost 40% of the world's carbon our buildings are currently producing 66% less carbon than the UN construction Benchmark where ahead of 2030 goals in most countries already simply for the modules that we produce today which are getting better so that all sounds impressive and promising but in the US only 6% of construction is modular some countries have more in Japan around 15% of houses have prefabricated elements as do around 80% of houses in Sweden there are different types of modular construction with a different breakdown between what happens in the factory and what happens on site some modular Builders just assemble the structural components like walls and roofs offsite others like Buckley's firm trans transport entire 3D modules we should say the idea of modular construction is not at all a new idea here again is the architecture Professor Ivan rupnik around World War I there's a lot of really important Innovative industrialized off-site construction happening back then for instance you could page through a catalog from Sears robu and pick out one of around 450 house options and then have the components Shi by box car with assembly instructions think of it as an Ikea for houses maybe it's no coincidence that Sweden is so big on modular houses today but the US never really got with the program it wasn't for lack of trying in 1969 George Romney Mitt Romney's father was the Secretary of Housing and Urban Development or HUD he put forward a plan called operation breakthrough the goal of operation breakthrough was to break through what were called institutional barriers in the regulatory framework around construction operation breakthrough promoted modular Construction in particular as a means to cut through the regulations and technological stagnation that were already hurting the construction industry HUD worked with private firms to build nearly 3,000 prototype housing units across the country but rupnick says the timing turned out to be wrong some of the funding was removed at a critical moment where these 20 odd companies that had just made significant Investments of their own without Federal funding into new factories into new employees were met with not just a lack of that aggregated demand that was promised that was argued by George Romney but they were also met with the energy crisis and an economic downturn producing kind of an Extinction event in companies it's interesting because a similar program went underway in Japan at the same time but one of the difference was that those companies in Japan were actually supported by companies like Toyota in our case many of the companies were not as well capitalized and so they were not able to survive that and so we lost the knowledge and we also never completed that framework transformation besides teaching architecture at nor Eastern Ivan rupnik is a founding partner of a company called mod x a consulting firm that works on modular construction mod x has been working with HUD to study the accomplish ments of operation breakthrough some of them were procedural for instance creating a national code for mobile homes or manufactured homes and some were inspirational countries like Japan and even the European Union generally have literally done what the late 60s HUD proposals were for the US did they copy the HUD report or did they do this independently so in Japan which from our research is probably the most manufactured housing friendly regulatory environment in the world they sent delegations to visit HUD specifically during this work the European Union generally speaking really started in 1975 to think about shifting from a myriad of prescriptive codes to a Performance Based code Performance Based codes being codes that describe how something should perform and not telling you the specific recipe it's taken them 50 years and they still haven't completed that process of getting the now 27 members states of the European Union to adopt it but a country like Sweden for example which adopted it early has had direct impact in the industrialized offsite construction space and can now demonstrate an increased productivity of 10% as compared to Conventional Construction in 2015 an American company called Cera tried to finish what HUD had started catara described itself as a technology driven off-site Construction Company it was founded by Michael Marx who had been interim CEO at Tesla and they had more than $800 million in funding from the Japanese investment firm soft bank here again is Von Buckley of the volumetric building companies Cera had a fascinating business model and I think that their goals were really quite Noble they came into a market telling the rest of the world how they were going to build in the future Buckley says Cera was intimidating to a firm like his at the time that CA was really raising the vast majority of their cash we had raised Zer and had produced more products than they had so it was certainly scary to us when we saw the billions of dollars that were getting pumped into the business and the lack of track record that was resulting from that investment Cera had a number of modular factories in California Arizona Washington State in India they put up a Marriott Hotel in Texas a big apartment building in Virginia a townhouse project in Arizona but the finances weren't working in 2021 catara filed for bankruptcy and they shut down they're trying to invent their own ways of doing things in so many different parts of the construction industry that it was almost impossible for them to achieve what they needed to in the time that they wanted to do it they're trying to revise 150 years of history in two by throwing a few billion dollars at it it didn't work it did work for Buckley's company they acquired a lot of cera's assets including one of their factories the catara story may have been a particularly visible failure but the construction industry is full of them here again is Carrie sturz dosik from the University of Washington I watch these companies kind of stand up and like we're going to disrupt we're here to disrupt in construction I don't think we're shaking in their boots very much but not because we didn't want to be disrupted I think there's lots of people in our industry that have been champ disruption for a while and like we're ready to change come on let's go but each of those disrupting companies came into the space and we're like whoa this isn't working it's not disruptable or we're not big enough in the case of Cera Ivan rupnik thinks there has been an impact I think their legacy is already positive they didn't just find the best people they put them together and they trained each other a number of the factories they built are still in use by great new companies they actually proved out both that some of the these Concepts that have been working in for 30 40 years abroad could work technically and they reinforced some of the barriers that I think the federal government identified in the 60s and 70s and was not able to fully overcome but there is a paradox here going back to something Ed Glazer told us earlier the centralization and scale that could launch a modular boom in the US are at odds with the reality of American Construction which is dominated by really small companies still Glazer has a vision for what could happen next you can imagine a world that doesn't feel that different than for example what happens with solar panels which is the solar panels can be produced by a large Factory but then it's going to be installed by a small mom and pop operation what you're describing here would be a success for housing Supply but it would essentially eliminate much of the value of these small firms correct I mean what they are doing is they are hand assembling a small group of people who will build by hand a house in a particular place and you are shifting that production to a different place a factory right you're right and it is certainly true that in the 18th century a lot of old style Weavers were pretty darn upset by you know Arc Wright that is certainly true technological change always has winners and losers I guess I would rather protect the construction industry with a robust safety net and with robust education for people of all income levels rather than trying to shut out technological change but I'm with you and that it's important to acknowledge that even if the dream that I just suggested comes true there will be losers from it but there are also losers in the current system especially if we're not able to build the housing and infrastructure we need Von Buckley again construction is not just a construction industry problem it's an every industry problem construction builds the buildings that every other industry operates out of the people that operate those other businesses live in housing that somebody had to build our housing stock is aging our costs are going up our productivity is going down our regulations are increasing in the end result here is not good we are on the way down we are not at the bottom here we're going to lose more labor we're going to lose more people in the industry we're going to lose the skill that they had we are in a spiral and that spiral requires us not to just encourage more people to enter the industry create more education or generally invest in new building materials it requires a complete shift in the way that we are building today in order for us to maintain our output tomorrow and that's where offsite construction is just one tool in the belt it's not the only solution to this problem but we need to rethink what we are doing everywhere because it is not working so what combination of old and new can work that's coming up after the break I'm Steven Dubner and this is Freakonomics [Music] radio we've been talking about modular construction Mass producing the elements of a building in a factory and assembling them on site as a possible solution to the construction industry's productivity problems as you listened you may have been thinking that sounds great it's also possible you were thinking that sounds like a recipe for buildings that are hideous people still look at modular and think of containers they don't fully understand what they're getting they don't realize that you can build a festar hotel with modular construction that is Michael Hawk he runs mjh structural engineers in Dublin his company was behind the design of what is currently the tallest modular tower in the world there are two towers actually in Cen in South London and the planners in Cen unusually wanted to go taller and taller so it was a very unusual situation where our client wanted to go taller obviously and the planners wants to go taller and as struct Engineers we're looking at what we can achieve and what we're comfortable with one of the towers is 44 Stories the other 38 before them the tallest modular Tower was a 32-story apartment building in Brooklyn near the barklay center arena that project had a lot of structural issues it wound up taking much longer costing much more than planned the Cen Towers were different oh I think all in was three and a half years or something like that it was incredibly quick it was on a deric site that had been deric for over 20 years it was part of regeneration of the area was seen as a flagship building in the area when you have everybody on board client Architects planners everybody wants to see the delivery as quickly as possible it's quite amazing what can be done which is very different to planning rules than how they work normally the two apartment towers are made up of around 1,500 separate modules it's stand taller than anything else in the area the skyline in Cen has definitely changed there are 546 housing units an art gallery a cafe and how long would it have taken to build all that with traditional methods you'd probably be closer to five five years I suppose in total so it's a lot faster and some of that comes from the fact that there's parallel construction methods going on that you have your site being built and your building is being built in a factory at the same time so there are two parallel streams of work and then the taller you go the more significant that percentage is now as Hawke tells it the cin project was a bit of an anomaly from a regulatory perspective a collective desire to get the towers built quickly pushed aside some of the usual slowdowns you could imagine Advocates of Modular Buildings citing cin as an example for how lawmakers and planning boards should think about the future of construction Hawk points to another viable example in Singapore Singapore have demanded that if you do a building on government lands it has to have at least 70% offsite within that building so they're encouraging offsite and as a result their offsite industry is very strong they're producing some amazing buildings at real pace and having a significant effect on their Market I think governments probably need to do that but is a little bit of a chicken and egg situation if you're going to do that you need to know that the businesses are there to support that 70% how do you get to a level whereby you know that you can be confident that there's enough manufacturing capability to do the 70% of all the work you want to do so it's a really difficult situation if you're not there and if you're low in the numbers I mean I think in the states you're at like 6% in terms of modular in the country so could the states decide to want to do 70% of their constructions would the 6% be enough to pick up that who knows getting even halfway to that 70% Mark in the US would require a lot of Innovation within the construction industry and the research paper that inspired this episode by Chad Severson and Austin gouby proves there just hasn't been very much Innovation we asked the construction scholar Carrie sturz dosc to read that paper and tell us what she thought I had more questions than answers when I was reading the paper one of the things I said was that the investment in R&D is pretty low in construction I agree with that in our own attempts to build industry Partnerships it's hard because when we talk to our industry Partners they say well I don't have an RD budget to work with you so what happens then is people are asked to innovate in the projects that they're working on and while some projects that we've studied have been effective at being Innovative within that context other projects are stuck dok says she can Envision a time when construction is radically transformed by Automation and industrialization the future version is robots going out and building houses in a day yeah when do we get that well you know I think when we can build in space we'll be able to build on Earth too I think the construction in space will motivate construction one of my undergrads is going to work for blue origin and focus on construction in space I was like oh my gosh that's the frontier right there that Tech technology will motivate the ways and change the ways we work on Earth until then what changes can be made down here we asked Von Buckley what he thinks it would take to boost the modular construction industry I think about the carrot and the stick as the two ways that we can make sure this industry succeeds many countries have chosen the carrot for example Canada has put over half a billion dollars into a recent initiative to speed up housing deployment which has invariably gone to the modular and offsite construction space because there's no way to speed up housing unless you put it in a factory California has issued home key regulation which gives Equity dollars for units that are on the street within 12 months of that funding being issued the only way to get units on the street within 12 months of funding is to renovate existing buildings or building a factory then you go to places like Ireland where they've recently implemented a stick the stick in this case is regulations that call for new public housing units to be built in in factories and the reason that they've done that if they've carefully analyzed the results the costs the efficiency and the labor market and said we have no chance of building what we need to build in the field over the next 10 years so it's now time for us to tell the industry how to do it and back in the US what about easing up on some regulations to boost construction here again is the economist Ed Glazer so most land use regulation is local and most of the things that need to happen for this to change our local this creates a particular challenge because in fact the cause of making housing affordable is not a cause that too many you know homeowners think is a particularly sensible cause it's not a cause that they woke up in the morning said oh you know what I'd really like I'd like the value of my most important asset to decline by 30% that would be a really great outcome for me but that's fundamentally what we're talking about when we're arguing for affordability and for that reason it becomes sort of really close to impossible to you know just Jawbone the localities to make changes the push has to come from somewhere else even if it's localities that are making the changes can you describe a future in America where the different players with guidance from people like you and others could produce a lot more housing more easily more efficiently and more cheaply in other words how important would that be to the functioning of this country and the society and the future and so on imagine Silicon Valley imagine Boston imagine New York imagine the possibility that some parts of these cities and they wouldn't have to be huge if you allowed lots of density we just tore up the rules we just actually tore up the rules about how density could be we said you know as of right you can build up to 50 stories whatever you want to do on this stuff you've got to be safe you've got to make sure that the buildings aren't going to fall down but basically you can build what you want imagine in the highly priced parts of America how many Builders would actually like to take the people up on that like to take the communities up on that and you know create innovative ways of supplying lots of that construction in ways that actually you know provided lots of ordinary people with affordable units and I think the more of these things that you had the more that you would end up catering not to Elite buyers but to ordinary buyers and the more pressure there would be to figure out how to do the building cheaply in its scale and maybe we start by just buying out the existing owners at you know twice their housing values three times their housing values something like that we engage in a very generous buyout program and then we just say the rules are that you now allow huge amounts of building in this area that sounds like a really fun experiment to run is anybody doing it you know parts of East Asia allow this but not on these Shores yet not that I am aware of if someone is listening to this and has a few hundred million or maybe a couple billion spare dollars in his or her pockets would this be a significant and legitimate project to try to engage in with some city or state that's willing if the demand is there for the housing then sure if you got you know 50 acres of prime land in Silicon Valley that you were allowed to put you know 5,000 units on yeah absolutely there are in fact some tech billionaires trying to do something like that but with a lot more than 50 acres a mysterious company in the words of the New York Times with funders including Reed Hoffman Mark andreon and Loren Powell J has spent over $900 million to buy tens of thousands of Acres on the northeastern edge of the San Francisco Bay Area it is mostly agricultural land now their goal is to transform it into a city as dense as Paris or New York is such a thing even remotely possible in California which has some of the strictest building regulations in the world if so that might go down as one of the most radical Innovations in the history of construction let us know what you think of this idea and what you thought of this episode our email is Radio [Music] freecomicsonline.to until then take care of yourself and if you can someone else too fre economics radio is produced by Stitcher and renb radio you can find our entire archive on any podcast app also at freakonomics.com where we publish transcripts and show notes this episode was produced by Elina Cullman our staff also includes Elanor Osborne Elsa Hernandez Gabriel Roth Greg rippen Jasmine kinger Jeremy Johnston Julie canfer LC bouic Morgan Levy Neil kth Rebecca Lee Douglas Ryan Kelly Sarah Lily and Zack Linsky our theme song is Mr Fortune by The Hitchhikers all the other music was composed by Luis G as always thanks for listening I can say right now that my neighbor is engaging in a large construction project on his house and I have not said anything negative about that you have a chance now you've got a microphone in cas there's anything you want to get off your chest the Freakonomics radio network the Hidden Side of Everything [Music] Stitcher