Worm Food

These thoughts were on my mind, and I jotted them down in my journal on Monday. I felt compelled to put them up here on the off chance someone might find them (useful).

I felt compelled to write these thoughts down. They are not empirical, but they do have a certain truthiness.

• Markets are more robust, lifting more people, when they are free from monopolies of any kind.
• The government itself is a kind of monopoly that can influence overall economic performance, either for good or bad. Therefore, regulation and stimulation, both of which will always have unforeseen consequences, must be carefully considered before being implemented.
• Unregulated markets tend to evolve into monopolies or oligarchies that maintain their status-quo by suppressing creativity, innovation, and overall economic growth. Everything becomes zero-sum.
• Every market has winners and losers. When the elites perceive themselves as losing, they will use any means necessary to protect their power. They will also convince themselves they are acting for the greater good. Some won’t care about the greater good so long as they benefit.
• “What’s bad for the hive is bad for the bee,” but the bees are not very good at recognizing what is good for them—especially when what is bad for the hive is pitched as being good for it. The inverse of Marcus Aurelius’s truism is patently false. Otherwise, nobody would poison the common well for their own profit.
• Humans are remarkably immune to cognitive dissonance. Double think is a real thing.
• I believe Greenspan was correct when he said the biggest problem with the economy was that nobody took the long term view. When asked why, he said, “because in the long run, we’re all dead.”

We are all “food for worms.” Memento mori.

Predicting the Real Estate Market

Economic Base Theory holds that basic industries and support industries are requisite for the population growth that spurs residential and retail development.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-02-12.

When I wasn’t watching the rat race or helping prepare for the educational events at the Dallas conference this week, I was taking notes on what the speakers were saying. My biggest takeaway was to learn about economic base theory (EBT). Economist Robert Murray Haig first put forward the theory in 1928. It essentially says that jobs lead the economy both when it is getting stronger and when it is getting weaker. This is something that we all have intuited, but it was good to have this feeling stated overtly and have the underlying science behind it explained.

I won’t go into all that, but I do want to provide the sequence and define some of the terms used in the theory.

EBT holds that development happens in a specific order for specific reasons.

In Houston, the Medical Center has become a basic industry, providing more hospital services than the local economy consumes. People come from around the world. Photo source: Wikipedia

1. Basic industrial development

A basic industry generates more of a “product” that is required by the local economy. The surplus is exported. Exporting creates more jobs than the local economy would otherwise support. Basic industries create jobs beyond what the local economy would generate without them.

The important thing to remember is that manufacturing is only one type of exportable industry. In Orlando, tourism is a basic industry. In Omaha, it’s insurance. Real estate is not a basic industry because it can’t be exported, but real estate education can be. For most of our history, agriculture was a basic industry.

2. Support industries

Support industries such as accounting and consulting move in once the basic industry grows to the point where it becomes able to outsource these functions more efficiently than it can perform them in-house. Support industries equate to even more job creation.

Industrial development brings in jobs at all pay grades. Some of the new people will demand single-family homes of various prices. Others will drive demand for multifamily development. If you’re going to invest in real estate, you must understand the basic industries that support the real estate market where you work.

3. Residential development

The basic and support industrial job growth create demand for additional housing once they have demonstrated that the jobs are there to stay (whatever that means). Workers like to live near where they work.

4. Retail development

As families move into the area to take advantage of the job growth, they need to buy things. Again, most consumers prefer not to travel very far to buy groceries or clothing.

In rural areas, the school district often is the largest employer. Education is like retail in that it depends on the strength of the local economy to survive. If the basic industry goes away, both retail and education will have to downsize and may eventually become completely unsupportable.

Finally, the advent of internet commerce slows down the demand for retail development and speeds up the deterioration of the retail market if a basic industry moves out without replacement. In fact, you may now see demand for retail space decrease even in a stable economy.

This model can help predict the direction a real estate market will move. It is not 100% predictive because the real estate market is imperfect in that everyone is working with incomplete information, each individual property—single family, multifamily, commercial, or industrial—is unique, and a single seller controls the availability of each property. Nevertheless, we all need to understand the direction our local economies, and therefore our local real estate markets, are moving.

 

Rocket Man

And I think it’s gonna be a long long time

Till touch down brings me round again to find

I’m not the man they think I am at home

Oh, no, no, no! I’m a rocket man

—Bernie Taupin

Grateful Monday

My kind of a Rocket Man—he dispenses cold beer.
Photo Source: Rocket Man Equipment Co.

I’m grateful I don’t have a jet pack. An article in Reasononline (Mangu-Ward, 2007) got me thinking about all the things the futurists predicted—from underwater cities to flying cars—and why I am grateful they did not come to be. At least, not yet.

I am no stick-in-the-mud Luddite or anything like that. I just don’t see the need for personal flight. I don’t jump out of good airplanes, and I don’t want a jet pack.

As Katherine Mangu-Ward notes, we—you and I, the lowly consumers of this world—control which inventions dominate the market. And as long as we have jobs left in this country where we can earn some disposable income, we will continue to make people who understand what we want rich. We want something that is usable, safe, and not-too-expensive. We have jet packs, underwater cities, and flying cars; we just don’t want them.

References

Mangu-Ward, K. (2007, October). From Sky Flivver to Hydropolis: What happened to the science-fiction future? Retrieved October 29, 2007, from reasononline: http://reason.com/news/show/122027.html