Monday, June 1, 2020

Sabotaging the Competition: A Home Construction Example

Why are monopolies bad? In a standard intro-econ textbook, the problem of monopolies is that because of the lack of competition, they can reduce output from what it would otherwise be, jack up prices, and thus earn higher profits. Some books also mention that monopolies may have less incentive for quality or innovation--again, because of a lack of competition.

James A. Schmitz, Jr.  at the Federal Reserve Bank of Minneapolis refers to this standard intro-econ model as a "toothless" monopoly, because in that model, all the monopoly firm can do is raise prices. He argues that it doesn't capture what bothers most people about monopoly. There's also also a concern that monopolies take actions to take action to sabotage and even destroy their rivals--especially the rivals who might have provide low-cost competition.  Moreover, monopolies may form concentrations of power with other monopolies or with with political allies to accomplish this goal, and in this way corrupt institutions of law and politics as well. 

Schmitz is in the middle of a substantial research project that encompasses both the intellectual history of these two views of monopoly and also a set of concrete examples. As a work-in-progress, he has posted "Monopolies Inflict Great Harm on Low- and Middle-Income Americans" (Federal Reserve Bank of Minneapolis, Staff Report No. 601, May 2020), which is nearly 400 pages long but described as the "first essay" in a collection of essays to be produced in the next year or two. It can usefully be  read as a preliminary overview of an ongoing research project. 

However, it's worth noting that Schmitz doesn't focus on the conventional everyday meaning of "monopoly"--that is, a super-big company that dominates sales within its market. Instead, he referring to "monopoly power" in a way that refers to when a group (not just a single large firm) acts restrict competition. Thus, his main examples are where existing producers have exerted political power to sabotage lower-cost competitors, including residential construction, credit cards, legal services, repair services, dentistry, hearing aids, eye care, and others.  

Here, I'll just focus on sketching his discussion of residential construction. Schmitz writes: "The most extensively used technology, by far, is often called the stick-built technology because sticks (two by fours) visually dominate the construction sites. This technology has been used for centuries. Homes are built outside, with a highly labor-intensive technology. It also requires highly-skilled-labor. The other technology is factory-production of homes. This technology substitutes capital for labor and also semi-skilled workers for highly skilled workers."

There has been a battle going back about a century between stick-built technology and factory technology for residential construction.  Schmitz traces the early legal conflicts back to the late 1910s. Here's a summary comment from Thurman Arnold, who was Assistant Attorney General for Antitrust in the 1930s, in a 1947 article. 
When Arnold left the DOJ, he did not stop challenging monopolies in traditional construction. He did not stop trying to protect producers of factory-built homes. In “Why We Have a Housing Mess,” Arnold (1947) began with a picture of a homeless Pacific War veteran, with his wife and five children, sitting on the street with their belongings (see Figure 2). The caption said: “This Pacific War veteran and his family are homeless because we have let rackets, chiseling and labor feather-bedding block the production of low-cost houses.” Arnold began his text this way: “Why can’t we have houses like Fords [i.e., automobiles]? For a long time, we have been hearing about mass production of marvelously efficient postwar dream houses, all manufactured in one place and distributed like Fords. Yet nothing is happening. The low-cost mass production house has bogged down. Why? The answer is this: When Henry Ford went into the automobile business, he had only one organization to fight [an organization with a patent] . . . But when a Henry Ford of housing tries to get into the market with a dream house for the future, he doesn’t find just one organization blocking him. Lined up against him are a staggering series of restraints and private protective tariffs."
Essentially, Arnold and other (including a substantial multi-author research project at the University of Chicago in the late 1940s) claimed that while no one explicitly passed rules to make factory-built housing illegal, building codes were carefully written in a way which had that effect. 

Some standard issues were that local building codes were different everywhere, which was fine for local stick-built construction firms, but posed a problem for a factory producer hoping to ship everywhere. There was often a distinction in building codes about living in "trailers" or in permanent structures, in which a "double-wide" home brought to the site in two parts was treated as a "trailer," even when it was installed permanently on-site and looked much the same as a stick-built home of similar size. 

In the 1960s, economic pressure had gathered for factory-built homes, which are typically much cheaper on a per-foot basis. But in the 1970s, regulators pushed back hard, with the the newly-created US Department of Housing and Urban Development playing a big role. Here are some snippets from how Schmitz tells the story. 
Many housing industry observers noted that stick-builders were facing such threats from
factory-built home producers in the 1960s. Though they did not have direct measures of
productivity, they compared the costs and prices of new, site-built homes to the costs and
prices of other consumer durables. Alexander Pike (1967), an architect, compared the prices of new homes and the prices of new cars from the 1920s. Though he did not have productivity statistics, his point was clear: the productivity of construction badly lagged that of the car industry. At roughly the same time, the research department of Morgan Guaranty Trust Company (1969) wrote about this productivity divergence when discussing the potential for industrialized housing ... in “Factory-Built Houses: Solution for the Shelter Shortage?” They noted the serious problems facing the stick built industry as its productivity lagged. They showed that, over the period 1948-68, the prices of consumer durables rose roughly 22 percent, while residential construction costs rose roughly 100 percent.
Modular construction for single-family homes took off in the 1960s. Schmitz cites statistics that they "increased from roughly 100,000 units to 600,000 units" annually. "The share of factory production of
single-family residential homes began growing in the mid 1950s, rising from about 10 percent
of home production to nearly 60 percent of home production by the beginning of the 1970s
(where total home production equals stick-built production plus factory production)."

But the stick-built industry, assisted by local and federal regulators, pushed back 
While the sabotage of factory housing has been going on for 100 years, there was a dramatic surge in the ferocity of this sabotage in the middle 1970s. During this period, laws were passed, and regulations implemented, that sent the factory-built housing industry into a tailspin. These regulations, and additional harmful ones introduced since the 1970s, remain on the books and mean the industry is a shell of its former self. When this new sabotage was unleashed in the middle 1970s, the producers of factory homes were well aware of it, of course. They fought the HUD and NAHB monopolies to reverse the sabotage but lost the fight. Today the members of the factory-built housing industry are unaware of this history.
As Schmitz documents, the pushback came in many forms, including regulations and subsidies. As one  example: Who knows how high the factory share would have risen if new sabotage of factory production would not have commenced in 1968. At that time, a national subsidy program was started
for households buying stick-built homes (see below). Under these programs, households purchased 430,000 stick-built homes (per year) in the early 1970s." There have been court battles, and the "is it a trailer, is it a house" battle has been refought many times. For example, there is often a rule that a manufactured home must be built on a permanent and unremovable chassis--like a trailer--even though that's not what many customers would want. 

For those with at taste for irony, there were also complaints from stick-built construction firms that manufactured housing was "unfair competition" because it could be built so much less expensively. Schmitz cites estimates from the US Census Bureau in 2007 that manufactured homes are one-third the price per square foot. One suspects that if manufactured housing was encouraged and allowed to flourish, the cost advantage from economies of scale would only increase. 

The US economy is widely acknowledged to have a shortage of affordable housing. It has also for a century has monopolizing, competition-reducing forces that have favored more expensive stick-built housing and sabotaged the economic prospects of manufactured housing. As Schmitz points out, whatever defense one wishes to offer for these kinds of competition-restricting rules, the unavoidable fact is that the costs of the rule are carried by those of low and middle income levels, who would benefit most from lower prices. 

For readers who are interested in antitrust discussions as they apply to the FAGA companies (Facebook, Amazon, Google, and Apple), here are a couple of earlier posts that offer a starting point. 
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