What Is the Skyscraper Effect?
The skyscraper effect is an economic indicator linking the construction of the world’s tallest skyscrapers with the imminent onset of an economic recession. The theory that there is a positive correlation between the development of mega-tall buildings and financial downturns was developed by British economist Andrew Lawrence in 1999. The skyscraper effect is also known as the Skyscraper Index.
- The skyscraper effect is an economic indicator that links the construction of the world’s tallest skyscrapers with the onset of an economic recession.
- When a project such as the world’s tallest building receives the necessary funding, the country’s economy can be viewed as one that has expanded so much that the likelihood of a bust in the near future is high.
- The theory was developed by British economist Andrew Lawrence in 1999.
How the Skyscraper Effect Works
The idea that any country that constructs a record-breaking skyscraper will be punished with an economic crisis may seem a little far-fetched at first. However, dig a little deeper and it becomes clear that Lawrence’s theory has some validity.
The correlation between the development of a skyscraper taller than a recent record holder in terms of height and the ensuing event of an economic crisis can be explained in a number of ways. An economic bust usually occurs after a period of economic boom, characterized by higher gross domestic product (GDP), a low unemployment rate and increasing asset prices.
When a project such as the world’s tallest building receives the necessary funding needed to commence construction, the country’s economy can be viewed as one that has expanded so much that the likelihood of a bust in the near future is high. Hence, the building of a gigantic skyscraper indicates that the expansionary economy has peaked and needs to correct itself by going through a recessionary phase in the near future.
A rapid expansion in an economy is usually fueled by a specific on-going event such as:
- New technology: For example, the auto assembly line in the 1920s and the Internet in the 1990s.
- The establishment of a new entity: Including the creation of trust companies in the early 1900s.
- A surge in capital inflows: Such as Thailand’s hot money economy in the mid-to-late 1990s.
- Increasing asset prices: For example, the inflationary price of tulips in the 1600s.
- Government measures: Including the 1944 GI Bill of Rights and the Employment Act of 1946.
- Innovations in a sector: Such as the credit derivatives created in the early 2000s.
Economic experts sometimes call the skyscraper effect the "skyscraper curse" or the "curse of the Tower of Babel," a reference to the myth from the Book of Genesis in which the people were scattered abroad and given different languages for building a city or tower that reached to the heavens.
Examples of the Skyscraper Effect
British economist Lawrence researched the skyscraper effect for 13 years. The following historical scenarios are used to support his theory:
- The 391-ft Park Row Building was considered one of the first skyscrapers and the tallest commercial building in the world. Shortly after its opening in 1899, Philadelphia City Hall was built in 1901, surpassing the height of the Park Row Building at 548 ft. Both constructions were followed by the New York Stock Exchange (NYSE) market crash in 1901, also called the Panic of 1901.
- Plans for the Metropolitan Life Insurance Company Tower, or simply the Met Life Tower, were announced in 1905 and unveiled in 1909. The tower was an addition to an existing 1893 building. The building was considered the tallest building in the world at 700 ft. Following its construction phase, the Banker’s Panic of 1907 occurred and a financial crisis was born.
- The Great Depression which started in the early 1930s immediately followed the completion of the Empire State Building in 1931. The building, which stood at 1,250 ft, was the world’s tallest building at the time.
- In 1972, the original One World Trade Center opened its doors as the tallest building in the world towering at 1,368 ft. Only a year later, Chicago’s Sears Tower beat this number when it was unveiled standing at 1,450 ft tall. Both spectacular creations happened just before the U.S. economy was plagued by a long period of stagnation, due to high prices of oil in 1973 and a subsequent stock market crash from 1973 to 1974.
- The Petronas Towers built in Kuala Lumpur, Malaysia in 1998 were the tallest buildings in the world at the time and coincided with the financial crisis in Asia that peaked in 1998.
Recording the Skyscraper Effect
The Barclays Capital Skyscraper Index is an economic tool used to forecast impending financial downturns by observing the construction of the world’s next tallest building. The Skyscraper Index was first published in 1999 and postulates that not only is there a correlation between both events but that the rate of increase in the height of a building could be an accurate measurement of the extent of the crisis that follows.
Criticism of the Skyscraper Effect
In 2015, Jason Barr, Bruce Mizrach and Kusum Mundra conducted in-depth research and analysis on the relationship between skyscraper heights and the business cycle. The economists theorized that if building the tallest structures is an indication that the business cycle has peaked, then the plan to build these structures can also be used to forecast GDP growth.
The researchers compared GDP growth per head in four countries—America, Canada, China, and Hong Kong—to the height of the tallest buildings in these countries and posit that both factors track each other. This means that in a period of economic boom, building developers tend to increase building height in a bid to take advantage of rising incomes that follow a rise in the demand for more office space.
The research concludes that while height cannot be used to forecast a change in GDP, the GDP can be used to predict changes in height. In other words, how high a building is constructed depends on how rapidly the economy is growing but does not indicate an imminent recession.