An Object Lesson in Austrian Business Cycle Theory

ABCT states that central bank money creation tends to shift the capital/consumption ratio in favor of capital, since much bank lending of newly created money goes to the capital goods sector. If the central bank money printing stops, those industries that saw the influx of new money into their sectors of the economy suffer the worst during the downturn, i.e., the readjustment period toward the old non-manipulated capital/consumption ratio.

Keynes' aggregate demand theory over aggregates economic theory and simply looks at an the economy as suffering an overall drop in demand, without noticing that capital goods sectors, such as construction, are much more severely impacted. KT fails to notice that the drop in demand is not smooth across all sectors and that, indeed, some sectors, namely immediate consumption goods sectors, such as the movie theatre industry, actually experience growth.

Today's WSJ gives us an object lesson on how one capital goods sector beneficiary of central bank printing, the construction industry, is now suffering because of the halt in central bank money printing. Alexandra Berzon reports:

Over the past 25 years, Larry Valdez has worked as an electrician in Grand Junction, Colo.; Duluth, Minn.; Salem, Ore.; and more than a dozen other places.

A skilled tradesman with a union card, he could always hop from one job to the next, building a mall, a power plant or a microchip factory. Five years ago, he landed in Las Vegas as developers were breaking ground on a series of lavish hotels and casinos on the Strip.

Thousands of carpenters, ironworkers, electricians, pipefitters and other tradesmen were lured here by the concrete and steel rising from the desert -- and the promise of steady work and higher pay. Known in the trade as "travelers" or "boomers," they have long served as a sort of a roving labor pool, providing the skilled manpower needed to get big projects off the ground -- no matter where they popped up.

Now, many of those Las Vegas construction projects have been mothballed or are nearing completion. Usually, Mr. Valdez, 52 years old, would be striking out for the next job by now. Instead, he has been out of work since April, with no prospects

The economic downturn has hit construction harder than most other industries. The unemployment rate for construction workers was 16.5% in August, double the rate a year earlier and the highest of any industry. The industry shed nearly a million jobs in the past year, a fifth of all jobs lost, as development slowed nationwide.

In Las Vegas, there were 21,000 fewer construction jobs in August than a year earlier -- a 20% drop. It is a sharp turnaround for a city where developers had planned more than $55 billion of condo, hotel and casino projects. The centerpiece is MGM Mirage's $8.5 billion City Center resort and casino, which employs about 10,000 construction workers.

Steve Holloway, executive vice president of the Las Vegas Associated General Contractors chapter, said about 15,000 union travelers came to Las Vegas during the boom. "Everyone was saying, 'Jesus, are there enough workers to do all this work?'" recalls Marc Furman, president of the Southwest Regional Council of Carpenters. That changed in August 2008 when Boyd Gaming Corp. halted its $4 billion Echelon project on the Strip. "Now it's like musical chairs. Everyone got to Vegas and is just sitting here," he said.