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- [00:00]
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Tracy Alloway
Oh, no.
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Joe Weisenthal
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Joe Weisenthal
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Tracy Alloway
Bloomberg Audio Studios Podcasts Radio News.
- [01:49]
Brian Potter
Hello.
- [01:49]
Tracy Alloway
And welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.
- [01:53]
Joe Weisenthal
And I'm Joe Weisenthal.
- [01:54]
Tracy Alloway
Joe, you're a homeowner now, right?
- [01:56]
Joe Weisenthal
Yeah, it's really fun.
- [01:58]
Tracy Alloway
Tell me, tell me how fun it is. I know you've had a few issues that cropped up basically as soon as you bought your new place.
- [02:03]
Joe Weisenthal
I don't wanna talk about. Let's go, let's move on.
- [02:05]
Tracy Alloway
No, this is part of my carefully planned intro.
- [02:08]
Joe Weisenthal
Yes, I know. Yeah, it's annoying and you have to deal with stuff. And I may have mentioned on the show one time actually, I've been lucky, by and large. But yes, it was very funny. You know, I think literally the day or two days after we closed on my apartment in the East Village, you know, it's like when there was something wrong before, you just. There's just a phone number of someone and you call up the landlord. Yeah. So the building still is a super, but you know, the landlord just deals with replacing something. And then I think literally the day after we closed, there was like a window leak and it's like, wait, is there no longer a number? Do I have to pay for this myself?
- [02:42]
Tracy Alloway
So who did you find to fix the window?
- [02:45]
Joe Weisenthal
That I don't remember. There is still a super in the building and the super. But we had to write a check.
- [02:49]
Tracy Alloway
Okay. One of the things that has surprised me about being a homeowner is, like, how low tech a lot of the housing construction and fixing actually is, right? So if there's a leak in your ceiling, in your roof or something, it's literally either you or some guy that you hire going up on a ladder and, like, putting down a few more shingles with a nail gun. Right. It all seems very well.
- [03:13]
Joe Weisenthal
What did you think was going to happen?
- [03:14]
Tracy Alloway
Well, I don't know.
- [03:15]
Joe Weisenthal
Is it going to be like, some, like, unitry, like, robot that, like, crawled up their drone?
- [03:19]
Tracy Alloway
No, seriously. It's the year 2025, and we're still. Still putting houses together with, like, you.
- [03:24]
Joe Weisenthal
Know, hammers and someone. Someone comes with a box and they look through to the different. They're like, no, this doesn't fit. This doesn't fit. Oh, I got it. And then they're like, one second, I don't have the right screw, and they go around to a construction store, they'll be right back like, oh, I got this. I got. Yeah, yeah. It's still pretty probably the way it looked when we were kids.
- [03:41]
Tracy Alloway
Okay. Well, anyway, I've been thinking about it because a couple months ago, the Richmond Fed put out this paper, and it was all about productivity in housing construction. And the fact that construction labor productivity in housing has fallen by more than 30% from 1970 to 2020.
- [03:59]
Brian Potter
That's crazy.
- [04:00]
Tracy Alloway
So you think about the arc of economic development. You know, normally there are productivity improvements as we invent new efficiencies and as we invent new technology and ways of making things. That hasn't happened in housing. It's still the guy showing up with a toolbox.
- [04:14]
Joe Weisenthal
This strikes me as a really important element of the housing affordability conversation that I don't think gets enough attention, which is it's EAS to talk about zoning, and I'm sure there are issues there that need reform. It's easy. You know, permits and all that stuff. It's easy to talk about financing, et cetera. However, housing is a product, and things get built at a cost and then sold at some profit margin above that. And if that underlying cost keeps going up, and it definitely has in, say, New York City and other areas, if that underlying cost keeps going up, then that is going to push up the cost of housing, regardless of what you do on now, again, like, maybe zoning can make help with productivity gains, et cetera. Nonetheless, it continues to get more expensive for the actual construction of a home, unlike many other built goods.
- [05:04]
Brian Potter
Right.
- [05:04]
Joe Weisenthal
I mean, the issue is that we don't build homes in China, unfortunately, if we did, that would solve the problem. We don't. And maybe we could talk a little bit about why we don't, but maybe one day we will, but that would help a lot.
- [05:14]
Tracy Alloway
Well, on that note, I mean, there have been attempts through history to have prefab houses. Right. And some of the old prefab houses that you order from, like the Sears catalog in the 1920s or 1930s, those are gorgeous, and I would happily live in one of those today. But we should talk about why it seems difficult to build houses or at least more expensive than some other things, and also why it seems that manufacturing other products seems to get more efficient over time while housing seems to kind of stagger. All right, so we do in fact have the perfect guest, I'm very happy to say. We have Brian Potter, who is the author of the Construction Physics newsletter on Substack. I subscribe to this and it's fantastic. He is also the author of the new book the Origins of Efficiency and a senior infrastructure fellow at ifp. So really the perfect guest. Brian, thank you so much for coming on the show.
- [06:02]
Brian Potter
Thanks for having me.
- [06:03]
Tracy Alloway
Congrats on the book Origins of Efficiency. Are we right in thinking that housing hasn't become that much more efficient of a process?
- [06:12]
Brian Potter
You are correct. And you know, the productivity metrics, those metrics are quite complicated. And you can measure in different ways and different things. Right. Slightly different trends. Some of them just show flat productivity rather than falling productivity. But the general point is yet, yes, it has not improved, unlike almost every sort of other. Like physical good has gotten, you know, cheaper and less expensive to make over time. Housing is not like that at all.
- [06:36]
Joe Weisenthal
And you, you worked for several years for a prefab housing company or something like that?
- [06:42]
Brian Potter
Yeah, my background is in as an engineer. I worked as a structural engineer for about 15 years. That's what my training is. And just that is basically just designing buildings. So I designed parking garages and water treatment plants and apartment buildings and stuff like that. And I had worked at different facets of the industry. And as you say, it seemed extremely inefficient to me. We're putting up these buildings, we're putting up these houses, you know, on site by hand, with a guy with a hammer. You know, it doesn't look that different than it did a hundred years ago. You know, on my side it was like we're designing these buildings from scratch every single time instead of designing it once and then making, you know, a million copies of it like you do with a car or something like that. So yeah, it seemed, when I was, you know, much younger, it seemed like incredibly backward and inefficient to me. And then in about 2018, I had a chance to join an extremely well funded construction prefab startup called Katera that promised like, oh, we're going to come in, we've raised all this money, we're going to change all that. We're going to build buildings in factories and it's going to be so much more efficient. We're going to be the Henry Ford of housing and we're just going to sweep away these old methods of building. And it, long story short, it did not work out at all. They had raised a very, very large amount of venture capital about like 2 or 3 billion dollars in VC and they burned through it in a few years and declared bankruptcy.
- [08:02]
Tracy Alloway
Oh dear.
- [08:03]
Brian Potter
And then. Yeah, and in the aftermath of that, I wanted to understand why had it all gone so wrong beyond just, you know, startups are hard, right? Startups have a high, you know, a naturally high failure rate, you know, and whatever operational missteps they may have made. I kind of came to believe that there's sort of fundamental thesis that if you build these things in factories like we build everything else, it will get cheaper. I came to believe that was either sort of not quite correct or at least missing a very big piece such. We didn't know specifically what we needed to do in these, in these factories to make the costs fall.
- [08:37]
Tracy Alloway
So why are houses, I guess, so customized and not standardized to your point?
- [08:42]
Brian Potter
Yeah, so there's a lot of reasons. One is just, you know, to go back to your point about permitting, there's a very, Larry, large number of permitting jurisdictions in the US something like 20,000 different jurisdictions which each might have their own slightly different versions of building codes that sort of need to be enforced. There's just, you know, different building sites or different sizes and shapes and have different, you know, soils will require different things, different environmental design factors, you know, different wind speeds. If you're in California, need to design for earthquakes. If you need, in Florida, you need design for hurricanes. So there's all these factors that kind of conspire to make the sort of housing market very kind of fragmented. And it's hard to Build a very, very large number of like a uniform product. The builders do try to do that. They have somewhat standardized designs that will plunk down in like different developments across the country, but it's quite difficult to do in really, really large numbers.
- [09:37]
Joe Weisenthal
Talk to us a little bit more about prefab housing specifically, or housing in a factory. There have been multiple attempts and as Tracy mentioned, you used to be able to buy a home from Sears. Talk a little bit about the sort of recent trends in this area. Because you do over the last several years you've heard a lot of, maybe the last decade you've heard a lot of excitement about this idea. And as you mentioned, you worked for a well funded startup. Why now? Like what's the general thinking? And then maybe we could get into the sort of the gap between the theory and then what happened in practice.
- [10:09]
Brian Potter
Yeah, so prefab is like this perennially popular.
- [10:12]
Joe Weisenthal
Yeah, perennially. It's always, it's always the next day.
- [10:14]
Brian Potter
Yeah, it's always the next big thing that's going to come along. And so every, you know, decade or two, you will kind of see these trends like some big company will come along, like, oh, I'm going to revolutionize the building with the housing industry with prefab construction. So. And yeah, these, these attempts stretch back a pretty long way, you know, and I became something of a student of these companies that have tried and failed. So right after World War II you have this company called the Lustron Home Company which made these very interesting homes, many of which are still around. You can actually go look at them, but they're made of these like steel panels covered in porcelain that turned out to be quite well made and quite durable. And they got government financing to sort of fund their operation. They had set up shop in this big, what was once one time the biggest factory in the world. It was this repurposed aircraft engine factory.
- [11:00]
Joe Weisenthal
But they look pretty cool.
- [11:01]
Brian Potter
Yeah, they're very neat. I live in Atlanta and there's some in Atlanta that you can go and look at. But they went bankrupt after quite a few years. In the 1960s there was this company called Sterling Homex that said, oh, we're going to be the next, you know, Henry Ford of construction. They went bankrupt in a few years.
- [11:16]
Joe Weisenthal
I'm sensing a pattern.
- [11:17]
Brian Potter
Yeah, they were part of this government program called Operation Breakthrough which was trying to fund the development of like, mass production housing techniques. That program basically failed. None of their companies that they funded, and there were quite a few of them ended up sort of succeeding and breaking through and, and creating sort of these mass produced housing products. So you kind of see the same thing happening over and over and over again where people are trying to use prefab to like, dramatically reduce the cost of construction. And there's ways that you can do that in kind of like a very limited sense. And you can also, like, build a successful business off of prefab where you're not necessarily trying to compete on low cost, but things like, oh, we can build much faster or stuff like that. But nobody has managed to do what everybody is trying to do, which is like, you know, be the Henry Ford of housing.
- [12:04]
Tracy Alloway
Okay, what's the sticking point then? I know you walk through some of the reasons that houses tend to be customized, things like soil types and zoning and regulation. But is that just the story of why we can't have prefab houses that are like, across America?
- [12:19]
Brian Potter
So there's. Yeah, I kind of look at this in two ways. I, I think of it in terms of. It's very hard to introduce some of these, like, improvements, these sort of strategies you have for improving efficiency into the construction process without accumulating, like, more costs elsewhere in the process. And then so at the same time that the gains that we found in terms of like, these strategies for efficiency improvement have historically been much more limited than you see in like, if you're producing, you know, a car or a light bulb or something like that. And at the same time, we've continually added like, more regulations and more difficulty, you know, more administrative overhead and getting stuff built, which is slowly, like, driving up the cost even as, like, you know, we're not sort of accumulating these productivity improvements.
- [13:03]
Joe Weisenthal
What's an example of, okay, this on paper looks like a productivity gain that we get in a factory, but then you pay for it somewhere else.
- [13:12]
Brian Potter
Sure. So, you know, a very simple example. You know, if you're building a car in a factory, you build the entire car, right. It rolls out of the factory line and the car is complete. A building is too big to come out of the factory all in one piece and get sent to the job site or whatever. So what happens is you have to sort of build your building in chunks. You know, that's why prefab construction is often called modular construction, because you build it in these modules. And there's different strategies for like how you break a building into modules, but you're always like, breaking it into these pieces. And what happens, you break it into pieces is that you have to add a bunch of extra stuff that you wouldn't have had to add if you were just building it on site so transporting it down the road. You have to sort of design that to be rigid enough to like not collapsed under like the load of like being bounced along on a truck. I used to work at a company that build concrete parking garages which are built from prefabricated, you know, materials. They build these like big concrete pieces and then drive them down the road. Road. And that was like the controlling design factor is designing to survive the loads that would concur during transportation. And then once you have those pieces driven down and gotten to the job site, you have to like stitch them together. And so you have all these extra connectors and this extra complexity and attaching them together that again doesn't exist in sort of the conventional construction process.
- [14:31]
Joe Weisenthal
It's kind of crazy to think that whether we're talking about a house or a parking garage that's presumably designed to last for decades, that are very significant factor in engineering is that few hours that it goes down the road. I mean that's what it sounds like. Yeah, like that's like that's gonna last forever. But it has to be there just for that, like that short transport period.
- [14:52]
Tracy Alloway
In the case of parking garages for sure. I guess that's why we do have some prefab houses in the US and they're called trailers because you can actually move them.
- [14:59]
Joe Weisenthal
Right.
- [15:15]
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- [16:46]
Tracy Alloway
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- [17:33]
Brian Potter
There is to, to some extent I think that specific liability is not necessarily the biggest controlling factor. What is a big controlling factor, and I've written an essay about this, is that the construction cost, like the cost of developing and putting up a new building, the sort of distribution of that is extremely fat tailed and right skewed, which so basically what that means is that a construction project that goes under budget, that goes really, really, really well, maybe you're like 10 over budget or under budget, maybe you're 15% under budget. You know, you can't push down that cost very much. But a project that goes over budget can be 100 or 200 or 3 per 100% over budget. So what that means is that the risk involved in like introducing some new system that you're not sure really how it works. It just the payoff is so asymmetrical. It's so much more likely to cause like a massive overrun than to sort of save a relatively small amount that these sort of builders are like rationally incentivized to not introduce some radically new technology that's going to dramatically change how things go because the potential costs are so extremely high.
- [18:40]
Joe Weisenthal
Sort of maybe dovetailing with Tracy's question, you know, or maybe in the case of Katera or some of these others, it's like, okay, they have some vision, but because they're not doing the entire thing all around the country, including presumably transport, et cetera, how much is the issue, like maybe Scale on those ends, Experience with that. Like, in theory, if you had a really big experience on the ground distribution and final assembly workforce or whatever it is, like, how much would that help? And how much is the issue that people who work on the ground, etc. Just aren't doing this full time?
- [19:16]
Brian Potter
Yeah, that's a part of it is like, you know, this modular construction is kind of a somewhat. Yeah. Niche aspect of the construction industry. There are quite a few experts in it that know how to do it and they do it fairly regularly and you can usually find them in like any given market. I would say a different point that you kind of alluded to. Scale is like another definitely big issue where it's like. It's not like a semiconductor where you can make a million of them in a factory in Taiwan and ship them all over the world. Right. That's another big aspect that makes it hard to sort of gain efficiencies from factory production and goes to what I was talking about, where it's hard to do that without introducing cost elsewhere in the system. The cost of like moving these modules around is so large that it's typically not economic to ship it like more than a day's drive because then the costs just get so high and. And so what you have instead of like one giant factory that can like produce at really, really large scales, even sort of these modular companies that are doing like large amounts of business, they all tend to be like done in factories like that are spread across the gigafactory. Yeah. So like. So like you talk about like trailers, like manufactured homes, which is one area that you can actually see some pretty substantial cost reductions due to various things. Partly it's like they're targeting a lower end of the market and stuff like that. So, like, the finishes and stuff aren't quite as nice. But if you look at like the way that their business is structured, they have like more than a dozen factories spread all across the US and then each one is serving like a day's drive catchment area. So they're not building like 50,000 houses or whatever in one factory. It's more. It's closer to like 500 or a thousand or something in. In one factory. And so the economies of scale that you can capture in like a given operation are just fairly limited.
- [21:01]
Tracy Alloway
Joe, I have to mention here, we didn't tell Brian that we were going to be talking about housing construction and trailers and all of that. This is all just off the top of his head, so I know. Pretty impressive.
- [21:10]
Joe Weisenthal
He sat down and we're like, by the way, can we talk about this?
- [21:13]
Tracy Alloway
Okay, you kind of alluded to it in your previous answer, but if you were going to choose a manufacturing process that was the polar opposite of housing, what would it be?
- [21:23]
Brian Potter
Oh, interesting. Probably something like chemical manufacturing, you know, or like, you know, raw material manufacturing, something like steel or something like that. Because chemical manufacturing, it's, you know, the sort of ultimate form of like a manufacturing process, which I kind of talk about in the book, is what's called like a continuous flow process, where it just like continuously transforms your group of inputs into the output of what you're doing. Just one, you know, continuously, without any sort of waiting, interrupting or batching or anything like that. It just all flows and is continuously transformed during the process. And that's what like chemical manufacturing, you know, very efficient chemical manufacturing is. Is done. And most other, like, really efficient manufacturing processes, they ultimately tried to sort of converge on something that looks like that. So like the assembly line and like, mass production is kind of a way to like, get something that approaches like a continuous flow process in these, like, very complex manufactured goods with like, thousands of parts. That was why it was such a huge transformative thing, is because now you could have this continuous flow process which existed before for, you know, much simpler things, but now you could adapt that to like, these really, really complex goods like cars. And that's why it was such a transformative thing when it was sort of invented in the early 20th century.
- [22:37]
Joe Weisenthal
I'm curious, do the economics or the diseconomics of building houses in this way? Do they inform your perspective at all on the prospect for small modular nuclear reactors? I mean, there sounds like there are some similarities, especially when it comes to, like, learning curves, etc.
- [22:55]
Tracy Alloway
Or the soil of where you're building.
- [22:56]
Joe Weisenthal
Any views on that? Yeah, having. Do you think there's any parallels? So, yeah, because this is also something that is always the next decade away, right?
- [23:03]
Brian Potter
Yeah, yeah, yeah. So, yeah. So. So I talk about economies of scale in the book and we're talking about, like, nuclear stuff. There's like kind of two related economies of scale that in some ways kind of pull in different directions. One is called, and you see this with like, other sort of processing equipment, which is I call geometric scaling, which is basically as you build a piece of equipment physically larger, it costs less per unit of whatever it is that you're producing, basically because of, like, area volume relationships. As you double the volume of something, you less than double the amount of like, surface area required to enclose it. And Be that like tanks or pipes or stuff like that. So like chemical processing equipment or like power plant equipment tends to get cheaper per unit of what you're producing up to a certain point. And eventually you run, it gets, you run into difficulties and those scaling laws stop working. And this is one reason why power plants, you know, and electricity got cheaper over sort of most of the course of the 20th century is because we're building these power plants physically larger. But with nuclear, you run into these very nasty diseconomies of scale around the same thing was because as a nuclear plant gets bigger, the accidents they could have get more dangerous. For like a very small reactor, you can make it so you basically can't have a meltdown. There's just not enough heat in there to like melt through your container or whatever. But for a very large one, the heat gets so large that the accidents become, the risk becomes much, much larger. And so you have to have these like, very involved safety systems that maybe you don't need to have on like a smaller reactor. So that is something that maybe points to a reason why these maybe small modular reactors were better. Plus, as you say, now you're getting, it's sort of the benefits of like getting, yeah. Series production and repeating it over and over and over again. But there is that trade off is that you're not getting those geometric effects that traditionally, like a lot of this, like processing type equipment has relied on to get cheaper.
- [24:55]
Tracy Alloway
This actually reminds me of something I wanted to ask, not necessarily about nuclear, but just manufacturing in general. When I think about efficiencies, I think about stuff like reducing costs as much as possible, maybe just in time, inventory management and stuff like that. The problem is that if something goes wrong, there's very, very little cushion for protection. And I'm curious, when it comes to efficiency, how do people balance streamlining production with, I guess, building in redundancies in case the worst happens?
- [25:25]
Brian Potter
Yeah, that's, that's really interesting. And the Toyota production system, slash lean, which is like a descendant of it, which I talk a lot about in the book, is kind of an interesting balance of these two things. Because everybody thinks lean or Toyota production system, it's like, oh, yeah, just in time. Get rid of inventories, you don't have all the costs. You know, your factories can be smaller, blah, blah, blah. But really what it is, it's sort of a balance of like, for every factor that you can control, try to like, have like the flow be like as smooth as possible and eliminate all this, like, you know, slack and waste in the system. But for the things that like you can't control, you should have your system adaptable to sort of accommodate that and be have sort of a flexibility built into it. So like one example is after the sort of, you know, to bring it back to nuclear, after I believe the sort of Fukushima nuclear accident in Japan, Toyota had, it ran into like a shortage of like automotive semiconductors for a while and they realized that this was like a big like potential like just bottleneck in their process. So after that, even though they're like so focused on, you know, inventory minimization and whatever, after that accident, they basically decided they were going to like stockpile certain critical things that maybe had difficult lead times or something like that. And so they stockpiled like automotive semiconductors. And so during COVID when all of a sudden there was all of a sudden a huge like shortage of like automotive semiconductors. Toyota for a while was like much less affected by some of these other than other mid car manufacturers because they had learned the lesson that oh yeah, in sort of, you know, logistics crunches, these semiconductors can be quite difficult to get. And so basically people were saying, hey, I thought you were all about like inventory minimization or whatever. But then somebody, you know, some spokesman basically responds like no, this is basically a standard lean solution where it's, you try to minimize the sort of waste in the sort of areas that you can control, but in the stuff that you can't control, you need to sort of adapt your system to accommodate it.
- [27:21]
Joe Weisenthal
I want to talk more about housing, but I want to do a little detour America seems to have gotten because I'm trying to understand sort of big picture, the trajectories in this country for various things. You know, I joked in the beginning the problem with housing is that we haven't found a way to offshore it to China. If we did, then probably housing would have gotten cheaper like everything else that we have manufactured there. But I'm curious, do you have like a theory? Because I haven't heard a satisfactory answer why the US seems to have gone backwards in plane construction. Like why does Boeing seem to be worse at the job of building an airplane than it was say 20 years ago?
- [27:57]
Brian Potter
Oh yeah, that's interesting. One point about your housing construction in China. There actually are companies that like try to do this stuff in China. They were like manufacture these modules. But again to my point about, you know, you incur all these. Yeah. Shipping and all that, you know, they have to, you have to break them into modules and Put them on these boats and bring them over. So it's, you know, it's a very sort of niche business in terms of Boeing. I mean, the standard, you know, story there is that they ended this merger with McDonnell Douglas. The finance people.
- [28:25]
Joe Weisenthal
I don't like the standard.
- [28:26]
Brian Potter
Yeah.
- [28:26]
Joe Weisenthal
And here's why, because I love it so much. Right. And so it's like, oh, it's such a good story.
- [28:31]
Tracy Alloway
Perfect.
- [28:31]
Joe Weisenthal
It's too perfect. They brought in the finance people, they care about the shareholders too much. Looking at the Boeing stock chart, you would not think this is a company that cares a lot about shareholders.
- [28:39]
Brian Potter
Right.
- [28:40]
Joe Weisenthal
They care about shareholders too much. And if they had just stuck with the engineers. I love that story. And because it feeds all of my biases, I'm like, skeptical.
- [28:48]
Brian Potter
Yeah. And you know, a big part of it is just manufacturing commercial aircraft is like extremely hard. There's like a reason that only like right now, two, maybe three, maybe four companies in the, in the entire world do it. Boeing, Airbus, Embraer in Brazil of all places. And then comac is looks like it's going to be the big fourth one. You know, Japan tried for many years to sort of break into the commercial aircraft manufacturing market and they were, you know, after spending like billions of dollars, they were basically gave up just because it was so difficult. There used to be many more competitors in the 1970s and they sort of got winnowed down one by one, one or two plan projects that don't pan out and you're basically out of business. That's essentially what happened to Lockheed. And so it's just a very, very difficult business to sort of be in. And so Boeing is having a lot of struggles right now. But you know, earlier in the 21st century you have Airbus having a lot of struggles. They had all sorts of problems, I think on their A380 that they were rolling out, they had like a lot of delays and stuff. They had to fix on it as well. So a big part of it is just it's a very difficult business to be in. There's very few people that can kind of really do it effectively.
- [30:16]
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Tracy Alloway
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Brian Potter
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Joe Weisenthal
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Joe Weisenthal
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Brian Potter
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- [32:11]
Joe Weisenthal
That's metronome.com Here's a question that I've wondered about, and maybe it relates to planes and maybe it relates to housing, maybe it relates to other things like when you see us going backwards or stalling out. Like here's my question, could we have some sort of. I don't know if Dutch disease is the right answer, where it's like maybe in the middle of the 20th century there were people who were working on the floor or working in management at Boeing in a plant somewhere in Washington who are really on the ball and really whatever. And now in that same person in 2025 could make 10 times as much money working for a startup in Silicon Valley or Wall street, et cetera, that there's some sort of like levels of, you know, awareness or skill or agent icness or whatever, et cetera. And that because we have these other areas where there's so much money, that there's like a type of individual who used to maybe work in a sort of Construction related field that left that and then it's changed the talent distribution.
- [33:09]
Brian Potter
Yeah, I think that's definitely part of it. There's like a theory in certain circles that we've just, we've gotten like in a sense too good at like allocating talent efficiently or whatever. So like somebody extremely like talented and smart, it's like, okay, we're going to send you to be a software developer or an AI programmer or work in finance or whatever and you're the value that you contribute there is going to be very highly rewarded. But what that means is like there's, you know, there's fewer people going into sort of these other sort of, you know, engineering disciplines. I worked as a structural engineer which is, you know, it plays reasonably well but doesn't, you know, not Silicon Valley software developer salary. And I used to sort of tell very young engineers or engineers thinking about in college or whatever. I used to say, you know, if you're smart enough to be a structural engineer, you're smart enough to you know, switch to like software development and make a lot more money and have a much less stressful job. Yeah, I, there's like, there's like this is, I think one part of the reason why, you know, Bell labs, very famous at&t r d lab in US invention factory for most of the 20th century, why it would be very hard to have a sort of organization like that today is because the quality of talent that you could, a place like that demanded would be so much more rewarding.
- [34:20]
Joe Weisenthal
Those hundred million dollar merits. Yeah.
- [34:22]
Tracy Alloway
Somewhere else, just quickly on aircraft. It's not like the US doesn't have a history of producing like large scale amounts of planes. And the example that everyone tends to turn to is in World War II, right. We produced I think hundreds and thousands of aircraft very, very quickly. What were the conditions that existed back then that allowed us to ramp up that kind of production so fast?
- [34:45]
Brian Potter
Yeah, I've written about aircraft manufacturing during World War II. The US actually built more airplanes during World War II that have actually been built during, for commercial purposes for the entire history of stunning. It's because we built, you know, so many of them and not that many commercial aircraft get built. I think a big part of it is just the US was just such a huge manufacturing power at like the mid 20th century. You know, we weren't building very large amounts of airplanes, but we were building more cars than anybody else. We're building more machine tools anybody else. We're making more steel than anybody else. The US was like, you know, the China of today, it was like the, by far the largest manufacturing country in the world. And so we just had the ability to sort of earn, redirect this manufacturing capability and talent into sort of these, these new industries. I think that was a very large part of it.
- [35:37]
Joe Weisenthal
You know, people think about, it's maybe since we're talking about war, we're talking about the US as the China of the 20th century, which is kind of sounds very.
- [35:44]
Tracy Alloway
Eric Adams. Yeah, the US is the China of the 20th century.
- [35:48]
Joe Weisenthal
I'm curious, when you think about it, like, could there be more than one global manufacturing hub? Because when you think about economies of scale and you think about network effects, you know, it's like how many other cities in the US have tried to be the San Francisco or the Silicon Valley and they've never, you've really never replicated. When you think about sort of agglomeration and network effects, et cetera, and you think about what it takes for manufacturing and you think about, okay, now in the 21st century, China is the China of the 21st century. And you think about the efforts at us sort of re industrialization because there's all this angst about whatever. We can't build advanced things. It's like, well, can we have advanced things if we don't also do the simple things like washing machines, et cetera? Like can there be more than one in the world at any given time? Or does market logic sort of dictate that one will be the powerhouse?
- [36:35]
Brian Potter
Yeah, that's a really interesting question. And so my first answer is that I don't know. And the second, the second answer is I think historically kind of what you see is that like transportation costs have kind of been something of a barrier to preventing one country from like just dominating production of a certain thing. So even like when in the 80s and 90s when Japanese like car manufacturers were like trouncing the US it was still so expensive to like ship them from Japan or whatever that you know, they still, it was still valuable to like set up local manufacturing operations in the U.S. they still wanted to build their plants in the U.S. to sort of make it not so expensive to sort of transport these things. So I wonder if like as transportation has gotten more and more inexpensive, I wonder if that has like shifted the logic of this and you can have this sort of like concentration of production in a way that maybe it wasn't quite, didn't quite make sense to do before when like these transportation costs bit a little bit harder, I don't know. But it's an interesting way of your interesting question.
- [37:40]
Tracy Alloway
Just going back to Boeing for a second. So we talked about the classic story of what went wrong at Boeing, and it's that tension between, I guess, the manufacturers on the ground and the executives in the boardroom who are trying to cut costs and boost the share price and things like that. Is that like a trend or a thing that you tend to see across manufacturing where the manufacturers are constantly under pressure from the finance execs on the top, or are there companies out there who have, like, cracked that relationship where finance and manufacturers, engineers kind of work together?
- [38:14]
Brian Potter
Yeah, I think, you know, the pressure definitely seems to be constant, pushing to find lower cost and which is one reason why, you know, the trend in the second half of the 20th century was like, just outsourcing, finding new places to sort of make this stuff that is cheaper. I talk about Nike in the book, and there's sort of an interesting path that Nike takes where it's like constantly hunting the cheapest sources of labor, where they start out manufacturing somewhere cheap. Right. They start out manufacturing their shoes in Japan because it's much cheaper to make them there than in the US but then as Japanese labor starts getting more expensive, they moved their manufacturing to Taiwan and then from Taiwan to China. And I think now it's almost all done in like, a Vietnam and Indonesia. So it's just constant hunt for the new sources of labor. And you see that just broadly across industries like where New York, which used to be sort of a garment manufacturing center, but as New York labor got more and more expensive, they moved, you know, across, you know, out of state, into New Jersey and then to the south and then over overseas. So there's this constant pressure. But then there's also companies that have, like, I think, bucked that trend and been, you know, more like. We think the returns from, like, investing in our workforce and its capabilities is going to be valuable enough that we're going to do it. I think, you know, a company like Nucor, which is a steel company in the US which is like, very famous in terms of, like, how it invests in its workforce and things like that, and they've been extremely successful, successful in doing that. They grew from nothing to being the. The largest steel manufacturer in the U.S.
- [39:45]
Tracy Alloway
I believe that just reminded me something that I really want an answer to. And you might actually have it. Why are communists obsessed with steel?
- [39:52]
Brian Potter
Oh, good question. I just think in the, you know, sort of the early 20th century, late 19th century, these were the things that like, represented like, industrial might and like successful country or whatever. And then they never kind of like got out of that sort of framework or whatever. So like one criticism of you know, the Soviet Union was that you know, they were really maybe good at sort of building these like industrial things, but they never managed to build like a successful computer or anything like that. They couldn't get out of their sort of mindset. It's, it's sort of maybe easy to measure like success in terms of like output or whatever. It's just like relatively, relatively simple commodity.
- [40:30]
Tracy Alloway
That you can write this physical thing.
- [40:31]
Joe Weisenthal
You can point to, you can point.
- [40:33]
Tracy Alloway
To pile of steel.
- [40:34]
Brian Potter
The more tons you have, the better you've done with more complex things. Maybe it's not maybe so amenable to sort of this like top down management style. I don't know. But those are some of my theories.
- [40:43]
Joe Weisenthal
Let's get back to housing because when we started and Tracy was talking about the fact that even setting aside the prefab stuff and you're talking about it, the actual on the ground, one off, etc. Home building, it's arguably by some measures productivity has gone backwards or maybe it's flat. Setting aside like prefab, you mentioned zoning regulations, et cetera. What is your view for why just the normal sort of style of housing construction hasn't gotten any more efficient over the years?
- [41:13]
Brian Potter
Yeah, and so I talk about the kind of this in the book. This goes to sort of this, the main thesis of the book where I sort of break down. There's a specific points of intervention that you can do in any process to make it cheaper. I've talked about these a little bit, you know, economies of scale. You can make more of what you're doing. You can introduce some like fundamental new technology. You know, an example of this to talk about steel, like the best summer process for making steel which like fundamentally was simpler and took less inputs than the processes that, that came before it. So I kind of break down these different factors in the book of like what you need to do to make some process more efficient. And if you can do those things your process can get cheaper and you can sell it for less. And if you can't do those things you're, if you know you can't make the process any cheaper. And all those basically paths to improvement are either like blocked or like very difficult to do in construction. So we like, we talked about economies of scale. That's a big one. We talked a little bit about risk aversion. It's hard to kind of introduce like fundamentally new technology the cost of your inputs is like a big one. You know, the materials and sort of energy and labor that you're using in the process, those costs are hard to sort of reduce in construction, sort of. It's very hard to make building materials any cheaper than they already are. And kind of in like, you know, dollars per pound or dollars per like cubic foot terms. They're basically as cheap as anything that civilization produces. It's not easy to make those things cheaper than they already are. It's also hard to use less of them in a way that doesn't make the house worse. And so all these paths are that you have, you know, that a process can take advantage of to sort of get less expensive. They're all very difficult to do in construction.
- [42:55]
Tracy Alloway
I just remembered another question that I always want to ask people, and I feel like you will also know the answer to this one, which is why does America build houses out of wood frames and timber versus the rest of the world where they tend to use a lot more cement and concrete?
- [43:10]
Brian Potter
Yeah, so the wood US has historically built a lot of stuff out of wood because we had such huge stuff supplies of it in places like Europe. A lot of those, you know, large forests got cut down way earlier. And so they just didn't have the huge, huge supplies of wood that the U.S. had. And so that kind of, you know, shaped how the technology developed because wood is very, very inexpensive. You can use it. It's a very inexpensive way to sort of build a house. They do actually do sort of still timber frame construction in other parts of the world. It's maybe not quite so dominant, but it's like used in the uk. Germany uses it. Germany actually they have some like prefab construction startups that are made using like timber frame, timber panel construction. It's used in a lot of the Nordic countries that have a decent amount of supply of wood. So it's not like unheard of. It's. It's most dominant in like the US and in Canada. But in other places that have a decent amount of wood, they tend to use it as well.
- [44:02]
Joe Weisenthal
Should we completely give up on prefab or major efficiency gains in housing in the US or like, is it just there's not a way to do this or is there still out there some magic bullet that's waiting to be found?
- [44:16]
Tracy Alloway
You should tell us what happened to the company you were working for as well.
- [44:19]
Brian Potter
Yeah, so they, yeah, they raised a huge amount of money and they basically, after raising like several billion dollars and building all these factories to like, you know, mass produce housing. They basically ended up going bankrupt partly because they were never able to, you know, sell enough of these buildings that they were trying to sell. It's very hard to, like, pivot your operations when you're, like, invested in all this, like, physical infrastructure. And then Covid, you know, was kind of the final nail in the coffin. I'm not completely pessimistic. I mostly just think if you're gonna sort of try to change the industry with prefab, you need to have a very strong thesis as to what specifically this time is different and, you know, why it didn't work previously and what is now has changed, what constraints have been relaxed that will make it possible now. And I don't have any number of things could change that. You know, certain materials get cheap enough, it gets, like, inexpensive enough to build a factory. You know, any number of things. I think that very, very good automation and robotics have a good chance of changing this, just because, even if nothing else, you know, I'm not the most creative person in the world. You know, I can't necessarily come up with, like, some amazing new way of putting a house together. But if, even if nothing else works, if you have, like, a robot that costs $5,000 and, like, basically duplicate, you know, 90, 95% of what a person can do, that would effectively solve your problem, right? You drop in these robots and you build, you know, whatever it is that you're trying to build using this robotic, much less expensive labor. And I have a sort of a vignette in the. In the conclusion of the book as to what that might look like in the future.
- [45:50]
Tracy Alloway
So we could get the. The drones that go up on the roof and fix leaks and stuff like that.
- [45:55]
Brian Potter
Why, anything's possible.
- [45:56]
Tracy Alloway
All right, Brian Potter, thank you so much for coming on Odd thoughts. Really appreciate it.
- [46:01]
Brian Potter
Thank you. It was great to be here.
- [46:15]
Tracy Alloway
Joe. That was a really fun conversation.
- [46:17]
Joe Weisenthal
Yeah, that's really fun. I love Brian's stuff, and I feel like one of those conversations where both of us could just ask a bunch of questions we've been meaning to ask for a long time.
- [46:25]
Tracy Alloway
I did read, apparently his new book, the Origins of Efficiency, has a bibliography that's like 600 items long.
- [46:33]
Joe Weisenthal
Amazing.
- [46:34]
Tracy Alloway
Which is incredible to think about him pouring over, like, 600 different reference sources.
- [46:40]
Joe Weisenthal
We didn't get into it in this conversation, but he's written about his process before of like, okay, I want to learn about some new industry, like fighter jets or whatever it is, and how he goes about diving into it. Et Cetera. And yes, it's seen as like, you have to build.
- [46:54]
Tracy Alloway
A lot of people who talk about stuff. I should probably read that.
- [46:57]
Joe Weisenthal
Yeah, totally.
- [46:58]
Tracy Alloway
Speaking of which, I am very proud of us for not mentioning the word deflator at all in a conversation about housing productivity. Housing construction, productivity. I should just mention that Richmond Fed paper that I talked about in the intro. So their conclusion was sort of an amalgamation of all the factors that we talked about in this conversation. So they basically said they think that smaller construction firms have reduced incentives to invest in technological innovation because you don't get that economy of scale. And in fact, if you look at areas with stricter zoning laws and things like that, you can see that they actually have even less construction productivity than other areas. Again because, like, the incentives and the economies of scale just shrink and shrink and shrink. So that's kind of interesting.
- [47:44]
Joe Weisenthal
It would be interesting. Something I was sort of curious about during that is I wonder if. If you just look at one market where it's very flat and dry. I was thinking about Arizona or something like that. Like, have they seen productivity gains there? Especially thinking about some of our conversations with Chase Emerson where there's one master plan and a bunch of houses we all have, driven by them that all look exactly the same. Do you get those learning curves, at least on some limited effects? I would be curious about that.
- [48:11]
Tracy Alloway
I feel like to some extent, that is the story of the Sun Belt States. Right. You have cheaper houses there because you can have these big developments.
- [48:18]
Joe Weisenthal
But it's scale. It's scale all the way down. And so I like that point that he made, which is that you can identify the sources of efficiency gains. Scale is 1. A scientific breakthrough, such as the Bessel or process in steel is another one, et cetera. But they're not magic. They're not just going to emerge. You know, you probably get some efficiency gains just from, you know, repeatable process or sales, labor force that gets better over time. But by and large, you're not just gonna. The silver bullet isn't gonna come out of nowhere.
- [48:49]
Tracy Alloway
Yeah.
- [48:49]
Joe Weisenthal
And especially the fact that there are all these sort of very fundamental reasons why you can't have scale. Or even the factories that build the prefab homes cannot be a gigafactory due to distribution costs. You see why that you run into that constraint.
- [49:02]
Tracy Alloway
That's what I was thinking. It's like the tyranny of physics, basically. Like, even though we have all these technological breakthroughs, transportation has gotten cheaper over time. You're still limited by geography. And the realities of, you know, real world objects. And I guess that's why you can have gigafactories for something like chips, which are really easy to send abroad. They're tiny, but you can't do it for something large.
- [49:27]
Joe Weisenthal
And I really am curious about the sort of the point about talent distribution and whether they're, you know, in the 1950s, for a certain type of talent, the Boeing factory was the best place they could have gone. That was the cutting edge and that was the cutting edge. And now the Boeing factory still more or less resembles the Boeing factory of the 1950s, with maybe similar pay scales and so forth. I'm sure the nominal pay has gone up a lot, but there are just so many great opportunities to make 10 times or much more money elsewhere. And so the sort of remaining talent, whether that has an effect on how well it can operate, I'm very interested.
- [50:01]
Tracy Alloway
In, you know, what Boeing needs.
- [50:03]
Joe Weisenthal
Go on.
- [50:03]
Tracy Alloway
They need like a Mad Men style TV series that glamorizes the aircraft manufacturing process and gets people interested in it again.
- [50:12]
Joe Weisenthal
Yeah, no, that's a really good idea.
- [50:13]
Tracy Alloway
All right. That's a free idea for Boeing. All right. Shall we leave it there?
- [50:16]
Joe Weisenthal
Let's leave it there.
- [50:17]
Tracy Alloway
This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me, Racee Alloway.
- [50:23]
Joe Weisenthal
And I'm Jill Wiesenthal. You can follow me at the Stalwart. Follow our guest Brian Potter. He's Brian Potter. Follow our producers, Carmen Rodriguez, Armenarmon, Dashiell Bennett at dashbot and Kale Brooks at Kale Brooks. For more Odd lots content, go to bloomberg.com oddlots where we daily newsletter and all of our episodes and you can chat about all these topics 24. 7 in our Discord Discord GG Oddlot.
- [50:46]
Tracy Alloway
And if you enjoy odd lots, if you like it when we talk about how stuff gets built, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all all of our episodes absolutely ad free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.
- [51:37]
Brian Potter
Wishing the holidays could come early. If you own or manage your business, they can with help from iHeartradio. People are already shopping for their loved ones and hunting for deals wherever they can find them, including right here. They're listening to the radio, they're listening to podcasts. They could be listening to you. Don't wait for everyone else to kick off the holidays. Get your best season of the year up and running today. Call 844-844-IHEART or visit iheartadvertising.com There are two kinds of people in the world. People who think about climate change and.
- [52:11]
Tracy Alloway
People who are doing something about it.
- [52:13]
Brian Potter
On the Zero podcast, we talk to both kinds of people. People you've heard of, like Bill Gates. I'm looking at what the world has to do to get to zero, not.
- [52:23]
Joe Weisenthal
Using climate as a moral crusade, and.
- [52:25]
Brian Potter
The creative minds you haven't heard of yet. It is serious stuff, but never doom and gloom. I am Akshat Ratty. Listen to Zero every Thursday from Bloomberg Podcasts on Apple, Spotify or anywhere else you get your podcasts.