Chapter 9 Links

1) Ed Glaeser writes at the Boston Globe on Detroit, “Sensible people don’t incur debts during their peak earning years and then expect to pay the bills when their income starts to fall. Detroit did just that. Detroit’s debt overhang doesn’t just impose overly high costs on the city’s now modest tax base. It also scares off new businesses. What firm wants to own part of that obligation?”

2) I’m on the Cato Daily Podcast talking about Detroit and municipal bankruptcy and writing about how creating a charter city could help the city’s population and economic growth challenges at The Umlaut.

3) Ilya Somin points to the role of eminent domain in slum clearance and urban renewal efforts as a key contributor to the city’s decline.

4) Cost overruns aren’t just for transit. Construction on a Wayne County jail was halted after costs went 30-percent over budget, and the county is now seeking proposals from developers to buy the seven acre site. This is a fortunate development from an urban development perspective because anything a private investor builds will be better for downtown Detroit than a prison.

5) On an uplifting note, Sandy Ikeda writes at Wabi Sabi about the role of cities in the market process:

Living cites and successful markets bring intellectually and culturally diverse people together to their mutual advantage, but they also create conditions in which vast amounts of novel information—about science, technology, religion, music, the arts, and lifestyles—get dispersed very rapidly. That in turn allows all kinds of people, the ordinary and the extraordinary, to experiment and to make new connections among all that information, generating even more diversity and attracting even more people. In this way, cities become “incubators of ideas” and economic growth. The process is highly dynamic, but also very messy and, yes, in a sense inefficient. Most experiments fail. But someone who fails in a city, unlike her counterpart in less-urbanized cultures, need not starve as a result, and there is more likely to be some new opportunity just around the corner.  We see the successes that drive innovation, but the failures are important, too.

Fictional Scandal at the NYC Landmarks Preservation Commission

Stephen’s post on alleged corruption at the New York City Landmarks Preservation Commission reminded me of a great scene from The Bonfire of the Vanities that I wanted to share here. Tom Wolfe describes a scenario in which a black bishop wants to sell his church’s property in order to raise money for the congregation. The fictional mayor’s assistant explains:

“The bishop wants to sell St. Timothy’s to a developer, on the grounds that the membership is declining, and the church is losing a lot of money, which is true. But the community groups are putting a lot of pressure on the Landmarks Commission to landmark it so that nobody can alter the building even after they buy it.”

“Is this guy honest?” asked the mayor. “Who gets the money if they sell the church?”

“I never heard he wasn’t honest,” said Sheldon. “He’s a learned gentleman of the cloth. He went to Harvard. He could still be greedy, I suppose, but I have no reason to think he is.”

The mayor meets with the bishop to discuss the issue of preserving the church and realizes that Bishop Thomas is an ideal connection to improve his approval with the black community. The mayor agrees to prevent the church from being landmarked and the bishop is overcome with gratitude at the benefit selling the property will provide the congregation. Then the mayor tells the bishop that he wants him to serve on a new “blue-ribbon commission against crime.” When the bishop declines because the commission would conflict with his role in the church, the mayor says not to worry about the church remaining without landmark status:

“Don’t worry about that at all. As I said I didn’t do it for you and I didn’t do it for your church. I did it because I think it’s in the best interest of the city. It’s as simple as that.”

When the bishop leaves, the mayor immediately picks up the phone:

“Get me the Landmarks Commissioner.” Presently there was a low beep-beep, and he picked up the phone and said, “Mort? You know that church, St. Timothy’s? . . . Right . . . Landmark the son of a bitch!”

[Tom Wolfe, (1987) The Bonfire of the Vanities, Chapter 27]

While of course Wolfe’s portrayal of the interaction between city hall and historic preservation may not be realistic, he certainly captures the quid pro quo nature of development and the corruption that some accuse the Landmarks Commission of today.

Most of The Bonfire of the Vanities has little to do with urban development, but Wolfe also offers very vivid descriptions of both the Bronx and Park Avenue in the 1980s, so it might be interesting to many of you if you’ve not yet read it.

Before there were stimulus projects

In his new book, Railroaded: The Transcontinentals and the Making of Modern America, Richard White explores the financing of railroads in the American West and the political process behind it. In history books, this accomplishment is often looked on as a heroic feat of engineering and perseverance, but White offers a contrasting perspective of the abuse of tax dollars and manipulation of public opinion. I have not had a chance to read his book yet, but White offered a very interesting interview on Morning Edition. He explained:

Western railroads, particularly the transcontinental railroads, would not have been built without public subsidies, without the granting of land, and more important than that, loans from the federal government … because there is no business [in the West at that time], there is absolutely no reason to build [railroads] except for political reasons and the hope that business will come.

Unlike the railroads of the Northeast where Vanderbilt made his fortune, private financiers were uninterested in the West, where rails would not be making a foreseeable profit. If the expected benefits of an infrastructure project outweigh the expected costs, private financing will be available in the absence of public funding. Only when costs are expected to exceed benefits do infrastructure projects require subsidies. Historically, the argument that infrastructure is a public good that must be paid for by taxpayers has been proven false by private infrastructure projects ranging from highways to lighthouses, canals, and city streets.

The transcontinental railroad, the largest public works project of its time, marked a shift toward American policy of relying principally on federally funded infrastructure rather than on entrepreneurs to supply these goods. In the 20th century, the Federal Highway Act of course dwarfed the scale of the transcontinental railroad, and today publicly provided infrastructure is claimed to do everything from creating jobs to allowing for long run economic growth. Without a market mechanism to guide infrastructure construction, we are left with the clumsy political process to determine the amount and distribution of money spent on transportation.

Amtrak’s utter incompetence

by Stephen Smith

There’s a lot to be said for Amtrak’s mismanagement, but a lot of it is technical and inaccessible to the layman. This, however, is unconscionable: Amtrak still does not offer wireless internet – either free or paid – on any of its trains. Megabus and Bolt Bus (whose tickets between DC and NYC are about $20), however, have had wireless for about two years, and I’m pretty sure some Chinatown buses have had it for longer. Amtrak’s normal tickets on the Northeast Corridor are about four times the cost of tickets on Bolt Bus and Megabus. Tickets on the Acela are about eight times the cost of bus tickets, and the service is heavily marketed towards business travelers who put a high price on their time. But no internet. It’s apparently coming to Acela in about six months and the rest of the Northeast Corridor by the end of 2010. Had intercity buses and airlines not introduced wireless internet, I seriously doubt Amtrak would have ever had the business sense to do it.

Originally posted on my blog.

Block vs Poole: The Public-Private Partnership Debate

The Orange County Register’s Freedom Politics website (check out my rent control article FreePo published in March) features articles discussing two differing takes on road privatization from notable scholars Walter Block and Robert Poole.

In Robert Poole’s article, he discusses the merits of the increasingly popular use of Public-Private Partnerships (PPP) to fund and operate roadways:

Four potential benefits are particularly important:

  1. Fewer Boondoggles: Elected officials often champion projects that yield political benefits but have costs greater than their benefits. But with PPP toll projects, nobody will invest unless the benefits exceed the costs to the extent that they can project a positive return on their investment. That’s a powerful safeguard against boondoggles.
  2. Avoiding “Big Dig” Disasters: Large-scale “mega-projects” like Boston’s notorious Big Dig are prone to large cost over-runs and schedule delays. In a well-structured PPP project, those risks can be transferred to the private sector, shielding taxpayers from those costs.
  3. Cost Minimization: Traditional highway projects are built by the lowest-bidder, which often means they are built cheaply and need lots of expensive maintenance over their lifetimes. But a PPP toll highway must be maintained for decades at the private company’s expense. Hence, it has every incentive to build it right to begin with, to minimize total life-cycle cost.
  4. Sustainable Congestion Relief: If you add ordinary freeway lanes, they tend to fill up and become congested. But today’s urban toll lanes use variable pricing (as on the 91 Express Lanes) to keep traffic flowing smoothly on a long-term basis.

In contrast, Walter Block takes a more principled stand for complete privatization:

Public – private partnerships (PPP) are thus part and parcel of both fascism and socialism; they constitute a partial state ownership of the means of production. As well, they are emblematic of fascism, and government is the senior partner, and its regulations still determine the actions of these public – private partnerships.

Block has dedicated a chapter in his new book, The Privatization of Roads and Highways: Human and Economic Factors to a critique of Public-Private Partnerships.  I haven’t read it yet, but hope to share some of the insights when I do.

This is a concept I have been debating in my head for a while.  Are public-private efforts towards privatization really a step in the right direction towards liberalizing the transportation system, or are they just a form of corporatism that enable governments to bail themselves out of their fiscal crises?  Should we hold out for Block’s ideal, yet unlikely, complete private overhaul, or hope for gradual, yet inevitably incomplete liberalization with PPPs as the first necessary step?

What are your thoughts?  Have any readers read Block’s critique of Public-Private Partnerships?  (a pdf version of the book is offered free from the Mises Institute)

What Would Moses Do? (Robert Moses, that is…)

(Map of Robert Moses’ unbuilt proposals via “vanshnookenraggen.”)

Sandy Ikeda blogs:

If Moses were around today I don’t think he’d waste any time getting every major project he could think of “shovel ready” for hundreds of billions of stimulus money. While he’s no longer with us, I do fear that, with the incentive structure of the stimulus legislation and the knowledge problems that will accompany such massive and hurried construction, we’ll soon be seeing many incarnations of Moses rising up in cities around the country.

So, not only will we have to live with ill-conceived mega-projects for decades to come, we’ll be subsidizing the birth of who-knows-how-many local despots who’ll be guiding urban policy for the foreseeable future.

Illinois Court Rules Against Chicago’s “Vague” Landmark Ordinance

Chicago Real Estate Daily:

An Illinois appellate court has struck down the city of Chicago’s landmarks ordinance, saying it is unconstitutionally vague, putting in jeopardy the city’s protection of more than 250 buildings and 50 historic districts.

Judge James Fitzgerald Smith of the three person Appellate Court wrote, “We believe that the terms ‘value,’ ‘important,’ ‘significant,’ and ‘unique’ are vague, ambiguous, and overly broad”, and thus found the ordinance in violation of the state constitution.

The case involved two plaintiffs and two landmarked districts where attempts to downzone the areas failed before landmarking. However, once the case (including appeals) is over, Chicago’s entire landmarks ordinance would be completely invalidated.

Wow! I am surprised this isn’t making bigger waves in Chicago, and other cities. What should we expect to happen if appeals by The City should fail?

Would property owners rush to tear down their landmarks before The City enacts a new landmarks ordinance?

Per Tribune Architecture critic, Blair Kamin (who calls the ruling wrong-headed, but fielded some good comments):

The laws are based on a 1978 U.S. Supreme Court ruling which stopped the bankrupt Penn Central Railroad’s attempt to pile a 55-story office building atop New York City’s Beaux-Arts Grand Central Terminal. In that ruling, the court held that communities have the right to safeguard significant pieces of property, so long as they do not trample the rights of the properties’ owners.

The key word is “significant,” a word that appears frequently in Chicago’s seven criteria for landmark designation, as in the site of a significant historical event or a building that is the work of a significant architect.

It makes you wonder if there is a more robust solution to landmarks that does less to compromise the property rights of the land owners, and isn’t vulnerable to unforeseen court actions that find flaws in ordinances designed to give more power to the politicians. Perhaps, cities could achieve this through the tried and true use of contracts and easements.

I would propose some sort of easement contract with a city. If a city determines a property to have significant value to the community, the city should be willing to purchase a landmark easement from the property owner at or above market value. If the property owner does not wish to cooperate, the City should be forced to go through the eminent domain process to achieve its preservation easement.

Nonetheless, land owners should be compensated in some way for the intrusion upon their property rights based upon some peoples’ idea of ‘value,’ ‘important,’ ‘significant,’ and ‘unique’. In particular, I find the use of the word “value” peculiar. If there is value to the community, which the owner of the property does not recognize, the community should be willing to compensate the property owner for seizing that value at his expense. A property owner should not be burdened with the use restrictions and added expenses of maintaining a landmark for the benefit of the community without being compensated by the community, who wishes to impose its will upon that individual at no expense to itself.

I hope this incident makes cities re-evaluate their landmark ordinances. Particularly, I get an uneasy feeling about landmarking entire districts. Landmarking districts is a roundabout way to downzone an area, and has the unintentended consequences of banning diversity and density, sucking the potential for vibrancy from the neighborhood.

I’ll certainly keep an eye on this one…

Urban[ism] Legend: Positive NPV Infrastructure

As Washington debates how many hundreds-of-billions of the nearly trillion-dollar stimulus will go towards infrastructure or to other spending/tax cut schemes, pundits claim that spending billions on “shovel ready” public works projects can effectively create jobs that will lead to recovery. As readers probably know, I am skeptical that the anticipated spending could be activated so quickly. As Bruce Bartlett put it:

Despite claims by the Conference of Mayors and the transportation lobby that there is as much as $96 billion in construction “ready to go,” the fact is that it takes a long time before meaningful numbers of workers can be hired for such projects.

As a recent Congressional Budget Office study explains, “Practically speaking … public works involve long start-up lags. … Even those that are ‘on the shelf’ generally cannot be undertaken quickly enough to provide timely stimulus to the economy.”

The prospects for unconventional projects such as alternative energy sources are even worse. The CBO calls them “totally impractical for counter-cyclical policy” because they take even longer to come online…

Finally, the impact of increased public works spending on state and local governments cannot be ignored. Most federal transportation spending goes for projects initiated by them. When they think there is a chance that the federal government will increase its funding, they tend to cut back on their own spending in hopes that the feds will foot the bill. A study by economist Edward Gramlich found that the $2 billion appropriated by the Local Public Works Act of 1976 postponed $22 billion in total spending as state and local governments competed for federal funds and actually reduced GDP by $30 billion ($225 billion today).

Meanwhile, proponents of infrastructure spending claim that Congress should sift through the shelved projects to identify those projects that will be economically beneficial, or in other words, have a “positive net present value”. One particular free-market impostor is bold enough to advocate highway spending, as “new roads can largely pay for themselves through tolls and other user fees.”

For the non-financial types, Net Present Value (NPV) is the amount of wealth created, discounted (per the time value of money) to the present, of a particular endeavor. Or in other words, positive NPV projects are expected to “pay for themselves”, from an investment point of view. As a simple rule, opportunities that have a positive NPV should be pursued, and negative NPV projects should be avoided.

2008 Nobel Prize winner Paul Krugman possibly infers positive NPV when he says “public investment leaves something of value behind when the stimulus is over”, but just because something of value is left behind doesn’t mean it was a good investment or that it had positive NPV. At the same time, if not inferring positive NPV, Krugman’s inference that something of value is left behind by private investment makes me think that he actually believes NY Times readers will be easily deceived by his amateurish sleight of hand.

While we know that something of value will be created by infrastructure spending, how certain can we be that alternative spending ideas won’t create something of greater value.

Those who claim positive NPV public infrastructure projects are plentiful neglect some common features of infrastructure projects. From my first-hand experience and study, ambitious, large-scale projects are vulnerable to huge cost overruns. I don’t feel I’m going out going out on a limb when I say that very large projects that are completed on-budget or under-budget are a rarity.

Having been involved with many extremely large projects, one thing has been consistent – they have grossly cost more than originally conceived. There are long-standing jokes (not so funny for taxpayers) among consultants that when estimating big projects in Chicago (and I imagine everywhere), you have to assume the cost at the end of the day will be a factor of 2-3 times as expensive. (The factor varies depending on whether it’s airport work, highway work, or other boondoggles.)

I typically attribute the under-estimation to “optimism bias” of project proponents. Politicians promise the public benefits of the project to voters, and if lucky have the project named after themselves.  Often, by the time the over-budget project is complete, the politician’s term will have ended. If all goes as planned, the politician will have moved to a higher office by then. Often, voters forget the cost over-runs of a boondoggle project once they start using it. After all, it was only a few dollars out of each of their pockets.

Furthermore, bureaucrats are driven to expand their departments and budgets. Designers and consultants who advise on the feasibility of the project are interested in eventually having the inside track on the full commission They thus have the incentive to low ball cost estimates, and inflate benefits. Contractors initially bid low, knowing huge projects are full of changes that are typically more lucrative than the original scope.  Estimators often neglect potential risks such as unexpected soil conditions.  They may neglect these things out of expediency, incompetence, or willfully in order to further a project that has the potential to bring future fees.

Industry lobbies produce studies that exaggerate the need for certain projects. Furthermore, project feasibility studies often neglect or underestimate the time needed to condemn the land needed for the large projects, as they usually are not careful to properly anticipate resistance from landowners who do not wish to give up their land or live near the blighted construction site.

For a more in-depth look, Bent Flyvbjerg has extensively studied cost overruns of large projects and similar topics:
How Optimism Bias and Strategic Misrepresentation Undermine Implementation Concept Report No 17 Chapter 3, Bent Flyvbjerg, January 4, 2007.

Characteristics of Large Infrastructure Projects

Large infrastructure projects, and planning for such projects, generally have the following characteristics (Flyvbjerg and Cowi, 2004):

• Such projects are inherently risky due to long planning horizons and complex interfaces.
• Technology is often not standard.
• Decision making and planning is often multi-actor processes with conflicting interests.
• Often the project scope or ambition level change significantly over time.
• Statistical evidence shows that such unplanned events are often unaccounted for, leaving budget contingencies inadequate.
• As a consequence, misinformation about costs, benefits, and risks is the norm.
• The result is cost overruns and/or benefit shortfalls with a majority of projects.

Projects With Cost Overruns and Benefit Shortfalls

The list of examples of projects with cost overruns and/or benefit shortfalls is seemingly endless (Flyvbjerg, 2005a).

Boston‘s Big Dig, – 275 percent or US$11 billion over budget in constant dollars when it opened, and further overruns are accruing due to faulty construction.

Denver‘s $5 billion International Airport were close to 200 percent higher than estimated costs.

The overrun on the San Francisco-Oakland Bay Bridge retrofit was $2.5 billion, or more than 100 percent, even before construction started.

The Channel tunnel between the UK and France came in 80 percent over budget for construction and 140 percent over for financing. At the initial public offering, Eurotunnel, the private owner of the tunnel, lured investors by telling them that 10 percent “would be a reasonable allowance for the possible impact of unforeseen circumstances on construction costs.”

Policy Implications

The policy implications of the results presented above are as follows:

• Lawmakers, investors, and the public cannot trust information about costs, benefits, and risks of large infrastructure projects produced by promoters and planners of such projects.

• The current way of planning large infrastructure projects is ineffective in conventional economic terms, i.e., it leads to Pareto-inefficient investments.

• There is a strong need for reform in policy and planning for large infrastructure projects.

[hat tip: bound rationality]

Also, the wisdom of Tyler Cowen:

…quick projects are usually wasteful projects. Good new projects need to be thought out and planned. The environmental impact study alone can take years. But Obama has told the state governments they will have to “use it or lose it” when it comes to federal grants. The result will be a lot of poorly conceived projects just to capture the money.

The biggest problem with a fiscal stimulus is this: our economic problems stem from having spent too much in the first place. Now that our homes are no longer rising in value every year and America is aging, more saving is in order, not more spending. Recovery will come only when we discover which new and valuable things the economy should produce as it shifts out of real estate and finance. Simply borrowing and doling out more cash doesn’t solve that problem.

[hat tip: Positive Liberty]

and Harvard’s Linda Bilmes:

A good play to start looking for lessons is by analyzing the three biggest recent examples of heavy government spending on infrastructure: the Iraqi reconstruction effort, Hurricane Katrina reconstruction, and the Big Dig artery construction in Boston. Let me start by pointing out that all of these were plagued by a number of serious problems.

(more from Alex Tabarrok)

And if the government really wanted to, it could easily find positive NPV projects by butting its nose in the business of anti-growth cities that are unreasonably down-zoned by anti-growth policies, as noted at winterspeak:

Infrastructure Spending will be allocated the way Infrastructure Spending is always allocated — it will be based on political expediency, not whether it is a positive net present value or not. If Infrastructure was based on positive net present value, we’d have sky scrape[rs] being built in San Francisco, and 8 story apartment complexes built in Cambridge, MA, and I don’t see a whole lot of either going on.

In my opinion, there is only one true test of a positive net present value, and that is whether private capital is willing to take on a particular project. And, if private enterprise is willing to risk capital to achieve a particular endeavor, why not let them put their own money on the line instead of taxpayer funds.

The bottom line is that big projects tend to go over-budget. Even the rare big projects that are showboated as being a positive NPV investments for society, rarely are after all is said and done as their actually cost far exceed their original budgets. When private projects (positive NPV or negative) are over-budget, investors who took the risk are on the hook for the losses. When public projects are over-budget, the taxpayers are on the hook for the losses. And when it comes to big, ambitious projects, budget over-runs and sizable losses are frequent.