Bike Shares and Public Goods

Yesterday, Maryland Governor Martin O’Malley announced that seven jurisdictions in Maryland will be receiving grants to start bike share programs. The money for these grants comes from the Maryland Department of Transportation’s Federal Congestion Mitigation and Air Quality, so these bike shares will be federally subsidized. O’Malley says of the program:

“As we celebrate Bike Month, these grants will help bring Bikeshare stations to Maryland,” said Governor O’Malley.  “Bikesharing allows Marylanders an affordable option for short-distance trips as an alternative to public transportation, driving or walking.  By getting out and taking a bike ride, we also learn to enjoy more of Maryland’s natural treasures, help reduce the impact on the land, improve our fitness and well-being, and enhance our quality of life.”

The program would be of a similar model to DC’s Capital Bikeshare with capital costs covered primarily with federal grants and some local contributions. I am not much of a bicyclist myself, but I can clearly see the appeal of bike share systems. They provide the convenience of riding a bike to a destination without having to ride it back again, introducing additional flexibility to this mode of transportation. Also, the bikes are better-quality than what many cyclists would buy for themselves.

The problem with the politics surrounding bikeshares is that bicycles are not public goods, but elected officials such as O’Malley like to paint them as such. As Adam has previously pointed out, no transportation investment is a public good. The two characteristics that define public goods are nonexcludability and nonrivalrous consumption. Bike shares are perfectly rivalrous and excludable. Because no more than one  person (maybe two people) can ride a bike at a time, bicycles are lower on the public good scale than transit or roads.

Greater Greater Washington cites a study that publicly-supported bicycle shares are, shockingly, not making money, but GGW says this doesn’t matter since bicycles provide so many benefits to their riders. In a system of better incentives, though, both a private company and cities with bikeshare programs could make money if the private company leased public space for docking stations.

TBD points to a study that analyzes the demographics of Capital Bikeshare users, unveiling the regressive nature of this program. About 80% of CaBi annual members are white, over 80% have college degrees, and 43% have graduate degrees. But from a politician’s perspective programs don’t get much better than this. The capital costs are spread across all US taxpayers through CMAQ grants while the benefits are narrowly concentrated on a population of likely voters.

Lydia DePyllis reports on a pilot program that would bring CaBi access to 10 homeless people who are willing to jump through major hoops, and new proposals to require developers, rather than federal taxpayers to pay for new docking stations. Both of these programs could make CaBi somewhat more equitable. We could provide targeted benefits to low-income bicyclists though with a voucher system for a privately run bike share and achieve greater benefits at a lower cost.

By leasing sidewalk space to private companies to have bikeshare docking stations, these programs could easily become an all-around win for customers, companies, and cities, but as it stands, they hurt everyone except for their users, a government contractor, and vote-seeking politicians.

Compared to other transit modes, CaBi is doing very well, nearly covering its operating costs, but none of its capital costs, with membership fees. I’m picking on this program, because it is currently so regressive and because perhaps it’s new enough to turn over to the market. The private bikeshare system proposed in Los Angeles demonstrates that some investors think there are profits to be made in this industry in an arguably less-bikeable city without imposing the costs of bike sharing on those who don’t use it.

Urban[ism] Legend: Transportation is a Public Good

In a recent post, commenter Jeremy H. helped point out that the use of the term “public good” is grossly abused in the case of transportation.  Even Nobel economists refer to roads as “important examples of production of public goods,” ( Samuelson and Nordhaus 1985: 48-49).  I’d like to spend a little more time dispensing of this myth, or as I label it, an “Urban[ism] Legend.”

As Tyler Cowen wrote the entry on Public Goods at The Concise Library of Economics:

Public goods have two distinct aspects: nonexcludability and nonrivalrous consumption. “Nonexcludability” means that the cost of keeping nonpayers from enjoying the benefits of the good or service is prohibitive.

And nonrivalrous consumption means that one consumer’s use does not inhibit the consumption by others.  A clear example being that when I look at a star, it doesn’t prevent others from seeing the same star.

Back when I took Microeconomics at a respectable university in preparation for grad school, I was taught that in some cases roads are public goods.  We used Greg Mankiw’s book, “Principles of Economics” which states the following on page 234:

If a road is not congested, then one person’s use does not effect anyone else. In this case, use is not rival in consumption, and the road is a public good. Yet if a road is congested, then use of that road yields a negative externality. When one person drives on the road, it becomes more crowded, and other people must drive more slowly. In this case, the road is a common resource.

This explanation made sense, but I was skeptical – something didn’t sit right with me.  Let’s take a closer look.

First, Mankiw uses his assertion as an example of rivalrous vs nonrivalrous consumption, while not addressing the question of excludability.  Roads are easily excludable through gates or any other mechanism that could restrict access.

Furthermore, Mankiw’s assertion that an uncongested road is nonrivalrous is simply confusing rivalrousness with the fact that the road is under-utilized and/or over-supplied at certain times.

For a silly example: if the government literally manufactured mountains of marshmallows free for the taking, Mankiw would have to consider marshmallows equally as non-rivalrous and non-excludable as uncongested roads in the US.  Would he then call marshmallows a public good?

Thus we can clearly see that all roads (when done right) are neither nonrival nor non-excludable.   We can use the diagram below (from Living Economics) to see that a congested (or tolled to prevent congestion) road is a private good, and in the case that a roadway is oversupplied, it is simply a “low-congestion good”, often called a “club good.”

I found this diagram at a very helpful site: livingeconomics.com

Roads are the more commonly misused example of a public good, but we can apply the same logic to transit.  First, most transit operations in the US already use a method of exclusions: the turnstyle.  Second, we can see that non-rivalrousness is simply a function of over-supply in the case of the subway car that isn’t full to capacity.

As economist, Don Boudreaux puts it :

So I’m more than sympathetic to the claim that government provision of roads, bridges, and highways distorted Americans’ decisions over the years to drive and live in suburbs.  But my sympathy for this claim comes from my rejection of the classic, naive case for government provision of public goods — and once that case is rejected, it cannot then be used to argue for government provision of, say, light-rail transport.

Does this alone prove that roads should be privatized? No, but the fact roads are either private goods or grossly oversupplied help weaken anyone’s case that transportation is government’s business in the first place.

I should warn you, if your Microeconomics professor teaches you this misconception unchallenged (perhaps using the Mankiw book), and gives you a true/false exam question of whether an uncongested road is a Public Good, you may want to answer “true”, or else be prepared to dispute your grade.  (And feel free to send your professor a link to this post.)

Next time you catch a commenter repeating this Urban[ism] Legend (like Jeremy H. did), refer them to this post.  Here are a few other links to back you up:

Are Roads Public Goods, Club Goods, Private Goods, or Common Pools? by Bruce Benson, Floria State University

Privatizing Roads by Tim Haab, “Environmental Economics” (blog)

Public Goods and Externalities: The Case of Roads by Walter Block, Loyola University

Highways Are Not (Economic) Public Goods by Rob Pitingolo, “Extraordinary Observations” (blog)

Public Goods from an Austrian Economics perspective


Urban[ism] Legend: Traffic Planning

Mathieu Helie at Emergent Urbanism posted a link to a interesting game created at the University of Minnesota. Mathieu explains it better than I can:

The game begins in the Stalinian Central Bureau of Traffic Control, where a wrinkly old man pulls you out of your job at the mail room to come save the traffic control system. You are brought to a space command-like control room and put to work setting traffic lights to stop and go. Meanwhile frustrated drivers stuck in the gridlock you create blare their car horns to get your attention, and if their “frustration level” rises too high you fail out of the level. As the road network gets as complicated as four intersections on a square grid, the traffic becomes completely overwhelming and failure is inevitable, but the old man reassures you that they too have failed anyway.

OK, you’ve played the game? If not, don’t go further until you have.

Now that you’ve played the game and failed to control traffic, compare that top-down system with this amazing video a friend sent to me from Cambodia. You’ve gotta see this:

Man, I love this video! I must have watched it a couple dozen times. I keep expecting a crash, in what to me (only being familiar with top-down planned traffic systems) looks like complete chaos. Yet pedestrians, bikes, motorcycles, scooters, rickshaws, and cars all make it to their destinations safely, and probably quicker than in the system in the game above. It must be similar to how capitalism must seem chaotic to people who have always lived in planned economies.

Don’t mistake me as an advocate of a world without traffic signals. I am quite certain that some sort of traffic signaling would likely emerge from a free-market street system. But, my bigger point is that when information is dispersed widely among decision-makers without government monopoly, sustainable solutions emerge from the uncoerced behavior of individual agents over time.

Another article at Infrastructurist discusses the philosophical differences Dutch and American road designs, and gives an example:

A fascinating example is a major–20,000 cars a day!–intersection in the Dutch city of Drachten that used to look a lot a typical American intersection, with lots of bright paint and traffic signals and enormous signs telling you what and what not to do. Traffic planners tore that stuff out and went naked, just putting down a roundabout in the center. The sidewalks even disappeared as distinct structures. Everyone figured it out though. Fatalities at the intersection dropped markedly, as did travel times.

Also read Tom Vanderbilt: News for Traffic Signal Manufacturers

Urban[ism] Legend: The Myth of Herbert Hoover

Please don’t misread the title. Herbert Hoover is not a man I consider a “Legend” – quite the contrary.  I use the words “Urbanism Legend” in the context of the series of posts intended to dispel popular myths as they relate to urbanism.

Myths and fallacies about Herbert Hoover are abundant these days as the media discusses the Great Depression. Most of the myths incorrectly accuse Hoover of being a laissez-faire ideologue. However, Hoover is better described as a Progressive, and strongly believed in the power of government to shape society. (at the time Progressive elitists enjoyed a home within the Republican party and advocated vast social engineering programs such as alcohol prohibition) This was a significant departure from the relatively laissez-faire doctrines of previous Republican Presidents Coolidge and Harding. In fact, Hoover’s commitment to progressive programs prompted Franklin Roosevelt’s running mate, John Nance Garner, to accuse the Republican of “leading the country down the path of socialism” during the 1932 presidential campaign.

I urge everyone to learn more about Hoover’s progressive interventionist policies on your own. (I also recommend Rothbard’s America’s Great Depression)  But, let’s look at Hoover’s anti-urbanist interventions, and legacy of sprawl.

Hoover, an engineer by trade, was a strong supporter of the Efficiency Movement, a significant campaign of the Progressive Era.  He believed everything would be made better if experts identified the problems and fixed them, and that efficiency could be achieved through government-forced standardization of products. This helps explain Hoover’s zealous affection for planning, zoning, home ownership, and various objectives often shared by the (often conflicting) elitist-progressive strains seen in Robert Moses or Lewis Mumford (and later New Urbanists).   (not to be confused with the Roosevelt New Deal Democrats who preferred intervention to promote decentralization and ruralization)

Hoover’s philosophy on planning and zoning could be exemplified by his praise of the Regional Plan of New York he gave in 1922:

The enormous losses in human happiness and in money which have resulted from lack of city plans which take into account the conditions of modern life need little proof. The lack of adequate open spaces of playgrounds and parks the congestion of streets the misery of tenement life and its repercussions upon each new generation are an untold charge against our American life. Our cities do not produce their full contribution to the sinews of American life and national character. The moral and social issues can only be solved by a new conception of city building. The vision of the region around New York as a well planned location of millions of happy homes and a better working center of millions of men and women grasps the imagination. A definite plan for its accomplishment may be only an ideal. But a people without ideals degenerates one with practical ideals is already upon the road to attain them.

(Later in 1922, progressive zoning triumphed over property rights in the US Supreme Court ruling, Pennsylvania Coal v Mahon, which decided, “property may be regulated to a certain extent, [but] if regulation goes too far it constitutes a taking.”)

We can trace the rapid growth of the adoption of zoning codes to Hoover’s tenure as Commerce Secretary during the 1920’s, when Commerce changed from a minor cabinet post to the most visible cabinet position. Before Hoover’s term as Commerce Secretary began in 1920, only forty-one municipalities throughout the United States had any sort of zoning laws. However, after eight short years this number had skyrocketed to 640. Popularity and legal legitimacy of planning and zoning grew rapidly through the 20’s with help from Hoover’s influence.  By 1924, the US department of Commerce under Hoover wrote the Standard State Zoning Enabling Act, which, had it passed Congress, would have granted cities the power to, “regulate and restrict the height, number of stories and size of buildings and other structures, the percentage of lot that may be occupied, the size of yards, courts, and other open spaces, the density of population and the location and use of buildings, structures and land of trade, industry, residence or other purposes.”  Instead, many states used the act as framework to implement comprehensive plans on their own.  (Zoning as we know it today was Constitutionally validated by Euclid v. Ambler Realty two years later.)  Then, in 1928, Hoover’s Commerce Department rewrote the Enabling Act in the form of the Standard City Planning Enabling Act to more precisely address and promote the use of master plans and comprehensive plans.  The primary principles of the SCPEA were to:

1) organization and power of a planning commission to develop a master plan
2) plan for the physical development
3) master street plan
4) approval of public improvements
5) control private subdivision of land
6) develop a regional planning commission and regional plan.

In a 1996 article published by the American Planning Association entitled, “The Real Story Behind the Standard Planning and Zoning Acts of the 1920’s” [pfd], Ruth Knack, Stuart Meck, AICP, and Israel Stollman, AICP wrote:

[Hoover] was, in many respects, a progressive who hoped to reform society by reforming the operations of government. To some extent, in fact, the Commerce Department under Hoover could be said to be the first activist federal agency-presaging the New Deal vigor of the administration of President Franklin D. Roosevelt. Of particular importance to land-use planners is the fact that Hoover took an active role in shaping the statutes that govern American city planning.

Hoover was instrumental in starting the “Own Your Own Home” suburban advocacy movement, which lasted through the twenties. The government and business leaders of the “Own Your Own Home” movement described the single family home as a “symbol that could build consensus” and a “hallmark of the middle-class arrival in society.” To encourage home building, Hoover created the division of Building and Housing within the Commerce Department to coordinate the activity of builders, real estate developers, social workers, and homemakers as he worked closely with banks and savings and loans industry to promote long term mortgages (a new concept at the time – sound familiar?). Hoover’s promotion of home ownership as an investment of the 20’s remains a concept embedded in the American psyche, and may have helped contribute to our current financial mess.

The 1920’s also ushered in huge spending increases under the Federal Highway Act of 1921. At the time, highways were under the jurisdiction of the Department of Agriculture. Nonetheless, Hoover hosted two conferences on traffic while he was Secretary of Commerce. These conferences yielded a Uniform Vehicle Code and a Model Municipal Traffic Ordinance, which were heavily influenced by the automotive trade associations.

While popular legend paints Herbert Hoover as a laissez-faire ideologue, the evidence says otherwise, particularly when it comes to urban issues.  Many of the problems of sprawl and auto-dependency derided by today’s progressives can be traced to policies of yesterdays’ progressive elitists, including Hoover.  Maybe modern-day urbanists should look at Hoover’s legacy of land use policy and suburban advocacy, and reconsider their support of Hoover-like intervention and “stimulus” today that will burden future generations as Hoover’s legacy burdens living generations.

—–

For further reading, here’s a recent article from Citiwire (as permitted) I googled-upon when searching for more information on the “Standard Zoning Enabling Act” of 1926:

Hoover’s Other Error: Making Sprawl the Law

By Rick Cole

For Release January 18, 2009
Citiwire.net

 Take any great place that people love to visit. You know, those lively tourist haunts from Nantucket to San Francisco. Or those red hot neighborhoods from Seattle’s Capital Hill to Miami Beach’s Art Deco district. Or those healthy downtowns from Portland, Oregon to Chicago, Illinois to Charleston, South Carolina. What do they all have in common?

The mix of uses that gives them life are presently outlawed by zoning in virtually every city and town in all 50 states.

Crisis offers opportunity. With real estate in a freefall, there is an opportunity to lay the foundation for a more prosperous and sustainable American landscape.

If only there is the vision and political will.

Scrapping zoning codes is the single most significant change that can be made in every town and city in America. It would aid economic development, reduce greenhouse gas emissions, foster healthier lifestyles, reduce dependence on foreign oil, protect open space and wildlife habitats, and reduce wasteful government spending.

Zoning is a legacy of Herbert Hoover. As Commerce Secretary, he championed the “Standard Zoning Enabling Act” to address “the moral and social issues that can only be solved by a new conception of city building.” In 1926, the Supreme Court upheld zoning to protect health and safety by “excluding from residential areas the confusion and danger of fire, contagion and disorder which in greater or less degree attach to the location of store, shops and factories.” The quite sensible idea that people shouldn’t live next to steel mills was used to justify a system of “zones” to isolate uses that had lived in harmony for centuries.

Under zoning, new neighborhoods were segregated by income, and commerce was torn asunder from both customers and workers. Timeless ways of creating great places were ruthlessly outlawed. The sprawl spawned by zoning spread from sea to shining sea.

Almost everyone admits the environmental and social devastation caused by sprawl. Yet it remains the law. What’s been lacking is the tool for producing great places instead of bleak, auto-dependent landscapes. If “zoning” is the DNA of sprawl the coding that endlessly replicates the bleak landscape of autotopia, then what is the DNA of livable communities?

It is found in timeless ways of building, updated for the 21st Century, including the need to accommodate cars. It regulates incompatible uses without the absurdities of conventional zoning. It is calibrated for new buildings to contribute to their context and to the larger goal of making a great place. It does so primarily by regulating the form of buildings, since that is what determines the long-neglected public realm of streets and sidewalks. It does that by regulating setbacks, heights and the physical character of buildings. For example, a form-based code could protect the existing scale of a neighborhood from the “teardowns” of traditional homes for replacement by McMansions–or facilitate the evolution of an auto-oriented commercial strip to a mix of uses, including residential and/or office over retail.

Called “form-based codes” or “smart codes,” this alternative framework for shaping great places exists, and it’s quietly spreading.

Where it’s been tried, it’s been a success. Seaside, Florida, the poster town for “new urbanism,” was “coded” rather than zoned, and ended up on the cover of Time magazine. In 2003, Petaluma, California scrapped its zoning regulations and adopted a new code for 400 underdeveloped acres in their Downtown, producing more than a quarter billion dollars in new investment. Now cities as diverse as Miami, Buffalo, Tulsa and La Jolla are pursuing “form-based codes.”

Unlike zoning, “form-based coding” is not a “one-size fits all” solution. The rules for form in a dense urban center are distinctly different from those for a predominantly residential suburban neighborhood. In each case, the form and character of buildings are “calibrated” to achieve a cohesive and complimentary sense of place.

Still, widespread adoption waits upon the widespread recognition that the time for reform has come. The real estate meltdown provides that wake-up call. The model is broken. Financing generic products (class A office; suburban housing tract; grocery-anchored strip center; business park, etc.) through globally marketable securities has become radioactive. By the time supply and demand right themselves, the financial and economic unsustainability of sprawl will be laid bare.

Of course, one can never underestimate what historian Barbara Tuchman called “the march of folly.” Perhaps in the interest of “stimulus” to the moribund economy, we will be willing to spend trillions more to subsidize sprawl. But in the end, as economist Herbert Stein pointed out, “That which cannot go on forever, won’t.”

Before that day comes, we can save untold environmental, economic and social damage by the widespread adoption of coding that respects human scale, restores the proximity of complimentary uses, and repairs the damage done to the American landscape and our rich (but abandoned) tradition of creating fine neighborhoods, towns and cities.

Scrap zoning. Adopt coding. Legalize the art of making great places that people cherish, that produce economic value, and that leave a lighter environmental footprint on the land.
Rick Cole’s e-mail address is RCole@ci.ventura.ca.us.

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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.

Urban[ism] Legend: Is Houston really unplanned?

by Stephen Smith

It seems to be an article of faith among many land use commentators – both coming from the pro- and anti-planning positions – that Houston is a fundamentally unplanned city, and that whatever is built there is the manifest destiny of the free market in action. But is this true? Did Houston really escape the planning spree that resulted from Progressive Era obsessions with local planning and the subsequent grander plans of the post-WWII age of the automobile? Michael Lewyn, in a paper published in 2005, argues that commentators often overlook Houston’s subtler land use strictures, and recent developments in the city’s urban core reaffirm this.

It is definitely true that Houston lacks one of the oldest and most well-known planning tools: Euclidean single-use zoning. This means that residential, commercial, and industrial zones are not legally separated, though as I will explain later, Houston remains as segregated in its land uses as any other American city. But single-use zoning is not the only type of planning law that Houston’s government can use to hamper development.

As Lewyn lays out in his paper, minimum lot sizes and minimum parking regulations abound in this supposedly unplanned City upon a Floodplain. He discusses a recently-amended law that all but precludes the building of row houses, a stalwart of dense urban areas (the paper is heavily cited and poorly formatted, so I’ve removed the citations):

Until 1998, Houston’s city code provided that the minimum lot size for detached single-family dwellings was 5000 square feet. And until 1998, Houston’s government made it virtually impossible for developers to build large numbers of non-detached single-family homes such as townhouses, by requiring townhouses to sit on at least 2250 square feet of land. As Siegan admits, this law “tend[ed] to preclude the erection of lower cost townhouses” and thus effectively meant that townhouses “cannot be built for the lower and lower middle income groups.” Houston’s townhouse regulations, unlike its regulations governing detached houses, were significantly more restrictive than those of other North American cities. For example, town houses may be as small as 647 square feet of land in Dallas, 560 square feet in Phoenix, and 390 square feet in Toronto, Canada.

Though this law was eventually changed to allow denser homes within Houston’s ring road (though not nearly as dense as some American cities allow), this change only affected a quarter of Houston’s homeowners, leaving the rest still as regulated as ever. Not to mention the fact that even for those within the ring road, the rules only matter to new construction, leaving the vast majority of the building stock in compliance with the old rules.

typical parking lot encouraged by minimum parking standardsNot to be outdone by minimum lot restrictions, the parking planners are also hard at work in Houston. As Donald Shoup explains in his magnum opus on parking regulations and the free market, minimum parking regulations are an oft-used and under-appreciated way for city planners to decrease density, push development farther from the city’s core, increase an area’s auto dependency, and decrease walkability and the viability of mass transit. Houston’s planning code mandates that developers, regardless of what they perceive as the actual demand, build 1.25 parking spaces per apartment bedroom, and 1.33 spaces per efficiency apartment. Retail stores are also saddled with these parking minimums, and even bars as Lewyn notes are required to build “10 parking spaces per 1000 feet of gross area,” flying in the face of common sense. To add insult to injury, the city requires that structures on major roads have a significant setback from the street, and the only rational thing to do with this unbuildable space is to put the mandated parking there, meaning that Houston actual codifies the hideous and inconvenient parking lot-out-front model of sprawl that is so typical across the US.

Another form of planning that Houston has, which is celebrated by the self-titled Antiplanner, is the institution of supposedly voluntary deed restrictions, or private land use covenants agreed upon by the owners of the property under restriction. I’m personally torn over the “libertarianness” of such schemes – are they truly voluntary? Can an individual owner of a property opt out of them once they’ve been signed? What’s the statute of limitations? One thing that makes me suspect that they perhaps aren’t as “free market” as they seem is that though the contracts are between individuals, Houston’s city code allows the city attorney to prosecute these lawsuits at no cost to the supposed victims – fellow property-owners. In this way, as Lewyn explains, Houston’s land uses are just as “Euclidean” as in other American cities:

But in Houston, restrictive covenants are so heavily facilitated by government involvement that they resemble zoning regulation almost as much as they resemble traditional contracts. Houston’s city code, unlike that of most American cities, allows the city attorney to sue to enforce restrictive covenants. The city may seek civil penalties of up to $1,000.00 per day for violation of a covenant. Thus, Houston forces its taxpayers to subsidize enforcement of restrictive covenants even when litigation is too costly for individuals to pursue. In its covenant litigation, the city focuses on enforcement of use restrictions (that is, covenant provisions requiring separation of uses), as opposed to enforcement of other restrictions such as aesthetic rules. By subsidizing enforcement of use restrictions, Houston’s city government subsidizes segregation of land uses–and in fact, land uses in Houston are only slightly less segregated than in most cities with zoning codes.

More recently, Houston’s supposedly laissez-faire attitudes towards planning have again been tested by the proposed 23-story tower at 1717 Bissonnet Street. The tower would have been in a low-rise residential neighborhood, within walking distance of Rice University. After years of wrangling, the project was finally denied by the city, on grounds that the developers failed to prove that the project would not adversely affect traffic flow (a pretty arbitrary and un-libertarian requirement considering Houston’s legendary congestion and the fact that developers have little say over where the city places its roads). And this, despite the fact that many of the tower’s prospective residents – Rice students and staff – could have either walked or biked to school/work.

Boosters of Houston’s land use policy – those who believe that Houston’s land use patterns are the free market, revealed – never mention the restrictive minimum lot size and minimum parking requirements. They mention deed restrictions as free market innovations but fail to see how the city’s prosecutors turn private concerns into public budget drains. And though the Antiplanner in his aforelinked comments on Houston recognizes the anti-density movement that reared its ugly head after the 1717 Bissonnet proposal, he evidently doesn’t see this as seriously detracting from Houston’s anything-goes land use policy.

This post was written by Stephen Smith, who writes for his own blog called Rationalitate.


This post is part of an ongoing series featured on Market Urbanism called Urbanism Legends. The Urbanism Legends series is intended to expose many of the myths about development and Urban Economics. (it’s a play on the term: “Urban Legends” in case you didn’t catch that)

To receive future Urbanism Legends posts, subscribe to the Market Urbanism feed by email or RSS reader here. If you come across an interesting Urbanism Legend, let me know by email or in the comments and I’ll make a post debunking the myth. Of course, I’ll give you credit for the tip and any contributions to the post you make…

Urban[ism] Legend: Creating Jobs With Infrastructure

This post is part of an ongoing series featured on Market Urbanism called Urbanism Legends. The Urbanism Legends series is intended to expose many of the myths about development and Urban Economics. (it’s a play on the term: “Urban Legends” in case you didn’t catch that)

Last week President-elect Obama announced some details of his economic stimulus package:

Second, we will create millions of jobs by making the single largest new investment in our national infrastructure since the creation of the federal highway system in the 1950s. We’ll invest your precious tax dollars in new and smarter ways

This further taxpayer subsidization, beyond currently insufficient highway revenue sources, of sprawl and auto-dependency seems to contradict Obama’s promise of “green jobs”. As Tyler Cowen remarks, “for better or worse you can consider the opposite of a carbon tax.” Furthermore, the Obama plan intends to fund the stimulus directly to states, as opposed to metro areas, which have historically received almost two-thirds of the funds directly.

Certainly, Obama’s plan is not an urbanism-friendly plan, yet I consistently hear urbanists subscribing to and spreading the myth that jobs can be created by spending on infrastructure, and that these jobs will lead to economic recovery. Even if the job creation myth were true, and could stimulate the economy immediately, you would think urbanists would not sacrifice urbanist ideals for the sake of short-term recovery through their commitment to so-called progressive ideology.

In his enduring 1961 classic, Economics in One Lesson, Henry Hazlitt addresses the long-standing myth about “creating jobs” through public works projects:

A bridge is built. If it is built to meet an insistent public demand, if it solves a traffic problem or a transportation problem otherwise insoluble, if, in short, it is even more necessary to the taxpayers collectively than the things for which they would have individually spent their money had it had not been taxed away from them, there can be no objection. But a bridge built primarily “to provide employment” is a different kind of bridge. When providing employment becomes the end, need becomes a subordinate consideration. “Projects” have to be invented. Instead of thinking only of where bridges must be built the government spenders begin to ask themselves where bridges can be built. Can they think of plausible reasons why an additional bridge should connect Easton and Weston? It soon becomes absolutely essential. Those who doubt the necessity are dismissed as obstructionists and reactionaries.

Two arguments are put forward for the bridge, one of which is mainly heard before it is built, the other of which is mainly heard after it has been completed. The first argument is that it will provide employment. It will provide, say, 500 jobs for a year. The implication is that these are jobs that would not otherwise have come into existence.

This is what is immediately seen. But if we have trained ourselves to look beyond immediate to secondary consequences, and beyond those who are directly benefited by a government project to others who are indirectly affected, a different picture presents itself. It is true that a particular group of bridgeworkers may receive more employment than otherwise. But the bridge has to be paid for out of taxes. For every dollar that is spent on the bridge a dollar will be taken away from taxpayers. If the bridge costs $10 million the taxpayers will lose $10 million. They will have that much taken away from them which they would otherwise have spent on the things they needed most.

Therefore, for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $10 million taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. More bridge builders; fewer automobile workers, television technicians, clothing workers, farmers.

But then we come to the second argument. The bridge exists. It is, let us suppose, a beautiful and not an ugly bridge. It has come into being through the magic of government spending. Where would it have been if the obstructionists and the reactionaries had had their way? There would have been no bridge. The country would have been just that much poorer. Here again the government spenders have the better of the argument with all those who cannot see beyond the immediate range of their physical eyes. They can see the bridge. But if they have taught themselves to look for indirect as well as direct consequences they can once more see in the eye of imagination the possibilities that have never been allowed to come into existence. They can see the unbuilt homes, the unmade cars and washing machines, the unmade dresses and coats, perhaps the ungrown and unsold foodstuffs. To see these uncreated things requires a kind of imagination that not many people have. We can think of these nonexistent objects once, perhaps, but we cannot keep them before our minds as we can the bridge that we pass every working day. What has happened is merely that one thing has been created instead of others.

Unfortunately, big spending on infrastructure projects are political chess pieces. As politicians align themselves for the handout, Governors are sure to push for spending that will allow them to funnel federal tax dollars into vanity projects that will do the most to boost visibility and popularity. I wouldn’t expect any wise long-term planning on the part of the spenders.

From an economic recovery point-of-view, it will be years before the money spent on infrastructure trickles back into the overall economy, and even longer for any productivity gains to be realized by the newly constructed infrastructure. This pervasive myth is a dangerous enabler of one of the least effective strategies for recovery (in the short-run), and a harmful disservice the the environment and living patterns (in the long-run).


To receive future Urbanism Legends posts, subscribe to the Market Urbanism feed by email or RSS reader here. If you come across an interesting Urbanism Legend, let me know by email or in the comments and I’ll make a post debunking the myth. Of course, I’ll give you credit for the tip and any contributions to the post you make…

Urban[ism] Legend: Gas Taxes and Fees Cover All Costs of Road Use

No doubt, mass production of the automobile is one of the greatest innovations of all times. It has allowed for increased mobility of goods and people, which has greatly improved productivity and leisure. But, is subsidizing mobility at the expense of taxpayers taking things too far?

In various blogs and forums, I frequently come across the argument that the costs of automobile use are fully (or mostly) internalized through gas taxes and fees. Often, this argument is used by free-market impostors against transit subsidies, or by automobile enthusiasts in defense of highway socialism. The usual argument is that the costs of roads and infrastructure are paid through gas taxes, and thus the users of the roads are funding what they use.

This is a powerful and pervasive myth that will continue to distort the truth, unless serious scrutiny is given to the assertion. Let us first examine the validity of the assertion through studies of the explicit costs (actual dollars) of roads in the US and the taxes and fees collected. Next, we will look deeper and discuss the implicit costs (ie opportunity costs) of roads and automobile use as well as acknowledge externalities involved with automobile use.

The Explicit Costs

We can see the extent of the Urbanism Legend by looking at wikipedia:

Virtually 100 percent of the construction and maintenance costs are funded through user fees, primarily fuel taxes, collected by states and the federal government, and tolls collected on toll roads and bridges.[citation needed] (The claim that only 56 percent of costs are funded by user fees is based on the misinterpretation of a table that applies to all highways, roads, and streets, not just the Interstate Highways.[citation needed]) In the eastern United States, large sections of some Interstate highways planned or built prior to 1956 are operated as toll roads.

Mark A. Delucchi of The Institute of Transportation Studies at UC Davis has researched this topic extensively. According to one study, Do Motor Vehicle Users in the U.S. pay their way?:

I make a comprehensive analysis of all possible expenditures and payments, and then compare them according to three of the four ways of counting expenditures and payments. The analysis indicates that in the US current tax and fee payments to the government by motor-vehicle users fall short of government expenditures related to motor-vehicle use by approximately 20–70 cents per gallon of all motor fuel. (Note that in this accounting we include only government expenditures; we do not include any ‘‘external’’ costs of motor-vehicle use.) The extent to which one counts indirect government expenditures related to motor-vehicle use is a key factor in the comparison.

In the summary of the results , DeLucchi observes:

[C]urrent user payments probably are on the order of 80–90% of the associated government expenditures on MVIS.

[I encourage readers to link to other research on the matter in your comments - even if it dissents]

One could argue that simply closing the funding gap with higher fees and taxes would take more than 20-70 cents per gallon since the higher cost would reduce demand of driving and thus gas tax revenues. As DeLucchi states:

[A]n initial increase in the motor-fuel tax likely would reduce the quantity of motor-fuel demanded and thereby necessitate a further tax increase to compensate for the reduced volume of fuel subject to the tax.

Thus, we can clearly see that from a simple sources-and-uses analysis, roadway use is significantly subsidized above gas tax and fee revenues in the United States.

The Implicit (Opportunity) Costs

Looking only at the dollars going in and out is a simplistic way of looking at an economics issue. However, to fully analyze, we must look at the opportunity costs of resources and productive activity that is forgone in order for the government to provide roads. According to Nobel Laureate, James Buchanan, opportunity cost expresses “the basic relationship between scarcity and choice.” To ignore opportunity cost would result in a huge distortion in the perceived value of roads in society.

Land: Most empirical research looks only at construction and maintenance cost, which are easier to track. However, we need to consider that highways and roads take up a considerable amount of valuable real estate. If not used as roads, the land would likely serve some other productive use. It would be difficult to estimate what the opportunity cost of the land would be, but it certainly would be significant. Even more difficult to quantify is the forgone property tax revenue of the road land.

Consider land currently occupied as roads that could relatively easily be privatized for more productive uses. The most obvious example of this is street parking. In many instances, adjacent property owners could very profitably put street spaces to good use as seating for cafes, or landscaping and setbacks that improve home values.

Capital: Road construction is typically financed through tax-exempt bond issuance. This puts a burden on the borrowing ability of governments for non-road spending, and diverts capital from non-exempt private investments in competitive capital markets.

Taxes: On top of lost revenue from tax-exempt bond issuance and property taxes, the fact that roads are not private means governments forgoes taxing a private operator of the roads as it would tax other private enterprises. Instead of being a source of corporate tax revenue, roads themselves drain government resources.

Environmental and Other Externalities

One externality we can see plainly is the value of properties along highways, between nodes. Because of noise, air quality, and other externalities, homes typically don’t locate along highways. (although commercial uses pop up at critical nodes) As a result, this land is usually left undeveloped or used by location-insensitive industrial firms who keep land costs low. The extent highways hurt nearby property values would be very difficult to estimate nationwide, but certainly significant.

It is even more difficult (and contentious) to quantify the environmental externalities involved with road use, and costs of defense of US oil interests. So, I’ll leave that discussion for another time, if I ever dare to touch it. But, for your reading pleasure, at the extreme, one study estimates the subsidies and external costs of oil use to be $5.60 to $15.14 per gallon! I am very skeptical of this study, but it does open discussion to many of the subsidies and externalities that could be considered in thoughtful examination.

Conclusion

Total gas tax and fee revenues fall short of funding total road expenses in the US. This gap widens when considering opportunity costs before even considering externalities. What’s the proper solution? Just raise the gas tax and let politicians battle over the right amount to cover opportunity costs and externalities? Or even better: privatize the roads, and let the market sort out the optimal use of roads for automobiles. (And when I say privatize, ideally I wouldn’t leave highways as a tax-exempt, public-private partnership. Let roads compete in the marketplace with all other goods and services on a completely level playing field.)

also check out:
streetsblog – Highway Funding: The Last Bastion of Socialism in America
Environmental Economics – Social cost of gasoline
Greg Mankiw’s Blog – The Pigou Club Manifesto: Raise the Gas Tax


To receive future Urbanism Legends posts, subscribe to the Market Urbanism feed by email or RSS reader here. If you come across an interesting Urbanism Legend, let me know by email or in the comments and I’ll make a post debunking the myth. Of course, I’ll give you credit for the tip and any contributions to the post you make…