The Rent is Too High and the Commute is Too Long: We Need Market Urbanism

Dense Development Around Tokyo Transit

Why is the rent so damn high? And why does it take hours to commute from cheap, plentiful housing to modern economy jobs? If you are living in a big city in America, you likely face this problem. And it isn’t just an American problem: From Ireland to New Zealand to The Philippines, the rent/commuting crisis is hitting the 21^st century hard, right in the big cities where most of the economic growth is coming from, and where most of the jobs are. Meanwhile, in the economically blighted regions of America, everything seems to be falling apart, with lead in the tap water, crumbling roads, and municipal bankruptcy for thousands of towns and cities a very real possibility.

But it doesn’t have to be this way. There are a few cities that seem to have figured out how to match a futuristic tech economy with futuristic transit and housing for the masses. And there are many small towns around the world that don’t face insurmountable backlogs of infrastructure repairs. What are they doing different? Why is the price per square foot for living space in Tokyo a third of what it is in Boston or San Francisco?  Both cities have similar incomes and geographic constraints. Why is it an enormous scandal in Japan when trains leave a few seconds off schedule, while in America it is normal for your bus or train to be an hour late or never show up at all? Chalking this up to cultural differences is an easy explanation, and may have some weight, but I submit that the underlying laws of human economics do not vary based on culture, and there is much that we can learn from looking abroad.

For Americans, the story begins in the nineteenth century when most of the country’s infrastructure was privately owned, as described in the paper “From Privies to Boulevards: The Private Supply of Infrastructure in the United States During the Nineteenth Century.” As a stand-in for all infrastructure, from highways to subways to sidewalks, let’s discuss sewers as a starting point. The main complaint at the time was that private sewer companies were not expanding fast enough: “Indeed, the main criticism leveled against private suppliers at the time was not poor service per se but a reluctance to expand to outlying areas.”

This frustration led to municipal regulation, subsidy, and eventually municipalization of the sewer systems: “By 1902, no city with a population of over thirty thousand still had a private sewer company.” Service began expanding to all areas of the city, and soon even small towns followed suit and were municipalizing and rapidly expanding their sewers, and nearly all their formerly private infrastructure. Problem solved, right?

Which brings us to Lafayette, Louisiana, the 200^th largest city in the US, with a growing economy and a public infrastructure system that’s growing even faster. Charles Marohn, an infrastructure consultant, was hired to figure out why the city’s backlog of repairs was growing longer every year, and whether there were any solutions. His analysis is quite morbid:

Except for a small handful of North American cities – literally five or less – Lafayette provides an insight into why your city has no money. Problems have solutions. Predicaments have outcomes. What is happening in Lafayette is not a problem; it’s a predicament…When we added up the replacement cost of all of the city’s infrastructure — an expense we would anticipate them cumulatively experiencing roughly once a generation — it came to $32 billion. When we added up the entire tax base of the city, all of the private wealth sustained by that infrastructure, it came to just $16 billion.

There is simply no way that Lafayette will be able to maintain the infrastructure it has built, and Lafayette’s story is America’s story. How did the great infrastructure bubble occur? The core of the problem is about decision making process: How does a municipality decide whether to make a particular expansion of its infrastructure?

Back in the days of private infrastructure, a company would determine whether a given sewer expansion was profitable by adding up the expected sewer fees and determining whether they were greater than the long-term maintenance costs.  i.e., was the investment profitable? With democratic municipalities, the decision-making process is quite different.

In a nutshell, the political economy of our democratic municipalities revolves around homeowner control. The main negotiation is one between the homeowners and the public employees, with some influence from developers, and even less from renters who are typically not very involved with their local government. The incentives of the homeowners are to lower taxes to as great a degree as possible while at the same time maintaining a well-funded public school, one of the main determinants of home price.

This is easily accomplished by allowing two types of construction: More single family homes in the same price range as existing homes, and new commercial property that yields a revenue stream without associated public school costs. Projects that are almost always opposed are ones that increase density in areas that don’t require new infrastructure, due to the NIMBY principle: It is an extremely rare thing in American politics post-WWII for an already built neighborhood to become more dense than they already are. Downzoning is the norm, and upzoning is an atypical exception. Before zoning took hold of America post-WWII, the normal development pattern was for the town center to be where almost all of the new development happened, and this is how towns grew into cities. After zoning, this process stopped: Once a neighborhood was even partially built out, it was typically downzoned so no new construction could occur.

Furthermore, homeowners care about the future of their towns for the next few years until they sell, but not beyond that. The story goes like this: A new shopping mall or cul de sac is proposed. The developer offers to pay for the initial install of the infrastructure, and for a decade or two there is new tax revenue with minimal costs, and everything is going fine. But then the town’s maintenance obligations kick in. Even in Homeowners Associations (HOAs) that are supposedly infrastructure self-sufficient, when the infrastructure reaches the end of its life cycle, there is nearly always a bailout of the HOA by the town. And the long-term unprofitability becomes glaringly apparent. In Detroit, it looks like abandoned neighborhoods. In Flint, it looks like poisoned water. And Detroit and Flint aren’t special, they just implemented these fiscally unsustainable development patterns a few decades before other cities, and indeed there are thousands of cities and towns that are already starting to look more and more like Flint.

The lack of a market feedback process produces forcibly sprawled, fiscally unsustainable cities and towns. The infrastructure-efficient urban core is downzoned, preventing any growth upward, and growth outward is heavily subsidized by flat infrastructure rates. A cul de sac might have 50 feet of street pipe per resident, whereas an apartment building might have 5 feet, but the residents in both locations pay the same. This is a subsidy to sprawl paid for by those who live densely and efficiently. Transit infrastructure is no different: Road construction can never keep pace with economic growth, and we get congestion and potholes, long commutes to where the housing is, and not enough housing where the jobs are.

The only way to begin designing our cities better is to admit that democratic socialism is very bad at city design. If there is a solution to our infrastructure woes, it is to incorporate more market feedback into the system, to avoid infrastructure boondoggles, and enable dense, efficient development. And some cities around the world show the path forward. Japanese mass transit infrastructure is a good case-in-point.

Over the past few decades, nearly all of Japan’s mass transit has been privatized. The trains are funded by fares, but more importantly, by the private rail companies’ real estate holdings. The rents from high rises constructed around the station pay for the operation of the rail line, which increases rents around the station, in a feedback mechanism. The profit/loss calculation determines how much housing construction should occur near which rail stations, and where the rail system should be expanded to next. As noted above, this has produced high-tech, high-speed trains that service nearly all of the 30 million or so folks in the Tokyo metro area.

And the rent is much cheaper, which is precisely related to the transit scheme above: In America, the socialist transit networks have very shallow penetration, with only a small fraction of the population living within walking distance of a rail stop. The trains don’t go to where the housing is, and the housing isn’t built where the trains are. Because land use is decided democratically, towns won’t approve high-density zoning by train stations, and so while many transit systems own quite a bit of developable land near train stations, they aren’t allowed to build on it. This means they can’t fund expansion of the rail system with these funds, and furthermore, even if you dump tons of money onto these transit systems, they don’t have the profit/loss mechanism to determine where the new stations should go.

And this is why Tokyo has futuristic trains and housing prices of around $339 per square foot, while in Boston prices are $661/sqft.  You have to be wealthy to afford one of the prized, scarce apartments within walking distance of transit, while the masses spend hours every day driving to the far corners of the metro area where housing is quasi-affordable.

The rent is too high, the commute is too long, the water is poisoned, and there are no easy answers.  But the first step is for Americans to learn from the successfully affordable and accessible cities of the world.  Ironically, these successful cities are typically more market-based in their planning decisions than the supposedly hyper-capitalist US.  Central planning for bread always produces bread lines, central planning for roads always produces congestion, and central planning for housing always produces a housing shortage and rising rents. Americans know they don’t want their bread from the government, but until the same attitude is adopted toward infrastructure, we will all be desperately waiting in long queues for stale crumbs.