Read the full report or the executive summary.

The post Elevator pitch appeared first on Market Urbanism.

(cross-posted from planetizen.com)

I have argued numerous times on Planetizen that increased housing supply would reduce rents. I recently read one counterargument that I had not fully addressed before: the claim that no amount of new housing will ever bring down urban rents because housing in high-cost, high-wage cities is expensive to build.* This argument rests on two assumptions: (1) that construction costs are the primary reason some cities are more expensive than others, and (2) if new housing is expensive, the median citywide rent will be equally expensive. I find neither assumption to be persuasive.

Admittedly, expensive cities do tend to have higher construction costs than more affordable costs—but this gap is far more modest than the gap in housing costs between high-cost and low-cost cities. For example, a study by the design firm EVStudio showed that the construction costs for a small apartment building in New York City were only about 30 percent higher than the costs of a similar building in Kansas City ($232 per square feet in New York, $181 in Kansas City). But rents in New York are far more than 30 percent higher; I pay about $5 per square foot for my Manhattan apartment, but paid just over $1 per square foot for a roughly comparable apartment in Kansas City (i.e., a doorman building in a fashionable intown neighborhood).

Similarly, the Lincoln Institute’s land price database reveals that regional differences in construction costs lag behind differences in land costs: for example, construction costs in San Francisco are only about 60 percent higher than construction costs in Kansas City, but the median San Francisco-area house costs seven times as much due to differences in land costs. Thus, construction costs are not the main reason some cities are more expensive than others.**

Moreover, the suggestion that high construction costs for new buildings mean high rents for everyone seems to me to be based on the assumption that most people live in those new buildings. In a newly built suburb, this argument might make sense. But in most urban cores, the overwhelming majority of housing was built long ago: for example, in Manhattan only 1.2 percent of housing was built after 2010. So even if a new building rents for $4000 per month, it does not logically follow that the median citywide rent will be $4,000 per month.

In fact, it seems to me that new housing, no matter how expensive, may bring down the cost of older housing. Here’s why: even an expensive new building takes away demand from the city’s older buildings. For example, suppose that San Franciscans built half a million new housing units. No matter how expensive those units would be, that would be half a million fewer occupants for the city’s existing housing stock. Such a collapse of demand would presumably cause rents to go down, or at least to increase less rapidly than usual. In fact, nothing like this has happened: for example, San Francisco has added 38,000 new jobs in recent years but only 4,000 housing units. Similarly, New York City has added half a million new jobs since 2000 and only 200,000 housing units.

In sum, new buildings in New York and San Francisco are more expensive than new buildings in Kansas City. But even though this is the case, more new buildings may mean lower rent for older buildings.

*A more moderate version of this claim focuses on high-rises; it seems to me that everything I write below applies with equal force to both high- and low-rise buildings.

**A more sophisticated anti-housing argument is that new housing will increase housing prices by increasing land prices. I have addressed that argument in thisMarch post.

The post High Rents: Are Construction Costs the Culprit? appeared first on Market Urbanism.

Here’s some examples of the typical contradiction many usually-reasonable urbanists are making when arguing for high speed rail-

Ryan Avent in an article plagued with this pseudo-logic:

Government is going to build more capacity. Given that, what is likely to be the best investment, all things considered?

Available alternatives, as it turns out, are not all that attractive. Roads do not appear to pay for themselves any more than railways do. Receipts from the federal gas tax come close to covering federal highway expenditures, but gas is used on highways and non-highways alike, indicating that at the federal level, highways are subsidized.

and:

I respect Mr Cowen very much, but I think it’s long past time we stopped listening to libertarians on the issue of whether or not to build high-speed rail. Who will ask whether road construction remotely passes any of the tests they’re so prepared to push on rail? And if we begin charging an appropriate fee on drivers to maintain existing roads and reduce congestion, what do they all think will happen to land use patterns and transportation mode share?

Some have emailed to ask me why I dislike Randal O’Toole so much.  The main reason is because people like Avent will always be able to point to the government highway-lover from CATO and rashly proclaim all libertarians have forever lost credibility when it comes to transportation and land use.  Of course, Avent’s narrow-mindedness on this topic deserves contempt too.

And Infrastructurist’s take seems to be favored by Avent, Yglesias, and others:

The construction of a high-speed rail line would require a large environmental sacrifice – construction crews would need to shape the land, poor concrete, lay the tracks, and build the stations. This work would release millions of tons of carbon dioxide into the atmosphere. But building a new highway such as Texas’ planned I-69 would require similar work and would almost certainly be just as ecologically damaging. On a somewhat smaller scale, the same can be said for new terminals or runways at airports.

In a rapidly growing state like Texas, though, a serious need for a transportation capacity upgrade is bound to arise over the next decades – especially between the state’s two biggest cities. The construction of this infrastructure would require carbon emissions on a large scale–but since we don’t yet have competing plans for highway or airport capacity expansions if the high-speed system is not built, the most meaningful question for us is the rail system’s environmental effects in operations rather than construction.

So, in other words, building either of the options, roads or rail both require “a large environmental sacrifice”, but all other options must be kept off the table, so let’s just sweep that under the rug.  Yet, there is an other option to consider for those who really think something should be done about carbon: STOP WASTING MATERIAL AND ENERGY ON CONSTRUCTION OF INFRASTRUCTURE BOONDOGGLES THAT SUBSIDIZE TRANSPORTATION!  That still goes double for roads and airports, where congestion and carbon emissions could be reduced through revenue-generating measures such as congestion tolling.

To me, the high-speed rail logic just doesn’t sound much different from what O’Toole might say (just interchange some words and continue to ignore facts):

Not only did the Interstate Highway System cost much less and move much more than our visionary rail network is likely to do, interstate highways have the virtue of being 100 percent paid for out of user fees. The rail system would require subsidies for pretty much all of the capital costs, most or all of the periodic rehabilitation costs, and at least some of the operating costs.

In the Infrastructurist article quoted above, Yonah Freemark smear’s Ed Gaeser’s back of the envelope critique of high speed rail (I admit, a little sloppy) with a hand-waving claim sounding eerily similar to the type Mr. O’Toole is so often criticized for making, “High Speed Rail Pays For Itself”.

He backs this bold claim with a calculation that shows how a hypothetical Dallas-Houston high speed corridor would cost $810M annually for construction and maintenance, while providing $840M in benefit.  Surely, we will see many more people use this analysis as evidence to back claims that high speed rail is good without proper scrutiny.  However, this analysis doesn’t even pass the O’Toole-level test of credibility, because it claims it pays for itself with 150M annually in carbon savings.  I can understand making the case for analyzing carbon savings as a “benefit” to society, but one must compare against all other options for use of cash to reduce carbon emissions – at least against a no-build + congestion toll option.  Just think of all the alternatives one might consider with a $810M annual budget for carbon reduction. At say $20/ton, that comes to 40 million tons a year.

On top of that, Freemark ignores all the other opportunity costs Randal O’Toole conveniently omits when claiming roads pay for themselves.  These omissions include:  opportunity cost of investment capital, opportunity cost of right of way land used, legal costs of eminent domain and related delays, inevitable cost overruns, accounting for optimism bias, and interest on bonds.  In my opinion, the largest of these is the opportunity costs of investment capital, which I would guess at over 15 percent compounding annually (vs a non-compounding 5% generously assumed by Glaeser and Freemark) for all costs during the 10 years (just a little optimistic?) of construction, and 8-10 percent once ridership is stabilized.  Responding to Matthew Yglesias’ hasty endorsement of Freemark’s analysis as “A real cost-benefit analysis of HSR”, Tyler Cowen similarly noted:

I’m not sure what discount rates he is using but even if we put that problem aside this screams out: don’t do it.  Given irreversible investment, lock-in effects, and required hurdle rates of return, this still falls into the "no" category.  And that’s an estimate from an advocate writing a polemic on behalf of the idea.  I’m not even considering the likelihood of inflation on the cost side or the public choice problems with getting a good rather than a bad version of the project.  How well has the Northeast corridor been run?

The urbanist in me would love a vast high speed rail network – it would centralize density at rail nodes and aid agglomeration.  But it just won’t be viable until government first stops wasting money subsidizing automobile and air travel.  In the meantime, HSR advocates commit an intellectual fraud similar to ones Randal O’Toole and his ilk make regarding roads when they make claims that HSR can pay for itself. 

If Ryan Avent is expecting to keep any credibility on infrastructure spending using these words:

In this country, we do not build transportation infrastructure for profit. Perhaps this is upsetting to the libertarians among us, but that’s how it is and how it should be.

Then, perhaps he should think twice next time he thinks of laying into Randal O’Toole for attempting to reconcile infrastructure spending using similarly shoddy arguments. Otherwise, similar to O’Toole, all the HSR advocates are saying is, “Never mind billions of dollars that must be appropriated from people of future generations. Never mind that most of those footing the bill will never ride high speed rail if they’re not fortunate enough to afford a ticket or don’t live in one of the chosen cities. Never mind the drastic effects of the construction on the environment. High speed rail would be a pretty neat thing for some cities, so ‘build baby build’.”

The post HSR Urbanists: “We Are All O’Tooles Now” appeared first on Market Urbanism.

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.

The post Urban[ism] Legend: Positive NPV Infrastructure appeared first on Market Urbanism.

Burj Dubai, Worlds Tallest Building now under construction [flickr israel_is.live

The skyscraper is the great architectural contribution of modern capitalistic society and is even one of the yardsticks for 20th-century superheroes, but no one had ever really connected it with the quintessential feature of modern capitalistic history — the business cycle. Then in 1999, economist Andrew Lawrence created the “skyscraper index” which purported to show that the building of the tallest skyscrapers is coincidental with business cycles, in that he found that the building of world’s tallest building is a good proxy for dating the onset of major economic downturns. Lawrence described his index as an “unhealthy 100 year correlation.”

• Introduction
• Do Skyscrapers Predict?
• Table 1: Skyscrapers and Economic Crisis
• Figure 1: Skyscrapers and Economic Crisis
• Cantillon Effects in Skyscrapers
• Cantilloned Buildings and Business Cycles
• When the Skyscraper Index Is Wrong
• References
• Notes

While macro business cycle theory is beyond my core strength in economics and the scope of this blog, this is a particularly interesting topic to me as I am an economics enthusiast with a passion for tall buildings.  The basic premise is that construction of worlds tallest buildings has strong corelation with economic downturns.  Construction of these buildings begin during times of economic expansion towards the peak of business cycles.  However, by the time the buildings are complete, the market has taken a turn for the worse.  Could the Burj Dubai be an indicator that tough times are ahead?

The common pattern in these four historical episodes contains the following features. First, a period of “easy money” leads to a rapid expansion of the economy and a boom in the stock market. In particular, the relatively easy availability of credit fuels a substantial increase in capital expenditures. Capital expenditures flow in the direction of new technologies that in turn creates new industries and transforms some existing industries in terms of their structure and technology. This is when the world’s tallest buildings are begun. At some point thereafter, negative information ignites panicky behavior in financial markets and there is a decline in the relative price of fixed capital goods. Finally, unemployment increases, particularly in capital- and technology-intensive industries. While this analysis concentrates on the US economy, the impact of these crises was often felt outside the domestic economy.

Thornton tells us three main effects of the business cycle on skyscrapers.  First, looking at the fundamentals of the economics of land development and interest rates:

When the rate of interest is falling, the land best suited for the production of the longer-term, more capital-intensive, and more roundabout methods of production will increase in price relative to land better suited for shorter term, more direct methods of production. …  Simplified, higher prices for land reduce the ratio of the per-floor cost of tall vs. short buildings and thus create the incentive to build buildings taller to spread the land cost over a larger number of floors. Lower rates of interest also reduce the cost of capital, which facilitates the ability to build taller. Thus, higher land cost leads to taller buildings.

Second, lower interest rates enabling larger firm sizes:

A lower cost of capital encourages firms to grow in size and to become more capital intensive and to take advantages of economies of scale. Production and distribution become more specialized and take place over a larger territory.

The third being improved technology as a result of investment in research and development of taller buildings:

Buildings that reach new heights pose numerous engineering and technological problems relating to such issues as building a sufficiently strong foundation, ventilation, heating, cooling, lighting, transportation (elevators, stairs, parking), communication, electrical power, plumbing, wind resistance, structural integrity, fire protection, and building security.

Beyond the mere technology it takes to build the world’s tallest building, every vertical beam, tube, or shaft in a building takes away from rentable space on each floor built, and the more floors in the structure, the greater the required capacity of each system in the building, whether it is plumbing, ventilation, or elevators. Hence, there is a tremendous desire to innovate with technology in order to conserve on the size of building systems or to increase the capacity of those systems. Therefore, as the height of construction rises, input suppliers must go back to the drawing board and reinvent themselves, their products, and their production processes.

diagram from the article

An office building is a capital good that is used to bring a variety of consumer goods to market in the sense that production in the office building involves the decision-making process over all aspects of the firm. Its use is ubiquitous in “big business” and is totally absent in small businesses such as family farms, hot dog stands, plumbing services, auto body repair shops, etc. The office building is a critical capital good in very roundabout production processes that represent virtually all modern production and all cutting-edge goods and service production. The modern economy is inextricably linked with the large office building or as Carol Willis (1995, p. 181) put it: “Skyscrapers are the ultimate architecture of capitalism.”

The skyscraper is not just a large version of the office building. Skyscrapers can be used to house the offices of a single corporation, the central offices and branch offices of multiple corporations, hotel and residential living space, commercial space, convention space, a wide variety of personal service businesses, and specialized tenants such as stock exchanges, theaters, and television studios. The skyscraper can serve as a much larger and more advanced office building (being both more productive and producing a higher-quality service). It can even take on the status of a business community or specialized form of privately controlled marketplace. Naturally, greater amounts and diversity of production are possible in larger skyscrapers. The world’s tallest building, past and present, also adds the status of a distinct address.

An interesting fact to consider is that the Burj Dubai is the first world’s tallest to be residential and not office.  Does it reflect the unique market cycle we are now in where the credit bubble resulted in a world’s tallest building with a non-commercial primary use?  Is it somehow telling that the Burj Dubai is not a skyscraper directly meeting the needs of big business?

Of course, the skyscraper index is not perfect, but Thornton examines the main counterexamples to the index, such as New York’s Woolworth Building.

The post Skyscrapers as Economic Indicators appeared first on Market Urbanism.

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

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The post Urban[ism] Legend: Gas Taxes and Fees Cover All Costs of Road Use appeared first on Market Urbanism.

In many different contexts, I have heard people argue that liberalizing zoning restrictions will cause “over development” or high density development filled with low income people. Even in relatively low density areas, people make the sensationalist argument that if zoning restrictions were lifted, high rises would be built in their community, creating congestion and overburdening infrastructure.

On the other end of the spectrum, I have even heard free-market advocates argue against Smart Growth and other urbanist concepts using several Urbanism Legends. They argue that Smart Growth goes against the market and causes density to increase in urban areas. They are correct when they refer to Urban Growth Boundaries that restrict development in outlying areas. Strangely, these market advocates rarely applaud Smart Growth proponents advocacy for loosening zoning restrictions in infill areas. They have argued that the upzoning discourages single family homes, which is the desired living arrangement for most people. And that the market should allow for more single family homes.

The reality is that zoning can not create density. Zoning only restricts density. Loosening zoning restrictions only allows market forces to meet the demands of the marketplace.

So, if there were no zoning would skyscrapers go up in quiet single family neighborhoods? Most likely not, unless zoning restrictions have serious hampered redevelopment or something drastic has caused demand to skyrocket in an area.

There’s the simple reason why: Construction costs (per square foot) rise as height and density increases. This is because more expensive construction materials and systems are necessary to build densely. So, building a 50 story building in a quiet suburban neighborhood rarely makes economic sense for a developer. Construction costs would be so high that the developer would not be able to sell the space in the tower at a high enough price to justify the construction costs, since space in single family homes would be significantly cheaper.

Other than construction costs, the other main variable driving density is land prices. Higher density development does allow for the cost of land to be shared by more constructed space. However, in typical suburban areas the land cost is relatively low, and has a very negligible affect on the cost of building densely.

In order for a higher density development to be feasible, it must be in a location desired by many more people. The land prices are likely higher in such a location. However, demand is sufficient enough to charge more money per square foot for that location. The developer will be willing to build more expensive, high density construction which spreads the high land costs over more units.

A rational developer would likely not be willing to build single family homes on very expensive land in normal circumstances. By the same rationality, if developers were restricted from building densely on desirable property by zoning, land values are held artificially low. This helps values of already built homes, but hurts the value of the land under them.

There are even instances where zoning has no effect on density since zoning restriction may be so loose that a developer could build the highest and best use as-of-right. In such cases, loosening density restrictions have not effect.

In microeconomics terms, zoning is a supply ceiling, which behaves almost inversely to a price ceiling. As the market is not allowed to optimally meet full demand, prices are forced higher by the shortage. These measures are regressive in that wealthy homeowners can afford to remain in the area, while middle class people are forced to look elsewhere for housing. Often, those middle class residents are displacing poorer residents from their low cost housing.

Wealthy municipalities, such as Beverly Hills use zoning to protect it’s wealthy home owners from more optimal higher densities. Beverly Hills is proud of their market distortions, and use the “Zoning Creates Density” legend (among other legends) to deceive people in their own propaganda video called, It’s a Wonderful City.

The bottom line is that zoning itself cannot determine density. Construction costs and desirablity are the main factors that determine density. Zoning can only restrict market forces from meeting demand, artificially driving up housing prices, while driving down land prices, thus pushing people to more affordable, yet less desirable locations.

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The solution, as Ryan Avent says, is to build denser communities. We ought to build more transit infrastructure, of course, but it’s cheaper to use what we already have more intensively. And, of course, it’s more practical to build new infrastructure if there’s a reasonable expectation that it will serve intensive development. Beyond that, density also serves to make walking and biking more practical for more trips. And best of all, getting denser could be accomplished mostly through growth-enhancing relaxation of regulatory burdens.

And of course if the supply of housing in central cities and nearby suburbs were radically higher, then it would be much easier for people to afford to live in them. Instead, restrictions on the supply of conveniently located housing lead to high prices and the “drive until you qualify” phenomenon that’s currently leaving many Americans in deep trouble as they try to pay for fuel.

In general, relaxing density restrictions will ease housing prices. But, a couple notes:

Creating more socialized infrastructure, whether transit or roads, disperses development. High densities create demand for transit, not the other way around. Transit creates demand to locate near the stations, but not elsewhere. This is because as commuters are diverted from roads, congestion subsides, allowing drivers to commute from further-out places. So, if density is the goal, I would privatize highways & parking, while putting the breaks on construction of new public highways & parking prior to building new expensive transit. If individual commuters were to pay for their use of the roads, many would alter their habits and perhaps where they choose to commute to / from. The change in location preference will, no-doubt, increase density.

Building densely has higher construction costs per unit as land costs are dispersed among more units, so density doesn’t necessarily equal affordability for those who live densely. However, building higher density where there is high demand releases pent up demand to gentrify less desirable areas. Overall affordability improves for a city as a result of allowing the market to provide additional supply.

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