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Mostly Empty Syndrome

If you have been following this blog, you may have detected a theme, I don't like the public wasting money on un-needed infrastructure. Of course no-one endorses "wasting" money, we just disagree what is wasteful and what is an investment.

I think the answer is obvious in retrospect. A successful investment had a positive "return on investment" at or above market interest rates. An unsuccessful investment (or waste) had a negative return on investment. Projects with positive but below market rates of return sit in an analytical purgatory.

In prospect, I think I can assess forecasts accurately, and project advocates are not to be trusted for a variety of well-understood reasons ranging from optimism bias to strategic misrepresentation. Unfortunately, other people also think they can assess forecasts accurately, even if we know they can't. If we had better mechanisms for requiring forecasters to be more accurate, we could mitigate these problems.


When these projects are small, it is not terribly important. The analysis of benefits and costs should not be costlier than than the benefits from the analysis (i.e. the difference in total welfare from a build/no build or a build this vs. build that decision). But when the project proponents ask for hundreds of millions of dollars (or more), we should be paying more attention.

A large number of projects seems to fall in the category of what I will dub "Mostly Empty Syndrome". MES projects are infrastructure that are underutilized. Mostly they are not underutilized by design, but by mis-forecast. There are facilities however, like NFL stadiums, that are in fact underutilized by design, with lots of marginal events schedule to mitigate the grossness of the structure.


These are projects that serve purported needs, but those needs don't materialize. Or they just are insufficient to justify the cost. Or they can be met in a different way. A few examples are listed below:

  • Vikings Stadium - As I suggested before, they really only need to play in a TV studio. More importantly, the facility is unused or underutilized 355 days a year. The worst aspect is that they could not somehow figure out a way to share the stadium with the college team at a university that is adjacent to the stadium site.
  • Stillwater Bridge - The old bridge required a replacement. The new bridge is overkill for the actual demands on the road.
  • SPUD - It is basically slated to serve 350 train passengers a day, and a few buses until lots of speculative rail lines are opened.
  • Northstar - Some forecasts greatly over-estimated benefits.
  • Maryland's Inter-County Connector is failing to realize forecasts of demand.

There are some counter-examples perhaps, projects that were long considered white elephants, though eventually demand caught up with supply. Dulles Airport meets this criterion. That still does not mean it was a good idea to build it when it was built, even if it is heavily used today. The 20 years of underutilization are fixed capital that could have been better spent in some other way.

There are other counter-examples, projects that were expected to fail (by someone, though not by proponents) that exceeded expectations. The Pennsylvania Turnpike comes to mind.


What connects MES projects?

  1. I believe history will show that they are designed and pushed through by politicians serving narrow interests rather than by market demands or public sentiment. That is, they are generated by top-down rather than bottom-up processes.
  2. They are large and require special treatment.
  3. They are backward looking, built near, at, or past the maturity of the technology they represent. Air travel was still growing when Dulles was built, and the market grew into its capacity there. Auto travel was still early in its cycle when the Pennsylvania Turnpike was built. In contrast we now have peak travel, long ago passed peak railway, and are hopefully at peak football.

The Strib reports: State gives city new tool to fund streetcars :

"One provision in the state tax bill could have a significant impact on Mayor R.T. Rybak's dreams of building a streetcar in Minneapolis.

The bill allows the city to dedicate tax revenues from several specific parcels around Minneapolis to help pay for a new streetcar line. The city pushed for the new funding method because, unlike regional transit like light rail, streetcars would be a localized project requiring more municipal investment.

Federal funding is still key to the deal. The city won federal funding to perform an alternatives analysis for a line along Nicollet and Central Aves. -- which is almost complete -- and city staff are preparing to apply for a TIGER grant to help fund the line itself.

The 'value capture district' designated by the state for funding streetcars is similar to tax increment financing. It uses revenues from parcels near the transit line to pay off bonds issued to build it. "

More on value capture.

Economists get what they want

Over at Price Roads, Lewis Lehe has a great post: Price Roads | economists get what they want: "Economists get what they want

Over at Marginal Revolution, Tyler Cowen says:
Voters are getting more or less what they want, which is some spending restraint, mostly holding the line on taxes, not too much trust in government as a way of moving forward, and a love of entitlements.  One can find that objectionable, and indeed I do across a number of fronts, but there you go.  We are not going to elect a new people anytime soon, and in this odd sense you can see all the recent political gridlock as reasonably democratic, more so than its critics would like to admit (I know I’ll generate a bunch of criticisms citing poll data about how Americans really want this, that, or the other but I’ll hold my ground on this one).

Cowen has bemoaned the trend of declining public investment and rising entitlements. He says this in line with voter preferences. I disagree. Declining public investment and rising entitlement spending is exactly what we would expect from a government run by policy experts over the last 40 years. Nearly everyone would rather the government directly spent less in the domain of her expertise."


For most of the 20th century, government had more public provision and more regulatory cross-subsidy than it does now. Economists hated this situation because it wasn’t pareto optimal. Government housing created hellholes so bad as to inspire movies like Candyman, so economists pushed for less spending and more direct aid. Price controls and protectionism (regulation), like the Interstate Commerce Commission and tariffs, created such yawning deadweight losses that economists pushed for free enterprise and direct aid for the ‘losers.’ These ‘swaps’ were better off for nearly everyone.

But both swaps will lower investment as a share of public spending.


Read the rest.

David King and I compose a sequel to our recent post on public transit, arguing: The case for (and against) public subsidy for roads @ streets.mn:

"In recent weeks we have thought about public subsidy for transit and university subsidy for parking.

But what about roads? Are roads worthy of public subsidy?"

Club Transit

In a recent Streets.MN post David King and I argued that transit is usually best thought of as a club good, and the relevant club-members should be its users and potential users. We wrote:

Users should be financially incentivized to get season or annual passes (paid monthly with bank debits) and become “members” of the transit system rather than pay-as-you-go “riders”, which will encourage more usage, and many users to get subscriptions so they have the easy option of taking transit. As with many museums and zoos and other clubs, membership should be reciprocal, so joining the Twin Cities Transit System gets me “free rides” in Chicago or New York. This will increase the perceived ownership that passengers have for the service.

Many people pay for transit on a per use basis, either by cash or with a stored-value card. Others (in the Twin Cities 9.5 million rides of a total of ~71 million (which depends on what numbers you use) on Metro Transit) use a season pass for "unlimited" use ("unlimited" use still has limits, for instance in the Twin Cities you still need to pay for services > $3 per ride, i.e. Northstar). For instance, a Metropass is $76 per month (if you belong to an organization with 10 or more subscribers), and allows unlimited service. A U-Pass (for University of Minnesota students) is only $97 per (4 month) semester, with subsidy from the University. There are many options.

For the individual traveler, $76 per month is worthwhile at current fares if you make at least 34 peak trips (17 days per month) or 43 off-peak trips (22 days per month), i.e. if you are essentially a daily user for commute trips, or use it for a lot of non-commute trips as well.

Several (perhaps obvious) points:

  1. There are probably a lot of existing riders who would benefit from a Metropass who don't get one (this would cost Metro Transit money);
  2. Possessing a Metropass would induce me to make more trips by transit (since the marginal cost of use would now be zero);
  3. At a relatively lower price, more people would get a Metropass. This may or may not increase Metro Transit's revenue. This can be achieved either by lowering the price of the Metropass or increasing the price of non-Metropass use;
  4. We would expect more people to have passes than use the passes on the system every day (not every pass-holder need be a daily rider). People pay for the option of not having to think about price.

What benefits do clubs offer? Let's look at the examples of other public institutions that use the club model: museums, zoos, public radio for some ideas:

  • Unlimited transit rides in your home city
  • Reciprocal unlimited transit rides in other cities
  • Free entry to the Minnesota Transportation Museum
  • Discounts from participating merchants and at events (sports games, shows, concerts e.g.)
  • A tote bag or mug
  • A newsletter or magazine
  • Two free taxi rides per quarter
  • Free parking! (At park and ride lots? In downtown?)
  • Eligibility to vote on governance (e.g. a Member's Board which has input into real decision making)


I am sure the tote bag will be popular, but there are limits to the ancillary benefits of membership in an organization, the main thing has to be admission to the service that organization provides.

The more important aspect of membership is that it changes the perspective from being a customer to being a member if not owner of the system. As a member of a club, I want there to be more members, as it helps spread the costs and raises money for the services provided. I become an advocate for the organizations I join. I feel part of a "larger social whole." I help maintain it, since it is my "property". A lot of this is "reframing" but the psychology is important here, people act differently based on whether they feel they have real input into decisions and real effect on outcomes.

Some cities have Bus Riders Unions, but they are often at odds with the transit agency. Almost everywhere has an Automobile Association (Minneapolis and St. Paul each have one), about which I have warm feelings since they help start my car when the battery is dead, or change a tire, or tow it when something else breaks. Transit workers are members of their union. Even transit agencies are members of APTA trade association. I cannot find an example of a transit system that organizes and treats its riders as members.

Why shouldn't riders be members of the non-profit organization that provides them transportation services on a regular basis? And why shouldn't they help govern that organization?

Street Improvement Fees

The League of Minnesota Cities writes:

Briefing paper---2013 Minnesota cities and street improvement districts League position

The League supports HF 745 (Erhardt, DFL-Edina) and SF 607 (Carlson, DFL-Eagan), legislation that would allow cities to create street improvement districts. This authority would allow cities to collect fees from property owners within a district to fund municipal street maintenance, construction, reconstruction, and facility upgrades. If enacted, this legislation would provide cities with an additional tool to build and maintain city streets.

Sounds like a good idea to me. To be fair, there are opponents. The stated opposition seems odd. They oppose this tool because it is not voter approved, yet I don't ever recall voting on property tax hikes, or sales taxes for stadia which are imposed on me. The real opposition is because it shifts the burden from one class of taxpayers to another, hopefully so that it is more closely aligned with benefits.

At any rate, our research on the similar Transportation Utility Fees is:

Drew Kerr has a pay-walled article at Finance & Commerce here.

MnDOT has posted the evaluation of the recent Mileage Based User Fee test: Connected Vehicles for Safety, Mobility, and User Fees: Evaluation of the Minnesota Road Fee Test:

"In 2007 Minnesota legislature approved a $5,000,000 project in order to demonstrate technologies which will allow for the future replacement of the gas tax with a fuel-neutral mileage charge. The Minnesota Department of Transportation (MnDOT) organized a study to examine the implementation and operation of a mileage based user fee program (MBUF), which might allow for the supplementation or replacement of traditional gas taxes. The primary objectives of the study were to: assess the feasibility of using consumer devices for implementing Connected Vehicle and MBUF applications. These applications included localized in-vehicle signing for improving safety, especially for rural areas, and the demonstration of the proposed Connected Vehicle approach for providing location-specific traveler information and collecting vehicle probe data. The study consisted of 500 voluntary participants, equipped with an in-vehicle system comprised of entirely commercially available components, primarily a smartphone using an application capable of tracking participant vehicle trips. Successfully meeting its primary objectives, the system was capable of assigning variable mileage fees determined by user location or time of day, as well as presenting in-vehicle safety notifications which had measureable effect on the participants driving habits. MnDOT contracted Science Applications International Corporation (SAIC) to perform research for the project and an evaluation of its findings. This document is the final report from SAIC, providing a summary of the study, its findings and an evaluation of the project as a whole."

The rates tested were:

1. Outside Minnesota miles - $0.00 per mile;

2. Inside Minnesota miles – $0.01 per mile;

3. Twin Cities (“Metro Zone”) – Peak miles – $0.03 per mile; and

4. “Non-Technology” miles – $0.03 per mile.


It looks like there were some technology problems in the experiment (having worked with GPS and in-vehicle devices for research, I believe this is still emerging technology with imperfect reliability, insufficient for mainstream application):

As mentioned previously, trip data was only available for 57 percent of trips generated by the system. Of the 43 percent of trips where trip data was not available, 69 percent of the trip data loss was due to a vehicle detection failure. Trip data was only recorded if the system could both detect the device was in the correct vehicle and a valid GPS signal was found. Therefore, the remaining 31 percent of the trip data loss can likely be attributed to poor GPS signal during trips. Although the log messages associated with GPS availability cannot be extrapolated to measure the number of trips or miles impacted, the loss of trip data resulting from vehicle detection failures or lack of GPS signal during trips clearly identifies GPS availability as a significant system issue. The deployment team’s report provides additional insight into the accuracy of the system as it relates to GPS connectivity and accuracy. Intermittent GPS signal was reported as a contributing factor to lower device miles compared to odometer miles collected.

Just as a random statistic, which probably doesn't mean a lot, the report includes the word "success*" 27 times and "fail*" 33 times.

I believe MBUF or an equivalent will come eventually, but here and now the gas tax (or wholesale fuel tax, if we want to hide it), properly indexed to inflation and fuel economy, is where we need to be focusing for the revenue required to operate road systems in the US.

 David King and I argue The case for (and against) public subsidy for public transport at Streets.MN:

"In most of the United States and much of the world, public transport is publicly subsidized. Everyone in an area pays for transit whether or not they use it. This was not always the case, and need not everywhere be the case. Once mass transportation was provided to the public for profit (in Minneapolis and St. Paul as well as most other US cities) from the late 1800s through the first half of the 1900s. While rights-of-way were often publicly provided, the companies operating transit paid for the maintenance of those rights-of-way above and beyond what was required for transit."

I posted a while back Transportation Benefits Too Little.

NetRateOfReturn

Matt Logan sends me to another paper of interest: Understanding the Contribution of Highway Investment to National Economic Growth: Comments on Mamuneas’s Study by Randall Eberts

Introduction:

: Since the early 1990s, various researchers have attempted to answer the question: “What is the rate of return of highway investments to the economy?” This follows from the simple proposition that highways provide the arteries for the flow of raw materials, and intermediate goods to producers and access to employment and markets for consumers. Without a highway system producers would not be able to obtain economies of scale to obtain the most efficient operation. Many economists agree that the rate of return to highways during the period 1950 - 1970 exceeded the rate of return available to alternative investments.

Recent studies have indicated that the rate of return to highways has decreased following the initial boost provided by national connectivity. There is strong debate about the actual level of returns in the late 90’s to the present day. The level becomes critical because some studies show the rate near or below the rate of return available from alternative investments. The Federal Highway Administration (FHWA) of the U.S. Department of Transportation seeks to continue to provide the best information available to policy makers to understand the benefits and trade-off involved with alternative uses of the scarce federal resources.

To that end, the Theofanis P. Mamuneas recently completed an update of his highway benefit research for the FHWA. During the 1990s Prof. Mamuneas conducted several studies with Prof. Nadiri based on a general equilibrium approach to modeling the returns to highway investments accounting for both consumer and producer benefits. This paper endeavors to place the most recent study authored by Prof. Mamuneas in context with previous results and results from alternative methodologies and data sets. Each study examining the returns to highways employs complex econometrical and data intensive modeling efforts. The studies also yield different and sometimes conflicting results, even though all employ generally accepted economic techniques. Policy makers need a technically skilled and unbiased review of the field in order to use the results of this literature for policy decisions.

The purpose of this paper is to review and summarize current literature relevant to contextualizing the recent update by Mamuneas to the previous Nadiri-Mamuneas estimates of the returns to highway investments. To provide this context, the paper will first provide an overview of the conceptual relationship between highways and output. The next section describes the highway capital stock estimated by Fraumeni and used by Mamuneas. Next, the paper describes the study conducted by Mamuneas and carefully analyzes the results for consistency within the modeling framework and in context with other studies. The paper then briefly summarizes the broad range of estimates from the literature to offer additional context. Finally, the paper offers an overview of the issues that still need to be addressed to provide more definitive estimates.

Conclusions say:

… While there may not be a consensus in the literature on the absolute value of estimates of the rate of return to highways, and perhaps that may not be possible given the different methodologies and levels of aggregation used in the literature, it appears that there is a convergence of thought that the U.S. highway system is maturing and that the system is no longer underbuilt. However, that does not mean that funding for the highway system should be reduced. As a mature system, highways require maintenance, upgrading and replacement to provide the same level of services as before. And with a large infrastructure, that requires considerable investment to maintain highways in the condition that they were originally built. In addition, as the economy continues to expand over the long-run, the proportion of highway stock to other factors of production will need to be maintained so that if the economy is at an equilibrium state in which the rates of return are roughly equal, that relationship can be maintained into the future.

I agree with the first part of the conclusions. I am less convinced the economy is ever in equilibrium nor that the share of highway stock in factor of production needs to remain constant. The whole point of dematerialization is to reduce transport and inventory costs, so I would hope transport costs might go down over time as more things can be done virtually.

Annals of excess cost: Volume 2

From an anonymous source:

The Ramsey Star bus service had 115 park-and-ride users in fall 2012, two months before the Ramsey Station opened.

2012 ANNUAL REGIONAL PARK-AND-RIDE SYSTEM REPORT

Meaning of course that most commuter rail riders are not new, so your
denominator perhaps should only be 15 new riders or $880,000 per rider!

I get quoted in Global Construction Review: $40bn “fix it first” plan headlines Obama’s infrastructure push

In his State of the Union address last month, US President Barack Obama proposed investing $50bn, starting right away, on the country’s transportation infrastructure.

Of that, $40bn would go toward the upgrades most urgently needed on highways, bridges, transit systems, and airports in what the White House has dubbed a “fix-it-first” policy.

“The national transportation system faces an immense backlog of state-of-good-repair projects, a reality underscored by the fact that there are nearly 70,000 structurally deficient bridges in the country today,” the White House said in a statement.
Mr Obama’s plan, which would need congressional approval, also proposes attracting private investment by pairing federal, state, and local governments with private capital, in what’s being called the “Rebuild America Partnership”.

And a third plank in the President’s infrastructure push is cutting red tape. Through a “historic modernisation of agency permitting and review regulations, procedures, and policies”, the President hopes to cut in half the duration of typical infrastructure projects.
The “fix-it-first” element of the plan received a muted welcome from Professor David M Levinson, an expert on the economics of infrastructure at the University of Minnesota.

“The priority should clearly be on repair because most of the system is built out, and we’ve had nationally declining travel over the last 10 years, so there’s not a major need for expansion nationally,” he told GCR.

The American Society of Civil Engineers (ASCE) has warned of an investment gap of $846bn in surface transportation
“The general problem is that the median age of an interstate highway link in the US is almost 50 years old now, and the expected lifespan of such links was in the order of 50 years.

“Generally most of the infrastructure that has got to be there 10 years from now is there now, and if we want it to be there ten years from now we need to fix it.”

The American Society of Civil Engineers (ASCE) has warned of an infrastructure investment gap, between now and 2020, of $846bn in surface transportation. If not addressed, says the ASCE, this shortfall will hurt the US economy.

Is $40bn enough?

“No,” Prof Levinson said. “No one really knows what’s enough. It’s about the equivalent of one year’s federal spending on roads. So it would be like adding an extra year to the decade, or 10% more over 10 years. It’s not trivial. It’s not going to solve the problem, either, but it’s a real amount of money.”

He also questioned the wisdom of infrastructure investment driven by the federal government.
“The states should be addressing this,” he said. “They can prioritise things locally, they know where the issues are, and they’re the beneficiaries.

“They know how much they need to spend locally to satisfy the local risk-reward, benefit-cost ratio. The federal government allocates things by formula and that means there’s a major inefficiency there.”

I just filled out my taxes this year, and it seems an awful waste of time. And TurboTax (and the tax code for which it stands) is increasingly sucky.

Suppose we replaced the federal income tax with inflation. The federal government holds a monopoly on money, so this is a plausible policy choice. What would happen? We would reduce all of the costs associated with collecting and complying with tax law. No more IRS, no more April 15.

Instead of trying to maintain the value of money, we would slowly devalue money by the amount of government spending.

Imagine we have an economy with two individuals:

One earns $100,000, the other $50,000. Government taxes are 15% for all income up to $50,000 and 30% for income in the bracket between $50,000 and $100,000 and so the government takes in $7,500 from individual one and $22,500 from individual two, for a total of $30,000. Assume the remaining money is all spent.

Now let's assume we have no taxes. The government just prints $30,000, so instead of an economy of $150,000, we now have an economy nominally valued at $180,000. Of course production is just the same (aside from some savings in tax collection). The next year to purchase the same amount of goods, everyone demands a wage increase of 20%, so incomes are $120,000 and $60,000 respectively.

(The following year, the government prints another $36,000, and wage demands are higher and so on).

Is anyone worse (or better) off in this situation, if it was understood that government spending would be no greater (or lower) than otherwise in real terms? I.e. assume everyone has rational expectations and the government is responsible.

Could this be advantageous to the United States, as there is so much foreign ownership of US dollars, to help export some of the costs of maintaining the government (and clearly it would be detrimental for whomever holds dollars at the time this is announced)? Certainly the currency would be devalued slowly as a consequence of this guaranteed inflation. The US dollar might lose some of its reserve status. Without the political check of taxes, government might be tempted to spend more as the consequences are hidden in the prices of goods and labor.

(I am aware of the risks of hyperinflation, but we handle some inflation each year now without hyperinflation, so what is the threshold beyond which confidence is lost in the system?)

There would be a one-time shift in favor of borrowers and wiping out lenders, maybe discouraging future lending. On the other-hand, the government would cease to be a future borrower. Nominal interest rates would also have to be at Inflation + Rate of Return, so would be much higher, but so would nominal returns.

Instead of arguing about the rate of taxation, we would argue about the rate of inflation. At least it would be a new argument.

In the text of the 2013 State of the Union (via MinnPost), transportation gets an important shout-out, with special attention to Fix-It-First:

"America’s energy sector is just one part of an aging infrastructure badly in need of repair. Ask any CEO where they’d rather locate and hire: a country with deteriorating roads and bridges, or one with high-speed rail and internet; high-tech schools and self-healing power grids. The CEO of Siemens America – a company that brought hundreds of new jobs to North Carolina – has said that if we upgrade our infrastructure, they’ll bring even more jobs. And I know that you want these job-creating projects in your districts. I’ve seen you all at the ribbon-cuttings.

Tonight, I propose a “Fix-It-First” program to put people to work as soon as possible on our most urgent repairs, like the nearly 70,000 structurally deficient bridges across the country. And to make sure taxpayers don’t shoulder the whole burden, I’m also proposing a Partnership to Rebuild America that attracts private capital to upgrade what our businesses need most: modern ports to move our goods; modern pipelines to withstand a storm; modern schools worthy of our children. Let’s prove that there is no better place to do business than the United States of America. And let’s start right away."

We have talked about Fix-it-first here before. In fact, Matt Kahn and I wrote a white paper on it: Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways for Brookings. For full details, read the report, the abstract is here:

The roads and bridges that make up our nation’s highway infrastructure are in disrepair as a result of insufficient maintenance—a maintenance deficit that increases travel times, damages vehicles, and can lead to accidents that cause injuries or even fatalities. This deficit is in part due to a prioritization of new projects over care for existing infrastructure and contributes to a higher-cost, lower-return system of investment. This paper proposes a reorganization of our national highway infrastructure priorities to “Fix It First, Expand It Second, and Reward It Third.” First, all revenues from the existing federal gasoline tax would be devoted to repair, maintain, rehabilitate, reconstruct, and enhance existing roads and bridges on the National Highway System. Second, funding for states to build new and expand existing roads would come from a newly created Federal Highway Bank, which would require benefit-cost analysis to demonstrate the efficacy of a new build. Third, new and expanded transportation infrastructure that meets or exceeds projected benefits would receive an interest rate subsidy from a Highway Performance Fund to be financed by net revenues from the Federal Highway Bank.

The Federal Highway Bank does not exist in that name, but there is the related, and recently expanded $1 billion per year TIFIA program housed within US DOT, which has similar loan and line-of-credit powers (for all of transportation, not just roads). The claim is that "each dollar of budget authority can leverage approximately $10 in lending capacity, " since banks can print money in the US. But policy is not as crisp as we would like, loans can be repaid from any approved source, including non-project related revenue (though project revenue is preferred), no Benefit/Cost test is required, and current policy still permits federal grants for new construction. Tanya Snyder at Streetsblog discusses some of the other distinctions between a bank and TIFIA. See Congressional Research Service's Surface Transportation Funding and Programs Under MAP-21: Moving Ahead for Progress in the 21st Century Act (P.L. 112-141) for an intelligible summary of MAP-21.

Some takes on the President's call from

Some local news sources got into the act, along the lines of "Deficient Infrastructure: Can it happen here", which of course it can and does, thus giving a nice local angle to a national speech:

Matt Kahn and I didn't invent the slogan, it's been around for a while, though our take is a bit more than a slogan, and more hard core than what was adopted in Map-21 (which does move in the right direction, but not far enough).

Still, not everyone likes the idea, the Public Works Finance, e.g.

David King too praises Canadian Transport Policy: Transport Finance without the Feds: The Canadian Model:

"There are certainly problems with the decentralized system. Some Canadians want a national transit agency. Fragmented governance in regions makes coordination difficult, and perhaps a stronger regional agency is needed. Most difficult, perhaps, is that many cities forego transit service all together. The city of Guelph, for instance, has 120,000 people but no bus service. However, eliminating unproductive transit so that resources can be used elsewhere is actually good policy. But by nearly every measure Canadian transport policy outcomes are superior to US outcomes. Whether US transport finance and policy devolves to the states remains to be seen, but it certainly isn’t something that should be dismissed as inferior to what we have now. It may well be better."

TranslinkOrg

The Buzzer blog has a nice link: » TransLink 101: What is TransLink, anyway?

TransLink is the multi-modal transportation organization for Greater Vancouver, BC, and it is unlike what we see in the States. It is in fact, closer to the idea described in Enterprising Roads, a transportation utility with autonomy constrained by oversight.

One of the key points to consider is that metropolitan Vancouver has a transit mode share of 21%, comparable with much larger Toronto and Montreal (though behind metro New York's 30%, it is well ahead of Seattle's 9%), despite ranking 34th in population. Some of that has to do with institutional factors and governance.

TransLink describe's its organization in a long, though well-done and readable, report:

The province agreed to provide six cents of tax room from the provincial fuel tax, which would be a major funding source, and also give the GVTA the parking sales tax revenue. The GVTA would have the ability to generate a steady stream of revenue through levying taxes; however, any increase in taxes would have to first be approved by the GVRD board. The only increase the GVTA could implement on its own was to transit fares.

...

“You can look at it as if it’s no different from water or sewers, or any other kind of utility,” Cameron said. “So what are the financing principles behind those utilities? They’re user pay, essentially. You use water and sewer revenues to pay for water and sewer services, and the aim was to get transportation services to be autonomous, self-financing, self-constructing utilities.”


Canada should consider exporting this model of governance to the US.

Recently published:

Abstract:

"This project provides case studies of the impact of transportation investments on local economies. We use multiple approaches to measure impacts since the effects of transportation projects can vary according to the size of a project and the size of the area under study, as well as other exogenous factors such as existing economic and demographic conditions. We measure effects on economic output and employment to estimate impacts of specific investments, and address issues of generative versus redistributive effects of investments, as well as identify specific economic sectors that might be disproportionately affected by such investments."

Executive Summary:

There remains a large amount of interest at state and local levels in using transportation investment as a means to promote economic development. Cities and regions that are growing slowly or not at all view improvements to infrastructure networks, especially transportation networks, as a potential way to stimulate growth by lowering the costs of local firms and making their location a more attractive place for private investment and expansion. Transportation investment programs often become more attractive when coupled with the offer of grants from higher levels of government. They also benefit from the reputation of infrastructure projects as a “safe” type of investment during periods of lower growth. This has been seen most recently with the United States government’s promotion of the American Recovery and Reinvestment Act, where infrastructure spending became emblematic of the bill’s efforts to promote employment, despite being a relatively small portion of the overall spending. Yet, as fewer resources have become available for such projects at the state and local levels in recent years, state departments of transportation and other public works organizations have begun to sharpen their focus to determine where and how such resources should be deployed to yield the greatest returns. This study evaluates the potential of transportation investment to generate increases in private economic activity by empirically examining a recent set of case studies of highway improvement projects in Minnesota.

Transportation investment is but one of the competing factors influencing patterns of economic development, and so as a first step in our study we examine the empirical literature on a number of factors, including transportation, that have been cited previously as affecting development. The factors reviewed include things like human capital and education, taxation and regulatory regimes, quality of life factors, and other types of non-transportation infrastructure such as sewer and water systems, schools and telecommunication systems. Broadly speaking, the factors centering around human capital and labor quality seem to be most important. Taxation and regulation levels are fairly important as well, though they seem to matter less at the national level than at the boundaries between state and local jurisdictions. Quality of life factors remain fairly prominent as well. The most cited factors in this category include things like favorable climates, which have accounted for a great deal of variation in regional population growth in the U.S. over the past several decades, as well as environmental quality and other natural amenities. Since some of these factors (e.g. environmental quality) are under the purview of state and local governments, they tend to complicate the analysis of factors such as taxation and regulation, as a full accounting these factors requires an analysis of their outcomes (e.g. how tax revenues are spent). Many types of non-transportation infrastructure have been found to correlate with economic development, though the direction of causality between them has not always been clearly identified. Finally, much of the evidence on the relationship between transportation investment and economic development suggests that there could be some moderately positive growth effects from improvements to transportation networks, but that the returns to transportation investment have been generally declining over time as many types of networks have matured.


How do transportation improvements translate into effects on economic growth? Theory suggests that different forces are at work depending on where the improvements are being made. Within urban areas, the primary contribution of transportation improvements for many types of industries is their ability to facilitate agglomeration effects. Firms in the same industry within a city may benefit from the use of certain shared inputs, such as specialized pools of skilled labor. A highly developed transportation network could increase firms’ access to these types of inputs and thus make them more productive. Outside of large urban areas, several other types of effects might dominate. These include the ability to expand the use of existing resources such as labor and capital (a scale effect), increases in the productivity of existing inputs, and the attraction of new resources and productive inputs (people and new firms) to an area. Several of these effects can take place simultaneously in response to a transportation improvement, thus making it difficult to disentangle their relative contributions.

These processes are not often observed directly due to the lack of quality data at the level of an individual firm. Thus, many analyses of transportation and economic activity rely on data collected at a geographically more aggregate level. In this study we focus on private sector earnings and employment data, collected at the county and city level, respectively, as appropriate measures of economic activity. Both data sources are used to construct panel data sets, which can be used to estimate the effects of the completion of the projects over time.

The first part of our analysis focuses on the case studies of the expansion of US 71/TH 23 (including the Willmar Bypass) near Willmar, Minnesota and the expansion of TH 371 (including the Brainerd Bypass) between Little Falls and the Brainerd/Baxter area. In both cases, county-level earnings by industry are used as the unit of observation. The analysis focuses on the construction, manufacturing, retail and wholesale industries as these have been identified in previous studies as “transportation-intensive” industries. Earnings data from 1991 to 2009 are collected for the county (or counties, as is the case for the TH 371 project) in which the project is located, along with neighboring counties, forming a panel data set. These data are used to fit an earnings regression with controls for population, state-level earnings in the industry of interest, and national output. The model is estimated using a panel correction technique that accounts for correlation across panels in the data as well as serial correlation. The effect of the improvement is estimated via a series of interaction variables that identify the county in which the improved highway is located, along with the time period of the observation (pre-, post- or during construction). Results indicate that none of the industries studied in either of the case study locations show evidence of statistically significant increases in earnings following completion of the respective improvements, once population and macroeconomic trends are controlled for.

The second part of the analysis examines in greater detail the spatial effects on development that might be expected from the case study highway projects. While the analysis of county-level industry earnings did not indicate any significant growth effects, it is possible that the projects might have induced changes in growth rates at the sub-county level. To test this possibility, we use city-level data on total employment for municipalities within the county where the project is located. Total employment data is used to ensure that smaller towns in the sample are not frequently excluded due to data suppression, a problem that would become more pronounced with further disaggregation. The employment data, which are available from 2000 through 2010, are again assembled to form a panel data set which is used to fit employment regressions. The employment
regressions have a similar structure to the models used in the analysis of industry earnings, except that the “treatment” effect of the highway expansions are specified differently. Cities in the sample are stratified according to their location relative to the improved highway. Cities are identified as being located along the improved highway segment, upstream or downstream from the improved highway (and thus likely to still receive some benefit), or neither. Again, these location attributes are interacted with variables identifying when the observation took place. Due to the shorter time series element in this data set, only pre- and post-construction periods are considered – the “construction” period is combined with the period prior to the commencement of construction. The results of the employment regressions indicate similar findings to those provided by the analysis of industry earnings, with little evidence of statistically significant impacts of the highway expansion projects on employment in the towns most directly affected by them.


The results of the analyses of industry earnings and employment for the various case studies appear to be strikingly consistent across locations, an important finding considering the different growth rates and industrial composition of the various case study locations. We cannot completely rule out the possibility that the projects did have some positive effect on employment, but that it was not distinguishable due the underlying amount of variance in the data. Were this the case though, the effects in question would still be quite small, in most cases on the order of a couple of percentage points. We also note the effect of the recent recession on our results, especially those using the employment data. Despite our efforts to control for macroeconomic trends, the recession undoubtedly had profound effects on private investment and business formation, both of which coincide with the latter years of our data. These years would also be the period when we would expect to see any growth effects from the improved highways.

With these caveats in mind, we may be able to draw some conclusions about the relative role of transportation investment in economic development. First, the lack of evidence of statistically significant effects on economic growth from the types of projects considered here are not unprecedented. Indeed, as our review of the empirical literature on transportation infrastructure and economic development revealed, a number of recent studies have indicated lower, if still positive, overall returns to transportation infrastructure. This seems plausible. While the introduction the of the Interstate highways often provided order of magnitude-type improvements in travel times between large cities, most contemporary projects are generally smaller in scope and involve modifying a relatively mature network. In a similar vein, our review of the factors affecting economic development seemed to indicate a continuing, non-trivial role for several non-transportation factors, some of which may be amenable to economic development policy.

We are certain that there will continue to be significant amounts of transportation investment in highways and other networks in the years to come, whether justified explicitly by economic development criteria or not. An important consideration for the evaluation of these investments should continue to be whether or not these projects generate net social benefits. Evaluations focusing on the user (and to a certain extent, nonuser) benefits that flow from a given transportation project will naturally be able to account for benefits like travel time savings, which are valued by users but which may not show up in conventional economic accounts. Under this type of evaluation, projects that might be justified on economic development grounds (i.e. employment or output effects) would likely be funded anyway, since they would almost certainly generate positive net social benefits. This conclusion also applies to transportation investment undertaken for purposes of fiscal stimulus and macroeconomic stabilization.

The Pain of Paying

JW sends me to Dan Ariely on "The Pain of Paying"

JW writes:

Here is an interesting presentation by Dan Ariely about the pain of paying. I think there are implications for infrastructure spending. There is a tradeoff between reducing the pain of paying and creating a moral conflict, or developing morally dubious payment schemes. For example, general revenue funds are a common pool resource with all of the tragedy of the commons issues - as people try to exploit the "resource" first before it is exhausted. Tolls create a higher pain of paying than gas taxes. Motor vehicle registration fees probably fall in between. Property taxes may not be recognized as funding local roads and so the pain (and anger) may be misdirected. Vehicle mileage taxes create a higher pain level than fuel taxes I think.

Ariely has a nice framing and discusses "saliency". Andrew Odlyzko and I identified mental transaction costs as a related factor in:

Time and the City

We sometimes think of the city as a collection of objects in space that exist for the purpose of reducing the costs of human interaction. The city is also a collection of objects in time. Taking the long view, cities once did not exist (the time before the founding of the city), and eventually may not exist again. The list of abandoned cities is long, and will eventually, though this may sadden us, grow longer.

However the city also operates at shorter timeframes. There is the multi-decade cycle of infrastructure renewal and replacement. There is the multi-year (though random) cycle of sports team victories. There is the annual cycle of the city operating through the seasons, with winter and spring and summer and fall events. There is the daily cycle of flows of people into and out of the city.


NoofTravelers TBI00

Why do we see diurnal patterns of flows? Why is there a morning and afternoon peak, or rush hour? The answer is to ensure some set of people (peak commuters) are generally in the same place at the same time. And we do this to reduce inter-personal coordination costs. If we are generally in the same place, we don't need to pre-arrange meetings, we run into each other in the hallways, I can easily knock on your door, I see you on the sidewalk. Our temporal coordination costs drop. And even if we do need to pre-arrange, it is relatively simple. As I tell my students in class: "I am here because you are here, you are here because I am here." In contrast, if we are not generally in the same place, we do need to pre-arrange meetings, I will not randomly run into you. Our temporal coordination costs rise.

There are lots of people for whom the congestion costs of the peak outweigh benefits of organizing work on the "standard" schedule. Many people with shifts in workplaces that operate more than 8 hours a day (medical, police and fire, manufacturing, transportation, retail, some construction, media) travel in the off-peak. For some this is necessary (you don't want to change bus drivers in the middle of the peak), for others convenience (why travel at rush hour when it is unnecessary).

In the Central Time Zone, that peaking pattern is partially dictated by what happens on the East coast. People here go to work earlier than they otherwise would to ensure a greater overlap in time at work with those back East. Similarly, people involved in international trade may keep odd hours locally to coordinate with their customers or clients elsewhere in the world. In other parts of the world, schedules similarly adapt to the needs of trade, as well as local custom. In some places, work lasts until very late, but there are mid-day breaks.

This temporal coordination imposes the cost of increased loads on the transportation system, as people converge and diverge at the same time, requiring either more capacity or more crowding (and slower speeds). We could (and do) smooth the flows on transportation systems, encouraging peak spreading (some of which the market does by itself) through differentiated prices.


03 1 vonthunen

We can be spatially coordinated to reduce our scheduling costs, or we can be temporally coordinated so that we have lower space costs. The classic multi-purpose room in 1960s era Elementary schools, hot-desking, or shared parking between office, stadiums, retail, and churches are examples of a form of temporal coordination to share a scarce resource to reduce land and structure costs. Most temporal coordination though shares the scarce resource of the humans being on the same task at the same time, and thus requires more space. Typical cities provide both spatial and temporal coordination, putting people close together and having them do the same things at the same time.

Cities work to reduce temporal coordination costs, one of the many ways they enhance economies of agglomeration. But they do so by increasing spatial coordination costs. We cannot occupy the same latitude and longitude at the same time. If we want to do so, we must go vertical. This adds to the cost of construction. We do not have freedom to use our land any way we want to, we must share some rights to it, because society demands it. This diminishes our freedom of action.

One expects that improved information and communication technologies will reduce the need for in-person interaction, and we certainly see some of that. But reducing the call of the city does not eliminate it. So long as some physical interaction is required, cities of a form will emerge. The need for young men and young women of different genetic lines to somehow interact in person is one such call upon the pattern of the city.

Just as 200 years ago, the city was barely what it is today, 200 years from now, the city may differ again. Cities may return to being seasonal, like the classic Medieval trade fair. These once comprised entirely temporary structures, which gradually became permanent. Look at the Minnesota State Fairgrounds for a more recent example of the temporary becoming "permanent". Today we construct state fairs with permanent buildings, but world's fairs, which do not repeat annually, have temporary structures. While not made of paper mach´e, the buildings of Chicago's White City or even New York's 1963 World's Fair are largely gone. But the world's fair is a lot less significant than it once was.

If people lose their need for daily interaction, we should expect a thinning of the urban support system, less reliance on costly permanent infrastructure, and more reliance on the ad hoc. Humans will still require shelter, and those shelters may still cluster so long as transport still has costs, but we can easily imagine a world where advanced technology means we don't need to commute or shop more than weekly. And that means we don't need to live as close together. And with advanced driverless cars, even that burden (the need to focus on the task of driving) is lifted, enabling even more spread.

Reihan Salam at NRO on Ending the Federal Surface-Transportation Program Might Be Crazy in a Good Way :

" So far, the most attractive realistic proposal for reforming federal highway expenditures is ‘Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways’ by Matthew Kahn and David Levinson, which calls for the following:
First, all revenues from the existing federal gasoline tax would be devoted to repair, maintain, rehabilitate, reconstruct, and enhance existing roads and bridges on the National Highway System. Second, funding for states to build new and expand existing roads would come from a newly created Federal Highway Bank, which would require benefit-cost analysis to demonstrate the efficacy of a new build. Third, new and expanded transportation infrastructure that meets or exceeds projected benefits would receive an interest rate subsidy from a Highway Performance Fund to be financed by net revenues from the Federal Highway Bank.

But now Rohit Aggarwala of Bloomberg Philanthropies has called for a more radical approach, which might garner bipartisan support while forcing believers in competitive federalism to ‘put up or shut up.’ The proposal closely resembles an idea floated by Christopher Papagianis, my erstwhile Economics 21 colleague. Aggarwalla calls for abolition of the federal gasonline tax and the devolution of responsibility over surface transportation to state governments:

Getting rid of the tax would force a serious discussion in each state about how, and how much, to fund roads and transit. States could choose to reimpose the same tax, or they could set a different rate based on their desired level of transportation spending. They could choose to raise other kinds of revenue to pay for roads and transit — such as sales taxes, property taxes, local taxes or tolls. Or they could simply reduce their transportation spending. "


I have been thinking about this for a while.

In the wake of MAP-21, it is worth reflecting on "Why is there a federal role?" In short the argument against are that the system exists, most is traffic local, and the states are perfectly capable of managing and preserving the system, since they already do. All they need to do is raise their gas tax by the amount the federal tax is reduced, and they are no worse off (assuming all federal transportation funds come from the Highway Trust Fund, which is less true than it used to be.

The federal role could be reduced to research (which might look self-serving as I am a researcher, but I support a federal role for this outside my field as well, since research is a public good with positive externalities), and safety regulations.

One argument against the Aggarwala position is that it is needlessly cumbersome to to fight 50 gas tax fights in 50 states, there is a strong convenience of existing revenue source, and this greatly reduces political transaction costs, since it is the status quo.

A second argument against is that we essentially need to rebuild the Interstate in place, and this recapitalization is a national need, just as the initial construction was, justifying a national funding source. We would not want one state to let its existing Interstates devolve to rubble due to poverty, even if it mostly hurt them. I don't think that would happen (at least not at a large scale), but clearly different states would have different investment levels without the federal minimum funds.

I suggested in Enterprising Roads that state DOTs be transformed to be more like public utility than a branch of government.

Norton (in Fighting Traffic) defines " a public utility was not just an enterprise 'of real public importance,' but also one in which competition was unfeasible." That seems to be an accurate representation of most roads in the US. We could argue about long distance roads being competitive, but there are large network economies at the local level, and while we could think about what might happen with atomistic competition (a really neat idea), it is not practical implementability in the short run.

We don't have or need federal funding of the backbone public utility electric grid (though there is regulation, and I am sure some subsidies somewhere), and seem to do ok, surely roads are similar. However, in the absence of that public utility transformation and movement to fuller understanding of direct user fees as the best funding source, avoiding 50 political battles and relying on the status quo funding (which is also an indirect user fee) for a few more years, and directing that existing funding, seems to me a good second-best solution, better than immediate complete devolution. Of course, one could argue that devolution might help force the transformation, so this is not obvious.

Looking for rationales for the highway program I stumbled on the following. In part this falls under the category: We have learned nothing in 30 (60) ((90)) years. The following paper could easily have been written today.


Gomez-Ibañez, Jose, (1985) Chapter 7 "The Federal Role in Urban Transportation" in
Quigley, John M., and Daniel L. Rubinfeld, editors American Domestic Priorities: An Economic Appraisal. Berkeley: University of California Press.

The Rationale for Federal Aid

Whatever the appropriate level of urban highway investment, one key issue is why the federal government should be so heavily involved. Since 70 percent of the United States population lives in urban areas, the majority of the country clearly has a strong interest in urban highways. At least in theory, however, our federal system reserves powers and responsibilities to state and local governments unless some compelling and distinct national interest is involved. This devolution of responsibilities is based both on democratic ideals and the pragmatic argument that those who are closest to a problem often know best how to solve it.

The principal rationale for federal highway aid programs has been the national interest in an intercity transportation system that serves long-distance or interstate as well as local traffic. When federal highway aid began in 1916, the road system was largely unpaved and road construction and maintenance were the responsibility of county governments. The counties were notorious for their failure to cooperate in improving roads that served more than one county, perhaps because their dependence on property tax revenues made it difficult to finance improvements that served more than local needs. An interconnected road system would benefit all, it was argued, by promoting interstate commerce and reducing the social and political isolation of rural communities. The federal government gave highway aid directly to state governments, on the theory that states would have more interest than counties in promoting an intercity highway system.[18]

While federal intervention may have been needed to promote an interconnected highway system seventy years ago, it may be unnecessary today. Thanks in part to early federal aid, each state now finances and administers its own system of trunk highways, leaving county and city governments responsible mainly for local or secondary roads. Federal aid may not be necessary even to induce states to build a coordinated interstate highway system. In the decade before the Interstate System was funded,
for example, many Eastern and Central states cooperated in the construction of an interconnected system of limited-access toll expressways that allowed motorists to travel between New York and Chicago or Boston and Albany without ever having to stop for an intersection or traffic light. Toll financing had eliminated the problem of using local taxes to support interstate travel and by 1956, when Interstate funding ended the boom, around 12,000 miles of toll expressways had been built, started, authorized, or projected.[19]

To the extent that there is a distinct national interest in the highway system, it applies more clearly to roads that primarily serve long-distance and interstate rather than local travelers. Although Interstate System planners rationalized the inclusion of urban segments on the grounds that interstate traffic often originates or terminates in urban areas, urban expressways probably have a limited claim to federal aid, since their design is largely dictated by peak-hour local commuting traffic.
Perhaps the strongest argument for a federal role is in the areas of highway research and demonstration projects. Research on pavement durability, highway planning techniques, and highway safety measures is of potential benefit to all states. Since no single state captures all the benefits, there is little incentive for a state to fund research alone. The federal government, however, can consider the benefits to all states in designing its research program.

He also wrote a section on Mass Transit

The Federal Rationale

The rationale for federal involvement in urban mass transit shares many of the weaknesses of the rationale for federal aid to urban highways. The argument most often cited in the early 1960s debates over the initial federal capital grant program was the need to counterbalance federal highway aid. The federal and state highway trust funds, all financed with dedicated gasoline taxes, were thought to have induced state and local governments to channel too much capital spending into highways and too little into mass transit. Transit had declined because of undercapitalization, the argument continued, and federal transit aid was needed to correct the imbalance.[47]

The failure of the transit investments of the 1970s to increase ridership significantly suggests that undercapitalization was probably not a major cause of the decline of mass transit patronage. Rising real household incomes, suburbanization of jobs and residences, and other demographic trends probably played more important roles in the postwar patronage losses. Even if local governments had seriously over-invested in highways and underinvested in transit, a massive new transit aid program may not have been the correct answer. By subsidizing both the highway and transit modes the federal government might reduce the balance between transit and highways only at the risk of overcapitalizing transportation in general. Reducing or eliminating the federal highway aid program might have encouraged more balanced spending on all forms of transportation.

Notes

18. Gifford, "The Federal Role in Roads"; Burch, Highway Revenue and Expenditure continue
Policy ; and John B. Rae, The Car and the Road in American Life (Cambridge, Mass.: MIT, 1972).

19. Rae, The Car and the Road , pp. 173-82.

47. For examples of this argument see Lyle C. Fitch and Associates, Transportation and Public Policy (San Francisco, Calif.: Chandler, 1964); Thomas E. Lisco, "Mass Transportation: Cinderella in Our Cities," The Public Interest no. 18 (1970): 52-74. The contrast between the overcapitalization and the demographic hypotheses was shown most clearly in George W. Hilton, "The Urban Mass Transportation Assistance Program," pp. 131-44 in Perspectives on Federal Transportation Policy , ed. James C. Miller, III (Washington, D.C.: American Enterprise Institute, 1975); and George W. Hilton, Federal Transit Subsidies (Washington, D.C.: American Enterprise Institute, 1974).


Enterprising roadsp1

Recently published:

Most roads in the United States are owned and managed directly by government, with funding for construction and maintenance derived primarily from taxes on gas. For many decades, this system worked well enough, despite widespread problems with congestion and road quality. Recently, however, rising maintenance costs and falling fuel tax receipts have begun to call into question the sustainability of this model.

At their current levels, gas taxes will not provide the revenue needed to maintain America’s roads satisfactorily, let alone to rejuvenate and extend the network where necessary. Yet, direct political management hinders the development of new revenue streams, leads to operational inefficiencies and hampers innovation. Put simply, the organizations that built the U.S. highway networks are no longer suited to running them.

A better approach is urgently needed. Ideally, the organizations that manage roads should be able to finance road construction and maintenance through the sale of bonds, without requiring direct consent from higher political authorities. And they should be able to cover the costs of those bonds by charging for road use. More generally, they need to be capable, energetic, ingenious and ready to act. And for all those reasons, they need greater autonomy.

This paper argues that roads should be managed by independent enterprises, with a clear mission of providing service to customers. One way to achieve this, while maintaining overarching political control—and thereby prevent abuses of monopoly power—is to convert existing government operated road management organizations (such as the state Departments of Transportation) into regulated public utilities.

Within such a framework, a wide variety of ownership structures are possible, ranging from municipal- or state-ownership to mutual- and investor-ownership. Each structure has its own set of advantages and disadvantages, but all are superior to the existing system in one crucial respect: they clearly orient the road enterprise away from day-to-day politics and toward providing value to their users.

The regulated public utility model is already well-established in other important sectors in the U.S., including water, energy and telecommunications. Indeed, around 10% of wastewater utilities, 20% of water utilities, most pipelines, electric utilities, natural gas utilities, and virtually all telecom and cable utilities are investor-owned.

Internationally, the regulated public utility model is already operating successfully in transportation. The New Zealand Transport Agency, for example, has an independent board of directors who appoint the CEO, and works in accordance with a performance agreement negotiated with the New Zealand Ministry of Transport. Management is separated from governance, and service delivery is separated from policy. New Zealand’s approach has delivered large efficiency gains without compromising service levels.

Australia’s state road enterprises, meanwhile, demonstrate the benefits commercialization could bring to state Departments of Transportation in the U.S. By contrast with their American equivalents, Australian road enterprises—like New South Wales’s Roads and Traffic Authority or Victoria’s VicRoads—are innovative and highly business-like.

The United States should follow Australia and New Zealand’s lead, and transform its state Departments of Transportation (or the highways divisions thereof) into separate, publicly regulated, self-financing corporate entities. Full-cost accounting—as already performed by Arizona’s Department of Transportation—constitutes a necessary first step in this direction. In making the transition, policymakers should strive to impose regulation only where absolutely necessary, to minimize the anti-competitive effects of any such regulation, and to leave social objectives to the government, thereby freeing road enterprises to focus on economic ones. Accordingly, road enterprises should be permitted to pursue cost-effective contracting and public private-partnerships as they see fit.

The new road enterprises should also be given latitude to make greater use of user fees—as opposed to general revenue—for funding their activities. Such charges are not just more efficient and equitable than traditional funding sources; if properly designed and implemented, they are also better suited to reducing congestion through effective pricing. Vehicle-miles-traveled charges, weight-distance charges and electronic tolling are all options that road enterprises should be free to pursue.

There is no single formula for success. Road enterprises will learn by doing, and by trialing alternate strategies. The U.S. has 50 separate laboratories of democracy in which road enterprises and state authorities can experiment to find out what works and what doesn’t. There will be successes and failures along the way: successes will be replicated; failures will be eradicated. It is only by establishing a learning process like this that innovative progress in surface transportation can be made.

A former student sends me to Peter Samuel @ TOLLROADSnews, who has a very nice rant (as with many things I post, I don't necessarily agree with it): Road funding reformed - dedicate fuel taxes to deficit reduction:

"It's high time highways supported themselves. Gasoline and diesel tax revenues are needed much more urgently for reducing dangerously bloated government deficits. The federal government should stop spending money on highways or transit. Those needs should be managed by the states. States too should use their fuel taxes for deficit reduction - devolving most responsibility for highways to metropolitan areas and counties, and encouraging user fee (toll) financing as an optimal and sustainable funding method.

As part of the end of federal-state grants and state grants, they'd of course lift restrictions on how roads are funded and managed. And they'd end the protracted federal permitting and planning and federal 'records of decision.'

Let counties and metro areas be fully responsible for their roads and transit. State devolution can proceed state by state at their own pace as dictated by their own legislatures.

Federal abandonment of highway and transit spending is most urgent. A deal has to be reached to control the federal deficit without increasing damaging new taxes. The new Congressional Budget Office report on choices for deficit reduction notes that continuing federal deficits:

- raise interest costs as a proportion of the budget and reduce the spending power of any given level of revenues

- reduce national saving and increase dependence on foreign lending

- limit national options

- increase the likelihood of a fiscal crisis in which investors lose faith in the US Government and require increasing risk premiums to lend to it

Present deficits they say are "ultimately unsustainable." "

And it goes on beyond that ...


Similarly with Interstate highways. As a descriptor of the actual function of these roads it's such an absurd term that only governments could embrace it. Interstate highways carry predominantly intra-metropolitan traffic. Or intra-state traffic in the sense of traffic moving within the state. Except in the tiniest states like Rhode Island and Delaware the vast majority of traffic using so-called Interstate highways is intra-state.

In short interstate traffic on misnamed Interstate highways is trivial.

There is no justification or rationale for the federal government to take financial responsibility for these highways.

Maybe there was at some point in the past - there was a certain charm to the idea of a national government stitching diverse states together. Or emulating the Nazis national 'autobahn' network was held to support national defense. That provided a justification for federal funding of interstates.

However all this is history now. Nostalgia and inertia is all that keeps the federal government financing highways.

In a rational scheme of governance local and metropolitan government would work out a framework for charging for roads. It's unlikely the locals would do much tax financing because obviously taxes fall only on local people and businesses and don't charge visitors and passers-through.

So there would be lots of tolling.

Now that gantries over a road can collect tolls at highway speed it's feasible to toll surface arterials as well as expressways. Major road improvements could be financed in part by assessments made of increased property values where those property owners agree to opt in to an improvement scheme. Strictly local streets could be funded by property taxes.

Separate segments of highways should be self-contained business operations, charging what the traffic will bear in competition with others, and making improvements where the risk takers make the judgment that users will subsequently pay for those improvements in tolls.

No VMT charges please

What we do NOT need is some centrally collected vehicle miles traveled charge.

Milleage based fees would perpetuate the dysfunctionality of centralized fuel taxes in which funds are allocated by politicians according a mix of ideology and favor trading. Central government management of roads and political management of funds is a disaster - improper pricing and lack of incentives to provide service produces chronic congestion, totally unnecessary congestion, high cost, neglect of high return projects and wasteful investment in unnecessary ones.

Proper pricing would manage traffic for freer flow and provide strong incentives to invest where there is a need for extra capacity and where that extra capacity can be provided profitably. But that requires highways to be privatized into many separate businesses. Or at least run as county or city owned businesses. The important thing is that their revenues derive from customers they serve.

They could get economies of scale by banding together to contract for joint services. But we need highways to be a diversity of different business units each managing its investments and operating expenditures based on what users will pay and where profits (the excess of consumer value over cost) lead them.

Brad Plumer on Obama's ‘We don’t need to build more highways out in the suburbs’:

"Last year, UCLA economist Matthew Kahn and the University of Minnesota’s David Levinson made a more detailed case for a “fix-it first” strategy. They noted that, at the moment, federal highway spending doesn’t get subjected to strict cost-benefit analysis, and governments often build new roads when they arguably shouldn’t. When a highway gets clogged, states find it more palatable to simply build new lanes rather than, say, put in place congestion fees — even though research has found that widening highways does little to alleviate traffic jams.

Among other things, there’s a solid economic case for making repairs a much higher priority. As Kahn and Levinson explain, road pavement tends to deteriorate slowly at first but then more quickly over time. It’s much, much cheaper to repair a road early on, when it’s still in “fair” condition, than when it drops down to “serious” condition. And that’s to say nothing of data suggesting that poor road conditions are a “significant factor” in one-third of all fatal crashes, and cause extra wear and tear on cars."

Towards auto-stabilizing tax rates

People talk about fiscal stabilizers and money supply rules. We should have a tax rule.

When the economy contracts, there is an automatic stabilizer in that federal government revenue drops. But this is insufficient to fully offset the economic decline. Thus Congress and the President rush to pass or extend tax cuts. But this is a couple of quarters into the recession, and is a very crude response. Further it either expires at some point in the future, or has to be reversed with a politically difficult tax increases.

The auto-stabilizer I propose is to systematically and automatically contract (and increase) tax rates to better absorb the loss and balance the budget in the long run.

Suppose the size of the federal government averages 20% of GDP over time (G = 20%). Over the long term, government spending should equal government revenue. (There is the alternative to inflate  out of debt, but assume this is not an option.)

Imagine we start with a single flat Value Added Tax (VAT) of 20% as the baseline. I use the VAT because it is easy to explain, does not involve marginal rates, and so on. The same idea could be applied to an income tax, or progressive income tax, but it gets complicated, and that is not a virtue.

If GDP contracts by 1% (D = - 1%) , the VAT might contract from 20% to 19% to counteract it. Let's say spending dropped from $100 units to $99 units, keeping the tax rate flat lowers government income by $0.2 from $20 units to $19.8 units, but lowering the rate to 19% contracts government income by 5%, absorbing all of the loss. This stimulates demand by leaving money in the pockets of taxpayers/consumers.

The exact multiplier can be determined, depending on the elasticity of demand to tax rates and so on. If we want to dampen recessions quickly, we cut government revenue 100% in proportion to the change in the size of the economy (i.e., the adjustment factor A = 1). If we want to dampen more slowly (and maintain more government revenue), we can dampen by G*D. So long as D < G, we can dampen up to G. However, the risk is that government revenue goes to zero if we try to absorb all the loss on the government side. If GDP contracts by more than the size of government, the government has to borrow for all operations.  In the extreme, an algorithm might not just reduce taxes to zero, but produce a negative tax. If the VAT were -3%, for instance (due to say a 23% contraction in the economy), everything would be on sale by 3%, a sale paid for by the government by borrowing from the future. This is akin to Friedman's negative income tax.

When the economy expands, the VAT would increase proportionately until the point that it assured a revenue stream which would pay off the national debt in N years (e.g. N=30). So taxes would rise until they paid for operating costs of government, plus interest on the debt, plus pay down the debt over time. Again the exact amount depends on elasticities etc.

So for instance when GDP rises by 1%, the VAT would increase by between 0% and 1% of GDP. If it increased by 1% it would absorb all the gains, if it increased by 0%, the gains in increased revenue it would be too slow to offset the previous deficit spending. So let's say the rate increases by the government share of GDP time the change in GDP (G * D). If GDP grew by 1%, and G were 20%, the increase would be 0.2%. If GDP grew at 10%, the rate increase would be 2%. So the government revenue increases both because GDP increases, and because the rate increases by G*D. This increase would continue each quarter until the revenue was projected to be sufficient to pay down the debt in year N, or until the GDP dropped. Thus the increase in taxes would be slower than the reduction.

There would be a quarterly update to the VAT rate based on a formula such as above.

The political economy might be tricky, since we are taking tax rates out of the hands of politicians. On the other hand, responsible politicians who don't want to vote for tax increases would not have to, since there would be a formula in place which accomplished the main policy objectives of the tax code, raise revenue and act as a counterweight to the economy in general. If government spending rose above the 20%, the tax rate increases phase in to establish a new equilibrium at a higher level, since the rule requires enough revenue to pay off the debt in N years. Budget increases would automatically be captured by a higher tax rate with this rule in place. If the economy expands faster than government spending, the budget would have to eventually be in balance.

Once in place, we would not need active government stimulus spending policies, since that could be done within the tax code. (Nothing prevents Congress from voting for those, but they would add to the long term debt. If a complete stabilizer were used, i.e. government revenue dropped by the entirety of GDP, any spending stimulus would be over-stimulative. If a less than complete stabilizer were used, than spending might be useful.) This does not consider existing federal spending programs like unemployment insurance which have stimulative effect, and might be a justification for using A < 1 in the tax rate adjustments.

Of course, if the economy completely collapses due to unexpected shocks or a breakdown of trust, there isn't anything the tax code can do to prevent it. But it might reduce the possibility of collapse, and is likely to better handle the run-of-the-mill business cycle (or even a severe shock), which can be dealt with directly, in near real time, through the proposed mechanism.

This would be better with a capital budget, so that N_capital might be 30, but N_operating might be 10. But the gist of the concept is above.

In practice, we may never pay off N, since recessions get in the way, but hopefully by being legitimately on the path to paying off N, there is confidence in the system, that we are on the right path, and government borrowing costs remain low.

The main objection I see is that by decoupling voting for tax increases and voting for spending increases (tax cuts/spending cuts), we make politicians more like drunken sailors than they already are. However, now politicians vote for spending increases without tax revenue and for tax cuts without spending offsets, and this would be a corrective. The new system adjusts tax rates that would automatically, over the long term cover any spending increases. Politicians lose their free lunch. Thus any spending cut brings with it an automatic tax rate cut. Any spending increase an automatic tax rate increase.

I think it might encourage taking things off the consolidated budget, i.e. establishing separate budget streams for different items (social security has a separate funding and spending stream, as do highways (at least "did", once upon a time)). So long as those independent systems are balanced over time, no problem. We can think of them as separate organizations responsible for specific taxes and specific spending objectives.

We can start the tax rate at the current share of government spending R_{0} = G_{0}. However, if the government is currently in deficit, this might be shock to the system. (For simplicity, I assume government spending has to pay the VAT as well, which may not true, so the rate needs to be adjusted to account for the share of government spending which pays the VAT (buying things) and which does not (redistributing money)). 

 

If for some reason the government holds a surplus (i.e. B< 0), then the government can cut taxes and return that surplus to the people over time.

Along with the quarterly estimate of GDP, there would be a calculation of next quarter's tax rate. If GDP is up, and the budget is not in balance, tax rates go up, dampening exuberance. If GDP is down, taxes go down, dampening the reaction. 

In math:

R_{q} = R_{q-1} + A * D

s.t.

R_{q} ≤ G + B/(Y*N*4)

 

A = 1 if D < 0,

A = G if D ≥ 0

 

Where:

R_{q} = tax rate at quarter q (%), applied to all spending, e.g. VAT. 

A = Adjustment factor

G = government spending share of GDP (Y) (%)

D = quarterly change in GDP (%) (D= (Y_{q} - Y{q-1}) / Y{q-1})

N= number of years to pay off debt

B = sum total of borrowed funds, i.e. debt, in net present value terms

Y = GDP (dollars) quarterly

one can make appropriate assumptions about interest rates, inflation, discounting, I am dealing in Net Present Value Terms here.

 

I am not a macro-economist, which I am sure is obvious. I have not seen policy discussions of a logic similar to this though. I am also sure there are more sophisticated ways to frame this, which account for the complexities of what is income, on what basis taxes are assessed, and so on. The formulae would not be nearly so elegant after running through the government policy machine. But really, it can't be worse than existing tax code. My hope is to spur conversation on this.

 

Also, I am not a lawyer, so I am not sure the constitutionality of this, in that Congress would be adopting a formula for setting tax rates, rather than adopting the rates themselves, but it seems to me it should be okay. And if necessary it could be framed as a set of contingent tax rates spelling out the rates under an enormous number of conditions.


The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

 

 

 

Middle Class

Why do so many people think they are middle class, even 1 per centers, even poor people? Why do both parties claim to appeal to the (vast) Middle Class, as opposed to any other class. One could divide the world into three classes (lower, middle, upper) of equal sizes. Americans divide the world into one class.

People typically buy into the most expensive neighborhood they can afford, as this will have better services, schools, etc.. Thus, they are in neighborhoods where they have about median income. Half the people in their neighborhood have more money, half have less money, the within-neighborhood disparity is not too wide. They more or less correctly perceive themselves as median for their neighborhood, half the people they know are wealthier. Every day they are in the middle, struggling to keep us with the Joneses.

Most people do not take the broader perspective of considering the wealth of the neighborhoods they cannot afford, nor the poverty of neighborhoods they avoid. If they do think about, they discount that significantly, compared with the people they see on a daily basis. This is a proximity/perception bias. They assume their perceptions are median perceptions.

Keeping up with the Joneses is a struggle (even if you are Mitt Romney and have to keep up with the Huntsmans, for all but one person on the planet, someone is wealthier). The number of things one could buy exceeds available funds. Capitalism is excellent at creating unfulfilled desire, and everyone is a relativist in economics and happiness. And once you have $75,000 year, money doesn't make you happier.


Highway figure
Michael Iacono and David Levinson (2012) Rural Highway Expansion and Economic Development: Impacts on Private Earnings and Employment. (Working paper)

With the interstate system substantially complete, the majority of new investment in highways is likely to take the form of selective capacity expansion projects in urban areas, along with incremental expansions and upgrades to expressway or freeway standards of existing intercity highway corridors. This paper focuses specifically on the latter type of project, rural highway expansions designed to connect smaller outstate cities and towns, and examines their effects on industry-level private earnings and local employment. We examine three case study projects in rural Minnesota and use panel data on local earnings and employment to estimate the impacts of the improvements. Our results indicate that none of the projects studied generated statistically significant increases in earnings or employment, a finding we attribute to the relatively small time savings associated with the projects and the maturity of the highway network. We suggest that for rural highway expansion projects, as with other types of transportation projects, user benefits should be a primary evaluation criterion rather than employment impacts.

Matt Yglesias @ Slate: Old Infrastructure Is Hard Infrastructure:

"So the question is, what's a mature superpower to do? It's all well and good for China to go from poor to middle income and build a bunch of new infrastructure. But America's infrastructure isn't old out of perversity, it's old because we genuinely built this stuff a long time ago. And having built it, people shaped their lives—dwellings, commerce, commuting patterns—around the presumption that it would be there. Turning it off temporarily to fix it doesn't just carry a financial cost, it's extremely annoying to the people who are hoping to use the infrastructure. Yet at the same time, deferring needed upkeep is very much a kind of false economy.

You can handle this dilemma better or worse and everything I know tells me we're not handling it optimally. But a lot of comparisons between the U.S. and newly industrializing Asia, or even between the Northeast and the Sunbelt, seem to me to not adequately recognize that aging physical infrastructure poses an inherent difficulty."


Cost Bundling

Alon Levy @ Pedestrian Observations: Cost Bundling:

"It’s common to bundle multiple construction projects into one, either to save money or to take advantage of a charismatic piece of infrastructure that can fund the rest. For example, on-street light rail is frequently bundled with street reconstruction or drainage work, and rail lines can also be bundled with freeway construction in the same corridor (as in Denver) or widening the road they run under (as in New York). Combining different constructions into one project can be a powerful cost saver, as seen in the Denver example and also in Houston." ...

I really like the term "charismatic infrastructure".

Herbert Mohring

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Herb Mohring

Lee Munnich passes on news that famed transportation economist, Herb Mohring, passed away on June 4. His biography in wikipedia is below:

Herbert Mohring: "Herbert Mohring was a transportation economist who taught at the University of Minnesota from 1961-1994. He received his Ph.D. from Massachusetts Institute of Technology in 1959.

He is widely known for his identification of what was dubbed the Mohring effect of increasing returns in public transportation (see: Mohring (1972) for details).

Mohring and Harwitz (1962) also showed that the revenues from the first-best congestion tax exactly cover the construction costs of highways when highways possess constant returns to scale.

Important Works


  • Mohring, Herbert, Optimization and Scale Economies in Urban Bus Transportation, American Economic Review 62, no. 4 (September 1972): 591-604.

  • Mohring, Herbert, The Peak Load Problem with Increasing Returns and Pricing Constraints, American Economic Review 60, no. 4 (September 1970): 693-705.

  • Mohring, H. and Harwitz, M., Highway Benefits: An Analytical Framework, Ch 2, pp 57–90. (1962)"

Much of his widely cited scholarly work can be accessed here.

A review of a paper extending Mohring's work: Cost recovery from congestion tolls with random capacity and demand and risk aversion by Robin Lindsey was given at the session in honor of Herb Mohring International Transport Economics Conference. June 16, 2009.

A policy presentation by Herb's friend David Lewis presented at the same session: America's Traffic Congestion Problem: Toward a Framework for Nationwide Reform.


Update 6/15/2012: Obituary published in Star Tribune.

Cross-subsidies | streets.mn

Now at streets.mn: Cross-subsidies:

"We subsidize transit to spur development. We subsidize development to spur transit ridership."

David Levinson

Network Reliability in Practice

Evolving Transportation Networks

Place and Plexus

The Transportation Experience

Access to Destinations

Assessing the Benefits and Costs of Intelligent Transportation Systems

Financing Transportation Networks

View David Levinson's profile on LinkedIn

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