In this recent post we discussed agglomeration economies in consumption. Just to re-cap, agglomeration economies describe the external economic benefits that arise from proximity. They’re essentially the economic benefits of cities.
The benefits of agglomeration are realised by both “producers” (typically employees in the form of higher wages or businesses in the form of higher profits) and “consumers” in the form of more diverse/specialised goods and services (NB: I use a broad definition of “goods and services”, which includes all forms of social/cultural interaction). For reasons I don’t fully understand myself, much of the literature on agglomeration economies focuses exclusively on agglomeration benefits to producers.
This unfortunate lack of attention on consumer benefits is, in turn, reflected in one-dimensional policy. NZTA’s economic evaluation manual, for example, considers only agglomeration benefits in production. In my last post I argued for a wider focus on agglomeration economies in consumption. In the long run production and consumption are simply two different sides of the same economic coin, i.e we produce so we can consume.
Stated differently, the value of what we produce is intrinsically dependent on our opportunities to consume. And when it comes to providing opportunities for consumption, cities do have a unique advantage – and that advantage seems to be growing in significance. The abstract to Ed Glaeser’s 2001 paper “Consumer City”, for example, reads as follows:
Urban economics has traditionally viewed cities as having advantages in production and disadvantages in consumption. We argue that the role of urban density in facilitating consumption is extremely important and understudied. As firms become more mobile, the success of cities hinges more and more on cities’ role as centres of consumption. Empirically, we find that high amenity cities have grown faster than low amenity cities. Urban rents have gone up faster than urban wages, suggesting that the demand for living in cities has risen for reasons beyond rising wages. The rise of reverse commuting suggests the same consumer city phenomena.
In his paper Glaser analyses several data sets to support his hypothesis that cities are becoming increasingly important centres of consumption. In this post I will follow Glaeser’s lead and present some evidence to suggest that Auckland is becoming one such “consumer city”. And ultimately use this to argue that the Government’s CRL criteria are rather foolish (they’re foolish for other reasons too). From where I’m sitting Auckland may well be a poster child for agglomeration economies in consumption.
I award the city this status not because it has achieved some marvellous consumer nirvana, indeed it still leaves much to be desired. Nonetheless, what is most interesting about Auckland is the rate at which new opportunities for consumption are driving the city’s growth. Through this agglomeration process the cities underlying economic DNA, namely land values, is being fundamentally altered in ways that support greater density.
The figure below, for example, shows population growth in Auckland’s city centre (NB: Defined rather narrowly as Auckland Central West and East census area units). What this graph shows is that over the last 12 years the residential population of Auckland’s city centre has grown approximately 2.5 times faster than the rest of the region (321% growth versus 121% growth). In absolute numbers the population of the city centre grew by just over 15,000 people, whereas the remainder of the Auckland grew by approximately 240,000. Hence, about 6% of Auckland’s population growth in the last 12 years has been accommodated in just these two areas units. Needless to say these two area units were already the densest in the region, and now they are even denser. So why are more and more people choosing to cram into the densest parts of the city? The primary answer to this question, I believe, is agglomeration economies in consumption. Put simply, people are choosing to live in the city centre because they are attracted to the opportunities for consumption that it presents, at least in comparison to other parts of the region. By living downtown, people simply can see and do more/better “things” than would be possible if they were living elsewhere. That’s possibly why the old commercial building that fronts onto Anzac Avenue (and who backs onto my apartment building) is now being converted into loft apartments, as shown below.
Data also hints at strengthening agglomeration economies over time, at least for new residents attracted to live in Auckland. Consider for example this research by Arthur Grimes (Chairman of the Reserve Bank) into property values in Auckland. In the graph below Arthur has modelled how land prices vary with distance from Auckland’s city centre – and in turn how this relationship has varied over time. Arthur’s key finding is that land values in the city centre have increased substantially more than land values at the urban periphery.
In fact, back in 1992 the land in Auckland’s city centre was actually valued less than land in surrounding suburbs (i.e. 6km away). This is extraordinarily unusual – and just goes to show just how poorly Auckland was performing as a city in the very recent past. Or, put in a more positive light, how far we’ve come in a short space of time. Fast forward to 2003 and Auckland’s land rent curve has reverted to the more traditional “monotonically declining” shape (try busting that phrase out at your next party), where land values in the city centre are valued at almost twice those found in surrounding suburbs. To me this is evidence that Auckland’s underlying economic DNA, i.e. relative land values, has been transformed.
And all this has come and gone with barely a squeak in policy circles! Well the implications are rather profound. It suggests that eventually we may have to pedestrianise Queen Street – simply because the volume of pedestrians will justify such a move on travel-time savings alone. More specifically, it just goes to show the silly nature of the Government’s criteria for funding the CRL. For those who are not aware, the Government set the following two criteria for accelerating funding of the CRL: 1) annual rail patronage in excess of 20 million and 2) total CBD employment growing by 25% over current levels.
The question I have been asking myself ever since the Government’s announcement is why choose these particular criteria? As an aside is not the best economic criteria for funding simply whether the economic benefits of the CRL exceed its costs ?
Moreover, there are plausible scenarios I can think of where the city centre’s employment numbers don’t grow by over 25% but the CRL becomes increasingly essential nonetheless. Consider a scenario where 1) the residential population of the city centre grows rapidly (as it has done for the last 15 years or so), which 2) forces up the value of land downtown and 3) thereby increases the cost of parking, which ultimately 4) stimulates mode shift from car to rail. Such a scenario could well play out even if total CBD employment remained constant.
Ultimately the criteria the Government has set for accelerating funding for the CRL really do seem rather foolish. They seem to fundamentally misunderstands recent growth in Auckland and how this might increase demand for non-car transport solutions. In a nutshell, Auckland is fast becoming a consumer city as well as a centre of production. And what a wonderful consumer city it could be too; I think it has the potential to one day challenge the exquisite beauty and vibrancy of places like Istanbul.
Realising this potential requires, however, we realise the need for different transport solutions, i.e. fewer cars, and more people – especially in Auckland city centre.