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Do motorways inevitably generate economic growth?

There were a number of odd things in the report released several weeks ago by the New Zealand Council for Infrastructure Development (NZCID), a lobby group. Matt has already reviewed the report in detail. Perhaps the oddest part of it was this sentence:

Motorway capacity is essential because motorways generate economic activity.

NZCID presents this as a factual statement – or perhaps an article of faith? – but does not attempt to justify it or offer much supporting evidence.

From an economic perspective, this is an odd statement because transport infrastructure does not and can not generate economic activity. Roads are a means to an end, rather than an end in themselves. They can enable some economic activity, by allowing people to make journeys that otherwise wouldn’t have been possible, but they can’t actually generate it themselves. (Unless you think that the roads physically lift themselves up off the ground and start moving around and working in factories and stuff, in which case I recommend a psychiatric evaluation.)

Consequently, we must ask: Is there evidence that past motorway investments have raised productivity elsewhere in the economy?

Although the NZCID hasn’t cited it, there is relevant empirical research that addresses this question, including in New Zealand.

Before I get on to that, here’s some macroeconomic data. The top graph, sourced from OECD data, shows New Zealand’s investments in roads in dollar terms. Observe how it started to rise sharply after 2003 – that’s approximately when we started building more motorways.

The bottom graph shows Statistics NZ’s labour productivity index for the measured sector – a measure of changes in GDP produced per worker. Observe how there has been absolutely no change in the productivity growth trend, in spite of a threefold increase in the amount of money being spent on roads.

Correlation is not causation, but an absence of correlation is often evidence for a lack of causation.

NZ road spending and productivity chart

 

This graph makes me doubt NZCID’s assertions about motorways and economic activity. For one thing, if building motorways truly was an economic panacea, shouldn’t tripling roads spending since 2003 be observable in the data by this point?

Fortunately, we don’t have to guess at the effects of motorway spending on economic output. Three OECD researchers, Balázs Égert, Tomasz Koźluk, and Douglas Sutherland, have taken a look at the issue. In a 2009 paper entitled “Infrastructure and growth: empirical evidence“, they examined the impact of infrastructure investment on economic growth using data for 24 OECD countries from 1960 to 2005. They looked at how investment (or disinvestment) in roads, motorways, rail, electricity generation, and telephone networks flowed through into subsequent economic growth.

Importantly, Égert et al found that the effects of infrastructure investment varied between countries – investments that had a positive impact on growth in one country can have a negative effect on growth in another. This could reflect differences in, for example, economic structure or quality of investment decisions.

Their key findings for New Zealand (from Table 1) were that:

  • Road investment had a positive impact on economic growth throughout the period
  • So did rail investment, although the effect was not quite as strong
  • However, motorway investment had a negative impact on economic growth.

This is, again, the exact opposite of what NZCID have asserted. Transport investment in general appears to have had a positive impact on economic growth, but motorway investment in particular was a drag on growth.

Moreover, the authors considered the possibility that the returns from further investment changed over the course of the period. This is a reasonable hypothesis – after all, in 1960 many OECD countries were undergoing rapid economic change, and trying to build new infrastructure networks to keep up with it. Today, they are largely investing in incremental improvements to existing road and rail networks.

When Égert et al modelled the effects of infrastructure investment over the last decade or so of the period – around the time New Zealand was thinking about ramping up road spending – they found that:

“…in a number of countries the effect became stronger, suggesting for example that further increases in electricity generation capacity can be related to a decrease in output in Australia and Austria, similarly to motorways in Austria, New Zealand and Switzerland and rail tracks in Ireland and the Netherlands, whereas increases in road capacity may be associated with an increase in output in Greece, Ireland and the United Kingdom and additional electricity generation capacity in Portugal may support growth”

Again, not great news for NZCID’s argument that motorways generate economic activity. If the OECD researchers had simply found that past motorway spending in New Zealand had an ambiguous or negligible effect on growth, I’d be willing to accept the possibility that we could achieve more positive outcomes from further spending. But their finding that past motorway spending has been a drag on growth makes me worried about NZCID’s policy prescriptions.

There is, in short, a risk that NZCID is confidently recommending the wrong strategy for New Zealand. A strategy that has little robust empirical evidence to back it up, and which could easily backfire and reduce our growth prospects.

What could a responsible lobby group do differently?

First, rather than arguing for an increase in the quantity of investment, it could argue for an increase in the quality of investment. We know that this is a challenge for current transport spending. For example, a Ministry of Transport review that I covered last year (parts 1, 2, 3, 4) found that benefit-cost ratios for new and improved state highway have fallen significantly over the last decade:

MoT state highway BCRs 2005-2012

Second, it could consider the role of transport investment in improving the choices available to people. As I’ve argued in the past, cities are diverse places, and the people living within them don’t all want the same thing. Some people love the big car and the big house – which is great, as long as they pay for the carbon pollution and don’t run anyone over. Others would be happier living in an urban neighbourhood and getting around on foot, bicycle, or public transport – and that’s also great.

Having more choices raises individual and social wellbeing. Unfortunately, transport policy has historically been “one size fits all” rather than “made to measure”. As there’s no real evidence that motorway spending has a positive effect on economic growth in New Zealand, wouldn’t it make more sense to invest in improving transport choices instead?

Motorways and economic growth: What do you think?

59 comments to Do motorways inevitably generate economic growth?

  • Stuart Donovan

    great analysis.

    A key statement in the NZCID is supported by no definitions, no evidence, no citations. There is lots of vacuous twaddle arguing for more investment in things that just so happen to make their members richer. But that’s besides the point. If I were a member of the NZCID I’d be choking on my home brand cornflakes at the (low) quality of this report.

    We’re left none the wiser as to what NZCID mean when they say “motorway capacity”. How is that defined exactly? Are they talking about maximum capacity? Or spare capacity?

    Spare motorway capacity is almost certainly a drag on economic productivity, because you’ve diverted resources from elsewhere in the economy (possibly leading to inflationary pressures) to invest in something that isn’t being used very much.

    This is incidentally what your graphs, the MoT’s analysis, and the OECD report all suggest. Building expensive and/or under-utilized motorway doesn’t make us better off.

    • Nick R

      I have it on reliable authority that members of the NZCID don’t have cornflakes, they eat taxpayers money for breakfast.

      Peter, you might have missed the ‘between the lines’ point, the rasion d’etre of the NZCID: Motorways do generate economic activity… while you are building them. Of course so would building busways or schools or housing, and so would digging a hole, filling it in again and billing the government for the labour. NZCID want us to spend buckets of public funds on motorways so that they get to have big jobs making them. I doubt they give to shits about anything else.

    • Bigted

      If governments and councils used your argument not to build something due to spare capacity then nothing would be built. Why build schools, they are only used 40 weeks of the year and in those 40 weeks they are only used 7 hours per day 5 days per week. Public transport is only fully utilized around 6 hours per day 5 days per week.

      • Sailor Boy

        Actually to use his logic would mean building enough classrooms for the total number of enrolled children and no more, which unsurprisingly is what we do. The we don’t have spare capacity, we have adequate capacity.

        • Bigted

          It actually has excess capacity, 12 weeks of the year they are not used at all, of the 40 weeks they are used there are 2 days per week (nearly 11 1/2 weeks) add the 17 hours per day that they are empty on the days they are used shows a lot of excess capacity.
          I’m am just trying to show the stupidity of the post that mentioned excessive capacity on the motorways as a reason to not build more.

          • Nik

            Except after the Christchurch earthquake, when there was early and late school, with more than one institution sharing the same facility.

          • Bigted

            Nik now that is thinking but it not something that happened long term.

          • Sailor Boy

            You aren’t doing a very good job of making that point…..

            Demand at schools is *really* inelastic to school capacity. Driving demand id *really elastic to roading supply, and more driving is generally disbeneficial while more children in education is generally beneficial.

          • Bigted

            OK Sailor Boy move onto the second part about public transport, is spending on public transport for it to be under utilized for 82% of the week (6 hours per day 5 days per week of even near full utilization) ‘generally disbeneficial’ or ‘generally beneficial’?

          • Sailor Boy

            Btw, here is my citation for generally disbeneficial http://grist.org/biking/one-mile-on-a-bike-is-a-42-economic-gain-to-society-one-mile-driving-is-a-20-loss/. Public Transport use is generally beneficial in Auckland, I don’t have the source to have but effectively in economic terms every train trip in rush hour saves society $17 in Auckland. Patrick may have the source for that number handy as he has posted it several times before. PT is generally beneficial because people taking PT are choosing to not drive.

          • Bigted

            So back to the original statement then Sailor Boy, if public transport is generally beneficial then how is building motorways not when the argument against is to do with spare capacity when there is far more spare capacity on public transport than on the motorway network.

          • Sailor Boy

            Because we are experiencing travel demand growth as a function of population growth, particularly as a function of densification. Bottlenecks in private transport infrastructure are restricting economic growth. We cannot increase private vehicle capacities on the corridors of highest demand in a cost effective manner. We can increase capacity on full public transport routes, and increase quality of service and capacity at the same time through the CRL to draw traffic off of busy corridors.

            Coming back to the original statement that we seem to disagree on; Otaki to Levin is an example where proposed motorway capacity would be spare and wasted because a 2 lane road can easily serve the volume present, the AWHC is wasted as spare capacity as the roads on either side won’t foreseeably be able to accommodate the traffic capacity of the harbour crossing. That, I believe, is the spare capacity that Stu was referring to.

          • Ricardo

            Bigted, you are the voice of reason on this score. Contributors to this blog are so anti car that even the most simple logic has them in fits of apoplexy.

      • Peter Nunns

        You’re making a bad argument against a straw-man. Stu isn’t arguing that roads are bad because they’re empty in the middle of the night (or the middle of the day). In fact, nobody is making that argument, which makes your comment about schools and public transport pretty irrelevant.

        What Stu’s saying (following the analysis in my post) is that it cannot be the case that expanding motorway capacity is *always* a good idea. There *must* be a point at which it hits diminishing returns, e.g. by crowding out other, more valuable private investment. The same goes for all other forms of public infrastructure. Unfortunately, NZCID doesn’t seem to appreciate that point.

        • Stu Donovan

          Thanks Peter, and yes you are right. This seems like much ado about nothing.

          BigTed is tryng to argue against a position that I do not hold, and which is not implied by my comment.

          He argues that spare motorway capacity at some times of the day/year doesn’t mean the infrastructure investment is not worthwhile. I agree with him on this.

          My point simply sought to highlight the silliness in NZCID’s suggestion that motorway capacity always, in of itself, leads to economic activity. Motorway capacity that is “spare”, in the sense it is under-utilized for large parts of the day, seems unlikely to represent an effective investment. Even motorway capacity that is well-utilized could represent an ineffective investment if the benefits of its use do not outweigh its costs.

          I thought that was pretty logical, but hey such is the diversity of life.

  • Adam W

    Great post; one simply can’t argue with the evidence.
    Wish this got more main stream media attention

    • Warren S

      The very name ‘New Zealand Council for Infrastructure Development’ is calculated to deceive………………..that is to make the average punter think it is an official government institution responsible for carefully analysed projects, which of course just ain’t so.

  • The worst example of grandiose motorway building for the sake of it is the East West Link blowing out from $200m to $1.85b and having a BCR below 1.0. But hey who cares about the BCR and trashing the Manukau foreshore again so long as I get a nice piece of asphalt that does not do anything for productivity.

    If NZCID really cared about productivity and value for money it would be at the front of the group screaming for Option B of the East West Link.

  • mfwic

    I did a heap of reading on economic growth a few years ago. The general idea I gathered was that infrastructure doesn’t create growth at all. But if there are bottlenecks in the economy then the right infrastructure can release the growth demand. For example if you are short of power and industry needs it there is no point building a road. That said you can get short term gains in output spending on anything, Battleships before 1914 is an example. They turned out to be almost useless in the war and nearly crippled the UK government but for a while they created a big demand for inputs and industry, Japan tried road spending to stimulate their economy and it didn’t go well. They spent up on huge bridges and roads to link islands and cities and rather than getting a long term gain the opposite happened. People looked at all the government spending and were smart enough to see through it. They knew one day it would all need to be paid for so people saved more and spent less of their own money. The government spending crowded out private spending, the difference was the private spending would have probably had more benefits!

    • Peter Nunns

      Yes, exactly. That’s very much my reading as well.

      As you say, there’s the potential for higher social returns from infrastructure investment when there is latent demand. This is unlikely to be the case in mature networks, like NZ’s urban roads. Things might be different for complementary networks, like PT and cycling, especially if they’re not perfect substitutes for driving.

      On the economic impact during the construction period, this paper seems relevant: http://www.tandfonline.com/doi/full/10.1080/00779954.2015.1043932#abstract

      • mfwic

        I think I read something similar by Sam a few years ago. Maybe it was one of the his Massey working papers. I have personally never bought into the Keynesian stuff about spending for its own sake- the whole bury pound notes in a field and sell the rights to dig them up. Yet there is a whole industry based on talking up public projects, events, festivals. Patrick sums it up nicely with his comment about the RoNS. If there were no links then the first one would allow industry to exist, but after that it is all at the margins.

  • Dave B (Wellington)

    Thanks Peter. What some of us have suspected all along. Motorways these days are built for ideological rather than practical reasons. The poor business-cases for many of the RoNS bear this out.

    According to the ideology, “Kiwis love their cars, so of course you need more roads”. And companion to this is, “Trucking is efficient; railways are a bottomless pit, S O C Y N M R”.

    These could be dismissed as harmless credenda of the flat-earth variety, but for the fact that massive spending decisions with far-reaching consequences for the country’s future are predicated on these articles of faith being correct.

  • So it’s clear that the enormous and destructive and ever expanding East-West Connections began as a project to improve freight access, but of course only road freight access, but then has become supersized by Ministerial whim and business sector connected interests. Has had no real economic evaluation, a process, frankly, that should be halted immediately and subjected to proper analysis.

    While connecting SH 1 and SH 20 at the waistband may seem like a good idea at first glance in practice this will likely create ever more unproductive switching between routes which in facts disrupts and slows traffic systems, in a well known if rather technical process:

    https://en.m.wikipedia.org/wiki/Braess%27_paradox

    Spending 1.85billion+ to do this is deeply stupid and NZTA should be made to prove, before a cent is spent, how exactly their plans will really generate value. On the information to date all the value appears to be in the Neilson St upgrade, discounting the cost to rail to Mangere. Why that work plus the third main aren’t prioritised rather than an appalling useless highway on stilts in a harbour (really? We’re still doing this?!)can only be because of political desire not because it will work.

    The opportunity cost of this project is criminal. And the place outcomes are worse. What does the infrastructure unit at Treasury actually do? Is English really fiscally conservative? Where are the checks and balances?

    The failure of our institutions to act as any sort of brake on Ministerial whim is frankly appalling. Perhaps if MoT and Treasury spent more time assessing how NZTA are actually burning through our cash on pointless place ruining motorways than working to stop AT and AC develope PT systems we would have a richer and more successful, and considerably less ugly, primary city.

    • mfwic

      That whole Braessian thing largely theoretical crap. You have to assume delay on some links is very strongly flow dependent and other links for some unexplained reason are not. The answer results from those assumptions so in logical terms it is the ‘begging the question’ fallacy.
      The rest of your comment is more reasonable. Building anything where the returns dont justify the cost is wasteful and will come at the cost of all the other useful things that could have been done with the money, rail, better road options, hip replacements, breakfasts for kids etc.

      • Sailor Boy

        Looking at it, I thought that Kapiti Expressway may be the ultimate real world example of Braeses Paradox. 10 minute overall saving for all those from the North cancelled out by 1-2 minute increase for anyone on Ngauranga to airport route.

      • A real-life example of a Braess paradox playing out on our roads right now, is the fact that opening the bus lanes to cars again will increase capacity for cars, yet it will hopelessly mess up traffic by making much of our PT unusable.

    • Bigted

      Patrick Reynolds, it actually opens up one of the biggest freight hubs in Auckland and the only point where road to rail to road switching is available in the whole of Auckland.

      • Bigoted. How and where? The work on Nielson St will help road freight, but not the nonsense in the Mangere Inlet. Furthermore, if it is really about freight where’s the 3rd main actually bring the freight to MetroPort? This isn’t a freight project; it’s just a random road fest.

        • Sorry; auto-correct with your name there BigTed [though rather funny]…

        • Bigted

          If you have been on Neilson st and seen the issues getting in and out of the only rail transfer point in Auckland you will understand why there is not as much long haul freight on rail as there could be. Making it easier to get from east to west frees up this area for this reason.

          • Well that isn’t even what NZTA’s own BCR process showed. It showed Neislon is the problem, to be helped by work on Nielson. The flyover in the harbour is irrelevant.

            Read: http://transportblog.co.nz/2015/12/03/costs-benefits-and-east-west-connections/

          • Bigted

            Patrick Reynolds it is the getting into and out of Neilson st as much as along it that is the problem taking the east to west traffic off Neilson st fixes that problem.

          • Greg N

            “taking the east to west traffic off Neilson st fixes that problem”

            For how long?
            Experience shows after 5 years the benefits of new roads are pretty much all used up by induced traffic, and you’re back to square 1 – only with even more traffic than you had 5 years ago.

            So you’ll blow $1.8B to fix a problem for 5 years? Sounds like really good value to me.

            Neilson is a problem, but its not East West traffic thats the problem – its the f*cking parked cars that make it 1 lane each way for much of its length thats the problem.

            If NZTA and AT were serious they’d ban parking on it and put truck lanes on Neilson in their place tomorrow then see how it plays out. I think it would prove to be a much better outcome.

            And probably cost a mere $1.8m to implement – making it a *thousand* times less spend to get a better outcome.

          • Dave B (Wellington)

            “Neilson St. . .the only rail transfer point in Auckland”??

            I think you’re forgetting about Port of Auckland, Metroport (Southdown), and the Wiri inland port,
            Lots of transfer-points road-to-rail, ship-to-rail, or from shunt-service to mainline haul. And there is a large and growing amount of both long-haul and short-haul freight by rail to/from Auckland.

            I do not believe freight by rail is being held back by the lack of the $1.8 billion East-West motorway, or that freight by rail will increase directly as a result of building it. Usually such roads lure freight away from rail.

          • Royce

            If Neilson Street is the front door into Metroport and the Toll yards, is the new East West link going to provide a back door or will trucks still need to access Neilson street to get into the railyards.
            Off course all rail freight going to or from Mainfreight, Mainstream Peter Baker, Coca Cola and of course Auckland Port and the Wiri inland port does’t need to go anywhere Neilson St.
            It would be possible to reopen the rail yards at Tamaki and Henderson which would help reduce congestion around the Penrose Onehunga area as well.

          • Bigted

            Auckland Port and the Wiri inland port are not points that you can transfer road to rail freight, Auckland port only takes freight for the port, Wiri in effectively a storage facility for the POA.

  • Great post. The Northern Gateway toll road saved 9 minutes on the trip to Northland, but after it was completed the GDP of Northland actually dropped, before plateauing. http://transportblog.co.nz/2014/04/24/no-economic-rationale-for-760m-warkworth-toll-road/

    • Sailor Boy

      I would suggest that 9 minutes is *extremely* conservative too. the route is 9 minutes faster even with the traffic reduction on the old route.

  • Ricardo

    You don’t have to be a genius to understand they were simply stating the obvious, without swift and efficient transport, economies stagnate. If you can’t easily move goods and people its pretty much over.

    • Peter Nunns

      Nobody disagrees that transport networks serve a useful economic function. But that statement does *not* necessarily imply that building lots more roads will be amazing for the economy, which is what NZCID was saying. The evidence does not seem to support their view.

      If you disagree with that, I’d encourage you to do what I’ve done in this post – i.e. go and take a look at the data and read the empirical research. Without facts and citations, you can’t be taken seriously. Refer to user guideline 6.

    • I don’t think there is any doubt that the road building and expansion programmes of the 50s, 60s and 70s have contributed significantly to economic growth, along with the technilogical advancements that allowed us to use them better. However, it’s hard to argue that building and widening motorways in urban areas, without changing the way we use them ie. public transport and commercial vehicle lanes could be adding much to economic growth.

      I don’t think NZCID has any interest in enhancing the use of existing corridors though, as they don’t get to build cool stuff.

  • Well here’s the question I asked about the RoNS programme in 2012:

    http://transportblog.co.nz/2012/09/03/can-these-rons-make-a-right/

    ‘….imagine if there were no roads, or rail line, or shipping routes, or flights to and from Northland, or at least if these were so suboptimal as to prevent any goods getting to market, milk spoiling, logs rotting, tourists unable to get to the Bay of Islands, then yes, making that connection for the first time would indeed be a breakthrough, and have a truly transformational outcome. Is this an accurate picture of the situation? Well there is one day of the year when traffic does get stuck heading north out of Auckland, December 27th, but even that dissipates well before it reaches Northland and only holds a cargo of impatient holiday makers.

    As has been observed here time and again Warkworth could indeed do with a bypass, sections of State highway 1 should be made safer, the rail line is long overdue some work and especially the planned for connection to the natural deep port at Marsden Point should be built, but there are no cases of freight or people being unable to make it through to Auckland or offshore because of the lack of a four lane highway in the Auckland countryside.

    Or is there even a cost barrier to these goods reaching Auckland? Will the time saving of 5 or 10 minutes that this project is planned to save change the value of Northland produce so profoundly? Anyway are these improvements certain to be delivered in practice because all such deliveries will still be subject any delays in the Auckland City part of their journey where being stuck for 5 or 10 minutes will only become more likely as a very consequence of the additional driving that this roads-only investment programme is bound to produce? Any economies from all this road spending are certain to be negated by the delays caused by the traffic induced by them and the lost opportunity to invest in other modes. Even a declining mode will have to be used if all other options are run down.

    It is very difficult to see how any radical change in performance of Auckland or Northland’s economy can accrue from these investments…’

    • Dave B (Wellington)

      Ha ha. I can refute this. So you must be wrong!

      “Motorway capacity is essential because motorways generate economic activity.”

      Source: NZCID 🙂

    • Andrew R

      The biggest time saving I have experienced in the trip from Bay of Islands to Auckland in the last twenty years was the passing lanes between Whangarei and Waipu and the Waipu bypass.

      Would bypasses at Wellsford and Warkworth and some more passing lanes give bigger time gains than the holiday highway?

      And one little detail re Marsden Point. It is a “natural” deep water port only because of the dredging when it was constructed.

      • Bigted

        So you have not saved anytime from the Orewa to Puhoi motorway? Extending the motorway to north of Warkworth and eventually Wellsford will save far more time than simply by passing the towns and putting in a few passing lanes.

        • Andrew R

          Most of the time I go via Waiwera/Orewa as it is nice to see the sea once in a while during the trip. But passing lanes/Waipu bypass knocked a good fifteen minutes off the travel time. My guess is that the toll road might reduce travel time by five minutes or so, but then you have to add the time spent going onto internet to pay the toll.

        • Andrew R

          The figures I have seen on this blog site for official estimated time savings on the full holiday highway require me to exceed the speed limit by quite a margin.

  • kelvin

    Possibly motoway encourge car transport which encourages sprawl.

    And the cost of sprawl is not sustainable due to long commute and congestion.

    Since time is money, time wasted on travel is a lost of economic productivity.

    Second is low density city are less efficient due to effect of negative agglomeration.

    • Yes Kelvin. But worse than that building m’ways/sprawl now is double down on the last period’s Structural Dependency. This means that it fixes our future condition to one that is showing every sign of not being the winning bert.

      This is especially limiting; it closes of futures and reduces agility in the city’s economy.

      Particularly visionless. People who walk backwards only looking at where they’ve been are apt to be tripped up by any change in the terrain.

  • Phil Hayward

    I would suggest that a significant contributor to benefit-cost inversion over time, is that motorways once tended to be done on greenfields land, planned and rights of way secured, well in advance. But trying to expand capacity in already built-out locations is going to be very much more costly, and provide benefit only at the margin. It is also not so wise to spend the highway budget in places like Transmission Gully where the geography results in very poor value for money. An intelligent national growth strategy would expedite growth where it is cheapest to expedite it.

    I also believe that the same money spent on surface arterials, again with rights of way secured in advance of growth, is far better value than massive elevated highways engineered for speeds that most vehicles traveling on them do not get to travel at anyway! There were interesting debates on this point in the 1950’s in the USA; the monstrous highways won out because it was “free money from the Federal government”. Frank Lloyd Wright was a strong opponent, and in favour of intense arterial networks (see his “Broadacre City” plan). Brown, Morris and Taylor, “Planning for Cars in Cities” – the full-length paper, not the journal article of the same name – is an interesting read on this point. Small and Ng have done more recent analytical work that shows surface arterials to be better value for money.

    Another important correlation involves the level and nature of economic land rent. Automobile based spread of urban economies significantly lowered land rent for several decades, reducing the zero-sum transfers of wealth to incumbent land owners that was a significant cause of inequality and a constraint on allocation of capital to productive purposes. We tend to forget that the intensity of political debates onland rent in the era of Karl Marx and Henry George, was based on far worse social injustice than we have been accustomed to since automobiles solved the worst of the “tyranny of rent” problem. Henry Ford understood this well, and loved being instrumental against both Marxism and the rentier capitalists.

    • stu donovan

      Good comment Phil and I completely agree with your suggestion that urban arterials being a much more effective solution to urban highways. Unfortunately because NZTA has a “highway and network operations” team that is rather large and influential and keenly interested in building highways. Things like high capacity urban arterials are considered to lie outside of their ambit. This intrinsic organisational bias means that regardless of the problem the recommended solution is always another highway. What else?!?

      It’s political/organisational problems like these that make me think we’d be better of creating an SOE to manage transport investment, which was publicly listed and the government retained a 50% stake. The SOE would then be required to return a dividend to shareholders (including the government) that included return on capital investment.

      The positive side-effect of this is that it’d create a more level playfing field between rail and road, such that subsidies to the former could be reduced and eventually eliminated.

  • Phil Hayward

    It is also telling that the UK has a significant productivity gap, which flies in the face of the thesis that “density creates productivity”. In fact forcing non-complementary activities into inappropriately tight proximity and forcing all sectors to bid for land at prices up to hundreds of times too high, will obviously reduce economic growth and productivity.

    http://www.productivity.govt.nz/sites/default/files/Sub%20001%20Phil%20Hayward%20-%20Submission.pdf

    This is a result of decades of not doing road-based urban expansion. But as per my previous comment, this is not an argument for highways, especially costly expansion of them too late; just roads and greenfields expansion.

    • Stu Donovan

      err – no it doesn’t. Your understanding of the literature on agglomeration economies seems a little creaky.

      Let me explain: National level differences don’t provide insight into agglomeration economies, at least in the sense they are used in regional/urban economics. Instead national level data is more likely to measure market potential, e.g. the UK is close to a large multi-national trading block, whereas NZ is not.

      On the other hand, if you analyse differences in productivity within the UK, and you include appropriate controls for worker and firm heterogeneity, then you will likely find that denser areas command a moderate but econmically and statistically significant productivity premium, of the order of 2-4%.

      • Phil Hayward

        The correlation between density and productivity within an economy, does not mean that aggregate productivity will be increased endogenously to forcing higher density with blunt land rationing policies. That is cargo-cult thinking. The density and productivity evolve in parallel to each other as a result of path dependent economic evolution; the productivity is not endogenous to the density.

        The UK productivity gap has been impossible to explain other than by reason of the Planning system that rations land. There is literature on this, but it is common sense. A national economy consists of a wide variety of economic sectors, with widely differing rates at which they require land to generate income. Forestry and farming are at one extreme, law and finance firms are at the other. What do you think it would do to farming and forestry, to require them too, to compete for land only available within urban growth boundaries? This is an extreme example to illustrate the point – but there are myriads of “urban” economic sectors that need a lot more land than law and finance firms even if they don’t need as much as farming and forestry. Unfortunately, only a few economists have any idea of the foregone economic activity in the UK economy due to the obstruction to the evolution of sectors other than high-income, low-land-use. Not to mention housing cost pressures on labour costs, and foregone employment for some “skill” cohorts. If the UK did not have the world’s biggest primary income flows from global finance, it would be in a much worse state still.

        I am not a “lassez-faire sprawl is the only solution” advocate – I am highlighting the problem and asking that the advocates of the policy settings that cause it, consider other approaches such as fiscal ones, or direct government operation in the land market.

  • Phil Hayward

    Stu, I appreciate being able to have a discussion of complex issues like productivity and density, the link.

    Further points: the UK has no low density urban areas at all (due to its urban planning), so it is not possible to find outliers like it is in the USA – where Silicon Valley and Hartford are in the top few most productive locations. Wolfsburg is Germany’s most productive location. We also need to stop and consider what is the nature of the “productivity” – does it relate to wealth consumption, or worse, zero-sum transfers (Occupy Wall Street, anyone?), or to value-added primary economic income (as with manufactured exports)? NZ needs more of Sir Paul Callaghan’s exemplar businesses, not growth of vampire-squid wealth transfers into CBD’s. How many of the Callaghan exemplar businesses are in CBD’s – or even in Auckland?

    Hugh Kelly and Matthew Drennan (2011), looking for evidence of clustering economies, found that clusters needed to be LARGE as well as dense – Manhattan shows this evidence, and much more weakly, the centres of Chicago and San Francisco; and then there is pretty much nothing to be found relating to the denser centres of all the other cities (and note Auckland is a small city by these standards).

    Agglomeration economies in larger data sets of cities, relate far more clearly to outright size than to density. They are more “invisible” than visible – Drennan and Kelly concluded that “the tyranny of distance is dead”. As I said in my submission linked above, agglomeration economies have been greatly increased by transport and communications substituting for proximity.

  • Roland Sapsford

    This issue was addressed by the Standing Advisory Committee on Trunk Road Assessment (SACTRA) in the UK in 1998/99. Here is a link to the full report

    http://webarchive.nationalarchives.gov.uk/20050301192906/http:/dft.gov.uk/stellent/groups/dft_econappr/documents/pdf/dft_econappr_pdf_022512.pdf

    If you Google “SACTRA Economic Growth” you’ll also find a summary Powerpoint. Trickly to summarise easily as its written in somewhat anodyne UK Government prose but essentially

    “Little empirical evidence of broader impacts, and what there is is contradictory. Some indicates significant impact on rates of economic growth, most suggests that there is some impact but that it is small.”

    “Any generalizations about the impacts are subject to strong dependence on specific local circumstances and conditions”

    You’d expect any large inflow of investment to have some impact on growth but the long term effects are small to negligible, and many so-called growth impacts are actually just transfers of economic activity that affect some people negatively and others positively.

    In short as noted above, NZCID are whistling in the dark. Some people appear suprised by this. Those of us who recall NZCID’s origins as a ‘roads lobby’ response to the Land Transport Management Act 2003 are perhaps less surprised 😉

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