City size, variety, and consumer surplus

In the 1990s, in the early years of the information technology revolution, economist Robert Solow famously commented that “you can see the computer age everywhere but in the productivity statistics.” Two decades on, that still rings true. Social life has been profoundly transformed by new technology: It has altered the way we communicate with friends and family, how we entertain ourselves, and even how we date.

how people meet romantic partners chart

When I read Douglas Adams’ Hitchhiker’s Guide to the Galaxy in the early 2000s, the titular device still seemed like a fantastical idea: a handheld device you could use to access information (much of it inaccurate or incomplete) on anything, from anywhere.

Now, we all have smartphones. But productivity growth has stubbornly failed to take off over this period. Does this mean that technological progress has failed to deliver?

Journalist Ezra Klein (Vox) recently reviewed the current debate over technological progress. One perspective he discusses is that the benefits of information and communication technologies (ICTs) have largely accrued to consumers rather than producers:

Measures of productivity are based on the sum total of goods and services the economy produces for sale. But many digital-era products are given away for free, and so never have an opportunity to show themselves in GDP statistics.

Take Google Maps. I have a crap sense of direction, so it’s no exaggeration to say Google Maps has changed my life. I would pay hundreds of dollars a year for the product. In practice, I pay nothing. In terms of its direct contribution to GDP, Google Maps boosts Google’s advertising business by feeding my data back to the company so they can target ads more effectively, and it probably boosts the amount of money I fork over to Verizon for my data plan. But that’s not worth hundreds of dollars to Google, or to the economy as a whole. The result is that GDP data might undercount the value of Google Maps in a way it didn’t undercount the value of, say, Garmin GPS devices.

As Klein goes on to observe, ICTs have transformed our leisure time more than our work time – in large part, by giving us many more choices about where to dine, what television shows to watch, and who to talk to.

Interestingly, what’s true for technology might also be true for cities. The conventional narrative about agglomeration economies – the economic benefits of scale and density – is that their main effect is to lift productivity. But, as Stu and I have discussed in the past, there’s an increasing body of evidence that suggests that agglomeration also has significant benefits for consumers.

In recent years, economists have used micro-data on household consumption patterns to build a much richer picture of the impact of city size and structure on consumption choices. In short, larger cities don’t always offer lower prices – as you’d expect if higher productivity made it cheaper to produce goods and services. But they do offer a much greater variety of goods and services, which in turn translates into higher wellbeing for households.

A 2015 paper by Jessie Handbury and David Weinstein uses barcode data on retail sales in 49 large US cities to analyse prices and product varieties. They find that:

There are approximately four times more types of grocery products available in New York [metro population 21 million] than in Des Moines [population 456,000].

Because people in larger cities tend to buy a wider range of goods, including more expensive products, a naïve comparison of average retail prices would suggest that larger cities are more expensive. But Handbury and Weinstein’s analysis shows that, after accounting for product variety, prices in large cities are no more expensive than smaller cities. If anything, they tend to be lower:

When we use the data to construct a theoretically rigorous price index that corrects for product, purchaser, and retailer heterogeneity and accounts for variety differences across locations, we find that the price level is actually lower in larger cities. Consumers spend less, on average, to get the same amount of consumption utility in larger cities.

Moreover, what’s true in grocery stores is also true in restaurants. In a 2012 paper, Nathan Schiff took a look at the impact of city size and population density on restaurant markets in 726 urban places in the US. His key finding is that:

For the 182 cities in the top quartile by land area of my data (mean population 331,000), a one standard deviation increase in log population is associated with a 57% increase in the count of unique cuisines. A one standard deviation decrease in log land area–which increases population density without changing the size of the population–is associated with a 10% increase in cuisine count, equivalent to increasing the percentage of the population with a college degree by one standard deviation and larger than the effect of increasing the ethnic population associated with each cuisine by one standard deviation.

In other words, cities that are larger or denser offer people more choices about where and what to eat. Density is especially crucial in large cities, as people generally don’t travel long distances to dine. (Incidentally, relatively open migration policies are also an important enabler of restaurant choice in cities, as migrants bring new cuisines with them.)

Distances travelled to jobs and retail in Auckland

What does this mean for urban policy? I think there are two main lessons.

The first is that although agglomeration economies in production are important to long-run economic outcomes, we might be looking for the benefits of cities in the wrong places. They might not always appear in productivity statistics or price indices, but in the consumption choices that cities offer people. Measuring variety – and how people respond to it – is therefore crucial to understanding agglomeration economies.

The second is that conventional urban policy might be based on false premises. Ever since the “dark Satanic mills” of the Industrial Revolution, policymakers have assumed that cities are good for businesses but bad for people. Accordingly, they designed transport systems and planning policies that aimed to disperse the city and to separate people from their workplaces and from each other.

That made sense when cholera was a major cause of death, but it’s increasingly illogical in today’s world. Urban disamenities such as air quality, crime rates, and infectious diseases are all improving, and the evidence increasingly shows that the consumer choices offered by cities (and dense urban places) have benefits for households. In this context, policies that enable urbanisation are likely to have larger benefits than commonly assumed.

What do you think about the role of consumer choice in cities?

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?

Houston and the fallacy of “roads first” transport policy

Over the last 50 or 60 years, the United States, Australia, New Zealand, and a number of other countries have pursued a “roads first” approach to transport policy. There have been significant public investments in (generally un-tolled) roads, and relatively few investments in competing transport modes.

It’s hard to justify this approach based on preexisting travel patterns. Take Auckland as an example. According to Paul Mees [Transport for Suburbia, p. 21], in 1954 Auckland’s public transport network “accounted for 58 per cent of trips by motorized modes, private transport only 42 per cent. When walking and cycling, which were not surveyed, are taken into account, it is likely that fewer than a third of daily trips were by car.”

However, from this date onward roads – not public transport, and certainly not walking or cycling – have dominated transport spending. Spending on a new system of motorways and arterial roads was considerably higher than spending on other modes that carried more journeys. In other words, public spending to enable car travel did not respond to existing demand – it was intended to shape future demand. (And in doing so, change the shape of the city.)

Another potential justification for disproportionate spending on roads is that it’s just what people wanted. Cars were invented and then cheaply mass produced, people wanted to use them to travel everywhere, so transport agencies had to build more roads.

There is some truth to this. Cars are very convenient for many journeys. But it can also be convenient and cost-effective not to own a car. PT tends to be cheaper than driving to places where you have to pay for parking, and cycling is often quicker than driving, and more enjoyable if there are enough safe bike lanes.

But this argument also ignores other policy factors that shape transport demands. In particular, planning regulations enacted and progressively tightened throughout the 20th century have tended to:

  • Make it more difficult for people to live near where they work, by zoning different areas exclusively for different uses
  • Discourage people from living at medium or high density by limiting building heights and setting minimum lot sizes for dwellings
  • Subsidise the ownership and use of cars by requiring all new buildings to have a significant amount of on-site parking.

But what, then, should we make of Houston, which lacks a zoning code but nonetheless has ended up with lots of driving, low public transport ridership, and a low-density urban footprint? Is Houston evidence that in the absence of planning regulations that distort people’s location choices, people will choose to live at a distance and drive to get around?

Source: NASA Earth Observatory

Houston from space. This image is 100km across. Source: NASA Earth Observatory

In a word: no.

It turns out that Houston is not actually as unregulated as people make it out to be. While the city lacks a comprehensive zoning code that rigorously separates different uses, several other planning regulations (and similar measures) have distorted its urban form and transport choices. A 2005 article by law professor Michael Lewyn identifies four important ways in which planning has influenced transport outcomes in Houston:

  1. Houston enforces a byzantine and quite restrictive set of minimum parking requirements (MPRs). As I discussed last year, these include a parking requirement for bars that defies all concepts of prudent regulation. These requirements make parking cheap, and walking to the shops hard.
  2. While Houston doesn’t formally limit building height, it does establish a minimum lot size of 5000 sq ft (or around 460m2) throughout most of the city. This discourages PT, walking and cycling by increasing the distance between dwellings and discouraging space-efficient typologies like terraced houses and small apartment buildings.
  3. Houston requires streets to be wide, blocks to be long, and buildings to be set back a considerable distance from arterial roads. All of these policies make it dangerous and unpleasant to walk there.
  4. Lastly, new developments in Houston make extensive use of private covenants that restrict uses and building designs. These agreements often simulate zoning, with the result that Houston has similar levels of racial, income, and housing segregation to (zoned) Dallas. Houston has chosen to imbue private covenants with the force of public authority – the city will pay to enforce them even if the people subject to the covenant would rather not.

As a result of these policies, Houstonians cannot make free choices about where to live, where to work, and how to get around. Their decisions are strongly influenced by a suite of planning regulations that, as in many other cities, conspires against density and against non-car travel. Houston’s heavy use of the car is not a natural outcome, but one that has been engineered by policy.

Seen from this perspective, “roads first” transport policies seem less like an exercise in meeting demands, and more of a component of a large social engineering programme.

The results are not necessarily stellar. While the city is known for low house prices, Todd Litman points out that Houston is relatively unaffordable for its residents, compared with other large US cities, once transport expenditures are factored in:

Litman US city housing and transport costs chart

Furthermore, Houston’s commuters experience more hours of delay in traffic than most other US cities. New York, on the other hand, looks pretty good. Although it is large and congested, many commuters choose to opt out and take the subway instead. In Houston, they lack that choice:

Litman US delay hours per commuter chart

What do you think would happen if we tried to facilitate choice instead?

If you want more consumption choices, live near lots of other people

One of the many reasons that people choose to live in cities is that cities offer variety. As Stu Donovan has argued before, being around more people sometimes seems inconvenient, but it also exposes you to new ideas, new people, and new consumption choices.

I’ve previously written about the value that people place on choices in housing and transport markets, and how having more choices is particularly valuable for people on low incomes. This week, I want to look at how cities provide us with choice in the retail and restaurant markets.

My hypothesis is that there are economies of scale in the provision of both public and private goods. In more straightforward terms, that means that if you live closer to more people, you can have more public transport, more parks, more good restaurants, more shops, and so on and so forth. If this intuition is true, the best way to obtain variety at an affordable price is to live in a dense area of the city.

In order to test this hypothesis, I took a look at Statistics New Zealand’s Business Demography statistics, which provide information on the number of businesses (“geographic units”) and employment within particular industries. Very helpfully, Stats NZ publishes this data at a suburb level (“area units”, in Stats-speak).

I’ve focused on two particular types of businesses that serve households’ daily needs:

  • ANZSIC industry H45, which includes restaurants, bars, and clubs
  • ANZSIC industry G41, food retail, which includes supermarkets and other small-scale food retailers.

I mapped the density of these businesses throughout different Auckland suburbs. Blue colours show higher densities of restaurants/bars or food retailers; yellow colours show lower densities. A few clear patterns emerge. First, densities tend to be highest in inner city suburbs, and even more so in the city centre. Second, there are also pockets of higher density around satellite centres like Takapuna and New Lynn. Third, the density of retail and restaurants tends to be much lower on the fringe of the city.

Auckland restaurant and food retail density maps v1

How can we explain these patterns? Why are some areas so much better supplied with retail and dining options than others?

We can get some insights by looking at the built form retail and restaurants areas in different areas of the city.

Here’s what a retail street looks like in the city centre, where high residential and employment density sustain a lot of activity both day and night. This is O’Connell St before and after its shared space transformation. Notice how people are just walking up:

O'Connell Before and After 4

Here’s what retail looks like in an inner-city shopping and dining district, Ponsonby Road, which is surrounded by old suburbs of medium population density. It has lots of shops right on the street, plus a bit of parking tucked around the back:

Ponsonby Rd St Johns

And here’s what retail looks like in a newer suburb at the edge of town – Albany centre. It’s physically separated from nearby residential areas, highly car-dependent, and as a result, it requires large swathes of parking to support each shop or restaurant:

Albany Mall - Aucklands most modern Metropolitan Centre...

Albany Mall – Aucklands most modern Metropolitan Centre…

In other words, less parking is required to get shoppers to the door in densely populated areas – which should make it easier to sustain more shopping and dining options per square kilometre.

A simple econometric analysis seems to support this view. I attempted to explain the density of restaurants and food retailers in suburbs in terms of the population density and employment density of those areas. (Using Census and Business Demography data from Stats NZ.) As I hypothesised, there is a statistically significant, positive relationship between higher population and employment densities and the density of restaurants and food retailers. These two factors predict roughly 85% of the variation in restaurant and retail density in Auckland suburbs.

Regression results are reported in the table below, for anyone who’s interested. These aren’t perfect models – I suspect that it would be worth testing some spatial regression models, as retailers often attract customers from a wider catchment than a single suburb. Furthermore, we’d have to analyse changes over time in order to establish that increasing population density in an area will in turn increase retail diversity. But these results do provide a reasonable indication of the underlying relationships.

OLS regression models for restaurant and retail density
Dependent variable:
log(restaurant_bar_density) log(food_retail_density)
(1) (2)
log(pop_density) 0.464*** 0.597***
(0.031) (0.033)
log(emp_density) 0.620*** 0.486***
(0.026) (0.027)
Constant -5.531*** -6.290***
(0.182) (0.191)
Observations 342 342
R2 0.856 0.835
Adjusted R2 0.856 0.834
Residual Std. Error (df = 339) 0.632 0.664
F Statistic (df = 2; 339) 1,011.219*** 860.694***
Note: *p<0.1; **p<0.05; ***p<0.01

What do these figures mean? The coefficients from the model – highlighted in bold – display the relationship (or “elasticity”) between population or employment density and density of restaurants or food retailers. They show that:

  • Areas with 10% higher population density have, on average, 4.6% more restaurants/bars and 6.0% more food retailers (including supermarkets)
  • Areas with 10% higher employment density have, on average, 6.2% more restaurants/bars and 4.9% more food retailers.

In short: Higher density can benefit people by giving them more choice in restaurant and retail markets. Having a mix of residential and commercial uses around is even better, as it can sustain activity throughout the entire day rather than just in the evenings or at lunchtime.

Stats NZ’s data isn’t granular enough to say, but I suspect that denser areas also have a greater diversity of dining and retail options. (This is intuitively obvious – if there are already two fish-and-chip shops in the neighbourhood, why would anyone choose to open up a third?)

What do you make of this data on density and retail choices?

We need more choice in transport markets

Via economist Donal Curtin, I ran across the draft report that the Australian Competition Policy Review issued last September. It’s a long and fairly technical document, but the introduction made some good points in accessible language:

Competition policy sits well with the values Australians express in their everyday interactions. We expect markets to be fair and we want prices to be as low as they can reasonably be. We also value choice and responsiveness in market transactions — we want markets to offer us variety and novel, innovative products as well as quality, service and reliability.

These are generally sound principles, and I think it’s worth considering how they might apply to transport policy. The first and most important observation is that New Zealand suffers from a serious dearth of choice in urban transport markets. Unlike most other developed countries, we have failed to invest in high-quality public transport, walking, and cycling alternatives.

This is what lack of choice looks like.

This is what lack of choice looks like in the US, another prominent exception.

In fact, it’s even worse than that: transport policy has actively sought to reduce or block choice and competition in urban transport markets. Late last year, I discussed how Auckland ended up with a motorway network rather than a regional rail network in the 1950s: politicians and planners misrepresented the costs and benefits of the scheme in order to scupper the alternatives. The same story has been repeated, with variations, over and over since then.

But surely more lanes will fix it?

Building more lanes will not give us more choice.

Things are changing – but too slowly. For example, changes to public transport policy and agency mindset are starting to deliver more useful bus networks. In Auckland, extensions of the rapid transit network – Britomart, the Onehunga Line, and the Northern Busway – have been highly successful. It is important to build on these successes, as they are integral to having real transport choices.

These people now have a choice.

These people now have a choice.

The Australian Competition Policy Review carries on:

Access and choice are particularly relevant to vulnerable Australians or those on low incomes, whose day-to-day existence can mean regular interactions with government. They too should enjoy the benefits of choice, where this can reasonably be exercised, and service providers that respond to their needs and preferences. These aspects of competition can be sought even in ‘markets’ where no private sector supplier is present.

This is especially true of transport. Low-income families have the most to gain from better transport choices, as they are in the worst position to afford the costs of owning and operating a car. As I found when looking at the costs of commuting by car and public transport, households could save thousands of dollars a year by cutting back on car ownership and riding the bus to work. (Findings reinforced by a recent study of commuter costs in Australian and NZ cities.)

Cycling is free! (Source)

Cycling is free! (Source)

At the moment, low-income households in Auckland and other large NZ cities disproportionately live in far-flung suburbs with limited transport choices (as I found when writing a research paper on housing and transport costs). Auckland’s New Network will improve service in many historically under-served areas of the city, but this is only a small step. As Luke showed when he looked at walking and cycling in Manukau, post-war suburbs are still pretty grim for everything but cars.

At this point, New Zealand’s transport policies should be oriented around giving people more and better transport choices. If we want transport to raise our quality of life, the best way to do it is to build our “missing modes”. More lanes on the same motorway will not cut it.

What choices would you like to make when travelling?

Dude, where’s my hoverboard?

The 1989 sci-fi comedy film Back to the Future II gave audiences a glimpse of what transport would be like in the far-off future date of 2015. Flying cars would merge and flow seamlessly in midair motorways, allowing for cities to be large, low-density, and free of congestion. (Something that is ordinarily a geometric impossibility.) And, of course, there was Marty McFly’s famous hoverboard:

Back to the Future hoverboard

Now it’s 2014, and I’ve got to ask: Dude, where’s my hoverboard? Why haven’t any of the promised revolutionary breakthroughs in transport technology actually happened?

Or, more generally: Should New Zealand wait for new, unproven technologies to solve its transport problems, or should it invest in existing technologies instead?

A few people, including the new Minister of Transport, have called for New Zealand to look to driverless cars as a solution to road congestion. Matt reviewed the state of the debate in a recent post. I’d like to look at the issue from an economic perspective instead.

Economists often use the concept of a “production possibilities frontier” to display the alternative production and consumption options available to an economy at a point in time. Here’s an example of a hypothetical PPF for an economy which only produces two goods (“guns” and “butter”). Points inside the curve (like point A) represent underutilisation of resources, while points outside the curve (like point X) are impossible to sustain.


Source: Wikipedia

Importantly, the shape and position of an economy’s PPF depends upon the technology (and techniques) that are in use. Over the long term, economic growth means shifting the curve outwards by adopting better, more efficient technology. And I’d like to stress “adopting” rather than “inventing”. While some countries have done well by developing new technologies, the best way for underdeveloped countries to raise their living standards has been to adapt proven technologies. Technology transfer is almost always easier and cheaper than inventing totally new technologies.

This is how east Asian countries like Japan, South Korea, Taiwan, and (most recently) China have become wealthy. They didn’t wait around for unproven pie-in-the-sky ideas to come along – they just figured out how to do the same things that successful countries were already doing. If Japan had decided, in the 1950s, to await the semiconductor revolution rather than figuring out how to make cheap copies of American consumer electronics and cars, it would still be a poor country.

The same is true for New Zealand’s transport system. In economic jargon, our transport system is far behind the technology frontier. While we have an extensive and relatively well-managed road network, we have failed to adopt a number of technologies and techniques that have been proven elsewhere. As a result, Auckland has:

  • A suburban rail network that can’t provide metro-style levels of service due to the lack of the 3 kilometre City Rail Link tunnel – in spite of the evidence from numerous overseas cities that frequent rail systems are efficient ways of moving a lot of people without congestion
  • A serious lack of safe cycling infrastructure – in spite of the fact that cities that have made cheap, efficient investments in cycling have reaped the rewards in terms of health and wellbeing
  • A single busway, and slow (but steady) progress on further busways – in spite of the fact that they are a cheap and easy-to-implement ways of getting high-quality rapid transit to underserved areas of cities.

Because these technologies already exist, we could implement them now and reap the benefits immediately. If we want to rapidly improve our transport system – i.e. move our PPF outwards – we should look to existing but underutilised technologies rather than awaiting this decade’s version of Marty McFly’s hoverboard.

A recent CityLab series on the future of transportation makes this point clearly. The cities that are moving ahead rapidly are largely investing in proven technologies like bus rapid transit, light rail, and cycling infrastructure. (As well as low-cost improvements to existing technologies like bike share.) They are not holding off on smart investments while awaiting new technologies.


Auckland desperately needs technology transfer (Source: Wikipedia)

By contrast, there are three big reasons why waiting on unproven technologies like driverless cars will make us worse off.

  • Waiting for new technologies imposes a significant opportunity cost. If we use the future promise of driverless cars as a reason to avoid investing in the City Rail Link, safe cycling infrastructure, and busways right now, we will sacrifice years of better transport outcomes.
  • Waiting for new technologies is risky, because new technologies may not ever succeed. An in-depth Slate article on driverless cars highlights how far they need to come before widespread deployment. There are big problems to solve in navigation and safety in poor weather conditions. Computers are still not very good at dealing with unpredictable situations.
  • Even if the technology was available today, it would still take decades to replace New Zealand’s entire vehicle fleet. New Zealanders own 2.7 million passenger cars, and it would cost tens of billions to fully replace them. New cars entering the fleet today will still be on the road in 15-20 years. In other words, we wouldn’t see the benefits of a fully driverless vehicle fleet until the 2040s or so.

In addition, many people actually enjoy driving quite a lot and wouldn’t really want to be chauffeured around by a robot. Driverless cars are not a good substitute for a V8!

While driverless cars (or hoverboards for that matter) sound exciting, we can’t afford to pin all of our hopes on them. The pragmatic, proven way forward for transport in a big city is the same as it’s always been: Give people good transport choices by investing in efficient rapid transit networks, frequent bus services, and safe walking and cycling options.

It may seem boring, but as an economist I’ll take tried-and-true over utopian fantasies any day.

What does the next Aucklander want?

In a recent post on the failures of toll roads, I argued that marginal analysis can be a powerful tool for understanding transport markets:

Economists understand the importance of marginal analysis when making decisions about what to build and how to charge for it. Businesses typically make pricing and production decisions “on the margin”. In other words, they look around for the next potential customer and ask: “Can I produce one additional unit and sell it to that person for a profit?” If the answer is yes, they produce it; if it’s no, they don’t as it would reduce their overall profits.

While transport infrastructure isn’t (and probably can’t be) run as a business, transport agencies could stand to take a few lessons from businesses. In particular, they should be asking: What does the next transport user want, and how can we best serve them?

Businesses that don’t ask this question don’t grow, because they don’t look for new customers. Over time, they will fail as their existing customers age out or lose interest. I’d argue that the same can be true for cities as well – cities that fail to respond to the needs and desires of the next potential resident (or business) will eventually decline. This is eventually bad for existing residents, as the tax base shrivels up and businesses close.

With that in mind, what does the data tell us about the transport desires of the next Aucklander?

Stu Donovan and Matt L have already taken a good look at the ongoing decline in vehicle kilometres travelled in Auckland (and lots of other places) – essentially, people are no longer willing to drive longer and longer distances every year. Rather than covering that issue again, I’d like to take a look at Aucklanders’ choices about travel mode using data from the 2006 and 2013 Censuses.

I used Census data to take a look at changes in changes in mode choice for commute trips in recent years. The analysis is summarised in the chart below. While growth in car use has been pretty anemic – a mere 2.3% increase – demand on all other modes is growing like crazy. There have been double-digit increases in bus trips (up 18.8%), train trips (up an astonishing 67.3%), and bike trips (up 26.4%). Ferry and walking trips have also done extremely well.

Census Auckland marginal transport user analysis

While most Aucklanders still commute in cars, alternative modes have captured the overwhelming majority of the growth in recent years. 61% of new commute journeys between 2006 and 2013 were made on public transport, on the bike, or on foot. (Broken down as follows: 22% of new demand was on the bus, 16% on trains, 7% on ferry/other, 6% on the bike, and 10% walking or jogging.)

This is an amazingly strong market signal. It’s remarkable that people are eagerly taking up alternative modes even with Auckland’s underdeveloped public transport options and dangerous walking and cycling infrastructure. Transport agencies need to recognise this market signal and build for the next Aucklander. That means:

  • Unlocking the potential of Auckland’s rail network by building the City Rail Link
  • Recognising the runaway success of the Northern Busway and accelerating investment in similar projects in underserved areas of south-east and west Auckland
  • Installing a safe, complete cycle network
  • Rolling out Auckland Transport’s new frequent bus network and complementing it with integrated fares.

The next Aucklander is likely to want to travel by bus, train, or bike. Will we invest to give them that choice? Or will we ignore all the market signals?

How congested is Auckland, really?

A lot of people think that Auckland’s got bad traffic congestion. The annual TomTom Traffic Index reinforces this perception – it regularly describes Auckland as one of the most congested cities in the region. (We’ve previously highlighted the methodological flaws with TomTom’s numbers – don’t take them at face value!)

However, I don’t think this perception matches up with reality. My experience is that Auckland has much better congestion than cities overseas. It’s incredibly easy to drive in Auckland. I’ve noticed that:

  • Although speeds on motorways and arterial roads drop during rush hour, traffic keeps flowing at a relatively constant rate. It seems uncommon to get totally deadlocked traffic in Auckland – unlike in California, where it’s common to see speeds of under 20km/hr on freeways.
  • The rush hour is incredibly short in Auckland – when I have to drive up to the North Shore after work to visit family, I find that traffic’s basically free-flowing after around 6:30. In other cities serious congestion starts much earlier and ends much later.
  • Counter-peak traffic is shockingly low – on the occasions when I have to drive to Takapuna in the morning, I’ve found that I encounter few queues and no congestion on Pitt St, Victoria Park Tunnel, and the bridge.

Of course, Auckland is more congested than small New Zealand cities with one-tenth its population. That’s only to be expected. But is Auckland really more congested than other large cities overseas?

Jarrett Walker points us toward some new data that can help shed some light on this issue. A recent study (pdf) of commute times in Brazilian cities provides comparative estimates of average commute travel times for thirty large cities all around the world. I used data from New Zealand’s Household Travel Survey to add Auckland to the list. Here are the results:

Avg commute times in large cities

As you can see, Aucklanders enjoy some of the fastest commutes of any city on the list. We travel faster than people in London, Stockholm, Sydney, Los Angeles, and Vancouver. Only Barcelona, a compact city with a densely-developed subway system, offers faster trips to work. (However, it would be good to see a few more Australian cities, like Perth and Brisbane, on the list for comparison.)

While population growth will put some pressure on Auckland’s transport infrastructure, this data suggests that our congestion problems are not severe at all. We look pretty good on Alain Bertaud’s preferred measure of transport accessibility! It seems like the impending completion of Auckland’s motorway network and the significant fall in vehicle kilometres travelled per capita over the last decade has given us a lot of breathing room on congestion.

Rather than trying to solve problems that can’t be observed in the data, we should use this breathing room to invest in real transport choices for Aucklanders. That means getting ambitious about building Auckland’s “missing modes”:

  • A rapid transit network that reaches all parts of the city – starting with the City Rail Link and continuing with something like the Congestion Free Network
  • A frequent bus network that is useful for more Aucklanders, more often – which Auckland Transport is currently doing
  • Safe cycle infrastructure throughout the city – while Auckland Transport and NZTA are starting to deliver great projects like the Grafton Gully and Beach Road cycleways, there are still many holes in the network
  • Good pedestrian-oriented streets – Auckland Council’s shared spaces in the city centre are fantastic but change hasn’t been as rapid in other parts of the city.

What’s your perception of Auckland’s transport problems?

Choice matters: an economic parable

Lately I’ve been thinking about the role of choice in transport and housing. People often underestimate the power of choice in these particular markets. But it’s important to have options – even if someone wants to drive 90% of the time, having the option to take the bus or cycle instead the remaining 10% of the time can make them better off. Morever, even if taking the bus isn’t a good option for you, it might make your neighbour (or your children) better off.

Perhaps it’s best to illustrate this point with a parable. Picture your neighbourhood shops. They might have a post shop, a drycleaner, a dairy, and a couple restaurants or takeaway joints. Basically, businesses that provide services to local residents.

Imagine, for a moment, that your neighbourhood shops have only two eating options, both of which are fish-and-chip shops. If you’re too tired to cook dinner for yourself after a long day of work, and you don’t want to drive to a bigger centre, your options are limited to fish and chips.

Now imagine that a new restaurant is opening up in the neighbourhood. Would you prefer it to be:

  • A third fish-and-chip shop, which would compete directly with the existing takeaways and maybe bring down the price of a snapper fillet by twenty cents, or
  • An Indian restaurant, which would offer you an entirely new option for dining out?

I think most people would choose the Indian restaurant, hands down. Having more dining options would be good for local residents. Even if they continued to get fish and chips most of the time, the Indian restaurant would be available as an alternative when they couldn’t stomach any more greasy chips.

(Incidentally, I didn’t choose this example at random. Auckland is now a fantastic city to dine in, due to the abundant choices of cuisines that recent migrants have brought to the city. But it wasn’t when my parents were young – it was fish and chips, meat pies, or nothing. Increasing choice has revolutionised the restaurant market.)

At the moment, Aucklanders have constrained transport or housing options. For many trips, driving is the only feasible option. For most households, living in a detached three-bedroom house is the only option on offer. But these options aren’t always well suited for all trips or all households.

Successive governments have tried to improve our wellbeing by, basically, opening more fish-and-chip shops. That means widening roads or duplicating them rather than adding bus lanes or protected cycle lanes. It means building new subdivisions on the edge of the city rather than allowing terraced houses and low-rise apartments to be constructed in existing suburbs.

Our transport budget? (Source)

Our transport budget? (Source)

Aucklanders would be much better off if we had more choices about how to get around and what type of home to live in. Policymakers could stand to take a few examples from the restaurant market.

The importance of housing choices in cities

Good cities should provide choices to their inhabitants. Any big (or small!) city is composed of a variety of people with various preferences, needs, and budgets. Look around you: Aucklanders are a bloody diverse bunch, and we’re getting more so as I type these words.

The Aucklanders of the future will want to get around in different ways, live in different places, and entertain themselves in different ways. In fact, this is already happening. It’s the reason for the success of the innovative mixed-use developments on the waterfront, the runaway success of Britomart and other rail upgrades, and, on the flip side, declines in vehicle kilometres travelled per capita.

At Transportblog, we recognise the importance of choice in cities, which is why we’re so enthusiastic about opportunities to invest in a better public transport network and better walking and cycling options. We believe that offering Aucklanders more travel choices at an affordable price will improve our living standards. Full stop.

What’s true in the transport market is also true in the housing market. Offering a greater range of housing choices will raise the living standards of Aucklanders, because we want to live in different types of homes. Enabling higher-density development in more areas will make some people much better off, because they want to live in dense environments, without making anyone else worse off.

Critics of intensification often fail to understand this argument. They say: “Oh, you just want to make everyone live in a tiny shoebox apartment!” In fact, the exact opposite is true. Enabling some people to choose to live in apartments or terraced houses will ensure that there is more land available for others who would prefer a lifestyle block in Dairy Flat or a quarter acre in Flat Bush.

Essentially, urban planning that enables housing choice allows for both high-density and medium-density living options and more low-density suburban living. This isn’t idle conjecture – it’s a well-established finding in urban economic theory and the empirical literature.

A few years ago a team of economists from the Reserve Bank of Australia put this idea to the test using economic modelling techniques. Their paper, entitled “Urban Structure and Housing Prices: Some Evidence from Australian Cities” (pdf), tested the impact of different urban policies. (NZIER economist Kirdan Lees has also done some similar work for New Zealand, but his initial paper (pdf) did not look at building height limits. In any case, the results are similar.)

The RBA economists model a relatively simple, monocentric city with employment and amenities concentrated in the centre and the residential population radiating out in a circle – the basic workhorse model in urban economics. While this is a simplification, it can easily be generalised to a polycentric city – just imagine multiple centres rather than a single centre. Their “unconstrained equilibrium” looks like this:

Kulish et al (2011) unconstrained

In short, densities – and building heights – are highest in the areas that are most accessible to employment and amenities. Land prices are also highest in these areas. This doesn’t occur as a result of a planner’s fiat – it happens because lots of people want to live close to the action. Others, of course, would prefer to be a bit further away with more space – and that is what they get in the unconstrained urban equilibrium.

Next, the RBA economists simulated the effects of imposing a building height limit. In effect, limiting building heights would prevent people from choosing to live at high densities near employment and amenities. Here are the results – the magenta lines show the effects of the constraint:

Kulish et al (2011) building height limit

Pay close attention to the middle two panels. They show that a building height limit does not just restrict high-density development in the centre – it also raises densities in the outskirts of the city. In short, a city that constrains medium to high density development doesn’t just fail to provide options for people who want to live in apartments. It also fails to provide options for people who want quarter acre sections or lifestyle blocks.

Has this happened in Auckland? It’s difficult to say for certain, but my research on population densities in NZ and Australian cities found that Auckland was missing out on both medium-density suburbs and low-density exurbs.

Finally, as the first panel shows, these restrictions are expected to raise the cost of housing for everybody, regardless of location or housing preference. As I said at the start, good cities provide choices for their inhabitants. Failing to provide for choice in the housing market just means that we all pay too much for homes that don’t suit our preferences.

So, what’s your dream Auckland home? Subject to budget constraints, of course…