Do economists think we should build more infrastructure?

Should we spend more money on infrastructure?

That’s a good question. Recent posts on Transportblog have looked at the case for a greater focus on providing better transport choices in Auckland, the need to start discussing rapid transit provision in smaller but growing cities, and the need for better connections between New Zealand’s cities and towns.

A key theme running throughout those posts is that there are opportunities to spend money better, rather than just spending more money on the whole. There may be a case to spend more, but before we get to that we should see where we can do things more efficiently.

I mention this because I’ve been thinking about a piece that StrongTowns’ Charles Marohn wrote in early January, in which he critiqued arguments for spending more on infrastructure:

Your road have potholes? Commute congested? Know a guy up the street that is underemployed? Want to make the country greener? Macro economists have the perfect response to all of this: infrastructure spending. Lots of it.

Spending on infrastructure is seen as the consequence-free way to boost the economy. It’s the rare thing a pickup-driving blue-collar worker and a tree-hugging PhD candidate can both agree on: America would be better off if we spent a lot more on infrastructure. Just look around! Is there anything more obvious? Economists even have nifty equations with fifty year projections that prove it. Who could be against that?

Sadly, those applying equations from the top of America’s economic ivory towers misunderstand the impact of infrastructure spending on cities, towns and neighborhoods. Whether or not a policy of borrowing money to build infrastructure really works at the national level — and there are really smart people who question whether it does — it’s not without consequence for local governments.

Marohn’s got some valid critiques. I particularly appreciate his argument that cities need to ensure that their investments are financially sustainable as a prerequisite for achieving their other aims:

Economics is a social science that often concerns itself with the well-being of people and things like environmental impacts, social justice and quality of life. These are admirable pursuits that can benefit from economic thinking and the work of economists. There are very good reasons for macro economists to study, quantify and pursue policies aligned with social objectives.

It is also perfectly acceptable for local governments to pursue similar aims. The difference is that local governments face hard financial constraints that the federal government does not. As we say at Strong Towns, financial solvency is a prerequisite for long term prosperity for local governments..

This means that cities have to #DoTheMath. Projects must pencil out, today and into the future. If something is done at a loss for a purely social aim, that’s perfectly acceptable so long as everyone understands that the ongoing revenue must be accounted for from somewhere else. Financial solvency is a prerequisite for local governments in a way that it never will be for the federal government.

However, I also think that Marohn’s being a bit unfair to economists! As I discussed in a post last year, there’s disagreement within the discipline about whether (and how) we should spend more money on infrastructure. And the economists who do make the case for spending more most strongly tend to come at it from a Keynesian perspective – ie spend a bit more during recessions, when there are unemployed people and machines to do the work.

Moreover, economists have researched the economic effects of more infrastructure spending in quite a bit of depth. A range of papers have investigated whether building more roads (etc) leads to increases in economic output (GDP) or increased employment, either at a local or a national level. They have generally found that building more transport infrastructure had strong positive effects in the 50s and 60s, and smaller or even negligible impacts since.

For instance, a literature review on the relevant evidence undertaken by the Ministry of Transport concluded that:

In developed countries that already have a high quality, well-connected transportation infrastructure network, further investment in that infrastructure will not on its own result in economic growth. However, where the potential for economic growth is present, lack of investment can inhibit the potential growth… Evidence for a ‘special role‘ for the effect of transport infrastructure investment on economic growth is limited.

In a similar vein, a 1999 paper by US economist John Fernald investigated the impact of road spending on economic productivity in the US, finally concluding that:

In essence, the evidence suggests that the massive road-building of the 1950’s and 1960’s—which largely reflected construction of the interstate highway network— offered a one-time increase in the level of productivity, rather than a continuing path to prosperity.

There’s less New Zealand-specific evidence, but one paper by three OECD researchers (Balázs Égert, Tomasz Koźluk, and Douglas Sutherland) that I reviewed in a post last year found that in New Zealand over the 1960-2005 period:

  • 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.

Basically, anyone arguing for a systematic policy of building heaps more roads (or infrastructure in general) isn’t taking the economic evidence seriously. At this point, there are unlikely to be abnormally high economic returns from building more infrastructure.

It isn’t hard to understand why. The first bridge, first decent road, or first rail line you build is likely to be transformational, just as the Auckland Harbour Bridge transformed the North Shore. But the third, fourth, or fifth bridge will make an incremental difference, at best. They may even do harm by ‘crowding out’ routine maintenance or pushing up construction costs across the economy. So we need to keep a close eye on how we’re spending our money and what we’re trying to accomplish.

What do you think about the economic returns on infrastructure spending?

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?

Better cities can answer New Zealand’s export woes

In recent years the New Zealand economy has benefitted from tailwinds – strong Chinese demand for milk powder and raw logs, net inward migration driving up house prices, and, sadly, the need to rebuild our second-largest city. But should we be so happy to rest on our good fortunes, or are there long-term risks we need to manage? If so, how can we address them?

History teaches us that bad things can happen to small, wealthy agricultural exporting nations that don’t succeed in evolving up the value chain. Argentina is a great – and troubling – example. In 1900 it was one of the wealthiest countries in the world, with GDP per capita close to the US. At the time, Argentineans were living well off beef and wheat exports. But its agriculturally-based, heavily overseas-owned economy failed to generate new sources of wealth.

The result was a steady, century-long relative decline in living standards, punctuated by the occasional economic crisis:

Source: Wikipedia

Source: Wikipedia

Could the same thing happen here? It’s certainly a risk. Arguably, it is already happening. In the 1970s New Zealand’s GDP per capita began to slide below the OECD average, and it’s never really recovered in spite of the radical interventions of successive governments.

Can we do anything to avoid turning out like Argentina? In short: Yes, but it will take some re-thinking. Most importantly, it will require New Zealand to invest in better cities, as cities are the engines of future economic growth. Let me explain.

In 2008, a new National government promised that it would achieve two things by 2025. It would:

  • Raise New Zealand’s economic growth rate to enable it to catch up with Australia in terms of GDP per capita
  • Boost exports to 40% of GDP, a significant increase from contemporary levels of around 30%.

A lot of people welcomed this – it seemed like the sort of ambitious, long-term programme that could prevent us from becoming Argentina. Unfortunately, we haven’t heard much about the government’s 2025 targets in the last few years.

As it turns out, closing the gap with Australia and transforming New Zealand’s export mix is extremely hard. Here’s a graph of New Zealand’s exports of goods and services as a share of GDP. As you can see, there has been precious little export-led growth over the last six years:

Source: World Bank

Source: World Bank

In a recent column for the Herald on Sunday, business journalist Rod Oram diagnosed the reasons for the failure to lift exports. In essence, we’re increasingly reliant upon a small number of commodified agricultural products. Like Argentina, we are currently failing to generate new sources of wealth. Oram is worth quoting at length:

The trade data are revealing. In the year to June, the value of our exports to China rose 50 per cent, dairy exports were up 40 per cent, logs 20 per cent and our overall exports were up 12 per cent, thanks to the commodity spikes.

But net of spikes, the data show we are becoming increasing dependent on selling fewer, simpler products to one customer. China is our largest trading partner, taking 23 per cent of our exports in the year to June. While China accounts for some new business, a big chunk is merely redirected from other markets.

The growing dominance of commodity dairy exports is striking. They have doubled their share of our total exports over the past 20 years to about 27 per cent today.

However, the upside is limited. For example, Dairy NZ estimates milk production will grow at 2.5 per cent a year, below its long term average. This reflects farming limits imposed by new freshwater regulations and less land available for conversion to dairying.


We need a broader, more sophisticated range of exports to overcome our commodity constraints. But we’re going in the opposite direction. Manufactured goods have fallen from about 37 per cent of exports in 2003 to about 22 per cent today.

This increasing simplification of our economy towards low value commodities has accelerated in recent years, according to data from a long-term study of countries’ economic complexity run by Harvard and the Massachusetts Institute of Technology.

In 2008, we ranked 39th in the world in terms of economic complexity, in the company of countries such as Brazil, Russia and Greece. But by 2012 we had fallen to 52nd.

This is the kind of thing that sets off alarm bells in the minds of economists. But how can we fix it?

The one thing that will not work, long-term, is continuing to rely upon milk powder and raw logs to support our living standards. We can’t keep doing the same thing and hoping for different results.

Fortunately, New Zealand has a unique opportunity to do things differently. Investing in better cities can create an environment for the development of new ideas and the growth of new, innovative businesses. Agglomeration and productivity growth in large, dense cities is an integral part of economic growth in the 21st century.

If we look beyond our own dairy exports, we can see the role of agglomeration everywhere. Economists have extensively studied the role of cities in economic growth, and businesses are actively taking advantage of it. It’s why:

  • One-third of the world’s major companies are headquartered in just 20 cities
  • The tech revolution started in, and is still based in, Silicon Valley and San Francisco
  • London and New York sell financial services to the rest of the world
  • Auckland’s city centre is home to New Zealand’s most productive jobs – the average city centre job is 139% more productive than jobs outside Auckland.

Urban businesses are often innovative, highly productive, and actively looking for export opportunities. We’re already seeing how cities can create new sources of wealth for New Zealand:

  • Cloud-based accounting software firm Xero (based in Wellington and Auckland) is growing rapidly and creating opportunities for other Kiwi software firms
  • Video game developers are hiring fast and growing sales globally: “The New Zealand Game Developers Association’s 33 member studios collectively hiked their earnings to $36.3 million in the year to March, up 86 per on the previous year… Kiwi-made mobile games had been downloaded about 130 million times in the year.”
  • Weta Workshops and Weta Digital export expertise to the global film industry from Wellington
  • I work for a company that exports public transport planning services from the Auckland city centre to Australia and the broader Asia-Pacific region.

As the late, great New Zealand physicist Paul Callaghan argued, in order to grow in the long term we need more firms like this. And in order to get them, we need to create an environment that attracts talented people and smart businesses and supports knowledge spillovers and innovation.

Triumph of the City

Cities are fantastic environments for generating new ideas and new sources of wealth.

We call that environment a city. If we want to get better economic outcomes, we need to invest in better cities, starting with Auckland.

That means delivering a great bus network and integrated ticketing (as Auckland Transport is doing). It means expanding transport choice by investing in the City Rail Link and the Congestion Free Network. It means enabling people to build the medium-density, mixed use neighbourhoods that the market’s crying out for. It means delivering great people-oriented public spaces (as Auckland Council and Waterfront Auckland are doing). It’s not that hard!

Better cities mean a wealthier New Zealand

Last week I took a look at whether government policy to support regional economies could divert growth away from Auckland. Based on the historical evidence, the answer seems to be no – people want to live in Auckland and start businesses here, and it’s senseless to try and stop that.

Today, I want to look at this issue from a different angle, and ask: If we somehow succeeded in stifling Auckland’s growth, would we be better off as a result? Would New Zealand be richer if it cancelled the City Rail Link, banned any new dwelling construction in Auckland, and told newcomers to bugger off to Timaru (or, more likely, Melbourne)?

Once again, we don’t have to speculate, as we can examine the results of previous “natural experiments”. Paul Krugman suggests that we could learn from recent population growth in the United States. (In between gaining academic renown for his work in new trade theory and public notoriety as a harsh critic of the second Bush administration, Krugman helped develop the new economic geography literature, which explains why cities form and grow.) He takes a look at the rapid growth of the “sunbelt” states, including Arizona and Texas, and finds that it has probably reduced economic growth in the US:

It turns out, however, that wages in the places within the United States attracting the most migrants are typically lower than in the places those migrants come from, suggesting that the places Americans are leaving actually have higher productivity and more job opportunities than the places they’re going. The average job in greater Houston pays 12 percent less than the average job in greater New York; the average job in greater Atlanta pays 22 percent less.

So why are people moving to these relatively low-wage areas? Because living there is cheaper, basically because of housing. According to the Bureau of Economic Analysis, rents (including the equivalent rent involved in buying a house) in metropolitan New York are about 60 percent higher than in Houston, 70 percent higher than in Atlanta.

In other words, what the facts really suggest is that Americans are being pushed out of the Northeast (and, more recently, California) by high housing costs rather than pulled out by superior economic performance in the Sunbelt.

But why are housing prices in New York or California so high? Population density and geography are part of the answer. For example, Los Angeles, which pioneered the kind of sprawl now epitomized by Atlanta, has run out of room and become a surprisingly dense metropolis. However, as Harvard’s Edward Glaeser and others have emphasized, high housing prices in slow-growing states also owe a lot to policies that sharply limit construction. Limits on building height in the cities, zoning that blocks denser development in the suburbs and other policies constrict housing on both coasts; meanwhile, looser regulation in the South has kept the supply of housing elastic and the cost of living low.

In short, restrictions on population growth in productive places – i.e. large, relatively dense cities – force people to move to less productive places, and earn less. A recent working paper by American economists Chang-Tai Hsieh and Enrico Moretti put a figure on the economic cost of these restrictions: housing supply restrictions in high-productivity cities like New York and San Francisco over the last three decades has lowered the US’s GDP by an estimated 10-14%. That’s absolutely huge.

This is agglomeration at work – or rather, “deglomeration”. The economic literature has identified a strong relationship between the scale and density of cities and the productivity of firms that locate within them. But rather than recognising and taking advantage of this phenomenon – for example, by allowing more office space to be built in San Francisco for the expanding tech industry and more apartments to be built in Silicon Valley for urbanophile tech workers – some American cities have chosen to reject it.

So could the same thing happen in New Zealand? In a word, yes. It’s definitely a risk and one that we should be careful to avoid.

First, the facts. Firms based in Auckland are more productive than firms elsewhere in New Zealand, after controlling for industry and firm characteristics. And firms in the Auckland city centre are even more productive. The table below, compiled from data in Dave Mare’s great 2008 paper on the topic (“Labour productivity in Auckland firms”), shows that there is a substantial “productivity premium” in Auckland:

Area Employment density (2006 jobs/sq km) Value added per worker (2006) Productivity relative to non-Auckland
New Zealand excl. Auckland 6.7 $45,550
Auckland urbanised area 518 $68,435 +51%
Auckland city centre 13,584 $106,873 +139%

I just want to say a brief word about the “productivity premium” of the city centre. A lot of people say that New Zealand’s an agricultural exporter, earning its way off the sheep’s back (or, more recently, the cow’s teats), and that downtown jobs are just an unproductive drain on farm revenues. However, service exports from urban businesses play an underappreciated role in NZ’s international trade picture. The two companies I’ve worked for in the Auckland city centre are both exporters of professional services. I’ve personally exported to Hong Kong, Australia, Fiji, and Papua New Guinea; my colleagues have also worked in Indonesia, Uganda, Canada, Saudi Arabia, the UK, and a whole host of other places. If we want to grow our exports in a smarter way, we need to encourage this sort of thing rather than deny that it’s happening.

As a result of the urban productivity premium, policies that stifle the growth of Auckland are likely to put a drag on New Zealand’s economy. In the US, a reluctance to let productive cities grow caused people to move to lower-wage cities like Phoenix, Houston, and Atlanta. Down here, the results are likely to be even worse, as New Zealanders are much more internationally mobile than Americans. If we put a lid on Auckland’s growth, some people will go to Hamilton or Tauranga instead, but many others will head to Australia or the UK.

Fortunately, we’ve got a much better option: Improve New Zealand’s cities rather than trying to smother them. Moreover, we’ve got some great opportunities to do just that. In Auckland, that means:

  • Making cost-effective investments in more transport choices, including better walking and cycling
  • Building the City Rail Link to unlock access to the city centre and allow firms to grow and benefit from the knowledge spillovers floating around
  • Preserving and improving our parks and public spaces – Waterfront Auckland is a truly world-class waterfront development agency and we should build on its success
  • And, as Krugman and Glaeser point out, it’s absolutely vital that we allow dwellings to be built in the places where people want to live – which increasingly means building more in places like Ponsonby and Mount Eden that are close to jobs and amenities.

We shouldn’t limit our vision to Auckland, either. While Auckland’s larger and faster-growing than Christchurch or Wellington, those cities also support agglomeration economies and interesting urban lifestyles. Investments in better cities will pay off there as well. Some of the same policies can also make small cities more liveable – although Hamilton will probably never need a CRL, look at the difference that NZTA’s Model Cycling Communities programme has made to Hastings and New Plymouth.

Why don’t we get on with it then?

More migrants! Sweet.

Several recent reports and articles have discussed trends in migration and its impacts on New Zealand.

In terms of trends, net migration is at a 10-year high. The recent surge in net migration trends is shown below.

Net migration

The simple reason advanced for the positive net migration trend is that our economy is doing relatively well compared to most of the countries with whom we compete for skilled labour. This is both 1) reducing the number of kiwis departing these shores and 2) attracting more people from elsewhere to come live/work here (some of whom will of course be NZers). Put simply, less out and more in = higher net gain. Trends in long term departures and arrivals are illustrated below.

Arrivals and departures

So what might be the impacts of higher net migration?

Usefully, the people at NZIER have been researching the impacts of migration on New Zealand’s economic performance. They find that for every 40,000 additional net migrants, our GDP per capita increases by approximately $400 p.a. Why? Well, there are apparently a number of microeconomic channels through which migration contributes to economic output, specifically:

  • They provide firms with new skills
  • They increase innovation and entrepreneurship
  • NZ businesses benefit from greater scale and competitiveness
  • They increase returns from public investment

The general message is fairly simple: Migrants increase the diversity and scale of our labour market and firms, while also increasing the returns on public investment (which typically have relatively fixed costs, such as infrastructure and institutions). It’s worth pointing out, however, that only the first two economic channels listed above are actually specifically linked to migration. The last two microeconomic channels are pure economies of scale, which would also result from a higher domestic fertility rate.

Which brings me nicely to another (potential) benefit from migration: Greater diversity in potential partners.

I know this sounds flakey, but I’ve just recently been struck by how many of my NZ friends (including several of my fellow bloggers) are partnered up with people of foreign origin. Which raises an interesting proposition: Is it possible that higher rates of net migration have an indirect impact on domestic fertility rates? I’ve been asking my mates but they’re a bit coy on the topic. But it seems reasonable to suggest that if migrants introduce diversity/specialisation into the labour market then perhaps they do the same for the “partner market”.

I guess the net effect depends not only on the quality of the match, but also migrants’ relative preferences for making babies compared to the existing NZ population (to which they are added). This is an area that may warrant further NZ-specific research (NB: The World Bank has analysed migration and fertility impacts in this paper. The key finding appears to be that migration reduces home country fertility and increases destination country fertility, as I would expect. However the World Bank appear to attribute this to simple differences in preferences, rather than better matching).

Are there negative impacts from migration?

The most obvious is the additional demand for housing that results during times of high migration, which could in turn lead to higher property price inflation and ultimately higher interest rates. This will not only curb domestic demand across the economy, but it will also tend to inflate the currency and undermine NZ’s export competitiveness. This issue is all the more relevant in the Christchurch context and, in my opinion, supports the Reserve Bank’s decision to implement loan-value requirements as a temporary curb on housing demand in these relatively exceptional circumstances.

Some people suggest that higher net migration might reduce social cohesion, although specific details on exactly what is meant by social cohesion are difficult to come by.

Data from StatisticsNZ (as discussed here on KiwiBlog) suggests people of Asian ethnicity in New Zealand have much lower rates of criminal offending than the general population, while the opposite is true of Pasfika ethnicity. However, this difference may be attributable to differences in the relative incomes of these two migrant groups.

I can’t help but wonder that if 1) more kiwis are staying here and/or returning from overseas (where approximately 1 million currently reside) and 2) kiwis who hook up with migrants are generally happier than they would be otherwise, then it seems possible that current trends will actually bring people/families together and thereby supports greater “cohesion”. So ultimately I think this supposed “negative” effect of migration is likely to be over-stated and that, on balance, migration has net positive impacts for NZ’s socio-economic performance.

So what should we expect from future trends in migration?

Well, if the results of this international survey are anything to go by then NZ can expect to see positive net migration numbers for some time. The survey ranked New Zealand ranked fifth overall for preferred destination and subsequently estimated that our population would increase to over 9 million in the event that everyone who wanted to migrate here was able to do so. Of course, the relative performance of NZ’s economy will be the main determinant of whether current rates of migration are sustained.

All I hope is that we start to get people like Emma Watson and/or Hayley Williams migrating here to vie for my affections. Sweet.

Does building roads harm the economy?

Most proposals to build new roads or widen existing ones seem to boil down to an ultimate belief that it will “help the economy”. Whether it’s by improving freight reliability or getting people to their jobs faster or helping business travel or whatever, there seems to be a fundamental belief among many that quite a strong relationship must exist between building more roads and improving the economy.

Clearly this is a contestable assumption, and some recent research in the USA details some pretty interesting trends – as reported on in Planetizen:

University of Minnesota professor David Levinson has written in the past that, because of the relative completeness of our national highway network and the cost of construction, the return on investment for additional mileage is approaching zero. One study estimates the return on investment for highway construction was just 14% between 1990 and 2000.

I recently decided to follow up on this line of research, so I dug through some Census data. What I found was shocking, though not altogether surprising. It seems that, besides wasting billions of taxpayer dollars, road-building may actually be holding back economic growth overall: from roughly 2000 to 2010, states that built the fewest urban road miles grew an average of 64 to 94 percent faster than their asphalt-enamored neighbors. Rather than increasing productivity through increased mobility and reduced congestion, as politicians and lobbyists so often promise, all this mindless road-building could be depressing statewide economic growth!

Let’s look at the details a bit more:

Looking at the numbers in aggregate, we see some interesting trends that seem to hold up just about any way you slice the pie:

  • States that increased their urban road mileage by less than 30% grew by an average of 14.40%, while those that increased mileage by greater than 30% grew by an average of just 8.77%.
  • If we set the cutoff at 20% mileage growth, states that built less grew by 17.97%, and states that built more grew by 9.24%.
  • At a 10% cutoff, states that built less grew by an impressive 20.70%, compared to just 10.66% for those that built more.

Statistically, analyzing the correlation between road-building and economic growth gives us an r-score (correlation coefficient) of -0.34, which implies that about 10% of a given state’s economic growth can be explained by how much urban road-building they did over this time period. Many things influence the overall health of any economy, obviously, so we shouldn’t expect the quantity of roads to wholly predict statewide economic growth by itself, but this does indicate a negative correlation between the two variables: more roads equals less growth. (As always, please remember that correlation does not imply causation.)

And for a graphed comparison:

roads_vs_growthThe post’s author, Shane Phillips, doesn’t think that these results are particularly surprising:

None of this should be particularly surprising. While politicians and advocates love to tout the job-creating value of new road and highway capacity, congestion reduction rarely lasts more than five years and widened roads ultimately only succeed in extending the boundaries of wasteful, unproductive sprawl. In the case of road widenings, it’s entirely possible that the disruption caused during the construction phase completely erases — or even exceeds — the fleeting benefits of reduced congestion.

Then there’s the opportunity cost: think of all the good that could have been done with the hundreds of billions of dollars spent on roadways over that period: more responsible transportation spending, education, renewable energy … take your pick.

I think it’s probably unlikely that building roads directly harms the economy, but there are logical reasons to think that it might cause indirect harm: particularly due to it not the best use of public funds and encouraging dispersed land-use patterns which undermine agglomeration. New Zealand’s heavy dependency on private vehicles also forces us to spend a lot of money each year importing cars and oil – basically cancelling out wealth that we create from exporting dairy to the the world.

The next version of the Government Policy Statement will be released some time later this year. If it’s anything like the current version it will stress the importance of transport’s role in improving the economy and then make a giant leap of faith in assuming that building more roads is the best way for transport to improve the economy. It’s time to fundamentally question that assumption.

Economic benefits of sustainable streets

Courtesy of Atlantic Cities, it’s explained how New York City’s Department of Transportation has done some pretty detailed analysis of the economic impacts of many of the changes they’ve been making to the layout of streets over the past few years.

Using tax data from the New York City Department of Finance, the DOT analyzed the impact of street re-design and transportation enhancements on retail businesses. Laid out in “The Economic Benefits of Sustainable Streets” [PDF], the data show encouraging results in seven test cases taken from three of the city’s boroughs, representing a wide range of neighborhood types.

The DOT compared sites where a variety of improvements had been implemented by the DOT to spots nearby and with the borough as a whole.

Overall, the numbers revealed broad economic benefits for the streets that had been changed. One example was Columbus Avenue, a busy shopping boulevard on the city’s affluent Upper West Side. There, the DOT had built a protected bike lane and pedestrian safety islands while narrowing travel lanes for motor vehicles. According to the tax data, revenue was up 20 percent over the baseline in the second year after bike lanes were implemented in the area.

In the comparison area immediately to the south without bike lanes, revenue was up 9 percent. The results are particularly interesting because a handful of vocal shopkeepers in the affected area had reported sales were down, leading to media reports that the lanes were bad for business.

This wasn’t just an isolated case either:

Another test case was the Hub, a congested and chaotic intersection in a working-class neighborhood of the South Bronx, where several subway and bus lines come together. DOT’s main improvements here were changing traffic patterns and improving transit connections, along with better pedestrian signals, crosswalks and shade trees.

Retail sales were up 50 percent by the end of the study period, compared with 18 percent in the borough as a whole, “all while area injuries were reduced and vehicle travel times and volumes were maintained.”

And even where parking was removed to improve bus reliability and travel times, there was also an improvement of economic activity:

On Fordham Road in the Bronx, where the implementation of a “Select Bus Service” express route and dedicated bus lane raised concerns among local merchants about lost parking spaces, sales increased 71 percent over the baseline, far better than the numbers for all but one of the comparison areas.

The DOT report acknowledges that it’s difficult to tease out all the different factors that contribute to a street’s economic health. In at least one of the test areas, a beautified Vanderbilt Avenue, overall gentrification – with all of its collateral damage to less affluent residents and business owners — was doubtless a contributor to a steep rise in sales numbers. But the NYC DOT’s data-driven approach is as valuable when it comes to money as it is when it comes to safety.

Business owners in a tough economy are often wary of any kind of change, especially when it reduces parking or changes their customers’ travel patterns in any way. Numbers like these provide yet another powerful rational argument for street design that puts people above cars.

This last point is key (and perhaps some business owners are starting to realise the value of high quality pedestrian environments). Changes to street layout that puts people above cars provides a valuable economic return – over and above what is often expected by business owners and the organisations that often represent them.

We’ve seen the same change happen in Auckland, with the introduction of a shared space in Fort Street leading to massive increases in sales and economic performance of the area. Conversely, High Street seems to be in terminal decline because retailers there have hung onto their pitiful on-street parking and the terribly narrow footpaths it creates, fighting attempts at creating a shared space.

How Cities Foster Innovation

We talk quite a bit on this blog about the importance and value of agglomeration, which is the additional level of productivity which comes from locating activities close to each other. Agglomeration is why Auckland growing will be good for all New Zealanders, and at a smaller scale why central parts of Auckland growing will be good for all of Auckland. While agglomeration economies are well studied in terms of observing that they most definitely do actually exist, it has been a little less certain exactly why they exist.

A recent article in The Atlantic Cities reports on research done by MIT (Boston version, not Manukau version) on this question – with some perhaps unsurprising but at the same time interesting results:

There have been plenty of theories. Adam Smith famously figured that people become more productive when we’re able to specialize, each of us honing a separate area of expertise. And when lots of us elbow into cities, we’re able to specialize in ways that we can’t when a rural farmer must also double as his own butcher, accountant and milkmaid. Other economists have suggested that cities become great agglomerators of industry when factories cluster together around economies of scale and communal access to transportation.

“We think there’s an underlying completely different way of thinking here, which is very different from the economist’s way of thinking,” says Pan, a doctoral candidate in computational social science in the MIT Media Laboratory’s Human Dynamics Lab. Previous work by researchers at the Santa Fe Institute has proven the math behind the power of cities: As they grow in population, all kinds of positive outcomes like patents and GDP and innovation (and negative ones like STDs and crime) grow at an exponential factor of 1.1 to 1.3.

This means that all the benefits (and downsides) that come from cities don’t just grow linearly; they grow super-linearly, and at roughly the exact same scale, with a growth rate that looks on a graph something like this blue line (a linear relationship is shown in red):super-linear
As for why this happens, though, Pan pushes aside theories about the location of manufacturing or the specialty of trade. “It’s more fundamental than that,” he says. “Cities are about people. It’s just that simple.”

We have discussed the work of the Santa Fe Institute in before in this post with a video presentation by theoretical physicist Dr Geoffrey West.

The full paper in which the study is published highlights that fundamentally it’s the density that we’re able to form social ties which generates the super-linear increase in outcomes. As noted, “the larger your city, in other words, the more people (using this same super-linear scale) you’re likely to come into contact with.”

However, unlocking the potential of cities is dependent upon ensuring that sufficient transport infrastructure is available for the city to effectively function as a large connected entity, rather than just a series of smaller disconnected placed which just happen to be next to each other. This is detailed further below:

“What really happens when you move to a big city is you get to know a lot of different people, although they are not necessarily your ‘friends,'” Pan says. “These are the people who bring different ideas, bring different opportunities, and meetings with other great people that may help you.”

Maybe this doesn’t sound like a novel discovery – that the inherent power of cities lies in our individual connections to each other. Other researchers have nipped at a similar idea, calculating, for example, the “social interaction potential” of place. But until recently, most economic thinking sidestepped the sheer value of human interaction in favor of explanations about the proximity of manufacturing, or the processes of production.

This explanation for the power of cities also raises some curious questions about those places that remain an exception to the model. In some African cities and Eastern mega-cities, innovation and productivity don’t grow super-linearly. Populations grow, but the benefits don’t accrue with them as we would expect. This is likely because transportation infrastructure in those places is so poor that people aren’t able to connect across town to each other. “To live on the west side of Beijing,” Pan says, you never go to the east side.”

What I find fascinating is to analyse whether the internet has the ability to change this fundamental relationship – because it’s now so easy to be in instant contact with a huge number of people no matter where you are. Yet none of the recent research seems to suggest that technological advances make agglomeration less important – in fact it seems like as employment specialises more and more, agglomeration actually becomes more critical than ever.

Auckland’s Economic Future

Auckland feels like it’s at the cusp of something of a transition between being an ‘overgrown town’ and a ‘real city’ – with the distinction between the two manifesting itself in the difference between the Council’s vision for Auckland and central government’s vision. In the transport arena, central government thinks that the biggest problem is congestion on Auckland’s roads – which needs to be solved through building more roads. This makes sense if you think of Auckland as just an overgrown town – where widening a road normally seems to fix the transport problem faced. However, it doesn’t work in a large city and alternative approaches – like building a high quality public transport system – are increasingly necessary.

An article in yesterday’s Herald articulated the growing recognition – once again seemingly mainly led by the Council – that Auckland’s scale provides economic opportunities and the potential to be the “growth giant” of the country which simply don’t exist elsewhere in New Zealand:

Auckland Council chief economist Geoff Cooper says the city’s growth is far outstripping the rest of New Zealand.

“Auckland will add a person to its population every 19 minutes. This compares to one person every two hours for Christchurch and one person every 2.5 hours for Wellington,” he says.

With that rate of growth will come big challenges, especially on infrastructure, particularly tunnels, tarmac and bridges.

As the only chief economist employed by a territorial authority in New Zealand, Cooper says he is in a unique position, able to provide a level of data beyond many other councils’ resources.

Auckland is a powerhouse for the national economy, Cooper says, and average labour productivity for firms in the CBD is 139 per cent higher than outside the Auckland region, according to a Motu study.

“This shows just how important the central city is, not just for Auckland, but for New Zealand as a whole.

“Auckland firms are prepared to pay a high rental premium because of these returns. Creating an accessible and high-amenity city centre will be critical in allowing more firms to take advantage of these returns and generate a high performing business district,” he says.

There’s an interesting conundrum around Auckland’s rate of growth compared to the rest of the country – in that as Auckland gets bigger it creates a wider variety of economic opportunities and a sheer scale which improves productivity. Yet at the same time, to enable economic growth Auckland needs investment in infrastructure, spending that probably wouldn’t be necessary if that same growth happened elsewhere in the country. For example, Invercargill could probably cope with quite a lot more growth before needing any major transport investment.

That sort of “distributing growth” approach seems like it was perhaps more suited to economies of two or three decades (and beyond) ago, that modern 21st century economies. When lots of employment is in low-skilled manufacturing then it doesn’t really matter where the factory sets up – and looking around New Zealand there are still quite a lot of large factories in fairly small towns (resulting in those towns generally becoming incredibly dependent on that industry). However, in more service and knowledge focused economies with a greater and greater focus on skills, agglomeration benefits, specialisation and so forth. In this type of economy, large cities with large and diverse labour pools tend to do well.

Perhaps this is reflected in Auckland’s economy doing reasonably well in recent times:

“As Harvard professor and urban economist Edward Glaeser notes, ‘despite the technological breakthroughs that have caused the death of distance, it turns out the world isn’t flat, it’s paved. The city has triumphed’,” Cooper wrote.

The Auckland economy grew by 2.1 per cent in the past 12 months.

“While this is not particularly glamorous in its own right – Auckland’s 10-year average is 2.5 per cent – against the backdrop of a European sovereign debt crisis, a double-dip recession for Britain, stuttering growth for Germany and a reduced growth outlook for China, it looks rather more attractive,” Cooper said.

I think I fall on the side of taking advantage of Auckland’s potential size and the economic opportunities it provides, even if that comes at the cost of additional infrastructure. Distributing growth may have worked OK in the mid-2oth century economy but it just doesn’t seem to be the way of the future. This decision has some massive implications, perhaps the most relevant one to this blog is the key importance of projects like the City Rail Link in enabling Auckland to achieve its potential.

Almost the world’s most liveable city

The 2012 Mercer Quality of Living Ranking survey has Auckland as the world’s third most liveable city – retaining the same ranking as 2011. The survey is designed to assist employers in the placement of expatriate staff and how much they should receive in living allowances, so the results tend to indicate quality of living if you’re really well off, however they give a useful guide. Here are the top 20:The explanation for how the results are collated is helpful in making sense out of them:

Mercer evaluates local living conditions in more than 460 cities it surveys worldwide. We analyze living conditions according to 39 factors, grouped in 10 categories:

Political and social environment (political stability, crime, law enforcement)
Economic environment (currency exchange regulations, banking services)
Socio-cultural environment (censorship, limitations on personal freedom)
Medical and health considerations (medical supplies and services, infectious diseases, sewage, waste disposal, air pollution, etc.)
Schools and education (standard and availability of international schools)
Public services and transportation (electricity, water, public transportation, traffic congestion, etc.)
Recreation (restaurants, theatres, movie theatres, sports and leisure, etc.)
Consumer goods (availability of food/daily consumption items, cars, etc.)
Housing (rental housing, household appliances, furniture, maintenance services)
Natural environment (climate, record of natural disasters)

The scores attributed to each factor allow for city-to-city comparisons. The result is a quality-of-living index that compares relative differences between any two locations that we evaluate. For the indices to be used effectively, Mercer has created a grid that allows users to link the resulting index to a quality-of-living allowance amount by recommending a percentage value in relation to the index.

For 2012, Mercer also prepared an Infrastructure Index, based on Electricity, Water Availability, Telephone, Mail, Public Transportation, Traffic Congestion & Airport Effectiveness. The results for this index are in many places quite different, with Auckland dropping from 3rd for liveability to 43rd for infrastructure provision. This most likely highlights that transport, particularly public transport I suspect, is the main barrier to becoming number one. The table below runs a comparison between the lists for those cities which appeared in both lists – those which scored better in the infrastructure are shown in green and those that scored better in the liveability are shown in red:It’s interesting that Auckland and Wellington are the two cities which outperform their infrastructure score in the final liveability ranking so much. What’s also interesting is that the cities with the top two infrastructure scores which haven’t corresponded to ending up in the top 50 liveable cities are Dallas and Atlanta: notoriously car dependent cities.

What is very interesting is that Auckland’s poor infrastructure score, relative to liveability, is perhaps reflected in Auckland generally scoring quite lowly in terms of economic performance compared to a number of these other cities. This is outlined in the Economy chapter of the Auckland Plan quite starkly:

Measured internationally, Auckland’s performance is relatively poor: it is ranked 69th out of 85 metro regions in the Organisation for Economic Co-operation and Development (OECD) in terms of GDP per capita. New Zealand’s economic performance has declined relative to other OECD countries in terms of GDP per capita to its position at 21st, but has stabilised at around 80% of the OECD median.

Pulling a few strands together, I think there’s likely to be an argument that Auckland’s historic under-investment in infrastructure – particularly the kind of transport infrastructure that encourages productivity through boosting employment densities – has held back our economic growth. This is reflected not only in our relatively poor economic performance, but also in our relatively low infrastructure scores in the Mercer survey. Because our transport investment in the past has been so focused on encouraging employment dispersal we have missed out on the agglomeration benefits that would have otherwise been enjoyed and therefore missed the economic growth that we should have had.

Fortunately there seems to be a growing recognition of this faulty thinking and a growing realisation that smart transport investment is about encouraging and facilitating land-use patterns which support economic growth – particularly through agglomeration. Let’s hope the government finally starts to understand this point and sees how critical a project such as the City Rail Link is in boosting Auckland’s economic productivity by allowing much greater employment densities in the city centre and in major centres on the rail network across Auckland. I can’t say I have too much hope though, sadly.