The strange side effects of parking subsidies

Parking policies are frequently bizarre. Parking is, after all, a private good – it is both rivalrous (two cars can’t park in the same space at the same time) and excludable (if you don’t want someone parking in your space, you can keep them out). In that respect, it is more like a refrigerator than a public park.

But unlike a refrigerator, there are all sorts of public subsidies and regulations affecting parking. Although refrigerators are arguably more of a necessity of life than parking, councils don’t impose minimum refrigerator requirement for homes and offices. Central government doesn’t provide a tax subsidy for employer-provided refrigerators. And councils don’t invest in (or subsidise) public refrigeration facilities.

And if they did, it would almost certainly result in some perverse outcomes.

A recent NZ Herald story provided an example of how parking subsidies can lead to odd outcomes. (It was also a fine example of meaningless “gotcha” journalism, but never mind that!)

They are the crack team of economic and planning experts charged with sorting Auckland’s future growth.

But a member of the Unitary Plan independent hearings panel has fallen foul of the city – after sneakily parking a jetski in a central city council carpark for almost a month.

The mystery jetski appeared three to four weeks ago, taking up a Queen St park reserved for the panel listening to submissions on the future of the city.

Here’s the jetski in question:

IHP jetski

The article implies that the panel member in question is rorting the system or acting unethically by using their employer-provided carpark to store a jetski. But, if you think about it, it’s actually a good illustration of the poor logic behind many existing parking subsidies.

Let’s back up a step: what subsidies are we talking about, exactly?

In the Auckland city centre, carparks have a market value, which is a good thing. The removal of minimum parking requirements in the 1990s led to an increase in the price of parking – and also to increased development as new buildings weren’t encumbered by the need to provide unnecessary but costly carparks. At present, Auckland Transport is leasing downtown carparks for between $110 to $490 a month – although the cheapest ones are fully sold out. Private operators seem to be supplying them at around $250-$300 per month.

So an employer-provided carpark in the city centre is likely to be worth somewhere in the range of $3000-$6000 per annum. Because fringe benefit tax isn’t levied on carparks, this is worth the equivalent of $4500-$9000 in salary for people paying the top marginal tax rate (33%). (As the panel members probably do.)

That’s a large public subsidy for a small bit of concrete!

In theory, the rationale for the tax subsidy on employer-provided carparks is that it makes it less costly for people to commute to work, and hence encourages people to enter the workforce. But the panel member’s jetski illustrates the absurdity of that approach.

For one thing, people have (or should have) a range of choices about how to commute. Some prefer to drive. Others may take the bus, train, or ferry, or walk or cycle to work. Consequently, a significant share of commuting trips don’t end in a carpark. Based on Census data, around half of the people working in the city centre in 2013 didn’t drive to work. A bit over one in four workers throughout Auckland didn’t drive to work.

Census journey to work Auckland mode share chart

Consequently, trying to subsidise commuting by subsidising parking is likely to be a distortionary and inefficient policy. Some people will change transport modes in response to cheaper parking, resulting in additional road congestion in peak periods. Others will be left with a subsidised parking space that isn’t much use to them.

The panel member who used their parking space to store a jetski probably falls into the latter category. They might walk to work, or take the bus or train. This leaves them with a bit of costly concrete that they don’t need to store a car – so why not use it to store another vehicle instead? I can’t blame them for that.

The jetski has apparently been removed from the parking space, but the policy distortions that led to it being there in the first place remain. So what could we do about that?

The key is to realise that our ultimate aim is to enable mobility, not to simply provide carparks, and make policy accordingly.

For some people, mobility means a monthly public transport pass, or a bicycle and access to a shower at work. But current fringe benefit tax policies discourage employers from offering those solutions to their employees – an employer-provided PT pass would be taxed as regular income, while a carpark is exempt from tax. We need to level the playing field.

The best way of doing so is by removing the fringe benefit tax exemption for carparks, but if that’s not political possible then a good alternative would be to exempt PT passes from FBT, as the Green Party has proposed.

Another alternative would be to offer people the option to “cash out” employer-provided carparks. It’s especially bizarre that employers aren’t required to offer this choice, as the current government changed employment law to allow people to exchange one week of annual holiday for the equivalent in cash. Why not adopt the same approach for carparks, which could easily be worth more than holiday pay for many workers?

Lastly, we also need to make some choices beyond how we price and subsidise parking. Getting a great range of transport choices will often require us to use existing road space differently. Sometimes the only way to get a dedicated bus lane or a safe, separated cycle lane is to remove a few on-street carparks. We need to look at those choices in a holistic way – i.e. do they improve overall mobility and access to destinations – rather than simply insisting that all carparks must stay in place.

How do you think we should address parking subsidies?

Locked Out

6:45pm tonight at the AMI Netball Centre Northcote there is a housing affordability debate with some interesting speakers, head along:

Locked-Out-twitter-image

 

Congestion prices, carbon taxes, and the art of the possible

If you ask an economist about transport policy, it’s a certainty that they will mention congestion pricing at some point. It’s easy to see why. Currently, we manage our roads like a Soviet supermarket: access is rationed by queues rather than prices. As a result, we get inefficient outcomes.

latvian-bread-line

The New Zealand transport system?

The theoretical and empirical case for congestion pricing is strong. In places where it has been implemented, such as London and Stockholm, it has increased vehicle speeds, improved accessibility, cut pollution, and improved safety. Not bad.

Because congestion pricing works, it tends to become quite popular once people can see the results. Although a majority of Londoners and Stockholmians opposed tolls at the outset, around 70% of residents in both cities now support them. But all of this raises a question: why haven’t more cities implemented congestion pricing?

I was thinking about this when reading a pair of articles that David Roberts (Vox) recently wrote about carbon taxes – and why they may not necessarily be the best policy for preventing climate change. Many of the points that he raises are also relevant to a discussion of congestion pricing.

In the first article, Roberts discusses the benefits of carbon taxes (efficiency) and the problems associated with applying them to complex markets. He argues that:

Believing a single tool will accomplish everything requires seeing the economy as a frictionless machine, a spreadsheet, not what it is: a path-dependent accretion of past decisions and sunk costs, to be tweaked and unwound.

As a result, it may make more sense to intervene more directly in specific markets – say, by regulating coal-fired power plants out of existence or subsidising alternatives. The equivalent in the transport space would be to manage congestion by cobbling together a raft of policies that look unrelated at first glance – e.g. transformative investments in rapid transit and cycling, bus lanes or high-occupancy-toll lanes on more roads, and higher parking prices.

In the second article, Roberts addresses a more challenging issue: politics and the art of the possible. He argues that carbon taxes are seldom effective in practice due to several factors that make implementing them and raising the tax to an effective level a risky proposition. These include concerns about distributional impacts, or the degree to which poor people will bear the impact, and low willingness to pay to avoid harms. Both of these factors seem potentially relevant to congestion pricing as well.

Roberts points out that many of the policy recommendations made for carbon taxes are economically sensible but respond poorly to political constraints. For example:

Many conventional economists, along with some of the few conservatives who take climate policy seriously, favor a “tax shift”: using the carbon tax revenue to reduce other taxes, preferably “distortionary” taxes like payroll or income.

The idea is that you double your impact: You get less of what you don’t want (carbon) and more of what you do want (work) — more efficient markets on both sides. Harvard economist Greg Mankiw is a big proponent of this perspective, as is Bob Inglis, one of the few conservatives actively working on climate change policy.

The main thing to note about tax-shift schemes is that they address few of the political barriers facing carbon pricing.

A carbon/income tax swap would be doubly regressive — raising a regressive tax to lower a progressive one. Reducing payroll taxes might have a net progressive effect, but it is very difficult to imagine the politics working.

In the past, I’ve taken a similar view on congestion charges. I’ve argued that we shouldn’t raise money from tolls. Rather, the revenues should be distributed back to households, and especially low-income households who might be most adversely affected.

But, Roberts suggests, offering to return the revenues will not necessarily make carbon taxes (or congestion pricing, I suspect) popular with the public. Instead, a more popular approach might be to tax something bad – e.g. carbon emissions or road congestion – and reinvest the revenues in something good, like renewable energy or better transport choice:

On the 2014 National Surveys on Energy and Environment, a carbon tax with no specified revenue use polled poorly. But things changed when different uses of the revenue were offered alongside the tax.

USA Today describes the results:

[A] different picture emerges when survey participants are asked about three possible uses of the tax revenue. If used to fund programs for renewable power like solar and wind, 60% back the tax overall, including 51% of Republicans, 54% of Independents and 70% of Democrats.

A smaller majority supports a tax if the revenue is returned to them via a rebate check. While 56% overall favor this idea, support ranges from 43% for Republicans to 52% for Independents and 65% for Democrats.

The third option — using the tax revenue to reduce the massive U.S. fiscal deficit — is not popular with any political group. It is opposed by the majority in each.

The same seems to hold true in the case of congestion pricing. In their excellent textbook on transport economics, Kenneth Small and Erik Verhoef cite surveys that find that people prefer toll revenues to be either reinvested in better road infrastructure or used to improve public transport.

This points to a paradox. The best way to get people to support such a scheme may in fact be to promise to put some tolls in place (albeit tolls that they can avoid by making different choices about how and when to travel) and then spend the revenues on giving them more transport choices.

Incidentally, I would stress the word choice in that sentence. There’s a reason why people want carbon tax revenue to be put towards renewable energy projects: it promises to give them options to avoid the tax altogether. In New Zealand, where 80% of electricity is generated from renewable sources, even a high carbon tax would have a small impact on households’ power bills. People in other countries would like to be in that same happy similar position.

The same is likely to be true for transport. If we implement congestion pricing, it might make sense to pair that with investments in public transport, walking, and cycling to allow more people to avoid the tolls. That will be more likely to lead to a win-win situation: People who value being able to drive on uncongested roads will get to pay a small price to do so, while everybody else will get to choose whether to pay the toll or travel differently.

What do you think about the politics of congestion pricing?

Mid-week reading: Kim-Mai Cutler, map-making, the Black Death, and knowledge as a public good

Welcome back to mid-week reading. With luck, there are only going to be a few more of these until I’m back on a more regular posting schedule.

First piece of the week is from Kim-Mai Cutler, a tech journalist from San Francisco who’s produced some invaluable reporting on their (our) housing crisis. The Bay Area is really where the forces of the age are colliding – a disruptive (and very productive) tech ecosystem butting up against a set of inflexible land use policies.

Cutler’s put together a fascinating and wide-ranging set of slides describing “the San Francisco Bay Area in the Second Gilded Age“. It’s really invaluable reading for anyone seeking to understand the issue.

cutler-housing-slide-18

Thus far, it’s been housing affordability. Poverty rates have been rising and home ownership falling throughout the Bay Area, in spite of rising incomes. Notice those figures for home ownership rates in San Francisco – only 36.6% of dwellings are owner-occupied, and the city’s politics are still in the grips of reflexive NIMBY opposition to development.

cutler-housing-slide-31

In the process, Cutler covers transport and social mobility – the reason why it’s important to build more housing in the places where people want to be. It has been possible to build quite a lot of housing in far-away places like Stockton, but that hasn’t really fixed the problem.

cutler-housing-slide-36

Here’s a more light-hearted comment on the phenomenon:

On a completely different note, Alison Ballance at Radio New Zealand has put together a really interesting piece on how maps are made: “Points, lines, and polygons – the art of making maps“. It goes into the nitty-gritty of putting together topographic maps, talking to the people at Land Information New Zealand who are responsible for the process:

Maps tell the story of our ever-changing Earth.

The length and breadth of New Zealand is charted, at a scale of 1:50,000, across 451 topographic maps produced with technical skill, art and patience by a team of map makers at Land Information New Zealand.

The map makers are witness to several stories unfolding in the country.

The most dramatic is the impact of Christchurch earthquakes. The strong black block that was the city’s CBD has been shattered into a mosaic, while the red zone is a ghostly snake of deserted roads that echo the shape of the Avon River.

Meanwhile, in the countryside humans are changing the landscape as farming evolves with market demands and new practices.

In the pre- earthquake map the central business district is a large black shaded area. In the post- earthquake there is only scattered black in the CBD and the ghostly remains of houses and roads in the red zone along the Avon River

Christchurch city before the earthquakes (left) and five years afterwards (right). Photo: Land Information New Zealand

This is a good point to drop in a reference to my favourite song named after map coordinates: Wire’s “Map Ref 41°N 93°W”. For the curious, the title refers to a field in Iowa.

On a much less cheerful note (worse than housing affordability!), I ran across this interesting map of the progress of the Black Death across Europe in the mid-1300s (via Zach Beauchamp at Vox):

The Black Death was an epidemic of bubonic plague that devastated Europe in the mid-14th century, killing an estimated 60 percent of Europe’s entire population. And it spread scarily quickly just over the course of six years — as this stunning GIF demonstrates:

vox black death map

 (Andrei Nacu)

The plague originated in China in 1334 and then spread west along trading routes through the Middle East. But Europe was particularly vulnerable to a devastating outbreak. According to University of Oslo historian Ole Benedictow, European society at the time had created the conditions for “the golden age of bacteria.” Population density and trade/travel had grown dramatically, but European leaders still had almost no knowledge about how to contain outbreaks.

The forces that allow diseases to evolve and disseminate are stronger than ever. We live in a more connected world. But the last point in the above paragraph – knowledge – is crucial to how we respond to potential pandemics… and also to more mundane causes of death.

I was thinking about this issue after reading a review of Angus Deaton’s 2013 book Great Escape, which discusses the transformative increase in living standards over the last several centuries. Deaton, who won last year’s Nobel Memorial Prize in Economics, makes a really valuable point: living standards have risen faster than incomes in many countries, as knowledge has been freely shared around the world:

Knowledge — which is to say education — is humanity’s most important engine of improvement. Deaton concludes, based on the data, that rising education is the most powerful cause of the recent longevity boom in most poor countries, even more powerful than high incomes. A typical resident of India is only as rich as a typical Briton in 1860, for example, but has a life expectancy more typical of a European in the mid-20th century. The spread of knowledge, about public health, medicine and diet, explains the difference.

Unfortunately, knowledge and facts are often on the defensive today. Fundamentalists of various stripes keep many countries from completing their own great escape. In the West, science still sometimes yields to dogma, on climate change, on evolution and on economic policy. Elites on both the right and left question the value of education for the masses and oppose attempts to improve schools even as they spend countless hours and dollars pursuing the finest possible education for their own children.

It is true that many of today’s biggest problems, including economic growth, education and climate, defy easy solutions. But the same was true, and much more so, about escaping centuries of poverty and early death. It was hard, and it involved a lot of failure along the way. The story Deaton tells — the most inspiring human story of all — should give all of us reason for optimism, so long as we are willing to listen to its moral.

I like this story. As an economist, much of what I do is basically about trying to improve allocation decisions in the context of scarcity. Do we devote road space to this use, or that one? Do we require people to do X (when there may be reasons to believe they’d prefer Y instead)? This is probably useful work, but it’s still a bit depressing to be constantly working within the context of fundamental trade-offs.

However, knowledge (and information in general) isn’t like that. If I know something, it doesn’t mean that you can’t know it. If you communicate something to me, it doesn’t mean you have to give it up in the process. Knowledge can be shared, and one person’s attempt to learn more will probably increase the stock of knowledge available to all humanity. It’s a public good. It’s a positive-sum game. It is, as Deaton points out, the best thing we’ve got going for us.

Mid-week reading: Burglaries, governance, and managing change

Mid-week reading!

One of the more thought-provoking things I read this week was Patrick Lyons’ interview (in Vice) with Geoff Manaugh, who runs the incredibly interesting website BLDGBLOG and who has just written a book on burglary. Manaugh argues that burglary is an essentially architectural crime:

A Burglar’s Guide to the City takes a look at our everyday urban environments through the eyes of the criminals aiming to hack them, illuminating the spatially-specific tactics used to break in, escape, and stay hidden in today’s surveillance-heavy metropolises. The goal, however, is not to be an actual handbook for the aspiring thief, but rather an alternative study of architecture and urban design.

Through interviews with former burglars, as well as law enforcement and security professionals, Manaugh explains how various features of cities and buildings lead to very specific types of burglaries. Los Angeles, with its sprawling highways, lends itself to quick bank robberies with easy escape routes. Chain businesses with identical layouts and employee schedules, such as McDonalds, invite repeat thieves who’ve previously robbed other locations. “If you look closely, from just the right angle,” he writes, “every city implies the crimes that will one day take place there.”

Throughout the text, Manaugh carefully organizes chapters focused on cities, buildings themselves, common burglary tools, and, finally, getaway strategies, bringing us along for the ride for an exhilarating, perspective-shifting read…

I will have to check the book out at some point. Incidentally, heist movies are always fascinated with architecture. Think about the way that Die Hard and Ocean’s Eleven dwelled on buildings, or the way that Inception constantly subverted the built form.

Another interesting take on cities – from an economic perspective rather than a criminal one – is provided by Noah Smith (in Bloomberg View), who looks at optimal government structures. It’s quite relevant for New Zealand, which sometimes seems like it has both too many and too few local governments. On the one hand, there’s an incentive to aggregate local governments to reduce coordination failures and share costs. On the other hand, there’s some value in competition between neighbouring local governments. Smith discusses the arguments for more fragmented government:

What’s the optimal size for economic performance? Are we better off with many little competing city-states, a bunch of midsized nations or just a few big super-countries overseeing hundreds of millions of people each? If bigger is better, what about a global government?

Actually, economists have thought about this a fair amount. In 1956, Charles Tiebout believed he had a solution to the problem. He reasoned that local governments knew more about their people’s needs than distant central governments, and so the best system was one where local governing units — city-states, essentially — offered different packages of taxes and public services. People would vote with their feet, going to the place that suited them the most…

Some people also claim that political fragmentation has been beneficial in the past. Anthropologist Jared Diamond, in his book “Guns, Germs, and Steel,” suggested that competition between small countries allowed Europe to get a head start on unified China in the Industrial Revolution. Economists Brad DeLong and Andrei Shleifer argued in 1993 that city-states helped Europe develop (though more recent evidence seems to counter this). Casual evidence would also suggest that Taiwan’s de facto independence from China helped provide the mainland with a capitalist model to revive its moribund economy in the 1980s and 1990s.

… and the arguments against:

But there are arguments on the other side, too. The mathematician and economist Truman Bewley examined the Tiebout idea in the 1980s, and found that a patchwork of little city-states doesn’t always lead to a well-functioning system.

There are several reasons why Tiebout’s idea can fail. One is that many of the services governments provide are what economists call public goods. These are things that the private sector either can’t or won’t provide. The classic examples are national defense, police, courts and support for basic research. But many other things, like roads, electrical grids and ports, are usually in short supply when left to the private sector…

A second issue is that governments don’t always have the right incentives. Some governments may decide to maximize the size of their tax bases. Others might care only about the welfare of their citizens, while others might be beholden to special interests — I imagine an independent San Francisco would be ruled by local landlords even more than it already is. There’s no perfect type of local government, and so we’ll have a wide variety of them. Bewley showed that this problem also prevents Tiebout’s patchwork from being an economically efficient utopia.

Finally, something from a month back. Public health researcher Alistair Woodward wrote a really invaluable article about Wellington’s Island Bay cycleway, which has aroused ferocious ire from some residents (via BikeAKL). It’s definitely worth reading in full, but here’s some highlights.

Woodward points out that the Island Bay arguments are nothing new:

But what is most remarkable about this story for me is its familiarity. What is happening in Island Bay has taken place in other cities. The arguments fit, almost word for word, with those made elsewhere.

Check out what was written about bike lanes on Lake Road, on the North Shore of Auckland, for example. Overseas, New York City has made many changes to its streets but attempts to re-allocate space from cars to other road users have been fiercely resisted, on much the same grounds as in Island Bay. Jason Henderson has written an excellent book on the politics of mobility in San Francisco, in which the chapter on bicycle space in the city applies closely to the situation in Wellington. In London the push to grow cycling by re-building roads has had many successes, but there has been opposition. See, for example, the arguments made against Dutch style separated lanes in Enfield.

The reason the Island Bay story is essentially a re-run of older controversies is this: there is a deep, underlying and terribly important issue here, and it has nothing to do with Island Bay (or any other specific location).

The issue is how we, as a society, negotiate access to resources that are shared and limited. Roads are part of the public commons – they belong to everyone and they belong to no-one in particular. Everybody benefits from access, but concessions must be made because the resource is finite. Who concedes, and by how much, are matters that are vital to everyone’s welfare and must be agreed upon collectively.

He goes on to make a few useful suggestions about how we can better manage change in the commons:

There must be a local solution, requiring hard work by Council and communities, stamina, good faith, political savvy and technical intelligence. But let’s not lose sight of the big picture, which is about how we, collectively, manage change. James Longhurst again: ‘the vehemence of the recurring battles since the bicycle’s arrival demonstrates that even the smallest alteration of perceptions, policy or physical construction may be perceived by competing forces as a new front in a war over a scarce resource.’

I argue that it is important to take a ‘responsiveness to change’ perspective because the present New Zealand transport system is, in many respects, stiff, constrained, and not well equipped to manage challenges to the status quo.

Here are three suggestions that are unlikely to resolve the Island Bay cycleway, but might contribute to sorting out future conflicts over what it really means to ‘share the road’.

  1. It would be a great help if governments signed up to a strategic vision and powerful targets for cycling and walking. There is nothing in New Zealand to match, just as an example, San Francisco’s vision of a 30/30/40 mode split by 2035 (30% motor vehicles, 30% transit, 40% walking and cycling). Many of those working in transport acknowledge the need for high-level goals to drive network change. Without this force from above, planning and operations fall back into incremental mode, and one of the consequences is that consultation tends to occur at the micro-scale. Change becomes very ‘sticky’ and difficult to progress.

  2. We must overcome a systemic tendency towards conservatism in design. Arising perhaps from concerns over institutional and political risk, and focusing on mind-numbingly fine print, putting a brake on innovation and experimentation is dangerous because it increases the chance of system failure. It is difficult in New Zealand at present, for example, to apply New York-style soft interventions (such as the first, temporary barriers in Times Square) that are easy to install, can be assessed rapidly, and if need be, taken down rapidly. In this environment the best minds in the world may struggle to get the best value from existing infrastructure, scope new challenges, test unfamiliar solutions, and respond quickly.

  3. Finally, I argue for a greater investment in evaluation. Compared with the intense scrutiny that applies at the front end of planning (business cases, benefit cost ratios, trying to find the best way of navigating blizzards of consents), remarkably little effort goes into learning after the event. In terms of cycling infrastructure and safety for example, there is generally no follow-up until police crash statistics reveal a problem – although it is well-known these data are insensitive, partial and slow to come to hand. Lack of follow-up also misses successes, which is important because re-allocation of road space may be a very good thing, benefiting residents, car drivers, walkers and cyclists, and local businesses.

Great suggestions from Woodward. How do you think we can improve the way we manage change?

The contribution of agglomeration to economic growth in Auckland

We’ve written quite a bit about agglomeration economies, as they’re one of the most important forces shaping urban life. Agglomeration economies refer to the benefits of proximity for economic and social interaction – when you’re around more people, it’s easier to meet the right person (for business or relationships!), easier to share knowledge, and easier to do things in general.

One “stylised fact” from the economic literature is that cities that are larger and better connected – i.e. denser and/or easier to get around – tend to be more productive. When it comes to economic performance, size matters. This benefits firms and workers, of course, but it is also good for consumers. For example, if you want to see a lot of rugby tests, you’re better off locating in Auckland than in Taupo, because test matches tend to go to where the people are. And if you want more restaurants and groceries, live in a denser neighbourhood.

However, economists have focused on agglomeration economies in production as they’re often easier to measure. For example, a few years ago the New Zealand economist David Maré estimated an “Auckland productivity premium” of around 50%. That means that firms located in Auckland are around 50% more productive than similar firms located in other regions. The premium was even higher for Auckland’s city centre.

In subsequent work, Maré and a collaborator, Daniel Graham, estimated that New Zealand had an “agglomeration elasticity” of around 0.065 (averaged across all industries). What this means is that places that are 10% denser tend to be around 0.65% more productive, all else equal.

But what does this mean in practice? How much does agglomeration contribute to the New Zealand economy? Is it a big deal, or not that important in the grand scheme of things?

To get a rough idea, I calculated changes in the “effective density” of jobs in Auckland over the period 2000-2015, taking into account the location of jobs within Auckland (from Stats NZ’s Business Demographics data) and the distance between job locations (calculated using GIS tools). I followed Maré and Graham’s formula for job density as a function of weighted distance to jobs in nearby areas – for the precise formula see equation 2 on page 12 of their paper.

Here’s a map showing how effective density of jobs changed over the whole period. Darker blues indicate higher percentage increases.

Almost everywhere in the Auckland urbanised area became more accessible to employment over this period – the rising tide of urban development lifted all boats. On average across the region, effective density rose by 29%. However, increases were faster around Albany and the upper North Shore, which saw rapid development, and slower in the western isthmus and west Auckland.

Auckland effective density 2000-2015

So things have changed quite a lot. The following chart shows that these changes happened incrementally over time. It shows the effective density of employment for the average job in Auckland. In 2000, the average job was proximate to around 71,000 other jobs. In 2015, that had risen to slightly less than 92,000 jobs.

Auckland effective density 2000-2015 chart

So job density has gone up quite a lot over the last 16 years as a result of Auckland’s growth. What effect has this had on productivity?

As a point of comparison, I estimated changes in GDP per employee over the same period. (I used Stats NZ’s employment data, regional GDP statistics, and GDP price deflators for the whole country. This isn’t a perfect estimate, as I’ve excluded self-employed people and haven’t corrected for part-time employment, but it’s not miles off.) Here’s what that looks like. Over the entire period, GDP per employee has risen by approximately 14.4%. The city’s economy currently produces around $88.3 billion in output.

Auckland real GDP per employee 2000-2015 chart

By comparison, Maré and Graham’s agglomeration elasticity of 0.065 implies that a 29% increase in job density is associated with a 1.7% increase in productivity (calculated using an arc elasticity formula: (92,000/71,000)^0.065-1). The true figure may be higher, as Auckland is specialised in industries that benefit more strongly from agglomeration economies.

In short:

  • Roughly 11-12% of the total productivity growth in Auckland over the last 16 years is due to increased agglomeration economies
  • In the absence of increased agglomeration economies from scale and density, Auckland’s economy would be around $1.4 billion smaller.

A wide range of other factors – increased skills, investment in capital goods, improved business practices, and changes to the composition of Auckland’s economy – also make important contributions to productivity growth. However, the contribution of agglomeration is significant – both in dollar terms and as a share of the city’s overall productivity growth. In the long term, those tenths of a percent add up to quite a lot. If we want a wealthier New Zealand, we need better, more productive cities.

Policymakers can do a lot to enhance – or undermine – agglomeration economies. For example:

What do you think about agglomeration economies in Auckland?

The “consumer city” and urban growth in Christchurch

This article was originally posted on Making Christchurch, a group blog set up by Barnaby Bennett in the wake of the 2011 Canterbury Earthquake, at the invitation of Transportblog commenter Brendon Harre.

Why do cities grow and change? And how can cities harness those dynamics?

Last month, I took a look at agglomeration economies, which describe the productivity and innovation gains arising from urban scale and density. The advantages that cities offer for production have underpinned urban success throughout history.

Economic productivity is important. To paraphrase Paul Krugman, in the long run, productivity growth underpins our ability to consume more of everything from electronics to healthcare, and to have more of the non-economic things that make life enjoyable. All else being equal, people tend to move towards more productive places in search of higher living standards. But economic productivity isn’t the only thing that matters for wellbeing — or for growth and change in cities.

Urban economics tackles urban amenities

For a long time, people assumed that cities offer advantages for production but disadvantages for consumption. This assumption, which shaped a lot of economic analysis and policymaking, was understandable. After all, modern cities first arose as manufacturing centres at a time when manufacturing was a dirty business. People could get jobs in the city’s “dark Satanic Mills”, but they had to suffer bad air, choleric water, and high crime rates to do so.

But things appear to have changed over the last half century, at least in developed countries. The bad aspects of cities, such as crime and pollution, have improved, and the good parts have also gotten better. Cities have become attractive for consumers as well as producers.

A pioneering 2000 paper by Ed Glaeser, Jed Kolko and Albert Saiz explored these dynamics. They argued that the availability of “four critical urban amenities” would shape future urban growth:

  • The availability of a rich variety of consumer goods and services —  which, in the era of Amazon.com and the iTunes store, means “non-tradables” like restaurants, live bands, bars, and dating opportunities
  • Aesthetics and natural settings — in other words, the quality of the city’s architecture, public parks, natural environment, and climate
  • Good public services such as schools and low crime rates
  • The quality and speed of transport systems — cities that make more destinations accessible are more likely to be attractive to residents.

In their view, the rise of the “consumer city” opens up other pathways for urban growth. If cities want to attract new residents and businesses, they don’t have to focus only on providing “producer amenities” like convention centres. Supplying great “consumer amenities” can also foster ongoing vibrancy and growth.

Here, I want to look at the prospects for New Zealand cities, and Christchurch in particular, to become successful “consumer cities”. I’m going to focus on the first two dimensions — variety in goods and services and aesthetics and natural settings — and leave a discussion of transport for a future post. (Public services are a bit less relevant to urban growth in New Zealand, as education and law enforcement are run by central government.)

Goods and services

New Zealand cities are coming around to the importance of consumption. It hasn’t always been thus. In the middle of the 20th century, when my parents were growing up in Auckland, the country was firmly in the grips of what historian James Belich called the “tight society”:

homogenous, conformist, masculist, egalitarian and monocultural, subject to heavy formal and informal regulation. There were no licensed restaurants, little weekend shopping, one supermarket (opened in Auckland in 1958) and a very limited range of goods and foods to buy in the shops and unlicensed restaurants that did exist… School milk was free, but you had to drink it.

A lot has changed since then, economically and demographically. While the wholesale deregulation of the 1980s was not an unmixed blessing, it certainly expanded the consumption choices available to New Zealanders. A more liberal migration policy brought new migrants with, thank goodness, new cuisines. And since the advent of mass-market international air travel, Kiwis returning from OEs have come back with new ideas for things to do in cities — from rock bands to restaurants to cycle lanes.

The result is a favourable climate for the adoption, invention, and proliferation of a variety of goods and services in cities — especially when it comes to bars, restaurants, and entertainment.

Christchurch has been instrumental in shaping a key part of the hospitality market: beer. When I started to be able to afford to drink nice beer in bars, the best thing on tap was often from craft breweries in Christchurch like Harrington’s and Three Boys. Their success has fostered competition: craft brewing has since taken off in Wellington and, more recently, Auckland.

In short, New Zealand cities have potential, but they may have to do a few things differently in order to fully realise it.

The first is simple: get some of the barriers out of the way. For example, minimum parking requirements can be a major impediment to opening new restaurants and bars, or converting old warehouse space to retail. They often require restaurants to devote more space to parking than to dining areas, which can be the kiss of death for hole-in-the-wall eateries.

The second is to understand — and take advantage of — positive feedback loops between population density and consumer amenities. Neighbourhoods with more people support a greater variety of consumption choices. While density isn’t for everyone, cities need some medium-to-high density, mixed use neighbourhoods to supply a rich variety of urban goods and services.

In medium-sized cities, city centres have traditionally filled that role. As the following population density maps (darker blue = higher density) show, that’s an area where Christchurch lagged behind Auckland and Wellington even before the earthquakes. The destruction caused by the 2011 Canterbury Earthquakes has created an opportunity for revitalisation on different lines — but government bungles seem to have delayed the process. It’s important that it get back on track.

Aesthetics and natural settings

Christchurch, like many other New Zealand cities, has some intrinsic aesthetic advantages as a result of the natural landscape. Here’s the view west across the city:

 

Photographer: P. Stalder

New Zealand’s environment has always drawn migrants, who often come for the landscape and live in the cities. Take, for example, novelist Eleanor Catton’s description of what drew her family to Christchurch:

I grew up on the South Island of New Zealand, in a city chosen and beloved by my parents for its proximity to the mountains — Christchurch is two hours distant from the worn saddle of Arthur’s Pass, the mountain village that was and is my father’s spiritual touchstone, his chapel and cathedral in the wild. For many years while I was growing up my parents did not own a car. We rode around town on two tandem bicycles and one single (a source of considerable embarrassment to me at the time) and at weekends we would occasionally rent a car in order to drive into the alps, and go hiking.

However, urban aesthetics also matter — even if you go tramping on the weekend, you still spend your weekdays in the city. This is an area where Christchurch has some strengths and some challenges.

From the start, Christchurch had a reputation as a “garden city” as a result of its large public parks and street trees. Although the idea of parks as a city’s “lungs” is less salient today than in Industrial Revolution cities, parks and street trees are still public amenities. They make people better off simply by existing in the vicinity.

The earthquakes seem to have opened up some opportunities to enhance the garden city — particularly along the Avon River, where many houses have been red-zoned. In addition to the central government-promoted Avon River Precinct, some community groups are calling for a forest park out to New Brighton. Others have simply gotten on with creating something new.

The built environment, however, is more problematic. Central government oversaw the demolition of over 1200 buildings in the city centre in the years following the earthquakes, including many of the city’s historic buildings.

Source: Wikipedia

This has been controversial and at times acrimonious. As I am neither an architect nor a Cantabrian, I’m not in a good position to weigh in on the debate. But as an economist from Auckland I’d observe that heritage buildings have a definite public value  — not one that trumps all other costs, but one that should be accounted for in decision-making. At the very least, it would be smart to replace any demolished buildings with more attractive and usable ones.

Prospects for population growth in Christchurch

Thus far, I’ve considered — in a thematic way — some of Christchurch’s challenges and opportunities as a “consumer city”. But what would success look like?

Let’s take a look at a few data points. First, here’s a chart showing Statistics NZ’s latest (2015) regional population projections. The Canterbury region, which includes Christchurch and its satellite towns, is projected to grow faster than all regions other than Auckland over the next three decades.

In other words, Stats NZ expects Christchurch to be relatively successful at attracting and retaining people. But look at the range on their estimates: the city could grow faster than Auckland, or it could hardly grow at all.

Without digging into Stats NZ’s forecasting methodology, it’s difficult to say why they’ve picked such a wide range. But perhaps it reflects uncertainty about the future attractiveness of Christchurch as a consumer city. Wages in Christchurch tend to be lower than in Auckland and Wellington, meaning that urban amenities potentially have a stronger role to play in fostering urban growth.

A second data point. A few months ago, I took a look at the sources of Auckland’s population growth. I found that natural increase accounted for the majority of growth but that net migration — more people arriving than departing — fluctuated wildly from year to year. Here’s what the picture looks like for Canterbury:

Source: Stats NZ Infoshare

Net migration to Canterbury has followed a very similar trend as net migration to Auckland — the peaks and the troughs coincide remarkably well. However, the troughs are just a little bit deeper in Christchurch, as substantial numbers flow out of the region in a bad year. In Auckland, by contrast, net migration seldom turns negative.

Net migration will always be a bit of a rollercoaster in New Zealand — it’s followed a boom-and-bust cycle for a very long time. But it’s possible — with the right combination of a resilient economy and good consumer amenities — to reduce the depths of the troughs and raise the height of the peaks. It might not be an inspiring mission statement for a city, but perhaps it’s the right one for Christchurch.

A brief explanation of what just happened with the Unitary Plan

Over the past week Transportblog has published several posts on the brouhaha (or is that kerfuffle?) about Auckland Council’s position on Unitary Plan rezoning.

However, we haven’t really taken a higher-altitude view on the issue. So here’s a quick summary.

The underlying issue is that Auckland’s home prices are really, really high, and rising rapidly. Rents are also rising faster than incomes. That’s great news for people who already own homes, but terrible for everyone who doesn’t.

The housing affordability crisis is particularly bad for young people and low-income households, who may be renting or trying to save up to buy a home. These people directly bear the costs of rising prices.

Home prices are high and rising because Auckland isn’t building enough homes. If there isn’t enough housing to meet demand, prices must rise until some people give up and go away. This may mean living in overcrowded flats, living in unheated garages, staying in abusive relationships to stay housed, or simply packing up and leaving Auckland.

Residential zoning rules determine how many homes can be built in the city. The Unitary Plan originally proposed by Auckland Council applies low-density residential zoning to much of the city, including many of the areas of highest demand. This means that few new homes can be built in Auckland.

On Wednesday, Auckland Council voted against considering changes to zoning to enable more homes to be built in areas that are accessible to jobs, education, and transport.

The most likely outcome of this is that Auckland will continue to build too few homes and prices will continue rising. The social ills caused by that dynamic – poverty and unhealthy housing, crimped opportunities for young people, unsustainable levels of car-dependent sprawl, and high rates of outward migration among the young – will also continue.

Book review: William Fischel, Zoning Rules! (1 of 2)

Over the holidays, I read William Fischel’s new (2015) book on urban planning, Zoning Rules! The Economics of Land Use Regulation. It’s an important, interesting, and – fortunately for me – readable book on the topic. Fischel draws upon three or four decades of research on the topic, as well as his experience as a member of his local zoning board in New Hampshire.

Zoning, or urban planning more generally, exerts a strong influence on the shape of cities. It influences where people live and work, as well as the housing choices and prices that they face. It is a dull-sounding topic with important ramifications – very similar to transport policy in that regard. And, like transport, it arouses a surprising level of passion.

Fischel Zoning Rules cover

In the book, Fischel addresses two main topics:

  • First, how did zoning / urban planning arise and proliferate? A century ago, cities did not have comprehensive zoning codes that defined how intensely people can develop land and what types of activities can happen in different places. Now, virtually every city has zoning / planning regulations. What changed?
  • Second, under what conditions is zoning economically efficient? Many commentators and researchers have critiqued the cost of planning rules, but there are also benefits – and complex interactions with other policies such as local government property taxation. What ties all this together?

In the first part of this review, I’ll discuss Fischel’s (convincing and well researched) answer to the first question.

Let’s start with a common story about why bad planning regulations exist. Here’s Finance Minister Bill English fingering some suspects in his recent speech on the topic:

Your prospects of being able to buy a house are directly related to the decisions made by planning officials about the availability of land, the environmental standards they apply to building, and the way infrastructure is allocated.

It’s very difficult to understand how planners do that, even though the consequences for the community and the economy are significant.

Central government has had the opportunity to sit alongside councils to understand how they make their decisions.

Some of those decisions appear quite arbitrary.

They can be driven by the tastes of individuals who have the power to make decisions.

English argues that planning rules are imposed in top-down fashion by council planning staff. In this narrative, planning rules exist because local governments have chosen to supply them to us in preference to other models.

Fischel argues that this story is backwards: urban planning rules have generally not come about due to top-down bureaucratic decision-making, but as a result of bottom-up democratic pressure. Politically active home-owners, or “homevoters”, advocate for tighter planning restrictions. Because the majority of the average homeowner’s wealth is tied up in their home, they have a strong incentive to vote to prevent developments that might put the value of their home at risk. In planning, ideas are secondary to self-interest:

Public officials respond to the interests of their constituents, and public ideologies such as city beautification, hearth-and-home, and environmentalism come to the fore when they serve the interests of property owners. [Zoning Rules!, p 215]

There is a significant amount of empirical support for the “homevoter hypothesis”. Saiz (2010) found that US cities with more severe geographic constraints also have more restrictive planning rules – suggesting that people who own expensive property are more likely to vote to limit development. (I recently reviewed Saiz’s paper.) At an international level, Germany and Switzerland have the lowest home ownership rates in the OECD and also some of the most affordable housing. At a hyper-local level, case studies of the great down-zoning of Los Angeles reveal the key role played by a relatively small number of vocal homeowner activists.

But timing also matters, as zoning is a relatively new phenomenon. Fischel identifies two critical periods in the development of urban planning. First, zoning was invented and subsequently spread quickly through America in the 1920s. Second, in the 1970s, zoning was tightened significantly, with increasing restrictions on both density and suburban expansion. Here was the result in Los Angeles:

FrameWORK_Housing_ZoningCapacity

The great down-zoning of Los Angeles (Source: Morrow, 2013)

Synchronised changes of this nature require synchronised causes. Fischel argues that zoning first arose as a result of a transport revolution in the 1910s and 20s:

As trucks, buses, and cars replaced rail-bound modes of transportation, suburban residential districts could no longer rely on nuisance law, informal pressures, control of rail routes, and piecemeal covenants to protect their residential investments from incompatible use. Zoning was a response to potential insults to their homes from near-nuisances transported to their neighborhoods by footloose trucks and buses. [Zoning Rules!, p 216]

The urban planning clampdown of the 1970s occurred as a result of a more complex mix of factors. The backdrop to these changes was the subsidised expansion of home ownership after World War II: governments handed out subsidised mortgages like candy, thus expanding the number of homevoters. Fischel identifies six main factors that increased homeowners’ demand for tighter zoning controls, and made it easier for them to get what they wanted:

…the three demand factors that led to the 1970s growth control movement were (a) the growing suburbanization of employment (as opposed to just residences) resulting from the construction of the interstate highway system and the spread of containerized shipping; (b) the expansion of equalitarian legal principles that derived from the civil rights movement of the 1960s; and (c) the sudden growth of housing values in the portfolio of homeowners [resulting from high 1970s inflation]. The three elements that facilitated the supply of exclusion were (a) the expansion of legal standing to opponents of development; (b) the federalization of the environmental movement that dawned on the national scene in 1970; and (c) state legislation that established multilayered review of many projects that were formerly regarded as entirely local. [Zoning Rules!, p. 217]

The details of the story are different in New Zealand than in the US. Our history with zoning as a means of racial exclusion is nowhere near as shameful as America’s. And planning legislation has followed a different (and, I hope, more efficient) course than in the US. But many of the key elements are likely to be similar. New Zealand cities have experienced the same revolutions in urban transport and suburbanised population and employment to a similar extent. And, of course, we also have a class of stroppy “homevoters” who will advocate for tighter planning regulations to maintain or increase their property values.

If you think that urban planning rules should be changed, it’s essential to understand the bottom-up drivers of those rules. Many critics of zoning are oblivious to the popularity of zoning among a vocal segment of home-owners. As City Observatory’s Daniel Hertz recently wrote:

anyone who thinks there is a “consensus” about the damage caused by too-strict zoning ought to attend the next community development meeting in their neighborhood.

Fischel’s excellent history of zoning is a useful reminder that urban planning policies generally arise as a result of pressure from homeowners, not as a result of a conspiracy of planners. Consequently, the path to reform or liberalisation of planning rules is a difficult one for local government politicians to walk. If they vote for significant loosening of planning rules, they increase their risk of losing the next election. And successful challengers may simply turn around and tighten the rules back up again.

Fischel’s awareness of that dynamic flavours his policy recommendations. Zoning Rules! closes with no proposals for sweeping change. Instead, it proposes various ideas for how a challenging “bottom-up” dynamic could be incrementally improved. At the top of the list is an important long-term play: reduce the demand for strict planning rules by cutting back tax subsidies for home ownership, like New Zealand’s lack of a comprehensive capital gains tax.

Next week: Fischel’s analysis of the economic efficiency of zoning.

Building a better city: Policies and perspectives (part 2 of 2)

This is the second and final post discussing some broad ideas for building a better city. The first post discussed the dynamic nature of cities and argued that a focus on appropriate pricing and incentive mechanisms was important to managing urban ills without stifling beneficial change. This part discusses how we might identify policy areas in need of improvement, and why we should care about efficient policy.

2. Cost benefit analysis is important for identifying opportunities to improve policies

Over the last 170 years, New Zealand cities have been shaped by a wide range of policies, ranging from planning regulations to public investments to government land-holdings to tax and subsidy policies. Many of those policies serve (or served) a useful purpose, and most are good intentioned. But it’s almost inconceivable that all of them are efficient. Cities are dynamic places, and policies put in place in past decades can easily become outmoded and begin to distort prices and limit people’s choices.

Fortunately, as I have tried to suggest in the previous post, we’ve got more policy alternatives than we think. We don’t have to use yesteryear’s solutions to solve next year’s problems. But how do we know what we might have to change?

In my view, cost benefit analysis, or CBA, has an important role to play in identifying which policies are good and which need to change. If you want to learn more about CBA, you can delve into the technical guidelines published by organisations like the Treasury and the NZ Transport Agency. But CBA is not really as complicated as the tedious official guidance makes it sounds. It boils down to a rather simple question:

“This policy has some benefits and some costs. Do we expect the benefits to exceed the costs?”

If the answer is no, perhaps we should do something different instead.

Cost benefit analysis can be applied to a wide range of policy questions. It’s commonly applied to evaluate public investment options – that’s what NZTA uses it for – and less widely used elsewhere. But the principles can readily be extended to a wide range of urban policies. In a paper I wrote for this year’s NZAE conference, I looked at a couple of approaches to evaluating the costs and benefits of planning regulations. I found that analysis of property sales could be used to identify cases where planning rules distorted prices and prevented people from making useful investments – as well as cases where planning rules could provide benefits by managing localised externalities.

Here are a few good examples of how CBA can help in making better decisions.

Back in 2009, the new National-led Government worked with the Green Party to design and implement an insulation and clean heating subsidy programme. In the first four years of the programme, roughly 180,000 homes were insulated and heat pumps were installed in around 60,000 homes. A cost benefit analysis undertaken in 2011 (Grimes et al, 2011) found that the project’s benefits exceeded the costs by a factor of five:

The overall results suggest that the programme as a whole has had sizeable net benefits, with our central estimate of programme benefits being almost five times resource costs attributable to the programme. The central estimate of gross benefits for the programme is $1.28 billion compared with resource costs of $0.33 billion, a net benefit of $0.95 billion.

This finding provided a strong rationale to extend the programme to 2016 and trial a rental warrant of fitness programme to improve home weathertightness and safety performance in selected NZ cities.

A second good example is the Ministry of Transport’s recent analysis of the economic performance of state highway investment. I reviewed their analysis in a series of posts last year (parts 1, 2, 3, 4). Among other things, they found that the economic efficiency of road spending had fallen since 2008, with projects with low benefit-cost ratios being selected over projects with higher BCRs.

MoT state highway BCRs 2005-2012

This is a valuable finding that should be taken seriously by policymakers and the public. It suggests that there may be opportunities to significantly improve the value that we are getting out of transport investment. That being said, it also suggests that policymakers have chosen to take a more optimistic view about project benefits than indicated by conventional CBA procedures. Sometimes this is warranted – it’s difficult to accurately account for some benefits – and sometimes it’s not.

This reminds me of a third example. I was struck by recent comments by Wellington’s Deputy Mayor about the city’s new publicly funded convention centre and film museum:

Deputy Mayor Justin Lester said the museum would become New Zealand’s most significant man-made attraction and an international draw card.

“It’s a little bit when Disneyland first opened in California, but in a Wellington context… In the 150th year since Wellington became New Zealand’s capital, there are only a handful of moments that rival the significance of this announcement.”

I haven’t read the business case, so I don’t know what assumptions were made to sell the project. But if the financial and economic forecasts require Wellington to become the “Disneyland of the south”, I would be very nervous.

This leads on to a very important consideration when using CBA results: To get the real story, it’s important to dive into the data and calculations that sit behind the headline figures. In some cases, people make claims about projects that are not backed up by their analysis. For example, they may require unlikely things to happen in order for the hypothesised benefits to materialise. In these cases, a properly-done CBA should also provide you with a means of understanding the risks inherent with the policy.

3. In an efficient city, there is time and space left over to lead a good life

But why is efficiency important? At the start of this post, I argued that good urban policies facilitate agglomeration economies in both production and consumption. This, in turn, enables cities to succeed in attracting new businesses and new residents. (The alternative of urban stagnation or economic decline is not really very appealing.)

Or, as Stu argued in a post last year, efficient urban policies provide us with an abundance of good things. Efficient urban planning policies allow us to have abundant, affordably priced housing, without sacrificing public goods. Efficient transport policies enable us to have abundant access. Good management of public assets allows us to combine a productive economy with a good supply of public goods.

Furthermore, generally prioritising efficiency in our urban policies means that we will have more resources left over for all the non-economic things that make life beautiful and enjoyable. For example, allowing people to use land efficiently by building more housing in areas that are accessible to jobs and amenities will also allow them to avoid commuting long distances to sprawlsville. This in turn frees up time to spend with the ultimate in non-economic investments – children and families.

Last December, I saw how things could be a little different. It was the first day that LightPath / Te Ara I Whiti cycleway was open. (Incidentally, I think it should be called PinkPath.) I skipped the mass ride organized by Bike Auckland in favour of a drink elsewhere, but checked out the new cycleway on the bike ride home.

Now, I wasn’t extraordinarily enthusiastic about the project. It seemed to be too far over to the west edge of town and so I wasn’t sure how many people would want to use it. But it has surprised me. I’ve been up and down it eight or ten times since then, and there are always people out on it, even at 10pm. They are having fun cycling – a relatively new concept for Auckland.

LightPath - Vaughn Davis

PinkPath was designed to be fun to cycle on and fun to see from a distance. It sends a message: “Auckland will give you new choices about how to travel. Rock up on your bike.” It didn’t cost much – less than 1% of Auckland’s annual transport budget and a disused motorway off-ramp. But that money and space can easily be consumed by inefficiency elsewhere in the system.

Which leads me to my conclusion: the good things in life are not necessarily expensive, but they can easily be crowded out by bad urban policies. So get the prices right, do some CBA, and live a better life in a better city.