Exports, prosperity, and cities

What does New Zealand do to pay its way, in the global context? And what could it do differently?

These are an important questions because New Zealand is a small, trade-exposed country. We produce some of the things that we need locally, but many other things must be imported, which means that we need to export something in return. For instance, I’m writing this post in a flat built from bricks that were (probably) fired in New Lynn and timber that was sawn locally, sitting on a chair that was made in Auckland. But the computer I’m writing it on was assembled in China using parts and patents from all over the world.

I’ve previously taken a look at what Auckland exports, both internationally and to the rest of New Zealand. This time, I want to look at the picture for NZ as a whole, and see how we compare with a number of similar countries using data from the World Bank’s excellent World Development Indicators dataset.

The following table summarises some economic and population data on New Zealand and nine other small OECD countries. New Zealand is one of the smallest (4.6 million people, equal to Ireland), with the second-lowest GDP per capita ($37,800 USD, just ahead of Israel). In terms of urban development, we have a mid-pack urbanisation rate (86% of us live in towns or cities) and quite a lot of land per person (second only to Australia and Norway, which have much more hostile climates).

Country 2015 population 2015 GDP per capita (current US$) 2014 exports as a percent of GDP 2015 urbanisation rate 2015 and per capita (ha/person)
Australia 23.8m $56,311 20% 89% 32.3
Denmark 5.7m $51,989 53% 88% 0.7
Finland 5.5m $42,311 38% 84% 5.5
Ireland 4.6m $61,134 100% 63% 1.5
Israel 8.4m $35,728 34% 92% 0.3
Netherlands 16.9m $44,300 94% 90% 0.2
New Zealand 4.6m $37,808 28% 86% 5.7
Norway 5.2m $74,400 39% 80% 7.0
Sweden 9.8m $50,580 42% 86% 4.2
Switzerland 8.3m $80,945 61% 74% 0.5

As this data shows, New Zealand also exports a comparatively low share of its GDP – only 28% in 2014, second only to Australia (20%). Other small OECD countries tend to export a considerably higher share of their GDP, indicating that they are more engaged with global trade patterns and potentially more successful in carving out economic niches for themselves.

The composition of exports can teach us something about how countries’ economies work. I’ve broken down exports into nine broad categories – five types of goods exports, and four types of services exports – to understand what these ten countries trade. That’s shown in the following chart.

We can immediately see that New Zealand doesn’t export much, on a per capita basis – around US$12,000 per person. (I’m ahead of my quota for the year!) Interestingly, we’re on par with Australia, which has a considerably higher GDP per capita.

As you can (hopefully) see, New Zealand’s exports are very heavily weighted towards food – almost half of our exports fall into this category, reflecting our specialisation in agriculture. But we’re not the biggest food exporter. The Netherlands actually exports more food per capita than New Zealand, in spite of the fact that it’s much more densely developed, with an average of 0.2 hectares of land per person compared with 5.7 hectares per person in New Zealand.

Clearly, density is not destiny: an increasing population doesn’t have to crowd out agricultural exports, provided that farmers and food processors are willing to specialise in higher-value products rather than just extruding tonnes of cheap commodity cheddar, and cities are allowed to go up in order to minimise demands to develop farmland.

However, the big difference between New Zealand and most other small OECD countries isn’t agricultural exports: it’s manufacturing and knowledge-intensive service exports. Notice the size of manufacturing exports (the blue bars) and computer, information, and communications services (the dark grey bars) in many of the other countries. Denmark, Finland, Ireland, Israel, the Netherlands, Sweden, and Switzerland all outperform us by a large margin in both areas.

What this data shows is that if we want to raise our standards of living, we will have to do different things than we’ve done in the past. We can undoubtedly get more value out of our agricultural exports – but, as the example of the Netherlands shows, the best way to do that is to invest in higher-value products, rather than increasing the dairy herd at great cost to water quality.

Ultimately, a transformative increase in New Zealand’s exports will require us to develop new products and services. For that, we need well-functioning cities. Manufacturing and knowledge-intensive services tend to be exported from cities, rather than rural areas. Increasingly, both industries benefit from agglomeration economies, such as the increased ease of sharing and generating knowledge in cities. They don’t necessarily occupy much land, but they do depend upon having a critical mass of skilled people and the right international connections.

What do you think of New Zealand’s export performance?

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?

Is Auckland too big?

[This was originally posted in unfinished form this morning. It has since been rewritten.]

Is Auckland too big? Some people are asking that question.

For instance, in a Twitter exchange a while back Radio New Zealand producer Tim Watkin stated:

Others disagreed, observing that we didn’t have any obvious way to make Auckland smaller, meaning that people must have good reasons for wanting to be here:

As it turns out, Auckland (1.6 million people) isn’t the only city where people are debating this question. The San Francisco Bay Area (7.6 million people) has the same challenges, as Kim-Mai Cutler has ably documented. So does Boulder, Colorado (300,000 people). Actual population size is not, it seems correlated with complaints about cities being “too big”.

BOULDER, Colo. — The small city of Boulder, home to the University of Colorado’s flagship campus, has a booming local economy and a pleasantly compact downtown with mountain views. Not surprisingly, a lot of people want to move here.

Something else is also not surprising: Many of the people who already live in Boulder would prefer that the newcomers settle somewhere else.

“The quality of the experience of being in Boulder, part of it has to do with being able to go to this meadow and it isn’t just littered with human beings,” said Steve Pomerance, a former city councilman who moved here from Connecticut in the 1960s.

All of Boulder’s charms are under threat, Mr. Pomerance said as he concluded an hourlong tour. Rush-hour traffic has become horrendous. Quaint, two-story storefronts are being dwarfed by glass and steel. Cars park along the road to the meadow.

These days, you can find a Steve Pomerance in cities across the country — people who moved somewhere before it exploded and now worry that growth is killing the place they love.

Economically, this is looking like an interesting question. Under what conditions can a city be “too big”, and are those conditions likely to hold true in practice?

There are some economic models setting out why and how cities might grow to be larger than their optimal size. (The same models also predict that cities can be smaller than optimal, but I will ignore this case for the moment.) Economist David Albouy and three co-authors investigate the theory of the issue in a November 2016 paper entitled “The optimal distribution of population across cities“.

Albouy et al develop a model of city size that includes two offsetting externalities associated with city size. On the positive side, agglomeration economies, or the economic and social benefits of scale and density. On the negative side, congestion and crowding, which are assumed to increase nonlinearly with city size. Putting it together, they get a picture that looks something like this:

This probably doesn’t make a lot of sense unless you’ve read the paper and sifted through the equations. But it’s pretty simple. If you’re seeking to maximise the net social benefits created by the city, you want it to be size ni (on the X axis). That’s the point at which the marginal costs imposed by the next city resident exceed the marginal benefits that they deliver.

But people will continue to move to the city even after it hits this size, as new residents receive the social average benefit from locating in the city, rather than the marginal benefit. Left uncorrected, the city will grow to a larger size (nm_large on the X axis).

This model shows how cities can grow to be larger than their optimal size, due to congestion costs that increase faster than agglomeration benefits beyond a certain size. However – importantly – it also make a very strong prediction that people will stop wanting to move to cities at a certain point. In other words, this model does not predict that cities will grow without limit: it predicts that they will reach a certain size and then stop growing.

In that sense, this model predicts that city size is analogous to road congestion. Although many roads are above the socially optimal level of congestion, congestion simply doesn’t increase without limit. At some point people decide not to drive any more, as illustrated empirically by Wallis and Lupton:

Within the model, there may be reasons why optimal size differs between cities. For instance, cities may:

  • Have different types of agglomeration economies, resulting in a stronger or weaker case for increased size
  • Have different transport systems leading to different relationships between growth and congestion
  • Be located near more sensitive ecosystems, meaning that growth may be more damaging.

However, on the whole, the predictions made by the model are extremely difficult to reconcile with observed reality, which is that urban growth follows a ‘random walk’ process, with large cities more or less equally likely to grow as small cities. (This is often referred to as Ghibrat’s Law.)

In New Zealand, we can see this at work. Auckland has grown faster than most of the rest of the country over the last century (excluding smaller centres close to Auckland), and it’s expected to continue to do so. Canterbury, which contains one of NZ’s two next biggest cities, is also expected to grow rapidly. If models of optimal city size held true, we’d expect Auckland to be at a disadvantage for further growth:

Statistics NZ’s 2013-2043 population growth projections

As Fujita, Krugman and Venables observe in their great book on new economic geography, the idea that urban growth is more or less random is empirically plausible but tends to upend models like the one I’ve described above. Cities, it seems, are not like roads: They can always fit a few more people in without grinding to a halt. Although it is a common trope, there may be no such thing as a city that is “too big”.

City Centre Streets for the 21st Century

Santiago de Chile is home to some 6m+ souls, its origins date back to the 16th Century, and it has south American largest, and still expanding, Metro system. But, like almost all cities coming out of the 20th Century, its city centre streets have been allowed to be dominated by vehicles, with all of the disbenefits this brings. Happily, this is now changing, and attracting a lot of positive attention, as this Streetfilms film describes:

This is a great model for the Auckland City Centre, where it will be even easier to achieve, and is in fact already underway, as the current trends in both declining vehicle mode-share and rising Transit and Active mode-share show. We have so far sort of bumbled into this success, with some parts of local government leading it and some resisting it. And the time is now perfect for the city to at last make this a conscious and consistently worked towards process.

In my view it is past time to implement clear policy to support the already reducing vehicle numbers using city streets, in order to allow their re-purposing to higher value and higher capacity uses; walking, cycling, and Transit. And as for place quality as well, as streets, now more than ever, offer greater value as more than just movement engines, or just as car storage facilities, but to support the all important urban services and travel economy.

This of course needs to be executed at detail and over time, by highly skilled urban designers and transportation professionals, with skill, sensitivity, and rational analysis. For as in every city all streets have competing uses, and these must be balanced and prioritised cleverly.

But the is nothing about that process that obviates the need for clear and conscious over-arching policy to guide these decisions. And that policy must be to build the successful city for this age: The more prosperous, people-focussed, greener, and more equitable 21st Century walkable transit rich city.

The Ideology of Traffic

Sometimes we come across something that is so perfect and so timely that it just needs repeating as it is. This is one of those times. The following post by Charles Marohn is lifted in its entirety from StrongTowns.org

capacity

The Ideology of Traffic by Charles Marohn

The greatest accomplishment of any ideology is to not be considered an ideology; to be a belief system that is not considered a belief system. Millions of Americans went to church yesterday and every one of them knew their experience constituted a belief, that others in the world believe other things. It is when beliefs are not recognized as such that things get scary.

“This approach to design – speed then volume then safety then cost – reflects the ideology of the profession, an internal belief system so foundational that they don’t recognize it as the application of a set of values.”

Last week I was in Washington State speaking to a group of mostly transportation engineers and technical professionals. My presentation was all about questioning the core beliefs of the profession, of helping the people in attendance recognize that many of their core truths are actually beliefs, and that there are competing beliefs that they should consider.

For example, when engineers design a street, they begin with the design speed. They then determine the projected traffic volume. Given speed and volume, they then look to a design manual to determine the safe street section and then, once a cross section is selected, determine the cost. This approach to design – speed then volume then safety then cost – reflects the ideology of the profession, an internal belief system so foundational that they don’t recognize it as the application of a set of values.

Of course, when presented with these values discretely and not as part of a design process – not as part of the ritual practice of their belief system – they collectively identified a different set of values. I actually had them shout out their values in order and, like the thousands of people I’ve asked to do the same, theirs came back: safety first, then cost then volume and, last, speed. Their actual values are nearly a perfect inversion of those they apply to their design ritual.

This weekend, there was an article that appeared in the NY Post titled The Real Reason for New York City’s Traffic Nightmare. I know the Post is tabloidy; the story contained all anonymous sources and lacked even a rudimentary level of fact checking that you’d find in an actual news story. Still, it fits the ideology of the traffic engineering profession and I saw the piece widely distributed. Here’s a quote:

“The traffic is being engineered,” a former top NYPD official told The Post, explaining a long-term plan that began under Mayor Mike Bloomberg and hasn’t slowed with Mayor de Blasio.

“The city streets are being engineered to create traffic congestion, to slow traffic down, to favor bikers and pedestrians,” the former official said.

“There’s a reduction in capacity through the introduction of bike lanes and streets and lanes being closed down.”

Let’s apply a contrasting value system to this quote, not one based on moving traffic but one based on building wealth. Here’s how each of these statements could be rewritten:

Ideology of Traffic: The city streets are being engineered to create traffic congestion.
Ideology of Wealth Creation: The city streets are being engineered to make property more valuable, encourage investment and improve the city’s tax base while reducing its overall costs.

Ideology of Traffic: The city streets are being engineered to slow traffic.
Ideology of Wealth Creation: The city streets are being engineered to improve the quality of the space for the people who live, work and own property there.

Ideology of Traffic: The city streets are being engineered to favor bikers and pedestrians.
Ideology of Wealth Creation: The city streets are being engineered to favor the access of high volumes of people over the movement of comparatively small volumes of automobiles.

Ideology of Traffic: There’s a reduction in capacity through the introduction of bike lanes and streets and lanes being closed down.
Ideology of Wealth Creation: There’s an improvement in the quality of the place and it’s corresponding value through the introduction of bike lanes and the closing of some streets and lanes.

Before the Suburban Experiment, cities were built with an ideology of wealth creation. That ideology was shared across the culture and, while some benefitted more than others, it provided opportunity for nearly everyone to get ahead. To understand why our cities are going broke, why they are struggling in a growing economy just to do basic things, one only needs to consider the dramatics of this ideological shift. We’ll bankrupt ourselves moving traffic and we don’t even understand why.

Time to adopt a Strong Towns mindset.

The Auckland productivity premium

The Motu Institute recently published new research into the urban productivity premium in New Zealand, or the degree to which firms and workers in big cities tend to produce more and earn higher wages. This is an essential issue for urban and transport policy as it gets to the heart of why we have cities. As we’ve discussed in the past, cities offer opportunities for better connections between firms, workers, and customers, leading to better economic outcomes. (Economists usually describe this as agglomeration economies.)

In the paper – with the enthralling title of “Urban productivity estimation with heterogeneous prices and labour” – researcher Dave Maré sets out to update and extend some of his previous work on the topic. His new research investigates two issues that might bias estimates of the urban productivity premium:

  1. Imperfect competition in small markets: Firms in large cities face more competition and hence will tend to have less market power (ie ability to jack up prices) than firms in small cities. This tends to result in low estimates of the urban productivity premium.
  2. “Sorting” of skilled workers into cities: People with higher skill levels – which could mean more education, more experience, or better ideas – tend to gravitate towards cities. (Similarly, cities tend to have different mixes of firms and industries.) Not controlling for this can result in a high estimate of the urban productivity premium.

Even after controlling for these factors, Maré finds evidence of a non-negligible productivity premium in Auckland. That is,

We document an urban labour productivity premium, with Auckland firms having labour productivity that is 17.9% higher than that of firms in other urban areas, and 17.0% higher than firms in rural areas. Some of this premium is due to the mix of industries in different cities. Auckland has a disproportionately high share of employment in industries that have above average labour productivity. Adjusting for this composition reveals a smaller, but still sizeable, premium of 13.5% relative to other urban areas, and 11.3% relative to firms in rural areas.

Here’s a chart showing how other parts of New Zealand compare to Auckland in terms of productivity, after controlling for industry mix, workers’ skill levels, imperfect competition, and a range of other factors like firm size. (This chart is based on the first column in Table 3 of the paper.) As you can see, firms in Auckland are more productive than firms in other parts of NZ, with Wellington (4.2% less productive) and Tauranga (9.4% less productive) being closest to Auckland.

mare-2016-firm-productivity-in-urban-areas-chart

It’s worth noting that Maré’s new estimates of Auckland’s productivity premium are considerably smaller than his previous ones. In a 2008 paper, he estimated that firms in Auckland were around 51% more productive than firms elsewhere in New Zealand. These are obviously very different numbers! But, as explained in an appendix, the majority of the differences are due to different procedures regarding data selection and processing.

Notwithstanding the exact number, Maré’s new analysis raises a few important conceptual questions about the urban productivity premium. His analysis shows that a large share of the difference in productivity between big cities, small cities, and rural areas is down to the fact that skilled workers tend to sort themselves into cities. When we control for workers’ skill levels, we tend to get lower estimates of the urban productivity premium. Or, if you prefer that in economese:

The meta-analysis by Melo et al. (2009, Table 4) reports that studies that control for labour quality generally yield agglomeration elasticities that are 5 to 6 percentage points lower than studies that do not. In the current study, labour quality adjustment lowers the estimated agglomeration elasticity by 0.057 (from 0.079 to 0.022).

However, I’m not sure it is totally appropriate to adjust for skill levels, as it’s possible that cities’ ability to attract and retain talented, innovative, and motivated people (and productive firms) is in fact a type of agglomeration economy. In other words, we might be controlling away the effect of interest!

Open migration between Australia and New Zealand means that people who can’t find an appropriate place (urban and economic) in New Zealand can easily go to Australian cities. So the alternative for skilled people who are dissuaded from living in Auckland isn’t necessarily that they’ll go and start up a business in Hamilton. Instead, they might head across the Tasman, where their skills are totally lost to New Zealand.

What does this mean for urban policy in New Zealand? I’d tentatively identify two key ideas we might want to focus on in order to allow our cities to get better at attracting and retaining productive people and firms.

First, we need to think hard about whether our policies make it attractive for mobile people to come to (or stay in) our bigger cities. This is a key consideration for, say, urban planning reform, as high housing prices driven by constraints on housing development are an important barrier to people coming or staying. Evidence from the US suggests that, if left unaddressed, high house prices can systematically dissuade people from moving to productive places where they can put their skills to best use.

Second, we also need to think about how to preserve and enhance the amenities that are on offer in New Zealand cities. Our relatively clean air, reasonably well-preserved coastal environment (clean beaches, marine reserves, etc), and accessible forests and natural parks are important attractions, but other areas are letting us down. For instance, rural and small-town water quality is rapidly declining due to expanding dairy farming.

More relevant to transport, street design in New Zealand is pretty retrograde, leading to a lack of high-quality public spaces where people actually want to be. All too often, we insist upon shoving cars down corridors, heedless of the fact that some streets have higher value as places to be. But we know we can do better: places like O’Connell St and Wynyard Quarter give many people joy on a daily basis.

What do you think about the urban productivity premium? And how can we get more of it?

What do garage bands and tech startups have in common?

Russell Brown’s Public Address article on the impending closure and redevelopment of the King’s Arms music venue got me thinking. Russell highlighted the importance of certain types of physical spaces for a music scene’s ongoing vitality:

What the King’s Arms and the Powerstation have in common is that they are reasonably large rectangular boxes, which makes them ideal rock ‘n’ roll venues. That’s a hard kind of building to find – and an even harder one to build – in the current environment. While the Wine Cellar and Whammy have done a good job of making the most of their space and Galatos seems to work well, the only real “big box” on K Road is The Studio.

As the article investigates, a confluence of positive and negative trends is putting pressure on spaces for live music at the centre of Auckland. On the one hand, the success of the city centre as a place for both employment and residential living means that redevelopment is spilling out to the city fringes that traditionally served a mix of cultural purposes. On the other hand, the city-wide housing affordability crisis is putting the screws on rents.

As I discussed in another recent post, when rents rise faster than general consumer prices across the entire city, it’s a sign that there is a shortage of housing supply relative to current housing demands. In other words, we haven’t built enough. In Auckland, if rents had kept pace with consumer prices since 2001, they’d be $120 per week lower than they actually are, or $6240 per annum. Here’s a chart:

auckland-mean-real-rents-01-16-chart

Russell doesn’t mention it in his article, but rising rents have a second negative effect on the sustainability of a local music scene. They make it more difficult for people to start bands, as the time that would have gone towards practicing, writing songs, and hustling for gigs and recording time goes towards paying the rent instead.

David Lowery (Camper Van Beethoven frontman and one of my favourite musicians) neatly set out the link between low rents and dynamic music scenes in a 2011 blog post about the Santa Cruz milieu that spawned his band:

…music scenes rely on low property values in particular transitional neighborhoods.  Neighborhoods that had once had another purpose but now had fallen out of primary use.  Cheap space and a tolerance for noise are important commodities for bands.

You could argue that the old beach rentals along the lower end of Ocean street and the neighborhoods clustered around the old harbor qualified as in transition.  Too seedy and rundown for beach rentals these houses were subsequently occupied by the more adventurous.  Arty students, musicians and other slackers now occupied many of these cottages.

But our cottage was effectively cut off from these neighborhoods by the river levee.  In retrospect I now see it was very Dungeons and Dragonsish of the locals to refer to the homeless population that slept in hideaways along the river as “trolls”.  Indeed walking to my house at night I learned to steer clear of these trolls as many were quite aggressive or totally insane.   You definitely felt penalized after unexpectedly making contact with these folks.

But the isolation was very good for a couple young mathematicians and songwriters. I was able to really dive into the most difficult proofs and songs in that cottage.  Later when I moved to a better part of town I found that I had to go to the science library to get any deep thinking done.

If you want a vibrant music scene, you need a combination of young people – university towns are great for this – and low rents. That was the recipe underpinning the Dunedin Sound in the 1980s, and pretty much any other successful music scene.

But this isn’t just about cultural vibrancy. The same factors underpin long-run economic success, as they affect people’s willingness and ability to start and grow new businesses in a city. Entrepreneurship is very important. Economies thrive not by continuing to do the same thing over and over again, with minor refinements and productivity increases, but by generating new ideas and making new goods and services.

Affordable rents aren’t the only factor that contributes to a vibrant startup culture, but they are an important one. In this respect, tech startups are similar to garage bands: in the early stages, they need a bit of cheap space to allow them to experiment.

steve-jobs-and-wozniak-1977

Apple Computer, 1977

(Other factors that probably matter include an educated population, low levels of corruption, support for primary science and research and development, an active venture capital market, and good access to markets. New Zealand does well on the first two, and iffy on the last three.)

Data on growth in inflation-adjusted mean rents suggests that constraints on housing supply in Auckland over the 2001-2016 period have imposed an implicit ‘tax’ of around $6000 on someone living here and trying to start a business. Possibly more, if you’re trying to pay the rent and rent commercial space for your business. There are obviously other advantages to being in Auckland. It’s got the best international connectivity, access to a large and growing urban market, and a talented and diverse pool of workers.

However, we can’t be sanguine that those advantages will outweigh the ‘tax’ that a lack of housing places on new businesses or creative endeavours in Auckland. Left unaddressed, rising rents will dissuade startups, resulting in a less dynamic, less prosperous economy. (And fewer good bands.)

Fortunately, there are things we can do to address this issue. The most important is to let more housing and commercial space get built, especially in areas that are accessible to jobs and other good urban things, as that’s a key factor in getting rents back in line with consumer prices. The Unitary Plan does quite a bit to enable more construction, but reforming and fine-tuning our urban planning system will be an ongoing challenge.

Improving transport choices is another key priority. The city fringe area is an attractive location for live music because it is both relatively dense (by Auckland standards) and very central. When you put on a show, people can get to it. (And, depending upon when it ends, you can get a drink and still be able to take the bus or train home.) Other parts of the city aren’t as well-connected, which serves as a barrier. Fortunately, we can fix this by improving transport choices throughout the city – more frequent bus routes, more rapid transit corridors, more safe cycleways.

What do you think about the prospects for starting bands or businesses in Auckland?

Should we spend more on infrastructure… or less?

The Auckland Transport Alignment Project (ATAP) report, which was released last week, identified the need to spend more money on transport infrastructure in Auckland. ATAP estimates that we need to spend $24 billion on new transport infrastructure over the next decade, around $4 billion of which would not be funded by current transport budgets.

While $4 billion is a sizeable gap, it’s smaller than previously assumed, due in part to ATAP’s recommendation to defer costly projects like the Additional Waitemata Harbour Crossing. But meeting it will mean raising fuel taxes, fares, rates, general taxes, or implementing congestion pricing to manage demands until funding is available.

ATAP’s obviously identified a need to spend more money on transport infrastructure in the Auckland context. But is spending more money on infrastructure in general a good idea? In other words, should any additional spending in Auckland be balanced by proportionately higher spending everywhere else in the country?

Two prominent American economists, Larry Summers and Ed Glaeser, recently took contrasting views on this question. Summers is most well-known as a policy advisor to Democratic administrations and (in recent years) an advocate of fiscal policy as a cure for long post-GFC recession. Glaeser, on the other hand, is best known for his work on urban economics, including his great book Triumph of the City.

Summers lays out the case for spending more (in the Financial Times). His key argument is that low interest rates signal an underemployed economy where the “opportunity cost” of paying people to build more stuff is relatively low, and that infrastructure spending is a good way to do this as it can enhance a country’s long-run productive potential:

There is a consensus that the US should substantially raise its level of infrastructure investment. Economists and politicians of all persuasions recognise that this can create quality jobs and provide economic stimulus without posing the risks of easy-money policies in the short run. They also see that such investment can expand the economy’s capacity in the medium term and mitigate the huge maintenance burden we would otherwise pass on to the next generation.

The case for infrastructure investment has been strong for a long time, but it gets stronger with each passing year, as government borrowing costs decline and ongoing neglect raises the return on incremental spending increases. As it becomes clearer that growth will not return to pre-financial-crisis levels on its own, the urgency of policy action rises. Just as the infrastructure failure at Chernobyl was a sign of malaise in the Soviet Union’s last years, profound questions about America’s future are raised by collapsing bridges, children losing IQ points because of lead in water and an air traffic control system that does not use GPS technology.

In particular, Summers argues that priority should be placed on funding deferred maintenance, which is a major problem in the US:

What is the highest priority? The fastest, highest and safest returns are likely to be found where maintenance has been deferred. Maintenance outlays do not require extensive planning or regulatory approvals, so they can take place quickly. And they tend naturally to take place in areas where infrastructure is most heavily used.

Glaeser sets out a considerably more skeptical perspective in the City Journal. Contra Summers, he argues that infrastructure spending isn’t a particularly efficient way of getting unemployed people back to work, and that the political incentives facing decision-makers tend to mean that additional funding is misspent in declining areas like Detroit or on projects that don’t do much good:

While infrastructure investment is often needed when cities or regions are already expanding, too often it goes to declining areas that don’t require it and winds up having little long-term economic benefit. As for fighting recessions, which require rapid response, it’s dauntingly hard in today’s regulatory environment to get infrastructure projects under way quickly and wisely. Centralized federal tax funding of these projects makes inefficiencies and waste even likelier, as Washington, driven by political calculations, gives the green light to bridges to nowhere, ill-considered high-speed rail projects, and other boondoggles. America needs an infrastructure renaissance, but we won’t get it by the federal government simply writing big checks. A far better model would be for infrastructure to be managed by independent but focused local public and private entities and funded primarily by user fees, not federal tax dollars.

Glaeser takes more specific aim at the notion that infrastructure investment inevitably generates broader economic returns:

Infrastructure spending is a form of investment: just as building a new factory can boost productivity, laying down a new highway or opening a new airport runway can, at least in principle, generate future economic returns. But the relevant question is: How do those future returns compare with the costs? Just because infrastructure is a form of capital doesn’t mean that spending a lot on it is always smart. When a firm estimates the rate of return for a new factory, it can calculate the expected net profits and compare those with the expense. The analog for, say, new or improved roads is to estimate the benefits to users from reduced travel times, add the likely modest spillover benefits to nonusers, and then subtract the spending needed to construct and maintain the infrastructure. The results can differ significantly across projects. A well-known 1988 Congressional Budget Office survey found that spending to maintain current highways in good shape produces returns of 30 percent to 40 percent—but that new highway construction in rural areas showed a much lower return. A clever study that used firm inventories estimated that the rate of return to new highways was sizable during the 1970s but sank below 5 percent during the 1980s and 1990s.

[…]

The existence of plausible transportation alternatives and the law of diminishing returns have also tended to reduce the benefits of infrastructure investment over the past two centuries. The opening of the Erie Canal in 1821 brought enormous value because the inland transportation options at the time were dismal. In the early nineteenth century, it cost as much to ship goods 30 miles over land as to send them across the entire Atlantic Ocean. Yet the very existence of canals, as much of a breakthrough as they represented, reduced the benefits of the later rail system, as Nobel economist Robert Fogel has shown. The returns for new transportation infrastructure in places with terrible roads, such as much of Africa and India, will be much higher than in the United States, which already enjoys an impressive, if under-maintained, array of mobility options.

While Summers and Glaeser take different views on the value of spending more money on infrastructure, there are some important points of agreement, such as:

  • Prioritising maintenance spending to replace or upgrade run-down infrastructure
  • Better cost benefit analysis to ensure that money is being spent in more beneficial ways
  • Where appropriate, funding new infrastructure more from user charges and fees, rather than general taxes.

Lastly, it’s worth asking whether these issues look different in New Zealand than in the United States. I don’t have a complete answer to this, but in previous posts I have looked at the issue of infrastructure spending from a variety of perspectives. For instance, I’ve asked:

On balance, I’d say that those posts present a moderately skeptical view of the case for significantly ramping up transport investment – ie more in line with Glaeser’s view than Summers’. That’s not to say that we shouldn’t spend a bit more, but any additional spending should be backed by robust analysis.

What do you think about infrastructure spending? More or less?

Zoning reform: Is the Unitary Plan any good? (2 of n)

This is the second post in an ongoing series on the politics and economic of zoning reform. The first part looked at the costs, benefits, and distributional impacts of reforming urban planning rules to enable more development. This part takes a more specific look at the most recent reform to Auckland’s planning system: the Unitary Plan.

Now that the hearings are over, the submitters have been heard, and the politicians have voted, it’s worth asking: What have we gotten from the Unitary Plan? Does it take us in a useful direction, and to what degree?

In order to give a coherent answer to this question, I’m going to have to simplify matters. The UP does a lot to regulate development and local environmental issues – addressing everything from air quality to zoning for factors. But it has the strongest effects are on the city’s housing market. The UP shapes how much housing can be built, where it can be built, and how easy it is to get permission to build it.

Consequently, I’m going to focus on the impact of the Unitary Plan on people’s ability to build more homes in the city. Zoning capacity isn’t the only thing that matters, but it’s important. Cities that have “downzoned” severely, like Los Angeles in the 1970s and 80s, typically experience rising housing prices, while cities that “upzone” significantly, like Tokyo in the 1990s, tend to have an easier time keeping prices under control.

FrameWORK_Housing_ZoningCapacity

The great down-zoning of LA (Morrow, 2013)

In order to estimate the UP’s impact on Auckland’s capacity to build more homes, I’m going to draw upon “capacity for growth” modelling produced by Auckland Council and subsequently updated throughout the hearings process. As changes to the modelling methodology make a like-for-like comparison a bit difficult, I’m going to have to piece together the overall results.

The 2012 Capacity for Growth Study estimated the number of homes that could be built under the legacy zoning rules that were put in place prior to Auckland Council amalgamation. The modellers estimated a measure of “plan-enabled capacity” – i.e. the total quantity of housing that could be built within the city if everyone (re)developed their site to the maximum permitted under the zoning rules.

This is obviously an implausible scenario, as many people won’t choose to redevelop, at least for a while. So the results are best thought of as a theoretical upper bound rather than a realistic estimate of what would happen in practice. As we’ll see, this was addressed in subsequent modelling undertaken during the hearings.

With that caveat in mind, the modellers found that the legacy zoning rules allowed between 250,000 and 345,000 additional dwellings to be built in Auckland. The lower number reflects the maximum capacity for infill development, while the higher number reflects the maximum capacity for redeveloping residential sites.

The 2013 Capacity for Growth Study used the same methodology to assess the version of the UP that was notified by Auckland Council after consultation on the plan. This showed that the notified UP had only made incremental increases to infill and redevelopment capacity within the city.

The modellers found that the legacy zoning rules allowed between 258,000 and 417,000 additional dwellings to be built in Auckland. The lower number reflects infill capacity, while the higher figure reflects redevelopment capacity. However, it also noted future greenfield areas with capacity for around 90,000 additional dwellings.

Taking the greenfield areas into account, the notified UP would have delivered a 39-47% increase in capacity for housing, relative to the legacy zoning. That difference is shown in the following diagram. Essentially, the Unitary Plan as originally conceived would have been at most an incremental improvement.

CfGS legacy plans and notified UP chart

Things get a bit more complex when comparing between the notified UP and the final version of the UP that was recommended by the Independent Hearings Panel and approved (with minor tweaks) by Auckland Council. The modelling methodology changed in the course of the hearings, with the focus shifting from “plan-enabled” capacity to “commercially feasible” capacity. In effect, a new model was built to filter out sites that wouldn’t be profitable to develop.

The result was the final numbers presented in the Independent Hearings Panel’s report (and covered, somewhat hyperbolically, by the Spinoff) are lower – but considerably more realistic – than the figures reported in the Capacity for Growth Studies.

You can see that in the following chart. The commercially feasible capacity enabled by the notified UP is 213,000 additional dwellings – only 42% of the full plan-enabled capacity.

The key thing in this chart is the change between the notified UP and the final UP. Feasible capacity has increased from 213,000 to 422,000 dwellings, or a 98% increase. Most of the increase in capacity comes from within existing residential zones, thanks to rezoning and changes to zoning rules to allow people to build more dwellings on the same amount of land.

Recomended UP - Change in Feasible Capacity

So if we squint a bit, we can put these estimates together to get a rough picture of the overall outcome:

  • The notified UP increased plan-enabled capacity by 39-47% relative to the legacy plans
  • The final UP increased feasible capacity by 98% relative to the notified UP
  • This implies that the final UP has increased the zoning envelope by around 175-190%, relative to the legacy plans (i.e. 1.98*1.39 to 1.98*1.47).

Equivalently, if we assume that only around 42% of the plan-enabled capacity under the legacy zoning plans would be commercially feasible (a similar ratio to the notified UP), we can put together the following chart:

Feasible capacity legacy plans and Unitary Plan chart

Is this sufficient? Time will tell. Getting housing, transport, and place-making right for Auckland doesn’t end with a planning rulebook. But the final UP is undoubtedly a large step away from the broken status quo.

As this is a series on the economics and politics of zoning reform, I want to close with a few simple observations that arise from the quantitative analysis in this post.

  • The incremental changes observed between the legacy plans and the notified UP reflect the outcome of a political process. Council put out a draft plan for consultation, and then pulled back a lot of the changes in response to criticism.
  • The considerably larger changes between the notified UP and the final UP arose from a technical process – the independent hearings.
  • Although the IHP recommended, councillors decided. The final UP was voted up by many of the same councillors who had pulled back to a more conservative position three years before.

This in turn raises two questions that I will revisit in future posts in this series. First, why did the political process deliver a more conservative outcome than the technical process? And second, what changed between 2013 and 2016 to obtain a different outcome from the council votes on the plan?

What do you make of these figures?

Zoning reform: Costs, benefits, and distributional impacts (1 of n)

This is the first part in an open-ended series on the economics and politics of zoning reform. The Unitary Plan decision means that Auckland’s urban planning framework is set for the short to medium term – albeit with inevitable appeals and changes. But the issues we’ve been grappling with over the past few years – i.e. how, where, and why to adjust the rulebook – will keep coming back. A growing city must also be a continually changing city, and zoning decisions can either help or hinder that.

A good starting point for thinking about the economics and politics of zoning reform is to ask: What are the costs and benefits of allowing more housing to be developed? And how are these costs and benefits distributed?

I investigated these questions in a conference paper at this year’s New Zealand Association of Economists. Without getting into the numbers, we can identify three main effects:

First, the benefits of new housing primarily accrue to people who are newly entering the housing market. For instance, young people trying to buy or rent a home benefit from there being more homes, as it means they can get better housing or cheaper housing. Equivalently, restrictions on new housing development mainly impose costs on people who don’t already own homes. When the supply of housing is restricted, then they face a choice between paying more for housing that meets their needs, living in substandard or crowded housing, or leaving the city entirely.

Second, the costs – adverse effects – of new development are location- and context-dependent. The distributional impacts – who is affected? – can also vary quite a lot. For instance, a new subdivision on the city fringe probably wouldn’t shade anyone’s home or block its view, but it might worsen water quality or biodiversity. And, given the dysfunctional way we build new suburbs, it will definitely increase traffic congestion.

By contrast, redevelopment and infill within the city will tend to have fewer environmental impacts – it’s already a city! – but there are more neighbours who may be affected by the various nuisances associated with development, like having new buildings casting shade on adjacent properties or more people parking on “their” street. People don’t like change very much… but they can easily adjust to different “status quo” scenarios.

For instance, consider Ponsonby. It would all be horribly illegal under today’s zoning codes. Lot sizes too small, buildings too close to each other and taking up too much of the lot, no parking, etc, etc. If you tried to get houses like these consented today, especially in an existing suburb, you’d be refused in about three seconds flat. But because they’ve been there for decades, people see them as something that should be protected – present-day zoning code be damned!

Ponsonby Russell St

Third, enabling housing development can allow cities to grow larger and in a more economically efficient pattern – leading to enhanced agglomeration economies. The benefits of increased productivity and greater consumer choice accrue broadly to most people in the city, or potentially even to the entire country. (Taxes paid in Auckland pay for retirements in Tauranga!)

Conversely, evidence from overseas cities suggests that restricting housing supply can result in large economic costs as a result of the misallocation of workers throughout space. For instance:

  • In the US, Chang-Tai Hsieh and Enrico Moretti found that high housing costs have discouraged people from getting jobs in high-productivity cities – in particular New York, San Francisco, and San Jose. If those cities had allowed more homes to be built over the past three decades – which would have entailed more intensive development – the US economy would now be 9.7% larger than it actually is, with commensurate gains in income.
  • In the Netherlands, Wouter Vermeulen and Jos van Ommeren found that housing supply, not productivity or availability of jobs, has driven cities’ growth. Rather than moving to locations with abundant high-income jobs, people move to places with more homes – again, with a cost to overall economic outcomes.

As Matt Yglesias observed, agglomeration economies benefit workers with different skills… provided that they can afford to locate in high-productivity cities:

…just as factories served as economic anchors for regions, today’s big industries produce broader local prosperity.

Here are some examples from the San Francisco area:

The problem is that for most residents of these places, the higher cost of living erodes the benefits of higher pay.

So how does all this add up? There are two answers. The first is that the benefits of urban development tend to outweigh the costs… provided that it isn’t happening in a totally dysfunctional way, like paving over the habits of endangered birds or building astonishingly unredeemable eyesores. In other words, the benefits for people who are getting housed, plus increased agglomeration economies, outweigh the costs from negative social or environmental impacts. So from the perspective of long-run social wellbeing, zoning that enables more development seems like a good idea.

The second answer is that the distributional impacts tend to determine the politics of zoning. As economist William Fischel observed, local governments tend to be dominated by “homevoters” who are mainly worried about risks to their property values and quality of life. In this context, the fact that enabling urban development mostly has benefits for new entrants to the housing market – i.e. young people and people moving into the city from elsewhere – is pretty important.

National and local voter turnout chart

As economists like to say, the incentives facing local government voters aren’t well aligned with long-run social wellbeing. To current voters, zoning reform isn’t necessarily an appealing proposition. It appears to create uncertainty for their neighbourhood and property values, while principally benefitting other people.

This is a very understandable view for individuals to hold, but it’s not awesome for society as a whole. If cities and economies don’t change, they wither and die, creating vast human misery in the process. In order to prevent that from happening – i.e. to keep people from crowding into unsanitary accommodation or going homeless – we need to be willing to reform our zoning policies.

In the subsequent posts in this series, I’m going to take a look at what that might look like. In the first instance, I want to focus on the institutional arrangements that enable reform, considering issues like:

  • The trade-off between localised and centralised decision-making
  • The good and bad in New Zealand’s legislative framework
  • The role of analysis and evidence in planning decisions
  • The role of social norms in encouraging (or discouraging) people to plan for future generations.

As always, leave your views in the comments.