Tag Archives: construction

Summer Games: The New Economic Stimulus?

The Chicago Tribune reports that Mayor Daley and the City Council have given unanimous support to fund any expense overruns should Chicago win its bid to host the 2016 Olympic games. This decision gives the city a fighting chance to be selected to host the games, keeping it in the running with Madrid, Rio de Janeiro, and Tokyo, all of which have secured similar financial guarantees.

Afterward, aldermen and Mayor Richard Daley gave themselves a standing ovation. The vote reauthorizes Daley to sign the Olympics host city contract in advance of the Oct. 2 vote in Copenhagen by the International Olympics Committee on which of four finalist cities gets the Summer Games in seven years.

This decision by the city’s leadership may not represent the desires of Chicago citizens who, a Tribune poll shows, have dwindling support for the city to host the games, largely because of concerns about taxpayer liability.

After the vote, many of the aldermen gave quotes to the press:

Ald. Ray Suarez (31st) said he initially “had some reservations.” But Suarez said he now feels the Olympics would bring jobs, housing and a new global reputation to Chicago.

“It will make Chicago a world-class city,” he said.

Of course, Chicago residents and leaders may have many reasons for wanting to host the 2016 Games, but it is uncertain that the event would be an economic boon to the city.  A study conducted to analyze the potential economic effects of the 2012 London Olympics found that historically while some host cities have benefited economically, others have suffered losses as tax dollars used to fund the games are not always recouped during the course of the event.

Adam Blake of the University of Nottingham Business School found that the event was likely to benefit London in 2012 and that increased growth is likely to last until 2016, but that in the years before and after this bracket the results are less certain.

Short-lived, costly events such as the Olympics often result in the construction of facilities that will have limited use after the games are over.  For example, the Bird’s Nest that became symbolic of the 2008 Beijing Olympics is today underutilized, making revenue today only from tourists who wish to see where the athletes competed.

A USA Today reporter speculates:

In other countries, the Bird’s Nest might be revealed as a white elephant — an expensive possession with little commercial value. But in China, the government and state-controlled media are unlikely to advertise the fact and citizens will never know the real cost.

Ex ante, we do not know if the 2016 games would benefit or harm Chicago in the long run, but looking to past cases gives reason to question whether or not host cities benefit in the long run.  Perhaps a more reliable policy to promote economic growth and tourism in the city would be to lower its notoriously high taxes. The Economist recently found that Chicago has the greatest tax burden for tourists of any American city.  The cities’ leadership would be wise to consider how this tax climate would impact potential visitors’ decisions to attend the games before speculating that increased tourism would certainly benefit residents.

Are Bikes the Answer to Urban Traffic Congestion?

A South China Morning Post editorial suggests that if more Chinese urbanites used bicycles for their commutes, the severe traffic congestion in China’s cities could be eased. Currently, Guangdong is considering limitations on vehicle use to help reduce crowding on its streets.

Unlike mass transit and road construction that take time and money to construct, bicycles can offer an immediate respite from traffic for individuals. However, expecting government to create incentives for increased bike use may be unrealistic if they clash with car manufacturers and commuters:

Conflicting interests are difficult for any government to deal with. In the mainland’s case, it involves balancing a policy of using vehicle production to boost industrial growth with ensuring that cities are liveable and function properly. The car industry is the catalyst for a plethora of spin-off industries that boost job creation, meet consumer demand and lay the groundwork for export markets. But cities are where factories, offices and workers are located and they need to be efficient and safe.

While bicycle commutes in many cities can be faster than car commutes as observed in Birmingham, England, congested roads that are not well-designed for shared use of bicycles and automobiles often pose dangers to riders.

Vauban, Germany has instituted a unique, local solution to city transportation, creating a community where car parking is very expensive, and only available on the outskirts of town. CBS’s Jim Sciutto, in a Good Morning America segment, suggests that Vauban’s solution is representative of the “city of the future.”

The New York Times reports:

Vauban, home to 5,500 residents within a rectangular square mile, may be the most advanced experiment in low-car suburban life. But its basic precepts are being adopted around the world in attempts to make suburbs more compact and more accessible to public transportation, with less space for parking.

The article states that only 30 percent of Vauban’s residents own cars and suggests that many of them view this lifestyle as an improvement for their health and well-being. It remains to be seen whether this policy will be successfully adopted in other cities, but University of California-Davis Professor Jeff Loux suggests that this city’s policy could successfully be transferred to the United States, but adjusting to increased housing density would be a big change for many Americans.

Whether or not the Vauban policy is adopted by other cities remains to be seen, but it is an example of successful use in policy variation between cities. If increased bicycle were mandated or incentivized in Germany at the national level, it would be extremely costly with benefits accruing only to those who wanted to give up their cars for bicycles. Vauban was completed in 2006 after 20 years of planning, and all of its residents selected to live there with the knowledge of its policy environment; decreased car use was not forced upon any residents.

If any US communities opt to follow a model similar to Vauban’s, they should do it at the local level and follow their example of allowing residents the opportunity to live in car-free communities rather than implementing “the city of the future” from the top down.

Malaise and Misery Ahead for State Budgets

Most states have closed the books on FY 2009 — just barely. July marks the start of the FY 2010 for many states, but as the Washington Post reports, just six weeks in a dozen states are short by a total of $24 billion. This year is certain to be a repeat of the last — only much worse, with revenues unlikely to recover in the short-term. Some of the budget balancing tactics of last year are depleted. Reserve funds are empty. And at least half of the federal stimulus has been spent.

With the choice between further tax hikes or budget cuts (or both), it’s likely that many states will choose something FY 2009 saw a great deal of, budget gimmicks. But these also have a cost. While deferring pension payments, eliminating property tax rebates, or taking out a line of credit to balance the budget may have seen New Jersey through July 2009, it was enough for Moody’s to downgrade the state from a “stable to a “negative” credit rating.

miseryindexnjMoody’s credit review was prompted by New Jersey’s planned issuance of $200 million in school construction bonds. New Jersey’s bleak fiscal picture isn’t an overnight occurrence. The state’s steady march to insolvency dates back decades and is driven by many things, including the tripling of taxpayer-supported debt since 1990 to $45 billion (most of it not approved by taxpayers). According to the New Jersey Taxpayers’ Association’s Misery Index, taxpayers have felt the increasing pressure of runaway government spending for a decade.

The federal bailout may have gotten New Jersey through part of its budget ordeal — but it has not stopped the state from the mistakes that brought it to the brink.  In considering how to tackle the coming year elected officials must break with the habits of the past, increased spending supported by ever-increasing taxation.

Pricing Transit

In Boston, the Massachusetts Bay Transit Authority is considering an increase in fares to raise revenues in order to maintain the profit levels that it saw last summer with steeply increasing gas prices.

In many cities around the world, funding for public transportation is an ongoing issue as different groups of people support varying levels of fare prices and public subsidy for transit systems. However, one mistake often made in this debate is that those supporting changes in fare prices ignore that changing the ticket cost will also change the level of ridership.

This fallacy has been avoided in Boston, where MBTA hired a consulting agency to estimate the effect that an increase in fare prices would have on revenue, acknowledging that more expensive tickets would lower the number of city residents taking buses and riding the T.  The Boston Globe reports:

Just one year after a record number of passengers flocked to the MBTA, the agency has come back to earth, as the price of gas has declined and the economy soured. And it can expect to lose another 5 percent of its riders if a proposed 19.5 percent fare hike is approved, according to a new state analysis.

This analysis acknowledges that as the price of Boston public transportation rises, people at the margin will substitute other means of transportation, reducing the number of riders. This may seem obvious to those commuters who realize that demand slopes downward, but oftentimes those involved in setting prices for public transportation do not acknowledge that changing fares leads to a movement along the demand curve for their service.

In Vancouver, for example, the TransLink system is facing budget shortfalls which it will likely address in part by raising fares.  As explained by the CBC:

The transit authority is looking to generate the additional funding needed through road user fees, a vehicle levy, tolls on bridges, increased fuel and parking taxes, and increased transit fares.

That plan would deliver hundreds of new buses, a third SeaBus, expansion of the existing Millennium and Expo SkyTrain lines, as well as construction of the long-awaited Evergreen rapid transit line to Burnaby and Coquitlam.

It is possible that this combination of price and service changes will increase revenues for TransLink, but this is far from certain without observing how customers respond to higher fares. It seems likely that increasing its services while potentially losing customers who substitute other means of transportation for the newly more expensive TransLink will be a profit losing strategy.

Vancouver policymakers have not considered that by lowering fees, maintaining their existing level of service, and increasing ridership, they could have perhaps balanced their budget without raising prices.

Resurrecting the New Deal in Perry County, Tennessee

While many cities and municipalities are still seeking approval on projects that propose to use federal stimulus money, a Tennessee county has used a different model to attempt to employ as many of its citizens as quickly as possible. The New York Times details the county’s efforts to put stimulus money to work in an area where unemployment levels recently exceeded 25 percent.

Rather than waiting for big projects to be planned and awarded to construction companies, or for tax cuts to trickle through the economy, state officials hit upon a New Deal model of trying to put people directly to work as quickly as possible.

They are using welfare money from the stimulus package to subsidize 300 new jobs across Perry County, with employers ranging from the state Transportation Department to the milkshake place near the high school.

Given the constraints of the American Recovery and Reinvestment Act, Perry County may be maximizing the potential of these federal dollars to lower current unemployment rates.  The Tennessean reports that the immediate effects of this program have been successful:

The centerpiece of an innovative job-creation program has put 300 residents to work temporarily, including 200… who are employed in the private sector, working at the local country club, insurance offices, hardware stores, trucking firms and the Subway sandwich shop.

What sets this program apart from other stimulus-related ones around the nation is that workers’ wages and benefits are paid directly by federal funds. It is the only stimulus initiative in the country like this, at least on this scale, according to federal Health and Human Services officials.

Aside from the local benefits of rapidly spending its ARRA allotment, the Perry County model is likely a better attempt at effective discretionary fiscal policy than has been witnessed in places that have yet to begin spending their stimulus money. A standard critique of discretionary fiscal policy is that is has long lags before taking effect, meaning that changes in taxing or spending in response to changes in the business cycle are likely to exacerbate, rather than smooth peaks and troughs in the business cycle. If it is possible to create spending programs that minimize these lags, Perry County has likely done just that.

As with other programs using stimulus funding, however, seeing success in Perry County’s unemployment reduction relies on a short-term view of economic heath.  The jobs funded by ARRA will likely disappear once these funds run out and public support for job creation wanes.  A local television news station explains:

The jobs are only temporary and will end a year from September. County Mayor John Carroll says the jobs are just a bandage: stopping the bleeding, but not a permanent fix.

Federal spending in places like Perry County has the potential to help people weather the current recession, but it may do more long run harm than good. Many manufacturing jobs that were once located in America are now outsourced to places where they can be executed more cost-effectively, but this trend does not require federal support to artificially create jobs for low-skilled domestic workers.

Instead, for long-term economic health, former manufacturing centers need to allow the private investment to direct their labor pools toward their new comparative advantages.

Homeowners and the Great Recession

Writing at Forbes.com, Joel Kotkin weighs in on the claim that homeownership caused the Great Recession:

Increasingly, conventional wisdom places the fundamental blame for the worldwide downturn on people’s desire–particularly in places like the U.K., the U.S. and Spain–to own their own home. Acceptance of the long-term serfdom of renting, the logic increasingly goes, could help restore order and the rightful balance of nature.

Once considered sacrosanct by conservatives and social democrats alike, homeownership is increasingly seen as a form of economic derangement. The critics of the small owner include economists like Paul Krugman and Ed Glaeser, who identify the over-hot pursuit of homes as one critical cause for the recession. Others suggest it would be perhaps nobler to put money into something more consequential, like stocks.

Much of Kotkin’s piece is devoted to the implications for the future:

Rather than a source of economic weakness, this renewed quest for homeownership could underpin a sustainable recovery. As prices fall to reasonable levels, more people will qualify for reasonable loans. First, the empty houses and somewhat later, the condominiums now on the market will find buyers, in most places in a matter of a few years.

This shift will create huge opportunities for a diverse set of geographies. For urban areas like New York or Los Angeles, there will be a unique–perhaps once in a generation–chance to induce middle-class people to settle down in big-city homes or condominiums. If they become homeowners, they will be more likely to stay than move elsewhere to the suburbs or other regions when the time comes to buy a home.

Other, more affordable, less regulated and often more economically dynamic places like Texas and the Great Plains may realize even greater gains. Over time, we will likely see a recovery in some now-suffering parts of the Sunbelt. The renewal of home demand could also help revitalize many of our hardest-hit sectors, including construction and manufacturing.

Additionally, Economic Recovery Digest points to new research about homeowners who can afford to pay mortgages but choose not to; the research suggests that a quarter of defaults could be “strategic.”

Top Ten Funded Stimulus Road Projects

The Business Insider has an interesting slideshow of the ten most expensive stimulus road projects to have received funding thus far, based on data assembled by ProPublica.

Of the ten, five are in California, two are in Florida, one is in New Jersey, one is in Alabama, and one is in Connecticut.

The most expensive project is the expansion of the Caldecott Tunnel on California’s State Route 24 between Alameda and Contra Costa counties. According to Caltrans, this improvement has been in the works for some time now, having received environmental approval in 2007, that is, long before the stimulus.

What makes this historically interesting is that construction on the orignal tunnel commenced in 1929 — but was taken over by the Public Works Administration and completed in 1937. So for the second time, the Caldecott Tunnel seems to have had fortunate timing when it comes to getting federal funding for an already-decided state project.

Overplanning in Dubai

In an  LA Times article, architecture critic Christopher Hawkin writes about his trip to study Dubai:

Like many first-time visitors, I expected to find in Dubai a messy, vital hybrid of architectural and urban strategies, reflecting the city’s history as a regional crossroads and trading center. I could hardly have been more wrong. Dubai is not some Middle Eastern Venice, a polyglot city where the combination of construction workers from Pakistan, bankers from London and Hong Kong and tourists from around the world creates a mash-up of contemporary urbanism.

[. . .]

One major reason that the city has been divided up this way is that the emirate’s ruling family, led by Sheik Mohammed bin Rashid al Maktoum, controls all the major real estate companies operating here. In Dubai, the urban planners and the developers are essentially one and the same. Market ambition and civic ambition are similarly intertwined: Sheik Mohammed has often been called Dubai’s chief executive. Instead of building a monumental city hall or war memorial, Dubai builds shopping centers and office towers at a monumental scale.

In the heart of most cities, the biggest piece of land that a single developer is typically able to control is one square block. (In a dense, layered city, of course, the average parcel is far smaller.) In Dubai, whole districts of the city, many covering dozens of square blocks and hundreds of acres, have been given over to single developments. Seeing architectural diversity within any project as a threat to the bottom line, their creators usually hire a single firm to design them around a recognizable theme: the golf community, the office park, the vaguely souk-like waterfront combination of retail outlets and condominiums.

Currently, the relationship between builders and policy makers in Dubai has led to a strange pattern of development and has resulted a compartmentalized city rather than a conglomeration of neighborhoods. If the city does not recover its position as a tourist destination, it will be difficult for it to diversify its economy because current land use is not suitable for typical residential or business uses.

The unnatural development that a lack of competition has created in Dubai shares similarities with ideas promoted by garden city planners of the early 20th century. Garden city planners believed an organized, planned utopia would be preferable to the apparent chaos of cities that grow organically. Although the idea of a highly stylized and planned city may theoretically seem  this sort of development does not lead to livable cities.

If Dubai seeks to be merely a tourist attraction rather than a vibrant city, this glitzy but impractical development model may succeed provided that global economic prosperity returns quickly.  However, such an undiversified economy means that the city would remain in a position to be particularly hard hit by downturns in the business cycle, as Las Vegas is in the United States.

In order to develop cities that function as more than amusement parks, competition between developers at the street level is necessary to facilitate the diverse needs of residents, rather than exclusively the desires of wealthy tourists.  As a British businessman in Dubai explained in The Sunday Times:

Dubai has brilliantly exploited the boom years to build itself on to the map and into people’s minds. But Plan A is over now. The model only works in the good times. We need Plan B and we need it fast.

More on Dubai’s economy from the Economist, and on the city’s future prospects from Tyler Cowen (who has written on Dubai over 100 times).

Farmland Prices and Suburbia

Rick Harrison at Newgeography.com has an article on the relationship between rising farmland prices and the construction of new suburbs. He looks at the Minneapolis-St. Paul region:

As the tiny towns outside the Urban Boundary attracted more development, they also attracted the national developers. All of the nation’s Top Ten Home Builders discovered this region. Each year 25,000 or so new homes were built and quickly sold to suburbanites who preferred a 30 to 40 mile commute over living near the city core….

Much of the escalation in home pricing was due to a bidding war over developable farmland. National builders, using their Wall Street dollars, competed for desirable acreage. If Farmer Fred was able to sell his property for $50,000 an acre, when Roy next door put his farm up, the starting price was $50,000 and the final fee was likely to be $60,000, the starting point of the next site for sale. By 2005 the outer small town land that could have been bought for $12,000 an acre a decade earlier was worth more than 10 times that amount.

Last month the Wall Street Journal reported a steep decline in farm prices. Data from the Chicago Fed are available here. In  much more land-constrained Britain, prices have dropped as well.

Want to Help the Earth? Move Back to Metropolis

Ed Glaeser writes in City Journal on his latest study, which suggests that cities emit less carbon than suburbs. (Full NBER paper with Matthew Kahn can be found here.) The top five cities (by emissions) are in California.

This sounds counterintuitive at first blush. But, Glaeser suggests, people who live in the suburbs drive more and consume more housing. The policy implication is make cities more affordable by loosening building restrictions:

If climate change is the major environmental challenge that we face, the state should actively encourage new construction, rather than push it toward other areas. True, increasing development in California might increase per-household carbon emissions within the state if the new development, following the current model, took place on the extreme edges of urban areas. A better path would be to ease restrictions in the urban cores of San Francisco, San Jose, Los Angeles, and San Diego. More building there would reduce average commute lengths and improve per-capita emissions. Higher densities could also justify more investment in new, low-emissions energy plants.

Similarly, limiting the height or growth of New York City skyscrapers incurs environmental costs. Building more apartments in Gotham will not only make the city more affordable; it will also reduce global warming.

Here’s Glaeser’s write-up at the New York Times Economix blog. Here’s Tyler Cowen on a previous, related study.