Category Archives: Economics

Study says Blue Line’s development impact is minimal | Star Tribune

Adam Belz in the Star Tribune writes: Study says Blue Line’s development impact is minimal, discussing a recent study by Sarah West and Needham Hurst of Macalester. I get quoted:

“My first sense is the Green Line is a better line,” said David Levinson, a civil engineering professor at the University of Minnesota. “It’s going to a denser area.”

Levinson said that the Green Line — and any subsequent additions to the light rail system — will also improve the value of land along the Blue Line, thus making it more ripe for development as the rail system grows and more people use it.

“That positive feedback system sort of kicks in, and it reinforces the growth,” Levinson said.

Emissions, Equilibrium, and the $10 Bill

On February 1 (at 6:05 am) I found a BART card with $1.35 of money still on it on Sacramento Avenue near the North Berkeley BART station. I picked it up and used it. In economics there is the parable that you never find $10 bills on the ground, because someone would have picked it up already. And that of course is true in a steady state where no one ever drops another $10 bill. Eventually they will all be picked up. But if someone does drop a bill, it is on the ground until someone picks it up.

The most charitable view of emissions, and it doesn’t matter which pollutant (e.g. the EPA criteria NOx, SOx, VOC, CO, PM10, PM2.5, or even CO2, among others), is that nature has not yet adapted to take advantage of the changed environment. If we increase nitrogen in the air slightly, we expect life will evolve over time to be slightly more nitrogen-phillic somehow. Those gene-lines that manage this evolution survive, those that don’t die off. The problem of course for big slow species like large mammals, or trees, is that it takes a long time (many generations, hundreds, thousands, tens of thousands of years) to evolve in a way that is well-adapted to the new environment. So after a sudden change or shock, a species may find its way to a new equilibrium, assuming there are no other shocks or external changes to the system, or be beaten to its appropriate niche by some other species, and go extinct.

But life itself is a disequilibrating process. Humans (and a few other species) for instance invent “technologies” (from using sticks for digging, or rocks for breaking things, to fire or iPhones). These technologies change the environment for humans and other species. If we did that and stopped, an equilibrium could possibly be found. But we continue to invent.

Further, the earth itself is not a closed system. We are being continuously showered by radiation from the sun (you know, light and heat and all), (which we adapt to, assuming it is roughly constant). The earth is also periodically showered by the detritus of the universe (meteors and asteroids). These add to the disequilibrium we face, and are reputed to have done in the dinosaurs.

So it is one thing to say life will adapt to the changes in the environment humans create, undoubtedly some life will do better than others unless we manage to extinguish it all. The question is how long it takes to come to a steady state ( without any external shocks).

Should we privilege the “steady state” ante-Industrial Revolution vs some current or future “steady state”. That seems to me an entirely arbitrary preference. By restoring life to some elysian past we are condemning those species that evolved faster and co-evolved with our technology (from chickens and cows to pigeons and squirrels, among the larger life forms). To say this is the perfect end-state now diminishes possibilities yet to be.

What is our objective? Preservation of the existing mix of species, restoration of some past mixture, maximization of total biomass, maximization of human biomass? Unless people can agree on what it is we want to achieve, the means (pollute, don’t pollute) will remain unsolved. To say “Save the environment” begs the question of which “environment” we are trying to save.

However, if we think of this in property rights terms, we can either define the commons as unowned (which quickly degenerates to a bad outcome), or define it as owned by everyone, as if we are all shareholders in the commons, and the proxy is held by the government (or governments) (1).

In that case, individuals (and firms) have no inherent right to pollute (which we might define as measurably changing the chemical composition of the air (water, land) at some fixed distance, say 10m, at any rate some distance such that breathing does not count as pollution, but tailpipe emissions do). Instead of trying to geo-engineer an ideal world, which is beyond our abilities anyway, even if we could agree upon on it, we would regulate the inputs to that future world in the form of regulating pollution. Nature will then evolve to whatever it evolves to, with a minimal additional influence from humans. We might hope it turns out ok.

The transition from the present “environment as an unowned commons” into which we can dump anything to an “environment as communally owned property” into which we can dump nothing without permission or penalty will obviously be a difficult one. Many processes that were efficient in the absence of pollution prohibitions and penalties are inefficient in their presence. But crisis creates opportunity, and for every old-style industry and behavior the new regime obliterates, a new technology and way of operating arises.

This is the logical outcome of the <a href=””>enclosure movement</a>, which has been steadily assigning ownership to the unowned over the course of human history.

(1) We could have an alternative, where the environment is somehow owned by selected individuals instead of as a commons or by nobody, but carving up the air is much harder than carving up the land, since air moves much faster than earth.

Lean Management of Toll Roads

Enterprising Roads: Improving the Governance of America's Highways
Enterprising Roads: Improving the Governance of America’s Highways

Washington State DOT conducted a Toll Division Operational Review in November 2013.  This report is quite interesting (and reality based, forecast traffic growth has been scaled back quite a bit).

There is further discussion by  Matt Rosenberg at Social Capital Review: WSDOT Report Muses on Private Transport Partners, who notes that Enterprising Roads was cited:

Drawing on Levinson’s paper, WSDOT says, “the theory…is that roads should be managed by independent enterprises that are charged with a mission of providing service to customers” like other “network utilities” which may be privately run but government-regulated, such as water, electric, pipeline, natural gas “and virtually all telecom and cable” systems.

In its report WSDOT stops far short of endorsing a private state transportation utility but does accent Levinson’s view that “the organizations that manage roads should be able to finance road construction and maintenance through the sale of bonds, without requiring direct consent from higher political authorities.” A variety of related alternatives are mentioned by WSDOT including “a public-private partnership contract involving toll rates where the contract holds the regulatory provisions including items such as a toll structure and associated performance criteria.”

Reaching into Levinson’s paper, the WSDOT report cites the New Zealand Transport Agency as one of the most full-fledged actual working examples of a publicly regulated, privately managed road utility – and says that data show its approach “has delivered large efficiency gains without compromising service levels.”

WSDOT’s public-private partnership program has for several years quietly inched the ball downfield on the idea of transportation public-private partnerships but not gotten far with that approach on major road projects due to legislative opposition.

The new WSDOT musings about a privately owned state road utility, regulated by the state, come as the Washington legislature continues to bog down on what is seen by key stakeholders as a much-needed state transportation funding package. If passed in the next few months a statewide transportation funding deal would probably be to the tune of $10 billion or $12 billion. Business, labor, local and regional governments in Washington state are vocally and energetically lobbying for it. Yet the package by all accounts will almost certainly feature at its core an increase in something that WSDOT correctly says in its new report “has been on a deep downward slide from some time” in terms of effectiveness. That’s the state gas tax.

The agency tolling division report states, “The purchasing power of the state fuel tax is declining. The fuel tax is a flat tax on each gallon sold. It is not indexed to inflation, and does not rise as the price of fuel goes up. In addition, Washington residents are driving fewer miles per capita, vehicles are becoming more fuel efficient, and new federal fuel efficiency requirements and the emergence of electric vehicles will accelerate this trend.”

Only eight of every 37.5 cents collected in state gas taxes per gallon of gas sold in Washington is allowed to go to state highways and ferries “including maintenance, preservation, safety improvements and congestion relief.” Adjusted for inflation based on a 77 percent hike in the construction cost index since 2001, state gas tax revenues have actually dropped by nearly half since then and related revenue projections for 2007-2020 revised downward by $3.7 billion as a result, WSDOT reports.

It is worth noting that user fees are not a left-right thing (or not for most of the political spectrum). They are supported by both Greens and Libertarians.  This is an efficiency notion. We should all want the right amount of travel, not more, not less. (We may of course disagree on how much is efficient, or how to weigh externalities, but we hopefully agree that some things are just dysfunctional.) We might also want beneficiaries to cover their costs, especially if they can, which is in general the case with roads.

It is also worth noting that Road Enterprises need not be privately owned (they aren’t in Australia, New Zealand, or Vancouver), they can be publicly owned corporations. The key is political independence. This needs to be done carefully. The Port Authority of New York  is an unfortunate example of pseudo-independence where politics runs amok without accountability. There are better examples.

Also there are many notions of equity in transportation, and not all of them can be satisfied simultaneously, and there is no agreement about which is morally preferable. Beneficiary pays is certainly a reasonable idea that aligns equity with efficiency. The question to be asked is “does the new policy improve things compared to the baseline”, not whether it is perfect.

Basic Employment vs. Sectors with Spillovers

Standard urban economics discusses Economic Base Theory. A nice definition is via Tim Chapin:

The economic base technique is grounded in the assumption that the local economy can be divided into two very general sectors: 1) a basic (or non-local) sector or 2) a non-basic (or local) sector.

Basic Sector: This sector is made up of local businesses (firms) that are entirely dependent upon external factors. For example, Boeing builds and sells large airplanes to companies and countries located throughout the world. Their business is dependent almost entirely upon non-local firms. Boeing does not sell planes to families or households locally, so their business is very much dependent upon exporting their goods. Manufacturing and local resource-oriented firms (like logging or mining) are usually considered to be basic sector firms because their fortunes depend largely upon non-local factors, they usually export their goods.

Non-basic Sector:The non-basic sector, in contrast, is composed of those firms that depend largely upon local business conditions. For example, a local grocery store sells its goods to local households, businesses, and individuals. Its clientele is locally based and, therefore, its products are consumed locally. Almost all local services (like drycleaners, restaurants, and drug stores) are identified as non-basic because they depend almost entirely on local factors.

Economic development practice is to entice/enhance “basic” industry. The example of Boeing is especially timely, given the recent issue of Boeing potentially moving airframe production if it didn’t get labor givebacks. I don’t imagine most of the places that Boeing was considering moving to have an airframe sector, or upstream or downstream vendors or customers, or a workforce skilled in airframe manufacturing, which would generate benefits beyond “jobs, jobs, jobs”. Similarly, ED advocates often argue for new infrastructure , despite at best weak evidence that in a mature (roadrailtransit) network there will be much accessibility gain, and thus little resulting economic development.

But the key point to remember from welfare economics is that everything is non-basic at a global level, and everything is basic at the household level. While it might be locally preferred to have more basic employment (we get money in exchange for stuff), that makes no difference on the global scale. Economic development practice is parochial (which is no surprise as it is funded by place-based local and state governments).

Yet that is not to say that local development is neither good nor bad. The reason it might actually be better to have local concentrations is because of various types of economies: in particular economies of scale of various kinds (including economies of agglomeration, which in places with very large employers, may all be internalized), and network economies. These economies produce spillovers, not just for the firm, but also for upstream and downstream supplies and customers, and potentially for competitors as well. I will call these Spillover Sectors.

Economies of scale mean that the cost goes down the more that is produced, (economies of scale are within firm, economies of agglomeration are within place, but between firms), so we can lower global costs if we specialize. The core reasons for this include large fixed costs associated with plants.

Reasons for Economies of agglomeration are also plentiful (from the Transportation Economics Wikibook):

Type of scale economy Example
Internal 1. Pecuniary Being able to purchase intermediate inputs at volume discounts
Technological 2. Static technological Falling average costs because of fixed costs of operating a plant
3. Dynamic technological Learning to operate a plant more efficiently over time
External or Agglomeration Localization Static 4. Shopping Shoppers are attracted to places where there are many sellers
5. Adam Smith Specialization Outsourcing allows both the upstream input suppliers and downstream firms to profit from productivity gains because of specialization
6. Marshall labor pooling Workers with industry-specific skills are attracted to a location where there is a greater concentration.a
Dynamic 7. Marshall-Arrow-Romer Learning-by-doing Reductions in costs that arise from repeated and continuous production activity over time and which spill over between firms in the same place
Urbanization Static 8. Jane Jacobs innovation The more that different things are done locally, the more opportunity there is for observing and adapting ideas from others
9. Marshall labor pooling Workers in an industry bring innovations to firms in other industries; similar to no. 6 above, but the benefit arises from the diversity of industries in one location.
10. Adam Smith division of labor Similar to no. 5 above, the main difference being that the division of labor is made possible by the existence of many different buying industries in the same place
Dynamic 11. Romer endogenous growth. The larger the market, the higher the profit; the more attractive the location to firms, the more jobs there are; the more labor pools there, the larger the market—and so on
12. Pure agglomeration Spreading fixed costs of infrastructure over more taxpayers; diseconomies arise from congestion and pollution

Source: World development report 2009: reshaping economic geography By World Bank, Adapted from Kilkenny, Maureen (1998) “Economies of Scale” Lecture for Economics 376, Rural, Urban, and Regional Economics, Iowa State University, Ames Iowa

Economies of scale are so pervasive we don’t notice them. Every road is an instance of economies of scale, we walk/ride/drive along roads because it is faster than going across unimproved space, even though it is less direct, but we individually could not afford to build the road, so we share the fixed costs with lots of people. The cost per person for roads is lower the more persons we spread the cost over. Economies of scale may also be played out (exhausted) at the margins we observe. Just because we had economies of scale in the roads we have built to date does not mean there are still economies of scale waiting to be picked up off the street like the proverbial $10 bill.

Two economists are walking down the street when one points to the ground and says, “Look, a ten dollar bill!”

The second economist replies, “That’s crazy. If that was a ten dollar bill someone would have picked it up already.”

In fact, most of the easy things have been done. Not to be as pessimistic as Tyler Cowan, but it is true that we pick the the projects with the highest Benefit/Cost ratios (low-hanging fruit) first, and work our way down-the list (up the tree), until the cost of building the project outweighs the benefits (the cost of getting the fruit outweighs the pleasures of consuming it). Clearly new projects are often on the low B/C side of the equation.

Network economies mean that the value of something increases the more people who use it. These are also so pervasive we don’t always notice them. The more people who use MSP airport, the better the airport is for me, because it will have more flights. Roads are also examples of network economies, as the more people who use the road, the higher quality road we will build and the more accessibility (by auto) I will have. Thus we have interstate highways because we have hundreds of millions of drivers. If there were only one driver, even Bill Gates, we would not have an interstate system.

So to get back to types of employment. When doing economic development we should not be thinking about Basic vs. Non-basic. We should be thinking about employment that has benefits from concentration, either economies of scale and agglomeration, or network externalities, or both, and then working toward establishing concentrations of those sectors to maximize the benefits to society.  This usually means considering where local strengths already are, rather than starting from scratch. Complement the existing rather than dropping in an alien business.  The job multiplier from two jobs paying $75,000 may be the same, but the one in a spillover sector will lower costs for others in the sector and/or improve benefits.  It means not going after projects just because they generate jobs, but encouraging firms to relocate into specialist concentrations where there are spillover benefits from those concentrations.

In contrast, sectors which have losses with concentration (think natural monopolies, where competitors split the market so that no firm can recover fixed costs), should be encouraged to remain dispersed.

Causality in the Link Between Road Network Growth and Regional Development

StatePanel image

Recent working paper:

  • Iacono, M. and D. Levinson (2013) Causality in the Link Between Road Network Growth and Regional Development

    This paper investigates the relationship between the growth of road networks and regional development. We test for mutual causality between the growth of road networks (which are divided functionally into local roads and highways) and changes in county-level population and employment. We employ a panel data set containing observations of road mileage by type for all Minnesota counties over the period 1988 to 2007 to fit a model describing changes in road networks, population and employment. Results indicate that causality runs in both directions between population and local road networks, while no evidence of causality in either direction is found for networks and local employment. We interpret the findings as evidence of a weakening influence of road networks (and transportation more generally) on location, and suggest methods for refining the empirical approach described herein.

A rewarding life

2013 06 09 at 10 27 52

Businesses offer rewards programs for at least two reasons. One to hook you and get you to return for your downstream reward; second, to monitor your behavior, and tie purchases to a single account. The latter is most common at grocery stores, where cash customers could not otherwise be tracked across multiple transactions.

I am of the opinion that in the modern world there is not much privacy left anyway, and who cares if they know I buy toothpaste when I buy chicken wings, but in the following purchase we buy bananas. I use a credit card anyway, and they should be able to do a lot of this tracking already.

If a business offers a rewards program, I am generally willing to sign up, so long as they don’t spam my email account. I still have frequent flyer cards from defunct airlines (generally having migrated my points to its successor). Sadly, I have lost miles that were earned for failure to maintain. American Airlines took away many miles since I didn’t use them for 18 months. This pretty much guarantees I won’t use them again. They didn’t even warn me, the way some other airlines have done, or let me convert the miles into magazine subscriptions.

I have been a continuous Delta Skymiles holder since the early 1980s, and much more intensively since the Northwest merger, and I recently was re-promoted to Silver Elite (I feel like Steve Martin in The Jerk, joyous about being in the phone book). I am borderline on this, so it is highly likely I will be relegated to Zinc Peon level next year, but still there are minor perks, like the Club room at airports (though I think you could generally just crash it and no one would notice at most airports).

I also sign up for every hotel program whenever I stay there. This is a problem since my hotels are less likely to be the same ones. I have managed to keep my Hilton points due to TRB every year, but the other hotel programs seem to lose my points, presumably for lack of my use. And I better use Hilton quickly, since TRB is migrating. This is sad. Most recently I just joined the Best Western program. Undoubtedly this will not be repeated. I have never claimed any benefits from a Hotel program, not even a free night, so I must be doing something wrong. The hotel however has used it as an excuse to comp me free Internet after I complained bitterly about the $15/night Internet charge when a Motel Six (which parenthetically, got its name from charging $6/night) gives it away free.

Restaurant reward programs are usually simpler, a punch card. I have gotten free meals (about 1/semester) from these, in particular the cards at some University Dining Service sites. There is always the difficulty about which meals get stamped, which are quite inconsistent between locations. Is a sandwich an “entree”? Is sushi an “entree”? These sometimes stay in my wallet for years. Erbert and Gerbert is more sophisticated than many and has an online sign-up. They gave me a free sandwich randomly, which was cool. Unfortunately, the card is not honored at all locations, which for such a small chain is puzzling.

To save money on future kid footwear purchases, I have signed up for Payless rewards twice, since I lost the first one.

There should of course be a better way than having to track each program, which could become a full-time job. This is a job for biometric screening, such as fingerprints or facial recognition, or something similar. When I go to a store, I would simply put a finger on a digital reader, or look into a retinal scanner, and it brings up my account, just like the movies. If my wife and I are together, we can link our accounts. And so on.

So how will pervasive biometrics change transportation?

Well, the normal pattern is that a new technology both does old things better and enables new things. We can easily imagine reducing the thickness of our wallet and the number of our keys, as biometrics would be used to let us check into places, serve as a frequent-flyer id, give a standard interface for business card exchanges, start our car etc.

But what new things will we do with biometrics that would not happen otherwise? Open road tolling with unique brain-wave identifier payment systems? Real-time hitch-hiker match-making with security? How will we avoid locational tracking when biometrics are everywhere?

Will everything be gamified, so I will earn points for driving on county roads and not city streets, or when I obey the law at signalized crossings?

Comments and suggestions welcome.

Thinking outside the Right-of-Way

There has been recent controversy about the Southwest LRT and its recent costs. (See Twin Cities Business for a nice write-up). I suggested in the comments that it might be cheaper to buy the Twin Cities and Western Railway company (presumably take the track rights, settle this controversy and then sell off the rest) than pay to accommodate them. But I have no idea what it is worth. I do have an estimate of its size, in terms of number of employees from their website.

We do have data on much larger public railways. I estimated the ratio of market value to number of employees, and then took the average ratio and multiplied it by the number of TC&W employees. (This is the market value each employee adds, and is loosely correlated with market value in mature industries, there are better more complicated estimates, but this is a blog post).

This gives a number just about $100M, which sounds ballpark. (I suspect it is too high, since there should be economies of scale in the larger Railroads) This is cheaper than some of the estimates for accommodating it. The long-term cost to the public would be less than this, since the parts that were not needed could be sold off.

Planners and public officials need to think outside the Right-of-Way (Box).

Railroad Number of Employees Market Value Ratio
CSX 32000  23,700,000,000 740625
UP 46787  74,170,000,000 1585269
NSC 30943  42,120,000,000 1361213
CP 15112  26,620,000,000 1761514
Twin Cities and Western RR 80  108,972,420  ESTIMATED

A second comment I had was about sharing track rights. There should be some way for the LRT and the freight railway to share tracks, given how few freight trains run per day and how slow they are. People say FRA won’t allow it. I am sure they won’t. On the other hand, this is what politicians are for, to grant exemptions. And for well less than $100 million, I am sure someone can be persuaded to grant an exemption.

How much did the lobbying for the St. Croix River Crossing cost?

Why transportation doesn’t get the money it “needs”

In the transportation community we tend to think surface transportation is underfunded. We think there are “needs” unmet. National reports from industry groups say more resources are required. Local reports are similar. Economists have a problem with the word “needs”, but the term in transportation has come to mean things for which the benefits outweigh the costs (subject to the usual debates about what are the benefits and costs of any given project).

Certainly the quality of services could  always be improved, pavement repaired, bridges strengthened, bus stops made more useful, buses modernized, etc. Money would enable us to do any of these things.

Therefore, the solution must be more money. Yet the sector doesn’t get more money at the federal level, or in most states. So if costs are low, and there are clearly needs, why can’t it close the gap?Some hypotheses:

  1. The industry is saturated. One concern is that maybe the amount of resources to do the work is limited, so we can’t physically get more infrastructure built. If there were a limited number of contractors, and they were all fully employed, more money would simply mean higher prices and a reshuffling of priorities not new building. Further, there are steep barriers to entry, I can’t just start a road construction company. So if they are fully employed now, all they would do is demand higher rates, defer something else, to do the new thing. Contractors of course probably claim they are not fully deployed, and certainly could add some employees and acquire additional materials. How high is capacity utilization in the road construction? How close to fully employed is the sector?  Nationally, according to the Bureau of Labor Statistics, employment in NAICS 237200 – Highway Street, and Bridge Construction was:

    From a 2006 peak, the sector was once 20% larger in employment. Clearly a lot of this is due to the effects of the recession on local government spending, but recovery is very, very weak.

    It is hard to conclude that even 2006 was “full utilization”, there is always elasticity (if wages are high enough, some people will put off retirement, others will be attracted to work in the sector). Some equipment can be transferred from building other types of projects to road construction. New equipment can be ordered, equipment and labor can be moved from other states. The real world is not black and white, but as capacity utilization increases, prices increase faster than output. However in the absence of full utilization, prices should be relatively cheap. If firms don’t need to go to extra effort to hire workers and machinery, (i.e. they would otherwise be idle or working at marginal tasks), prices will be stable.

    The analogy here is a bottleneck. At well below capacity, travelers can proceed at free flow speed. Only as capacity approaches does delay (higher prices) result.

  2. Money won’t go to needs. Political rent-seeking will divert funds from what matters. Cynical as this may be, there is some evidence for this. The construction industry itself is indifferent to what is built, so will happily support any spending. It is the users/taxpayers who suffer from the misallocation of resources, not only in the opportunity cost of what isn’t done, but the future maintenance burden of supporting what was done. Spending money may solve today’s macro-economic unemployment problem, but spending it poorly creates future problems. We have no evidence that giving more money will result in it being spent on the things we care about.
  3. Transportation doesn’t need (much) more money:
    • Weak version: People don’t perceive the same needs as industry does. Most roads and bridges are in good enough shape. Most people drive on those good-enough roads. The perception is limited to what people actually travel on. As Charles Lane says: “So how come my family and I traveled thousands of miles on both the east and west coasts last summer without actually seeing any crumbling roads or airports?” Even Lane acknowledges “The United States probably needs more infrastructure spending. It also needs a serious debate about how much cash to invest and how to invest it. Alarmism promotes the former, not the latter.”
    • Strong version: The industry is wrong. There is in fact no need. Not only don’t we need new roads, the existing roads are fine too. There is already enough money flowing through the system to keep the it in a state of good-enough repair. So what if a bridge collapses every few years, that is nothing compared to other social problems, like the 35,000 people killed each year in car crashes. Conditions are getting better.
    • While existing roads are in fine condition, they are congested, so we need more new and wider roads. The purported need for maintenance is just a distraction put forth by the greens to avoid new construction.
  4. People see the problem but don’t care about the social outcomes. They would rather have the large screen TV than pay for the better road as some surveys gas taxes repeatedly find their unpopularity.
  5. There is a need, but I don’t like roads. We have too many roads as it is. Deterioration is a form of traffic calming, so we should encourage it..

My take:

In short, I think the road-building sector is far from fully utilized, there is a lot of slack to handle more road building. More expenditures in road building should not significantly drive up prices at this time.

But, what would it be spent on? I am sympathetic to the claim that more money won’t actually go to needs. I am also sympathetic to the perception bias problem. There is only a problem if you see it every day. Lots of roads are in good enough condition, and bridges don’t fall down with alarming frequency. However it is clear Charles Lane did not travel on the signalized arterials near my house.

The Minnesota gas tax was last raised in 2008 (with a multi-year phase-in), and with all of the stars aligned for an increase: business community endorsements, DFL legislature in both houses, the Senate actually willing to vote for it, and the House too, with some encouragement, the Governor pooh-poohed an increase and said we need another information gathering campaign, and suggested that it can be done next year, which is an election year. Worse, all Governor Dayton could think to do was build a bridge to Wisconsin. The edifice complex, infrastructure infatuation edition, will suck away a lot of the funds.

Certainly any taxes are unpopular, but there is an issue of framing with any polls, and a general problem of the public not believing that user fees are dedicated to transportation, even when the law says it is. Sure marketing and education campaigns would help, but there are fundamental issues of trust. This is an institutional problem, which can be rectified by separation of roads from the executive branch into a public utility.

Pricing with and without Reservations

The Twin Cities freeway system, like many places, is designed so everyone who wants to use a freeway can do so on-demand by showing up and getting on the road (or queueing at a ramp meter waiting for the opportunity). The Twin Cities also has a MnPass system on some of its freeways, which it plans to expand.

MnPass System of Dynamic Pricing
MnPass System of Dynamic Pricing

The MnPass High Occupancy/Toll (HOT) lanes guarantee free-flow travel times, but have tolls which vary systematically over time-of-day (rising during the peak period), or in modern installations, dynamically. In the case of dynamic tolls (like MnPass), they are intended to ensure the toll is high enough to prevent congestion (ensure the level of traffic is far enough below capacity that bottlenecks are not activated, and if temporary queues are formed they are quickly discharged.) However with the dynamic toll,  travelers don’t know what it is until they are about to decide between using the priced lane or not. (It is capped at $8.00, but the price has variability).

Almost everywhere else, we guarantee the price on a road ($0) with variable travel time.

We thus have either uncertainty on price with certainty on time, or certainty on price and uncertainty on time. We should be able to have certainty about both of these, assuming we allow the price to be non-zero.

First-come, first-serve is not the only way to allocate space. We don’t allocate table space that way during prime time at nice restaurants. We don’t generally allocate airline seats that way. We don’t have to allocate roads that way.

We could, for instance, have reservation pricing (which has been proposed for intersections in a real-time way). At its most basic level, for instance, every day the commuter pre-purchases a ticket to use a particular road segment (e.g. between exit 400 and exit 401) during a particular time slot (say between 7:45 and 8:00). The ticket cost is known in advance before departure, like a plane ticket. The road agency would only sell as many tickets as the road would accommodate (without congestion) at that period. The ticket would be validated electronically through some form of Electronic Toll Collection.

But, roads are not like airplanes, the traveler might arrive at 7:44 or 8:01, does the road agency force the car onto the shoulders? More likely they just charge a penalty which increases with deviation from the purchased window. So if the charge were $2, there might be a $0.10/minute surcharge added for each minute early or late the traveler was.

If the system were deployed universally, congestion would be a rarer occurrence (seeing only non-recurring congestion, due to crashes and other incidents, not the daily recurring congestion because of excess demand for the available capacity). Further the system would know whether the traveler or the agency was the caused the earliness or lateness. If there were non-recurring congestion, it might waive the penalty. If on the other hand the traveler left too early or too late to reasonably make their slot under planned for circumstances, the surcharge would stand.

But travelers don’t want to map out their route every day. OK, the agency can probably just sell a ticket allowing travelers to be “on the roads” (as opposed to being on a specific road), and let individual travelers sort out the best path. The losses from not micro-managing spatially are relatively small, compared to the gains from spreading traffic out by time of day. See the literature on Macroscopic Fundamental Diagrams about this.

In this case, the traveler pre-purchases a ticket to use any metropolitan area road between 7:00 and 7:30 am, but the number of passes is limited by system capacity. If purchase is made far enough in advance there is a lower price then if the ticket is bought real time. But no-one wants to plan their schedule that far in advance, or log-in daily spending even 5 minutes to buy tickets for a 20 minute trip.

Here the road agency managing the system can be a little bit more clever. They could sell various types of season passes (just like transit agencies). A traveler might buy an unlimited use pass for a premium, but there would be a limited number sold to residents of each zip code (if spatially fixed, passes would not be transferrable, the electronic transponder would be linked to a license plate) (or any other local geography that makes sense, the key is there is still finite space on the roads, and too many pass-holders from a wealthy suburb won’t save time just because there is excess capacity elsewhere). Or they could buy a more limited use pass at a lower price. And of course, travelers would buy these as recurring subscriptions, billed to a credit or debit card.

People without passes could take their chances with same-day tickets which might be more expensive if traffic is on the edge of congestion, or cheap if traffic is low that day.

If set up properly, these passes replace existing revenue sources for the agency.

How should the agency allocate these passes? Clearly it should not just give them away. But setting a fixed  price and selling them does not real allow discovery of demand patterns. Here Dutch or Vickrey auctions might be appropriate. For instance, the passes would be available at a posted price (‘buy-it-now’), but the agency would also accept lower bids. Suppose there were 100 passes, there would be a bidding period, and at the end of the period, the top 100 bids would win and the price would be set at the willingness to pay of the 100th bidder. There are many variations on auctions, which each have advantages for buyers or sellers in terms of maximizing revenue or price discovery or fairness.

Mostly Empty Syndrome

If you have been following this blog, you may have detected a theme, I don’t like the public wasting money on un-needed infrastructure. Of course no-one endorses “wasting” money, we just disagree what is wasteful and what is an investment.
I think the answer is obvious in retrospect. A successful investment had a positive “return on investment” at or above market interest rates. An unsuccessful investment (or waste) had a negative return on investment. Projects with positive but below market rates of return sit in an analytical purgatory.

In prospect, I think I can assess forecasts accurately, and project advocates are not to be trusted for a variety of well-understood reasons ranging from optimism bias to strategic misrepresentation. Unfortunately, other people also think they can assess forecasts accurately, even if we know they can’t. If we had better mechanisms for requiring forecasters to be more accurate, we could mitigate these problems.

When these projects are small, it is not terribly important. The analysis of benefits and costs should not be costlier than than the benefits from the analysis (i.e. the difference in total welfare from a build/no build or a build this vs. build that decision). But when the project proponents ask for hundreds of millions of dollars (or more), we should be paying more attention.

A large number of projects seems to fall in the category of what I will dub “Mostly Empty Syndrome”. MES projects are infrastructure that are underutilized. Mostly they are not underutilized by design, but by mis-forecast. There are facilities however, like NFL stadiums, that are in fact underutilized by design, with lots of marginal events schedule to mitigate the grossness of the structure.

These are projects that serve purported needs, but those needs don’t materialize. Or they just are insufficient to justify the cost. Or they can be met in a different way. A few examples are listed below:

  • Vikings Stadium – As I suggested before, they really only need to play in a TV studio. More importantly, the facility is unused or underutilized 355 days a year. The worst aspect is that they could not somehow figure out a way to share the stadium with the college team at a university that is adjacent to the stadium site.
  • Stillwater Bridge – The old bridge required a replacement. The new bridge is overkill for the actual demands on the road.
  • SPUD – It is basically slated to serve 350 train passengers a day, and a few buses until lots of speculative rail lines are opened.
  • Northstar – Some forecasts greatly over-estimated benefits.
  • Maryland’s Inter-County Connector is failing to realize forecasts of demand.

There are some counter-examples perhaps, projects that were long considered white elephants, though eventually demand caught up with supply. Dulles Airport meets this criterion. That still does not mean it was a good idea to build it when it was built, even if it is heavily used today. The 20 years of underutilization are fixed capital that could have been better spent in some other way.

There are other counter-examples, projects that were expected to fail (by someone, though not by proponents) that exceeded expectations. The Pennsylvania Turnpike comes to mind.
What connects MES projects?

  1. I believe history will show that they are designed and pushed through by politicians serving narrow interests rather than by market demands or public sentiment. That is, they are generated by top-down rather than bottom-up processes.
  2. They are large and require special treatment.
  3. They are backward looking, built near, at, or past the maturity of the technology they represent. Air travel was still growing when Dulles was built, and the market grew into its capacity there. Auto travel was still early in its cycle when the Pennsylvania Turnpike was built. In contrast we now have peak travel, long ago passed peak railway, and are hopefully at peak football.