Category Archives: Economics

The effect of failed urban economics on the French riots

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French Revolution2.jpgJoel Kotkin is an Irvine Senior Fellow at the New America Foundation, the author of The City: A Global History (Modern Library, 2005) and a friend of Houston Strategies’ Tory Gattis. Mr. Kotkin came to my attention recently for his insightful writings on urban planning (here and here) during the aftermath of Hurricane Katrina.
In this OpinionJournal op-ed, Mr. Kotkin addresses the unintended consequences in France of governmental policies such as high taxation, the welfare state and the economic barriers to entry caused by excessive regulation:

The French political response to the continuing riots has focused most on the need for more multicultural “understanding” of, and public spending on, the disenchanted mass in the country’s grim banlieues (suburbs). What has been largely ignored has been the role of France’s economic system in contributing to the current crisis. State-directed capitalism may seem ideal for such American admirers such as Jeremy Rifkin, author of “The European Dream,” and others on the left. Yet it is precisely this highly structured and increasingly infracted economic system that has so limited opportunities for immigrants and their children. In a country where short workweeks and early retirement are sacred, there is little emphasis on creating new jobs and even less on grass-roots entrepreneurial activity.

Read the entire piece.

In defense of urban sprawl

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urban sprawl.jpgRobert Bruegmann is a professor of architecture, art history and urban planning at the University of Illinois at Chicago, where he is chair of the art history department. He is also a well-regarded author on the issue of suburban growth and is the author of the recent book Sprawl: A Compact History (UChicago Press 2005). In this LA Times op-ed (free reg required), Professor Bruegmann challenges the conventional wisdom that Los Angeles is the epitome of urban sprawl run amok and that the northeastern metro areas are paragons of sound urban planning:

Los Angeles is not a particularly good example of urban sprawl. Take the part about being unplanned. The truth is that New York, Chicago and most of the older American cities had their greatest growth before there was anything resembling real public planning; the most basic American land planning tool, zoning, did not come into widespread use until the 1920s.
L.A., by contrast, was one of the country’s zoning pioneers. It has had most of its growth since the 1920s, during a period when planning was already important, and particularly since World War II, when California cities have been subject to more planning than cities virtually anywhere else in the country.

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The economics of deferred obligations

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Delphi2.gifChronicle business columnist Loren Steffy wrote this interesting column over the weekend that includes excerpts from an old interview with business restructuring expert Steve Miller, who is currently managing the reorganization of Delphi as its CEO.
The reorganization of Delphi is considered a precursor of the almost inevitable larger reorganization of its former parent General Motors and other large American companies — not to mention the federal government’s Social Security and Medicare programs — that are burdened with huge unfunded pension and retiree health care costs. Mr. Miller sums up the basic problem well in describing the similar problems that he confronted in one of his former reorganization projects, Bethlehem Steel:

In 1960, when [Bethlehem Steel] adopted a lot of its benefit programs, the company had 100,000 workers and about 12,000 retirees. Promising them pensions and health care benefits for life seemed, at best, a distant worry.
More than 40 years later, Bethlehem, by then in bankruptcy, had 12,000 employees and 130,000 retirees and dependents. The math no longer worked.

Read the entire article.

A truly scary thought — Metro morphs into real estate developer

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metrocar14.jpgThe Chronicles Nancy Sarnoff writes in this article about the Metropolitan Transit Authority‘s latest venture to do something other than what it is chartered to do, which is to provide a flexible and effective mass transit system for citizens of the Houston metropolitan area:

[Metro] has selected Houston-based Transwestern Commercial Services to build [a $105 million building above the transit center on Fannin near the Medical Center], which could include condominiums, a hotel, office and retail space in the Texas Medical Center.

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Nobel Laureate Thomas C. Schelling

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schellin.gifFormer University of Maryland economics professor Thomas C. Schelling was named the winner of the Nobel Memorial Prize in Economic Science yesterday along with Israeli economist Robert J. Aumann for their work in game theory, which essentially attempts to explain the choices that competitors make in situations that require strategic thinking. Mr. Schelling was the mentor of Marginal Revolution’s Tyler Cowen, so don’t miss Tyler’s excellent overview of Professor Schelling’s career and extraordinary contributions to economics, foreign policy and clear thinking. Tim Harford of the Financial Times also chimes in. Enjoy.

The latest urban boondoggle

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metrocar12.jpgHouston’s light rail system is a depressing black hole that gobbles huge amounts of money, so we are reduced to feeling somewhat better about that waste by stories such as this one that portend an even bigger urban boondoggle:

A decade ago, local leaders [in the Raleigh-Durham Research Triangle area of North Carolina] started planning a regional rail system, hoping to avoid a future of clogged highways and frustrated commuters. . .
The Triangle Transit Authority wants to build the $759 million system. But TTA is struggling to answer rigorous questions from federal officials about predictions of how many people will ride.
No dirt has yet been turned, although TTA has spent nearly $43 million acquiring land and access to an existing railroad corridor.
The project’s cost has ballooned from a 1994 estimate of about $100 million to a new estimate of $759 million.

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Robert Reich on the dangers of the political economy status quo

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reich.jpgRobert B. Reich is University Professor and Maurice B. Hexter Professor of Social and Economic Policy at Brandeis University and at the Brandeis Heller School of Social Policy and Management. He has served in three national administrations, most recently as Secretary of Labor in the Clinton Administration. Daniel Drezner points us to this NY Times op-ed in which Mr. Reich provides a fine analysis of the dangerous economic effects of the seemingly intractable governmental tendencies toward protectionism and pork-barrel spending:

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An economist’s marriage proposal

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greenspan3.jpgNBC News correspondent Andrea Mitchell is a part of one of Washington’s most formidable power couples through her marriage to Federal Reserve Chairman Alan Greenspan. Asked during a Time magazine/CNN.com interview this past week as to whether Mr. Greenspan ever engaged at home in “Greenspeak” — i.e., the art of ambiguous economic pronouncements — Ms. Mitchell observed:

“Occasionally. In fact, he claims he proposed three times before I was able to understand. He was so oblique.”

The Power of Pork

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metrocar8.jpgTory Gattis and I recently generated some interesting discussion regarding mass transit generally and light rail in particular in a series of posts (here, here and here). Part of the psychology in favor of the light rail projects discussed in that blog thread is that the federal government — regardless of economic merit — is going to throw some political pork barrel funds at light rail projects, so light rail proponents reason that we might as well claim our fair share.
Although that line of reasoning is understandable, it doesn’t really make me feel any better about the pork being distributed in the first place. This Washington Post article provides a good analysis of the politics of the new transportation bill:

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The Psychology of Light Rail

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Tory Gattis (Houston Strategies) recently authored this insightful post that explores the vexing question of why many people passionately support light rail in the face of the overwhelming economic arguments against it?

Tory concludes that it has something to do with an unexpressed human psychological need to be liked — sort of like, “Here, check out and play with my light rail toy, and you will probably think better of me.”

Tory is clearly on to something in that there appears to be an element of a civic inferiority complex underlying some folks’ support for light rail. However, Tory’s point still does not explain why people who need mass transit the most — i.e., folks who cannot afford the cost of buying and maintaining a car — support light rail, which certainly does not improve their mobility and, by drawing resources away from mobility projects that would, probably harms it.

My sense is that that question lies somewhere between the human demand for entitlement and lack of viable choices.

As previously noted on this blog, the true economic benefit of light rail is highly concentrated in only a few interest groups — political representatives of minority communities who tout the political accomplishment of shiny toy rail lines while ignoring their constituents need for more effective mass transit, environmental groups that are striving for political influence, construction-related firms that feed at the trough of light rail projects, and private real estate developers who enrich themselves through the increase in their property values along the rail line.

Inasmuch as none of these reasons for mass transit appeal to the part of the electorate who actually need mass transit, this amalgamation of interest groups continues to disguise their true interests behind amorphus claims that the uneconomic rail lines reduce traffic congestion (they do not), curb air pollution (they do not), or improve the quality of life (at least debatable). The literature on all this is public and volumnious — check out demographia.com, cascadepolicy.org, and americandreamcoalition.org.

So, how do these interest groups get away with this? The costs of such systems are widely dispersed among the local population of an area such as Houston, so the many who stand to lose will lose only a little while the few who stand to gain will gain a lot.

As a result, these small interest groups recognize that it is usually not worth the relatively small cost per taxpayer for most citizens who do not use mass transit to spend any substantial amount of time or money lobbying or simply taking the time to vote against an uneconomic rail system.

Meanwhile, the light rail interest groups garner support for light rail from the part of the electorate that actually needs mass transit by simultaneously limiting the mass transit choices and threatening that part of the electorate with loss of the governmental funds for mass transit if they fail to support light rail.

Thus, a referendum on mass transit issues is never promoted with choices between alternatives such as a light rail system, one one hand, and a cheaper and more effective bus-based system system, on the other. It’s simply an “all or nothing” choice, and folks who need mass transit will understandably vote in favor of getting their share of public transportation funds even if it does not improve their mobility one iota.

Indeed, given the cost of light rail systems, one wonders how those citizens who actually need mass transit would vote if the alternative were a light rail system, on one hand, and a new Toyota Prius for each such citizen, on the other? Frankly, the cost of the latter alternative would likely be cheaper than most any light rail plan.

So, at the end of the day, where does that leave us? Is it wrong that people who need mass transit vote in favor of something that does not really address their needs? No, it does not, but it troubles me when they are misled in doing so.

As Anne Linehan and Kevin Whited (blogHouston.net) have repeatedly pointed out, a part of Metro’s pitch for its light rail plan was that light rail would enhance Metro’s bus system and service. Inasmuch as that representation has turned out to be patently false, it seems reasonable that our public officials should at least be required to point out publicly that Metro’s most utilized and efficient mass transit system — i.e., the bus system — will likely continue to erode as Metro continues to invest heavily in light rail.

In the meantime, it would also be nice if public officials would admit publicly that the usual economic justifications for light rail are also dubious. If mass transit users and other citizens want to allow Houston’s public officials to continue to throw money at a light rail system in the face of the economic truth about such a system, then I can live with that result despite my compassion for those citizens who are not being provided the mass transit that they need.

But at least let’s require truth in advertising in connection with having citizens vote on such matters.

A similar sentiment is shared in this interesting Owen Courreges post (Lone Star Times) in which he takes the Chronicle to task for suggesting that Metro’s political opposition — rather than Metro itself — is misleading the public about Metro’s expanded light rail plan.

Finally, Tory points out that we should take some comfort in the fact that Houston’s light rail plan is at least not as big an economic boondoggle as similar plans proposed for Seattle and Denver. Similarly, a couple of commentators to Tony’s post chime in that the marginal cost of the light rail system to Houston area citizens is relatively small for a civic asset that will impress citizens and visitors alike for many years to come. That latter point may have some validity, but let’s make sure that we are talking about the correct marginal cost.

A big difference between the light rail system and the publicly-funded stadiums that Houston has built over the past several years are that the stadiums have tenants who pay the vast majority of the cost of maintaining the facilities.

In comparison, Metro’s light rail system does not come close to generating enough revenue to pay its ongoing costs, as was brought home by Metro’s recent announcement of desultory operating results coupled with the expenditure of $104 million more on the three-year-old rail line to fix problems caused by construction errors and add more rail cars.

In that regard, even the $1.5 million that Harris County spends annually to mothball the Astrodome pales in comparison to underwriting the ongoing cost of the light rail system.

The bottom line is that light rail systems eat voraciously, and any analysis of the true marginal cost of such a system to citizens has to take into consideration the high cost of feeding that appetite.