Transportation Investment and Economic Development: Has the TIED turned?

1. Transportation Investment and Economic Development:Has the TIED turned? • David Levinson • University of Minnesota

2. The value of land is determined by its proximity to everyone and everything else. Atack and Margo 1996

8. Clearly Transportation Investments was Historically Concomitant with Land and Economic Development

9. Lifecycle Proportion of Maximum Extent Maturity Growth (Decline) Birth 1825 1985

10. Trends in Roads and Vehicles

11. Macroscopic Productivity Mamuneas, T. and Nadiri, M. (2003) Production, consumption and the rates of return to highway infrastructure capital. Federal Highway Administration, Washington, DC

12. Trends in US Transit Ridership

13. Investments in US Surface Transportation have Peaked because Returns on Surface Transportation have Peaked.

14. H: Gains from agglomeration have largely been played out.Test: Responses to recent investment smaller than response to average investment.

15. Homeowners don’t value marginal increases in access • Accessibility (jobs in 20 minutes by car, AM peak) in Hedonic Model of Single Family Home Price in Twin Cities. Iacono, M. and Levinson, D. (2012) Accessibility Dynamics and Location Premia: Do Land Values follow Accessibility Changes (under review)

16. Larger cities are denser, more accessible and wealthier (have higher incomes) ...

17. Levinson (2012) Network Structure and City Size PLoS One 7(1) e29721 ISSN: 19326203 DOI: 10.1371/journal.pone.0029721

18. ... therefore density causes wealth?

19. ... density is associated with (and presumably causes) congestion Levinson (2012) Network Structure and City Size PLoS One 7(1) e29721 ISSN: 19326203 DOI: 10.1371/journal.pone.0029721

20. ... and larger cities are better connected Levinson (2012) Network Structure and City Size PLoS One 7(1) e29721 ISSN: 19326203 DOI: 10.1371/journal.pone.0029721

21. Maybe connectivity causes wealth.

22. The limits to agglomeration • Cities with greater density have greater "wealth". • Density lowers cost of spread of ideas, transportation of people and goods. • However cause and effect are not clear. I will pose a contrary hypothesis: • Cities with firms (industrial sectors) that are more agglomeration-benefitting produce higher densities; cities with firms that are less agglomeration-benefitting produce lower densities.

23. Growth occurs in waves Disruption (Schumpeter’s Gales of Creative Destruction) is process by which maturity is replaced with innovation. Also consider Christensen’s Innovator’s Dilemma

24. Capitols and Capital • Where agglomeration still matters most are in the political Capitols and centers of financial Capital. (The über-industries) • It matters where firms are relatively small and pool things (suppliers, customers), i.e. early stages. It matters less where firms are large and internalize the supply chain, i.e. maturity.

25. Information Technologies • The Internet and other information technologies diminish the relative benefit of face-to-face interactions.

26. Internalization • Firms and industries undergo a lifecycle process, where there are many firms initially that get consolidated over time. Within a sector, external agglomeration economies are internalized. These firms can then move to isolated campuses. • Some industries are sufficiently dynamic or unstable that consolidation takes longer (PCs), or may not happen (fashion).

27. A positive (but diminishing) feedback loop Decentralized Job growth + + weak agglomeration sectors or stages Centralized Job growth + + strong agglomeration sectors or stages Sectoral growth due to scale, scope, innovation High Residential Density Low Residential Density 0 + + + Exchange of ideas, goods, people

28. Consequences • If the proposed model holds: density is at least as much the effect of agglomeration economies, as the cause of agglomeration benefits.

29. Maturity vs. Innovation • Agglomeration benefits may matter in early stages of networks and industries, but in the end, diminishing returns set in.

30. Policy Implication • Investing in new transportation technologies and networks that are significantly faster or cheaper or better than existing may spark economic development impacts if industry has not exhausted potential agglomeration economies. • More of the same will not.

31. Thank you • dlevinson@umn.edu • http://nexus.umn.edu

32. Levinson (2012) Network Structure and City Size PLoS One 7(1) e29721 ISSN: 19326203 DOI: 10.1371/journal.pone.0029721

33. Size of bubble indicates journey-to-work time Levinson (2012) Network Structure and City Size PLoS One 7(1) e29721 ISSN: 19326203 DOI: 10.1371/journal.pone.0029721

34. Minneapolis Example • To take a case I am familiar with, Minneapolis, downtown has not seen much new commercial growth in over a decade, though there has been a significant (though regionally relatively small) increase in residential density. Minneapolis might be termed a provincial capital. It has a large hinterland, a Federal Reserve Bank, many regional and national bank operations (Wells Fargo, US Bank, etc.), and a large number of headquarters of large firms (regionally especially, though many are not downtown, Target, Best Buy, General Mills, 3M, Medtronic, etc.), as well as emerging clusters in a few economic sectors. • In Downtown there are plenty of vacant lots (i.e. parking lots) for development to occur, and no real constraints on new office (or residential) construction downtown. Clearly the private benefits of building downtown are not as great to the firms making location decisions as locating that new building in suburban areas. Unlike New York, the zoning downtown is not a binding constraint. In brief, the private share that firm will attain from agglomeration benefits of the CBD do not outweigh the costs, (including the opportunity cost of building in some other locale). Those suburban places too have some (weaker) agglomeration benefits, but those may be sufficient. The location within a metro-area still produces benefits (which are weaker than the CBD benefits on daily walking distance face-to-face metric, but still enable daily or weekly driving distance face-to-face), such as shared labor pools, and all that. • If there are agglomeration benefits of locating downtown, they are not sufficient that the local firms (acting through local government) bribe these non-CBD locating firms to move downtown to enable those spillovers. Only a few cases where the spillovers are believed strong result in sufficient side payments (bribes, tax increment financing, etc.) (the Minnesota Twins and the Target HQ building come to mind). • The Twin Cities has some tax-based sharing, so may differ from other regions in the local willingness to bribe, but it also suggests that if agglomeration benefits exist for the marginal new business choosing a location, they are relatively weak. The mental model of agglomeration producing huge benefits if only density limits (as in New York and Washington) were lifted may not apply in many other cities.

35. The Commanding Heights • I see lots of complaints about height limits (especially in DC) in the Blogosphere: e.g. Avent, Yglesias, Market Urbanism, Freemark. • I am in DC and have walked around again. The density feels right for a city, much like Tokyo, London and Paris (all notable for a lack of overly tall buildings). In DC, the buildings are not too tall and canyon like, and there are few vacant lots in the core. • What do height limits do? The restrict buildings over X stories. Thus more buildings less than or equal to X stories are built over a greater footprint if demand is fixed. In other words height limits reallocates development. The consequence is that a larger area is urbanized at a higher density (at or near X stories). In DC, there is a much larger urban sphere than, say, height-limit-less Minneapolis, where high-rises in downtown are surrounded by many low-rise and surface parking lots. • Instead of having 10 blocks of 50 story buildings, DC has 50 blocks of 10 story buildings. Is this a really worrisome outcome? • This additional urbanized space is a positive externality in a number of ways. Better urban form (more sidewalks are walkable), less congestion (traffic is spread out over more space), less pollution intake ("the solution to pollution is dilution", the bad stuff is spread over more area), less crime (more eyes near street level), more serendipitous random meetings on the street (which supposedly create greater productivity) and so on. • At one limit, we could have a height limit of 1 story, and spread everything out, at the other, we could have no limit, and buildings would be as concentrated as the market and structural engineering could support. Clearly the first is extreme, but so is the second, so long as we have unpriced externalities. We live in an imperfect (second-best) world with many unpriced externalities (congestion and pollution among them), which have no clear property rights. Regulating heights is one of many second-best solutions to this problem. • Do the height limits imply more suburban development? Sure, someone who really really wants a high rise for some reason will have to locate in the suburbs. • I can't think of a good reason except ego for needing a high rise, while I see many inefficiencies associated with tall buildings: greater distance to the ground floor and thus to people in other buildings (in the absence of skyways on the 50th floor), limited interactions on the upper stories, so much floor space devoted to elevators, higher building costs, etc.) • Otherwise suburban development is not for lack of space in DC, but rather due to a preference for the suburbs. Cities without height limits get their share of suburban development for all the usual reasons (lower land costs, easier access for workers, etc.) when day-to-day inter-firm accessibility is not particularly valuable in their sector, and intra-firm accessibility still matters.

36. Zoning and Externalities • Ryan Avent (among others) comments on Ed Glaeser's piece on Skyscrapers: Density and Skyscrapers and seems to support allowing more high density development in cities, which are restricted by local government regulation. • The issue that does not really come out (though is mentioned in the comments) is the problem of zoning vs. externalities. The reasons for the lower zoning densities are many, but the rationale is externalities (and the desire to move nuisance law from courts to regulation to avoid the large transaction costs and uncertainties of the judicial system). If you increase density, as the neighbors know, you increase local externalities which they bear (through longer travel times, etc.). • Since no one owns the right to uncongested roads, developers (and planners who support them in their quest for the highest and best use) think they can just offload these costs to local neighborhood streets and it is okay. But what they do is take time from other people by increasing congestion. The neighbors think (presumably by custom, status quo, or some other logic) that they have the right to prevent these externalities, and they do so with restrictive zoning. Zoning regulates negative externalities that are not currently governed by Pigou or Coase. • Neither side is right, the problem at its core is undefined property rights and untolled roads. It is just two sides of selfishness: greedy developers vs. greedy NIMBYs. • I had a similar conversation with Jonathan Levine at the November Regional Science Conference. He asked if a developer could come and build a high-rise in an existing single-family residential area. I replied "good luck", suggesting the NIMBY's hold the cards. I also suggested this was a relatively rare case, which I think is because the zoning largely reflects the market in most places. I.e. there is not much market for high rise housing in largely single-family neighborhoods. There are of course edge cases. Systematically, there are three four cases when a developer is considering building somewhere: • (0) The zoning is not binding. In this case the zoning exceeds market demand, but there are negative externalities to development which the neighbors want to avoid. • (1) The zoning is not binding. In this case the zoning exceeds market demand, but the negative externalities are small. • (2) The zoning is binding, but the developer through either request or lobbying (perhaps at some monetary expense) gets an area rezoned. The lobbying allows political decision-makers to collect rents from restrictive zoning, or neighbors to achieve side-payments. These side-payments compensate the community for the negative externalities that will be received upon a change in the status quo. The political rents are a problem for the political system and how we finance campaigns or administer bribery laws. • (3) The zoning remains binding, but the land is not rezoned because the developer's payments were, or would be, insufficient to persuade the opponents or decision-makers. • Case 0 is a problem for the community, which must now pay the developer not to develop. We see this when communities purchase development rights (e.g. agricultural reserve areas). Here the Coasian right to develop resides with the developer One can see difficulties with Case 0 scenarios. Developers can threaten to develop, and get paid not to develop, even though they were not serious. Bluffing is very easy. Hence the desire for communities to control the development rights through restrictive zoning. Residents must act through government because of the asymmetry and coordination costs, 1000 neighbors all harmed slightly do not have the ability or incentive individually to give a side payment to a developer not to develop at all (or as much), because some residents will want to free-ride on the side payments of others. Only through the government or government-like organization can this be achieved. • Case 1 is not a problem for developers or the community, and the development proceeds without hitch. • Case 2 costs the developers money, but in the end if they choose to build, it still must generate above "normal profits", otherwise it would be better for the developer to keep their money in a bank account. This results in a transfer of money, but is at least neutral and probably win-win. • Case 3 might result in some social loss (especially if there are, in fact, economies of agglomeration), but what is happening is that the loss perceived by the opponents outweighs the benefits perceived by the developer. There may be of course miscalculations about the opponents willingness to pay or willingness to accept, but in the end the potential gains did not outweigh the potential losses, and the project may not have been as good as claimed. • Whether the zoning reflects the wishes of developers or neighbors depends on context, and as density increases, we would expect the neighbors to become relatively more powerful, if only because the negative externalities of development become apparent to more and more people. • As I implied above, there is not a moral right in retaining the status quo, but from a Coasian perspective, zoning creates the property right in a given level of externalities which rezoning proposes to change. There should still be an approximately efficient outcome in the end, if not for political rent-seeking.

37. Metros ranked by accessibility Levinson (2012) Network Structure and City Size PLoS One 7(1) e29721 ISSN: 19326203 DOI: 10.1371/journal.pone.0029721

38. Travel Time Levinson (2012) Network Structure and City Size PLoS One 7(1) e29721 ISSN: 19326203 DOI: 10.1371/journal.pone.0029721

39. Mode Shares Levinson (2012) Network Structure and City Size PLoS One 7(1) e29721 ISSN: 19326203 DOI: 10.1371/journal.pone.0029721