What kind of company is Amazon, and how many locations does it want?

We’re now into round 2 of the great Amazon HQ2 extravaganza, and as with the initial announcement much digital ink has been spilled to analyze the meaning of the winnowing of the list to a mere 20 cities. The Brookings Institution’s Jenny Schuetz has a very smart breakdown of the relative housing markets of the different contenders, splitting them into high cost places, recently gentrifying markets, those with abundant housing, and cities with older housing stock.

In our view, most of what’s been written about the Amazon HQ2 contest misses two important points.  First, Amazon’s decision is likely to be dictated by internal business strategy factors, especially what kinds of technologies and markets it wants to develop, and its choice of cities will be dictated by whether a city’s specializations match the particular functions Amazon chooses to move away from Seattle.  Second, Amazon is very likely to chose multiple locations (HQ2, HQ3, HQ4) to tap different city specializations, to minimize its negative effect on housing markets, and to continue to its negotiating leverage over “winners.”

Specialization matters

First, no one seems to be paying much attention to what business functions Amazon will place in its second headquarters. The assumption seems to be that HQ2 will be a functional clone of the Seattle mothership. That’s seldom, if ever, the way that corporations partition activities among different sites. Opening a second major headquarters location is a non-trivial event in Amazon’s business strategy:  which functions get spun off to a new location, and which are left in Seattle will make a big difference to the company’s future.

Simply duplicating all of Amazon’s Seattle operations in another city would make almost no business sense. Coordinating activities and managing rivalries between otherwise similar centers would invite an internal them v. us dynamic that could outweigh any advantages of a second location. Far more likely that Amazon will spin off discrete functions to its second location. Seattle will continue to do some (probably most) things, but HQ2 will develop its own strengths and specializations.

Viewing HQ2 as a clone leads most observers to treat cities as a kind of undifferentiated commodity, measured solely by a common set of generic attributes (their housing stock, workforce with a college degree, or tax break packages).  But if Amazon is really going to establish a second location with a distinct set of specializations, then the choice of a second city is much more likely to hinge on each city’s strengths as a base for that kind of activity. Our study of the high technology industries in the United States published by Brookings shows that the range of cities generally regarded as tech hubs (Austin, Boston, San Jose, etc), each exhibit distinctive technological specializations, and what’s high tech in one city is not the same as what’s high tech in another.

So the big question is this:  What kind of company is Amazon going forward? Over the next decade or two, what parts of the Amazon enterprise does the company want to grow that it can best nurture in a location that isn’t Seattle?

The answer to that question is complicated by the fact that Amazon is innovating at the periphery of several different industries:  retailing, logistics, software, and media/entertainment, to name just four.  Depending on which of those functions one wants to emphasize, or spin off to a non-Seattle location, one would focus on a very different subset of cities.

For example, if Amazon sees itself increasingly becoming a logistics company, competing with the likes of Fedex and UPS, then it might want to locate HQ2 in a mid-continent location that could become a national hub. (Amazon already operates its own delivery vehicles in many markets, and has chartered aircraft to expedite shipping). Indianapolis, Columbus, and to some extent Chicago, offer similar locational advantages to places like Memphis (Fedex’s hub) and Louisville (UPS).

Or if Amazon views itself as a software company, developing more robotics (like drone delivery), or further refining its techniques for marketing, then perhaps it will want to go some place like Pittsburgh.

But Amazon may view itself as a rival to established media and entertainment companies, in which case Los Angeles (movies, TV), New York (print, advertising), or Washington (news) may make the most sense.

Amazon may also be a telecommunications backbone company, building on its AWS (Amazon Web Services) division.  In that case, it might make sense to have a headquarters in Washington DC (strong government market, close to regulators) or Philadelphia (which is already home to Comcast).

The biggest factor at work here may be the kind of specialized labor force that Amazon could tap in each of these markets. The critical decision point may not be the simple availability of educated or creative workers, but rather the availability of just the kind of specialized workers Amazon wants. For example, Amazon reportedly told Detroit that it didn’t make the list of finalists because it didn’t have the kind of talent pool the company wanted. Richard Florida harrumphed that Amazon foolishly excluded Detroit from its list of 20 finalists, despite the fact that the region had hundreds of thousands of creative class workers.

If Amazon were looking to innovate in the automobile business, he’d have a point, but it may not be just general knowledge workers the company is seeking, but specialized talent in areas relevant to its expansion plans.

A Little History

It’s worth reflecting for a moment on the history of Amazon. Why is it in Seattle in the first place? Jeff Bezos came up with the idea selling books on-line in 1994, while living in New York. But rather than start his company there, he packed his bags and moved to the Pacific Northwest. According to a 1996 interview in Fortune, the choice was quite deliberate:

He chose the Seattle area because of its proximity to both high-tech talent and a major book distributor, Ingram’s warehouse in Roseburg, Oregon.

“The next big thing is a bookstore,” Fortune, December 9, 1996

Most startups are established and grow in the places where their founders happen to be living. Few people consciously pick up and move to an entirely different community and start their business based on labor market and supply chain analyses. The fact that Bezos did so more than two decades ago, when his company was just a partly formed idea, is a good indication that it will be just as rational, now that its a huge and growing corporation.

Why not HQ2, HQ3, HQ4?

If specializations are important–and we believe they are–a critical question is why Amazon ought to create just one secondary headquarters. Part of the argument would have to be that there must be significant synergies between different functions that the company would reap a business advantage from having all those functions in a single location. In an important sense, however, the company has already crossed the Rubicon on that issue, by deciding on a major expansion outside Seattle. What that decision says, in effect, is:  “We don’t have a good business reason to expand all these functions in close proximity to our core.”

Once the company has committed to put some functions in HQ2, it may find it simpler and far more productive to establish an HQ3 and and HQ4 in other cities that have the specialized labor they need. Others have noted this possibility: Richard Florida tweeted to this effect last week.

There’s another good reason to pick multiple cities. If a single winner is announced, and its competitors are dismissed, then Amazon’s negotiating position becomes much weaker. A city may not be able to deliver everything that’s promised (especially over time), and local political demands for Amazon to provide compensating benefits to the community in exchange for its subsidies are likely to escalate. Having mulitple winners will allow Amazon to continue to keep each of them honest. This has been a lucrative game for Amazon: there’s no reason to end it now.

We’re a bit wary of reading too much into the list of finalist cities. Some may be included for public relations reasons, and as we predicted many of the choices reflect the desire to maximize the companies negotiating leverage when it comes to subsidies (hence the choice of three locations in metropolitan Washington). That said, it seems likely that some of the smaller cities on the finalist list (Pittsburgh, for example), may be there not because they are candidates for HQ2, but because they may be a logical HQ3 or HQ4 for a particular specialization (like robotics).

Having several smaller HQ2, HQ3, and HQ4 locations would also work to Amazon’s advantage in minimizing its impact on housing affordability. Much has been made of a likely “winner’s curse:”  in addition to giving away substantial public subsidies, a city that suddenly got 50,000 highly paid jobs would likely see a substantial escalation of housing prices.  Splitting HQ2 among several different cities would lessen housing market dislocations (and not incidentally, keep alive the prospect of future competition among these “winning” cities for subsequent job expansion).

At this stage, it’s very much in Amazon’s interest to make everyone think that there’ll be just one big “winner-take-all” first prize in the HQ2 sweepstakes. A big prize is designed to elicit very large subsidy offers and other concessions, like New Jersey’s $7 billion incentive package. But like any reality-TV show, there’s nothing that stops the producers from injecting a late-in-the-game plot twisting rule change. Don’t be surprised if later this year, Amazon announces that its going to have more than one HQ2, and that the corporate functions it moves to those places don’t have a close connection to a city’s established industrial and technological specializations.

 

Growing supply is producing growing vacancies and easing rents

There’s been a lot of skepticism expressed as to whether supply and demand are actually at work in the housing market. We’ve been strong believers that the economic perspective is fundamentally sound: rent hikes over the past few years have been the product of demand outstripping supply, and as supply catches up, we can expect rents to abate. When it comes to housing, there is a classic “temporal mismatch” between demand and supply: demand can change quickly as more people move to an area, jobs and wages increase, and the popularity of city living or particular neighborhoods increases. These changes can happen almost overnight.  It takes much longer–years–to plan, finance and build new housing.

At City Observatory, we pay close attention to our backyard:  Portland, Oregon. Here, until just a little over a year ago, rents were increasing sharply. In response to public outcry, the City Council enacted an inclusionary housing requirement (in our view, ill-advised). The Legislature considered authorizing local governments to impose rent control. But in the mean time, the market has been responding. Lots of new apartments have been constructed in Portland, and they are steadily being completed, and coming on to the market.

The result, as we explored last fall, is a profusion of something that had rarely been seen on Portland streets:  For Rent signs.  We recently updated our sidewalk survey of the rental market during a short trek around Northeast Portland. There are an abundance of rentals available.

This overhang of vacancies puts pressure on landlords to ask for lower rents. Some units are offering several months free rent to new tenants. And gradually, this process is spilling over into measured rents. This week we have new data from RentCafe–which gets its data from the Yardi real estate company–showing actual year-over-year declines in rents in Portland, down by their estimate 1.2 percent over the past twelve months in the city.

And their neighborhood data show even more significant declines in some of the city’s hottest close-in neighborhoods (where much of the demand and new construction has been focused.) A total of 11 Portland ZIP codes have seen their average rents decrease. According to Rent Cafe, ZIP code 97227 covering parts of the Eliot and Overlook neighborhoods posted the steepest decrease rate, rents there are 6.8% lower than a year ago.  (Green and orange zip codes on this map experienced year over year declines in average rents, according to RentCafe).

This is, of course, just one firm’s estimate of the state of the housing market. At City Observatory, we’ve been cautious to put too much reliance on widely published rental price indices. Despite its many merits, RentCafe lacks data for several neighborhoods, including zip code 97212, where all of the “for rent” signs illustrated above are posted.  At this point, we take the RentCafe data as just one more sign that supply and demand are starting to come into balance. We’ll continue to track this market using other indicators in the months ahead.

What City Observatory did this week

 

1. Two thing’s everyone’s missed about Amazon’s HQ2. The urbanist Internet has been all abuzz reading the tea leaves from Amazon’s decision to winnow the list of contenders for its ballyhooed HQ2 to 20 cities. Some cities who didn’t make the list are licking their wounds, while others are counting their blessings. Ultimately, we think the HQ2 decision will ultimately be dictated by Amazon’s internal business strategy: It’s not easy or straight-forward to split the operations of a major corporation between two locations. It’s most likely that Amazon will hive off particular functions or technologies, rather that simply clone itself in a second city. It makes sense for the city to match these relocated functions to the knowledge and talent specializations of particular cities. So depending on whether the company is looking to grow or relocate content creation, or software development, or logistics, it will choose a metro area with particular strengths in that area. In addition, once an operation has been moved out of Seattle, their may be little reason to group it with other Amazon functions, which may lead the company, logically, to develop HQ3 and HQ4. Keeping mulitple cities in the running for pieces of an ever-growing Amazon maximizes the company’s bargaining position, and likely minimizes its negative impacts on housing markets.

2. More evidence of rent declines in Portland. A new report on average rents in Portland from RentCafe (powered by data from real estate analytics firm Yardi Matrix) shows that supply and demand seem to be coming into closer balance. As more and more new apartments are completed, vacancies are rising, especially in the close-in neighborhoods that have attracted much new demand and construction. Year-over-year rents in Portland are down 1.2 percent according to RentCafe, with decreases of more than 5 percent in some neighborhoods. It’s just one data point, but its pointing in the right direction: down.

Must read

1. The Trump Administration’s leaked infrastructure plan. Axios has obtained of copy of what’s said to be the Trump Administration’s latest infrastructure proposal. It remains to be seen whether this is an ephemeral trial balloon, or the probable outline of future policy, addressing everything from air travel and brownfields to broadband and waterways. Though $200 billion over ten years is bandied about as the level of federal funding, the proposal is ambiguous about that point. Half of whatever federal money is available for grants to a wide range of projects, but there’s an important catch: Federal money is limited to 20 percent of total project costs.  Item I.A.1. under the heading “Principles for infrastructure improvement”  proposes liberalization of tolling at the state level “Allow states flexibility to toll on interstates and reinvest toll revenue in infrastructure.”

2.  The death of the charitable deduction. The new federal tax reform law will me a dramatic reduction in the number of households that can take the charitable deduction. The Tax Policy Center estimates that the number of middle income households that will have a charitable deduction will fall by two-thirds, and that the total number of taxpayers itemizing charitable deductions will fall by more than half, from 37 million to 16 million, primarily because of the increase in the standard deduction to $12,000 for most households. This will likely reduce total charitable contributions by roughly five percent (somewhere between $12 and $20 annually), and skew giving even more heavily to charities favored by the highest income households.

The center also warns that there’s a second shoe waiting to drop here: because of the increase of the estate tax exemption to $22 million, many households that might have previously made charitable donations from their estates may now pass more of their fortunes on to their heirs, reducing the flow of new capital to foundations and other charities. They haven’t begun to estimate how large that effect might be.

3. Sierra Club opposes reforming zoning to allow higher densities near transit in California. There’s a battle brewing in California over Senator Scott Weiner’s bill, SB 827, which would essentially allow by-right development of multi-family housing in areas served by high capacity transit. The key insight behind the bill is that absent some over-riding state direction, local governments have strong incentives to limit the amount of residential development that occurs in their jurisdiction, as a way of shifting costs to others. Writ large, this kind of beggar-thy-neighbor approach fuels increased sprawl and automobile dependence, undercurts the viability of transit investments, and worsens greenhouse gas emissions. Surprisingly, long-time environmental organization Sierra Club has come out in opposition to Weiner’s bill. Blogger Ethan Elkind offers a cogent argument that Sierra Club has lost its way.

In the news

Whet Moser, writing on housing affordability in Chicago in Chicago Magazine links to Daniel Kay Hertz’s careful examination of the reliability and unreliability of published rental statistics.

 

What City Observatory did this week

1. We’re losing the battle for Vision Zero. One of the compelling aspects of the Vision Zero road safety campaign is its bold, measurable objective: we want to completely eliminate traffic deaths. That vision gives us a clear metric, but unfortunately, the data show that we’re losing ground. While the national data for 2017 aren’t in yet, the evidence from around the country is that roads deaths are up. Portland recorded a nearly 60 percent increase in traffic deaths over the past three years. The prime culprit: more driving. With a decline in gas prices, driving is up, and American’s higher levels of driving are a potent reason why we have higher traffic death rates than other countries. A key aspect of achieving Vision Zero will be whether we figure out ways to reduce automobile dependence and driving.

2. Are integrated neighborhoods stable? The famous “tipping point” theory of segregation suggests that even small differences in personal preferences about the racial or economic composition of one’s neighborhood can result in a situation where if a neighborhood changes at all, it changes completely. This thinking is behind stories of white flight from the 1960s, and also underpins much of the rhetoric about gentrification: if a few newcomers move in, all the existing residents will flee (or be pushed out) and the neighborhood will flip from one kind of segregation to another. In this view, integrated neighborhoods are at best temporary phenomena. A recent study published in Journal of Urban Affairs explores whether this is actually the case. It finds that integrated neighborhoods are growing in number and tend to remain integrated over time.

 

Must read

1. Patrick Sharkey on the decline in crime. At CityLab, Richard Florida interviews Patrick Sharkey about his new book,  Uneasy Peace: The Great Crime Decline, the Renewal of City Life and the New War on Violence. Sharkey looks at the steep decline in crime rates in major cities, and its effect on neighborhood revitalization and long-time residents. The decline is substantial: today, low income residents of these cities face a risk of crime victimization that is comparable to that experienced by high income residents two decades ago. He relates:

. . . the drop in violence helped bring about new shifts in population, particularly in high-poverty neighborhoods. But this is not the typical story about gentrification and the displacement of the poor. This is certainly a problem in some cities, but what has been much more common is that as a neighborhood becomes safer, it attracts new higher-income residents, with no evidence of poor residents moving out. I think that’s one of the most important consequences of the crime drop and one that is often overlooked. The crime decline led to a reduction of concentrated poverty.

2. Seattle-area rents drop significantly. The Seattle Times reports that after years of rent inflation, the tide appears to be turning.  The city has built as many apartments in the past decade as it had in the previous fifty years, with the result that housing supply is finally starting to catch up with the burgeoning Amazon-accelerated demand for urban living in the Emerald City. Average rents are down about 3 percent year over year, and the Times reports that some renters have been pleasantly surprised that rents were lower than they expected. Also: kudos to the Seattle Times for carefully explaining the source of their rental market data.

3. Massachusetts considers new statewide requirements for zoning. Writing in the Boston Globe, Renee Loth argues that zoning reform offers a path to economic equality and social integration. Like California, Massachusetts is another state where highly localized zoning powers are implicated in the dearth of affordable housing. In the past decade, 200 of the commonwealth’s 351 cities and towns haven’t permitted the construction of any multi-family housing. The State Legislature will be considering legislation that would set statewide standards for allowing multi-family housing and accessory dwelling units, would prohibit exclusionary practices and modify supermajority voting requirements on zoning changes. Loth maintains that “Done right, comprehensive zoning reform will not just increase the supply of housing, but will also facilitate the kind of rich social integration that has eluded this state for years. ”

4. Rent control does more harm than good. Bloomberg’s Noah Smith has a quick, non-technical summary of recent research out of Stanford University on the effects of San Francisco’s rent control program. The research (which we profiled earlier at City Observatory), confirms what economists have long said about rent control: it prompts landlords and property owners take their property out of the rental housing market. Reducing the supply of rental housing pushes up rents in the uncontrolled segment of the market. The Stanford study shows that the savings to those who benefit from rent control are offset by the higher rents charged to others. In addition, by constricting population growth in a productive, opportunity rich place, rent control tends to reduce overall economic growth.

New knowledge

The costs of commuting for teenagers. Partly due to data availability, much of our focus on the costs of commuting is focused on workers. But millions of American kids commute to and from school every day. As population has suburbanized, and as schools have become larger (and increasingly are being built at the edge of town), many students have long commutes to school. A new article in the Journal of Planning and Education Research . The study looked at differences in time use reported by a national survey of 2,700 adolescents. A couple of the key findings: the more time kids spend commuting, the less sleep they get, each additional minute of commuting is associated with one minute and 15 seconds less sleep.  Long commutes also tend to reduce participation in physical activity: those who commuted more than 30 minutes each way to school got significantly less physical exercise. (h/t to Planetizen)

Voulgaris, Carole Turley, Michael J. Smart, and Brian D. Taylor., 2017. “Tired of Commuting? Relationships among Journeys to School, Sleep, and Exercise among American Teenagers.” Journal of Planning Education and Research

In the news

The Boston Globe’s Dante Ramos pointed to our post on the “Illegal City of Somerville” in a column examining proposed changes to zoning in California.

Planetizen reported on our recent analysis of Census data showing the continued growth of 25 to 34 year-old college graduates in the nation’s largest cities in “Young adults aren’t fleeing cities–quite the contrary.”

 

What City Observatory did this week

1.  How great cities enable you to live longer. We take a close look at some findings from the Equality of Opportunity Project on the connections between community characteristics and life expectancy. It turns out that among people in the lowest income quartile, some of the strongest correlations with longer living are aspects of the community, including population density, the share of immigrants in the population, and regional educational attainment. We know that cities promote higher levels of innovation and productivity, and that city economic success is correlated with education, but these data suggest that there may be important spillover benefits in terms of life expectancy even for those who are relatively low income.

2. Your college degree has a higher payoff if you live in a city. We all know by now that education is strongly correlated with income: those with more education, on average, earn more than those with less. There’s also a marked geography to the economic returns to education. If you really want to capitalize on your college degree, you’re much better off living in a city.  Those with a BA or graduate degree earn 25 to 35% more if they live in an urban area than a rural one. In contrast, those with just a high school degree earn only slightly more in cities than rural areas. This urban wage premium is likely a key reason that well-educated workers are increasingly concentrated in cities.

Must read

1. School attendance boundaries and segregation. Seven decades after Brown v. Board of Education, American schools remain highly segregated by race. Part of this has to do with residential segregation, but in many cities, school segregation is actually intensified by the way attendance boundaries are drawn. Want to get really smart about how school attendance boundaries can either offset or worsen racial segregation? Have a look at Vox’s illustrated explainer of this important subject. It’s a great mix of accessible explanation of a lot of pretty dense academic literature combined with a drill-down data tool that let’s you see how school’s in your city perform on these metrics. Vox’s Alvin Chang deserves a public policy Golden Globe award (if there were such things) for his work here: the web-page generates customized local maps and performance charts on the fly.

2. A radical proposal to reform zoning in California. Fresh on the heels of last year’s legislation to liberalize zoning in the Golden State, State Senator Scott Wiener has proposed an even more sweeping proposal to allow much higher densities in areas with good transit service. SB 827 would mandate within a half  mile of high capacity transit service (like San Francisco’s BART stations) and within a quarter mile of frequent transit stops that local governments eliminate density maximums (such as single family home zoning), and minimum parking requirements and have height limits no lower than 45 to 85 feet. This proposal would open up vast swaths of transit served urban sites to much more intensive development, and could dramatically expand the supply of housing and ease California’s chronic housing affordability problems. It is, of course, a major challenge to the traditionally local prerogative of setting densities. We look forward to the debate that this proposal will generate in California.

3. A new traffic safety paradigm. Todd Litman of the Victoria Transportation Institute has once again done masterful and methodical job of dissecting a major tansportation policy issue.  This time, its traffic safety. Presenting a range of time series and cross sectional data, he illustrates how US traffic death rates, which had been declining, have ticked upwards in recent years. Death rates to traffic crashes are much higher in the US that in other countries, and also vary tremendously by state. A key risk factor that’s generally understated in US discussions–if not omitted altogether–is the much longer distances Americans drive. As Litman points out, this means that measures to reduce driving improve safety: “extensive research indicates that policies which increase vehicle travel, such as automobile-oriented transport planning, lower fuel prices,and sprawled development patterns tend to increase traffic casualty rates, and those that reduce vehicle travel, such as multimodal transport planning, public transit improvements, higher fuel prices and road user fees, and Smart Growth development patterns, tend to increase traffic safety.”

New knowledge

How much is urban land worth? One of the biggest assets in the economy is the value of land in the nation’s cities. Valuing it correctly actually turns out to be difficult because in most transactions, land comes bundled with improvements and buildings. A new paper by three economists, led by David Albouy of the University of Illinois uses data on land sales in a number of cities, coupled with a probabilistic estimating function to calculate the total value of land in metro areas; the study also sheds light on the pattern of variation of land prices within metro areas. Bottom line: the value of urban land in US metro areas is something on the order of $20 trillion, roughly 1.3 times the value of annual GDP. Nearly half of that value is in the nation’s five largest conurbations (list).  The paper also looks at the land price gradient–the degree to which land decreases in value the further it is from the center of an urban area.  In large cities, the gradient is particularly steep; urban land in the center of New York is worth 22 times what it is ten miles away.  Other metros tend to follow a similar pattern, although the differentials between core and periphery are smaller, averaging about 6 times higher in the center compared to ten miles out..  The report has a number of other interesting observations:  the average value of an acre of urban land is about $370,000; that value peaked in 2006 and fell through 2010 (the latest year in the analysis). More than a third of the value of urban land is in public hands (in the form of roads, parks, and other public landholdings.

 

What City Observatory did this week

1. Cities continue to attract the young and restless. We’ve seen some push-back in the last few months, arguing that city population growth is no longer outpacing suburbs, and that the movement back to cities is threatened by “peak-millennials.” That led us to take a close look at the latest data on city population growth, with a focus on the number of 25 to 34 year olds with a college degree, a demographic we call “the young and restless,” in part because they’re the most mobile Americans. These smart young workers are still moving to cities in large numbers: between 2012 and 2016, the number of 25 to 34 year olds with at least a four-year degree living in the largest 50 cities in the US increased by about 19 percent, nearly five times faster than the 4 percent total increase in population in these cities. All but two of the 50 largest cities saw increases in this demographic, which is even more concentrated in large cities than it was four years ago.

2. There isn’t a technological fix for pedestrian safety. If you are an automotive engineer, it seems, we’re always just one more technological fix away from safer travel. The latest evidence of that phenomenon is GM’s patent for external air bags on cars to cushion pedestrians when cars crash into them. It reminded us of Google’s patent from a couple of years back to create flypaper like automobile hoods that would catch pedestrians. (We’ll leave it to others to decide whether its better for a pedestrian to stick to a car or be bounced off by an air-bag). The point is that while these are billed as “pedestrian safety” measures, they’re really about making the roadway more amenable to car traffic. And that attitude is really the biggest threat to pedestrian safety.

Must read

1. Krugman: The gambler’s ruin of small cities. Paul Krugman takes a short break from his regular commentary on the current national political economy to indulge his longer term academic interest in the geography of economic growth. What’s to become of the nation’s smaller cities, he asks. Arguably, much of the basis for urbanization around the country is two-fold: the need to provide central service centers (education, health care, banks, stores) for the more dispersed agricultural population, and the clustering of relatively smaller scale manufacturing industries. Many of these clusters emerge gradually and serendipitously over time, but it appears that especially in the case of manufacturing industries, fewer such clusters are developing. Small cities may essentially be “one-hit-wonders” with economic success tied to the flourishing of a particular industry at a particular time; the chances that smaller cities will find a second act is an increasingly unlikely proposition, what Krugman characterizes as the gambler’s ruin:  “In the modern economy, which has cut loose from the land, any particular small city exists only because of historical contingency that sooner or later loses its relevance.”

2. Emily Badger: How globalization draws our richest cities into a different role. Krugman’s musing about the fate of smaller cities was promprompted by this piece from his NYT colleague Emily Badger. Badger notes that major US cities, like New York and San Francisco, now have a fundamentally different economic structure, dictated by the leading roles they play in global technology and finance. A key characteristic of the knowledge based economy is that these successful cities build powerful and self-reinforcing combinations of industrial clusters, talented workers, global connections and serial entrepreneurs that accelerate the divergence between them and the rest of the economy.

3. Zillow:  Homeowners racked up almost $2 trillion in capital gains in 2017. The real estate information firm Zillow compiles detailed, nearly real time data on the value of the U.S. housing stock. As of the end of the year, they reckon the value of the nation’s homes and apartments to be about $31.8 trillion. Based on their analysis of sales trends, the total value of housing increased by slightly less than $2 trillion over the last year. That’s a good measure of how much collectively, homeowner’s gained in appreciation over the year. As we’ve suggested before, taxing a portion of that gain might be a way of generating funds to address our affordable housing problems. But for nearly all homeowners, these capital gains are exempt from federal taxation, a policy that’s largely continued under the new tax bill.

New knowledge

Does broadband Internet boost educational performance? One of the articles of faith in the technological community, or so it seems, is that faster Internet connections are just bound to help kids learn more and faster. But do those with access to high speed Internet actually perform better academically? A new study looks at the school performance of more than 250,000 Swedish teenagers, and tests whether those with access to fiber optic Internet service progressed as rapidly through school.  They find for boys, the availability of fiber had a small negative effect on Grade Point Average:  going from 0 percent fiber service in a neighborhood to 100 percent was associated with a decline in GPA of 4 to 8 percent of a standard deviation. The authors hypothesize that faster Internet speeds may have led students to spend more time on the Internet, but disproportionately for leisure, rather than studying. The effect however, is quite small; but it does tend to discredit the common assumption that faster speeds will promote greater learning. (Erik Grenestam & Martin Nordin,  High-Speed Broadband and Academic Achievement in Teenagers: Evidence from Sweden, Lund University, Department of Economics, School of Economics and Management, December 2017).

 

 

In auto-land, pedestrians are just one more patented gimmick away from being safe

The dominant approach to automobile safety has, for many years, been the quintessential technical fix. Some combination of new technologies (anti-lock brakes, collapsible steering columns, crush zones, multiple air bags, etc) will make cars safer and safer (well, at least for their occupants).  And soon, self-driving cars will (it is hoped) eliminate human errors that produce most crashes. 

Still the humble pedestrian remains under-engineered for this brave new world of technologically assured density. But that’s changing.

Some months back, we noted that Google unveiled drawings of a novel plan to coat the exterior of self-driving cars with a special adhesive that would cause any pedestrians the vehicles struck to adhere to the car rather than being thrown by the impact.  Now, Automotive News is sharing reports of a new General Motors patent that would put airbags on the outside of cars to deflect errant pedestrians.

Whether it would be better to find oneself stuck to the car that struck you, or being pushed aside by an exploding airbag, is far from clear. But let it not be said that automotive engineers and major corporations are the only ones who can come up with such far-fetched ideas. Here at City Observatory, we’ve come up with our own concepts for, if you will, lessening the impact of cars on pedestrians. In the interest of safety and advancing the state of the art, we’re putting our ideas into the public domain, and not patenting any of them.

 

Personal airbags. Airbags are now a highly developed and well-understood technology. Most new cars have a suite of frontal impact, side curtain and auxiliary airbags to insulate vehicle passengers from collisions. The next frontier is to deploy this technology on people, with personal airbags. Personal airbags could have their own sensors, inflating automatically when the pedestrian was in imminent danger of being struck by a vehicle.

 

Rocket Packs. While a sufficiently strong adhesive might keep a struck pedestrian from flying through an intersection and being further injured, perhaps a better solution would be to entirely avoid the collision in the first place by lifting the pedestrian out of the way of the collision in the first place. If pedestrians were required to wear small but powerful rocket packs, again connected to self-driving cars via the Internet, in the event of an imminent collision, the rocket pack could fire and lift the pedestrian free of the oncoming vehicle.

 

We offer these ideas partly in jest, but mostly to underscore the deep biases we have in thinking about how to adapt our world for new technology.  Let’s be clear: while these are labeled “pedestrian safety” technologies, they are really about making the environment better for cars and driving. Like crosswalks and electronic “walk-don’t walk” signs, these are not technologies that are needed in pedestrian-only environments. No matter how crowded, no mall, stadium, or concert hall has stoplights for pedestrians.

It has long been the case with private vehicle travel that we’ve demoted walking to a second class form of transportation. The advent of cars led us to literally re-write the laws around the “right of way” in public streets, facilitating car traffic, and discouraging and in some cases criminalizing walking. We’ve widened roads, installed beg buttons, and banned “jaywalking,” to move cars faster, but in the process making the most common and human way of travel more difficult and burdensome, and make cities less functional. And at some point, the existence of these kinds “pedestrian protection” technologies becomes a basis for rationalizing making the physical environment even more hostile to actual humans. The ultimate objective of much engineering practice seems to be to exterminate walking (if not walkers). As one Washington State engineer bluntly described Seattle’s 1950s era transportation plan: “Pedestrians, who are a constant hazard to city driving, are entirely removed.”

Everywhere we’ve optimized the environment and systems for the functioning of vehicle traffic, we’ve made places less safe and less desirable for humans who are not encapsulated in vehicles. A similar danger exists with this kind of thinking when it comes to autonomous vehicles; a world that works well for them may not be a place that works well for people.

 

Not all of our problems can be solved with better technology. At some point, we need to make better choices and design better places, even if it means not remaking our environment and our communities to accommodate the more efficient functioning of technology.

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Thanks to Matt Cortright for providing the diagrams for our proposed pedestrian protection devices.

Obsolete before its even tried: A simple mileage fee is a bad way to pay for roads

• It’s being touted as a replacement for the gas tax, but the VMT fee is a flawed way to pay for roads.
• We should adopt a pricing system that reflects impacts on the environment, wear and tear on the roadway, and the costs of congestion, not just how far a vehicle is driven.
• Chances to change the way we pay for our transportation system come along about once a century, it would be a shame to get locked into a flawed, second-rate system.

At City Observatory, we’re big believers that many of our transportation problems come from the fact that our prices are wrong – and solving those problems will require us to get prices right. While we desperately need a way to pay for roads that better reflects the value of the space we use, just moving to a new model isn’t enough. If we don’t get the new pricing system right, it could make many of our transportation problems worse. As the old adage goes, the devil is in the details. There’s growing interest, and even some state experiments with a “vehicle miles traveled” fee (VMT) fee.  This would basically tote up the number of miles a car is driven each year, and charge a price per mile (a few cents). Interest in the VMT fee has been prompted by the advent of fuel efficient vehicles and electric cars, which have cut into gas tax receipts.

While a VMT fee has some advantages over a gas tax, its a far from optimal way to pay for roads, and send the right signals to road users about how their choices affect the transportation system and society.

Technology and consumer acceptance have blown past the simple-minded idea of a VMT fee.  Nearly all American adults already have smart-phones and other GPS-enabled devices that track their locations in real time. Uber and Lyft have conditioned urban travelers to paying a la carte for time and distance (and paying a surcharge when demand is particularly heavy). Insurance companies and telecommunication firms have developed the mileage tracking dongles that plug in to cars’ data ports. Shortly, new cars will have sophisticated vehicle-to-vehicle communication built-in.

So as we think about how to design a road finance and pricing system to replace the gas tax (and other taxes), we ought to have a system that accounts for all  the cost-drivers associated with travel:  heavier vehicles that cause more road wear should pay higher fees, as should vehicles that pollute more. How much you pay to drive on a road should be related to how much that road costs to build and maintain. Use a congested urban highway at the peak hour, and you’ll pay a higher fee than if you use a rural road at 2 am.

In short, American cities have too much traffic today for the same reason that the old Soviet Union always had bread lines: we charge too little for a scarce and valuable commodity. As a result, people consume too much, and we end up rationing access by making people wait.

The main way we price road travel today is the gas tax, but it doesn’t send the right signals to travelers about how much different kinds of travel, in different places, at different times, actually cost. In contrast, the proposal to replace the gas tax with a vehicle miles traveled (VMT) tax – directly charging people by how much they drive – is clearly a step in the right direction.

With great fanfare, the State of Oregon launched its road pricing demonstration program, OReGO, three years ago. Under this voluntary program, up to 5,000 motorists were supposed to sign up to pay a per mile fee of 1.5 cents rather than state’s 30 cent state gas tax. Motorists had two different options for monitoring their mileage: one that periodically reads the vehicle’s diagnostic data port, and another that uses GPS technology.

For those hoping for a sensible alternative to the gas tax, the VMT fee seems like a big improvement.  CityLab’s  Eric Jaffe was enthusiastic about this kind of mileage fee concept, listing 18 reasons why it’s a good idea. While the concept of charging more for the roads, and charging in a way that reflects the cost of use – including contributing to congestion, road damage, and pollution – is essential, Oregon’s VMT fee does exactly none of these things. The crux of the problem is that 1) it raises no more money than the current gas tax, and 2) it ends up subsidizing heavier, more polluting vehicles while actually punishing lighter, more fuel-efficient ones.

For many, the primary reason to favor a VMT tax is, as Eric Jaffe puts it, to “raise a gargantuan amount of money.” That would replace the gas tax, which, according to accepted political wisdom, is a dying revenue source.  But VMT may not be a revenue panacea. For one thing, total driving in the US has declined in the past, and is likely to decline in the future. Moreover, if we tied the tax to VMT—and set the tax at a high enough level to produce the “buckets” of revenue that proponents want–we’d expect that people would do what they normally do when something gets more expensive: do less of it.

The gas tax functions more like a carbon tax than does the VMT fee

It also turns out that the gas tax is more proportional to the physical damage vehicles cause to the roadway and to the environment. A gas tax functions very much as a carbon tax (albeit a very low one): the more you pollute, the more you pay. But shifting to a tax based solely on mileage, without regard to how much pollution a vehicle creates, would essentially tax hybrids to subsidize hummers.

The flat, undifferentiated VMT fee would be like a butcher that charged a single price per pound for every cut of meat in the shop. You’d quickly find that you would have long lines of people lining up to buy steak and you’d end up throwing out over-priced hamburger that no one would buy. A key part of a VMT fee should be its ability to signal to users how much travel costs to society as a whole, depending on when, where and how they do it. A flat fee per mile, whether it’s in Manhattan, New York or Manhattan, Kansas, or at 5am or 5pm, will do nothing to encourage people to use cars at more efficient times or places, or to choose to take transit, bike, or walk instead.

Getting a VMT fee right is going to become increasingly important, because the problem of mis-pricing and under-pricing road use is going to become much worse in the years ahead. The business models of Uber and other “ride-sharing” services are predicated on very low-cost access to the public right of way.

Already, there is evidence that the growth of Uber and other for-hire vehicles is putting further strains on the very limited street capacity.  In New York the number of for-hire vehicles in the city has grown 63 percent since 2011, and traffic speeds on Manhattan streets have fallen 9 percent since 2010. Slower traffic has resulted in slower rush hour bus service, and contributed to declining Manhattan bus ridership, which fell 5.8 percent last year.

It’s tempting to treat road pricing as just a way to raise more money for construction and maintenance. But that would be a huge mistake. If we get the prices right, we can make a significant dent in congestion by signalling to travelers how to make more efficient use of the roads we have, avoiding the need for expensive new capacity.

Already, we have good models of how this works with congestion pricing systems that vary by place and time of day in London, Stockholm and Singapore. San Francisco has implemented variable pricing for parking. New York, Los Angeles and Chicago are all actively exploring proposals to implement various forms for road pricing based on time of day. And the evidence from earlier experiments in Oregon is clear, while a flat VMT fee has very little impact on peak hour travel, a fee that ranges from .4 cents a mile (off peak) to 10 cents per mile during peak hours in the central city would reduce vehicle miles traveled by more than 20 percent.

Oregon now seems set to leapfrog the VMT fee. The 2017 state legislature directed the Oregon Department of Transportation to seek federal permission to implement value pricing in Interstate 5 and Interstate 205 and other freeways in the Portland metropolitan area. The state’s proposal due to the US DOT by year end. Based on the latest iteration of its long-awaited infrastructure proposal, the Trump Administration is favorably disposed to letting the states make the the call on tolling existing Interstates.

Our transportation problems are–at their root–a product of getting the prices wrong. If we adopt a new way of charging for public roads, we have a once in several generations chance to get the prices right. Let’s not blow it by failing to make sure that the way we price roads and travel sends the right signals to everyone about how, and when to use the roads.