A new study from Germany shows that added housing supply lowers rents across the board

A 1 percent increase in housing is associated with a 0.4 to 0.7 percent decrease in rents

Housing policy debates are tortured by the widespread disbelief that supply and demand operate in the market for housing. In our view, its been a growing demand for cities and urban living, running headlong into a relatively fixed, or at best slowly growing supply of urban housing that’s been the principle reason for affordability problems in many cities.  But many housing advocates refuse to believe that increasing housing supply will have any beneficial effect on rents.

A new study from Andreas Mense an economist at the University of Erlangen-Nuremberg, using detailed data on housing construction and rents in Germany, documents the direct and widespread effects of new market rate construction on rent levels. The paper uses variations in the completion rates of new housing units over time to tease out the effects of increments to supply on rent levels.  Here’s a typical chart showing how rent increases vary in response to additional housing completions in the month of December (the red line on the chart).  In the wake of completions (the period to the right of the red line) rent changes are negative.  The core finding is that a one percent increase in housing completions tends to be associated with a 0.4 percent to 0.7 percent decrease in rents.

Importantly, Mense’s work shows that added supply influences rents across the entire housing market.  At best, market-skeptics will aver that new market rate units will reduce rents at the top-end of the market, but can’t conceive of how that will affect lower rent units. But Mense’s work shows that it isn’t just high end rents that decline.

To the contrary, they suggest that new housing supply shifts the rent distribution as a whole. When considering the point estimates, it seems that the lower parts of the rent distribution reacted more strongly in the first months after the new units came on the market, while the upper part reacted more strongly several months later. Overall, none of the two main forces — substitutability of housing units, and moving costs —, seems to dominate. The key implication is that new housing supply provided by private developers effectively lowers rents throughout the rent distribution, shortly after the new units are completed.

(emphasis added)

One of the most helpful aspects of Mense’s paper is that it has quantitative estimates of how much additional housing a city might need to build to stave off rent increases. For example, he estimates that Munich would need to increase the number of new units built over the past seven years by about 20 percent above the actually completed levels in order to hold rent increases to zero.  Berlin, where markets are tighter and rent increases greater, would need an even bigger increase in production; most German cities would need to produce about 10-20 percent more new housing units than they actually built to hold rent inflation in check.  (Note that the required increase is not a 10-20 percent increase in total housing stock, but a 10-20 percent increase in the number of new units built compared to actual new construction).

One of the most common objections to “supply side” approaches to promoting affordability is that somehow building market rate housing only affects the price of higher priced housing.  This paper adds to a growing body of evidence that new market rate construction triggers a chain-reaction of moves and price adjustments that rapidly propagate through an entire housing market and ultimately benefit low income households. Building new housing sets of a chain of moves—the kind of musical chairs progression modeled by the Upjohn Institute’s Evan Mast—that yield increases in supply in existing units with various prices elsewhere in the region.  The vacancy of these units not only creates additional housing opportunities at lower price points, but puts downward pressure on rents.

Housing costs of the population as a whole can be reduced effectively by letting developers provide enough market-rate housing. Consequently, denser development has great potential to reduce the housing cost burden of low-income households—in addition to other possible benefits such as shorter commuting distances and larger productivity spillovers.

This is an important finding for housing policy.  Too much of the housing debate is a kind of myopic particularism, looking at whether a single housing unit is affordable, with no attention given to affordability across the market spectrum.  Too often, policies are obsessed with highly visible but microscopically small interventions, which may provide affordability for a few lucky tenants, but which do little or nothing to lower costs and increase affordability across the entire housing market. The truly pernicious part of some strategies, like inclusionary housing requirements, is that the negative effects of such requirements on new housing supply (which operate across an entire market) outweigh the benefits in terms of a few dedicated affordable units. Ultimately, housing affordability is about scale, and increasing housing supply is a necessary precondition to making sure affordability is achieved for many, rather than just a few.

Mense, Andreas (2020). The Impact of New Housing Supply on the Distribution of Rents, Beiträge zur Jahrestagung des Vereins für Socialpolitik 2020: Gender Economics, ZBW – Leibniz Information Centre for Economics, Kiel, Hamburg

Here’s an insight from tolling:  A substantial portion of the people driving on our roadways are only there because we’re subsidizing the cost of their trip.

When we charge a toll to use a road, suddenly many of those using it find they don’t value it enough to pay even a fraction of the cost of the road’s cost.

Our most egregious subsidies are to those drivers who demand to travel at the peak hour when roadway space is scarce, and which is the most expensive problem to fix.

The biggest problem with transportation is we don’t price road use correctly, to reflect back to road users the costs that their decisions impose on society and everyone else traveling.  In essence, we have daily urban traffic jams for the same reason Ben and Jerry have long lines on their annual Free Cone Day: when you don’t price something valuable, it gets rationed by queuing and patience.  What’s worse is a lot of people who are driving on many roads at the rush hour is essentially because we are paying them to do so.

Freeways are only “free” in the sense that, no matter when you drive, you pay the same marginal price:  Nothing.  Of course,  we all pay for roads through things like the gas tax and vehicle registration fees (as well as a host of other general taxes), but the point is, whether you use a road at the peak hour or not has no effect on how much you pay to drive.  Whether you use it at 2 am when there are literally no other cars on the road, or you use it when it’s jammed at rush hour, makes no difference.  And because peak hour capacity is in short supply, and is damned expensive to increase, “free” roads are a massive subsidy from the general public to the relatively few of us who use roads at the peak.

When we ask road users to pay even a modest fraction of the cost of providing that expensive peak hour road capacity, many of them tell us, by voting with their feet (or their tires), that they simply don’t value the roadway enough to pay for even a tiny fraction of its cost.

The latest example of this comes from Seattle, where Washington State has spent about $3.3 billion tearing down the old elevated Alaskan Way highway viaduct that marred the city’s waterfront for decades, and replaced it with an expensive new tunnel bored under downtown.  After the tunnel was completed, it was “free” for a while, but a year ago, the state asked users to pay tolls, which vary from $1.25 to $2.25 per trip, plus a $2 surcharge, if you don’t have a transponder.

Now keep in mind that tolling will cover less than 10 percent of the cost of the tunnel, about $200 million of the more than $3 billion cost. When the tunnel was first opened, it carried more than 75,000 cars per day.

As soon as the state asked those using the tunnel to make a modest contribution to its cost, that number dropped to 55,000.  Here’s the official analysis from WSDOT:

Of the 20,000 trips that diverted from the tunnel after tolling began, data indicates that roughly 10,000 trips used other routes (primarily Alaskan Way, Elliott Avenue, and I-5) or switched from driving to riding transit. Ferries and water taxi ridership were largely unchanged. The remaining 10,000 trips are not accounted for using existing roadway sensors and automated passenger counters on buses, however, anecdotal data suggests that some trips were discontinued as people embraced teleworking, bicycling and other active forms of transportation, or by using an unmonitored route.

What this really means is more than a quarter (20,000 of 75,000 users) used the tunnel because only somebody else paid for more than ninety percent of the cost of their trip.  And contrary to the usual doomsday scenario’s of highway agencies, most of that traffic isn’t displaced onto city streets or alternate routes, it simply disappears.  Again, the evidence from Seattle’s tunnel has been that neither abrupt changes in capacity or tolling produced noticeable worsening of traffic elsewhere in the city.

Here’s another example, also taken from the State of Washington, although it spills over—as we’ll see—into the state of Oregon.  To set the scene: Vancouver Washington, sits just north of the Columbia River, which forms the border between the two states, and is part of the Portland Metropolitan area. Washington has a sales tax, Oregon doesn’t.  There just two bridges—I-5 and I-205—connecting the 400,000 Vancouver area residents with jobs and stores in Oregon.  Washington residents who shop in Oregon avoid state and local sales taxes of more than 8 percent, meaning a $200 shopping trip saves a resident more than $16 in sales taxes.  Washington is, in effect, paying its residents to drive to Oregon to shop.

We’ve estimated that the average Vancouver household saves more than $1,000 in sales taxes per year by shopping in Oregon and that shopping trips account for between 10 percent and 20 percent of the traffic on the two Interstate bridges.  Not incidentally, this shopping traffic is a key reason why the two states are considering spending more than $3 billion to widen the I-5 bridge.

Want less traffic and pollution? Stop paying people to drive

This has to be the key insight for transportation policy:  The reason we have traffic congestion is essentially because we’re paying people to drive.  As soon as we ask drivers to pay even a fraction of the cost of the roads they’re using, large numbers of them find other routes, or simply take fewer trips.  In a world where we’re losing the fight against climate change principally because we’re driving more and more each year, a logical first step is to stop paying people to drive their cars.  That’s exactly what policies like road pricing, and parking pricing do:  they ask those who benefit from using their cars to pay for a larger fraction of the cost of providing the services they enjoy.

One of the fascinating, and least widely understood aspects of the science of traffic jams is that it takes only a small reduction in traffic levels to keep roads flowing freely.  As long as traffic levels stay below a tipping point where the road becomes saturated and loses capacity, the road works well. Adding (or subtracting) just a few cars when traffic is at this tipping point makes a huge difference both in travel times and how many cars a road can carry. This is just what happened during the height of the pandemic, when reduced demand kept Portland-area freeways below their tipping point, and enabled them to carry more cars at the rush hour than they did in “normal” times. Pricing a roadway causes a minority of travelers to change their trips, but it’s enough to keep the roadway flowing freely. A common argument against pricing is that some people simply don’t have alternatives to driving, or driving at a particular time; and that’s true.  But the data show that a significant minority of those on the road will immediately change their behavior given even a small financial incentive—and that segment of the population staying away is enough to make the road system work much, much better for everyone else who doesn’t have that flexibility.

The old saying “you get what you pay for” applies with a vengeance to transportation:  We pay people to drive, and so they do, with the result that we get chronic congestion, air pollution, and aggravated climate change.  A sensible policy of charging road users based on when and where they travel would both dramatically reduce traffic congestion—by encouraging those who are only on the road because someone else is paying for the trip to choose another time or destination—and also reduce pollution and greenhouse gases.  Those who paid would be getting what the British call “value for money”—by tolls would get them a quicker and more predictable trip than is possible at any price now.

You can’t be a climate mayor—and your city can’t be a climate city — if you’re widening freeways

Phoenix says it’s going to reduce greenhouse gases 90 percent by 2050, but the city’s transportation greenhouse gases have risen 1,000 pounds per person since 2014, and it’s planning to spend hundreds of millions widening freeways.

Around the country, and around the world, leaders are pledging to solve the climate problem—someday, in the distant future.  Typically, these pledges claim that a city (or other organization) will be “net zero” by some year ending in zero (2040, 2050), or that it will reduce its emissions (or usually, some carefully selected fraction of the greenhouse gas emissions it is responsible for), by a stated percentage. These multi-decade pledges aren’t really pledges that these leaders will be responsible for achieving:  it will be their successors, several steps removed, who will be in charge when the day of reckoning comes.

One of the world’s leading climate activists is calling “BS” on this phony and deceptive strategy.  Greta Thunberg is challenging leaders to  commit to change now, rather than waiting:

“When it’s about something that is in 10 years’ time, they are more than happy to vote for it because that doesn’t really impact them. But when it’s something that actually has an effect, right here right now, they don’t want to touch it. It really shows the hypocrisy.”

“They mean something symbolically, but if you look at what they actually include, or more importantly exclude, there are so many loopholes. We shouldn’t be focusing on dates 10, 20 or even 30 years in the future. If we don’t reduce our emissions now, then those distant targets won’t mean anything because our carbon budgets will be long gone.”

“. . . we can have as many conferences as we want, but it will just be negotiations, empty words, loopholes and greenwash.”

One doesn’t have to look far to find a city that is pledging to be much, much better (in a few decades), while its current efforts are failing perceptibly, and its actively spending money that will make the problem worse.  Today, we’ll pick on Phoenix, but much the same story could be told about many other cities.  Mayors are proclaiming loudly that there’s a climate emergency, and very visibly endorsing the Paris Accords, but at the same time are planning to put vast sums of scarce public resources into building more roads that will only make the problem worse. What makes this particularly egregious is that nearly everywhere, increased driving is now the single largest and fastest growing source of greenhouse gas emissions.  The one thing cities can do to fight climate change is reduce the need to travel by car; and widening freeways does just the opposite:  it subsidizes driving, and promote sprawl and car dependence.

Phoenix is developing a new climate action plan, because it’s required to do so for joining the C40 cities organization

The city’s goal is to complete CAP updates by year’s end in part due to Phoenix having joined C40 Cities Climate Leadership Group earlier this year.

“One of those things that C40 cities require is completion … or an updated climate action plan by the end of this year,” Environment Program Coordinator Roseanne Albright . . .”

Like a lot of cities, it has goals of reducing climate pollution . . . someday.  Here’s the provisional goal according to the city’s website.

Headed in the wrong direction

All well and good to have a reduction goal for the next couple of decades.  But what climate data show is that Phoenix–like most cities is utterly failing to make progress in reducing its greenhouse gas emissions.  Data from the national DARTE database of transportation greenhouse gas emissions shows that metropolitan Phoenix is rapidly going in the wrong direction.  Its GHG per capita which had been flat to trending downward in the first half of the last decade (even as the economy was recovering from the Great Recession) grew rapidly after the big drop in gas prices in 2014.  Today, the average Phoenix resident emits about 1,000 pounds more greenhouse gases from transportation than in 2014.

Going faster—in the wrong direction:  A wider freeway

Even as they proclaim their climate goals, the Phoenix is embarking on a massive $700 million freeway widening project, with the full support of its mayor.  The plan would widen an eleven mile stretch I-10 through Phoenix to as many as 16 lanes.

According to Planetizen, Phoenix’s Mayor is all on board:

Phoenix Mayor Kate Gallego is quoted in the article touting the safety benefits of the proposed project, along with its potential economic benefits. On that latter score, Mayor Gallego cites the potential for $658 million in new economic activity.

The project’s video notes that there will be as many three pedestrian and bike overpasses, but makes it clear that these are currently only conjectural:  “multi-use bridges for pedestrians and bicyclists could span the freeway.”  Plus, as we’ve noted at City Observatory, this kind of “pedestrian” infrastructure is really primarily designed to serve cars and doesn’t contribute to a more walkable city.

Finally, much of the cost of the measure is being subsidized from a regional sales tax.  So in essence, the region’s residents will have to pay for the wider freeway whether they use it or not.  This amounts to a massive subsidy to more driving, and predictably will lead to even more sprawling development, longer commutes and more greenhouse gases.

In a way, its unfair to pick on Phoenix. (For the record, we’ve been unstinting at City Observatory in our critique of Portland’s failed climate efforts).  Other cities around the country, who ostensibly care about climate change or who have endorsed the Paris accords are pursuing their own massive freeway widening projects, as James Brasuell has chronicled. The list includes projects in Houston, Los Angeles, Akron, Indiana, and Maryland.  As Brasuell says:

Some of the politicians and agencies behind these plans claim to be climate warriors without being held accountable to their promises. Others are climate arsonists, who are not being held accountable to the consequences of these actions.

Tragically, these efforts are even being promoted by the National Science Foundation, under whose auspices that Transportation Research Board published a report calling for billions more in subsidies for road construction to facilitate literally trillions of more miles of driving, building a true highway to hell.

Again:  It’s anecdotes, not data that are fueling claims of an urban exodus due to Covid-19

The virus is now  deadlier in the nation’s rural areas than it is in cities, undercutting the basis for the urban flight theory

Since the early days of the Coronavirus, the media has regularly trumpeted anti-city screeds, a kind of 21st Century echo of the “teeming tenements” indictment of the alleged unhealthiness of urban living in the 19th Century.  In the Spring, the worst outbreaks were in the New York City metro area, which automatically led many to equate size and density with pandemic risk. As we’ve noted, the canonical story is generally the product of a reporter quoting some suburban real estate agent about a sale they’ve just made to someone who moved from the city. But as we’ve noted time and again, and yet again, the data don’t support the urban exodus theory.

Last week we saw another provocative headline about surging interest in suburban living, this time from usually reliable analysts at John Burns Real Estate Consulting (JBREC).  They claimed that

We have all heard the tales of the current renter migration to the suburbs and even to the exurbs in some parts of the country. Until now, the migration story captivating the housing sector has been mostly anecdotal. But we now have proof! Our recent national survey of single-family rental (SFR) operators provides hard data confirming the migration movement that has been amplified by the pandemic.

. . .

59% of new SFR tenants are relocating from urban locations, with 41% of new tenants moving from already suburban locations.

We took a close look at the report.  It’s single key data point is this:  In their survey, 59 percent of those renting single family homes from survey participants were moving from urban areas.

We don’t have any reason to doubt the accuracy of that statistic, but without a little more context, its impossible to know what it means.   Specifically, we don’t know if 59 percent of new residents coming from urban locations in higher than prior to the pandemic, or lower, or whether its influenced by seasonality or other factors.  We followed up with JBREC’s Devyn Bachman, who confirmed that they don’t have data for the prior year, and telling us that the surge is based on anecdotal reports.  The critical part of the story here is not the fraction of people moving from urban locations to suburbs, but whether that trend has shifted noticeably from prior years.  And here, again, what we have is not data on such a shift, but simply anecdotes.

Its also worth keeping in mind that suburban single family rental housing is a relatively small segment of the market (most rentals are still multi-family).  And Burns’ survey is a sample of larger scale, institutionally owned single-family landlords, which are an important and growing segment of the market, but a decided minority of single family landlords.

The pandemic is now far worse in rural reas

The foundation of the “urban flight” hypothesis is the notion that cites are vastly more risky than suburbs or rural areas:  by fleeing, you can reduce your risk of getting Covid. The JBRE story pushing the urban flight hypothesis now seems a bit dated in light of the recent data on the spread of Covid-19.  While it was true that cases and deaths per capita were higher in cities in the Spring, that’s no longer the case.  In fact, the relationship between city size and Covid-19 mortality is now just the reverse, with the highest rates of deaths per capita in the nation’s most rural and least dense communities.  Based solely on location factors, those who fled to the countryside earlier in the year are now statistically at much greater risk of being diagnosed with and dying from the disease that their urban counterparts.  Our friends at the Daily Yonder have chronicled the grim shift in death rates:

The nuance here seems to be that cities and large metro areas are more closely connected to the rest of the world, and while exposed to the Coronavirus first, and at a time when knowledge of the virus’s danger and preventative measures was limited, there was nothing about the urban environment that made its residents more susceptible to Covid. As the pandemic spread, more sparsely populated areas which were insulated from the virus primarily because of less frequent and robust connections to other places ceased to be refuges.

“Urban flight” as collective journalistic hysteria

NPR’s On the Media took a close look at these stories and concluded that the “urban flight” meme is both widespread and utterly false.  In an incisive article at real estate website Curbed, Jeff Andrews attributes the popularity of these stories to biases of reporters:

Given that the media industry is concentrated in Manhattan — with another good chunk in San Francisco — journalists seem to be confusing the minor outbound migration from two ridiculously expensive areas with the double dose of demand happening across the country.

More insidiously, some members of the media are willing to peddle stories about nonexistent carnage in the streets, extrapolating that the cities — all cities, but especially the diverse, Democratic–led ones — are headed for inevitable collapse. And it’s hard not to separate that dark fantasy from a Republican talking point.

But, according to the data, it’s just not happening.

The idea that the pandemic has upended real estate markets and is triggering a flood of migrants to suburbs and rural areas has enormous appeal for reporters and their editors. Anecdotes to the contrary notwithstanding, there’s virtually no data to show this is happening.

City Beat is City Observatory’s occasional feature pushing back on stories in the popular media that we think are mistakenly beating up on cities.

What City Observatory did this week

1. Want lower rents?  Build more housing!  A new study from Germany provides more evidence that the fundamentals of economics are alive and well in the housing market. The study looks at how increments to housing supply affect local rents, and finds that a one percent increase in the number of new homes constructed is associated with a 0.4 to 0.7 percent decrease in rents. Even more importantly, the study finds that rents decline across the board, both in the higher priced and lower priced tiers.  A key reason: new market rate construction triggers a chain of moves that ultimately creates vacancies and downward price pressures throughout the market.

The study also provides a quantitative estimate of “how much” new housing is needed to hold rent increases in check. In most German cities, an increase in new construction of between 10 and 20 percent above current levels would push rent inflation to zero.

2. Sustainability is about more than electrification. We’re pleased to publish a guest commentary from Kevin DeGood of the Center for American Progress.  In a recent series of tweets, DeGood profiled Soleil, a cutting edge housing development outside Salt Lake City, festooned with solar panels and substantial battery storage.

But the development itself is cut off from the surrounding neighborhoods, and is far from any common non-residential destinations, like shops, cafes and parks. It is car-dependent with a Walk Score of zero and much of the site is given over to roadways and car storage. As DeGood points out, that kind of development simply is not sustainable, no matter how many solar panels it has.  Like 1,800 space “LEED certified” parking structures that provide free parking and net zero homes with three car garages, auto dependency is the hallmark of un-sustainability.

Must read

1. What will Post-Covid cities look like? The Atlantic’s Derek Thompson looks at the tea leaves for cities in the wake of the pandemic.  We’re all hoping that 2021 will see the widespread distribution of an effective Covid-19 vaccine. Thompson predicts that we’ll see a resurgence in city center office employment, but it will be slowed for a while by our new skill at distance-work. He also predicts that the time we spent at home and in our neighborhoods will lead to a greater interest in promoting “15-minute living.”  Most optimistically, Thompson predicts a boom year for economic growth, once we shake off the pandemic:  the pent up demand for services and experiences coupled with hundreds of billions of forced savings could fuel a strong economic rebound.

2. More highway boondoggles. Bigger and more wasteful.  US PIRG and the Frontier Group have published the sixth volume chronicling wasteful highway projects around the country.  On the cover (shown below) is Houston’s Loop 1604 Expansion, which is joined by similarly grandiose and destructive projects in Cincinnati, Birmingham, Chicago, and Charleston, South Carolina.  In every case, states are putting hundreds of millions of dollars into roadways which will aggravate air pollution and climate change by encouraging more driving.  And as the report notes, due to induced demand, they won’t even achieve their stated objective of lowering traffic congestion.

These projects are the poster children of a highway building complex that at last count squandered $26 billion a year on futile and destructive expansion projects. The report and its accompanying website also has updates on the boondoggles—like the I-5 Rose Quarter Freeway widening in Portland, and is a great resource for tracking freeway fights across the country.

3.  Why electric vehicles aren’t a pollution panacea. Many Electric Vehicle (EV) advocates would like you to believe that electric vehicles will somehow cause auto pollution to disappear, but a new analysis by OECD scientists, reported by Kea Wilson at Streetsblog, is a reminder that even “clean” cars create enormous volumes of fine particles, from tire wear and brake linings.  These fine particles, including microplastics, are now nearly ubiquitous in the environment and have serious health effects. Recent research from Washington State shows that just one chemical compound in tire residue is responsible for killing adult Coho salmon.  Heavy vehicles, driven long distances inevitably produce larger amounts of these kinds of pollutants, even if they’re powered electrically.

4.  The perils of bi-partisan agreement on infrastructure. The New York Times editorialized fawningly over the prospects of bipartisan agreement on increased infrastructure spending. But the nostalgia for highway building makes no sense in an era of soaring carbon dioxide levels and a global climate crisis. As Robert Liberty observes, even the illustration chosen for this story reveals the problematic nature of the current glib nods to infrastructure:

It is telling that the photo chosen to accompany this article about consensus politics is a gigantic freeway interchange. This is the symbol of a bi-partisan policy that gutted the cities, enabled white flight into segregated suburban sprawl, polluted the air, changed the climate and destroyed natural resources and the diverse, low-income communities where freeways were built. And little appreciated or understood is that many of these freeway projects were big wastes of money compared to other, smarter projects and that they inevitably failed to fix the congestion that their construction amplified. ‘Bi-partisan” does not equal “good.”

We’ve been down this road before—and it’s why we’re facing a climate crisis.  We need a new path, not a repetition of past failures.

New Knowledge

Cities aren’t just about work, they’re about consumption and social interaction, too.  The subtext of much of the rumination about the future of cities in a post-Covid world is the notion that, if technology let us work remotely, no one would want to live in a city. Hence predictions that we’ll all decamp to suburbs or rural areas, now that we’ve all figured out how Zoom works.

As we’ve argued at City Observatory, people value living in cities for many reasons, and access to employment is just one.  A new study from the London School of Economics looks at the comparative importance of work versus social aspects of cities (consumption and leisure) and comes to a surprising conclusion.  Even if all of the productive advantages of urban locations disappeared, their advantages in consumption would still be a powerful force keeping people in cities.

Technically, economists call the benefits of living in dense cities “agglomeration economies” and they come in a couple of different flavors.  Agglomeration economies in production stem from labor market pooling, supplier specialization and knowledge spillovers, making workers and firms in cities more productive and profitable.  The second, and less studied economic advantage of cities comes from their rich array of consumption opportunities, including the number, diversity and proximity of businesses (like restaurants) and their opportunities for social interaction.

Four economists from LSE— Gabriel Ahlfeldt, Fabian Bald, Duncan Roth, andTobias Seidel—have created  a dynamic equilibrium model of urban location to tease out the relative contribution of these two factors.  They’ve used this model to perform a kind of post-Covid thought experiment, looking to see what happens to cities under two different alternatives (one where city’s productive advantages are taken away, and a second in which their consumption advantages are erased).  It turns out that both of these alternatives reduce the attractiveness of cities to people and businesses, but the effect of losing the social advantages is far more consequential.

More broadly the new method the authors have developed for estimating the value of qualify of life differentials across places suggests that the traditional approach (which assumes frictionless migration, and which doesn’t model divergent and idiosyncratic preferences among population groups) substantially understates the value people attach to quality of life.  The implication of this work is that quality of life and local public goods make a considerably larger contribution to well-being that estimated by standard hedonic models.  For example:  the new method finds that the consumption amenities associated with city size are a bigger factor in increasing welfare (and attracting and holding population) than the production efficiencies of agglomeration.

The authors have a non-technical summary of their work at the LSE US Centre; their full academic paper is available at LSE.

Gabriel M. Ahlfeldt Fabian Bald Duncan Roth Tobias Seidel, “Quality of life in a dynamic spatial model,” Center for Economic Performance Discussion Paper No. 1736, December 2020

In the News

Thanks to StreetsblogLA for highlighting our commentary on how our “free” roads are essentially paying people to drive.

What City Observatory did this week

1. The only reason many people drive is because we pay them to. There’s an important insight from recent applications of tolling to urban highways. When asked to pay even a modest amount for using a fast (and expensive) asset, many drivers vote with their feet/wheels and choose other routes or forego driving at all. Case in point:  Seattle’s new $3 billion SR 99 tunnel under downtown:  Tolls cover less than 10 percent of the cost of the project, but as soon as they started charging tolls, nearly a third of the traffic on the tunnel went away; and half of that decline simply disappeared.

The plain message here is that many people will only drive on these expensive new urban roadways only if someone else pays all (or nearly all) of the costs.  In effect, that means that much of the traffic (and traffic congestion) we experience is a result of paying people to drive.  If they were asked to pay even a tiny fraction of what it costs to provide the roadway, there’d be no congestion.

2. CityBeat: More anecdotes about urban flight. The number of such stories is waning, but there’s still a strong impulse to spin narratives  proclaiming an “urban exodus” based on fears of the Coronavirus. The latest of these comes from John Burns Real Estate Consulting, who conducted a survey of institutionally managed single family home rentals, and found that 59 percent of new tenants had moved from urban areas. While they judge that to be evidence of city flight, the data are missing some important context; specifically, there’s no indication of whether 59 percent is an increase or decrease from pre-pandemic patterns. Moreover, the urban flight theory makes almost no sense today because—unlike in the Spring—Covid rates are now higher in less dense areas.  The death rate from Covid-19 in recent weeks has been twice as high in the nation’s rural areas as in metro areas. Statistically, leaving the city increases your risk of catching Covid.

Must read

1. Fixing US housing policy.  Brookings Institution’s Jenny Schuetz has some measured and direct advice for the Biden Administration if it wants to help address housing affordability, availability, and to address lingering wealth disparities. Schuetz points out the failures of promoting homeownership as a wealth building strategy:  our subsidies are heavily skewed to higher income households, and for many homeownership is an inappropriately risky bet. The collapse of housing prices a decade ago disproportionately affected lower income households and communities of color. Schuetz advocated eliminating the mortgage interest deduction entirely (it’s now only available to higher income households and is extremely regressive), and putting in place some combination of individual development accounts and baby bonds, that would enable all Americans to build wealth, both to have the financial security to weather short-term crises, and to accumulate the savings needed for major investments like education and housing.  It’s sensible, if understated, advice.

2. Rolling Coal:  Illegally disabling pollution control devices results hundreds of millions in added health costs. The most visible pollution cheating scandal was Volkswagen’s test-beating software that enabled pollution controls on its diesel vehicles only when they were being tested. In the US, there’s widespread DIY cheating on diesel emissions. Its possible to buy chips or hardware that disable the pollution controls on diesel vehicles.  Nationally, EPA estimates half a million pickups and SUVs have had their controls disabled.  Among US states, California has done the best job, through regulations, inspection and public education, of discouraging cheating. Streetsblog NYC’s Charles Komanoff estimates if other states could equal California’s record for compliance, the reduction in diesel emissions would save $10 billion in health costs.  Where’s the law and order crowd when it comes to following laws that save people’s lives?

3. Falling toll revenues are telling us something important about transportation projects.  Writing in the Seattle Times, reporter Heidi Groover has a terrific example of data-driven journalism that shines a light on our transportation economics. Groover tracks the traffic levels, and associated toll revenues from a series of major transportation projects in Washington State, including the multi-billion dollar Highway 520 floating bridge replacement and the new Highway 99 tunnel bored under downtown Seattle.  In short, the financial outlook for several of these projects is grim.  Groover writes

Traffic is down by about half on the Highway 520 bridge and in the Highway 99 tunnel, after steeper drops earlier in the year. Neither the bridge nor the tunnel is expected to meet pre-pandemic budget projections, and toll increases are likely on both routes next year. “We’re really in crisis management mode for the 520,” Deputy Treasurer Jason Richter told state lawmakers Nov. 30.

It’s a reminder that toll-based projects are only as financially sound as the projections on which they’re based, and its all too common for states to over-estimate how much revenue they’ll collect.  When toll revenues fall short, state DOTs start cannibalizing revenue that could otherwise be used for maintenance and safety, or are forced to further increase tolls, which can lead a kind of financial death spiral for a tolled roadway.  The truth is, as we opined this week at City Observatory, many big expensive highway expansion projects are only used because we massively subsidize people to drive on them.

New Knowledge

Travel limitations reduced the spread of the Coronavirus in the Spring.  A new study from Philadelphia Federal Reserve Bank economists looks at the effectiveness of reduced travel on the spread of the Coronavirus.  Using cell-phone data to track the overall level of travel, and also to focus in on travel to and from more affected counties, Jeffrey Brinkman and Kyle Mangum find that lessened rates of travel in the Spring significantly reduced virus exposure.  Their studied focused on five large metro areas.

Travel patterns changed in the U.S. during the coronavirus outbreak. People adjusted their travel patterns based on available information about the number of cases locally. Not only did people reduce overall travel but they avoided locations with a prevalence of cases. This significantly decreased exposure to and, in turn, reduced the spread of the virus.

Statistically, they estimate that compared to a counterfactual assumption where we didn’t reduce travel,overall exposure in the U.S. at the end of April was half as high as it would have been if people hadn’t traveled less often to locations with fewer cases.

While the results show people traveled less (total travel was down about 60 percent) and in particular, people avoided traveling to counties with high infection rates, the study doesn’t discern how much of the travel reduction was attributable to edicts like “Stay at Home” orders, and how much was due to voluntary decisions to reduce travel (and self-interested choices to avoid places with high levels of cases).  Either way, though, its clear that reducing travel had the effect of slowing the spread of the virus.

Brinkman, Jeffrey, and Kyle Mangum. “The Geography of Travel Behavior in the Early Phase of the COVID-19 Pandemic,” Federal Reserve Bank of Philadelphia Working Paper, forthcoming.  A pre-publication summary of these results appears in Economic Insights.

In the News

Streetsblog republished our commentary, Climate Hypocrisy in Phoenix, calling out the disconnect between pledging to meet the Paris Climate goals someday in the distant future, while plunking hundreds of millions of dollars into freeway widening.  Sadly, Phoenix is not the only offender.

The Transportation Research Board, nominally an arm of the National Academy of Sciences, is engaged in technocratic climate arson with its call for further highway expansion and more car travel.

• The planet is in imminent peril from global warming, with much of the recent increase in emissions in the US coming from increased driving.
• In the face of this monumental crisis, the Transportation Research Board, which should represent science, is calling for tripling spending on highway construction to as much as $70 billion annually, to accomodate and another 1.25 trillion miles of driving each year.
• They’re ignoring global warming (except as an excuse to flood-proof highways), and hoping that somebody else electrifies cars, so that carbon emissions go down.
• No consideration is being given to how we might reduce driving to reduce pollution, and make our cities–which were devastated by the construction of the interstate highways—more livable, green and just.

At City Observatory, we think climate change is the challenge of our time. One of the biggest opportunities to meet this crisis is to dramatically rethink the way we get around and the way we build our cities. The interstate highway system and the car-centric transportation system and land use patterns it fostered have undermined our cities, torn our civic fabric, segregated our citizens and threaten our environment. Much of what is happening today in urbanism is a wave of experiments aimed at reversing the damage done by cars and highways. It’s a project of collective remembering that great urban places are walkable, bikeable and well-served by transit, bringing us closer together and freeing us from our dependence on cars and their substantial costs, pecuniary, social and environmental.

If we’re serious about tackling climate change, reversing the damage done by the Interstate Highway system should be at the top of our list. A new congressionally mandated review of the system provides, in theory, an opportunity to think hard about how we might invest for the kind of future we’re going to live in. Sadly, the report we’ve been provided by the Transportation Research Board is a kind of stilted amnesia, which calls for us to repeat the today just what we did 70 years ago. Now is no time for indulging nostalgia for the Eisenhower era. But that’s exactly what we’re being offered.

The new report looks at the future of the Interstate Highway System, and calls for spending hundreds of billions of dollars expanding interstates and to facilitate more than a trillion miles of additional driving every year. The report comes from the Transportation Research Board, which is part of the National Academies of Engineering and is affiliated with the National Academy of Sciences. The report was overseen by the “Committee on the Future Interstate Highway System,” and written by TRB staff and consultants.

While much of its work is prosaic and uncontroversial (coming up with standards for paving materials and road markings, and figuring out how to optimize traffic signals), some of the Transportation Research Board’s  work has a profound and subtle bias that is at the root of our urban transportation problems.

In the past we’ve written about how engineering “rules of thumb“–minimum parking requirements for buildings, minimum lane widths for roads, “level of service” traffic standards, and hierarchical, dendritic street systems–systematically lead to less livable, more car-dependent communities. While its ostensibly a technocratic exercise, the new report titled “Renewing the National Commitment to the Interstate Highway System: A Foundation for the Future” is really a strongly political statement in favor of more and more road building.  The title clearly signals the messaging: this is a backward looking plea for funds, asking us to repeat what we did in the past.

And even if you didn’t read the title, The cover illustration pretty much gives away the game:  This is all about rationalizing building more highway capacity.

Climate Change:  That’s someone else’s problem

There’s an overwhelming consensus in the scientific world that anthropogenic climate change is rapidly reaching irreversible and catastrophic proportions. The International Panel on Climate Change (IPCC) has issued a dire warning that we have just a little over a decade to save the planet.

If you wade through the first 118 pages of the TRB report, you’ll finally reach a mention of climate change.  A short sidebar (Box 4.2) concedes that by stimulating vehicle use and car-dependent travel problems the Interstate Highway System contributed to the problem.  And the solution is to . . . wait for somebody else to develop low-carbon and no-carbon transport technologies:

. . . a transformation to a low- and no-carbon transportation system will increasingly mean that [freeway] planning is integrated with the planning of low-carbon mobility options, from public transit to zero-emission trucks.  Many states, counties, and cities are investing in low-carbon transportation solutions, seeking to create new opportunities for both low-carbon mobility and economic development.

The report acknowledges the reality of climate change, but largely ignores and minimizes the contribution of vehicle travel to carbon emissions. Instead, the report is chiefly concerned about using climate change as yet another excuse to spend more money on rebuilding highways (to harden them against flooding, storms and other climate-related disruptions). In essence the report paints highways (and highway department’s distressed budgets) as victims of climate change, rather than one of its principal causes.

We’re told that the Interstate Highway System accounts for a mere 7 percent of US greenhouse gas emissions.  That of course misses the fact that in many states, highway travel accounts for 40 percent of greenhouse gas emissions, and unlike other sources of carbon pollution, it is increasing—for example, causing both Oregon and California to lose ground on their climate change objectives.

More importantly, the Interstate Highways make all of us more car dependent, whether we travel on the Interstate or not. As the report acknowledges–grudgingly, and in passing–the toll the Interstate system wreaked on cities.

It is generally understood that urban Interstates and other freeways contributed to suburbanization and the depopulation of many major U.S. cities, which accelerated after World War II in concert with an expanding middle class and the fast-growing personal motor vehicle fleet. Although many other factors were at work, the Interstate System facilitated greater dependence on the automobile for commuting to work and other household and social activities.
However, the effects of urban Interstates were not entirely beneficial for center cities and their neighborhoods. The postwar mass movement of people and employers to the suburbs led to the loss of center city population, a declining housing stock, and impoverished urban neighborhoods (TRB 1998).

“Not entirely beneficial” is perhaps the most banal way of conceding the fact that highways devastated cities and amplified segregation, problems that plague us today. Nathan Baum-Snow has estimated that each additional radial freeway constructed in a metropolitan area reduced the central city’s population by 18 percent.

One has to be very resolute in overlooking all of the negative consequences of increased car dependence wrought by the interstate highway system, in the form of sprawl, the deaths and injuries (especially to vulnerable non-car road users) pollution, and the destruction of urban neighborhoods.  Allusions to the supposed economic benefits of the original interstate highway system in the 1950s and 1960s (which benefitted the trucking industry and suburban land developers to be sure), are not something that would be repeated by additions to the system in the 2020s and beyond. The careful scholarship on road investments has shown that the economic return on investment from additional highway capacity has fallen to almost zero in the past several decades. And that doesn’t allow for full accounting of the social, environmental and health effects of car dependence.

TRB’s Vision:  One and a quarter trillion more miles of driving annually by 2040

The case for “renewing” our commitment to expanding the Interstate Highway System is predicated on forecasts of increased driving activity.  While the report is careful to couch its findings in technical terms and talk about the smallest possible numeric increments (1.5 percent per year), the implications of their traffic projections are for a huge increase in the volume of driving.  At their mid-range figure 1.5 percent per year of 1.5 percent annual growth, vehicle miles traveled in the US will increase by about one and a quarter trillion miles annually by 2040, up from about 3.2 trillion today to nearly 4.5 trillion in 2040.

The climate implications of all that driving?  Not TRB’s problem. Automakers or somebody might electrify vehicles, and reduce carbon emissions, but that’s not something that highway engineers are going to worry about–at all.

It’s worth questioning whether that 1.5 percent annual increase makes any sense.  The report and its technical appendix is careful to hedge its forecasts with all kinds of qualifications about the economic and technological uncertainty of predicting future travel patterns, but when it comes down to it, they conclude that come hell or high water (and what with global warming, it’s likely to be both), traffic will only go up, somewhere between .75 percent annually and 2 percent annually.

A quick review of recent trends in driving is in order.  The key metric here is “vehicle miles traveled. Last year Americans drove about 3.2 trillion miles, according to the US Department of Transportation. The following chart shows the trend in VMT since 1970, with actual values in blue, the TRB’s baseline forecast in red, and an alternative lower forecast (which we’ll explain in a moment, in green). The long term trend, particularly from the 1970s until the turn of the millennium was for a steady increase in driving year over year, but after 2000 things began to change.

At first the rate of increase slowed and then declined; from 2004 through 2014 per capita vehicle miles traveled actually declined. For economists, this was hardly a surprise:  real fuel prices increased dramatically after 2004, and remained high through 2014; it was only after the oil market bust that year that driving started going up.  Interestingly the growth rate for the four years 2014 to 2018 was slightly more than 1.5 percent, the exact figure that TRB forecasts to continue for the next two decades.  Implicitly, TRB is assuming that driving will grow for the next 20 years or so at the same pace that it managed (a) after a decade of stagnation, and (b) over a period of time in which real fuel prices fell by more than 40 percent.

The experience of 2004 to 2014 suggests that a very different future is entirely possible.  Somewhat higher gas prices—high enough to reflect the social and environmental cost of carbon—are likely to depress if not entirely eliminate the growth in VMT.  If we changed gas prices to resemble the 2004-14 period, we would expect driving to increase only very slowly, as shown in the green line. The experience of the past decade shows that its extremely possible for the US to have a much slower rate of increase in driving.  All it takes are the right policies.

And increasingly, policies that discourage driving will be essential to saving the planet.  As economists of every political stripe have stressed, some sort of carbon tax is essential to lowering carbon emissions—plus they’ll have the side benefit of lowering the need to build extremely expensive highway infrastructure.  An intelligent report would consider how the US could, building on the experience of leading cities and other countries, work to build communities that simply require less driving, thereby reducing carbon pollution, lowering road costs, and not incidentally, mitigating some of the historic damage done to cities by the construction of the interstate highway system.

The upward slope of that red line and the added trillion miles we’re assumed to drive each year is the oldest trick in the highway engineer’s book. “More cars are coming!  It’s an inexorable, immutable force that we must respond to.  We must expand capacity.” But these forecasts have been repeatedly shown to be wrong.  For example, Clark Williams-Derry exposed the serial misrepresentation by the Washington Department of Transportation:

The engineers routinely ignore or grossly downplay the effects of induced demand—that the principal reason that driving is increasing is that we’re building vastly more un-priced road capacity.  More road capacity, generates more sprawl, longer trips and more VMT, in a never-ending, self-reinforcing cycle, one which is now so well established as to be called the “fundamental law of road congestion.”

If we build highways for another trillion miles of vehicle travel we’re actively making the carbon pollution problem worse, not, as engineers would have it, passively responding to some unchanging natural trend.  If Americans drive a trillion more miles each year by 2040, it’s going to make it vastly more difficult to reduce greenhouse gases. Failing to acknowledge that fundamental fact, and suggesting a casual mention of vehicle electrification absolves them of any responsibility for thinking further about this question is simply irresponsible.

Same old punchline: Give us billions more

As Chuck Marohn of StrongTowns has pointed out, reports by engineering groups are almost invariably self-serving demands for more money thinly disguised as impartial technical advice. Not surprisingly, the TRB report’s primary recommendation is that we give more money to highway builders—lots more money. The report calls for doubling to tripling the amount of money spent on Interstate highways:

Recent combined state and federal capital spending on the Interstates has been about $20–$25 billion per year. The estimates in this study suggest this level of spending is too low and that $45–$70 billion annually over the next 20 years will be needed

And a big chunk of this funding would be for explicitly earmarked for capacity expansion.  The report is vague, but its “blueprint” says $22 billion of a $57 billion pot would be set for capacity expansion, with the remainder for pavement, operations and bridges (categories that are often used to fund wider roadways—bridges that are “rebuilt” are almost invariably widened).

While the report talks a good game about aging bridges and multiplying potholes, there’s abundant evidence that when additional revenue is available, maintenance is still deferred in favor of marquee capacity expansions. State Departments of Transportation (who are allocated the bulk of money for the interstate system) have repeatedly engaged in bait and switch tactics; marketing potholes and spending on wider roads.

This is a report that looks backward, learns nothing, and is destined to repeat the mistakes of the past, while remaining obstinately blind to the manifest threat that climate change poses to our collective global future. Now is not the time to be squandering precious billions on more and wider roads, and stimulating trillions of additional miles of vehicle travel. This report tragically evades the most serious problem we face and avoids shouldering any responsibility for meaningful action. It’s difficult to imagine that anything so willfully narrow-minded and self-serving could be allowed to masquerade as the product of scientific endeavor.

National Academies of Sciences, Engineering, and Medicine 2019. Renewing the National Commitment to the Interstate Highway System: A Foundation for the Future. Washington, DC: The National Academies Press. https://doi.org/10.17226/25334.