Getting More out of Public Transit Spending

An important part of the transportation infrastructure crisis is the state of public transportation systems in America. Many public transit systems are having difficulty covering the cost of maintenance. Tracks are deteriorating, stations need to be refurbished and outdated equipment is not being replaced quickly enough, which makes it difficult to attract riders. Governments struggle to find the money to pay for these expenses. Meanwhile, governments spend billions on new rail systems and bus rapid transit systems and propose further transit expansions in the future.

Advocates of transit emphasize that by expanding transit systems and enticing riders to use transit instead of driving, highway congestion can be reduced. Yet many recent transit expansions have not been cost effective. Much of the money spent on expanding transit would be better spent improving existing transit service in corridors where there is sufficient demand or on improving highways.

Transit ridership has declined in many US metropolitan areas due to deteriorating quality of transit service along with the growth of ride sharing. Yet many people still depend on transit to get to work.

If more people used transit instead of private automobiles, fewer freeway lanes and parking lots would be needed and cities could be more walkable.The benefits of living in walkable neighborhoods in densely populated communities include better fitness, more visually appealing streetscapes, and more opportunities to interact with neighbors than in typical car dependent suburbs. But for a variety of reasons, most US metropolitan areas are not densely populated. Transit, especially fixed route transit, whether rail or bus rapid transit, does not attract nearly enough riders to cover its costs except in relatively dense corridors connected to urban centers with substantial employment concentrated in a relatively small area.

Auto-oriented development has come to dominate newer US cities as well as suburbs of US and European cities. A growing share of jobs and businesses are decentralized throughout metropolitan areas. For most of those who commute to jobs located where there is not a high concentration of jobs in a relatively small area, the most cost effective and least time-consuming way to commute to work is by automobile. But in large metropolitan areas this requires extensive systems of freeways, arterial roads and parking facilities.

Because it would be far too costly to provide transit service connecting all parts of a metropolitan area, transit expansions that do occur only benefit a limited number of residents. Those who live in areas served by high quality transit often pay more to live close to transit stops or stations. But without sufficient density, too few people use transit so that fares do not cover a major share of the operating cost and capital costs of high quality service, particularly if it involves a fixed guideway.

Unfortunately, political incentives often result in cities building expensive new rail transit lines in areas without sufficient density to utilize close to the capacity of the trains, buses and fixed guideways. According to Cervero, out of 54 rail transit investments that occurred since the 1970s, only 23 have combined net operating and capital costs (what is left over after fare revenue) less than $0.85 per passenger mile. If we assume average fare revenue of 50 cents per mile, that is equivalent to total operating costs of less than $1.35 per mile, which is the estimated marginal cost of commuting by automobile during peak periods.

Transit proponents argue that new rail transit systems have contributed substantially to reduced congestion and that the benefits from reduced congestion are large enough to cover the cost of transit subsidies. Although good public transit service has reduced traffic congestion substantially in a few cities, reductions in congestion from most recent transit expansions are small, for several reasons. First of all, when cities expand rail transit, many of the new users are former bus riders, so not many cars are taken off the road. Another problem is that as former drivers switch to transit, the reduced traffic on urban expressways makes it easier for people to commute a longer distance to work so that there is an offsetting increase in expressway traffic.

Some transit proponents argue for expanding transit systems into less densely populated areas and then encouraging transit-oriented development (TOD)– dense mixed-use development of apartments, offices, and retail near transit stations. Residents in many suburbs resist the increased density required for TOD to be successful. They express their political power through zoning that limits density.

Even in suburbs were transit-oriented development is permitted, many residents are affluent enough to own cars and rely on those cars for most non-work trips as well as many work trips. Although the resulting dense neighborhoods may attract residents whose jobs are accessible by transit, if families have two or more workers, many of those additional workers will find a job that is not accessible by transit.

The further suburbs are from the central city the less dense they are, which means highway lanes cost less to build and transit is less likely to attract enough passengers to come close to covering its costs. Thus, if governments spend scarce transportation funds investing in rail transit or bus rapid transit, the money should be spent in urban centers or first ring suburbs that are dense enough so the system can generate enough fare revenue to cover a substantial share of capital and operating costs. In many cases, rather than spending to expand transit, cities should spend more to maintain the systems they already have or improve the quality of service in corridors where transit is already heavily used.


What problem was zoning intended to solve

Spencer Gardner wrote an interesting piece for Strong Towns, A History of Zoning, Part II. Contrary to the views of some, zoning was not intended as a means to protect people from nuisances like air pollution, noise, etc.  He argued that the purpose of zoning, at least as originally developed, was to protect single family homes from apartment houses. It was the view of Frederick Law Olmstead, an early advocate of zoning,  that apartment houses and multi-family homes should be assigned to separate districts from single family homes, that single family homes should be located in such a way that they have adequate protection against apartment houses.  Detached, single family homes were viewed as inherently superior for advancing civic virtue and good morals.

I am not sure that this view is the same as the reason people support zoning today.  Clearly many today believe that when people own their homes, they will take better care of them.  Most people also want to keep apartments or rental housing from being located close to their single family homes for fear that it would limit the potential appreciation of their homes.

This piece followed part I of a planned three-part series on the history of zoning.  Part I talks about what zoning does and the legal underpinnings of zoning. Zoning law specifies height limits, setbacks and lot coverage.  Zoning derives from the police power, which the US Constitution granted to state and local governments to regulate for the purpose of insuring the health, safety, morals, and general welfare of the people.

The Federal Reserve and Interest rate increases in 2016

Since 2008, it has been very hard to find a bank that pays any interest on savings accounts. This state of affairs can be blamed on Federal Reserve monetary policy, which  kept short term interest rates close to zero for seven years. After talking about raising interest rates throughout most of 2015, the Federal Open Market Committee finally raised the target level for the Federal funds rate by ¼ point on December 16. Many now expect the Federal Reserve to gradually raise interest rates so that by the end of 2016 the federal funds rate is close to 2 percent.

If the federal funds rate continues to rise, other interest rates will likely follow. Rising interest rates are good for those of us who have money to save, but will discourage people from borrowing money to invest, which is important for economic growth. Higher interest rates in the US also cause the foreign exchange value of the dollar to rise. Given the fragile state of the world economy, this could hasten the coming of a recession to the United States.

Some economists have criticized the Federal Reserve for its quantitative easing, the policy of buying government bonds and mortgage backed securities, which expanded the monetary base by more than five-fold between 2008 and 2014.  Quantitative easing played a major role in holding down interest rates during that time period. It does not follow, however, that the Federal Reserve can improve the economy by now pursuing policy that would raise interest rates toward levels that commonly prevailed before the financial crisis of 2008. Interest rates are low today, not because of current Federal Reserve monetary policy, but because most of the nations of the world are on the brink of a recession.

All interest rates are market determined. Interest rates depend on the supply and demand for loanable funds, which the Federal Reserve alters by buying and selling US government securities or mortgage backed securities. By expanding the monetary base, the Federal Reserve put downward pressure on interest rates. In the past year however, the Federal Reserve has not increased the monetary base. A stable monetary base and money supply should keep inflation rates close to zero, which is a good thing for anyone who is trying to save money.

The federal funds rate, which is the rate banks charge for lending reserves to each other, has been largely irrelevant since 2008, because almost all banks have excess reserves and thus do not need to borrow from banks. Nevertheless, it does move with changes in the interest rate the Federal Reserve pays on excess reserves. Since banks must decide how much of their reserve balances to lend, the rate paid on excess reserves will have an effect on the interest rates banks charge for business and consumer loans.

To further increase the federal funds rate in 2016, the Federal Reserve would have to pay a correspondingly higher interest rate on excess reserves, which would likely discourage banks from lending money. For example, to raise the Federal funds rate to 1 percent, they would need to double the rate they pay on excess reserves, and their interest costs would more than double if banks increased their excess reserves in response to the higher interest rate. Holding more excess reserves is a less risky way for banks to earn interest than lending the money to a business or buying Treasury bills.

Most other central banks, including the European Central Bank, the Bank of Japan and the Chinese central bank have been increasing the supply of their currencies. This is why the dollar has been rising relative to the value of other currencies and the inflation rate in the US has been close to zero. As long as the Federal Reserve continues its policy of maintaining a stable monetary base, inflation should remain low. With recession looming in many parts of the world and many leading indicators pointing to a recession in the US, no good reason exists for the Federal Reserve to further raise interest rates. The Federal Reserve wants to prevent a recession and has indicated that it would like to see the rate of inflation increase so it is closer to the stated target of 2 percent per year.

Since little or no benefit can come to the Federal Reserve from raising the federal funds rate further, and the costs are substantial both in terms of increased likelihood of recession and reduced net income to return to the Treasury, do not be surprised if the federal funds rate remains stable or even falls in 2016. Although this means Americans will not earn much on their savings accounts, the Fed will at least be doing its part to delay the onset of the next recession.

The Roots of the 2008 Financial Crisis

It is easy and natural for conservatives to blame the 2008 financial crisis, the great recession and the governments flawed response to it of using massive bailouts on political liberals, or on the Bush administration that was not willing to stick to conservative principles. In reality, though, the roots of the crisis go back to economic policy during the Reagan years and before. Yes, Reagan, the icon of many conservatives, pursued policy that contributed to the economic crisis. So says David Stockman in his book, The Great Deformation, and his critique reflects sound economic analysis, not bad feelings directed towards his former boss.

Defenders of Reagan could argue that he wanted to cut government spending more than Congress would let him, and so the high and persistent deficits during his administration were not his fault. That may be the case, but if he was serious about cutting the deficit, he could have done much more than he did both to limit military spending and to seek cuts in the welfare state. The large Reagan-era deficits were part of the process of abandoning old habits of fiscal responsibility that opened the door for reckless policy that brought about the 2008 crisis and the explosive growth of the monetary base and government debt that followed.

Both conservatives and liberals came to believe based on the short run consequences of policy during Reagan’s presidency that deficits don’t matter. In spite of early promises to cut spending along with taxes, federal outlays during Reagan’s second term averaged 21.7 percent of GDP. This level of government spending as a share of GDP was the highest level of peacetime spending in US history up to that time.

Although the Reagan supply-side tax cuts did have a positive effect on the economy, the Reagan deficits did as much or more to the demand side of the economy. Those deficits, which were consistent with Keynesian dogma, contributed to prosperity which lasted for more than twenty years. Supply side growth is reflected in expansion of private investment, but private investment expanded by only 2.5 percent during the Reagan years, while the demand side of the economy grew by 3 percent per year.

The demand side of the economy continued to grow rapidly during the 1990s, while savings rates fell and investment remained low. Thanks to falling import prices due to the growth of low-cost manufacturing in East Asia made possible by cheap labor, American standards of living rose rapidly in spite of low rates of investment. This prosperity, however, was not sustainable. Growing public and private debt ultimately brought about the day of reckoning with the 2008 financial crisis.

Erroneous ideas learned during the Reagan years continue to guide attitudes toward taxes of government spending of many conservatives and liberals, few of whom care any longer about deficits and the explosive growth of government debt. Unfortunately the future obligations of the federal government are now so large that becoming fiscally responsible again could not prevent the government from defaulting. Nevertheless, reducing spending could delay the day of reckoning and would reduce the political pressure for raising taxes that is sure to come when the government can no longer afford to keep its promises to retirees.