Economic Principles for Urban Planners – The Antiplanner (Randal O’Toole)
Urban Planners and economists often come to the exact opposite conclusions about various policy proposals. In too many cases, this seems to be because urban planners (which I define here as “advocates of government spending and regulation”) have a poor understanding of basic economics. To help them out, the Antiplanner has developed ten economic principles for planners.
1. Capital costs are costs.
Too many planners want to ignore, or want other people to ignore, capital costs. Like a high-pressure car salesperson whose job is to get the customer to buy the most expensive car they can afford, they’ll say, “Pay no attention to the number of zeroes at the end of that number. You only have to pay the capital cost once, and then think of all the benefits you’ll get.” Why get a Chevrolet when you can get a Cadillac? Why get a Yaris when you can get a Lexus? Why improve bus service when you can build light rail?
In fact, capital costs are costs, and they can be equated with operating costs using a simple mortgage calculator. Most infrastructure investments have about 30-year lifespans, so calculate the mortgage over 30 years using a reasonable rate of interest. The Federal Transit Administration currently says to use 2 percent. Don’t forget to multiply the monthly payment times 12 to get an annual payment.
Whether viewed as a one-time cost or an annualized cost, capital costs partly represent the opportunity cost of what you could do with that money if you didn’t spend it on whatever the planners are proposing. This opportunity cost can be very high.
2. Maintenance costs are operating costs.
By definition, a capital cost is a cost that leads to an increase in quality or quantity and thus increases potential revenues or, at least, benefits. Operating costs are the year-to-year costs of keeping something running. Under generally accepted accounting principles, maintenance is an operating cost, because it is needed to maintain quality or quantity without increasing either.
Yet both Amtrak and the Federal Transit Administration treat maintenance as capital costs. This allows Amtrak to claim that some of its trains cover their operating costs even as it defers maintenance or seeks huge increases in capital subsidies. It also allows some transit agencies to claim that rail transit operating costs are lower than bus costs even though rail maintenance costs are far higher than bus costs.
3. Economic growth requires new economic activity.
Planners often claim that the projects they propose will lead to new jobs, increased tax revenues, or other things that elected officials regard as benefits. In fact, many of the projects they advocate will do little better than shuffle economic activities around without generating many if any new economic activities.
For example, the Florida high-speed rail project that Governor Rick Scott ultimately rejected was supposed to get 96 percent of its passengers from autos and only 4 percent was projected to be new travel. Similarly, many light-rail projects are expected to get all of their riders from people who currently take cars or buses.
Similarly, urban-renewal projects typically don’t generate economic growth; they merely influence the location of development that would have taken place anyway. Thus, they generate no new taxes or other net benefits for the city or region as a whole. In fact, spending tax dollars on both rail transit and on urban renewal are likely to reduce economic growth by imposing higher tax burdens on the region.
4. New economic activity requires lower costs or higher quality.
In order to get the new economic activity that leads to genuine economic growth, new projects must reduce the cost or increase the quality of goods or services available. Transit is more expensive, slower, and less convenient than driving; even the fastest intercity rail is slower and more expensive than flying and less convenient and more expensive than driving. For the same price, multifamily housing is smaller and offers less privacy than single-family housing.
5. Whenever possible, user fees are the best way to pay for infrastructure.
The vast majority of the benefits of any sort of infrastructure are enjoyed by the users of that infrastructure, so it is only fair that they pay for it. But just as important is the fact that infrastructure that is paid for by users is likely to be better maintained than infrastructure that is paid for by taxes.
Users won’t pay as much for poorly maintained infrastructure, so operators who depend on user fees are likely to keep it well maintained. By comparison, politicians prefer to fund new projects over maintenance–“ribbons, not brooms” says one US DOT official–and so infrastructure funded out of tax dollars is likely to suffer from deferred maintenance. This is especially true if that infrastructure is overbuilt in the first place because the planners weren’t subject to the discipline that comes from having to pay for the infrastructure out of user fees.
6. There’s no such thing as a free lunch.
Planners would like you to believe that there is free money available to do the projects they propose. Sometimes they mean federal money (“it’s going to be wasted somewhere, so we might as well waste it here”), while other times they mean tax-increment financing (“if we didn’t subsidize the development, the taxes wouldn’t come in to pay for it”).
Both of these views are wrong. It is possible to make money, but the projects that planners wanted to fund could make money, they wouldn’t need government subsidies. Research indicates that regions that use tax-increment financing grow more slowly than ones that don’t, so rather than increase future tax revenues, TIF actually reduces them.
7. If you subsidize something enough, people will come, but that doesn’t make it a success.
Transit requires three dollars in subsidies for every dollar paid in fares, and subsidies for most recent rail transit lines are far greater. Yet officials endlessly proclaim these lines a great success because some people are riding them. A truly successful project would earn revenues greater than its costs.
8. If you create of shortage of something, the price will go up, but that doesn’t mean you have increased demand.
Planners are great at creating shortages of things that people want and surpluses of things they don’t want. Then they say the higher prices created by the shortages are proof that the plans are working.
Paul Danish, the author of the growth restrictions that have made Boulder one of the least-affordable cities in the nation claims that higher housing prices are solely because his policies have made Boulder “a really desirable place to live” while any place that is more affordable must be “a really awful place to live.” In fact, Boulder is no more desirable than many other cities, it is simply less affordable.
Even the Washington Post has discovered that liberal cities tend to be the most expensive. It won’t be long before people realize that the land-use restrictions imposed by liberal governments are responsible for making housing in these areas less affordable.
9. Demand is a line, not a point.
Planners are fond of saying that the demand for a specific good is a specific number. But demand can’t be expressed as a single number without referring to price, any more than speed can be expressed in terms of miles without referring to the elapsed time.
As a corollary, if something costs more, that doesn’t mean the demand for it is higher. For example, downtown condominiums may cost more than suburban single-family homes, but that doesn’t prove that the demand for condos is greater. The fact that demand is a line means there will often be someone willing to pay a higher price, even if most people would not. Downtown land costs more than suburban land and mid- and high-rise construction costs more than low-rise construction, so higher prices reflect higher costs, not higher demand.
10. If most people who like something fit a certain demographic, that doesn’t mean most people in that demographic like that thing.
Planners observe that most people who live in dense, mixed-use developments are young people with no children, so they assume that most young people with no children want to live in such developments. In fact, as demographer Wendell Cox has shown, population growth of young people is much faster in the suburbs than in inner cities.
Some planners go even further and claim that, since most people who live in dense, mixed-use developments have no children, then most people with no children, including empty-nester baby boomers, want to live in such developments. Instead, if anything, baby boomers are moving further away from cities, not closer in.