"Developers in my city are only building luxury housing. They're not building anything that ordinary people can afford." If you’ve said this lately, or heard someone else say it, here are five possible reasons why.
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Cost of Development
What would our neighborhoods look like if we voluntarily reduced the amount of infrastructure? This isn’t a purely academic question. As municipal, state, and federal budgets get squeezed there’s going to be a point at which we have no choice but to stop building new roads and even reduce the amount of maintenance on the roads we already have. We could approach this situation with dread and a sense of loss, or we could embrace it as an opportunity to get a better quality of life for a whole lot less money.
We have been working on a project in my hometown called A Better Brainerd for most of this year. I've occasionally shared updates when they were relevant to this broader audience and today is example of that.
Last night there was a city council meeting here in my home town and the budget was discussed extenively. I wasn't there so I'm reactig to the press reports, but you'll get a sense here how one small town (13,500) has allowed debt and the aspiration for quick and easy growth to put it in a real bind.
Today in the Brainerd Daily Dispatch there was report of a very interesting exchange at last night's council meeting. It started with a logical question about the city's debt, a topic we've written about here before.
Matthew Seymour of Brainerd wanted to know more details on the city’s debt and how the city planned to handle the increased debt.
“This is a huge part of the budget and I’m more worried about the debt (than the increase in 2014 taxes),” said Seymour.
Us too. Debt makes us very fragile and while the state seems flush with cash for the moment, that huge percentage of our budget that relies on St. Paul's ongoing generosity should make all Brainerd residents and business owners nervous.
Here was the response.
[Brainerd finance director Connie] Hillman said part of the reason why the debt is higher is because the city has not sold all of its industrial park properties. Once the properties start to sell the city will make money, she said.
City Administrator Theresa Goble said the city also hasn’t received all the money through its Beaver Dam Road and Riverside Drive improvement projects. Goble said once more people are hooked up to city services that the money will come in.
Let's first examine this notion that the city is going to ever "make money" once these properties sell. How does anyone know? Seriously, nobody has ever done the math to see if these properties will generate more revenue over the long term than they create in costs for the city. This math has never been done. There is no target number for sale price, land valuation or fee revenue that has been done. We have no clue if we will ever make money because nobody has ever figured out what that would take.
When the city finance director says "make money" that really means "cash flow," which is a far, far cry from being financially solvent over the long term. Is the tax base of these properties going to be sufficient to cover the cost of maintaining and servicing them over the long term? Nobody knows, but there is good reason to believe that, even if the lots sell, it won't even be close.
And that "if" is a BIG if. The city used borrowed money to gamble on new growth in the industrial park. There are currently 21 lots sitting empty with infrastructure in place just waiting. "Shovel ready," as they say in the business. City taxpayers are covering that gambling debt until there is some cash flow revenue from the sale of those lots.
Empty developments with full utilities off of Beaver Dam Road. Even if they build out, the tax base will never be there to maintain all of this.The same thing has happened with the Beaver Dam Road and Riverside Drive expansions. We have acres and acres of vacant property where the city, again with the use of public debt, is the gambling partner on speculative development. I think city officials would argue that these looked like sound investments until the housing market downturn but, unfortunately, even if these developments had built out as hoped, there was no wealth to be had for the city. We're not doing the math.
These are bad decisions we can't undo and so it does us little good to rehash them unless we can use the experience to draw some lessons. Here are two.
First, we shouldn't be considering another multi-million dollar expansion of the sewer and water systems out to the airport, even if the bulk of the cost for the initial installation is going to be covered by state debt, not local debt. We've shown that we are not very good at gambling on future growth (the reality is that no city is -- some are just luckier than others). If we've learned anything, it should be to shun these so-called "transformative" investments.
Second, there are other alternatives to the big gambling project and we should be pursuing those vigorously. In October, we released a report called Neighborhoods First that showed how we can implement the city council's stated priority of neighborhood investment by using an incremental approach. We outlined eight low risk, high return projects in the Northeast neighborhood that the city can do today. We also offered to train the staff and city officials (at no cost to the city) on how to incorporate this approach into their annual capital improvements and budgeting process.
We need to be honest with ourselves and acknowledge that our approach is not working, that we aren't ever going to "make money" in our current approach. We need a new mindset, one that plays to the city's strengths. We can improve the lives and fortunes of our residents and business owners and create real wealth and prosperity within this community, but only when we stop gambling and start investing incrementally in our core neighborhoods.
We started this year with an examination of an intersection that had been eating at me for quite a while. In the summer of 2012, the Minnesota DOT did an obnoxious and very expensive widening of a dangerous stroad intersection in my hometown. The improvement was clearly a safety enhancement, yet this dangerous intersection was only 970 feet north of a full signalized intersection, clearly a much safer place to make a turn (and only 14 seconds away at 45 mph). Why would a cash-strapped agency spend so much money on a redundant access, especially when the investment would only marginally improve safety? Closing the intersection would not only be cheaper but vastly safer. Vastly.
The answer is easy: economic development. The accesses serve businesses and, along a stroad, that theoretically means growth, jobs and all the good stuff cities pursue.
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This post is the second day of the examination. In it, I take the theoretical approach to task and demonstrate, with the actual math, how our pursuit of economic development through transportation improvements -- not to mention our acceptance of a certain level of injury and death on this stroad -- is made even more pathetic by the low financial returns of the so-called "economic development". In this auto-oriented approach, we sacrifice so much yet we get comparatively so little.
Months after I wrote this, Minnesota's new DOT Commissioner would tour the state in an effort to drum up support for more transportation spending. He has been joined on the road of late by the chair of the Met Council. There is a growing coalition of road and transit advocates that are ready to get in bed together if they can birth a transportation bill with a lot more spending.
Where is the talk of reform? Any reform? Where is anyone talking about a transportation system where we evaluate things in a different way? One where we actually put safety first in practice, not just in talk, and not just by throwing money at it? Where is the push to create a system where projects like this one don't happen?
Nowhere. I don't see any serious, substantive conversation about changing our current approach. We're just desperate for more money to do more of the same...and then some more.
Over the weekend, a Strong Towns member from here in Minnesota, our friend Alex Cecchini, tweeted this:
We need more money for transportation, but I won't be supporting any revenue initiative until we have substantive policy changes. DOT's need to be working to build strong towns, not undermine them with an illusion of wealth and platitudes about safety.
Here's the first of our Best of Blog for 2013.
The nature of productivity
If we are going to make transportation investments as a way to create jobs and economic development, we should be doing so in places with a high return. Spending scarce resources to make STROADs modestly safer is not helping, especially if it induces more people to drive. What our cities need right now is to invest in productive patterns of development.
Yesterday we examined a dangerous intersection along a STROAD, one where the frequency and severity of accidents prompted a severely cash-strapped DOT to spend good money making modest safety improvements. This, despite the fact that the dangerous intersection is less than 1,000 feet from an expensive, fully signalized intersection maintained by the DOT, with the full complement of expensive frontage roads feeding back into it.
While closing the dangerous intersection would improve traffic flow, improve safety and cost less than the extensive reconstruction recently done, it remains open. For all involved, the seconds saved in accessing the adjacent big box retail establishments outweigh in value any other considerations. This must be one valuable location.
Or perhaps not.
The most valuable property in this section of STROAD is the Mills Fleet Farm site. The four parcels includes the Fleet Farm big box store, a Mills Motors auto dealership, a Mills gas station and related parking and storage. Of the four corners accessed off of the dangerous intersection, this is by far the most valuable (and the one with the highest traffic demand). The others are a collection of half-vacant strip malls, underutilized former big boxes, pole buildings with fake facades and other structures of much less value.
The Fleet Farm site is 22.8 acres. It has a total value of $14.4 million. The productivity of this site, in terms of value per acre, is $630,000.
Most cities would bend over backwards in order to have that kind of tax base. This is the kind of growth we get -- and celebrate -- when we make a nine figure investment in a major highway improvement. The Mills corporation pays a ton of taxes to the City of Baxter, Crow Wing County and the State of Minnesota. It is not difficult to imagine a world where the state, with all good intentions, would drop half a million dollars improving a pesky intersection that has proven frustratingly dangerous.
In order to provide an apples to apples analysis, I went to the adjoining city of Brainerd to make a comparison of the Mills site -- the most productive site on this STROAD -- to the productivity found in the traditional development pattern. The nine blocks of downtown Brainerd shown below create a site of slightly less size -- 17.4 acres -- but far greater value. The total value of these nine blocks is $18.9 million, a per acre productivity of $1.08 million, a 72% premium over the Mills STROAD site.
There is an important thing to note about this part of downtown Brainerd. While it is financially the most productive part of the downtown, that is not saying much. There is a small area where the streetscape has been given a freshening up, but most of the development is of pretty low quality. I've brought some of my planning friends from out of town there to survey the damage and they are always shocked at how bad it is. The neglect and atrophy is depressing, even more so when you know what it used to look like.
You can also see from the photo just how much of the space has been given over to automobile storage. In a race to the bottom, Brainerd has destroyed its tax base in an effort to achieve the parking ratios found along the 371 STROAD. Yet that historic value endures.
There are some important takeaways from these observations.
First, and most obvious, is the productivity machine that is the traditional development pattern. There are good reasons that thousands of years of trial and error produced this style of development. Even after two generations of neglect and disinvestment, it remains financially superior -- by a large margin no less -- to the most productive similarly sized STROAD investment in the area.
Second, the traditional development pattern is antifragile in so many ways while the STROAD development is anything but. In the downtown there are 132 different properties, many with multiple tenants. On the STROAD we have one corporate owner. With those 132 different properties, we have an entire ecosystem (albeit a starved one) of jobs, investments and micro opportunity. On the STROAD we have no such diversity; it is all in the hands of one business and their model. Downtown we have resilient building types where one storefront can be an office or retail or service or even residential, depending on the market demands and conditions. When the big box on the STROAD closes, there are few happy things that come next.
Third, since the beginning of the Suburban Experiment, we have had infrastructure throughout the downtown. No new investments have been required to obtain this premium return. To get the far inferior returns from the STROAD, we have spent over a hundred million dollars on highways and frontage roads along with tens of millions on sewer and water systems, all long term obligations that local taxpayers must now sustain on a meager, diffused tax base.
Fourth, the original impetus for this conversation was the way we willingly sacrifice safety for low-return economic development along the STROAD. Well, the traditional development pattern has no such safety concerns (although in this instance, the city of Brainerd has insisted on a high speed, dangerous design through their traditional neighborhoods). We may have fender benders, but your grandmother is not going to get smashed by a semi trying to time a highway gap fleeing from the road rage driver on her tail.
And finally, when we come to grips with the reality that the problem of our cities is not lack of growth but lack of productivity, we will ask ourselves: how do we make our places more productive? Look at the STROAD site. Unless there is an heroic effort by a well financed and determined developer, there is no way the value of that property ever doubles (in real terms). There is no way the parking is converted to structures, a second story is added and other improvements are put in place to improve the value and return on that site. And even if this happened, it doesn't fit with anything around it. It would become an isolated point of productivity in a ring of decline. Today's low return condition is the financial high water mark.
The traditional development pattern of the downtown not only starts the productivity race 72% ahead of the STROAD, it has lots of opportunity to grow. All of the parking can easily be converted to more productive uses. When that low hanging fruit is consumed, all of the buildings can be improved. The second and third floors can be recaptured, renovated and remodeled. This doesn't require one sugar daddy but can be accomplished through the organic functioning of many different players. And when this happens, it won't suck the life out of the surrounding properties. To the contrary, this can only happen successfully in conjunction with the surrounding neighborhoods. Even though the current downtown is far more financially productive than the STROAD, the current atrophy and decline should be the low point. With a little different focus, it is easy to envision the value of these nine downtown blocks doubling, tripling or more.
Now go back to the cash-strapped DOT; if half a million dollars is going to be spent on transportation improvements, and if economic development considerations are going to trump safety, the numbers would suggest that retrofitting the STROAD through the downtown to be more neighborhood compatible is the investment with the highest return.
That is what a state looking to build strong towns would do.
If you are interested, I did a post on the Strong Towns Network that explained my methodology and provided the math behind these numbers. It's still there for you to check out, along with a lot of interesting stuff.
Election 2012 Note:
There is something great about experiencing an election with a group of strangers over a beer in a public place.
Unlike the last Presidential election, I stayed in this year. It was quite the juxtaposition to 2008 and 2010 (read: Sweeny’s Pub, plenty of ale and countless mini-corn dogs). Last night I enjoyed my girlfriend’s delicious Midwestern-style dinner of chicken and biscuits and a nice, relaxing night in – yet, it didn’t quite rival the excitement of experiencing election results with a large group of strangers over a pint. There is something excellent about being surrounded by people from both parties, cheering for different candidates, all in the same space.
We need to create built environments all over this country where these interactions can happen more often. It’s one reason that I stress our need for more quality “third” places. Twitter is a good place to communicate, but a great third place is tough to beat.
Now, I’m sorry for the rest of this post (read: possible grammatical errors and wayward thoughts). Like the rest of America, I was up late glued to the television and social media, and all I can say is: Well America – that was fun, but can we please get back to upbeat television ads about fast food, laundry detergent, beer and shiny electronics?
What’s the plan now? That’s a good question.
I’ve often contemplated what this election mean for America’s towns and cities? I’m not really sure. My guess is that is resembles something like what Bob Collins’ tweet was hinting.
In my mind, one of our political faults is that we ignore how we build places and don’t have anything that resembles a consensus on urban and rural infrastructure development. Our collective culture is still set in the idea that large infrastructure projects will help us grow our way out of debt [See "Debate Questions" on the blog and the related podcast].
The establishment, both liberal and conservative, view projects like the $750 million St. Croix Bridge and the $125 million 169/494 interchange as catalysts of growth – not agents of future debt and long-term maintenance obligations. It’s embedded in our economic culture and how we develop our landscapes.
A great example of lacking a consensus is my hometown: Mankato, Minnesota.
Mankato really wants a vibrant downtown. They’ve pulled out all the usual stops: promote mixed-used development, a historic building facades grant program, improve street, pedestrian and bike connections and reacquaint the town with its riverside. The plan is good, but the City has absolutely no idea how to make it happen.
All the money and time spent towards revitalization efforts is moot if Mankato doesn’t stop subsidizing large competing suburban infrastructure projects that add no real value to the community and quickly become financial liabilities. Public officials on all sides of the political spectrum want the best of both worlds: 1) more quick tax revenue windfalls from easy-to-build suburbanism, and 2) a vibrant downtown. This point is best illustrated by Mankato’s new expensive intersection and its relationship to “new mall building.”
This 1.2 mile blue line represents one of the biggest urban planning blunders in Mankato history. In fact, it probably represents upwards of a $1 billion in extra cost to the small City and its residents over its short 20 year existence. What is the blue line you ask? Well – it is the shortest route that connects Mankato’s Madison East Mall (built late 1960s) to the newer River Hills Mall (built early 1990s). This also ignores that they also built a mall downtown (destroying good urban fabric) in the 1980s.
In the early 1990s, instead of expanding the existing mall and using existing infrastructure in the (still) vacant land surrounding the Madison East Mall, the decision was made to sprawl out the town an extra 1.2 miles. The question I wish would have been asked in the 1990s is: how much financially better off would the town be if it didn’t build the additional roadways, exit ramps, water and sewerage pipes and electric lines?
All of this needs to be maintained into perpetuity. Not to mention that every driving trip for the majority of Mankato’s population burns 2.4 miles more in gas. And for what? In return for the newer mall where city residents get virtually the same stores in a different location? Needless to say, the town is still recovering from this decision, the old Madison East Mall is a ghost town and the buildings that once abutted the commercial hub have gone through 25 years without reinvestment.
My favorite example is the Burger King at the entrance of the old mall. It’s now abandoned. The Burger King closed after access to the fast food restaurant was decreased as a result of a $25 million intersection “improvement” project that was designed to accommodate more traffic towards a newly built intersection ($4 million) and away from an old (and “congested”) intersection adjacent to the River Hills Mall. I’m not mourning the loss of a fast food chain, but merely shaking my head in disappointment and begrudging acceptance at the desolate environment that will continue to ensue once the building starts to fall into disrepair along Mankato’s busiest road.
This cost $25 million. It effectively saves drivers upwards of 1 minute in time and prevents people from having to turn left. This is in addition to another $4 million to build yet another intersection (just slightly down the road) at local Highway 14. All of these expenditures are necessary because of the Mankato’s chosen development pattern. Unfortunately, all of this cost a lot of money and doesn’t pay for itself. Imagine what could be done if Mankato decided to spend the $29 million spent on sprawl-inducing intersections and instead used that money to improve its already existing public infrastructure downtown or neighborhoods?
To give you an idea of the total costs of public infrastructure: The total land and construction of Mankato’s new elementary school costs $8 million less than its two new intersections. At the end of the day, Mankato has money to spend on infrastructure. The town just isn’t spending it in the right places.
This is the problem we have and this is where I agree with Bob Collins’ Tweet: What’s the plan now? For development of infrastructure and our built environment, it looks to be more of the same. If politicians were looking for a stronger economy, they should look to build Strong Towns.
A quick aside on our off day (we normally publish here on Monday, Wednesday and Friday)...
A response I received to yesterday's essay on the assessment process was anticipated and all too predictable. It went something like this:
If the city just lets the road go bad, then the property will lose value. Assessing the improvements maintains the value they have.
I can see how this is comforting for some public officials. There are two big problems with it.
First, nearly all taxpayers believe they are paying the local government taxes and fees to maintain infrastructure. Ask any taxpayer what local governments do and they will say police/fire, roads/streets and elections. When local governments go back to taxpayers and explain that their taxes don't cover even a fraction of the cost of fixing their street, sewer pipe or water service and that the property owner needs to pay more through an assessment for those basic services, it is generally not a pleasant conversation. This is a problem we either avoid or gloss over with new growth, but understand, this is not a revenue problem. It is a communications problem.
Second, while the "let it rot" approach is clever, that is not how the constitution is written. Local governments can't say, "If we don't maintain the street, your property will be worth much less, so let us just assess you the cost to keep that from happening." Let me give you an analogy.
Let's say the city needs to dispose of road kill. They come to you and say, "We are going to designate the ditch in front of your house our road kill disposal site. We realize that will lower the value of your property -- yes -- so, if you are inclined to pay a little extra for proper disposal of these unfortunate critters, we can put them somewhere else."
If you don't give us money, we'll let something bad happen to you. There's a word for that. It's called extortion. Here's a definition:
The crime of obtaining money or some other thing of value by the abuse of one's office or authority.
Public officials need to take some really urgent steps, actions we outline in our Curbside Chat manual. They need to get off the Ponzi scheme and stop digging their financial hole deeper. They need to do an accounting of all of their liabilities and obligations, a REAL capital improvements plan so-to-speak. Then, when they know where their ledger sits and the extent of their shortfall, they need to have an informed, intelligent and respectful community conversation about what to do.
Pretending there is no problem -- or worse, getting mad at me for pointing out this ubiquitous scam -- is not a valid substitute for real leadership. If the court, in this case or a subsequent case, reigns in municipal abuse of the assessment process, there will be clawing and gnashing of teeth in city halls across the country. Better to come clean today and let your people know the truth.
Trust me, they can handle it. In fact, they are waiting for you to do it.
How can a country that is so wealthy be in such enormous debt? How can a country that can build such marvelous transportation systems not find the money to sustain them? How can a people that enjoyed decades of unrivaled economic hegemony -- staggering levels of growth beyond anything seen in human history -- be facing such economic turmoil after a couple years of, not even decline, but just slowing growth? The answer to these questions reveal some uncomfortable truths about who we are, how we got here and what options we have for our future prosperity.
I wanted to provide a brief message for our podcast listeners who have now gone three weeks without an update. I'm so sorry. Like our politicians and engineers with our highway systems, I have had the best of intentions. I've brought along recording equipment on our recent trips to California and Memphis but never had the time to put something quality together. There are two answers to this problem. First, I'm going to make some time this week and next week, with CNU, I will have a ton of content. Keep your ears open for that. Second, we need some help around here, and that can only happen with your assistance. We have an amazingly small budget when compared to everything we do. If you are in a position to support our high return operation, we would value your contribution and put it to good work. Thank you for your support.
I'm struck by how strongly our culture associates growth and prosperity with highway construction and expansion. Tom Friedman, a respected left-of-center columnist with the New York Times, had an entire chapter in his most recent book, That Used to Be Us: How America fell behind in the world it invented and how we can come back, devoted to the concept that "our winning equation" is, in part, to invest in infrastructure and then watch prosperity flourish, just like it did in the 1950's and 1960's.
Of course, this ignores that fact that our investments during the first generation of America's Suburban Experiment (1950-1975) were higher return investments that generated a lot of positive cash flow. I like to point out that, when we built the 35W bridge here in Minnesota for the first time, it connected far flung areas of the Minneapolis/St. Paul metropolitan region in a way that had not been done before. Following that investment, new commercial real estate was developed, new residential housing went in and the resulting influx of tax receipts made us feel wealthy. When the bridge fell down and had to be rebuilt, we didn't experience all that new growth, just the costs of construction and delay. Maintenance has an entirely different set of financial metrics than new construction.
Which is why our transportation spending is set up to favor new construction. It is just so much more fun. Maintenance is simply a pain, a local concern. That highway fix it project means nothing but congestion and delays and, when it's all done, all you have is a little smoother ride. By contrast, new construction is so much better. Not only do the politicians get a ribbon cutting scene, but we can all (once again) "solve" congestion while getting a new WalMart, Taco Bell and Quiki Mart in the process. New growth just feels so much better.
How else can you explain what I experienced last week in Memphis? Here is a city with enormous infrastructure maintenance problems having spent untold sums running highways all over the region. Their local transportation board is proposing the region spend $10 billion more, almost all of it adding new capacity on the far flung (new growth) extremes of the network. Maintenance? That's someone else's problem.
How else can you explain a state (Minnesota) that would prefer to spend more on one bridge to aid exurban commuters from the neighboring state than on maintaining all of the state's 1,149 bridges that are currently rated as structurally deficient? We culturally believe in the power of new growth to solve our problems, that investments in highway capacity and combating congestion pay dividends to us as a society.
Unfortunately, we base this belief on the illusion of wealth that was created in the early years of the Suburban Experiment, where the first life cycle of horizontal expansion had produced growth for our economy and that pesky overhang of maintenance was still a decade or more away. We should know better by now, but there are few in a position to change the system that don't benefit, at least in the short term, from it being perpetuated.
The emperor has no clothes, indeed, but we're still in the phase where we jeer and deride the one pointing it out. That will change soon.
What will speed up that change is an understanding of the fact that our transportation investments are not creating wealth, they are destroying it. Now I'm not talking about just the investments where the old Target store at the old interchange is induced to move into the new Target store at the new interchange four miles up the road. I mean almost all of our highway spending. It costs more to build and maintain than it generates in returns and, therefore, will only continue so long as we have the capacity and the desire to delude ourselves.
Let me provide an example. Pretend you were a local elected official and I came to you and said that I had a project that would reduce congestion, allow us to improve traffic safety, create local economic development opportunities and return 2,194% of the cost of the project to the local economy? Sounds good.
What if I then said that the federal government would pick up 90% of the cost, making the local share just $716,000? This is now a no-brainer, right?
Today let's just look at the federal contribution. I did a Google search for a Diverging Diamond enhancement project with a cost benefit analysis and came up with this one from Kentucky Colorado. Yes, I have an obsession with the delusion that is the diverging diamond interchange, but the selection of Kentucky Colorado was just random. The report for the project contains an appendix that has a cost benefit analysis as follows:
You can see that by the time you get to 2030, for the diverging diamond without the added enhancements, the cost is $7.2 million but the benefit is nearly 22 times that at $157 million. That is an AWESOME rate of return. Graphically, it would be presented to public officials like this, which makes it easy to understand why it could be supported.
At this point, we're not going to delve too deeply into what this benefit is. That will come later. Let's give it the most optimistic spin. Nobody is suggesting that this is money that will pour back into the government. What is being suggested here is that transportation investments like these will reduce congestion, increase mobility, create jobs and that will all grow the economy. So the $157.1 figure could be thought of as the increase in Gross Domestic Product (GDP).
Still sound good? Consider that the federal government -- through all means of taxation, including income tax, tariffs, business taxes, estate taxes and even including the gas tax -- currently captures 15.8% of the economy. Put another way, for each dollar of GDP, about sixteen cents finds its way to the federal government. That means that our whopping $157.1 million in GDP growth only returns $24.2 million to the federal coffers. Graphically, it would look like this.
Okay, this still feels like a good project, doesn't it? The Federal government spends 90% of $7.2 million and, over the subsequent 15 years, brings in $24.2 million. We should just do this over and over again because we're just getting richer, right?
Not so fast. It is not like the $24.2 million is going to be spent on transportation, or even that $7.2 million of that is going to be spent on transportation. The Federal government does many things, has tremendous obligations and spends the vast majority of its funds on things that our society deems more worthy of our investment than transportation. In fact, in 2011, the Federal Highway Administration's budget was 41.1 billion, just 1.07% of the Federal budget. If we are only going to spend 1.07% of what we bring in on transportation, that means this project yields just $259,000 in funds that actually pays for transportation investments.
If the problem here is not obvious to you at this point, let me elaborate. We spend money on transportation. We feel wealthy and experience this enormous "return" (more on that in a second). Only a fraction of that wealth is actually cycled back into the system, however, and an even smaller fraction of that will actually be captured to pay for the project. The amount recouped is ultimately nowhere near the amount invested.
The most obvious "solution" to this problem is to devote more of our Federal budget to transportation projects. That would be the solution of the American Society of Civil Engineers and their adherents in the Infrastructure Cult. Okay, let's not bother calculating the time value of money (the fact that the costs are today but the benefits are spread out over many future years), but just evaluate what it would take in terms of an increase in our budget to go from $0.26 million returned to break even at $7.2 million. That increase -- 27 times the current budget -- would make the Federal Highway Administration's budget $1.1 trillion, bigger than the national security budget ($895 billion), Social Security ($730 billion), Medicare ($491 billion) or Medicaid ($297 billion). That's not going to happen.
So what if we just raised taxes and the federal government captured more of the wealth generated by this improvement? The calculations reveal that the Federal government would need to increase its take of GDP from 15.4% to 19.8% of the economy, a tax increase of $640 billion with all that extra money devoted just to roads. Only the true socialists and/or the true believers in the power of the Suburban Experiment will think that is a good idea.
Now let me drop the bomb I've been alluding too: Those "benefits" that we kind of think of as prosperity, wealth or GDP; they really aren't. There are derived from a set of narrow correlations between time saved and prosperity that we witnessed in the early 1950's when we built those initial highways. We connected these far flung places -- places only served by railroads or poorly constructed roadways prior -- and we saw all kinds of economic gains. We then used that knowledge to build equations to justify expansion of the system. Nobody ever questions those equations today (why would they) and nobody stops to consider the diminishing returns of the system.
So there is not actually any money here, just a few seconds of saved time here and there that economists and engineers equate with money when they are trying to justify a project. Do you take home more money, generate more wealth for the economy or spend more of your income when you can arrive at work 45 seconds more quickly? Not me either. These equations are a joke. (If you want to learn more, read our 2010 series on Costs and Benefits.)
So when I say we are going broke, that this system provides the illusion of wealth in the near term but ultimately destroys wealth, that the decay you see around you in our transportation system is not due to a lack of investment but to the lack of financial viability of the system, you can get a sense of how far gone we are. We are literally operating in a totally different paradigm from reality.
When someone like James Howard Kunstler says we need to rebuild our passenger rail system, that the highway era is a transitional phase that is going to come crashing down on us, we all smile and nod to his face and then giggle behind his back because "that guy is a little crazy". Like I said earlier, the emperor has no clothes, but we're still in the phase where we ridicule the guy pointing it out. We need to get past that. Quickly.
Yes, this is just one project, but I picked this project because it is a low cost, high return endeavor. That is the argument that the engineering profession is making and one of the reasons people got so mad at me when I did my earlier posts on the diverging diamond; the diverging diamond makes better use of existing infrastructure and pays a high return, especially when compared to things like adding another lane or building another interchange. Even so, the math on it is ridiculous. Imagine what the math on a project like the infamous St. Croix bridge would be.
In a follow up post I'm going to look at the original construction of our passenger rail system and show how important capturing value to pay for capital costs is to making transportation systems work as well as how such a system naturally resists excessively ridiculous spending, or at least creates systems that break early enough to avoid catastrophe. In the process, I'll explain why funding the highway system with gas tax dollars was flawed but also why continuing to fund it with deficit spending is perilous. I'll also, if needed, address any engineers (or those sympathetic to them) that want to argue that we shouldn't look at the revenue for a single project because it's the system, dude, that generates the prosperity. Yeah, how's that working out?
The time to shift our focus to building Strong Towns is now.
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