Does Central Asia need automatic stabilizers?
To smooth out fluctuations of income over time, a national government may rely on programs, called “automatic stabilizers,” that spend more in recessions and less in recoveries. For example, most nations pay benefits to the unemployed. This props up national spending -– and thus national income – in recessions, when unemployment rates are high. When the jobless have enough to put greens and soup on the table, they help preserve jobs at the grocery store.
On the other hand, when national spending and prices are too high, the stabilizers work in reverse. Unemployment compensation drops when few people are out of work, thus averting overspending.
Compared to the West, Central Asia has few automatic stabilizers. For example, Kazakhstan does not offer unemployment insurance to most workers. These benefits are aptly named; one can think of the taxpayer as paying “premiums” to the government in exchange for partial replacement of her wages lost during unemployment. But “the unemployment benefit scheme, to which [workers] previously contributed and earned the right to benefits, was abolished in their time of need,” remarked Martina Lubyova of the International Labour Organization in 2009. Now only the poorest of the jobless qualify for benefits.
In general, post-Soviet governments in this region cut back on social spending in the mid-Nineties, partly to qualify for Western loans. Because this spending usually goes to poorer households, it often acts as an automatic stabilizer. In 2002, welfare spending by the government of Kazakhstan amounted to 5.4% of the size of the economy (gross domestic product). Throughout Europe and Central Asia, the average ratio was 10.1%, noted the World Bank.
The lack of stabilizers in Central Asia may aggravate swings in its business cycles. For the period from 1998 through 2009, one measure of income volatility in the region was more than triple that for major economies in the West (see the Notes). In Central Asia, volatility was lowest in Kyrgyzstan and highest (by far) in Turkmenistan. Stabilizers are not the only factors in Central Asia’s volatility; the region depends on exports of such natural resources as oil, gas and gold, which oscillate wildly in their global prices. But this price volatility may strengthen the case for stabilizers.
Central Asia does share with the West some stabilizers that mitigate the business cycle indirectly. For example, when income falls in a recession, so do income tax payments. Unless the government spends all tax revenues on domestic output -– which is not the case in Kazakhstan -– then some part of tax payments leak out of the national economy. A fall in national income reduces this leak. In the United States, taxes absorb as much as 8% of an economic shock to gross domestic product, estimated economist Carl Walsh.
Stabilizers cannot eliminate economic downturns, but it can gentle them. The U.S. economy had few automatic stabilizers in the 1930s –- which is overlooked by paperback authors who predict another Great Depression just around the corner in America. In the Thirties, U.S. welfare was mainly left to the states and localities. Herbert Hoover had rejected a plan to provide federal welfare as “fascist and monopolistic.” By 1933, the states and localities were out of money, so Congress passed a New Deal bill to provide relief. Since then, the U.S. has never suffered unemployment rates as high as occurred in the early Thirties.
Automatic stabilizers may be more effective than discretionary policy, because they take effect right away, noted Nobel Laureate Joseph Stiglitz. In the U.S., carefully planning and carrying out a federal budget usually take the President and Congress at least 20 months. Kazakhstan may not need so much time, since the President dominates the Parliament, but automatic spending still would save time.
Automatic stabilizers can work only if the central bank tolerates them. When the central bank is intent upon tightening the money supply, then it can blunt the stimulus due to spending on unemployment insurance. In the Nineties, the Bank of Canada sometimes overrode the stabilizers to demonstrate its commitment to low inflation, noted David Dodge. In Central Asia, central banks are not as independent of national political leaders as is the Bank of Canada. -- Leon Taylor, tayloralmaty@gmail.com
Notes
To measure the volatility of a national economy, I gathered data on real gross domestic product per capita – in 2005 international dollars, using purchasing power parity – for the five post-Soviet nations of Central Asia, three major Western economies, and for Russia. The period studied was from 1998 (when the Russian ruble crashed) to 2009 (a year of global slowdown). I chose recessionary years for the endpoints to try to compute descriptive statistics over complete business cycles; but the strength of the slowdowns in those two years varies with the country. I measured volatility as the ratio of the sample standard deviation to the mean. It was 4.1% in France, 4.5% in Germany, 28% in Kazakhstan, 13% in Kyrgyzstan, 23.1% in Russia, 23.6% in Tajikistan, 41.5% in Turkmenistan, 5.1% in the United States, and 18.3% in Uzbekistan. All data are from the World Bank’s World Development Indicators.
Good reading
David A. Dodge. Untitled remarks. Economic Review. Fourth quarter 2002. www.kansascityfed.org.
Martina Lubyova. Labour market institutions and policies in the CIS: Post-transitional outcomes. Working paper 4. International Labour Organization. 2009. www.ilo.org
Joseph E. Stiglitz. The roaring Nineties. W.W. Norton. 2003.
Carl E. Walsh. The role of fiscal policy. Economic Letter. September 6, 2002. www.frbsf.org
World Bank. Dimensions of poverty in Kazakhstan. Report No. 30294-KZ, volume 1. Poverty Reduction and Economic Management Unit, Europe and Central Asia Region. 2004. www.worldbank.org The source of the estimates of the ratio of social spending to GDP.
References
World Bank. World Development Indicators. Various years. www.worldbank.org
Wednesday, June 29, 2011
Monday, June 27, 2011
Wheelers, dealers, and other public servants
If the government parties now, will it be hungover in the morning?
Central Asia is relying increasingly on presidents and legislators, not on the central banks, to guide the economy. In 2009, the governments of Kazakhstan and Kyrgyzstan stimulated their languishing economies by spending more than they collected in taxes. The resulting deficits amounted to 2% of the size of the economy (gross domestic product) in Kazakhstan and 1.4% in Kyrgyzstan, according to the World Bank. (Data were not available for Tajikistan, Turkmenistan and Uzbekistan.) Is this trend healthy?
Keynesians may sympathize. As an antidote to recession, they tend to favor fiscal policy to monetary. Tax cuts and government spending may create jobs when the economy is operating below capacity. On the other hand, printing money might not work. When people are scared, they might simply hide the new money rather than spend it. That other tool of monetary policy -– the interest rate -– might also fail. In principle, lower interest rates enable firms to borrow more money in order to expand. But in a depression, the interest rate is already low; the central bank can't push it much lower. If it is zero, then banks will see no point in loaning out more money, even if the central bank does provide it for a song. Welcome to the liquidity trap.
Even in normal times, firms don't pay much attention to the interest rate when contemplating their investment projects, according to Keynesians. True, they would profit by giving the green light to a project with a rate of return exceeding the interest rate. But firms don't always know what rate of return to expect. Executives base their investment decisions partly on "animal spirits" -- on their gut sense of where the economy is headed. They might pay high interest rates if they think that the economy is headed for a boom. And they might pass up a chance to build a factory at bargain-basement interest rates if they think that the economy is headed for a fall.
Even Keynesians would concede that monetary policy is not always impotent. Printing money doesn't always revive the economy, but destroying money seems a sure-fire way to cool it off for a while. We can't be sure that increasing the money supply will encourage investment, since the central bank can't force firms to borrow money. But reducing the money supply will discourage investment. Firms can't build factories if they can't borrow money to pay the builders. Loans are especially important to firms in Central Asia, which have not been operating long enough to build up war chests of cash (“retained earnings”). In the West, the Federal Reserve and the European Central Bank must worry that their attempts to ward off inflation may succeed all too well.
To Keynesians, government spending in a recession will raise output, not prices, because firms will not mark up their prices when demand is anemic. In the United States, prices were indeed stable during the 1950s -– but not in the 1960s. Economists then took more interest in inflation, noted a macroeconomist at the U.S. central bank, Marco Espinosa-Vega. Nobel laureate Milton Friedman argued that a temporary increase in the money supply can affect output in only the short run, by tricking workers into producing more; eventually, they will realize what has happened and will act accordingly. By spending more, the government just confiscates more of the economic pie for itself.
Economists worry when the government borrows in order to spend. The competition with firms for loans forces up the interest rate, crowding out private investment. For example, the U.S. government mainly paid for the Civil War by borrowing money. The new federal debt claimed nearly one-sixth of the gross national product of the North –- large enough to crowd out all new investment during the war, wrote economic historians Jeremy Atack and Peter Passell.
Until recently, however, the bond markets didn’t worry about the deficit, perhaps because it does not claim as large a share of gross domestic product as it did in the Civil War -– or, for that matter, in the 1980s. You could argue that the U.S. deficit was not quite Brobdingnagian – not until recently, anyway.
But Americans really have foreign investors to thank, reported The New York Times. Asian central banks tried to weaken their currencies by selling them for dollars. (They want weaker currencies in order to boost exports.) To put their dollars to work, the central banks reinvested them in U.S. Treasury bonds, even when their rate of return was minuscule, according to The Wall Street Journal. (In May, net foreign assets for Kazakhstan were worth 10.7 trillion tenge, up by more than a third from the previous May, according to the National Bank of Kazakhstan.) Should the central banks stop buying dollars, the U. S. government would have trouble selling bonds. Bond prices would drop, and interest rates would rise. That would compound the difficulty of paying off Washington’s debt. And it would tend to raise interest rates paid by borrowers in Kazakhstan.
For an extreme example of what could happen in developing countries, let’s go to Argentina. A decade ago, the country’s mounting deficit convinced investors that they would never see their money again. They demanded higher interest rates before they would buy the country’s bonds. Over 2001, the interest rate on a 10-year bond rose by 20 percentage points to 35 percent, although the country had tried to reduce its deficit by raising income taxes, wrote Mark Spiegel. Argentina did not earn enough foreign currency from its exports to cover its interest payments, so the government eventually defaulted on its loans. Although Argentina became the second fastest-growing economy in the Western Hemisphere -– second only to oil-rich Venezuela –- it remained virtually the last place in the world in which investors would park their dollars, concluded a Federal Reserve economist, Ramon Moreno, in 2002.
The third-largest economy in the world, Japan’s, was in a similar predicament. Japan’s national debt amounts to 150 percent of its gross domestic product -– the highest ratio among leading industrial nations. In 2005, Moody’s ranked Japan’s bonds below those of Botswana. The fear was that Japan, having run deficits for 15 years, would simply keep issuing bonds, increasing the supply and forcing down the price, reported The New York Times. There was no point in speculating on the bond. The nuclear-power disaster at Fukushima this year has revived this economic problem.
The “in” crowd
Fortunately, the government can “crowd in” investment by paying off its debt. This enables savers to put their money instead into private investment. When the United States government paid off the Civil War debt, interest rates dropped, encouraging private investment and industrialization, concluded Atack and Passell.
The deficit might actually mean something if we could express the net cost of government to you over your lifetime. That’s the idea behind generational accounting. Due partly to the growing burdens of Medicare and Social Security, a 25-year-old male American could expect to pay nearly $200,000 more to government than he would receive in benefits, reported economists Roy Ruffin and Paul Gregory at the turn of the 21st century. On the other hand, the grandparents made out like bandits. Seventy-year-olds received over $50,000 more than they paid in taxes. And Uncle Sam was kinder to the 25-year-old female than to her male Significant Other; she could expect to pay only $90,000 more than she would receive. Women live longer than men, so they can expect to receive benefits for longer. They may also receive benefits as survivors of their husbands.
Kazakhstan is on a similar trajectory. For nearly 30 more years, the pension program will continue its transition from a pay-as-you-go system, in which current workers finance payments to current retirees, to fully-funded liabilities, in which each worker provides for her own eventual retirement. Future generations of workers will have to shift for themselves, unlike workers of 15 years ago.
Sustaining the unsustainable
If we can shift the burden of taxes to future generations, then we may spend too much today. That may help explain why the young bear a larger net burden than the old. It remains to be seen whether the young will pass on their spending to their progeny, too.
If the young perceive that they must pay higher taxes, then they may invest less in education and training, since they would take home a smaller share of the paycheck. The lack of education would strip our economy of growth. And that’s not the end of the story. Higher taxes might also discourage skilled immigrants from moving to the United States; and they might dissuade foreign investors from staking their wealth here, speculated The Financial Times.
Because the government must pay interest on the debt, we can expect it to grow at the rate of interest, unless we run up a surplus that diminishes it. The government cannot run deficits forever if the interest rate exceeds the rate of economic growth. Eventually, we would have to devote the entire economy to paying the interest. Even before interest payments overwhelm, foreigners may refuse to lend us money, for fear that we won’t pay it back. Adjusting for inflation, the annual interest rate at which the National Bank of Kazakhstan lends money, a benchmark for the economy, is roughly zero -- well below the national rate of economic growth, 7% or 8%. The government’s securities amount to 1.8 trillion tenge, according to the National Bank of Kazakhstan. Is cheap money addictive? – Leon Taylor, tayloralmaty@gmail.com
Good reading
Jeremy Atack and Peter Passell. A new economic view of American history. New York: W.W. Norton. Second edition. 1994.
Marco A. Espinosa-Vega. How powerful is monetary policy in the long run? Economic Review. Third quarter 1998.
Milton Friedman. The role of monetary policy. American Economic Review. March 1968. Pages 1-17.
Jagadeesh Gokhale. Tomorrow’s generation will foot the bill. The Financial Times. February 13, 2004. Page 13.
David Leonhardt. That big fat budget deficit. Yawn. The New York Times. February 8, 2004.
Ramon Moreno. Learning from Argentina’s crisis. Economic Letter. October 18, 2002.
Roy J. Ruffin and Paul R. Gregory. Principles of macroeconomics. Seventh edition. Addison-Wesley. 2000.
Michael R. Sesit. The hazard of currency reserves. The Wall Street Journal. February 11, 2004. Page C4.
Mark M. Spiegel. Argentina’s currency crisis: Lessons for Asia. Economic Letter. August 23, 2002.
Todd Zaun. After 100 years, Japanese will go abroad to sell bonds. The New York Times. January 15, 2005. Page B3.
References
World Bank. World Development Indicators. Online at http://data.worldbank.org/indicator
Central Asia is relying increasingly on presidents and legislators, not on the central banks, to guide the economy. In 2009, the governments of Kazakhstan and Kyrgyzstan stimulated their languishing economies by spending more than they collected in taxes. The resulting deficits amounted to 2% of the size of the economy (gross domestic product) in Kazakhstan and 1.4% in Kyrgyzstan, according to the World Bank. (Data were not available for Tajikistan, Turkmenistan and Uzbekistan.) Is this trend healthy?
Keynesians may sympathize. As an antidote to recession, they tend to favor fiscal policy to monetary. Tax cuts and government spending may create jobs when the economy is operating below capacity. On the other hand, printing money might not work. When people are scared, they might simply hide the new money rather than spend it. That other tool of monetary policy -– the interest rate -– might also fail. In principle, lower interest rates enable firms to borrow more money in order to expand. But in a depression, the interest rate is already low; the central bank can't push it much lower. If it is zero, then banks will see no point in loaning out more money, even if the central bank does provide it for a song. Welcome to the liquidity trap.
Even in normal times, firms don't pay much attention to the interest rate when contemplating their investment projects, according to Keynesians. True, they would profit by giving the green light to a project with a rate of return exceeding the interest rate. But firms don't always know what rate of return to expect. Executives base their investment decisions partly on "animal spirits" -- on their gut sense of where the economy is headed. They might pay high interest rates if they think that the economy is headed for a boom. And they might pass up a chance to build a factory at bargain-basement interest rates if they think that the economy is headed for a fall.
Even Keynesians would concede that monetary policy is not always impotent. Printing money doesn't always revive the economy, but destroying money seems a sure-fire way to cool it off for a while. We can't be sure that increasing the money supply will encourage investment, since the central bank can't force firms to borrow money. But reducing the money supply will discourage investment. Firms can't build factories if they can't borrow money to pay the builders. Loans are especially important to firms in Central Asia, which have not been operating long enough to build up war chests of cash (“retained earnings”). In the West, the Federal Reserve and the European Central Bank must worry that their attempts to ward off inflation may succeed all too well.
To Keynesians, government spending in a recession will raise output, not prices, because firms will not mark up their prices when demand is anemic. In the United States, prices were indeed stable during the 1950s -– but not in the 1960s. Economists then took more interest in inflation, noted a macroeconomist at the U.S. central bank, Marco Espinosa-Vega. Nobel laureate Milton Friedman argued that a temporary increase in the money supply can affect output in only the short run, by tricking workers into producing more; eventually, they will realize what has happened and will act accordingly. By spending more, the government just confiscates more of the economic pie for itself.
Economists worry when the government borrows in order to spend. The competition with firms for loans forces up the interest rate, crowding out private investment. For example, the U.S. government mainly paid for the Civil War by borrowing money. The new federal debt claimed nearly one-sixth of the gross national product of the North –- large enough to crowd out all new investment during the war, wrote economic historians Jeremy Atack and Peter Passell.
Until recently, however, the bond markets didn’t worry about the deficit, perhaps because it does not claim as large a share of gross domestic product as it did in the Civil War -– or, for that matter, in the 1980s. You could argue that the U.S. deficit was not quite Brobdingnagian – not until recently, anyway.
But Americans really have foreign investors to thank, reported The New York Times. Asian central banks tried to weaken their currencies by selling them for dollars. (They want weaker currencies in order to boost exports.) To put their dollars to work, the central banks reinvested them in U.S. Treasury bonds, even when their rate of return was minuscule, according to The Wall Street Journal. (In May, net foreign assets for Kazakhstan were worth 10.7 trillion tenge, up by more than a third from the previous May, according to the National Bank of Kazakhstan.) Should the central banks stop buying dollars, the U. S. government would have trouble selling bonds. Bond prices would drop, and interest rates would rise. That would compound the difficulty of paying off Washington’s debt. And it would tend to raise interest rates paid by borrowers in Kazakhstan.
For an extreme example of what could happen in developing countries, let’s go to Argentina. A decade ago, the country’s mounting deficit convinced investors that they would never see their money again. They demanded higher interest rates before they would buy the country’s bonds. Over 2001, the interest rate on a 10-year bond rose by 20 percentage points to 35 percent, although the country had tried to reduce its deficit by raising income taxes, wrote Mark Spiegel. Argentina did not earn enough foreign currency from its exports to cover its interest payments, so the government eventually defaulted on its loans. Although Argentina became the second fastest-growing economy in the Western Hemisphere -– second only to oil-rich Venezuela –- it remained virtually the last place in the world in which investors would park their dollars, concluded a Federal Reserve economist, Ramon Moreno, in 2002.
The third-largest economy in the world, Japan’s, was in a similar predicament. Japan’s national debt amounts to 150 percent of its gross domestic product -– the highest ratio among leading industrial nations. In 2005, Moody’s ranked Japan’s bonds below those of Botswana. The fear was that Japan, having run deficits for 15 years, would simply keep issuing bonds, increasing the supply and forcing down the price, reported The New York Times. There was no point in speculating on the bond. The nuclear-power disaster at Fukushima this year has revived this economic problem.
The “in” crowd
Fortunately, the government can “crowd in” investment by paying off its debt. This enables savers to put their money instead into private investment. When the United States government paid off the Civil War debt, interest rates dropped, encouraging private investment and industrialization, concluded Atack and Passell.
The deficit might actually mean something if we could express the net cost of government to you over your lifetime. That’s the idea behind generational accounting. Due partly to the growing burdens of Medicare and Social Security, a 25-year-old male American could expect to pay nearly $200,000 more to government than he would receive in benefits, reported economists Roy Ruffin and Paul Gregory at the turn of the 21st century. On the other hand, the grandparents made out like bandits. Seventy-year-olds received over $50,000 more than they paid in taxes. And Uncle Sam was kinder to the 25-year-old female than to her male Significant Other; she could expect to pay only $90,000 more than she would receive. Women live longer than men, so they can expect to receive benefits for longer. They may also receive benefits as survivors of their husbands.
Kazakhstan is on a similar trajectory. For nearly 30 more years, the pension program will continue its transition from a pay-as-you-go system, in which current workers finance payments to current retirees, to fully-funded liabilities, in which each worker provides for her own eventual retirement. Future generations of workers will have to shift for themselves, unlike workers of 15 years ago.
Sustaining the unsustainable
If we can shift the burden of taxes to future generations, then we may spend too much today. That may help explain why the young bear a larger net burden than the old. It remains to be seen whether the young will pass on their spending to their progeny, too.
If the young perceive that they must pay higher taxes, then they may invest less in education and training, since they would take home a smaller share of the paycheck. The lack of education would strip our economy of growth. And that’s not the end of the story. Higher taxes might also discourage skilled immigrants from moving to the United States; and they might dissuade foreign investors from staking their wealth here, speculated The Financial Times.
Because the government must pay interest on the debt, we can expect it to grow at the rate of interest, unless we run up a surplus that diminishes it. The government cannot run deficits forever if the interest rate exceeds the rate of economic growth. Eventually, we would have to devote the entire economy to paying the interest. Even before interest payments overwhelm, foreigners may refuse to lend us money, for fear that we won’t pay it back. Adjusting for inflation, the annual interest rate at which the National Bank of Kazakhstan lends money, a benchmark for the economy, is roughly zero -- well below the national rate of economic growth, 7% or 8%. The government’s securities amount to 1.8 trillion tenge, according to the National Bank of Kazakhstan. Is cheap money addictive? – Leon Taylor, tayloralmaty@gmail.com
Good reading
Jeremy Atack and Peter Passell. A new economic view of American history. New York: W.W. Norton. Second edition. 1994.
Marco A. Espinosa-Vega. How powerful is monetary policy in the long run? Economic Review. Third quarter 1998.
Milton Friedman. The role of monetary policy. American Economic Review. March 1968. Pages 1-17.
Jagadeesh Gokhale. Tomorrow’s generation will foot the bill. The Financial Times. February 13, 2004. Page 13.
David Leonhardt. That big fat budget deficit. Yawn. The New York Times. February 8, 2004.
Ramon Moreno. Learning from Argentina’s crisis. Economic Letter. October 18, 2002.
Roy J. Ruffin and Paul R. Gregory. Principles of macroeconomics. Seventh edition. Addison-Wesley. 2000.
Michael R. Sesit. The hazard of currency reserves. The Wall Street Journal. February 11, 2004. Page C4.
Mark M. Spiegel. Argentina’s currency crisis: Lessons for Asia. Economic Letter. August 23, 2002.
Todd Zaun. After 100 years, Japanese will go abroad to sell bonds. The New York Times. January 15, 2005. Page B3.
References
World Bank. World Development Indicators. Online at http://data.worldbank.org/indicator
Friday, June 3, 2011
Don’t take the A train
Is a subway system the way to go?
After more than two decades of work, Almaty’s subway system is to open in December, reported Business New Europe. Will it prove worth the wait?
Perhaps not. In the United States, subways cost so much to build and run that they almost always lose money – even in crammed San Francisco, where Marlon Boarnet found that rush-hour traffic was nearly twice the normal capacity of the highways. In 1985, President Ronald Reagan said Miami could have saved money on its transit system by scotching it and buying a limo for each user. Metrorail, in Washington, D.C., was so expensive that the city could have bought a BMW for each daily passenger and saved money, wrote Tony Snow.
Mass transit is expensive, because not enough people use it to drive down its per-rider cost by much. The problem is not the fare. Offering mass transit for free could draw only a third more riders (judging from the American experience), because the demand to ride does not respond strongly to changes in the fare, concluded economists Gerald Kraft and Thomas Domencich. The problem is that people don’t want to walk to the station and wait for the train. Per hour, they value their walking and waiting time at as much as one and half times their wage. Their time within the vehicle – be it a car, bus or train – is valued at only half their wage, reported an urban economist, Arthur O’Sullivan. Mass transit consumes more time than the automobile in the journey from home to the vehicle, and from the vehicle to work. Because people value this time highly, they prefer driving to riding.
San Francisco’s subway system, BART, illustrates how mass transit can go wrong. The train speeds 80 miles per hour between stations spaced 2.5 miles apart. The rider spends little time on the train but must take a while to reach the station and wait for the vehicle. Since the rider values this time highly, he prefers to drive, albeit at only 40 miles per hour. Studies suggested that buses were cheaper than BART at all levels of traffic; and that the auto was cheaper than BART for traffic levels of up to 22,000 passengers per hour, noted Melvin Webber in his case study of the subway system. For a fourth of BART’s construction cost, San Francisco could have bought enough buses to carry all subway riders.
Even so, mass transit may decongest highways and thus save money – lots of it. Bangkok may lose a third of its output to congestion, estimated Japan’s international cooperation agency in 1990. In the United States, congestion may have accounted for .7 of a percent of the value of domestic output in 1994, estimated economists Richard Arnott and Kenneth Small. In Europe, congestion may claim 2 percent of GDP, calculated the transport directorate for the European Union. In Los Angeles, commuting takes so much time that the average household there is willing to take a pay cut in order to take a job that avoids congestion, found urban economists Edward Glaeser and Janet Kohlhase.
Cash or crash?
Suppose that transit helps us avoid just 1 percent of traffic accidents. Then, judging from Urban Institute estimates, cities in the United States would have saved $3.3 billion in 1989, nearly half of the total operating subsidy for public transit that year, said Janet Rothenberg Pack. Mass transit also helps us shorten the auto trip – a value that we can measure as the increase in the worth of a house that is nearer the work site and that thus avoids a longer commute. In addition, mass transit decongests alternate routes and reduces noise and pollution downtown. Finally, the riders themselves get something out of it. Pack figured that the total benefits of transit in Philadelphia exceeded the costs for each of the three years that she studied – 1981, 1982 and 1989. The largest benefits were the welfare gains to riders of transit and commuter rail. Estimates of the net benefits over the three years varied from $70.3 million to $140.3 million.
To justify the subsidy, the city can argue that the price of driving an automobile is too low, since it does not reflect the congestion imposed on other drivers; so the city must lower the price of transit to make it relatively attractive. But the subsidy also lowers the cost of travel; with low prices for both the car and the bus, we may get too much travel.
In recent years, fares from mass transit have covered less than 40 percent of costs. One problem is that transit systems pitch their fares low to attract riders. Since fare cuts attract relatively few riders in the short run, they reduce fare revenues. Moreover, transit systems must pay escalating labor costs. Wages have risen while the productivity of a worker –- the number of transit rides per employee – has dropped.
To save money, the city could contract out transit services to the lowest private bidder. Phoenix, Arizona, hired a taxi firm for dial-a-ride service on Sundays, at one-sixth of the cost of running buses.
Other possibilities include small buses, called jitneys, running to the station or to work; and buses picking up riders more often and at more stops. In Ottawa, a fleet of 850 buses accounted for more than 70% of all rush-hour trips to the downtown, reported the Transportation Research Board in the United States.
Rather than build subways or roads, the government could attack congestion directly, by taxing it. A study of California counties inferred that taxing congestion might prove more productive than building highways. Relieving congestion bore a strong, and positive, statistical relationship to output per worker across counties in the Seventies and Eighties. Constructing highways lacked this relationship. The author, Marlon Boarnet, concluded that taxing vehicles during rush hour would do more to increase output than would building roads. Relieving congestion helps workers get to their jobs quicker and thus produce more.
Building highways may fail to decongest roads by much, because it attracts new drivers, argued Small, an urban transportation economist. Taxing congestion, on the other hand, discourages all drivers. Moreover, it is a cheap measure for the government to undertake. One need only find a way to collect the toll – which may be fairly easy, with electronic monitoring. In New York, New Jersey and Pennsylvania, toll authorities equipped millions of cars with detection gadgets, so that drivers could pay their tolls monthly or with prepaid magnetic cards. The government can either return the money to taxpayers or use it to improve roads and transit. Small figured in 1993 that, in greater Los Angeles, a congestion fee of 15 cents per vehicle-mile during peak hours would raise nearly $3 billion a year.
In principle, the congestion tax should equal the cost that the motorist imposes on other drivers. It compels the motorist to weigh the true costs of his decision before deciding whether to drive. The tax is flexible. The government can experiment with the right tax to levy, raising it on the congested road until the road becomes slightly less congested than alternative routes, noted Small. It can charge a higher tax during peak hours, when the road is more jammed.
Governments are slowly adopting the congestion tax. Singapore has levied it since 1975; and, in 1992, France began taxing congestion on Sundays on its A1 highway into Paris, according to Small.
The case for a congestion tax is not unchallenged. Perhaps the time lost to congestion is not a true social cost, because the driver consents to bear it. Moreover, some congestion may be optimal, as a practical matter. In principle, one may maintain an even flow of traffic on the road; in practice, however, traffic ebbs and flows. If the road is not congested in its peak hour, then it may be underused at other times. In the Netherlands, highway use seemed optimal when 2 percent of each day’s traffic encountered congestion, reported The Economist. But even a little congestion can seem like too much of a good thing. -– Leon Taylor, tayloralmaty@gmail.com
Good reading
Alan Altshuler, editor. Current issues in transportation policy. Lexington, Mass.: LexingtonBooks. 1979.
Marlon G. Boarnet. Infrastructure services and the productivity of public capital: The case of streets and highways. National Tax Journal50 (1): 39-57. March 1997. Online. Reprinted in Wassmer (2000).
The Economist. Why motorists always outsmart planners, economists, and traffic engineers: The unbridgeable gap. May 9, 1998. Reprinted in Wassmer (2000). Reported the estimate of European congestion.
Matthew Edel and Jerome Rothenberg, editors. Readings in urban economics. New York: Macmillan. 1972.
Edward L. Glaeser and Janet E. Kohlhase. Cities, regions and the decline of transport costs. Harvard Institute of Economic Research Discussion Paper 2014. Online. 2003.
Gerald Kraft and Thomas A. Domencich. Free transit. In Edel and Rothenberg (1972).
Edwin Mills and Bruce Hamilton. Urban economics. Upper Saddle River, New Jersey: Prentice Hall. Fifth edition. 1997. Discusses urban transportation.
Arthur O’Sullivan. Urban economics. New York: McGraw-Hill. Seventh edition. 2009. Discusses mass transit.
Janet Rothenberg Pack. You ride, I’ll pay: Social benefits and transit subsidies. The Brookings Review 10(3). Summer 1992. Online. Reprinted in Wassmer (2000).
Kenneth A. Small. Urban traffic congestion: A new approach to the Gordian knot. Brookings Review 11: 6-11. Summer 1993. Online. Reprinted in Wassmer (2000).
Transportation Research Board, of the National Academy of Sciences. Case study of bus rapid transit in Ottawa. Online. Undated.
Robert W. Wassmer, editor. Readings in urban economics, Malden, Mass.: Blackwell. 2000.
Melvin E. Webber. The BART experience – what have we learned? In Altshuler (1979).
References
Clare Nuttall. Almaty metro nears end of line. Business New Europe. May 31, 2011. Online.
After more than two decades of work, Almaty’s subway system is to open in December, reported Business New Europe. Will it prove worth the wait?
Perhaps not. In the United States, subways cost so much to build and run that they almost always lose money – even in crammed San Francisco, where Marlon Boarnet found that rush-hour traffic was nearly twice the normal capacity of the highways. In 1985, President Ronald Reagan said Miami could have saved money on its transit system by scotching it and buying a limo for each user. Metrorail, in Washington, D.C., was so expensive that the city could have bought a BMW for each daily passenger and saved money, wrote Tony Snow.
Mass transit is expensive, because not enough people use it to drive down its per-rider cost by much. The problem is not the fare. Offering mass transit for free could draw only a third more riders (judging from the American experience), because the demand to ride does not respond strongly to changes in the fare, concluded economists Gerald Kraft and Thomas Domencich. The problem is that people don’t want to walk to the station and wait for the train. Per hour, they value their walking and waiting time at as much as one and half times their wage. Their time within the vehicle – be it a car, bus or train – is valued at only half their wage, reported an urban economist, Arthur O’Sullivan. Mass transit consumes more time than the automobile in the journey from home to the vehicle, and from the vehicle to work. Because people value this time highly, they prefer driving to riding.
San Francisco’s subway system, BART, illustrates how mass transit can go wrong. The train speeds 80 miles per hour between stations spaced 2.5 miles apart. The rider spends little time on the train but must take a while to reach the station and wait for the vehicle. Since the rider values this time highly, he prefers to drive, albeit at only 40 miles per hour. Studies suggested that buses were cheaper than BART at all levels of traffic; and that the auto was cheaper than BART for traffic levels of up to 22,000 passengers per hour, noted Melvin Webber in his case study of the subway system. For a fourth of BART’s construction cost, San Francisco could have bought enough buses to carry all subway riders.
Even so, mass transit may decongest highways and thus save money – lots of it. Bangkok may lose a third of its output to congestion, estimated Japan’s international cooperation agency in 1990. In the United States, congestion may have accounted for .7 of a percent of the value of domestic output in 1994, estimated economists Richard Arnott and Kenneth Small. In Europe, congestion may claim 2 percent of GDP, calculated the transport directorate for the European Union. In Los Angeles, commuting takes so much time that the average household there is willing to take a pay cut in order to take a job that avoids congestion, found urban economists Edward Glaeser and Janet Kohlhase.
Cash or crash?
Suppose that transit helps us avoid just 1 percent of traffic accidents. Then, judging from Urban Institute estimates, cities in the United States would have saved $3.3 billion in 1989, nearly half of the total operating subsidy for public transit that year, said Janet Rothenberg Pack. Mass transit also helps us shorten the auto trip – a value that we can measure as the increase in the worth of a house that is nearer the work site and that thus avoids a longer commute. In addition, mass transit decongests alternate routes and reduces noise and pollution downtown. Finally, the riders themselves get something out of it. Pack figured that the total benefits of transit in Philadelphia exceeded the costs for each of the three years that she studied – 1981, 1982 and 1989. The largest benefits were the welfare gains to riders of transit and commuter rail. Estimates of the net benefits over the three years varied from $70.3 million to $140.3 million.
To justify the subsidy, the city can argue that the price of driving an automobile is too low, since it does not reflect the congestion imposed on other drivers; so the city must lower the price of transit to make it relatively attractive. But the subsidy also lowers the cost of travel; with low prices for both the car and the bus, we may get too much travel.
In recent years, fares from mass transit have covered less than 40 percent of costs. One problem is that transit systems pitch their fares low to attract riders. Since fare cuts attract relatively few riders in the short run, they reduce fare revenues. Moreover, transit systems must pay escalating labor costs. Wages have risen while the productivity of a worker –- the number of transit rides per employee – has dropped.
To save money, the city could contract out transit services to the lowest private bidder. Phoenix, Arizona, hired a taxi firm for dial-a-ride service on Sundays, at one-sixth of the cost of running buses.
Other possibilities include small buses, called jitneys, running to the station or to work; and buses picking up riders more often and at more stops. In Ottawa, a fleet of 850 buses accounted for more than 70% of all rush-hour trips to the downtown, reported the Transportation Research Board in the United States.
Rather than build subways or roads, the government could attack congestion directly, by taxing it. A study of California counties inferred that taxing congestion might prove more productive than building highways. Relieving congestion bore a strong, and positive, statistical relationship to output per worker across counties in the Seventies and Eighties. Constructing highways lacked this relationship. The author, Marlon Boarnet, concluded that taxing vehicles during rush hour would do more to increase output than would building roads. Relieving congestion helps workers get to their jobs quicker and thus produce more.
Building highways may fail to decongest roads by much, because it attracts new drivers, argued Small, an urban transportation economist. Taxing congestion, on the other hand, discourages all drivers. Moreover, it is a cheap measure for the government to undertake. One need only find a way to collect the toll – which may be fairly easy, with electronic monitoring. In New York, New Jersey and Pennsylvania, toll authorities equipped millions of cars with detection gadgets, so that drivers could pay their tolls monthly or with prepaid magnetic cards. The government can either return the money to taxpayers or use it to improve roads and transit. Small figured in 1993 that, in greater Los Angeles, a congestion fee of 15 cents per vehicle-mile during peak hours would raise nearly $3 billion a year.
In principle, the congestion tax should equal the cost that the motorist imposes on other drivers. It compels the motorist to weigh the true costs of his decision before deciding whether to drive. The tax is flexible. The government can experiment with the right tax to levy, raising it on the congested road until the road becomes slightly less congested than alternative routes, noted Small. It can charge a higher tax during peak hours, when the road is more jammed.
Governments are slowly adopting the congestion tax. Singapore has levied it since 1975; and, in 1992, France began taxing congestion on Sundays on its A1 highway into Paris, according to Small.
The case for a congestion tax is not unchallenged. Perhaps the time lost to congestion is not a true social cost, because the driver consents to bear it. Moreover, some congestion may be optimal, as a practical matter. In principle, one may maintain an even flow of traffic on the road; in practice, however, traffic ebbs and flows. If the road is not congested in its peak hour, then it may be underused at other times. In the Netherlands, highway use seemed optimal when 2 percent of each day’s traffic encountered congestion, reported The Economist. But even a little congestion can seem like too much of a good thing. -– Leon Taylor, tayloralmaty@gmail.com
Good reading
Alan Altshuler, editor. Current issues in transportation policy. Lexington, Mass.: LexingtonBooks. 1979.
Marlon G. Boarnet. Infrastructure services and the productivity of public capital: The case of streets and highways. National Tax Journal50 (1): 39-57. March 1997. Online. Reprinted in Wassmer (2000).
The Economist. Why motorists always outsmart planners, economists, and traffic engineers: The unbridgeable gap. May 9, 1998. Reprinted in Wassmer (2000). Reported the estimate of European congestion.
Matthew Edel and Jerome Rothenberg, editors. Readings in urban economics. New York: Macmillan. 1972.
Edward L. Glaeser and Janet E. Kohlhase. Cities, regions and the decline of transport costs. Harvard Institute of Economic Research Discussion Paper 2014. Online. 2003.
Gerald Kraft and Thomas A. Domencich. Free transit. In Edel and Rothenberg (1972).
Edwin Mills and Bruce Hamilton. Urban economics. Upper Saddle River, New Jersey: Prentice Hall. Fifth edition. 1997. Discusses urban transportation.
Arthur O’Sullivan. Urban economics. New York: McGraw-Hill. Seventh edition. 2009. Discusses mass transit.
Janet Rothenberg Pack. You ride, I’ll pay: Social benefits and transit subsidies. The Brookings Review 10(3). Summer 1992. Online. Reprinted in Wassmer (2000).
Kenneth A. Small. Urban traffic congestion: A new approach to the Gordian knot. Brookings Review 11: 6-11. Summer 1993. Online. Reprinted in Wassmer (2000).
Transportation Research Board, of the National Academy of Sciences. Case study of bus rapid transit in Ottawa. Online. Undated.
Robert W. Wassmer, editor. Readings in urban economics, Malden, Mass.: Blackwell. 2000.
Melvin E. Webber. The BART experience – what have we learned? In Altshuler (1979).
References
Clare Nuttall. Almaty metro nears end of line. Business New Europe. May 31, 2011. Online.
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