Author: Wendell Cox

California: The Housing Bubble Returns?

To read the periodic house price reports out of California, it would be easy to form the impression that house prices are continuing to decline. Most press reports highlight the fact that house prices are lower this year than they were at the same time last year. This masks the reality of robust house price increases that have been underway for nearly half a year. The state may have forfeited seven years of artificially induced house price escalation in just two years but has recovered about one-fifth of it since March.

California Housing Market Since 2000: In 2000, the average median house price among California markets with more than 1,000,000 population was $291,000. The Median Multiple (median house price divided by median household income) was 4.5, making houses in California approximately 50% more costly relative to incomes than in the rest of the nation.

According to the California Association of Realtors, the average median price peaked at $644,000 between 2005 and 2007, depending upon the particular market. This nearly 140% price increase translated into a more than doubling of the Median Multiple, to 9.2.

Median prices fell rapidly from the peak, dropping at their low point to an average of $315,000. The average Median Multiple fell to 4.4, slightly below the 2000 level, but still well above the national level. All markets reached their low points in the first part of 2009.

It is at this point that the business press lost track of what was going on. Of course, year on year price declines continued, but only because the price declines had been so severe early 2008. Since the bottoming out of house prices, there have been strong gains. As of September, the average median house price among the major metropolitan areas was $383,000, a nearly 20% increase from the low point. Moreover, in dollar terms, median house prices recovered nearly 20% of their loss from the peak to the low point.

Major California Markets: Median House Prices: 2000 to Present
Metropolitan Area (MSA)	2000	Peak	Low Point	2009/09	Loss: Peak to Low Pt	Change from Low-Pt
Los Angeles: Los Ang. County	$ 215,900	$ 605,300	$ 295,100	$ 351,700	-51.2%	19.2%
Los Angeles: Orange County	$ 316,200	$ 747,300	$ 423,100	$ 496,800	-43.4%	17.4%
Riverside-San Bernardino	$ 144,000	$ 415,200	$ 156,800	$ 172,400	-62.2%	9.9%
Sacramento	$ 172,000	$ 394,500	$ 167,300	$ 184,200	-57.6%	10.1%
San Diego	$ 231,000	$ 622,400	$ 321,000	$ 386,100	-48.4%	20.3%
San Francisco	$ 508,000	$ 853,900	$ 399,000	$ 536,100	-53.3%	34.3%
San Jose	$ 448,000	$ 868,400	$ 445,000	$ 553,000	-48.8%	24.3%
Average	$ 290,700	$ 643,800	$ 315,300	$ 382,900	-52.1%	19.4%

Exhibit: Median Multiple	4.5	9.2	4.4	5.2
Above Historic Norm (3.0)	50%	208%	46%	73%

Derived from California Association of Realtors and National Association of Realtors data
Note: California Association of Realtors divides the Los Angeles MSA into Los Angeles and Orange counties

Profligate Lending: It is critical to note that the inflated house prices that existed two to three years ago were wholly artificial. Prices had been driven up by the special and hopefully never to be repeated conditions of profligate lending, which increased demand.

California: Regulating Away Housing Affordability: But the increase in demand alone would not have been enough to produce the unprecedented house price increases had public officials and voters not established a veritable mish-mash of housing supply regulations. The house price increases were driven ever higher by these severe land use restrictions, which prevented housing markets state from meeting demand.

Supply restrictions, which go under various names, such as compact development, urban containment and “smart growth,” have been a feature of California housing for some time. Examples of such policies are urban growth boundaries, building moratoria and expensive development impact fees which disproportionately tax new homes for the expanded community infrastructure a rising population requires.

As more loose lending practices increased the demand for home ownership, the inability (and unwillingness) of the state’s land use regulations prevented the housing supply from increasing in a corresponding manner. With demand for housing far outstripping supply, prices had nowhere to go but up. The result was short term house price escalation that may have never occurred before in a first-world nation.

Contrast with Healthy Housing Supply Markets: There was a stark contrast with house price increases in the liberally regulated markets around the nation. For example, in Atlanta, Dallas-Fort Worth and Houston, house prices remained near or below the historic Median Multiple norm of 3.0, as the supply vent was allowed to operate. This is despite the fact that there was a strong underlying increase in demand for home ownership (measured by domestic migration) in these and other liberally regulated markets. In the California markets, on the other hand, there was overall negative underlying demand, with significant domestic out-migration. Of course, speculation ran rampant in California, as could be expected in any market where asset values are responding to a severe shortage of supply relative to demand.

By the 1990s, Dartmouth’s William Fischel had associated California’s high house prices relative to the nation with the intensity of its land use regulation. In 1970, as the more severe regulations were beginning, house prices in California were at approximately the same level relative to incomes as in metropolitan areas in the rest of the nation.

California’s disproportionate losses are illustrated by the fact that its major metropolitan areas have less than twice as many total owned houses as those in Texas (Dallas-Fort Worth, Houston, San Antonio and Austin), yet experienced gross value losses 85 times as great as the Texas metropolitan areas by Meltdown Monday (September 15, 2008, when Lehman Brothers failed).

Recent Price Increase Rate Exceeds the Bubble: While widely unnoticed, the post-bottom median house price has increased 20%. In six months or less, the average median price increase among California metropolitan areas exceeded the annual price increase for all of the bubble years except one, which was 22% in 2004. The 2009 price increase rate, annualized, is nearly double that. As a result, despite the widely reported bubble collapse, California’s housing affordability now is worsening relative to the rest of the nation. The prospect could be for further inflation of the bubble, with the passage of Senate Bill 375, which is likely to lead to even more intensive land use restrictions, on the false premise that higher densities will materially reduce greenhouse emissions. As governments increasingly force development to occur only where it prefers, the property owning winners can extract much higher prices than would occur if there were more competition.

This of course will mean that the more dense housing units built will be even more expensive, even as the market is prohibited from supplying the larger detached homes that households overwhelmingly prefer. All this will make California less competitive, something the increasingly uncompetitive Golden State could do without.

Another View: The recent price escalation, however, may be illusory. The widely read California real estate blog, Dr. Housing Bubble suggests that the first wave of “sub-prime” loan failures that constituted the bubble burst could be followed by a second wave over the next few years, driven by “option arm” mortgage resets. The Doctor notes that these loans are concentrated in California and other ground zero states (Florida, Arizona and Nevada), unlike the previous wave, which was more evenly spread around the nation.

In the End: Regulation Will Lose the Day: Thus, the “jury is still out.” The bubble may be re-inflating in California, or another bust could be on the horizon. However, in a state that has given new meaning to regulatory excess, the longer run prospects call for artificially higher housing prices, unaffordable to much of the state’s middle class. This means that California will continue to become an ever-more bifurcated state, between an aging, largely affluent coastal homeowning population and, well, just about everyone else.

Photograph: Los Angeles (Porter Ranch in the San Fernando Valley)

Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris. He was born in Los Angeles and was appointed to three terms on the Los Angeles County Transportation Commission by Mayor Tom Bradley. He is the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”

November 19, 2009

Long Beach Freeway Saga

The Los Angeles Times reports progress toward completion of the Long Beach Freeway (I-710) gap between Valley Boulevard in East Los Angeles and Pasadena, with a geologic study finding a tunnel alignment to be feasible. Real progress is overdue. My great aunt and great uncle were forced out of their house in the early 1960s in South Pasadena by the California Highway Department, in anticipation of building the freeway. I suspect the house is still there.

For nearly one-half century, South Pasadena residents have opposed building the “Meridian” route that would have dissected the city. They were not against the freeway per se, but rather preferred the “Westerly” route, which would have skirted the city. The state had selected the Meridian route. In the middle 1980s, while a member of the Los Angeles County Transportation Commission, I served on a special route selection committee chaired by former county supervisor Peter F. Schabarum. Under our legislative authority, we also selected the Meridian route. Nothing came of it.

It is to be hoped that serious efforts to close the gap will be underway soon.

November 18, 2009
A Canadian Autobahn
Canada is the largest high-income nation in the world without a comprehensive national freeway (autobahn, expressway or autoroute) system. Motorways are entirely grade separated roadways (no cross traffic), with four or more lanes (two or more in each direction) allowing travel that is unimpeded by traffic signals or stop signs.

The Economic Advantages of Motorways: Motorways have been associated with positive economic and safety impacts. For example, a synthesis of research by the American Association of State Highway and Transportation Officials (AASHTO) noted the positive impact of US motorway system:

The Interstate Highway System represented an investment in a new, higher speed, safer, lower cost per mile technology which fundamentally altered relationships between time, cost, and space in a manner which allowed new economic opportunities to emerge that would never have emerged under previous technologies.

In particular, the AASHTO synthesis indicated that motorway

…investments have lowered production and distribution costs in virtually every industry sector.

It is a well known fact that motorways are by far the safest roads. We estimated that 187,000 fatalities had been averted due to the transfer of traffic from other roads to motorways between 1956 and 1996.

A World of Motorways: Truckers in Japan, Europe (the EU-15) and the United States can travel between virtually all major metropolitan areas on high quality motorways.

Further, motorway systems have and are being built in developing nations. By far the most impressive is China, which now has approximately 65,000 kilometers of motorway, not including motorways administered at the municipal level (as in Shanghai and Beijing). Only the United States has more, at approximately 85,000 kilometers. China’s plans call for the US figure to be exceeded within a decade. These roads are being built not only throughout populous eastern and central China, but also to the Pamirs at the Kazakh border and to Lhasa, in Tibet, across some of the most desolate and sparsely populated territory in the world. Mexico, a partner with Canada and the United States in the North American Free Trade Agreement also has an extensive motorway system.

Motorways in Canada: Canada, however, is an exception. Only a quarter of metropolitan areas are connected to one another by motorways. Edmonton and Calgary are among the few metropolitan areas in the developed world that are not connected to comprehensive motorway systems (Vancouver is connected to the US system, but not to the rest of Canada).

For many trips between Canadian metropolitan areas, it takes less time to travel through the United States on its motorways than on the Canadian roads (such as between Winnipeg or Calgary and Toronto). The principal problem is the long, crowded, slow, two-lane stretch of roadway through the northern Great Lakes region between the Manitoba-Ontario border and between Sudbury and Parry Sound. There is also a long section of roadway in the British Columbia interior that a Calgary talk show host referred to as a “stagecoach” trail. Canada pays an economic price for this lack of a world-class highway system, both in terms of manufacturing and tourism.

However, parts of Canada are well served by motorways. Much of central and eastern Canada is connected by motorways, with routes from Windsor, Ontario, through Toronto, Ottawa, Montreal, Quebec to Halifax. This route includes only a short segment that is not motorway standard in the province of Quebec as it approaches the New Brunswick border.

Moreover, despite its reputation to the contrary, the largest Canadian urban areas have world class freeway systems. Few, if any, urban areas in the United States or the developed world have more kilometers of motorway or motorway lanes in relation to their urban area size as Toronto and Montreal.

A Canadian Autobahn: In cooperation with the Frontier Centre for Public Policy, we proposed a world class highway system for Canada. In a report entitled “A Canadian Autobahn: Creating a World Class Highway System for the Nation” we proposed:
1. Upgrading the entire transcontinental route from Halifax, through Toronto to Vancouver to motorway standards. These improvements should be completed within 10 years and would cost approximately $28 billion (2009$).
2. Upgrading other principal routes to at least pre-motorway standard, which would require “twinning” (four-lanes) and minimizing the number of grade crossings. The longest of these additional highways is the Yellowhead route: Edmonton and Calgary to the Canada-U.S. border; Ottawa to Sudbury; and across the island of Newfoundland. These improvements should be completed within 15 years and would cost approximately $33.5 billion).

The transcontinental route would provide a long overdue economic stimulus to urban areas such as Thunder Bay and Sault Ste. Marie. The improved Yellowhead route would provide far better access to the new deepwater, superport at Prince Rupert (British Columbia), which is the closest North American port with connections to major Asian markets. This could materially improve Prince Rupert’s competitiveness relative to larger ports on the US West Coast, such as Los Angeles and Long Beach (which have become much less competitive themselves in the last decade). The improved roadway would make it possible to effectively serve the markets of the US Midwest, South and East through a connection to I-29 in North Dakota.

The report was unveiled at a Calgary event on October 29 and was covered by media across the nation.

What About Greenhouse Gas Emissions: A question was raised about the advisability of expanding highways at a time that the world is attempting to reduce greenhouse gas (GHG) emissions. Such a strategy would seem to be at odds with the popular perception that we shall all have to abandon our cars and move into flats in the central city. This perception presumes that people are prepared to return to the standards of living and lifestyles of 1980, 1950 or even 1750. In all of my presentations on similar issues I am yet to uncover any groundswell of support for the lifestyles of yesterday.

It needs to be recognized that the international commitment to reducing GHGs is based upon an assumption of minimal impact on the economy. GHG reductions will be achieved only if they are acceptable to people, which requires acceptable costs (research by the United Nations International Panel on Climate Change suggests an upper bound of $50 per ton). Cost effectiveness is necessary to not only prevent a huge increase in poverty, but also to allow continued progress toward poverty alleviation and upward mobility. In fact, as recent US research indicates, there is scant real world potential to reduce GHGs from reduced levels of driving.

Given the strong association between economic growth and personal mobility, there is a single realistic path to substantial GHG emission reduction: better technology. Fortunately, developments suggest that technology is, indeed, the answer.

The question, thus, comes down to whether jobs in the northern Great Lakes region (and elsewhere) are more important than strategies that are politically correct, but comparatively ineffectual with respect to materially reducing GHG emissions. It seems likely that people will place a priority on jobs.

Finance: Because of the importance of tying the nation together, it would be appropriate to spend federal and provincial funds on the Canadian Autobahn. User fees, such as a dedicated gasoline tax (as in the United States) or tolls (as in France, China and Mexico) could finance the expansions, using public-private partnerships or “arms-length” government corporations.

China’s Love Affair with Mobility

China Daily reports that car (light vehicle) sales reached 10.9 million units in the first 10 months of 2009, surpassing sales in the United States by 2.2 million. This was a 38% increase over the same period last year. Part of the increase is attributed to government programs to stimulate automobile sales.

China’s leading manufacturer is General Motors (GM), which experienced a 60% increase in sales compared to last year. By contrast, GM’s sales in the United States fell 33% in the first 10 months of the year on an annual basis. GM sold nearly 1.5 million cars in China, somewhat less than its 1.7 million sales over the same period in the United States.

High Speed Rail: Not One Big Happy Family

California High Speed Rail Commission member Rod Diridon is chafing at all of the competition that has been created by the billions committed by the federal government to high speed rail. According to a New York Times report, he called many of the proposed systems around the country “vultures” and told an American Public Transportation Association meeting “If I can borrow a term from our good friends in labor, they are a ‘Do not patronize… And I cannot say it any stronger”. Consistent with that view, Diridon urged that the federal government be asked to commit all of its current $8 billion in funds to the California project.

There may be even more disturbing news for Diridon: new competition has appeared on the horizon. A report (page 23) by the David Suzuki Foundation and the Pembina Institute (both of Canada) suggests that:

“Using the Edmonton – Calgary example as a template, judgmentally adjusted for distance, geography and relative land values, we estimate that a full high-speed link would cost about $4 billion. If the cost were shared equally between Canada and the United States, the Canadian total would be about $2 billion.”

Why stop at that? How about getting a quarter each from Zimbabwe and the Honduras? It would certainly make it less expensive for Canadian taxpayers. Perhaps our friends to the North simply made a typographical error, but perhaps not. Stranger things have been proposed.

Congress and the Administration Take Aim at Local Democracy

Local democracy has been a mainstay of the US political system. This is evident from the town hall governments in New England to the small towns that the majority of Americans choose to live in today.

In most states and metropolitan areas, substantial policy issues – such as zoning and land use decisions – are largely under the control of those who have a principal interest: local voters who actually live in the nation’s cities, towns, villages, townships and unincorporated county areas. This may be about to change. Two congressional initiatives – the Boxer-Kerry Cap and Trade Bill and the Oberstar Transportation Reauthorization Bill – and the Administration’s “Livability Partnership” take direct aim at local democracy as we know it.

The Boxer-Kerry Bill: The first threat is the proposed Senate version of the “cap and trade” bill authored by Senator Barbara Boxer-Kerry (D-California) and Senator John Kerry (D-Massachusetts). This bill, the Clean Energy Jobs and American Power Act (S. 1733), would require metropolitan planning organizations (MPOs) to develop greenhouse gas emission reduction plans. In these plans, the legislation would require consideration of issues such as increasing transit service, improvements to intercity rail service and “implementation of zoning and other land use regulations and plans to support infill, transit-oriented development or mixed use development.” This represents a significant step toward federal adoption of much of the “smart growth” or “compact development” agenda.

At first glance, it may seem that merely requiring MPOs to consider such zoning and land use regulations seems innocent enough. However, the incentives that are created by this language could well spell the end of local control over zoning and land use decisions in the local area.

True enough, the bill includes language to indicate that the bill does not intend to infringe “on the existing authority of local governments to plan or control land use.” Experience suggests, however, that this would provide precious little comfort in the behind-the-scenes negotiations that occur when a metropolitan area runs afoul of Washington bureaucrats.

The federal housing, transportation and environmental bureaucracies have also been supportive of compact development policies. As these agencies develop regulations to implement the legislation, they could well be emboldened to make it far more difficult for local voters to retain control over land use decisions. There could be multiple repeats of the heavy-handedness exercised by the EPA when it singled out Atlanta for punishment over air quality issues. In response, the Georgia legislature was, in effect, coerced into enacting planning and oversight legislation more consistent with the planning theology endorsed by EPA’s bureaucrats. No federal legislation granted EPA the authority to seek such legislative changes, yet they were sought and obtained.

There is also considerable support for the compact development agenda at the metropolitan area level. The proclivity of metropolitan and urban planners toward compact development is so strong as to require no encouragement by federal law. The emerging clear intent of federal policy to move land use development to the regional level and to densify existing communities could encourage MPOs to propose plans that pressure local governments to conform their zoning to central plans (or overarching “visions”) developed at the regional level. Along the way, smaller local jurisdictions could well be influenced, if not coerced into actions by over-zealous MPO staff claiming that federal law and regulation require more than the reality. It would not be the first time. Further, MPOs and organizations with similar views can be expected to lobby state legislatures to impose compact development policies that strip effective control of zoning and land use decisions from local governments.

Surface Transportation Reauthorization: The second threat is the Surface Transportation Authorization Act (STAA or reauthorization) draft that has been released by Chairman James Oberstar (D-Minnesota) of the House Transportation and Infrastructure Committee. This bill is riddled with requirements regarding consideration of land use restrictions by MPOs and states. Unlike the Boxer-Kerry bill, the proposed STAA includes no language denying any intention to interfere with local land use regulation authority.

Like the Boxer-Kerry Bill, the Oberstar bill significantly empowers the Department of Transportation and the Environmental Protection Agency and poses similar longer term risks.

The Administration’s “Livability Agenda:” These legislative initiatives are reinforced by the Administration’s “Livability Agenda,” which is a partnership between the EPA, the Department of Housing and Urban Development and the Department of Transportation. Among other things, this program is principally composed of compact development strategies, including directing development to certain areas, which would materially reduce the choices available to local government. Elements such as these could be included in an eventual STAA bill by the Obama Administration.

The Livability Agenda: Regrettably, the Boxer-Kerry bill, the Oberstar bill and the “Livability Agenda” will make virtually nothing more livable. If they are successful in materially densifying the nation’s urban areas, communities will be faced with greater traffic congestion, higher congestion costs and greater air pollution. Despite the ideology to the contrary, higher densities increase traffic volumes within areas and produce more health hazards through more intense local air pollution. As federal data indicates, slower, more congested traffic congestion produces more pollution than more freely flowing traffic, and the resulting higher traffic volumes make this intensification even greater.

There are also devastating impacts on housing affordability that occur when “development is directed.” This tends to increase land prices, which makes houses more expensive. This hurts all future home buyers and renters, particularly low income and minority households, since rent increases tend to follow housing prices. It is particularly injurious to low income households, which are disproportionately minority. The large gap between majority and minority home ownership rates likely widen further. So much for the American Dream for many who have not attained it already.

The Marginal Returns of Compact Development Policies: These compact development initiatives continue to be pursued even in the face of research requested by the Congress indicating that such policies have precious little potential. The congressionally mandated Driving and the Built Environment report indicates that driving and greenhouse gas emissions could be higher in 2050 than in 2000 even under the maximum deployment of compact development strategies.

Local Governments at the Table? The nation’s local governments should “weigh in” on these issues now, while the legislation is being developed. If they wait, they could find bullied by EPA and MPOs to follow not what the local voters want, but what the planners prefer. Local democracy will be largely dead, a product of a system that concentrates authority – and perceived wisdom – in the hands of the central governments, at the regional and national level.

Even more, local citizens and voters need to be aware of the risk. It will be too late when MPOs or other organizations, whether at their own behest or that of a federal agency, force the character of neighborhoods to be radically changed, as Tony Recsei pointed out is
already occurring in Australia.

Smart Growth Places 3rd in Houston Mayor’s Race

Houston city councilman Peter Brown, unique as a devotee of smart growth (compact development) in this city of light land use regulation, placed third in the mayoral election yesterday. Brown had long advocated Portland-style smart growth land use and development policies for the city of Houston and looked likely to garner the most votes in the four-way race. Brown, an architect and urban planner, spent more than $3 million of his own money in the election.

The Houston metropolitan area distinguished itself by not experiencing the profligate credit and smart growth related house price bubble and, as a result experienced little decline in house prices and largely avoided the Great Recession. Houston is the largest municipality in the nation without zoning, however, with land regulation being principally limited to private covenants between land owners. Other Texas metropolitan areas also averted the housing bubble and the Great Recession, because their generally more liberal approaches to land regulation did not produce the price distortions that occurred in more highly regulated metropolitan areas as in California, Florida, Arizona, Nevada, the Pacific Northwest and the Northeast.

New York Migration Study, the State Continues to Lose Residents

The Empire Center for New State Policy has released “Empire State Exodus,” which details New York’s continuing loss of people and their incomes to other states. The report was authored by E. J. McMahon, senior fellow with the Manhattan Institute and director of the Empire Center and me.

Since the beginning of the decade, New York has experienced a net domestic migration loss of more than 1,500,000, the largest loss in the nation. The extent of this loss is illustrated by the fact that Katrina/Rita/defective dike ravaged Louisiana lost a smaller share of its population than New York, which also led in relative terms.

The report uses the latest Census Bureau and Internal Revenue Service (IRS) data to examine how many New Yorkers have left the state, where they have gone and how much income they have taken with them. It includes detailed breakdowns of population migration patterns at a regional and county level.

More than 85% of the domestic migration loss was from the New York City region (combined statistical area) of New York State and more than 70% of the loss was from New York City itself. The data shows a continuing exodus from the city, to the suburbs and to elsewhere in the nation.

The annual net loss of New Yorkers to other states has ranged from a high of nearly 250,000 people in 2005 to a low of 126,000 last year, when moves nationwide slowed down sharply along with the economy.

Households moving out of New York State had average incomes 13 percent higher than those moving into New York during the most recent year for which such data are available. In 2006-07 alone, the migration flow out of New York drained $4.3 billion in taxpayer income from the state. New York taxpayers moving to other states had average incomes of $57,144, while those
moving into New York averaged $50,533 as of 2007, according to the report.

“Even with its large domestic migration losses, New York’s total population has grown slightly since 2000, thanks to a large influx of immigrants from foreign countries,” the report says. “But New York’s share of U.S. population is still shrinking. A continuation of the domestic migration trends highlighted here will translate into slower economic growth and diminishing political influence in the future.”

The report is available at EmpireCenter.org.

The Week New Urbanism Died?

It has been a bad media week for New Urbanism.

“The day that New Urbanism Died?” was the headline of the St. Louis Urban Workshop blog that detailed the Chapter 11 bankruptcy of Whittaker Builders, developer of the “New Town at St. Charles,” a premier New Urbanist community located in the St. Louis exurbs (beyond the suburbs).

The author notes that “New Town will not disappear, plenty of people are happy to live there, but its promise is gone. It’s become just another suburban enclave and will face the same challenges as other suburban developments; lack of retail, long commutes, etc.” The blog’s headline is a play on a characterization by postmodern architect Charles Jenks, who referred to the demolition of the infamous Pruitt-Igoe public housing project as “The Day Modern Architecture Died.”

The Northwest Indiana Times detailed the failure of a new urbanist community (Coffee Creek) in an October 23 article. The article noted that the planned 2,000 home mixed use development, located in the exurbs 45 miles from Chicago’s Loop had attracted only 12 homes and an apartment building. Much of the empty land has been purchased by another developer, who indicated an affection for the new urbanism concept, noting however that it probably would not work here. The article notes that a more modest New Urbanist development is doing better, in nearby Burns Harbor, with 75 homes occupied out of a planned 300.

Perhaps the unkindest cut of all was a survey, reported by the Oregonian, to the effect that residents of Orenco Station travel by car to work nearly as much as people who live in the unremarkably conventional and sprawling suburbs of Portland.

Despite these unhappy stories, the death of New Urbanism is not imminent. True, to the extent that New Urbanism requires subsidies it is likely to prove unsustainable in the longer term, like its Pruitt-Igoe type predecessors. On the other hand, to the extent that New Urbanism represents a genuine response of architects, builders and developers to actual, rather than imagined demand, New Urbanism could be with us for some time to come.

The Limits of Transit: Costly Dead-End

The proposed Chicago Transit Authority (CTA) fare increase and service cuts for next year are indicative of transit’s recurring budgetary problems, and not only in Chicago but nationwide. But in the Windy City, these moves have elicited an understandably negative public reaction since the city of Chicago depends on transit about as much as any city besides New York.

CTA, like other transit agencies around the nation routinely, claim that fare increases and service cuts are necessary due to under-funding. Transit budget crises seem to come as often as Presidents day in many places and more often than February 29 (every four years) virtually everywhere.

If under-funding were the primary problem, then an examination of historic trends would indicate that the money available to transit had declined (after adjusting for inflation) relative to ridership. But in nearly all cases, including both the CTA and the national data, this is far from the truth.

Cost Escalation at CTA: Despite its storied history as one of the nation’s premier transit agencies, CTA has suffered heavy ridership losses since its modern peak in 1979. A principal reason for this decline was a series of devastating fare increases that would not have been necessary if costs had been maintained within inflation. In 2007, CTA spent 13% more (inflation adjusted) to run its buses and trains than in 1979. That would be fine if ridership had risen 13% (or more), since then both riders and taxpayers could feel that they had obtained value for money. However, ridership dropped by more than 2 percent. If CTA had kept its costs per passenger within inflation, it would have at least $400 million more each year, and would have no need to consider fare increases or service reductions.

National Transit Cost Escalation: Between 1982 (the last year before the federal gas dedicated gas tax for transit) and 2007, national transit ridership (passenger miles) rose 44% percent. At the same time, transit expenditures, adjusted for inflation, rose 100%. This means that each new inflation adjusted $1.00 for transit delivered $0.44 in new value (additional ridership). If transit had kept expenditures growth within inflation, there would have been in excess of $13 billion in 2007 (See Note).

In contrast, the price (or cost) of most products and services rise about with the rate of inflation or slightly more or less. Over the same period of time, automobile and airline costs per passenger mile have declined, producing more than $1.00 in value for each new inflation adjusted dollar. Food costs have declined 3 percent relative to inflation, energy costs have declined 2 percent relative to inflation and housing costs have risen 1 percent relative to inflation.

Transit’s Intractable Fiscal Problem: Transit is incapable of producing ridership increases that coincide with its funding increases because of its structure. Transit is a monopoly, and an unregulated monopoly incapable of managing itself effectively. Private monopolies, such as electric utilities, are routinely regulated. Economic theory generally holds that monopolies are to be avoided, because of their power to violate the interests of consumers by passing on higher than necessary prices and substandard service. No responsible government would think of granting a monopoly to a private company without exercising regulatory control to ensure that the company does abuse its position of power.

Before the wide availability of subsidies to transit, there were private companies, which could not raise fares or cut service without regulatory review and approval. It was not the best possible system, but it was designed to principally serve consumers. But government is different. There are no commissions set up to regulate government monopolies, like transit.

Competitive Incentives: The antidote to monopoly is competition, and transit costs cannot be controlled without it. There is a successful model. Transit agencies can competitively bid and competitively contract bus routes for limited periods of time, requiring firms to supply services they specify. The public agency continues to draw the routes, establish the timetables and set the fares. In a number of cases, competitive contracting has lowered costs and reduced the rate of cost increase.

In Los Angeles, our efforts led to carving a new transit district (Foothill Transit) out of the old public monopoly (the Southern California Rapid Transit District). Other services were transferred from the public monopoly to be administered by the city of Los Angeles. In each case, the transferred services were competitively contracted, and evaluation reports put the savings at more than 40%. Similar results have been achieved in Denver and San Diego, where approximately 50% of bus services are now competitively contracted. In Denver, the competitive contracting program was established by state legislation, while in San Diego, local officials introduced the program to gain control of rapidly escalating costs. More than a decade ago, my report for the Metropolitan Transit Association showed that substantial savings could be achieved at CTA through competitive contracting without requiring employee layoffs or give-backs.

Competitive contracting has even spread to commuter rail systems, such as in San Diego, Dallas-Fort Worth, Miami, Boston and Los Angeles. However, for all of these savings, competitive contracting accounts for only a small share of transit services in the United States.

The Antithesis of Cost Effectiveness: There remains strong resistance by the special interests that control transit, from the managers to the employees to vendors. Within a couple of years, the California legislature caved to lobbying from transit interests, including the transit unions, and outlawed the kinds of cost reducing reforms that had created Foothill Transit. This is despite the fact that not a single penny in wages or benefits had been taken away from a single transit worker.

Perhaps the most brazen case was when the Denver transit agency approached the state legislature in the early 1990s seeking repeal of the competitive contracting bill, claiming that it was costing the agency more than if the services were provided by its own employees. It later was revealed that the analysis had compared the internal costs of operations with the competitively contracted costs of operations and capital (buses and facilities). It was even worse than that. The cost of the competitively contracted buses was amortized at a rate more than double the normal accounting standard. After this misleading initiative, the legislature expanded the competitive contracting requirement.

The resistance of monopoly transit interests to competitive contracting is understandable. People and organizations generally tend to look out for their own interests first and unregulated monopolies can do so with a vengeance. Without the countervailing force of competition (or, less effectively, regulation) their financial demands prevail over the interests of the riders and taxpayers, without whom there would be no reason for transit to exist.

One result is that when major transit expansions are chosen, the approaches that cost the most per passenger are often selected. The classic case is the selection of rail technologies over bus technologies, which are usually far more cost-effective given the modest transit volumes in the United States. Instead we often choose rail systems that cost more on an annual basis than it would cost to lease each new transit customer a car in perpetuity. Sometimes the cost equals that of an economy car, other times it could be a Lexus.

Another contributing factor has been transit wages and benefits, both for managers and operating employees. These have risen far faster than in competitive markets, whether unionized or not. Other costs have risen as well, from capital costs to the costs of administration. The present monopoly situation effectively establishes a public policy objective of maximizing transit costs per passenger. The focus should be on maximizing ridership by minimizing expenditures per passenger.

Internal Reforms Do Not Survive: There is always the potential for internal reform. One of the most sweeping of such programs was implemented by Chicago’s Mayor Jane Byrne in the early 1980s. She forced major cost reductions at CTA. However, after she left, costs resumed their upward trend. It is difficult, if not impossible, to sustain the political will to control transit costs without the incentives of competition.

Overseas: Perhaps surprisingly, the conversion to competition has been widespread overseas. Virtually all of the world’s largest public bus systems take this approach. Transport for London (formerly London Transport) is competitively bid. Between 1985 and 2000, the costs per mile of service declined more than one-half, adjusted for inflation. Much the same has occurred in Socialist Scandinavia. All Copenhagen bus service is competitively bid. Stockholm not only bid its bus service, but also saved money by competitively bidding its metro (subway) system. Commuter rail lines are being competitively bid in Germany, as are entire bus systems in Adelaide and Perth in Australia. In all of these cases, the public has gained by lower costs, expanded services and generally lower fares than would have otherwise been the case. In the United States, however, the surviving public monopoly structure skims more than half of the new money off the top, leaving less than half for the riders and taxpayers.

Why This is Important: All of this is relevant because there is a sense that transit will play a much larger role in the future. Virtually none of the analysis exhibits any understanding of the dynamics that rule transit expenditures. For example, the contentious Moving Cooler presumes that transit expenditures will rise within the inflation rate and, as a result, expects romantically unachievable increases in ridership.

This is wishful thinking of the worst kind. Congress, the state and the nation’s transit agencies have studiously avoided any sort of analysis that would compare transit costs to inflation. They cannot be relied upon to set things right since they will not confront the special interests that control transit.

Instead, American transit agencies spend more without a corresponding increase in ridership. New money made available to transit loses value like the depreciating currency of a hyper-inflating economy. Washington, state governments and local governments can throw a lot more money at transit. They seem incapable however of producing a corresponding increase in ridership.

Note: National expenditures calculated from the governments database of the United States Bureau of the Census. Ridership from the American Public Transportation Association. Chicago ridership and operating cost data from the American Public Transportation Association and the US Department of Transportation Federal Transit Administration National Transit Database. Financial data adjusted to 2007$ using the Consumer Price Index.

Wendell Cox was appointed to three terms by Mayor Tom Bradley to represent the city of Los Angeles on the Los Angeles County Transportation Commission (LACTC), which was the principal transit and highway policy body in the nation’s largest county. As the only LACTC member who was not an elected official, he chaired the Service Coordination Committee, which established the procedures that led to the establishment of Foothill Transit. He also chaired two American Public Transit Association national committees (Governing Boards and Policy & Planning).