Evidence of the Fundamental Law of Traffic Congestion
Recently, the Georgia Department of Transportation has begun to allow motorists to use the emergency shoulder on segments of GA-400 as traffic lanes during rush hour. GDOT thinks this will reduce traffic congestion on a heavily travelled road. However, the experience so far has been less than encouraging (AJC:Ga. 400 shoulder opens, traffic still a bear). Some would suggest that it is the media frenzy surrounding the opening of new lanes that has caused the lackluster outcomes.
I would suggest another possibility, however. The Fundamental Law of Traffic Congestion, as theorized by Downs in 1962 (and reiterated in 1992), “states that on urban commuter expressways, peak-hour traffic congestion rises to meet maximum capacity.” Recent empirical research by Gilles Duranton and Matthew A. Turner seems to confirm this proposition that adding new traffic lanes to highways does little to reduce traffic congestion. Rather, the provision of new highway capacity is met with a proportional increase in traffic. Therefore, it is unsurprising that the provision of one extra highway lane during peak traffic times fails to reduce traffic congestion.
NBER Monday
Since it’s Monday, there are new NBER working papers. Both of these deal with housing, though in different ways. The first deals with housing booms/busts and differences across housing markets. The second deals with the influence of housing wealth on college choice. Links and abstracts are below.
House Price Moments in Boom-Bust Cycles by Todd M. Sinai
This paper describes six stylized patterns among housing markets in the United States that potential explanations of the housing boom and bust should seek to explain. First, individual housing markets in the U.S. experienced considerable heterogeneity in the amplitudes of their cycles. Second, the areas with the biggest boom-bust cycles in the 2000s also had the largest boom-busts in the 1980s and 1990s, with a few telling exceptions. Third, the timing of the cycles differed across housing markets. Fourth, the largest booms and busts, and their timing, seem to be clustered geographically. Fifth, the cross sectional variance of annual house price changes rises in booms and declines in busts. Finally, these stylized facts are robust to controlling for housing demand fundamentals – namely, rents, incomes, or employment – although changes in fundamentals are correlated with changes in prices.
The Effect of Housing Wealth on College Choice: Evidence from the Housing Boom by Michael F. Lovenheim and C. Lockwood Reynolds
The higher education system in the United States is characterized by a large degree of quality heterogeneity, and there is a growing literature suggesting students attending higher quality universities have better educational and labor market outcomes. In this paper, we use NLSY97 data combined with the difference in the timing and strength of the housing boom across cities to examine how short-run home price growth affects the quality of postsecondary schools chosen by students. Our findings indicate a $10,000 increase in a family’s housing wealth in the four years prior to a student becoming of college-age increases the likelihood she attends a flagship public university relative to a non-flagship public university by 2.0 percent and decreases the relative probability of attending a community college by 1.6 percent. These effects are driven by relatively lower and middle-income families. We show that these changes are due to the effect of housing wealth on where students apply, not on whether they are admitted. We also find that short-run increases in home prices lead to increases in direct quality measures of the institutions students attend. Finally, for the lower-income sample, we find home price increases reduce student labor supply and that each $10,000 increase in home prices is associated with a 1.8% increase in the likelihood of completing college.
New Working Papers of Note
Two of this week’s new NBER working papers are of note. One is dealing with fiscal illusion; a topic of interest to me given my work on revenue diversification. The other is dealing with public infrastructure development. Abstracts and links can be found below. Per usual, these papers are gated for those not on a university campus.
On Fiscal Illusion and Ricardian Equivalence in Local Public Finance by H. Spencer Banzhaf and Wallace E. Oates
We re-evaluate two forms of fiscal illusion in local public finance: debt illusion and renter illusion. The Ricardian Equivalence Theorem for local governments suggests the form of finance of a public program (tax or debt finance) has no effects on substantive outcomes. For the local case, this results from the capitalization of local fiscal differentials into property values. We show that this version of the model is quite restrictive. In particular, in the U.S, context, where state and local interest is exempt from federal taxation, rational behavior may be inconsistent with Ricardian equivalence if local governments can borrow on more favorable terms than individuals. We also suggest a new test for renter illusion (or the renter effect). In particular, whether or not renters are more likely to support public investments in general, the renter effect suggests that renters are more likely to support them when financed with property taxes than with sales taxes. Using data from hundreds of open space referenda in the U.S. using a variety of finance mechanisms, we find evidence that households do prefer debt financing to tax financing, but find no evidence of the renter effect.
Roads to Prosperity or Bridges to Nowhere? Theory and Evidence on the Impact of Public Infrastructure Investment by Sylvain Leduc and Daniel Wilson
We examine the dynamic macroeconomic effects of public infrastructure investment both theoretically and empirically, using a novel data set we compiled on various highway spending measures. Relying on the institutional design of federal grant distributions among states, we construct a measure of government highway spending shocks that captures revisions in expectations about future government investment. We find that shocks to federal highway funding has a positive effect on local GDP both on impact and after 6 to 8 years, with the impact effect coming from shocks during (local) recessions. However, we find no permanent effect (as of 10 years after the shock). Similar impulse responses are found in a number of other macroeconomic variables. The transmission channel for these responses appears to be through initial funding leading to building, over several years, of public highway capital which then temporarily boosts private sector productivity and local demand. To help interpret these findings, we develop an open economy New Keynesian model with productive public capital in which regions are part of a monetary and fiscal union. We show that the presence of productive public capital in this model can yield impulse responses with the same qualitative pattern that we find empirically.
Snowfall & State/Local Budgets
Today’s Wall Street Journal (Less White Equals More Green) explains that lower than average snowfall has been a boon for state and local governments in the northern half of the country who have not expended their snow removal budgets. As such, these governments are experiencing a windfall. The article discusses the varied responses of state and local governments to these excess funds which range from hedging against declines in tax revenue (in ski resort areas) to plugging budget holes.
What state and local governments decide to do with their snow related windfall is an interesting study in public financial management and local politics. All indications are that this mild winter was an anomaly so these windfalls can be seen as one time, lump sum payments. Dedicating this excess to hedge against an uncertain future (budgetary or snow related) is likely the prudent course of action. However, plugging budget holes with unexpected windfalls is political popular, especially if the services saved are popular among residents. Plugging budget holes is not without significant risk of future problems, though. If budget deficits are the result of structural problems (revenues<expenditures), making up for deficits with one time payments is at best a delaying tactic. The deficit is solved for one year while dealing with the larger problem is pushed off into the future.
All of this is to say that public financial management and politics are deeply intertwined. What is financially wise can be (and often is) dominated by what is politically expedient.
Amazon and Sales Taxes
Source: Reuters
From Reuters. The amount of uncollected sales taxes on e-commerce is not a trivial amount. I would expect that the type of battle that happened in Texas will continue to occur in other states for the foreseeable future unless Congress decides to act.
