Posts Tagged 'baumol’s cost disease'

Prophylactic planning: Rapid transit in the era of cost disease.

A couple years back, Slate Star Codex published a widely-discussed article about what the author called “cost disease” – not the disease identified and explained by William Baumol, but a distinct and poorly-understood condition where prices in certain industries rise at a rate much faster than inflation.

This condition is particularly acute in the case of rapid transit infrastructure.

Since Slate Star Codex had limited itself to American data, I wondered whether Canadian rapid transit projects might be suffering from the same ailment. It’s difficult to compare infrastructure costs over time, as no two projects are identical. But looking at projects in Toronto and Vancouver, I found a noticeable upward tick since the 1990s, suggesting the presence of cost disease in Canada.

toronto vancouver rapid transit costs

(Click image for data and sources.)

(To emphasize, these are per-kilometre, inflation-adjusted prices that appear to be rising.)

Accepting that this wasn’t just a mirage created by staring too hard at a limited data set, I went on to argue that we should hurry up and start digging subways now, while it’s only shockingly expensive, instead of putting it off into the future, when it’s likely to be cripplingly so.

(But one could also argue that we’ve already missed our window, and that instead of blowing money on huge infrastructure projects that are unlikely to prove cost-effective, we should invest in a better bus network, or fleets of autonomous cars, or the latest Elon Musk fever dream, or what-have-you.)

For now, let’s assume what I can’t prove: that at least some rapid transit megaprojects are still worth the inflated price. If we want that to continue being true in the future, we need to smarten up the way we plan our rapid transit network.

In my earlier essay I mentioned four factors contributing to the spread of cost disease:

1. In the big cities where rapid transit gets built, land values have been rising at a rate far exceeding inflation, leading to higher property acquisition costs.

vancouver west side housing prices versus inflation rate

(Click image for data and sources.)

2. The accumulation of buildings, pipes, and wires – what I called infrastructure clutter – around potential rapid transit corridors makes construction ever more complicated.

3. We’re more safety-conscious these days, which means we build more slowly, carefully, and expensively than they did in the rough-and-ready 20th century.

4. We’re willing to spend more to protect our natural and architectural heritage from the negative side effects of construction, and to ensure full access for handicapped people.

Since then, other factors have occurred to me:

5. Population growth means there are ever more residents and business owners to object to the inconvenience of construction, the noise of passing trains, lowlife transit riders invading their fancy neighbourhoods, and other blights of public transportation. The internet has made it cheaper and easier for obstructionists to organize and demand pricey compromises.

6. We’ve gradually used up or sold off the most promising rights-of-way that came available in last century’s shift from rail to road as the primary transportation mode, leaving us no choice but to dig tunnels.

7. Related to point 6, for political reasons earlier city planners prioritized easy-(and therefore cheap)-to-build projects, leaving the most challenging (and pricey) pieces of the network to be dealt with by future generations – i.e., us. Look at Toronto, which has spent the last half-century pushing its subway ever further into the lightly-built suburbs, ignoring the pressing need for a new line downtown.

8. Related to points 6 and 7, modern planners may be more choosy than their predecessors about where to place their routes. Vancouver’s original 1986 Expo Line was built on an abandoned rail right-of-way four or five blocks from Kingsway, the busy road it parallels. Thirty years later, many Kingsway commuters continue to take the bus. Compare the current plan to extend the Millennium Line, which disregards the out-of-service rail line a few blocks to the north for a brand-new tunnel directly under Broadway.

millennium line broadway extension

Not coincidentally, the per-kilometre cost of the Millennium tunnel is expected to be over five times higher than the Expo Line.

skytrain construction costs

Millennium Line extension (6 stations, 5.5 km.) estimated at $2.57 billion (2018 Canadian dollars), completion date 2025. Source.

Of the above list – which I fear is far from comprehensive – most of the factors are driven by population growth, which means they’ll only get worse.

We could conceivably save money by skimping on factors 3 and 4 – by building more recklessly, noisily, and uglily. As an example, Surrey mayor Doug McCallum has suggested that the proposed Langley extension of the Expo Line could be built more cheaply if crews worked round-the-clock. Maybe so, but I suspect they’d only run up against factor 5: angry opposition from residents living near the construction zone.

This doesn’t mean we’re helpless against cost disease. Since the choices of today’s planners determine where future residents will live, we can predict where demand for transit should grow. And by thinking about why costs go up, we can predict which routes will be most expensive to build in the future and should therefore be prioritized, and which can be affordably postponed.

Some basic principles of cost prophylaxis. All else being equal…

1. Extending existing lines is cheaper than building new ones.

2. Building all in one go is cheaper than building in fits and starts.

3. Building where there’s nothing is cheaper than building where there’s something.

4. Coordinating with other infrastructure projects lowers costs. (Toronto’s 1966 Bloor-Danforth subway saved a bundle thanks to the farsighted inclusion of a lower deck on the Bloor viaductfifty years earlier.)

…But as I stated in my earlier post, planners are already well aware of the above strategies. If they fail to implement them, it’s only because it’s difficult: to anticipate which projects future politicians might prioritize; to coordinate between multiple agencies, levels of government, and private entities; to resist political pressure to cut corners and push expenses into the future.

I doubt I can offer any insights that haven’t occurred already to the experts. But I think they might give points 5 and 6 a little more weight:

5. Every project will stir up opposition. But well-off residents, because they rely on transit less, and because they tend to own their homes, have less to gain and more to lose from transit expansion. Their money, education, and well-groomed spokespeople make them more effective obstructionists. Therefore, try to put rapid transit into a neighbourhood before it fills up with yuppies.

6. If you’re hoping to preserve a corridor for future use, you’d be better off building now: to prevent future politicians from selling it off piecemeal; to prevent infrastructure clutter along the route; and to prevent residents from getting emotionally attached to it in its virgin state.

(Here I’m thinking of Vancouver’s Arbutus corridor – the rail line shown on the map above – stretches of which were colonized by gardeners from neighbouring properties during its years of disuse. When the city, after acquiring it last year from CP Rail after much haggling, tried to convert it to a paved bike path, nearby residents protested the despoliation of what they viewed as their private rambling grounds. I can just see the outcry in the future when the city attempts to pursue its vision of running a streetcar down the line…)

Vancouver’s new mayor, Kennedy Stewart, has been advocating for the Millennium Line extension – currently set to terminate at Arbutus Street – to continue down Broadway and West 10th Avenue all the way to UBC.

millennium line broadway extension potential phase 2

…Which, don’t get me wrong, would be terrific: I’d use it a lot.

However, looking at it from a cost-prophylactic perspective:

1. The corridor is already densely built-up: infrastructure clutter is therefore unlikely to worsen.

2. The properties for future stations, if they haven’t already, can be acquired now, and held onto until needed. (Astonishingly, if this Daily Hive article is to be believed, as late as March of last year the site of the Millennium Line’s planned Broadway & Granville Street station hadn’t yet been sewn up.)

3. The West Side can’t be any further yuppified. The locals have already secured all the compromises they’re likely to dream up: instead of a noisy elevated train like their poor cousins in East Van, they’re getting a tunnel; and not a cut-and-cover tunnel, like the one that enraged Cambie Street merchants during the construction of the Canada Line a decade back, but a fully bored tunnel.

If the Millennium Line can be extended all the way to UBC in a single go, then it absolutely should: it would be far more cost-effective.

If (as seems likely) it can’t, this corridor presents only a moderate inflationary risk. The UBC extension can affordably be postponed.

Meanwhile, down at the southern end of the Arbutus corridor the homely neighbourhood of Marpole, containing one of the few concentrations of affordable apartments still left within the city’s borders, is seeing a surge of new construction. Would it make sense to move the Arbutus streetcar plan forward, while there are still a few students and working class people living along its route who might benefit from it? [1]

The Arbutus corridor is wide enough that property acquisition costs for future streetcar stops should be minimal. But have they figured out yet how to bridge the 2-kilometre distance between the end of the corridor and Marine Drive station on the Canada Line? That could be an expensive gap to fill.

marpole map arbutus streetcar canada line

And if the city is seriously contemplating rapid transit along 41st Avenue, even in the “extremely long term”, they’d better start locking things down now. With the lower-middle-class enclave near Joyce-Collingwood station doomed by encroaching condo towers, and the futuristic “micro city” about to begin construction at Oakridge, 41st Ave. is extremely susceptible to cost disease.

vancouver 41st ave rapid transit

I’d nominate Marine Drive and East Hastings as two other yuppifying streets where rapid transit would make sense, and where the risk of cost disease is acute. I hope to have more to say about the latter corridor in a follow-up post.

[Update, Dec. 25 2019: As promised above, The Hastings SkyTrain alternate reality.]

M.

1. This isn’t an endorsement of the Arbutus streetcar scheme, by the way. To me it seems as misbegotten as the now-abandoned Surrey LRT plan I discussed last month: why spend a bajillion dollars laying rail for “rapid transit” that’s not significantly faster than a bus? You might as well make a bigger up-front investment in a tunnel or elevated tracks and enjoy the benefits of higher speed and driverless operation.

If I’d been benevolent dictator, on the day the Arbutus corridor was acquired I would have turned it into a trench two SkyTrain cars wide, put a roof over it, and left the resultant tunnel until it was needed. Instead, the city elected to fancy up the corridor with walking paths and flowerbeds from one end to the other, guaranteeing an infestation of sign-waving old ladies in sunhats whenever they attempt to alter it.

Sooner or later: Cost disease and Canadian transit.

Back in 2015, in the wake of Metro Vancouver’s failed referendum campaign for a 0.5% sales tax to fund an ambitious list of regional transit upgrades, I argued that the big-ticket items on the list should be scaled back or postponed while we focussed our limited dollars on improving bus service. Subways and LRTs are great, I said, but a couple big rail projects will eat up all the money we could instead use to make the whole network faster, less crowded, and more enticing to commuters.

I still think my argument makes sense. I occasionally take the bus during rush hour, and I seethe at being stuck behind lines of idling cars when I can see how a simple bypass lane, costing a paltry few million bucks, would save thousands of straphangers five or ten minutes out of their commute each way, every day. Many roads wouldn’t even have to be widened – simply sacrificing a few on-street parking spots would do the trick. There must be dozens of such chokepoints around the region, and they could all be unchoked for a fraction of the cost of putting a subway down Broadway. Though I’d like us to build the subway too.

But a post last month on Slate Star Codex – Scott Alexander’s estimable blog, to which I lately find myself linking with unseemly frequency (see here and here) – makes me wonder if my sensible, fiscally-prudent argument was in fact completely wrong.

Alexander discusses something called Baumol’s cost disease, a phenomenon in economics where increasing efficiency in one industry counterintuitively leads to increasing costs in an entirely unrelated industry.

Suppose new manufacturing methods save an auto plant part of the cost of building a car. Profits rise, allowing the company to boost its workers’ wages by a couple bucks an hour. Meanwhile the meat processing facility across town hasn’t seen any improvement in productivity, but if they don’t offer an equivalent wage hike they’ll lose their best workers to the auto plant. They pass the higher costs along to their customers, and suddenly the price of meat goes up because the cost of manufacturing cars has gone down.

That’s Baumol’s version of cost disease, anyway. Alexander wonders whether it’s a sufficient explanation for the perpetually increasing costs in four different sectors of the U.S. economy – education, health care, housing, and public transportation infrastructure. Even after adjusting for inflation, costs in these four sectors have gone up in my lifetime by factors of two, five, even ten, without commensurate improvements in outcomes. Life expectancy is flat. University grads are as semiliterate as ever. Apartments aren’t appreciably nicer. And subway tunnels are pretty much the same as the ones our forefathers dug for a fraction of the cost.

Alexander is American, and in his brief section addressing ever-pricier subway construction he restricts himself to American data. In fact one of the questions he asks is why the U.S. seems to be more susceptible to cost disease than other countries. So my first question was – does this disease afflict Canadian public transportation infrastructure as well?

Let’s look at the costs – adjusted for inflation – for a half-century’s worth of rapid transit projects in the two big cities I know reasonably well, Vancouver and Toronto:

toronto subway costs

vancouver skytrain costs

(Click on images for data and sources.)

Some caveats and observations:

  • With so few data points to work with, the trendlines are susceptible to being skewed by one or two pricey outliers, like Toronto’s bonkers Line 1 extension to Vaughan.
  • Reported final costs are questionable, since governments tend to find ways to obscure overruns. Vancouver’s 2016 Evergreen extension, for instance, is known to have blown past its budget, but we’ve been assured that the unanticipated costs will be eaten by the contractor. The true cost, therefore, is higher than the figure shown.
  • The graphs are to the same scale, but the cities’ rapid transit systems shouldn’t be compared directly since they use totally different technologies. Vancouver’s light, high-frequency, mostly-elevated SkyTrain permits smaller stations and (for the 20% or so of the system that’s underground) narrower, cheaper-to-build tunnels than Toronto’s heavy-rail subway. (I’ve left Toronto’s SkyTrain-like Scarborough RT and under-construction Eglinton light-rail project out of the analysis for this reason.)
  • Even within each city, these aren’t apples-to-apples. In the Toronto graph there are visible discontinuities between the early cut-and-cover subways in the city core, with stops every 500-600 metres and relatively low per-station costs; the 1970s extensions into suburbia, often at surface level and with fewer, more widely-spaced stops; and more recent bored tunnels where the costs shoot into the stratosphere.

In any case, both graphs show a discernible upward tick since the 1990s or so, suggesting that cost disease may indeed have spread to Canada. But if so, what are the causes?

The libertarianish Megan McArdle waves away Alexander’s data on the rising cost of subways as merely “union featherbedding combined with increasingly dysfunctional procurement and regulatory processes”. Maybe those are worsening the problem – I don’t know enough to comment – but off the top of my head I can think of four other possible contributing factors:

1. The cost of land acquisition goes up at a rate faster than inflation (because they keep making people but they aren’t making more land).

2. The ground beneath and alongside city streets is ever more crowded with pipes, cables, parking structures, and so on, which must either be relocated or awkwardly worked around.

3. An increased emphasis on worker and bystander safety slows and complicates construction. (Some of this probably falls under the definition of “union featherbedding” as mentioned by McArdle.)

4. Projects now include the expenses of mitigating environmental damage, preserving historic neighbourhoods, averting noise pollution, accommodating the handicapped – all that touchy-feely stuff previous generations didn’t give a rip about.

Doubtless there are other causes I haven’t thought of, but I’ll stop at those four because they pair off neatly into two groups I’d like to examine a little more closely. When you think about it, all four are side effects of growing wealth:

  • Causes 1 and 2 – the rising cost of land and the build-up of clutter along possible transit routes – accelerate as a city becomes more populous and its taxpayers demand more and better services.
  • Causes 3 and 4 – worker safety and the mitigation of environmental and social externalities – might be thought of as perks, which previous generations were willing to forego in their pursuit of progress but which we in our prosperity don’t mind splashing out on.

I think the “perk factor” actually explains much of the cost disease in the sectors Alexander identifies. As we’ve grown wealthier we’re willing to spend more on things that are orthogonal to the actual missions of health care, education, housing, and public transportation – things like prioritizing the physical and mental well-being of our workforces, or ensuring that their gender and ethnic compositions are representative of the wider population. These perks require added layers of administration that do nothing to improve the outcomes we’re attempting to measure. Those layers aren’t failing – they’re doing what they’re meant to do – but those things aren’t captured in graphs like the ones in this post.

As a taxpayer I suspect we could afford to do without much of this extra padding. But I don’t want construction workers risking their necks, or rivers recklessly diverted, or noisy trains rattling people’s cupboards, just to save a few bucks. I know next to nothing about health care or university administration or housing construction, but I suppose the people who are familiar with those matters have equally strong objections to cutting what may strike me as frivolous perks.

In any case, sticking to transit infrastructure, there’s no reason to suppose we’re likely to care less about safety, or the environment, or architectural heritage in the future. In fact those concerns will almost certainly grow, making construction ever less affordable.

To return to causes 1 and 2 – land costs and infrastructure clutter – it should be possible to mitigate cost disease through better planning – say, through more farsighted property acquisition, and coordinating with other agencies to ensure that future transit corridors aren’t obstructed. But I assume we’re already trying to do those things, and my suggestion of “Okay, well, just do them better” is not too helpful.

Sooner, or later?

One way to avert cost disease might be by preemptive surgery – building rapid transit today, at today’s comparatively reasonable prices, in anticipation of tomorrow’s needs. Metro Vancouver’s overall outline is pretty well established by geographic barriers like mountains and rivers, and more recently by the imposition of an urban containment boundary meant to preserve nearby farmland.

metro vancouver urban containment boundary

Source: Metro Vancouver. (Click for original.)

Therefore we can assume that the Vancouver of the future will be much the same shape as the Vancouver of today, only a lot denser. We should be able to predict with fair accuracy where future demand for transit will lie, and build in anticipation of that demand.

However, of the four causes of cost disease mentioned above, preemptive surgery really only targets the first one – rising land costs. It sidesteps the cost of infrastructure clutter only by transferring that cost to future generations who will have to spend more to build around the clutter we create today. And while it might seem thrifty to thwart the next generation’s opportunity to waste money on what we consider silly perks – by using construction methods that they’ll see as barbarously unsafe, maybe, or by bulldozing some architectural monstrosity before it’s declared a heritage monument – who are we to say what the future’s priorities should be?

I’m grateful for much of the infrastructure earlier generations of headstrong builders bequeathed me, but I wish they’d been more cautious about what they smashed in the process – like the whole blocks of Vancouver’s Strathcona neighbourhood destroyed in the sixties to make room for the Georgia viaducts, which planners are now preparing to remove. Building preemptively means we risk building unnecessarily, as the future evolves new habits of getting around that we can’t anticipate.

Still, being made aware of cost disease has tipped me in favour of building rapid transit now, while it’s still barely affordable, rather than putting it off as demand grows and grows. Spending sooner rather than later may actually be the sensible, fiscally-prudent thing to do.

M.


Michael A. Charles is a writer, animator, and musician currently living in the Vancouver area. He used to be the singer and guitarist for the band known as Sea Water Bliss.

You can find a selection of his cartoons, music videos, and ads on the Gallery page.

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