Tuesday, February 7, 2012

An Allegory for Justifying Transportation Investments: A Brand New Bathroom!

There are many justifications for investing in transportation infrastructure. Some of the most common and widely used claims for why the public should spend lots of money on new trains, roads, bike lanes or other such things are that such investments will create jobs, lead to new economic activity and offer future environmental benefits. These are all offered as unambiguously positive characteristics. To evaluate these claims a bit I developed an allegorical situation where a household decides to build a new bathroom on their house. 

Picture a four person family who lives in a nice little house with three bedrooms and two bathrooms. They decide that their current bathrooms are old and inadequate and something should be done. They can either fix up the two bathrooms they already have or add a third bathroom. They decide to add the third bathroom. So far, so good. The family has a bathroom designed and gets bids for construction. The first bid has five workers completing the project in a week. The second bid has ten workers completing the project in two weeks. The third bid has 20 workers completing the project in a month. Let’s assume all bids are under the same labor rules. Should the family “create” the most jobs and take the month long bid with 20 workers? It seems obvious that the family should take the first bid once they have verified that the company is honest and legit. Jobs are a cost to the project.

But perhaps the family wants to be job creators, so they take the high bid. They figure they will make it up in new productivity from having a new toilet, shower and sink. Will the new bathrooms make them more productive? Are toilets a derived demand? Considering that bathroom use (production) is a matter of inputs (food and activity) it’s not likely that the family will start pooping, peeing or showering more than they did prior to the new bathroom. So productivity is a wash (no pun intended). However, because there is a new place to “produce” the location of production will shift. This may be in everyone’s interest considering the potential externalities, but the family needs to weigh whether the cost of the new bathroom is worth the benefit.

What about the future benefits? There are potentially many from a new bathroom such as lower water flow and nicer fixtures. Yet these could also be achieved through remodeling the existing bathrooms, which will need maintenance and upkeep anyway. Maybe everyone would be better off with a new hot water heater instead so there is always adequate warm water for the existing showers. A new bathroom may allow the family to put off fixing up their old bathrooms, but not forever, and money spent on a new bathroom cannot be spent on an existing bathroom. 

Ultimately, undertaking a new bathroom addition is something that the family may decide they want to do for a variety of reasons (maybe to accommodate new members to the household or congestion before everyone goes to school and work). However, a new bathroom will only shift the time and location where bathroom activities take place rather than causing each member of the family to poop, pee and shower more. Remember, they have adequate bathrooms now and do not bathe in the river. 

In the bathroom expansion case, I suspect most people would insist on hiring the low labor cost company and would never consider that an additional bathroom would increase the need for a toilet.* Yet for transport investments we tend to argue that we need to invest in what has the highest labor cost and claim increases in productivity that have not been borne out through research. In the US the existing infrastructure needs a lot of work, and new facilities (roads, trains, etc) tend to just shift economic activity instead of creating new economic activity.**  While travel is not entirely a derived demand, it largely is, just like using a bathroom. I’m not saying that governments should plan and budget like households, because they shouldn’t. But we should remember that jobs are a cost to projects and that when an economy has a mature, well functioning transport network additions and subtractions to that network will affect the location of economic activity far, far more than create or destroy economic activity.

*It’s entirely possible that the current number of bathrooms is inadequate for peak demand, which the family may want to address, but this is different than increasing overall use.
**In the UK the official policy of the expected net effect on productivity of High Speed Rail investment is zero for precisely this reason.

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