The Upward Society: Laying the Foundations for a Post-Oil Age Economy

July 14, 2009

Laying the Foundations for a Post-Oil Age Economy

By Jake Huneycutt

For years, Americans allowed themselves to be convinced by mistruths parroted by politicians and the National Association of Realtors that an economy based on home building and sprawl could thrive permanently.  Just like the deluded investors in the Roaring Twenties who convinced themselves that stocks could go up forever, people became convinced that home values could see dramatic appreciations in value for the rest of time, with no negative side effects.  However, the myth of American economic infallibility has been destroyed over the past two years.  Now, Americans suddenly find themselves reexamining the situation.  In truth, this might only be the beginning of America’s economic decline as this nation is not built to thrive in a resource constrained world.

You may believe I’m another doom and gloom prophet.  Maybe I am in one sense as I believe the American economy is poorly equipped to deal with the challenges of the 21st Century.  At the same time, I do believe there are solutions to our economic malaise and the longer we fail to deal with the underlying problems in our economic structure, the more we’ll fall behind the rest of the world.  It’s just a matter of convincing people to change the way things work; which if history is any indication, is always difficult, but never impossible.

In 1776, Adam Smith wrote The Wealth of Nations, an economic treatise arguing in favor of “free market” principles and in opposition to the mercantilistic views that were dominant at the time.  Smith’s work has been quoted, misquoted, cited, and distorted numerous times in the 233 years since its publication.  I have no intention of discussing the nuances of Smith’s views or providing detailed thoughts on his analysis in this piece; rather, I simply point to the one guiding principle behind Smith’s work: increasing economic efficiency.  That should be the ultimate goal, since greater economic efficiencies will result in greater wealth for the most people.  While we have numerous economic problems right now, we have almost completely ignored one of the greatest inefficiencies in our society: sprawl.

The Sprawlipolitan Nightmare

If you’ve ever taken a look at maps from some of Europe’s greatest cities in the 18th and 19th Centuries, you’ll notice the very thorough urban planning almost immediately.  The great European cities that were at the center of world power were not haphazardly put together; nor were the early American cities.  Baltimore, one of the thriving American cities from the late 18th Century all the way into the mid 20th Century, is a great example of an American city were one can still see a planned out design and structure.

New York City, 18th Century

New York City, 18th Century

However, the nature of American metropolitan planning changed dramatically after the 1950s.  Suburbs began to sprawl dozens of miles outwards from major city cores with little coherence or thought-out design, eventually dramatically reducing American efficiency.  The reasoning as to how sprawl creates inefficiencies is quite simple: greater distances between housing centers and work centers results in a greater use of resources.  Greater uses of resources create economic inefficiency.

Due to our development patterns, we use more oil to travel to work, the grocery store, friends’ houses, and go out to the movies.  We use more energy to power the infrastructure to build and sustain the sprawled out suburbs.  In fact, the average American uses nearly twice as much energy as the average European.

However, if you believe it stops there, you’d be dead wrong.  Sprawl raises our costs of living in many other ways that we don’t often think about.  Sprawl means we have to pay more taxes to construct and maintain the road and highway system needed to service these suburbs.  We pay more taxes for emergency services that are spread out over a larger area.  We pay higher prices for goods as an indirect result of higher energy costs that drive prices upwards.  We may not notice these things on a day-to-day basis, but it stands to reason that sprawl imposes significant costs on a societal-wide scale that hinders America’s ability to compete with the rest of the world.

If that were not enough, sprawl has helped destroyed one of the things that previously defined America: a sense of community.  Sprawled our suburbs isolate us and make it more difficult for us to develop close friendships with many people.  It makes it more difficult to sustain major cultural institutions. It leaves us alienated from the world around us.  If sprawl imposes very real economic costs on our society, it also creates significant quality-of-life issues and creates considerable constraints on the liveliness of our own culture, which was envied by everyone around us.

America’s Advantages

Fortunately, despite these major issues, America’s advantages have helped us overcome our disadvantages over the past half century.  There are very few societies on Earth as free and open as ours and, undoubtedly, that has helped foster a spirit of creativity and ingenuity that has made the American economy the strongest in the world and has lured countless number of dreamers from foreign lands onto our shores.

We originated a system of public financial reporting (via the SEC Acts of 1933 and ’34) that has helped decrease the level of uncertainty for investors and has helped drive costs of capital down.  It made America the safest country in the world to invest in and a haven for capital in the latter part of the 21st Century.

The merits of that system should become clear when we see scandals involving highly secretive, private investment firms such as the one run by Bernie Madoff.  Madoff was able to perpetrate his Ponzi scheme for decades largely because there was no significant public oversight.  In a sense, our public reporting system is like an accounting version of “open source” software, and while there will be bugs in it occasionally, so long as it’s out in the open, people will find it, inform others, and try to correct the situation.

We are also a nation blessed with diverse and plentiful resources and we have a highly educated population.  With the exception of China, there are not too many nations that could sustain themselves even in a worst-case scenario where all imports were cut off.  We have agriculture, we have minerals, we have manufacturing, and just about anything else we could possibly need in a jam.

Despite these advantages, the rest of the world is catching up to us quickly.  As tends to be the case throughout history, when one society has success, others try to mimic it.  Inevitably many succeed.  It’s no surprise that people in certain parts of the globe, notably Eastern Europe and China have admired America and have sought to learn from us.  If we want to maintain our position in the world, it will be necessary to orient our economy towards the future and evidence suggests we are heading towards a resource-constrained world with higher and higher extraction costs.  Minimizing energy usage, waste, and maximizing efficiency will be the keys to improving the quality of life.

Minimizing Energy and Resource Usage

If the problem is limited resources and increasingly higher costs of extraction, then the logical solution is to find ways to minimize usage of those resources.  America’s great dilemma is that over the past 60 or 70 years, we have built our infrastructure based on the flawed assumption that cheap oil would be plentiful for the foreseeable future.  That myth was briefly shattered in the 1970s, before America seemed to have revived the tall tale of eternally cheap oil once again in the ‘90s and ‘00s.

In the late ‘90s, motorists were able to find gasoline as cheap as 80 cents per gallon at one point.  Even the greatest demand destruction event in most of our lifetimes was only able to beat the price back down to about $1.50 per gallon at the height of the market collapse in November ’08.  Given this, it’s probably safe to say we won’t be revisiting the heyday of the late ‘90s any time soon.  At $50 – $60 per barrel, most of us believe that oil is relatively cheap.  When you consider that oil can manage to stay that high despite extremely suppressed demand levels, it becomes clear just how costly our heavy usage of this fossil fuel has become and it’s only going to get worse as emerging economies such as China and India continue to increase their oil consumption.

At this point in time, the American economy might be facing a giant Catch-22.  It can only thrive over the long-run with inexpensive oil.  Yet, oil is only inexpensive when demand is suppressed in a depressionary or severe recessionary environment.  The only real solution is to free ourselves from this paradigm and decrease our energy consumption.  The question is, how do we best achieve that?

There are several areas where I believe the nation can begin to promote more efficient energy usage and my goal with this blog will largely be to explore many of these areas.  My primary targets are:

(1) Expansion of public transportation and high-speed rail systems

(2) Transportation policies that reward the most efficient users

(3) Economic policies that promote upward, urban development

There are certainly other areas where we can decrease energy consumption and alternative energy technologies can allow us to reduce dependence on foreign oil, but I want to focus on the areas that I believe provide the most significant advantages that are often overlooked.  In fact, many of the issues I wish to highlight deal with things that are simply taken for granted.  With that, let’s explore some of these issues.

Smart Infrastructure Building and Public Transit

In 1956, the Interstate Highway System was proposed under the Eisenhower Administration.  It was one of the greatest infrastructure projects in American history and it was, in many ways, a huge success.  The American government provided the up-front capital, but the system was to be paid for and maintained via the gasoline tax.  While there were some flaws with this system, it largely worked up till the point that the Federal government decided to stop aligning the gas tax with the expenditures needed to maintain the system.  At some point, the system became dramatically underfunded as legislators wanted to have their cake and eat it, too.  Policymakers continue to aggressively fund highway and road projects, but did not raise the gas taxes to meet the necessary funding levels.

While we can lament the recent failings of American highway policy, the important take-away from the Eisenhower Interstate System is the same message that was repeated a gazillion times in that stupid Field of Dreams movie:  “if you build it they will come.” That is to say, people use the highway system because it’s (mostly) free, well-connected, reasonably maintained, and can take them anywhere.  If instead, the highway system where a disjointed series of high toll roads with huge gaps, requiring users to exit onto crowded city streets at various points, before re-entry, it would not be nearly as heavily utilized as it is today.  In essence, the reason the highway system works is because policymakers dedicated themselves to it and made it an attractive proposition to American consumers.

We’ve never seen the same dedication to public transit outside of New York and maybe a small number of college towns.  Instead, policymakers have constantly asked for the systems to “break even” immediately despite competing against a heavily subsidized auto/road system.

The fact of the matter is that consumers are smart.  It’s not that they love cars and hate public transportation or vice-versa.  It’s that, in general, people will gravitate towards the method of transportation that is (a) most cost-efficient, (b) reliable, (c) convenient, and (d) inter-connected.  One problem I’ve found with some transit systems is that it can often take two hours and three transfers to move five miles.  One could walk or bicycle the distance much more efficiently in that case.  Outside of NYC, the public transit system is a hodgepodge; if these systems were more integrated, more thorough, and more convenient, they’d also be more heavily utilized.

MARTA

MARTA train in Atlanta, GA

The benefits of public transit should be obvious.  Greater use of public transit means lesser energy usage, less taxpayer funds needed to expand highways further and further, less congestion on the roads, and greater economic efficiency.  Yet, due to the heavy lobbyist influence of the auto industry at various points in our nation’s history, public transit has been shunned despite its superiority in major urban areas.

Transportation Policies and Cost Distortions

One of the biggest reasons that public transit and high speed rail will never “break even” goes back to policymakers’ preferences.  American policymakers have consistently favored the road/auto system over other alternatives.  I use the term “road/auto system” because it’s an inter-connected network that requires various functioning parts in order to be useful to American citizens.  Politicians have dedicated themselves fully to this system, which is why it has worked so well.

Unfortunately, policymakers’ preferences have also had the negative effect of distorting the market and making it appear as if driving is more inexpensive than it is in reality.  While we have a gas tax to fund the Federal highway system, the tax has been frozen since 1993 and the highway system has faced massive shortfalls as a result.  In essence, the system has been funded by US debt and general income taxes, rather than meeting its original design.

President Obama’s stimulus package was originally supposed to be an infrastructure-building bill; so much for that!  Only about 17% of the package went to infrastructure building and more than 20% of that went directly to the underfunded highway system.  In essence, it was more of a highway system “bailout” than anything else.

It’s not that I oppose the highway system.  It’s rather than I oppose policymakers’ unequal treatment of it.  In a time when energy efficiency should be one of our top priorities, we still continue building highways as if our oil-guzzling Gods will be around to transport us forever.  In fact, we’ve created an even new problem: now that cars are more fuel efficient, there are even less funds to sustain the highway system.  While the gas tax was somewhat useful in funding the system, it’s not completely tied to usage.  Rather, you use the system for free and the gas tax is supposed to reasonably compensate for your usage; but it doesn’t.

Perhaps even more distortive than the continued highway/road funding sources is policymaker’s dedication to building it.  Just as a successful business enterprise calls for up-front investment that is unlikely to breed a return in the short-term, so too, do transportation networks.  In fact, a dedication to building the road/auto system is the primary reason why it has become so popular for Americans.  As I alluded to earlier, if the road system were nothing more than a sporadic and disjointed series of toll roads, very few people would utilize it.

The big question becomes, why do we treat public transit as if it should be a sporadic, disjointed system that should “fund itself” while treating the highway/road system as a dynamic, interconnected system that will eventually pay for itself via the promotion of greater transportation and commerce?  There’s a double standard with policymakers and we need to make the transportation system reflect reality, as those who put the most strain on the system should pay the most, while those who put the least strain on it should pay the least.  That’s the only way to end the distortive effects of American transportation policy.

Promoting Upward, Urban Development

Public transportation is the low-hanging fruit for the promotion of energy efficiency.  It would be easy to build and expand public transit networks and decrease our energy consumption.  Our transportation policies are a bit higher up the tree, but we could shift our agenda to promote more energy efficiency and transfer costs to those who use the most energy.  Shifting gears on both of these issues  would be beneficial to Americans, but I think there’s even more energy savings to be found if we regain our ambition and embark upon a policy of promoting upward, urban development.

Why have Americans favored sprawl over the past five decades?  There are several reasons, but the most notable are:

(1) Transportation policies that favor sprawled development by hiding true costs

(2) The deceiving cheapness of oil

(3) High city taxation coupled with a high cost of property ownership in cities

I’ve already touched up the first two issues.  The last one is particularly important to me, however, because I believe people often ignore it.  Taxation tends to be significantly higher in city cores.  Yet, dense urban development creates greater efficiencies and reduces societal hidden costs (e.g. more city services, taxes to fund highway/road building, etc.).  So why do we continue to punish those who chose to live the most efficient lifestyles?

High city taxes come in a lot of forms.  The City of Philadelphia imposes a wage tax that is roughly 3% of one’s income.  Meanwhile, the surrounding suburbs do not impose a wage tax at all.  If you are a professional and you earn $70,000 per year, would you rather live in the city or two blocks outside of it, other things being equal?

Then, there are property taxes.  I’m going to make a somewhat controversial assertion and state that property taxes in the American political system are nonsensical.  Why, you ask?  Land is taxed based on “value” rather than usage:

MemphisOldTimeSm

Memphis, early 20th Century

(1) The people who pay the most are the ones who build valuable, upward urban properties that also happen to be the most energy efficient.

(2) All property is taxed even if the land is best suited for wilding.  If we want to promote a clean environment, why should we punish people who chose to leave their land wild, particularly out in rural areas?  No one is ever going to choose to leave their land wild, when a developer will come by and relieve them of their tax duty and provide them with mucho dinero.

(3) Upward building lowers the costs of government services and creates greater wealth for a greater number of people.  Meanwhile, sprawled out development increases government costs and passes those costs on to the general taxpayers.  Yet, urbanites are punished the most, while the deepest suburbs offer the lowest tax burden.  This is, in essence, one of the biggest market distortions in our system.

19th Century writer, Ralph Waldo Emerson, once stated that “the test of civilization is the power of drawing the most benefit out of its cities.”  Over the past 60 years, the United States and its various governments have embarked upon policies that have unintentionally drained all the life out of our once-great cities.  If we want America to be truly great again, we have to tap into the power of these cities once again. American needs to begin promoting upward, urban development.  The only way to achieve that is to examine the root causes of our urban decay and correct them.  That is my major intention with the launch of this blog.

The Beginning

This is only the beginning.  My primary goal here will be to challenge the predominant thinking in American energy and urban development policy and to push us towards ideas that can help restore us to the economic greatness we once knew.  I have 100% faith in the ingenuity, creativity, and determination of the American people.  The problem is our governmental system does not bring out the best in us.  We need to change that.

I am no ideologue.  I believe in rational discussion about America’s problems.  My goal, first and foremost, is to encourage that and get people thinking about issues that may otherwise get pushed to the backburner.  For anyone who wishes to join me, I will certainly consider posting articles from similar-minded individuals.  For those who wish to participate by commenting and contributing your ideas, I welcome you as well.  We can’t rebuild America alone and it’s time to start sharing ideas again to find realistic solutions to the issues facing us all.

The Rubric Theme. Blog at WordPress.com.

Follow

Get every new post delivered to your Inbox.