A Congested Economy

How tolls and congestion pricing can reduce air travel and road delays

Congestion is slowly strangling the New York region’s economy, and the recent misguided attempts to rein it in by federal and local officials are proof that a fresh approach is needed.

Recently, the Federal Aviation Administration threw down the gauntlet on air traffic congestion, continuing caps on flights into and out of La Guardia Airport and threatening caps for Kennedy International Airport. This is like saying the problem with congestion is too many people want to come to (or through) New York City, so the solution is to keep them out.

Similarly, Mayor Michael Bloomberg’s politically bold congestion pricing plan attacks road congestion by diverting travelers from cars to mass transit – again, telling people to stay out.

Both proposals fail to grapple with the root of the congestion crisis on land and in the air: the transportation network’s physical infrastructure has not kept pace with demand. And the failure to come to grips with this situation will have significant long-term consequences for the region’s economy.

According to the Texas Transportation Institute, a research group associated with Texas A&M University, traffic congestion already represents a $7.4 billion economic loss to the New York area’s economy. The F.A.A.’s flight caps would drastically reduce access to the region’s major airports, limiting access to the world’s most important financial center and air traffic volume to levels not seen since the 1960s.

These claims may seem exaggerated. Traditionally, economists have claimed that a certain degree of congestion is efficient because the costs of eliminating congestion might not exceed the benefits. And some urban planners believe that congestion is actually good for the economy because it forces people to take public transportation and shop locally. Indeed, if congestion is so terrible, why aren’t the economic consequences more visible?

But the problem is that the region continues to grow, and congestion’s negative economic effects continue to broaden. The New York City and Northern New Jersey area, which includes Long Island and Westchester County, is expected to add at least 3.5 million people by 2030, on top of the 18 million people already there. This growth is not sustainable if congestion continues to go unchecked and elected officials continue to opt for blunt policy choices like caps that fail to address the need to expand capacity.

The metropolitan New York, northern New Jersey and southwestern Connecticut region produces as much as it does because it taps into entrepreneurial talent and other resources unavailable in large concentrations elsewhere. This access to labor and resources gives it the foundation for sustained economic growth through increasing productivity.

The results are staggering. According to a 2005 ranking of the world’s largest urban economies by PricewaterhouseCoopers, the tristate area, for example, churns out $1.1 trillion worth of goods and services each year.

But if congestion continues, eventually it will eat away at economic productivity in the region. Congestion reduces the pool of resources available to businesses and workers by reducing access to jobs and employees. A 30-minute commute to work might become 45 minutes or an hour, pushing the job outside a worker’s “opportunity circle,” which is the amount of time a typical worker is willing to travel to a job.

Productivity can compensate for the economic drag of congestion but only to a certain point. If congestion becomes too severe, the economy begins to fragment, which means that businesses drawing on a large metropolitan labor pool will be forced to tap into only those who live within a certain time and distance to the job. A fragmented economy hurts productivity.

It’s already happening in the region. The Partnership for New York City, a business group, estimates that eliminating excess traffic congestion would add as much as $4 billion and 52,000 jobs to the regional economy. Congestion drains the region’s manufacturing sector of $2 billion in revenue and 8,674 jobs. Wholesale trade takes a congestion hit worth $1.3 billion in increased operating costs.

In a world where New York is facing increasing competition from cities like London, Paris, Tokyo and Beijing, the economically debilitating effects of air and traffic congestion can no longer be ignored. Competitive margins are becoming thinner and thinner in an increasingly global economy, and congestion is a deadweight loss that needs to be addressed sooner rather than later.

Fortunately solutions exist for both traffic and air congestion. A crucial first step is to adopt congestion pricing in which toll rates are used to maximize travel speeds, not keep cars out of specific locations at certain times of the day. For example tolls should be highest during peak travel times but should fall during times of the day when demand for the same roadway is less.

The same principle can be applied to airports. At the moment, take-off rights, landing rights and runway slots are allocated based on a “use it or lose it rule.” Landing fees are based on aircraft weight, not the airline’s willingness to pay for using a certain airport. Congestion pricing would allow airlines to bid for slots based on their desire to have access to the runways of airports during busiest travel periods of the day.

But even managing the system more efficiently doesn’t compensate for the need to add more capacity to meet travel demand. This is why the F.A.A. rules are so draconian. Rather than recognize the need to add new runway capacity to meet higher travel demand, the regulatory hammer is being used to try to reduce demand to meet existing capacity. Caps put the solution upside down. The policy goal should be to increase mobility (and access), not reduce it.

If we are willing to make the policy changes necessary, the days of living with congestion in the air and on our roadways can be over. More important, in today’s global economy, the optimal level of congestion may in fact be zero despite the protests of some planners and old-school economists. At a minimum, perhaps we need to plan for a world where speed and mobility take their legitimate place as pillars of a productive urban economy.