Covid 19 - Unpacking the City

 The compact city – a crumbling consensus

The policy consensus promoting compact, centralised cities cannot be sustained in a world ravaged by Covid-19. The current pandemic is accelerating the move to dispersed urbanism. Beyond the direct impact of disrupted trade, travel, and consumption on the economic foundations of cities lies the cascading impact of changing work behaviours. This post considers what remote working might mean for urban development.

Calculating the number of jobs that can be decanted

My previous post summarised the McKinsey Global Institute (MGI) analysis of sector-specific potential for remote working, applying the resulting metrics to New Zealand.  Here, in line with other developed nations, around 30% of current jobs offer remote working potential.  

This post considers the possible impacts on urban function and form by applying the MGI approach to New Zealand’s cities and districts.

Urbanisation and Remote Working

The share of tasks that can be undertaken remotely has been calculated across 19 sectors for 67 territorial local authorities (TLA).  The results have been aggregated into: (1) the three largest cities (Auckland, Christchurch, Wellington); (2) ten provincial cities with populations between 50,000 and 175,000; (3) partly urbanised districts characterised by smaller towns and townships; and (4) mainly rural districts encompassing rural areas and small settlements (Figure 1). 

Figure 1: Urban Dimensions of Remote Working Potential, New Zealand

 

The potential for remote working appears to be a matter of scale: the large urban areas offer the greatest opportunities. 36% of Wellington’s jobs could be done remotely, 32% in Auckland and 29% in Christchurch. The potential is lower among small provincial cities (28%), partly-urbanised districts (25%), and rural areas (22%).

It appears that more urbanised areas have greater potential to substitute remote work for fixed-workplace employment.  This is confirmed when we plot potential for remote working against urbanisation across all TLAs (R²=0.47, Figure 2). 

Figure 2: Urbanisation and Remote Working Potential, New Zealand Council Areas

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Examination of the variation around this relationship between urbanisation and remote working potential indicates the role of differences in local employment structure.  More production-based jobs offer lower potential for remote working, while more business and service jobs lift the potential.

Where within the city?

This section considers variation in the potential for remote working within Auckland (New Zealand’s dominant city with 1.7+m residents). Figures for 20 Local Board areas based on the MGI sector coefficients have been aggregated and organised in Figure 3 from north to south (left to right on the axis).  Reflecting the city’s linear geography, areas at each end are most distant from the CBD.  The CBD and its fringe comprise the “Central” area, sitting within the Isthmus, which contains the city’s older, inner suburbs.

Based on this example, remote working potential varies more within the city than among cities, ranging between 41% in the centre (47% in the CBD fringe) to 10% in the upper north and west and 2% in the rural south. The former reflects the high value, administrative, business, and professional jobs in the inner city and suburbs, and the latter the greater share of manufacturing and personal service (face-to-face) jobs in the suburbs and primary production on the fringe.

Figure 3 The Prospects for Remote Working within Auckland

 

Push and Pull Drivers

Much of this theoretical capacity is likely to be taken up.  On the push side, the risk of exposure to infectious diseases is reduced by limiting exposure to places where people congregate for work, education, and entertainment. One benefit is limiting the spread of other infectious illnesses, a personal and productivity bonus. Remote meetings offer another productivity gain, lowering travel costs and focusing information exchange, supervision, and negotiation.

On the pull side, remote working has been positive for many people and businesses, with reports that the practice is being adopted on an ongoing basis in New Zealand despite limited community transmission of Covid and internationally.

What about the downsides? 

A suitable work (or school) space within a dwelling is needed to maintain both productivity and satisfaction from remote working at the individual level. With housing affordability constraints impacting on younger people and families, in particular, their capacity to work effectively from home will be constrained.

Lack of face-to-face contact with colleagues limits the benefits of work based social interaction. In a Covid-free environment, however, one option is to mix remote working with workplace attendance one, two, or three days a week.

Impact at the centre

However it evolves, the urban impacts of remote working will be far-reaching. As employment in the central city stutters, policy makers and investors will have to rethink the principles of workplace location, investment, and development.

Hospitality, personal services, and discretionary retailing in the city centre will suffer from reduced commuter and work-related spending. They will also suffer from any changes in the attraction of the city centre for housing. Modest apartments in multi-storied buildings marketed for a city lifestyle will lose appeal, becoming a welfare, last resort, or first housing step rather than lifestyle choice.

Add the deskilling of high order services, displacement of predictable or repetitive transactional tasks by AI, and the prospect that the international travel industry shifts away from mass tourism, and the outlook for city centres as we know them dims.

Against this, the resurgence of suburban centres, provincial cities, satellite towns, and country life may build on the intrinsic appeal of living locally as more people decamp from intensively urbanised areas, provided, perhaps, that the policy-makers do not seek to impose the densities of inner cities on under-resourced suburbs and cling on to the notion of commuting-based city centres.

And Infrastructure?

As it stands, the compact city comes at considerable cost. The demands on ageing infrastructure from intensification were never anticipated by the city builders.  Maintaining or rebuilding energy and water supplies, the capacity and reliability of wastewater systems, boosting transport networks and retrofitting ageing transit systems all demand substantial expenditures, mortgaged in large part against expectations of growth that must now be in doubt. 

If nothing else, the impetus Covid has given to dispersal must shift attention to infrastructure challenges in existing suburbs.  While highlighting the hard questions in a policy environment beset by an unnatural aversion to greenfield development (in which the potential for sustainable settlement has suddenly become compelling); it also raises challenges for small, erstwhile sleepy settlements unprepared for the demands of a growing flow of ex-urbanites. 

Preparing for a Post-Covid19 Economy: capacity building or building capacity?

We seem to have the pandemic under control - what next?

Now that community transmission has been eliminated in New Zealand and some rigour brought to border control, it is timely to think about economic recovery. That’s not straightforward. As the pandemic rages globally restricted travel, limited trading opportunities, and disrupted supply chains mean that we have to make the most of an inevitably shrunken economy.

Making decisions about where to put economic resources – including spending on recovery – is made harder because we have no idea what the future holds. We can no longer predict economic conditions and the outcome of policies with any confidence if we rely on past experience.  We can, however, make decisions about how to deal with today’s crisis in a way that prepares us for tomorrow’s unknowns. 

This post suggests focusing early recovery on employment-intensive sectors that better equip the community to rise to the unknown challenges of the new normal, rather than building the infrastructures associated with the old.

The Infrastructure Capacity Consensus

To date, New Zealand’s rebuilding strategy has been defined mainly in terms of building physical infrastructure to cater for economic activity as we knew it.  Among other things, the Government has just committed $3bn to start on its list of shovel-ready projects. While it's early days, the National opposition already says we need more infrastructure. While there may be debate about how much, what projects, and in what order, there is no obvious disagreement with the notion of building our way out of the darkness.

This risks justifying spending on uneconomic infrastructure that undermines productivity and prejudices long-term growth. Promoting infrastructure to create jobs simply promotes investment that cannot otherwise be justified in sectors already facing supply chain and skill bottlenecks. When these are publicly funded they not only increase fiscal risk; they potentially starve activities that promise greater employment and a more assured long term return.

Building Capacity as an Alternative

What about another approach? What about building the capacity of people, rather than structures, to deal with a future that will not be a rerun of the past? This will emphasise more jobs more immediately, maintain better short-term domestic demand , and build the adaptability and resilience needed in the long-term.

It does not mean dismissing infrastructure, but calls for spending on it to be moderated, focusing on what we know is needed and not the nice-to-have or me-too projects, favouring instead activities that deepen the skill base, develop talent, promote creativity, and encourage entrepreneurship.

Investing in people

Today we are confronted by a deficit of demand, not a deficit of infrastructure. Investing in people will lift demand directly, hold together a fractured domestic economy, and lay the groundwork for long-term recovery and resilience. Our nation’s capacity to respond will be best served if the population is in good health, well housed, well educated, and well employed.

So, what are the best sectors for promoting employment?
Employment multipliers are used here to address this question.  The multipliers relate job numbers to output in each of the 106 sectors used to define the economy.  The jobs may be direct (within the sector in question), indirect (associated with supplying materials, components, goods, and services to that sector),and induced (from the spending of employees in the first two categories). [1]

Table 1 lists the sectors with the highest employment multipliers. Among other things, this indicates that one million dollars of additional output (or funding) in pre-school education would give the most jobs for $1,000,000 spent: around 29 in total, comprising  around 21 in the sector itself, 3 in activities supplying it, and 5 from the resulting household spending. Specialised food retailing also scores well, with a strong indirect effect reflecting how it draws on domestic suppliers.[2]   

Table 1: Sectors with Highest Output:Employment Multipliers (2017)

Table 2 compares multipliers from the most employment-intensive industry groups drawn from Table1 with those for the industry targeted by infrastructure spending, construction.

From this we see that:

·   The employment boost from spending in construction sits close to the median for all sectors, but well below education, health, and social care services.

·  Residential building is a slightly better job-booster than civil engineering (roads, bridges, and the like) and non-residential building.

·  Residential and non residential building both generate significant indirect employment, reflecting reliance on local suppliers and subcontractors.

·   Non-tertiary education sectors have a substantial direct employment impact, with a relatively high induced impact suggesting that the sector’s typically “middle incomes” sustain above-average household spending.

Table 2: Employment Contribution, Selected Industries (2017)

·   Spending on tertiary education may generate less immediate employment because of higher overheads and salaries.

·   Medical and residential care and social assistance also have significantly greater employment impacts than construction.  Some of this will come from low paid “care” jobs, an issue highlighted by the critical nature of this sector to the Covd19 response.

Promoting job-intensive sectors may seem two-edged: they tend to pay the lowest wages (Figure 10).[3] However, low income households are likely to direct most of their additional spending to food and consumables, ensuring a large share of increased earnings flow through the retail and service sectors.

Figure 1: Average Wages by Sector, Q4 2019

In addition, these are the sectors that promote well-being across the community and should increase people’s skills and their abilities to deal with change.

Creating value

The benefits of recovery driven by employment-intensive industries also depend on how much value they add to the economy. According to the 2013 National Inter-Industry Tables, the share of output that is value added in the construction sector is modest, although low margins are offset in part by the substantial purchase of intermediate goods and services by the sector. 

While gross output is substantially lower in health and education than in construction, more value is created, largely in salaries and wages.  And because health and education each generate more household income than construction, funds channeled into these industries will lead to greater downstream demand in retail, services, and hospitality.

Table 3: Value Added, Imports, and Compensation of Employees, Selected Sectors (2013)

Towards a Multi-Layered Recovery – Scaling back the Infrastructure Sell

Infrastructure still has a role to play, especially in accommodating extra capacity in the priority sectors indicated by these figures. And, to be fair, the first $2.4bn of spending outlined by the Government included a strong commitment to social and affordable housing, well distributed sanitation and community enhancement projects, and environmental initiatives (Figure 2). Just under 30% was directed towards transport. However, this omits the big promises made to Auckland transit projects and major highway developments.

Figure 2: Distribution of the First Round of Shovel-Ready Spending

Investing in Human Resources

It is time to back off spending on mega-transport projects for which demand is uncertain and, instead, to focus on building the capacity of our people to deal with a changing economy.

Already there has been a commitment to step-up health funding in the May 2020 budget. The Simpson report on reorganising health and disability delivery (by consolidating and centralising administration and “professionalising” governance) may also help with a reset, although on the face of it looks a little like an expensive rearrangement of deckchairs.

Beyond that, a step up in new and innovative educational and vocational projects and initiatives across society may be the best means of ensuring that the recovery from Covid19 can be sustained, and that the country will be even better placed to deal with such crises in the future. 

Directing funding towards a more diverse, inclusive, and flexible education sector may mean increasing funding to both the educators and the educated. A simple start could include: increasing the funding of pre-school education; lowering staff student ratios in schools; developing applied tertiary courses in technology, production and distribution, agriculture and horticulture, and resource management; and encouraging and funding applied research.

Infrastructure should serve recovery, not shape it
Without doubt, initiatives in these areas will drive demand for further infrastructure.  But this investment will be focused on the needs of the sectors that underpin social well-being and economic productivity, and that foster the capacity of people to adapt to whatever demands the new normal might make. 

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[1]    The multiplier estimates are based on the national input-output tables (Statistics NZ, 2014) calculated and updated to 2017 by Insight Economics in Auckland. I gratefully acknowledge access to them, and am solely responsible for their interpretation here.

[2]    Employment in retailing largely reflects the induced effect of growth in other sectors. Spending by overseas visitors in retailing (and hospitality), though, represents additional external demand.  

[3]   Although wages in sectors like medical care span a wide range.

Its not the shovels that count: its what they're shovelling

Is boosting infrastructure the best road to economic recovery for New Zealand?

If we do not get investment for recovery right we will undermine productivity and economic progress for generations to come. Indiscriminate infrastructure development at this time risks limiting options by absorbing and concentrating resources in an area in which performance has been demonstrably deficient.

New Zealand's recovery from Covid19 requires short-term job gains and long-term income growth if we are to throw off the shackles of public debt. Committing substantial resources to “shovel-ready” projects without rigorous assessment risks excessive spending to meet uncertain demand. The result of over-investment will be lower foreign reserves, a diminished credit rating, and a prolonged productivity deficit.

Get the economics right first

Economic justification is essential to establish whether the benefits generated by infrastructure justify the resources consumed in its development. Projects that do not stack up have a negative fiscal impact, requiring ongoing tax- or rate-payer subsidy. While otherwise uneconomic projects may provide non-market benefits (to the environment, social equity, or public health for example), if we do not first consider their economic efficiency, we cannot know whether they are the best means of achieving those benefits. 

We do know, however, that the wrong projects can set our economy back: the Think Big projects contributed substantially to a run on foreign exchange reserves in the early 1980s.

Current failures

The damage from uneconomic projects tends to increase if they are large scale. The literature on cost blowouts for major infrastructure projects – especially in transport – is extensive. Auckland's Central Rail Link , for which the case was flawed from the outset, and Transmission Gully are text book cases.  Consider the following:

• Under-specification at the outset, with inadequate technical assessment or design myopia leading to re-specification and add-on costs in the course of development;
• Under-costing from relying on precedent and current (or historical) costs for estimation, failure to consider the effect of competing demand for resources, and the optimism-bias of project protagonists leading to unwarranted approvals and subsequent cost blow-outs;
• Contract failures from accepting low tenders and engaging at-risk contractors to meet tight project budgets, leading to higher costs when contractors fail and re-tendering is necessary;
• Project delays from under-specification and under-costing compounded by resource shortages (including labour and skills), tying up capital and delaying benefits.

The failures threatening the CRL are such that economist Tim Hazeldine’s view is that it is time to stop pouring good money after bad. The contingencies facing such large scale projects should double down the call for rationality in today’s perilous economic environment. 

Unproven Demand

Because large-scale investments take time to finish, demand at completion may be quite different from what was projected at inception. Along with the impact of unexpected disruptions, extended pay-back periods add to uncertainty over what demand a project may eventually have to meet. 

As of today, the Infrastructure Commission’s pipeline of major public capital works , although incomplete, outlines around $16b or more of spending. Approximately 60% of this is for transport. (These figures are based on the cost ranges provided).  Yet major transport projects today face substantial shifts in demand, such as:

• Revised working conditions lowering building occupancy and increasing the appeal of large footplate, low-rise, suburban workspaces with natural light and airflow;
• Changed working arrangements (staggered hours, home-based working);
• Newly suppressed demand for and lower passenger densities on public transport;
• An increased preference for medium/low density suburban living environments;
• A shift from large scale venue-based recreation;
• Reduced international travel and tourism;
• Reduced demand for mall-based retailing in favour of local services and centres;
• More on-line retailing and in-home services.

We can add to this market uncertainty the impact of changing technologies, including prospects for:

• Enhanced face-to-face telecommunications;
• Gains in vehicle autonomy increasing capacity on existing highways;
• Falling electric vehicle costs boosting private transport and demand-responsive public transport;
• Aircraft operations favouring smaller aircraft on point-to-point rather than hub-and-spoke networks;
• Continuing logistics gains integrating production and distribution with direct delivery;
• Artificial Intelligence, product printing, design refinement, innovation, and changing consumption preferences jointly supporting local production of specialised goods;
• Distributed specialist services (law, health, medicine) supported by AI, gains in computing power, seamless tele-conferencing, and advanced instrumentation;
• Decentralised settlement with modern, localised infrastructure, decentralised employment, and efficient inter-regional and international information and transport connections.

A Shortage of Resources

Supply chains are over-stretched in the development sector.  This flows through to delays, costs, and failures all-too-often overlooked by local politicians and their consultants in the haste to justify economically suspect projects. 

Shovel-ready projects track straight into this quagmire of unrealistic supply chain and labour market expectations.  Yet, Infrastructure New Zealand has effectively lobbied the civil engineering/development complex to the top of the national economic agenda. It is supported by a network of professional players (engineering, consulting, planning, design, and legal) and the vested interests of operators. Because of its visibility, infrastructure building also plays to political monumentalism. 

What are the alternatives?

A shovel ready recovery locks us into projects based on the economy and labour market of the past. Uneconomic or marginally economic projects limit our ability to do other things. It would be better to focus on initiatives that lift adaptability (the ability to change what we are doing), and flexibility (the ability to vary how we are doing it). 

Here are some ideas that might contribute: 

• Vet and prioritise infrastructure projects, ditching those like Auckland light rail plans with costs bound to blow out and which face uncertain demand; 
• Pursue best practice in the assessment, design, specification, and management of any projects that may be justified (most likely in public health, water quality, and the like); 
• Prioritise social infrastructure (education, health, and housing) for  short- and long-term benefits. 
• Promote innovation and entrepreneurship with vocational education to increase career mobility and deepen domestic skills and experience. 
• Pursue an open business environment to facilitate enterprise, mobilise capital, ensure productive resources and feedstocks can be widely accessed, and streamline regulation; 
• Address business support to future-oriented capacities, rather than propping up existing structures and practices; 
• Review approaches to trade facilitation, support for innovation and technology, and business taxation. 
• Maintain household incomes: increasing local consumer spending, especially among low income households, will have the highest immediate impacts on employment while providing breathing space as the country and the world adjust to the economic shock of Covid 19.

Quite simply, an infrastructure-dominated programme that imposes new and potentially open-ended fiscal demands on currently constrained incomes is more likely to undermine than boost economic activity.

Cities Don’t Consume Resources, People Do

Urban form or urban consumers?
If we want to reduce the environmental impacts of modern society let’s prioritise consumption, not city form.  The evidence suggests that large cities (and especially city centres) are associated with a bigger environmental footprint than modest cities or suburbs. 

This post looks at incomes and consumption, especially the consumption of housing and transport services, asking how far can local regulation really influence environmental impacts?

What can local governments do about the environment?

Local governments have two core roles.  One is to ensure that the infrastructure and services necessary to sustain everyday life and commerce are in place and working well.  In fulfilling this role they should aim to enhance the quality of the urban environment and limit any environmental impacts of infrastructure. 

The other role is to plan and manage development in a way that reduces conflict among land uses.  In doing that they should aim to contain or control adverse spill-over impacts. 

However, for councils to use their investment in infrastructure and land use regulation to determine in detail how and where people should live and consume pushes the boundaries of these roles, particularly when they try indirectly to reshape household behaviour by reshaping the city.

The key to understanding the environmental impacts of urbanised society is not urban form but household consumption, a function of income, not city plans.

Urbanisation and environmental impacts

In my last blog I showed how policies to increase residential densities around city and town centres assume a relationship between urban form and environmental impacts that is not supported by the evidence . In Australia, for example, residents of the New South Wales state capital, Sydney, particularly central Sydney, have by far the largest environmental impact per head.  Much lower levels are recorded in suburbs, smaller cities, and towns. (The same pattern is evident in all Australian states: have a look using the Australian Consumption Atlas).

The environmental impacts of intensive urban living outweigh any advantages of increasing scale and density. This means that policies that push agglomeration and intensification will increase rather than lower the impacts of urban living.

Household spending is the issue

The Australian study confirms that a city’s environmental impacts simply comprise the collective impacts of its residents.  Income is the driver of their consumption and thereby their demands on the environment. 

If we really believe city form can in some way over-ride income- and consumption-driven environmental impacts, then we should heed the evidence, and plan for modest, small scale, dispersed urban settlement. 

Spending on housing and transport in New Zealand

Household Expenditure Survey data for New Zealand (and elsewhere) provide an opportunity to explore the role of income in consumption generally. 

First, take a look at the distribution of spending on housing, transport, and discretionary goods (recreation and cultural services is used to represent the latter category) according to household incomes in 2010. Average spending levels have been organised by income decile for this purpose, each group containing 10% of households. Average incomes increase from decile 1 (the lowest earning 10% of households) to decile 10 (the highest earning 10%).

The pattern is pretty predictable.  Housing dominates the spending of low decile households.  It accounts for 34% in the lowest decile, falling to 22% in the ninth.  It rises again (to 24%) in the highest earning decile (10). This lift between decile 9 and 10 households no doubt reflects higher discretionary spending in the latter group by way of additional space, the quality of fit-outs, and second homes. 

Shares of Household Spending to Selected Categories, by Income Band

   

Do lower housing costs lead to higher transport spending?
Rent theory suggests that lower household spending is offset by higher transport spending.  This is because low income households can only afford cheaper, less accessible properties and so end up commuting further at a higher cost than high income households. 

It turns out that it’s not that simple.  Contrary to the theory, higher income households actually spend more of their income on transport.  That makes sense when we realise that commuting accounts for only around 25% of time spent travelling by New Zealanders.  The capacity to take discretionary trips is a bigger determinant of transport consumption than non-discretionary commuting and work-based trips.

The Relationship Between Spending on Housing and Transport

 

 

 

Lower incomes leave a lot less to spend on discretionary goods and services once housing and essential transport spending are covered.[1] Higher income households can and do travel more and consume more.  Their behaviour is unlikely to be significantly influenced by changing city form.  

Who spends how much?

Not surprisingly total consumption in New Zealand is dominated by higher income households: the 20% highest earning households (deciles 9 and 10) account for 35% of total spending on goods and services, while the lowest earning 20% (deciles 1 and 2) account for just 20%.

And decile 10 households account for 7 times more spending on transport than decile 1 households.  They spend 5.5 times more on recreation and cultural services, and 3.5 times as much on food.

 

The Contribution of Household Total Expenditure by Income Band, Selected Categories

 

The highest income households spend three times more on housing than low income households, an average of $476 per week compared with $161.

If refurbished housing in high amenity inner city living is expensive, guess which income groups will be living there?  The high consumers, obviously.  And in Auckland, at least, it seems that city planners and policy-makers are keen to deliver them the high order consumer services that will promote ever-more discretionary spending around the CBD(although much of central city resident travel may be taken up with recreational and social trip-making away from there).   

A high social cost for little environmental benefit?
The conclusion is straightforward: higher incomes mean more expenditure on additional housing, transport, and discretionary goods and services with correspondingly high environmental impacts.  If incomes are higher in cities, then their collective impacts will be high too. 

Planning policies won't change that much - except to the extent that they erode consumption by inflating the basic costs of living, something that impacts most heavily on lower income households.  

Fiddling with city form is unlikely to significantly reduce the impact of higher incomes and associated spending on the environment.  Increasing dwelling and living costs by promoting larger cities, higher residential densities, and uneconomic transit systems simply penalises low income households already committing substantial shares of their spending to housing and transport.  And this is the group that, by dint of constrained consumption, has the lowest impact on the environment. 

Better to address environment issues directly
From a policy perspective, environmental issues are better tackled directly.  This may mean promoting environmentally friendly goods and services, promoting low impact technologies (including low impact housing, fuel efficient vehicles, and the like), and encouraging responsible consumption. If we are really serious about environmental threats, we need to examine the efficiency of current pricing practices and even taxation measures, rather than leaning so heavily on clumsy, indirect, and ultimately spurious urban planning policies. 

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[1]           Overseas spending is omitted from discretionary spending here as it is included in the catch-all category “Other Expenditure", which accounts for 6% of decile 1 spending and 11% of decile 10.