Smart Economic Stimulation

Todd Litman's picture
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Economic stimulation is an important issue these days. Let's be smart when choosing economic stimulation strategies.

Smart investments do more than just create short-term jobs, they support other strategic objectives such as congestion reduction, increased safety, improved mobility for non-drivers, energy conservation and pollution emission reductions. For this reason, it is usually better to invest in alternative modes (walking, cycling and public transit improvements) and redevelop existing communities) than to expand urban highways or build suburban infrastructure that stimulates sprawl.

American automobile manufacturers are requesting $25 billion in government economic stimulation funds, but this could harm the economy overall if it perpetuates inefficient transportation patterns. Such subsidies are only justified if they are particularly effective at providing economic development and employment. The industry's current business model fails this test: it is an unprofitable and declining industry, with high subsidy costs per job created, and domestic vehicles tend to be fuel inefficient.

North Americans currently consume about twice as much transport fuel per capita as peer countries, largely due to government policies intended to support the domestic automobile industry, such as lax fuel efficiency standards, low fuel taxes and automobile-oriented transport planning. Had North America implemented energy conservation policies comparable to other industrialized countries, national fuel consumption would be about half its current rate, keeping hundreds of billions of dollars in the economy annually.

Petroleum imports are a haemorrhage to the economy, bleeding jobs and profits. A US Department of Energy study estimated that excessive dependence on imported petroleum cost the U.S. economy $150-$250 billion in 2005, at a time when oil averaged $35-$45/bbl. These costs are likely to increase in the future as domestic production declines and international oil prices rise.

Economists use input-output analysis to quantify the employment and business activity generated by specific types of expenditures. Such analysis indicates that fuel and vehicle purchases create fewer domestic jobs and less business activity than most other expenditures, since they are capital intensive and a large portion of inputs are imported (domestically-assembled vehicles incorporate many imported components). The table below indicates my estimate of the jobs created by various types of expenditures, based on available sources.

Estimated Jobs Created By Million Dollars (Notes Below)                                                   

Expenditures                                        Domestic Jobs Created

Fuel                                                            1-3

Automobiles                                                4-8

General consumer goods                             8-15

Public transit services                                 15+

This table compares the estimated jobs created by a million dollar expenditure on various types of goods. 

 

 

This suggests that each million dollars shifted from purchasing fuel to general consumer goods (that is, each million dollars of fuel conserved) typically creates 10-12 additional domestic jobs, and shifting a million dollars from vehicle expenditures to general consumer expenditures creates 5-7 additional domestic jobs. Transportation policies that halve U.S. per capita fuel consumption would directly save consumers $300-500 billion annual dollars, provide indirect economic benefits of comparable size, and generate 3 to 5 million domestic jobs, five to ten times more than the number of jobs provided by the domestic automobile industry (in 2007, GM, Ford and Chrysler together employed about 240,00 U.S. employees, and including component subcontractors the US automobile industry employs about 730,000 workers, or about 0.5% of the total national workforce).

The key question is whether automobile industry subsidies provide greater economic returns than alternative public investments, for example, in education, infrastructure and research. The $25 billion requested by U.S. automobile manufactures represents about $100,000 per job, in addition to the many other direct and indirect subsidies provided to the automobile industry by local, state and federal governments. Such subsidies would throw good money after bad. Even worse, they could distort transportation policies in ways that are economically, socially and environmentally destructive.

If automobile companies received new federal subsidies they will be under tremendous pressure to maximize short-term profits. Large, fuel inefficient vehicles have been their most profitable products, so their natural response will be to promote the sale of such vehicles. Even worse, if citizens and public officials consider themselves automobile industry shareholders, they may favor transport policies that stimulate automobile ownership and use to maximize financial returns. The result would be more transport system inefficiency, with disastrous long-term consequences. Transport system efficiency affects a far larger number of jobs than those provided by domestic automobile manufactures. Policies and subsidies that perpetuate inefficient vehicle sales and automobile-dependent transport systems destroy far more jobs than they create. Of course, U.S. manufactures can produce fuel efficient vehicles, but doing so goes against well-established habits.

Consider three policy scenarios. The first is intended to support the domestic vehicle industry profits by maintaining the relatively modest target for 2020 of 35 mile-per-gallon (MPG) average new vehicle fuel economy, which would increase 2020 fleet fuel economy to about 28 MPG. This could be accomplished with technical improvements, while allowing domestic manufactures to continue selling large numbers of SUVs, light trucks and performance cars. The second scenario would raise the 2020 target to 55 MPG, increasing average fleet efficiency to 38 MPG. This scenario would probably require reducing average vehicle size so the U.S. automobile fleet would become similar to those in Europe and Asia. The third option includes this increase in fuel economy plus mobility management policies such as road and parking pricing, higher fuel taxes, and distance-based insurance and registration fees, significant investments in alternative modes, and smart growth land use policies, to reduce per capita vehicle mileage 20% by 2020. The results are summarized below:

 

Scenarios Compared (Scenario 1 is the baseline. Assumes 300 million personal vehicles, 10 net jobs created per million dollars in avoided oil import costs, $150 per barrel of oil in 2020) 

Scenario 1: Auto-industry favored policies 

Practical requirements: Technical innovations and modest reductions in vehicle size

New vehicle average MPG:            35

Fleet average MPG:                      28

Average annual miles per vehicle:    12,000

Average annual gallons per vehicle:    429

Petroleum dollars per vehicle:          $1,531

Total national dollars (millions):      $459,184

Domestic jobs created                  -  

Other economic benefits:             -                                                   

              

Scenario 2: Increased vehicle fuel economy

Practical requirements: Technical innovations and significant vehicle size reductions

New vehicle average MPG:            55

Fleet average MPG:                      38

Average annual miles per vehicle:    12,000

Average annual gallons per vehicle:     316

Petroleum dollars per vehicle:        $1,128

Total national dollars (millions):      $338,346

Domestic jobs created:                 1,208,378

Other economic benefits:             

·         consumer fuel savings 

 

Scenario 3: Increased transport system efficiency

Practical requirements: Technical innovations, vehicle size reductions, and transport system changes.

New vehicle average MPG:            55

Fleet average MPG:                      38

Average annual miles per vehicle:  10,000

Average annual gallons per vehicle:       263

Petroleum dollars per vehicle:        $940

Total national dollars (millions):      $281,955

Domestic jobs created:                 1,772,288

Other economic benefits:

  • consumer fuel and vehicle savings
  • congestion reduction
  • road and parking facility cost savings
  • accident reductions
  • improved mobility for non-drivers

 

 

This suggests that the most important factor to consider when evaluating economic stimulus strategies is not the short-term jobs created per dollar, but their long term impacts on transportation system efficiency. Policies that increase energy efficiency support economic productivity, competitiveness and employment. In this example, a reasonable scenario of agressive fuel economy targets and transport system reforms is projected to add nearly two million domestic jobs by reducing petroleum import costs, and provides other economic benefits such as  congestion reductions, road and parking facility cost savings, and accident cost reductions. These are Win-Win solutions that help achieve economic, social and environmental planning objectives.

 

Notes

Vehicle and petroleum production support economic development if the output is exported or substitutes for imports, but there is no evidence that policies which stimulate consumption of these goods (for example, by reducing the quality of alternative modes or encouraging the sale of fuel inefficient vehicles) supports economic development. Although businesses that sell such vehicles and fuel may benefit, a far larger portion of businesses (those that sell everything else) are harmed because consumers have less money to spend on their goods.

Petroleum and vehicle expenditures generate relatively little domestic employment and economic activity, since they are capital rather than labor intensive, include a significant portion of imported product (more than half of the petroleum consumed in the U.S. is imported), and even domestically assembled vehicles incorporate many imported components (ASTRA, 2000). However, I could find only two specific references that quantify these impacts.

A 1999 Texas case study used national input-output table data to calculate the regional economic activity and employment generated by expenditures on automobile use, transit use, and general consumer expenditures (Miller, Robison & Lahr, 1999). It found that each 1% of regional travel (53 million vehicle-miles) shifted from automobile to public transit increases regional income about $2.9 million (5¢ per mile shifted), resulting in 226 additional regional jobs.  

Regional Economic Impacts Of $1 Million Expenditure (Miller, Robison & Lahr, 1999)

Expenditure Category                       Regional Income               Regional Jobs

Automobile Expenditures                                 $307,000                               8.4

Non-auto Consumer Expenditures                     $526,000                               17.0

Transit Expenditures                                       $1,200,000                            62.2

This table shows economic impacts of consumer expenditures in Texas.  

 

The British Columbia and Washington State input-output tables show similar impacts. These studies are old, so current job creation will be lower due to inflation, automation, and increased dependency on imports. They reflect regional perspectives and so may understate national employment impacts (for example, although Washington State produces no automobiles, other states do, so a portion of vehicle purchase dollars stay in the U.S.). 

Jobs Created in British Columbia by Transportation Expenditures (B.C. Input/Output Table, British Columbia Treasury Board, Victoria, 1996)

$1 Million Expenditure                 Full Time Jobs Created

Petroleum                                          4.5

General Automobile Expenses              7.5

Public Transit                                     21.4

This table shows economic impacts of transportation expenditures in British Columbia. 

 

The U.S. automobile industry was once a leader in technical innovation, profits and employment, but no longer. It has not generated high profits for years, and currently pays only slightly higher than average wages, a premium likely to decline in the future due to international competition. Industry advocates claim huge economic costs from the collapse of U.S. automobile companies (CAR, 2008), but they exaggerate by including all related employment. Without GM, Ford and Chrysler, Americans would still consume, produce and service motor vehicles (many "foreign" manufactures have U.S. factories), and many of the affected employees would find jobs in other productive companies or are scheduled to retire soon. This is not to deny that some individual employees and investors would be harmed directly by automobile company bankruptcies, but there is no obvious reason why these companies should receive more public support than other industries facing similar threats.

Is it possible to increase average vehicle fuel economy to 55 MPG? Yes. This will require a smaller and lighter vehicle fleet composed of more cars and fewer SUVs, light trucks and large vans. Is it possible to reduce per capita vehicle mileage by 20%? Yes, mileage reductions of this magnitude and greater are achievable with various policy changes, including investments in alternative modes (residents of cities with high quality rail transit systems typically drive about 20% fewer annual miles than equally wealthy residents of more automobile-dependent areas), pricing reforms and smart growth land use policies.

Please let me know if you have more specific information on the employment and economic development impacts of vehicle and fuel expenditures (litman@vtpi.org).

 

References

ASTRA (www.iww.uni-karlsruhe.de/astra/summary.html), is a set of integrated transportation and land use models that predict the long-term economic and environmental impacts of different transportation and land use policies in Europe. The Final Report, is available at www.iww.uni-karlsruhe.de/astra/ASTRA_Final_Report.pdf.

CAR (2008), CAR Research Memorandum: The Impact on the U.S. Economy of a Major Contraction of the Detroit Three Automakers, Center for Automotive Research (www.cargroup.org/documents/FINALDetroitThreeContractionImpact_3__001.pdf).

David Goldstein (2007), Saving Energy, Growing Jobs: How Environmental Protection Promotes Economic Growth, Profitability, Innovation, and Competition, Bay Tree Publishers (www.baytreepublish.com); summary at www.cee1.org/resrc/news/07-02nl/09D_goldstein.html.

Good Jobs First (www.goodjobsfirst.org) investigates the economic impacts of Smart Growth and efficient transport, and promotes policies that support employment and equity objectives.

Todd Litman (2008), Smart Transportation Emission Reduction Strategies, Victoria Transport Policy Institute (www.vtpi.org); at www.vtpi.org/ster.pdf.

Jon Miller, Henry Robison & Michael Lahr (1999), Estimating Important Transportation-Related Regional Economic Relationships in Bexar County, Texas, VIA Transit (San Antonio; www.viainfo.net).

Robert Shapiro, Nam Pham and Arun Malik (2008), Addressing Climate Change Without Impairing the U.S. Economy: The Economics and Environmental Science of Combining a Carbon-Based Tax and Tax Relief, The U.S. Climate Task Force (www.climatetaskforce.org); at www.climatetaskforce.org/pdf/CTF_CarbonTax_Earth_Spgs.pdf.

VTPI (2008), Online TDM Encyclopedia, Victoria Transport Policy Institute (www.vtpi.org). In particular, see "Economic Development Impacts" at www.vtpi.org/tdm/tdm54.htm.

OFM (2008), 2002 Washington Input-Output Table, Office of Fiscal Management, Washington; at www.ofm.wa.gov/economy/io/2002/default.asp.

 

Todd Litman is the executive director of the Victoria Transport Policy Institute.

Comments

Comments

now we're dealing

now we're dealing with serious solutions..isn't it?

"Is it possible to increase

"Is it possible to increase average vehicle fuel economy to 55 MPG? Yes."
"Is it possible to reduce per capita vehicle mileage by 20%? Yes."

In order to achieve our goal for a better economic is through a long term impacts on transportation system efficiency. If auto industries are required to develop a smaller and lighter vehicles (with efficient car parts such as blower motor, exhaust, bumper, tire) fewer SUVs, light trucks & large vans, then it would be better. I think one of the best things to do is to have a better policy changes. Auto makers should deal with it.

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