Matthew Kahn is a professor at the UCLA Institute of the Environment and Sustainability with joint appointments in economics and public policy. This op-ed originally appeared in the Harvard Business Review on Monday, April 18, 2013.
Philadelphia is 101 miles from Manhattan, and the current travel time between the two cities is about 1 hour and 50 minutes. Suppose that Amtrak could achieve the speed of China's bullet trains and move at 175 miles per hour. The one-way commute time would decline to 35 minutes. Common sense suggests that home prices in Philadelphia would soar from their current median of $140,000 as businesses and households would come to view the city as a new Manhattan suburb, and the demand to live and work there would sharply increase. Philadelphia would benefit from the population increase and all the amenities that private enterprise would build to support it.
That is exactly what happened in China as a consequence of the country's enormous investment in bullet trains, as work that I did with Siqi Zheng of Tsinghua University shows (news release). But the question is what level of public investment do the United States and other governments want to make to relieve congestion in mega cities and spur growth in second and third tier cities, especially at a time when many are questioning the role of government and pushing for fiscal austerity.
Here's China's story. Between 2006 and 2010, the Chinese central government spent billions of dollars on new bullet trains that connect second and third tier cities with the mega cities of Beijing, Shanghai, and Guangzhou — but of course bullet trains don't connect every smaller city to a mega city. So my coauthor and I looked at the differences that bullet train connections wrought on "connected" cities by comparing them to similar cities that the bullet train had bypassed. Using data for 262 cities, we documented large home price increases for newly connected cities. Based on the ridership data for two major bullet train lines, we calculated that the average city house price growth per billion passenger-kilometers is 4.2 percent. Effect 1: a capital gain windfall for land owners in second and third tier cities.
High rents in the mega city also nudged the subset of households and firms with the lowest willingness to pay to locate there to consider relocating to the secondary cities. But these decentralized households can easily travel to the major cities for unique shopping and restaurant options. Effect 2: dispersed population.
What other changes can these lower tier cities expect? In our past work examining the consequences of new subways built in Beijing, we have documented that the private sector responds to major public transit investments through two different investment strategies. First, real estate developers respond by building new housing towers in close proximity to the new public transit stops. Second, commercial real estate demand is stimulated as upscale restaurants and shopping agglomerates close to these transit stations. The extent of this effect will depend on whether the area is zoned for residential or commercial activities, and also the density limits defined in zoning codes. Effect 3: private investment in amenities to support the growing populations of the lower tier cities.
The bullet train simultaneously alleviates some of the congestion costs associated with urban growth in the mega cities and triggers the growth of the nearby second and third tier cities. In this sense, the bullet train creates the possibility that the nearby lower tier cities become a "safety valve" for the mega city and this alleviates concern about such cities growing "too big." In the case of China, such investments strengthen center cities as the bullet train connects to downtown subway stations in the big cities. In this sense, this investment is a low carbon strategy that lessens the need for both in-city and cross-city car trips. Effect 4: lower carbons emissions.
There's even more to the story for companies. The bullet train has the potential to play a similar role as the Internet [PDF], attracting back-office activity and helping firms fragment so that they keep their deal makers in the expensive commercial real estate in the center cities while sending their routine activities to cheaper land at the periphery. The rapid transport will allow for a more efficient allocation of business activity across space, helping firms to control costs. It's a "win-win" as the scarce mega city's land is efficiently used and the secondary cities experience local growth. Effect 5: more efficient use of space for private enterprise.
In the United States, Amtrak seems unlikely to accelerate any time soon, so Philadelphia, Providence, and other cities on the Northeast Corridor will not enjoy the full benefits of their geographic proximity to Boston and New York City. In the west, though, California is going ahead with its High Speed Rail. And while our work quantifies some of the spatial consequences of investing in high speed rail, we cannot claim to have conducted a cost/benefit analysis of such irreversible investments. Our work suggests that cities with bullet train stations will offer new investment opportunities for cities such as Fresno and Bakersfield.
But bullet trains cost billions, and California is expecting the federal government to provide much of this money. Critics will note that it is easy (and quite tempting) to spend "other people's money." In this new age of fiscal austerity, public finance arrangements for major urban infrastructure projects will become an important topic for debate.