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Keynes, Macroeconomics, and Traffic

Orlando Roncesvalles (oroncesval4@gmail.com)

Back in 1936, a smart aleck named Keynes (John Maynard, or just Maynard) cooked up something he called The General Theory of Employment, Interest, and Money. He thought of unemployment as something to be solved, possibly in the same way that Albert (surname Einstein) thought “relativity” was the mystery to get fixated on. The parallels stop pretty much there despite the historical fact that failed mathematicians sought to infuse physics into economics, a project that took a long time to be discredited (not until 2008 anyway, when the Great Financial Crisis finally put paid to the misconception that physics and economics can mix, the latter having the muddle-like consistency of dirty motor oil and the former the empirical clarity of replicable experiments).

The genius of Keynes was in his insistence that the short run mattered more than the long run (when we would of course all have died). In that short run, slack in an economy (or unemployment) could be dealt with by public works. This idea was nothing new — even the Roman emperors knew that public spectacles kept people employed (even entertained). Keynes came up with the idea that in the short run, aggregate supply (or output, later standardized into GDP or gross domestic product) would have to adjust to what he called aggregate demand, whose components included consumption, investment, and government expenditure. Textbooks would later call this equality between aggregate demand and supply as “goods equilibrium.”

But Keynes then married the idea of goods equilibrium with something we might today call “asset equilibrium”— a situation wherein people are content to hold the quantity or amount of money in their pockets.

Asset equilibrium meant that peoples’ “liquidity preference” was satisfied through the movements of the interest rate as the price of credit and the opportunity cost of holding money. Money demand was driven by GDP and the interest rate, while money supply was a policy variable in the hands of the central bank. The equality of money demand with supply would be at the market-determined interest rate. Recognizing such an equilibrium was a way of bringing in the workings of the money and banking system into a fuller explanation of the gyrations of the business cycle. After all, the money markets determined interest rates, and these rates in turn drove business investment, which of course is a component of aggregate demand in the goods market.

The essence of Keynesian thinking was and remains the workhorse of macroeconomics (that specialty within economics that concerns itself with the short run determination of GDP and interest rates).

After Maynard, everyone then had a field day. The business-cycle savants focused on the confidence-based elements of aggregate demand (consumption and investment); the politicians latched on because government spending was their domain and Keynesian economics provided cover for influence and corruption; and the bankers were very much in on the act of determining interest rates. Macroeconomics caught on as the thing to know before one can say anything about the national or global economy.

It turns out that the apparatus of macroeconomics can be tweaked to help us understand the relationship between GDP and traffic.

Recently, a noted legislator reiterated the idea that prosperity (a growing GDP) was behind our traffic woes. I interpret what the legislator said to mean that without the heaven of a business boom, we wouldn’t have the hell of traffic. We should sit back and no more challenge him and his ilk to take public transportation because of course he already knew the answer: We are prosperous, so that we should just grin and bear it!

A critical but opposite view has nonetheless come forward. It is the idea that traffic is a brake on prosperity. The more severe the traffic, the less the GDP.

So, which is it? Is it a positive correlation between GDP and traffic? Or a negative one?

Keynes would likely scoff at the seeming contradiction. The negative correlation is the working of goods equilibrium if we realize that the severity of traffic negatively impacts aggregate demand. Bad traffic keeps consumers from traveling to malls, and smart businesses would likewise invest less if traffic drags down sales projections. Bad traffic kills GDP.

The positive correlation is something else. As GDP grows, the more we want to acquire transportation assets, such as cars and motorcycles. But in the short run, there is only so much roadway for all, and traffic problems arise.

The two disparate relationships – goods equilibrium and “traffic equilibrium” – are synthesized in the macroeconomics apparatus. Smart students will see that the thought experiment is the same as that of the infamous IS-LM apparatus of macroeconomics, where IS represents goods equilibrium and LM represents assets equilibrium; we now simply replace assets equilibrium with traffic equilibrium. Traffic equilibrium, by itself, reflects the positive influence of GDP on the severity of traffic problems, though it also suggests that the less the traffic, the more that people will demand transportation assets (this is the analog to the idea that the lower the interest rate, the more we would prefer liquidity or hold money).

What does all this mean? Can we now have a “clean” sorting out of the two disparate influences – the one of GDP on traffic and the other of traffic on GDP?

The answer is this. As an economy grows so of course does GDP. If the traffic infrastructure is left “as is,” traffic problems worsen, and governmental neglect is the culprit. This is because the traffic infrastructure (like monetary policy) is in the hands of the economic authorities. The infrastructure is in fact a public good. Still, the hapless citizens aren’t exactly helpless. They can move closer to where they work or work closer to where they live. They can drive less and consume less, and coincidentally lessen their carbon footprint. As a modern Marie Antoinette might say, let the travelers have their air-conditioned “me time.” Except that the peasants don’t eat cake or have their James (the proper name for chauffeurs of Rolls or Benz automobiles). Apparently there is no free lunch, and traffic is here to stay. Embrace it.

But if we were to solve the supply side of the transport asset equation, we reduce the severity of traffic, and the GDP boom continues or strengthens.

How to improve the traffic infrastructure is then the key. It is the magic but elusive password. Our legislators are perhaps simply not up to the challenge. Boot them, but don’t use the Denver boot. It won’t work because they’re too self-important. They’ve so far set things up so that they don’t suffer the inconvenience of public transport. Instead, they tell the ordinary citizen that it’s his fault because he enjoys a prosperous economy. Nuts.

TraffIc Woes: The enemy is us


By Orlando Roncesvalles

Almost gridlock

Just about everyone complains these days about traffic in Dumaguete that I often wonder whether we’re fast approaching the gridlock of Los Angeles, Washington (DC), or even Manhattan. The common culprits are easily all over the place. The local economy has grown, and car dealers sell cars like pancakes on easy financing terms. This has added to the more traditional problem of big trucks and buses competing with motorcycles and tricycles. The owners of new Wigos, Eons, and Picantos are left to scratch their heads at their mix of newly acquired mobility amidst near gridlock conditions around 8am and 5pm.

What to do then? Though not immediately obvious, it’s not simply a case of too many cars and trucks using the limited roads. That much we ought to know from the infamous Law of TraffIc formulated by one Anthony Downs. He said that when we widen the road, we just get more vehicles and only a little improvement. It would be better to look at traffic problems from other angles. (For the curious, I sketch a proof of Downs’ Law at the end of this column.)

The status quo

The city officials cannot be faulted for lack of trying. Today, we have a complicated one-way system for the central business district; this seems to work well enough even as car owners complain that they have to drive more. The advent of private parking garages is reportedly at hand, which should reduce the “parking-space hunter” problem downtown. The cap on the number of public motorized tricycles has also limited the well-known traffic-generating disparity between these vehicles’ slowness (maximum 30kph) and the speed of private cars. So far so good? Not quite. We are still some way from traffic sanity.

More than a decade ago, a halfway solution emerged from recognizing that certain places generated unnecessary traffic in their midst. This is particularly true of schools, hospitals, and churches. The full solution was to enact laws ensuring that such institutions wouldn’t be the source of traffic problems. The analogy with environmental pollution is apt. The trick is to require a Traffic Compliance certificate, of the same nature as the Environmental Compliance certificate now required to protect the environment. But it seems that these institutions are so politically powerful that city officials were reduced to “begging” them to convert real estate into service roads. The Silliman Grade School actually responded positively. Others appear to just ignore the problem they’ve created. Why?

A good long-term solution includes the bypass road concept. Cut-through traffic from outside the city needs to be shunted away from downtown. The coastal road and Rizal Boulevard are now unable to function well as bypass routes because of the new restaurants and tourism growth. I once asked city officials about the by-pass, and it seems that the answer is something out of eminent-domain hell. The city has to acquire the roadway, but landowners play the cat-and-mouse game of guessing where this road might be, thereby almost interminably delaying the solution.

Self-help

For the meantime, the literature on traffic problems gives some nuggets of folk and science-based wisdom. The following is a limited list:

One is obvious. Walk or bicycle. Here, city officials have to get better at giving pedestrians and cyclists a fairer shake at the benefits of city-hood. These folks pay taxes too; they deserve sidewalks and bicycle lanes. I once asked my students to study the idea of making half of Perdices Street downtown as a pedestrian zone (combined with availability of parking spaces at both ends). That idea should be kept alive and kicking.

Two, legislate and enforce no-parking rules. Some streets are not so bad if only “lawless” parking were controlled.

Three, traffic enforcers and stop lights are band-aid solutions for problem intersections. For example, near schools, it is probably more productive to get the schools to give solutions that get students to school without adding to traffic problems. Relocating the school may be a better alternative. As to stop lights, they work in the first world but probably not in Dumaguete. We thrive on the idea of traffic in scooter-crazy Rome, where almost anything goes!

Four, drive smart. Waze helps the car driver avoid peak-hour congestion. A few minutes earlier or later can reduce trip times albeit by not much. Another form of smart driving is to take the straight route or to avoid left turns. At times, even three right turns can beat waiting for a left.

Five, for the spoiled rotten, get a driver. Parking is hard work, time is scarce, and good drivers can give you the latest gossip, or tune the radio to sad and funny radio-seryes.

Finally, consider Stoicism. Maybe staying home is best. Living well is a form of revenge. That’s how Netflix makes its money. Now, if only we could speed up that internet!

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Note on Downs’ Law: The basic model is one of getting from one place to another using two roads, the main road and a next-best alternative. Typically, the main road is already congested (it’s not the main road for nothing). The city decides to widen the main road. What happens? Traffic that used to use the next-best road then shifts to the widened main road. The traffic problem then remains unsolved. The shifting traffic is called induced demand, and this explains why the widening of the road doesn’t solve the problem. 

Recognizing Downs’ Law means that city officials should concentrate their limited resources on next-best routes, not on the main roads. It means the opening or speeding up of such parallel routes.

Comments at oroncesval4@gmail.com

Senior Citizens of Makati – Know Your Rights in Traffic

[Blast from the past: April 25, 2013 at 1:29am]

The traffic law has since been re-written (see below).  But a bit of this post is still relevant.

This is almost a tongue-in-cheek note.

On April 23, 2013, I was stopped by a traffic enforcer on Buendia in Makati. He claimed that my car was “smoke belching.” Quietly, I argued that I maintained my car in good shape and smoke belching is not an issue. He asked for my license and car registration, which I politely and promptly gave him to inspect.

He then talked about a “manual test” of my exhaust, and informed me that if the car failed the test he would confiscate my car’s license plate. I protested that as far as I knew there was no authority for him to confiscate my car’s license plate.

After a little bit of hemming and hawing by the enforcer, I gave him my senior citizen ID, and informed him that I am a resident of Makati. His response was to consult with another traffic enforcer. His tone of voice changed from one of threat to one of exasperation. Finally, he said he would let me go because, according to him, senior citizens were “exempted” from traffic violations.

In my mind I hadn’t heard of such a rule, but I simply thanked him for letting me go. I don’t know whether what the enforcer told me was true or correct.

Still, I have the following suspicions:

One, the smoke-belching story is just another ruse to extort money. It may work against public use buses and jeepneys, but an informed motorist should resist such an extortion attempt (politely, of course).

Two, the enforcer did not have any authority to apprehend a private car on smoke belching. (Subsequently, from the MMDA website, I learned that as a motorist, I have the right to ask for the enforcer’s mission order, and the scope of his authority in this regard.)

Three, the idea that senior citizens are exempt from traffic rules is ridiculous. But let it be. Perhaps this was just the enforcer’s way of saving face because by then he decided that I would not offer him a bribe.

Four, the traffic enforcer was abusing his position. A reading of official pronouncements from the MMDA suggests that the authority of an enforcer to issue a TVR while confiscating a driver’s license is limited to instances of a crime, accident, or certain administrative violations by the motorist, such as a tampered taxi meter in the case of a taxi. Outside these circumstances, the enforcer may not confiscate a driver’s license. The official rules also state that under certain conditions, the enforcer may detach the car’s license plate. One such condition is when the motorist refuses to surrender his driver’s license. (I am not sure what other conditions will allow a traffic enforcer to confiscate a car’s license plate.)

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NB.  The new traffic law of 2014 has changed some of the rules of traffic enforcement.

New Rules for 2014

The new rules do not allow the confiscation of license plates, but allow the impoundment of vehicles if they operate with smoke belching (determined by observation), or have modified equipment (presumably, illegal modifications).  The penalties are the same for cars, trucks, and motorcycles, which means that those with motorcycles are vulnerable for impoundment for even very minor equipment violations, such as those pertaining to mirrors, mufflers, and lights. A motorcycle owner with three equipment violations faces a fine of P15,000 and impoundment on the spot.

(Whether this is an unreasonable deprivation of property without due process seems a proper constitutional challenge, as well as a violation of equal protection since the fine for a truck with faulty brakes or unsafe tires is P5,000, the same as for a motorcycle with ‘modified’ wheels or tires.  Also, the determination of what is street-legal for equipment seems to be vulnerable to abuse of discretion on the part of the enforcement officer.)

The old traffic violation receipt (TVR) is back, even for minor violations, but now called TOP (temporary operator’s permit).  The penalties are lesser for driving without carrying the driver’s license, relative to driving without any license at all.  This means that  the old TVR/TOP extortion schemes won’t work so well if you carry only a copy of the original license with you.  You may show the enforcing officer the copy of your driver’s license, so he can charge you with not carrying the ‘real’ license, but he can’t inconvenience you with having to go to LTO to retrieve your license.  You now have 30 days to pay the fine, after which the LTO can suspend the license, whereas the TOP (if the enforcement officer has ‘confiscated’ your license) is valid for only 3 days.

The LTO is in charge of collecting fines, and allows a motorist five days to file a written contest of the charges.  After that period, the motorist is deemed to have admitted the violations on the traffic ticket. The five-day period seems to be there to provide a kind of due process protection, and test cases of contests raised on appeal to a higher authority than the LTO can be raised by concerned citizens.