MTR 306, Detour Ahead! When the American Dream Prevents the American Dream

Issue 306

February 26, 2001

Detour Ahead! When the American Dream Prevents the American Dream

An increasing body of work suggests that "smart growth" strategies will pay off economically, both at macro and at household levels. The Surface Transportation Policy Project's recent "Driven to Spend" report found clear evidence that sprawl development has driven up transportation costs for U.S. households. Here, Scott Bernstein, president of Chicago's Center for Neighborhood Technology and a "Driven to Spend" co-author, discusses the problem in terms of anti-poverty efforts.

His argument has clear implications for transportation policy in our region. Areas of NYC and urban NJ poorly served by transit, and the combination of big road plans and stingy mass transit budgets in Long Island and Connecticut come immediately to mind.

This article first ran in the Jan-Feb, 2001 edition of STPP's newsletter, Progress. Bernstein is working on a book entitled Driven to Debt: How the American Dream Prevents the American Dream.

What costs more than three times as much as medical care, makes it hard to save for retirement or school, is the subject of community debates everywhere, and yet was never mentioned in the recent national elections? What has achieved the status of cultural icon, is backed by $14 billion per year of advertising, is most often compared to a love affair, yet has become the number two household expenditure and may be keeping ten percent of Americans from ever being more than "the working poor?"

If you answered "transportation" or "cars," you're right.

It wasn't always this expensive. Transportation expense grew from under 1 dollar out of 10 in 1935 to 1 dollar out of five today. This is due to the changing nature of demand. As regions decentralize, travel demand increases.

From 1970 to 1990, land use grew by up to 13 times the rate of population change. In metro Chicago, each 1 percent increase in developed land resulted in a 1.25 percent increase in daily vehicle miles traveled. From 1960 to 1997 the cost of passenger travel alone increased 13 times while the population only doubled.

Rapid sprawl and use-separated zoning leads to a kind of demand that can only be met by increasing car trips. A significant trend is the drop in work-related travel. From 1969 to 1995, the percentage of household trips that were-

Journey-to-work, dropped from 32 to 24;
Social and recreational, dropped from 22 to 18;
Shopping, increased from 15 to 22; and
Other family & personal business (including education), increased from 14 to 27.

The increase in car trips was helped by a credit system that makes car purchase seem easy-from 1959-1999, households went into car debt 7.4 times faster than the increase in total spending, while the savings rate dropped from 7.5 percent to zero.

Why these changes are of special interest to economic policy

For the well off, the falling savings rate can be attributed to an increase in the ownership of stocks and mutual funds, but for the bottom three income quintiles, the drop is largely related to the increase in debt. The largest expenditure increase, after housing, is for car purchases.

The pathway out of poverty is surely tied to building wealth. The asset mostly likely to result in wealth is homeownership. From 1959-1999, homeownership jumped from 61.9 to 66.9 percent. During that same period, the portion of households owning at least one car jumped from 74 to 91 percent, and those owning at least two cars jumped from 15 to 57 percent. However, further improvements to the home ownership rate could reach a speed limit-the total amount of credit that can be assumed by households of limited means.

One reason to focus on this credit squeeze is that the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 ("welfare reform,") may be reauthorized in 2001. A growing literature calls for incentives to increase car ownership among the working poor. The stated reasons are that most jobs require cars and that mass transit can't serve most jobs. It's also claimed that this is somehow affordable, by the nation, by states, by communities, and by individuals and households.

There are several reasons policies aimed at increasing car ownership could hurt fixed income households.

1. Assuming that job openings are limited to newer areas near each region's edge is wrong.
The Bureau of Labor Statistics (BLS) projection for the next ten years is that 70 percent of job openings will be replacements for existing jobs, with only 30 percent of openings in new jobs. Most businesses relocate only twice during their lifetime, so most metropolitan jobs are likely to be where they currently are. The working poor are mostly located in central cities and older suburbs; these are the very places where mass transit does serve existing jobs.

2. The use of transportation alternatives is increasing.
Transit patronage is increasing at rates not seen in four decades, and in many areas, at rates twice the increases in vehicle miles traveled. Non-traditional transit, including car-sharing, and van-pooling, is undergoing a rapid renaissance of innovation and deployment.

3. The public is willing to pay for transportation alternatives and to manage growth.
The combination of congestion, changes in federal policy and the apparent willingness to pay for and ride transit has changed the environment for public investment. This parallels recent changes in attitude toward growth policies, and the tangible results of hundreds of state and local referenda on growth, open space and transportation. Investors are starting to recognize the value of accessibility in location rating. Employers rate "workforce accessibility" with the fervor they once exhibited only for "environmental streamlining," and they are concerned with the effects of traffic congestion that has resulted.

4. Cars and homes compete for credit.
There's a spatial relationship between mortgage approval rates and household transportation spending. In 1998, those regions with the highest car ownership had the lowest mortgage approval rates (e.g., Fort Worth, Dallas, Houston, San Antonio, Austin, Detroit) and those with the lowest car ownership had among the highest mortgage approval rates (Baltimore, Washington, Chicago, Oakland, Boston). This finding is consistent with the overall concern about the best use for the limited availability of credit.

5. There is a big difference between home ownership and car ownership.
Homes have appreciated in value over the past 10 years at an average 3.2 percent per year. Vehicles, by contrast, depreciate at an average of 8 percent per year. Homes last an average of 80 years, while cars are increasingly lasting only 12 years.

6. Increased vehicle ownership eats into limited resources.
We estimate that the net cost for owning a second car for the working poor is $300 per household per month-this is close to the cap placed on Earned Income Tax Credits by the federal government. This amount of additional transportation expenditure would increase the cost of living for the first income quintile by 22 percent; for the second quintile by 15 percent; and for the third quintile by 11 percent, respectively.

7. The aggregate burden is unacceptably high.
Encouraging car ownership by the working poor could increase car ownership by one car, for households at or below the poverty level. Currently, the bottom two quintiles of households spend a total of $150 billion per year on transportation. Such proposals could add 17 million vehicles to poverty level households in the first and second quintile. At a cost of $3,600 per year, this policy could add as much as $62 billion or 40 percent to the transportation burden of the working poor.

8. There is a better choice-encouraging smarter locations through homeownership.
This is smarter credit policy-a reduction of 2.5 percent in credit used for vehicle purchase could result in a 1 percent increase in homeownership nationally. A 12.5 percent shift in credit from vehicles to homes could result in a 5 percent increase in homeownership. When I first purchased a home in 1982, the minimum down payment was 20 percent; today that entry fee is as little as 3 percent down. Targeting these credit shifts could result in faster increases in homeownership, and a measurable and sustainable reduction in poverty.

How Can We Meet Transportation Needs While Building Wealth?

A set of strategies that address this opportunity includes:

Working with employers to increase assistance for homeownership near work, lower the cost of transportation to work, and to locate workplaces in accessible locations;
Working with government to identify direct transportation subsidies and the hidden incentives for using particular transportation modes;
Asking credit counseling programs to explicitly consider transportation expenditures;
Rapidly expanding car sharing programs;
Rapidly expanding Location Efficient Mortgages, and other programs that recognize transportation savings as income to cover debt and help meet the affordable housing gap;
Improving credit scoring programs to include transportation spending;
Developing experimental packages of these incentives specifically targeted at working families, along with tracking systems for continuous improvement;
Supporting regional coalitions willing to build affordable housing and public transportation using innovative financing tools; and
Working with regulators and the housing market to take advantage of the new rule governing Government Sponsored Enterprises (GSE's). The rule, which took effect Oct. 31, raised the minimum purchase of loans in underserved areas from 24% of loans to 31%.

It's not too late to change this picture. Careful examination of the Smart Growth America poll (see Progress, v.10, n.4) shows Americans want both economic security and quality of life. Our research shows that if the "American dream" requires too many cars, both financial security and quality of life are threatened. This is an economic detour. Helping families get the quality of life we deserve shouldn't require a credit addiction to cars. Helping people achieve value in better investments can make smart growth work for everyone.