Detour
Ahead!
When the
American Dream Prevents the American Dream
by Scott Bernstein
President,
Center for Neighborhood Technology
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,1
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 why
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.2 Vehicles, by contrast, depreciate at an average of 8 percent
per year. Homes last an average of eighty years, while cars are increasingly
lasting only twelve 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 the 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 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 MortgagesSM, 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 on October 31, raised the minimum purchase
of loans in underserved areas from 24 percent of loans to 31 percent.
It’s not too late to change this picture. Careful examination of the
Smart Growth America poll (see Progress,
v. 10, n. 4) shows that 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.
Scott Bernstein
is President of the Center for Neighborhood Technology, co-author of Driven
to Spend, and co-author of the upcoming Driven
to Debt: How the American Dream Prevents the American Dream, from the
Brookings Institution Center for Urban and Metropolitan Policy.
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