Tuesday, February 28, 2006

The Traffic Congestion Index

There are lots of economic indicators out there: GDP, CPI, PPI, the unemployment rate, housing starts, labor productivity, FDI--the list goes on and on. But perhaps the most telling indicator of how a particular regional economy is doing is traffic.

In a column in the San Jose Mercury News, commentator Mike Langberg documents the fall and rise of traffic in Silicon Valley over the last five years. At the height of the dot-com boom, traffic was horrible, but according to one person quoted by the article, "everyone was making so much money they tolerated the interminable delays." After the bubble burst, traffic dropped by more than 30% over three years. Last year, it started to get slightly worse, and it's projected to get worse still as the economy continues to recover. As traffic worsens, CEOs in the area worry that congestion makes it more expensive to do business.

The rise and fall of traffic over the business cycle is a nice metaphor for the rise and fall of inflation. When an economy heats up, there's inflationary pressure because people are making so much income that they're willing to pay higher prices for goods. However, the higher prices mean workers demand higher wages, just as longer commutes make jobs less appealing to workers. As a consequence, the cost of doing business increases, cooling the economy off.

In a macroeconomic model, the most reliable way to increase output in the long run is through technological progress. Not surprisingly, especially for Silicon Valley, Langberg suggests a technological solution to the traffic problem: more telecommuting from home or from "drop-in" centers. These solutions can allow the regional economy to grow, while helping to contain traffic congestion--just as technological advances can allow a national economy to grow while helping to contain inflation.

1. What other aspects of daily life rise and fall with the business cycle?

2. Are hours worked from home and hours worked in an office perfect substitutes for each other? Why or why not?

3. Can you think of another technological advance that has helped increase productivity while not increasing inflation? How has it been able to do so?

4. The article says that the employees of one company who telework "give 60 percent of their saved commute time back to the company." Do you think that's high or low? Why?

Topics: Business Cycles, Inflation, Congestion


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