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Traffic turn-ons and an old bubble

Traffic turn-ons and an old bubble
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First Published: Sat, Oct 10 2009. 12 47 AM IST

Updated: Sat, Oct 10 2009. 12 47 AM IST
When stuck in interminable traffic jams, how often have we cursed the municipality or the state government for their inability to build new roads and flyovers to take care of the congestion? And yet we often observe that, miraculously, soon after the new road or bypass has been built, congestion is back to normal. Is it because we have too many cars? Or too easy vehicle financing schemes? National Bureau of Economic Research economists Gilles Duranton and Matthew Turner have a very different take on the subject. They propose what they call a “Fundamental Law of Road Congestion”, stating that the extension of most major roads and highways is met with a proportional increase in traffic.
Illustration: Jayachandran / Mint
Duranton and Turner have analysed city traffic in the US between 1983 and 2003 and investigated the impact that adding lane-kilometres of roads has on vehicle-kilometres travelled. They say that traffic jams persist even when roads are widened and extended because of—an increase in driving by current residents; an increase in trucks using the roadway; and an inflow of new residents. Surprisingly, they say that diversion of traffic from other roads is not a reason. Even more surprisingly, they find that increasing public transport will also not eliminate congestion.
So what does relieve it? The researchers say it’s the price of travelling. Impose congestion charges, raise the price of fuel or increase parking charges and road congestion will improve.
But perhaps increasing the number of highways serves a different purpose. If the researchers are right, that should lead to a rise in the vehicles using those roads. In other words, build the roads and growth will follow.
New Evidence on the First Financial Bubble—by Rik GP Frehen, William N Goetzmann and K Geert Rouwenhorst
Studying bubbles is in vogue these days and what could be a more worthy subject than the South Sea Bubble of 1720, one of the earliest examples of irrational speculative mania? Here’s what Wikipedia has to say about it: “The South Sea Company was a British joint stock company that traded in South America during the 18th century. Founded in 1711, the company was granted a monopoly to trade in Spain’s South American colonies as part of a treaty during the War of Spanish Succession. In return, the company assumed the national debt England had incurred during the war. Speculation in the company’s stock led to a great economic bubble known as the South Sea Bubble in 1720, which caused financial ruin for many.”
Illustration: Jayachandran / Mint
Rik G.P. Frehen of the University of Maastricht and K. Geert Rouwenhorst and William Goetzman, both of Yale University, argue that the irrational exuberance in English and Dutch stocks at the time had a plausible basis. They point to two major financial innovations around that time. One of them was a shift in global trade, with companies newly set up to exploit trade in the Americas—the Mississippi Company owned the Louisiana territory and the South Sea Company owned the exclusive right to export African slaves to Spanish America. The second innovation was the conversion of maritime insurance firms into joint stock companies, thus lowering the risk in insurance. Write the authors, “Our results suggest that speculation about the Atlantic trade with the Americas was an important factor in investor expectations. We also find evidence that market prices and new issues in Britain and the Netherlands were driven in part by investor expectations about the financial innovations in the insurance trade.”
That is why, apart from the South Sea Company, the shares of other companies involved in the Atlantic trade and in insurance also rose at the time.
Their conclusion: you need a plausible story to justify investor enthusiasm. That’s rather obvious—what else do all those grand investment themes by analysts do but sell stories.
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First Published: Sat, Oct 10 2009. 12 47 AM IST