Amtrak, Bullet trains, California, capital costs, Carbon Emissions, fare revenue, Frederic Bastiat, High speed rail, infrastructure, Malinvestment, Megabus, operating costs, Privatization, profitability, Public benefits, Public boondoggles, Randall O'Toole, Sean Davis, The Federalist, Transit subsidies
Public boondoggles come in many forms, including sports stadiums and entertainment venues, convention centers, local trolly lines, light rail, superhighways, “gold-plated” public offices, and even subsidies for politically-favored (as opposed to market-favored) industries. Anything involving “infrastructure” has an almost perverse political appeal. The many varieties of boondoggles have much in common from a public finance perspective: ultimately, they are almost always funded by taxpayers; when they confer benefits to private parties (and they usually do), they are underpriced to those users. Taxpayers are often lucky if these projects cover their operating costs, let alone capital costs, via direct revenue generation. Taxpayers are usually on the hook for the bonds. Pure public benefits might offer some justication for this burden, but those cited by project proponents are often unconvincing on that basis. Let’s face it: projects are seldom evaluated against something approximating the true opportunity costs faced by the public or taxpayers.
A prominent example of such a project that seems to capture the political imagination is high-speed rail (HSR). My friend John Crawford emailed the following link: “Doing the math on California’s bullet train fares“. John provided this summary:
“Not surprisingly, today’s fare estimate has risen 72% over the estimate that was cited during planning. That’s telling but probably not surprising to anyone, even those that tried to change opinions by citing the $50 fare. What I think is most interesting follows.
CA-HSR price of 86 is about 20c/mile. Comparable prices are 22c for a Chinese train that everybody agrees to be subsidized, 54c for a French train that is profitable and 50c for the Amtrak corridor on the East coast, which is probably profitable; 46c in Germany. Somehow, they think they can do what nobody else in the world can do…profit at 20c/mile.“
The California authority is either spectacularly arrogant or stupid. Probably the former, because they are doing what self-interested bureaucrats and politicians always do. They want the project to get done, thus creating an empire, kicking a can-full of fare increases and taxpayer liabilities down the road, beyond the time when anyone will hold them accountable for the malinvestment. But the true extent of the malinvestment will never be obvious, because the counter-factual will remain in the unseen world of lost opportunity.
Something I find exasperating about articles like this are references to “profitability”, as in “… state officials say the system will quickly become profitable“, when the meaning is not actual profitability. My friend John did it too, but I forgive him because he knew the score, and because he’ll forgive me for being a pedant (I hope). But this is important! What the California officials mean by “profitability” (and it is a misuse of the term) is fare revenue in excess of operating costs. The latter do not include initial capital costs, so these officials are not making claims about actual profitability. Profitability means that revenue exceeds ALL costs, including capital costs. Many observers consider the California authority’s estimates of operating costs to be suspect, so it’s not even clear that revenue will cover the future costs of capital replacement, let alone the initial installation costs. Construction and planning costs are expected to be $68 billion for Phase 1 only, and you can safely bet on significant additional overruns by the projected completion of Phase 1 in 2029.
Fares calibrated to cover operating costs are not defensible in terms of long-run marginal cost pricing. While an incremental rider does not cause the capital cost of the system to increase in the short run, incremental riders absolutely do have an impact on long-run capital costs. In any case, there are many incremental riders at start-up. The long run is now. Yet, like many public projects, the burden of uncovered costs is justified in terms of other benefits of a supposedly public nature. Here is a vague description of such benefits from the CA HSR Authority:
“California high-speed rail will connect the mega-regions of the state, contribute to economic development and a cleaner environment, create jobs and preserve agricultural and protected lands.“
Let’s take these one at a time:
- connecting “mega-regions”, if that is a real benefit of HSR relative to alternative modes of transportation, will largely accrue to riders, not the general public.
- Economic development benefits are possible along the route or near stations, but that is hardly a pure public benefit, and it is likely to come at the expense of development elsewhere.
- The trains will be powered, at least in part, by energy from fossil fuels. If HSR produces less carbon than equivalent airplanes, autos and other alternatives, that might represent a pure public benefit (according to the carbonphobic), but this is a costly way to achieve a minor reduction in carbon emissions. It is of value only to the extent that HSR brings real substitution away from other, higher carbon modes.
- Construction jobs are part of the cost of the project, but this is a common ploy and very handy way to sell the project. Gains for the workers are certainly not a pure public benefit. To paraphrase Bastiat, calling construction jobs from malinvested capital a “public benefit” is like calling a broken window beneficial because it provides work for the glazier.
- As for preserving agricultural and public lands, I do not believe that HSR will make much of a dent in future, land-gobbling highway construction (and if it did, it would offset those vaunted HSR job gains).
The public should always view large public projects like HSR with skepticism and insist that private benefits should be paid privately. There are always alternative uses of taxpayer funds, including the possibility that taxpayers should keep them. Too many public projects become funding disasters. In many cases, private parties would not be willing to buy the facilities for more than 10 cents on the dollar.of original cost. Without access to tax revenue, only a low purchase price would allow them to operate at a profit.
At the national level, this week’s tragic Amtrak crash near Philadelphia was the context for misguided calls to provide additional funding to the rail service. Sean Davis in The Federalist has a more logical proposal, even if it is a bit radical: not only should Amtrak be privatized, its assets should be given away! And how could anyone reach such a conclusion?
“Amtrak lost nearly $1.3 billion in 2013. Since its creation, Amtrak has racked up over $31 billion in accumulated losses. And every penny of those losses has been covered by federal taxpayers.
… Hand over the entire enterprise to whichever rail company wants it. ‘But that’s crazy!’ you might say. ‘Giving it away for free makes no cents [sic]!’
Well, neither does keeping it on the taxpayers’ books. The status quo costs taxpayers at least a billion dollars each year.“
Davis makes a fair point, though a give-away might attract multiple takers. Ultimately, bidding just might be necessary! Or, perhaps it would be necessary to PAY a private rail operator to take Amtrak off the federal government’s hands. A fairly high payment would still be worthwhile to taxpayers.
Randall O’Toole provides this excellent discussion of privatizing transit in a video of approximately 17 minutes. He discusses trends in ridership, the inefficiencies inherent in public transportation systems, and compares various market structures and types of private transportation systems, including private intercity buses (Megabus). He also addresses concerns that private transportation systems will not meet the needs of the poor by proposing the substitution of “transit stamps” for the huge subsidies currently paid into transportation bureaucracies.