Monday, March 30, 2009

Ohioans: Hi-speed trains are going to pick your pockets!

This article from Sunday's Dayton Daily News caught my eye. It is very revealing, if you read it closely.

A high-speed rail link for Ohio?

Gov. Ted Strickland has requested $250 million in stimulus funds to develop the 3-C Corridor, a passenger train system from Cleveland to Cincinnati, according to Stu Nicholson, spokesman for the Ohio Rail Development Commission. Also requested was $7 million to study development of the Ohio Hub, a proposed system of crisscrossing high-speed train lines that would connect Ohio to other states.

So, let's see what we've learned: Ohio officials are seeking to spend $257 million on this. That's a lot of money--but what does it buy us? Something vaguely called "study" and "development."

When we read further, we get a better idea of the full cost: "Developing the Ohio Hub would probably involve installing new rails in existing right-of-ways, and the eight- to 10-year project would cost up to about $7 billion."

"About"? Ever notice how TV ads will say, "it cost you 'about a dollar a day'?" What do you immediately think? "It'll cost more than a dollar a day, because if it cost less they'd have said that." How much more than a dollar a day, you don't know till you read the fine print; same with that "about $7 Billion." And if you re-read that paragraph, the hedging about the time-frame and the cost leaves ample room for it to be a lot more than that. This from the same folks who built all those e-check stations at whatever huge cost, instead of licensing existing car-repair places to handle it.

OK, but let's call it $7 Billion on the dot and move on. What's the payoff?

The next paragraph is priceless; the reporter wrote it so artlessly, that either he didn't catch the joke, or he just played it straight. So just for fun, I'll hold back the key information for last, so you can get the full picture:

"An economic impact study by Wright State University economists, however, predicts the Hub would generate about ______ in economic benefit over 30 years. In addition to the jobs created by construction and operation of the trains, the study projects economic development around the train routes and stations, significant fuel cost savings and environmental benefits.

Oh, my think of all that economic benefit! Jobs! Trains! Development around the stations--which have to be built of course, more jobs! "Significant fuel cost savings"! And best of all: "environmental benefits!" Oh, rapture!

How much might all that add up to, you wonder?

"$17 Billion." (over 30 years).

Now, I realize not everyone is good with numbers; I'm not all that good. But I know a little about compounding interest, and my antennae popped up on that one. "Just how much return is that on the original $7 Billion," I wondered.

I googled "interest calculator" and arrived here. Here's how I calculated things, so that you can evaluate whether my method was valid:

I put in 70 cents initial outlay (representing 1/10 of $7 billion), adding the same for the first 10 years; then I took the total that gave me, and recalculated for another 20 years' growth, To arrive at $17 (i.e., $17 billion) required a 3.1% interest rate.

That means that this ballyhooed investment is equal to slightly more than a 3% return! Meanwhile, if you check the rates at the U.S. Treasury, you'll find 30-year notes are currently earning 3.62%.

In case you didn't get the joke: this is the rate of return on this so-called "investment"--based on the most sunny projection they could come up with! Just like the ads that say, "about a dollar a day"...if they could have said this would yield $30 or $50 billion in "economic benefit"--they would have! "Economic benefit" is an extremely loose term and from a strict business point of view, it's meaningless. Prove it to yourself this way: go open a restaurant (or any business) this week--empty your savings, or take out a loan, and get yourself all set up. Proceed to lose money every week, until you are broke. But be consoled--you will have generated an amount of "economic benefit" far larger than the amount you lost. Get the picture?

Notice something else: if they could have said this would make a profit, they would have! Go read the story--and you tell me if that single word ever appears. Hint: it doesn't.

If you still think this is a good idea, then I have an offer to make: send me money. As much as you want. As often as you want. I won't promise you any profit or return; but I guarantee to generate lots of "economic impact." Deal?

6 comments:

TerryC said...

Before throwing stones at high speed rail lets look at other forms of transportation and how the government supports it.
Lets start with air travel. Does the government make money on air travel? Each city and town supports airports, often built at great expense with taxpayer money. The federal government supports the air traffic control system, the NTSB, the FAA, the FCC and keeps the airplane manufactures in business by buying both military and militerized versions of commercial aircraft. If the government was not in the air transport support business would the airlines be able to operate?
Lets look at the automobile. Cities, states and national govenrments build roads, support street light and traffic control systems, pay for traffic law enforcement and courts to support that enforcement. Lately they are directly supporting automobile manufactures. Would the automobile be a viable prospect if each driver had to pay the total cost of their part of this support infrastructure? Does the government at each level make a profit by supporting the surface transportation system? Since the interstate system is support by federal dollars, money which we all know the federal government doesn't have (hence the concept of deficit spending), I suspect they don't operate the Interstate system at a profit.
I say it is unfair to hold rail up to a standard that we do not hold other forms of transportation up to.

Father Martin Fox said...

Terry:

If you are advocating removing subsidies for other forms of transportation, I agree.

I would point out, however, that we pay fairly steep taxes as part of these other forms of transportation. Have you ever noticed the taxes added onto an airline ticket? And a large chunk of the price of gas is federal and state taxes to pay for infrastructure. I'd be very interested to see a careful calculation to compare the income generated to government from such taxes (and many others less apparent) with the subsidies you mention, to see what the actual balance is. If you have such a comparison, or can point to one, it would be useful to us all.

But all that evades the issue of adding yet another expense. If you found you were wasting money on your cable, food and utility expenses, would you decide that wasting even more money was now a good idea, just to be "fair"?

One more thing: will you feel good about spending $7 billion to build train tracks, train stations, and to buy and operate a train system that ends up being underused--with trains half-empty or worse? Realize that not only means the initial outlay, but a subsidy each year to cover the losses.

Because--if the advocates of this plan anticipated it making a profit, why would they "forget" to mention it? And if they really did forget to mention it, do you really think they're ready to handle this project?

Pete said...

Fr. Fox,
We've got train fever up here in New Hampshire as well and if I recall, we will be getting some stimulus seed money to study NH rail...problem is, it will cost billions to reinstall rail here (there were lots of unsuccessful railways in NH 50 and 100 years ago)and that fact (the $billions) is rarely mentioned in the romanticized rail advocates presentations....Don't get me wrong, I love trains! But the nature of today's world and my business and life requires me to come and go as I need, not as the trains run. I'll suggest this need would hold true just about anywhere. As a nation (dare I say culture?) we are lock, stock and barrel with the auto and have invested gazillions in highways, bridges and bailouts...let's stay focused on that. Railways have a place for sure, but let's stick to the knitting here....
I'm babbling, over and out.
God Bless.

Greta said...

When you have government using terms like investment, you have to guard your wallet. I am not sure when people will figure out that they are the worse possible place for us to "invest". I think that rather than taxes, the government should have to sell bonds to fund anything they are planning. Kind of like WWII when they had to get war bonds. We agree the local, state, and federal government tax money for the three or four things that a vote brings agreement on with 75% of the people. Other than that, if they want to fund them, got out and sell the benefits to the people.

We are headed for some very bad times with the debt that is mounting by the day with the government actions. It is a house of cards and it will collapse.

Jim said...

There is another piece to this issue that you haven't addressed and that is lost opportunity cost.

This money that will be spent on a rail system has been taken away from taxpayers who would (or at least could) have invested it. Remember Obama's plan is to tax those with the most, who also happen to be those who invest the most.

Even invested conservatively in the T-bills you mention the $7B would be ~$11.5B in 30 years. Over the last 25 years the Dow has returned 11% annually (wow!). That means this boondoggle would cost taxpayers ~$24B from their IRAs and 401Ks. This isn't money sitting in a bank vault either it is money that grows the economy certainly as well as a high speed rail system.

rightwingprof said...

Trains are not comparable to planes or automobiles (unless Obama starts a program to buy people cars at taxpayer expense). Trains are comparable to all the other failed public transportation systems: city buses, subways, and trains, most notably, Amtrak.

Fortunately, Mitch Daniels killed this fiscal insanity in Indiana.

Build all the public transportation you like, provided, and only provided, that only those who use and directly benefit from it pay for it, and that includes the salaries paid to police officers to patrol the crime-magnet all such projects become.