Saturday, May 14, 2011

O'Toole: The Great Train Con 2 - Michigan Cooks the Books

Randal O'Toole / / The Michigan

When the Michigan Department of Transportation first applied for federal high-speed rail funds, it justified its application using a 2006 economic analysis that claimed the benefits would be 1.8 times greater than the costs. A close scrutiny of that analysis, however, shows that Michigan cooked the books.

The state wildly exaggerated the benefits while underestimating the costs of high-speed rail.

The report was written by a consulting firm called Transportation Economics and Management Systems, which specializes in analyses of passenger rail projects. From the reports it has written, its staff never met a train they didn't want someone else to subsidize. Rail advocates like to hire consultants like this because they know they will come up with the answer they want - no matter how much the proposed train project will cost.

Exhibit 11.2 of the Midwest report is a chart projecting benefits and costs (in billions):

System revenues: $8.3 billion
Consumer surplus: 8.9
Air congestion relief: 1.6
Highway congestion relief: 2.7
Airline benefits: 0.9
Emissions benefits: 0.6


Capital costs: $6.1 billion
Track maintenance: 0.3
Operating costs : 6.5



True? Let's take a closer look at the ingredients.

The largest benefit is "consumer surplus." This means that some really wealthy people might be willing to pay a lot more to ride the trains than the actual fares. The analysts are counting that willingness to pay as a benefit - even though those people won't actually have to pay it! Note that if they did have to pay it, they wouldn't be able to spend the money on something else, so someone else would lose.

The point is the analysts are saying that they want to use your tax dollars to subsidize tickets for really wealthy people who would be willing to pay more but won't have to - and they count that as a benefit. How generous of them!

While economists debate the importance of consumer surplus, the idea that it can be used to justify subsidies to the wealthy is absurd. This is especially true since poor people will still have to ride a bus because today's rail fares are at least twice bus fares, and high-speed rail fares tend to be even higher.

The calculations of air and highway congestion relief assume that nothing else will be done to relieve that congestion. Yet there are many things that can be done to relieve congestion that would cost a lot less than high-speed rail. In fact, most of those things probably will be done whether high-speed rail is built or not, so the congestion won't even be there to be relieved.

The supposed "airline benefits" are the most laughable part of the analysis. The writers literally say the airlines will be so happy to lose customers to high-speed trains that they would be willing to pay $28.13 per stolen customer. (The to-the-penny precision makes it even more laughable.) Of course, no one has any intention of asking the airlines to pay $900 million to support the trains, but the report still counts this as a benefit.

The calculations of emissions benefits assume that cars in the future will be no cleaner than cars today. In fact, our auto fleet is getting cleaner every year - while pushing diesel locomotives up to 110 mph will produce a lot more pollution. By 2025, the average car on the road will be cleaner than any diesel-powered high-speed train, so the report should really calculate an emissions cost.

On the cost side, $6.1 billion for capital costs is ridiculously low. The Midwest Regional Rail Initiative calls for five 110-mph corridors, three 90-mph corridors, and two 79-mph corridors all of roughly the same length. But Illinois says it needs at least $4.9 billion just to get the Chicago-St. Louis corridor up to 110 mph, and the Michigan corridor needs at least $1.6 billion.

The real cost for all ten corridors will be well over $10 billion.

In estimating track maintenance costs, the analysts appear to have looked ahead only 30 years. But the real rail maintenance costs begin AFTER the system is 30 years old - when the entire system must be rebuilt at nearly the same cost as the original construction. The 35-year-old Washington Metrorail system is falling apart today because no one foresaw or budgeted for this cost. Discounted to the present, the cost is likely to be well over $3.0 billion on top of the $0.3 billion calculated for the first 30 years.

A more realistic assessment would look something like:

System revenues: $8.3 billion
Capital costs: 10.0
Maintenance costs: 3.3
Operating costs: 6.5



In short, for every dollar spent on Midwest high-speed rail, taxpayers and the economy will lose 60 cents. That's a bad deal for Michigan taxpayers.

Randal O’Toole is a senior fellow with the Cato Institute and author of Gridlock: Why We’re Stuck in Traffic and What to Do About It.

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