The news that President Barack Obama granted $8 billion in stimulus funds to high-speed rail service gladdened passenger train enthusiasts, especially Midwestern ones, as some of the money would go to an eventual Chicago-Madison, Wis., high-speed line and a smaller amount to planning a Twin Cities-Chicago line.
But others oppose such spending bitterly, especially in a time of unprecedented budget deficits.
There are economic arguments on both sides of this issue.
First of all, there are few cases at any time in the past century or in any other country where inter-city passenger rail service was profitable for private owners. Yes, some heavily traveled routes like New York-Chicago made money historically, but overall, few railroads made money on passenger traffic.
Yes, many European countries and Japan have fine rail service. But nearly all those countries are geographically smaller with higher population densities and older cities ill-suited to cars. Moreover, all these systems are subsidized by government.
On that basis alone, some would contend passenger rail should be allowed to fade away rather than be subsidized. After about 1910, people were not willing to pay enough to make buggy manufacturing profitable either, and we didn’t subsidize buggies any more than we do carrots or plasma TVs. Moreover, whether inter-city or urban, rail is very capital-intensive and hence far more expensive than mundane alternatives such as buses.
The counter-argument is that there is no external benefit to society as a whole from buggies, or from flat-screen TVs for that matter, above or beyond the benefits enjoyed by the purchaser. Rail travel is different, the argument goes. Putting people on trains takes them off congested roads or out of crowded airports that are themselves subsidized. Moreover, trains reduce congestion where it is most socially costly by bringing people directly to city centers.
Furthermore, trains produce less pollution per passenger mile, especially on electrified lines like Amtrak’s Northeast Corridor from Washington to Boston, than autos. Nor do they cause the noise pollution of airplanes. And, some argue, there is a benefit to society in having a ground alternative for those who find air travel difficult for whatever reason.
From an economist’s perspective, the benefits to society — internal and external, private and public — need to exceed all the costs to society, private and public, for the nation as a whole to be better off by a project being built. This hurdle does not apply just to trains but is true for any possible expenditure, public or private.
But the benefit-cost calculations need to go a step further. Not only should societal benefits exceed societal costs, they also should exceed them by a greater margin than do alternative uses of resources, either by government or by private individuals and businesses.
This may seem hard to measure or compare, but interest rates, which reflect the willingness of people and businesses to have money to spend, provide a good first estimate of the benefits the private sector expects from using money.
(Given our ongoing financial fiasco, it is important to note that interest rates don’t always reflect true returns to society. This is particularly true when a central bank artificially pushes down interest rates as it pumps out new money to shore up teetering financial institutions and markets.)
How the benefits of public rail subsidies are distributed among the population is yet another issue for economists. There may be spillover benefits from rail, providing a general justification to most economists for government subsidies. But the subsidy must be calibrated to those who need it most. Overly generous subsidies to routes like Boston-New York or Silicon Valley-San Francisco may benefit options traders or venture capitalists but do little for the inner-city poor or rural widows.
Indeed, subsidized inter-city rail always will transfer some public money to densely urbanized areas from the rest of the country. This includes not only rural areas but also such cities as Boise, Des Moines, Wichita or Albuquerque, where potential traffic probably cannot justify much subsidization of inter-city rail even when spillover benefits are estimated generously.
A final issue is seldom discussed: Even when spillover benefits justify government subsidy, it is not clear the money should come from the federal government. San Diego-Los Angeles-San Francisco and Portland-Seattle are increasingly popular routes. But nearly all the riders come from California or from Oregon and Washington state. Most environmental and congestion-relief benefits are localized. So why should the nation as a whole pony up any money?
As with many other public goods, ones that society may need and that a pure free market will not provide, estimating all the costs and benefits of passenger rail inevitably requires analysts to make subjective judgments about what dollar figure to attach to hard-to-measure costs or benefits. That makes the conclusion easy to challenge politically by one side or the other.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.