Blaring train horns and diesel smoke can be a real nuisance, particularly when calm prevailed before, so people living in suburbs near rail lines with rapidly increasing traffic are understandably put out. But they won’t get much sympathy from economists. The bulk of economic thought would support the position that the current policy status quo is the best. And this view is rooted in the distant past.
Start with British economist David Ricardo. In the early 1800s, Ricardo analyzed the relationship between income from an asset, like farmland, and the market price of that asset. He found that when higher grain prices increased returns per acre, it didn’t help the tenant farmers common in England at the time because landowners simply raised rents to capture the increased profits. And the market value of the land went up.
As a result, tenant farmers on unproductive land were not much poorer than those on fertile land, because they paid lower rents than their counterparts.
That observation is the root of all finance theory. The value of a stock or bond depends on the flow of income it is expected to produce. The ethanol mandate together with federally subsidized ever-paying-out crop insurance plus strong demand from China have increased per-acre returns for U.S. farmers. But that doesn’t help renters. Instead, landowners like me are enjoying higher rents and higher sale prices.
You can generalize Ricardo’s insight onto the values of personal property, such as a house or car, and to nonmonetary amenities that make the use of these assets more or less satisfying. A new park a couple of blocks from a suburban house will raise its value. A light-rail line down University Avenue increases the value of old warehouses that can be turned into lofts. A halfway house for ex-con sex offenders will lower the value of nearby houses.
So will increased train noise and diesel emissions.
Most Minnesota rail lines have been in place for more than a century. They were there before most of the nearby houses were built. Homeowners knew they were there when they bought their houses. Yes, rail traffic may have been much less, but any rational person knows that train frequencies can rise at any time.
The possibility that trains could become a real nuisance was priced into homes in the vicinity of these lines when the current owners bought them, whether that was in 1958 or 2008. They may not like that the noise has increased, but they should not feel entitled to an economic remedy. Similarly, I shouldn’t complain about bus noise increasing on Como Avenue in the time since I chose to buy a house there 27 years ago. I could have gotten a house on a much quieter street, but it would have cost much more.
Frazzled homeowners might retort that no one anticipated the dramatic increases in rail traffic and hence they did not get cheaper houses. Economist Eugene Fama, who got a Nobel last month, would disagree. Fama argued that markets are efficient in the sense that the current market prices of any asset, whether a house in Shoreview or a share of British Petroleum, reflect all available information about anything that might affect its value. This includes expectations of what might happen in the future.
Those expectations are not always correct.
The chance that BP might have a disastrous well blowout that costs the company billions did not play large in the market valuation of its stock prior to the company’s Deepwater Horizon explosion in April 2010. And people who bought houses a few blocks from Canadian Pacific’s sleepy predecessor rail junction in the 1980s did not expect many more trains. But collective expectations, even when wrong, still are the best estimate of the future and they are reflected in the price of the asset.
The situation seems unfair to some of the homeowners. But Ronald Coase, the 1991 Nobelist who died in September, argued that was irrelevant in terms of economic efficiency. What is important is that the rules of property rights be clearly defined. Exact details of how they are defined don’t matter much.
Here the rules are clear. Railroads have the right to run trains on their tracks. The federal government actually requires trains to frequently blow horns. Local government has little jurisdiction. Homeowners have none.
Those have been the rules for more than a century. Changing them now would foster wasting resources. Noisy trains seem unfair to homeowners, but making railroads pay for the myriad crossing gates that would obviate the need for horn blowing would make a big dent in the profitability of railroads to the detriment of the widows, orphans and college teachers’ retirement plans that own railroad stocks. That would be unfair, too.
The rules are clear that local governments are responsible for providing any crossing gates. Citizens’ requests for action by their elected officials are at the core of our democratic system. So it is fine for homeowners to try to get local municipalities to fund such gates. If a large fraction of the residents in a town are affected, then having all local taxpayers bear the burden is fair and economically efficient.
But if those affected, both in sleep deprivation and in the lower house values on balance sheets, are only a small fraction of all citizens, then there is potential for that small aggrieved group to unite and use their concentrated political power to force more numerous nonaffected taxpayers to finance a remedy.
That is what Mancur Olson, who might have gotten a Nobel if he had not died at age 66, called “the logic of collective action.”
Appropriately, since Olson grew up on a Red River Valley farm, U.S. sugar growers are one of the best examples of a small group with much at stake using political power to wrest money from a much larger group, the members of which have so little at stake that they ignore their pockets being picked.
James Buchanan, the 1986 Nobelist who died in January, explored all aspects of resorting to government to get more wealth. When homeowners lobby state or federal officials to intervene, either to change property rules to their benefit or to fund measures too expensive for local voters, that is classic “rent-seeking” behavior as expounded by Buchanan.
Aggrieved parties can take some heart, however. The deck is less stacked against them in terms of the issue of diesel exhaust. And if the railroads ever want to acquire more land for improvements, such as larger sidings to accommodate long trains of oil and ethanol tank cars, local governments usually have them over a barrel.
The BNSF railroad has been improving its main line from the Midwest to the container ports in the Los Angeles area, and one local government after another has been able to win crossing signals or overpasses in return for zoning adjustments necessary for the railroads to get new land for double track. Coase would not disapprove; those rules have been in effect for a long time, too.