Tag Archives: China

High-speed rail: is this year different?

Many U.S. cities are racing to develop high speed rail systems that shorten commute times and develop the economy for residents. These trains are able to reach speeds over 124 mph, sometimes even as high as 374 mph as in the case of Japan’s record-breaking trains. Despite this potential, American cities haven’t quite had the success of other countries. In 2009, the Obama administration awarded almost a billion dollars of stimulus money to Wisconsin to build a high-speed rail line connection between Milwaukee and Madison, and possibly to the Twin Cities, but that project was derailed. Now, the Trump administration has plans to support a high-speed rail project in Texas. Given so many failed attempts in the U.S., it’s fair to ask if this time is different. And if it is, will high-speed rail bring the benefits that proponents claim it to have?

The argument for building high-speed rail lines usually entails promises of faster trips, better connections between major cities, and economic growth as a result. It almost seems like a no-brainer – why would any city not want to pursue something like this? The answer, like with most public policy questions, depends on the costs, and whether the benefits actually realize.

In a forthcoming paper for the Mercatus Center, transportation scholar Kenneth Button explores these questions by studying the high-speed rail experiences of Spain, Japan, and China; the countries with the three largest systems (measured by network length). Although there are benefits to these rail systems, Button cautions against focusing too narrowly on them as models, primarily because what works in one area can’t necessarily be easily replicated in another.

Most major systems in other countries have been the result of large public investment and built with each area’s unique geography and political environment kept in mind. Taking their approaches and trying to apply them to American cities not only ignores how these factors can differ, but also how much costs can differ. For example, the average infrastructure unit price of high-speed rail in Europe is between $17 and $24 million per mile and the estimated cost for proposals in California is conservatively estimated at $35 million per mile.

The cost side of the equation is often overlooked, and more attention is given to the benefit side. Button explains that the main potential benefit – generating economic growth – doesn’t always live up to expectations. The realized growth effects are usually minimal, and sometimes even negative. Despite this, proponents of high-speed rail oversell them. The process of thinking through high-speed rail as a sound public investment is often short-lived.

The goal is to generate new economic activity, not merely replace or divert it from elsewhere. In Japan, for example, only six percent of the traffic on the Sanyo Shinkansen line was newly generated, while 55 percent came from other rail lines, 23 percent from air, and 16 percent from inter-city bus. In China, after the Nanguang and Guiguang lines began operating in 2014, a World Bank survey found that many of the passengers would have made the journey along these commutes through some other form of transportation if the high-speed rail option wasn’t there. The passengers who chose this new transport method surely benefited from shorter travel times, but this should not be confused with net growth across the economy.

Even if diverted away from other transport modes, the amount of high-speed rail traffic Japan and China have generated is commendable. Spain’s system, however, has not been as successful. Its network has only generated about 5 percent of Japan’s passenger volume. A line between Perpignan, France and Figueres, Spain that began services in 2009 severely fell short of projected traffic. Originally, it was expected to run 19,000 trains per year, but has only reached 800 trains by 2015.

There is also evidence that high speed rail systems poorly re-distribute activity geographically. This is especially concerning given the fact that projects are often sold on a promise of promoting regional equity and reducing congestion in over-heating areas. You can plan a track between well-developed and less-developed regions, but this does not guarantee that growth for both will follow. The Shinkansen system delivers much of Japan’s workforce to Tokyo, for example, but does not spread much employment away from the capital. In fact, faster growth happened where it was already expected, even before the high-speed rail was planned or built. Additionally, the Tokyo-Osaka Shinkansan line in particular has strengthened the relative economic position of Tokyo and Osaka while weakening those of cities not served.

Passenger volume and line access are not – and should not be – the only metrics of success. Academics have exhibited a fair amount of skepticism regarding high-speed rail’s ability to meet other objectives. When it comes to investment value, many cases have resulted in much lower returns than expected. A recent, extreme example of this is California’s bullet train that is 50 percent over its planned budget; not to mention being seven years behind in its building schedule.

The project in California has been deemed a lost cause by many, but other projects have gained more momentum in the past year. North American High Speed Rail Group has proposed a rail line between Rochester and the Twin Cities, and if it gets approval from city officials, it plans to finance entirely with private money. The main drawback of the project is that it would require the use of eminent domain to take the property of existing businesses that are in the way of the planned line path. Private companies trying to use eminent domain to get past a roadblock like this often do so claiming that it is for the “public benefit.” Given that many residents have resisted the North American High Speed Rail Group’s plans, trying to force the use of eminent domain would likely only destroy value; reallocating property from a higher-value to a lower-value use.

Past Mercatus research has found that using eminent domain powers for redevelopment purposes – i.e. by taking from one private company and giving to another – can cause the tax base to shrink as a result of decreases in private investment. Or in other words, when entrepreneurs see that the projects that they invest in could easily be taken if another business owner makes the case to city officials, it would in turn discourage future investors from moving into the same area. This ironically discourages development and the government’s revenues suffer as a result.

Florida’s Brightline might have found a way around this. Instead of trying to take the property of other businesses and homes in its way, the company has raised money to re-purpose existing tracks already between Miami and West Palm Beach. If implemented successfully, this will be the first privately run and operated rail service launched in the U.S. in over 100 years. And it doesn’t require using eminent domain or the use of taxpayer dollars to jump-start that, like any investment, has risk of being a failure; factors that reduce the cost side of the equation from the public’s perspective.

Which brings us back to the Houston-to-Dallas line that Trump appears to be getting behind. How does that plan stack up to these other projects? For one, it would require eminent domain to take from rural landowners in order to build a line that would primarily benefit city residents. Federal intervention would require picking a winner and loser at the offset. Additionally, there is no guarantee that building of the line would bring about the economic development that many proponents promise. Button’s new paper suggests that it’s fair to be skeptical.

I’m not making the argument that high-speed rail in America should be abandoned altogether. Progress in Florida demonstrates that maybe in the right conditions and with the right timing, it could be cost-effective. The authors of a 2013 study echo this by writing:

“In the end, HSR’s effect on economic and urban development can be characterized as analogous to a fertilizer’s effect on crop growth: it is one ingredient that could stimulate economic growth, but other ingredients must be present.”

For cities that can’t seem to mix up the right ingredients, they can look to other options for reaching the same goals. In fact, a review of the economic literature finds that investing in road infrastructure is a much better investment than other transportation methods like airports, railways, or ports. Or like I’ve discussed previously, being more welcoming to new technologies like driver-less cars has the potential to both reduce congestion and generate significant economic gains.

The barriers to brewing

Recently, Evan Feinberg of Generation Opportunity described some of the barriers craft brewers face. In one instance, a brewer — who does not prepare any food — was told he had to install a hood for a food oven that he did not even own. Another brewer — who does not use poultry in his beer — was nearly kept from operating because he did not have the equipment to handle raw chicken.

tasty beerThat’s Chris Koopman and me, writing at U.S. News and World Report. We have a new report on the regulatory barriers to craft brewing in Virginia. Here is an excerpt:

In aggregate, the number of regulatory procedures that we identify (12), the wait times to complete many of these procedures (in excess of 100 days), and the associated costs (e.g., $2,150 for a single license) represent formidable barriers to entry. All of these barriers are in addition to the standard regulatory hurdles that all small businesses must surmount (zoning ordinances, incorporations rules, and tax compliance costs). This means that starting a microbrewery in the state of Virginia requires as many procedures as starting a small business in China or Venezuela, countries notorious for their excessive barriers to entry.

I was astounded to learn that, among other reasons, the state may deny a license if regulators feel that the brewer is “physically unable to carry on the business,” is unable to “speak, understand, read and write the English language in a reasonably satisfactory manner” or if they feel that there are already too many brewers in a particular locality. You can read our new report here.

One Man’s Privilege is Another’s Punishment

When governments bestow privileges on particular firms, they also impose costs on others. A recent CNN report brings this to light (HT, Rob Raffety).

It tells the story of Bill Keith, an entrepreneur who started a small business out of his garage. He installs solar-powered attic fans that pump away hot air and lower cooling bills. The Obama campaign heard about him and sent someone out to meet (vet) him. Soon the campaign, and then the Administration, was featuring Mr. Keith in speeches and other materials. His story was perfect politics: small businessman meets green energy meets financial success.

Mr. Keith’s business soared, peaking at $5 million in revenue in 2009. But more recently he’s run into trouble:

Today, Keith’s solar star appears to be on a collision course with another Obama policy that may put him out of business. The irony is not lost on Keith: A man whose profile and company soared because of the administration’s energy policy [MM: it isn’t clear from the story what policy he actually benefited from, other than the loads of free advertising] is now falling apart because of a new Obama anti-dumping policy involving China.

While 95 percent of Keith’s fans are American-made, he has yet to find a U.S. company that can make the small customized solar panels that make his fans run.

So he has had to turn to—gasp—Chinese suppliers. And that has made him a target of the Administration’s so-called “anti-dumping” policy. Unless he can prove that the panels he buys are not Chinese-made, he faces tariffs as high as 250% (!). This is an effective rate of $270,000.

In response to CNN inquiries a White House spokesperson responded:

[T]hat the tariff “highlights the degree to which solar panel manufacturers have faced unfair competition from countries like China” and the president’s move to impose a tax on Chinese-made goods is a way to establish “a level playing field with China for American businesses and workers.”

There is a reason that economists are nearly unanimous in supporting free trade. Though tariffs such as those on imported solar panels are a privilege for domestic panel manufacturers, they are a burden for domestic consumers such as Mr. Keith. To make matters worse, economic theory and evidence long ago established the point that the costs borne by consumers outweigh the benefits bestowed on producers.

In this case, there is another cost: debasement of the English language. Notice the words used by the spokesperson. In order to establish a “level playing field” we need to tilt the playing field in favor of domestic producers at the expense of foreign producers and domestic consumers. So an uneven playing field is an even playing? Newspeak, much?

Undermining Competition is No Way to Compete

Money is tight for state and local governments, and that’s never more obvious than when lawmakers work to finalize budgets before the new fiscal year starts on July 1. A common priority for lawmakers, particularly in the revenue department, is to bring new business to the state. That’s why various state economic development websites claim to offer would-be-entrepreneurs the perfect set of enticements to start or expand one’s businesses.

Even on the national stage, President Obama frequently cites the need to compete with India and China in calling for more spending (or, to use his preferred phrase, “more investment”). Unfortunately, politicians often believe that the way to out-compete other governments is to undermine genuine competition at home by offering some firms and industries an uncompetitive edge.

This week, for example, the D.C. Council unanimously voted to give the daily deal company, LivingSocial, a $32,500,000 get-out-of-tax free card. Two years ago, the state of Illinois offered LivingSocial rival, Groupon, a similar though less-lucrative deal: $3,500,000 in state funds to hire 250 employees. In some industries, these types of special deals are business as usual. Film production companies, for example, can get special tax treatment in 40 out of 50 states. In Virginia, film production companies pay no sales tax on production-related products and are allowed refundable individual and corporate income tax credits. Needless to say, Virginia companies in other lines of work aren’t so lucky.

Interestingly, these types of deals are as likely to be opposed by progressives as they are to be opposed by market-oriented economists. In 2010, the left-leaning Center on Budget and Policy Priorities released a report that was critical of film subsidies. The author argued:

Like a Hollywood fantasy, claims that tax subsidies for film and TV productions — which nearly every state has adopted in recent years — are cost-effective tools of job and income creation are more fiction than fact. In the harsh light of reality, film subsidies offer little bang for the buck.

I couldn’t agree more. Back in March, I also found myself largely agreeing with the left-of-center D.C. Fiscal Policy Institute’s Ed Lazere, as we both lambasted government business incentives on the Kojo Nnamdi Show.

Though special deals for particular firms or industries are often sold in the name of competition, they are exceedingly anti-competitive. When one firm or one industry obtains a privilege from government, it obtains a measure of monopoly power. While the profits of the firm go up, so do the prices that consumers pay. And while it is harder to quantify, would-be competitors who aren’t so lucky to have government’s favor also lose. But that’s not all. Privileged firms tend to offer lower-quality products and they tend to be less-attentive to cost-cutting. Then there is the social waste associated with obtaining privileges: each year, firms expend millions of dollars on lobbying and other political activity in an attempt to obtain privilege. At the societal level, privileges undermine long-run growth and may even lead to short-term macroeconomic instability. Government-granted privileges are often dispensed on the basis of personal connection rather than merit. This, in turn, can undermine the legitimacy of both the public and the private sector. In a new paper, out soon, I document these and other problems with government-granted privilege.

There is nothing wrong with a government and its leaders attempting to compete with other governments. But the best way to compete is to offer a sound, economically free, environment in which any firm that creates value for its customers is free to prosper. It is a good indication that a government has failed to create such an environment if it feels the need to suspend or otherwise alter the rules of the game for certain favored firms and industries.

Maybe We Need a Super Democrat?

The Super Committee has failed. What now?

As I have said before, it is very difficult to look at the long-run fiscal projections and conclude that the impending debt crisis is anything but a major spending problem. According to the CBO, when my daughter graduates from college, federal revenue will be right at its historical average of 18.4 percent of GDP. At the same time, federal spending will consume more than 35 percent of GDP—more than 15 percentage points above the 20 percent average that has prevailed my entire life.

So the long-run explosion in spending—which is driven almost entirely by entitlements and interest payments—must be arrested. How?

In my view, it takes a Democrat.

Only Nixon could go to China. Only Carter could deregulate. Only Reagan could sign the first arms reduction treaties. Only Clinton could sign welfare reform. Lasting and meaningful reforms often require politicians to cross the ideological divide. Given the partisan divide right now, it is very difficult for me to imagine that any Republican president would be successful in reducing entitlement spending. But a Democrat could do it.

And one piece of evidence for this is a 2004 paper in the Journal of Public Economics by the economist José Tavares. He writes:

In a panel of large fiscal adjustments in OECD countries during the last 40 years, we find evidence that left-wing and right-wing cabinets are partisan: the left tends to reduce the deficit by raising tax revenues while the right relies mostly on spending cuts. Our testable hypothesis is that cabinets can signal commitment by undertaking fiscal adjustments in ways that are not favored by their constituencies. In other words, the left gains credibility when it cuts spending while the right becomes more credible when it increases tax revenues. Probit estimates of the determinants of persistence in fiscal adjustments confirm that spending cuts by the left and tax increases by the right are associated with persistent adjustments.

So if it is spending cuts that we need, then these cuts are likely to be more sustainable (“persistent”) if they are executed by a left-leaning government.

Unfortunately, I don’t see much evidence that President Obama is keen to follow this course. His best shot at it came when his own deficit-reduction panel (the Bowles-Simpson Commission) endorsed a mostly-spending-cuts approach. He ignored them.

Are Bikes the Answer to Urban Traffic Congestion?

A South China Morning Post editorial suggests that if more Chinese urbanites used bicycles for their commutes, the severe traffic congestion in China’s cities could be eased. Currently, Guangdong is considering limitations on vehicle use to help reduce crowding on its streets.

Unlike mass transit and road construction that take time and money to construct, bicycles can offer an immediate respite from traffic for individuals. However, expecting government to create incentives for increased bike use may be unrealistic if they clash with car manufacturers and commuters:

Conflicting interests are difficult for any government to deal with. In the mainland’s case, it involves balancing a policy of using vehicle production to boost industrial growth with ensuring that cities are liveable and function properly. The car industry is the catalyst for a plethora of spin-off industries that boost job creation, meet consumer demand and lay the groundwork for export markets. But cities are where factories, offices and workers are located and they need to be efficient and safe.

While bicycle commutes in many cities can be faster than car commutes as observed in Birmingham, England, congested roads that are not well-designed for shared use of bicycles and automobiles often pose dangers to riders.

Vauban, Germany has instituted a unique, local solution to city transportation, creating a community where car parking is very expensive, and only available on the outskirts of town. CBS’s Jim Sciutto, in a Good Morning America segment, suggests that Vauban’s solution is representative of the “city of the future.”

The New York Times reports:

Vauban, home to 5,500 residents within a rectangular square mile, may be the most advanced experiment in low-car suburban life. But its basic precepts are being adopted around the world in attempts to make suburbs more compact and more accessible to public transportation, with less space for parking.

The article states that only 30 percent of Vauban’s residents own cars and suggests that many of them view this lifestyle as an improvement for their health and well-being. It remains to be seen whether this policy will be successfully adopted in other cities, but University of California-Davis Professor Jeff Loux suggests that this city’s policy could successfully be transferred to the United States, but adjusting to increased housing density would be a big change for many Americans.

Whether or not the Vauban policy is adopted by other cities remains to be seen, but it is an example of successful use in policy variation between cities. If increased bicycle were mandated or incentivized in Germany at the national level, it would be extremely costly with benefits accruing only to those who wanted to give up their cars for bicycles. Vauban was completed in 2006 after 20 years of planning, and all of its residents selected to live there with the knowledge of its policy environment; decreased car use was not forced upon any residents.

If any US communities opt to follow a model similar to Vauban’s, they should do it at the local level and follow their example of allowing residents the opportunity to live in car-free communities rather than implementing “the city of the future” from the top down.