Tag Archives: eminent domain

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.

Today’s public policies exacerbate our differences

The evidence that land-use regulations harm potential migrants keeps piling up. A recent paper in the Journal of Urban Economics finds that young workers (age 22 – 26) of average ability who enter the labor force in a large city (metropolitan areas with a population > 1.5 million) earn a wage premium equal 22.9% after 5 years.

The author also finds that high-ability workers experience additional wage growth in large cities but not in small cities or rural areas. This leads to high-ability workers sorting themselves into large cities and contributes an additional 3.2% to the urban wage-growth premium.

These findings are consistent with several other papers that have analyzed the urban wage premium. Potential causes of the wage premium are faster human capital accumulation in denser, more populated places due to knowledge spillovers and more efficient labor markets that better match employers and employees.

The high cost of housing in San Francisco, D.C., New York and dozens of other cities is preventing many young people from earning more money and improving their lives. City officials and residents need to strike a better balance between maintaining the “charm” of their neighborhoods and affordability. This means less regulation and more building.

City vs. rural is only one of the many dichotomies pundits have been discussing since the 2016 election. Some of the other versions of “two Americas” are educated vs. non-educated, white collar vs. blue collar, and rich vs. poor. We can debate how much these differences matter, but to the extent that they are an issue for the country our public policies have reinforced the barriers that allow them to persist.

Occupational licensing makes it more difficult for blue-collar manufacturing workers to transition to middle-class service sector jobs. Federal loan subsidies have made four-year colleges artificially cheap to the detriment of people with only a high school education. Restrictive zoning has made it too expensive for many people to move to places with the best labor markets. And once you’re in a city, unless you’re in one of the best neighborhoods your fellow citizens often keep employers and providers of much needed consumer staples like Wal-Mart out, while using eminent domain to build their next playground.

Over time people have sorted themselves into different groups and then erected barriers to keep others out. Communities do it with land-use regulations, occupations do it with licensing and established firms do it with regulatory capture. If we want a more prosperous America that de-emphasizes our differences and provides people of all backgrounds with opportunity we need more “live and let live” and less “my way or the highway”.

With Government Shekels Come Government Shackles

Though privileged firms may not focus on it when they obtain their favors, privilege almost always come with strings attached. And these strings can sometimes be quite debilitating. Call it one of the pathologies of government-granted privilege.

Perhaps the best statement of this comes from the man whose job it was to pull the strings on TARP recipients. In 2009, Kai Ryssdal of Marketplace interviewed Kenneth Feinberg. The Washington compensation guru had just been appointed to oversee compensation practices among the biggest TARP recipients. Here is how he described his powers:

Ryssdal: How much power do you have in your new job?

FEINBERG: Well, the law grants to the secretary who delegates to me the authority to determine compensation packages for 175 senior executives of the seven largest corporate top recipients. The law also permits me, or requires me, to design compensation programs for these recipients, governing overall compensation of every senior official. And finally, the law gives me great discretion in deciding whether I should seek to recoup funds that have already been distributed to executives by top recipients. So it’s a substantial delegation of power to one person.

Another example of shackles following shekels comes from Maryland. That state has doled out over $20 million in tax privileges to a film production company called MRC. MRC films House of Cards, a show about a remarkably corrupt politician named Frank Underwood. The goal of these privileges was to “induce” (others might call it bribe) MRC to film House of Cards in Maryland. One problem (among many) with targeted privileges like this is that there is no guarantee that the induced firm will stay induced; there’s nothing to keep it from coming back for more.

In this case, MRC executives recently sent a letter to Governor Martin O’Malley threatening to “break down our stage, sets and offices and set up in another state” if “sufficient incentives do not become available.” Chagrined, state Delegate William Frick came up with a plan to seize the company’s assets through eminent domain. It is clear that Delegate Frick’s intention was to shackle the company. He told the Washington Post:

I literally thought: What is an appropriate Frank Underwood response to a threat like this?…Eminent domain really struck me as the most dramatic response.

As George Mason University’s Ilya Somin aptly puts it:

But even if the courts would uphold this taking, it is extremely foolish policy. State governments rarely condemn mobile property, for the very good reason that if they try to do so, the owners can simply take it out of the jurisdiction – a lesson Maryland should have learned when it tried to condemn the Baltimore Colts to keep them from leaving back in 1984. Moreover, other businesses are likely to avoid bringing similar property into the state in the first place.

My colleague Chris Koopman notes that there are also a number of practical problems with this proposal. The only real property the state could seize from MRC would be its filming equipment: its cameras, its lights, maybe a set piece or two. And by the U.S. Constitution, it would have to offer MRC “just compensation” for these takings. The company’s real assets—the minds of its writers and the talents of its actors—would, of course, remain intact and free to move elsewhere. So essentially Mr. Frick is offering to buy MRC a bunch of new cameras, leaving the state with a bunch of old cameras which it will use for…well that hasn’t been determined yet.

In this case, it would seem that the shackles are more like bangles.

The Maryland State House adopted Frick’s measure without debate. It now goes to the Senate.

Profiles in Privilege

  1. When powerful politicians give no-bid construction contracts to their friends, you get Olympic bathrooms with two toilets to a stall. Thank god we don’t have those sorts of problems here in the West, right?
  2. Sheldon Adelson, owner of one of the largest (off-line) gambling ventures in the world, is really worried about on-line gambling. And, apparently, he “can sound surprisingly like a Southern Baptist preacher.” Bruce Yandle probably saw this coming.
  3. Remember that time when the D.C. City Council tried to side with the local taxi monopoly to keep out an innovative new competitor that was wildly popular with customers? Remember how Council members backed down after they were inundated with protests from angry constituents? Politicians in Pittsburgh, Chicago, Milwaukee, and Paris (France) don’t.
  4. In an effort to catch up with the private sector, the Obama Administration wants to move more government business from paper to the web. The paper industry is not a fan of this. In Bastiat’s telling, candlestick makers didn’t like competition from the sun either.
  5. Makers of maple syrup want more exacting grading standards for maple syrup. In other news, I would like a law saying that only economists who attended ASU and GMU can call themselves economists.
  6. Soccer star and aspiring (unproductive) entrepreneur David Beckham is trying to get a stadium built. He says “We don’t want public funding…We’ll fund the stadium ourselves. It’s something where we have worked hard to get this stage, to fund it ourselves.” In other reports, however, “Beckham’s group has hired prominent Tallahassee lobbyist Brian Ballard to help seek a state sales-tax subsidy similar to what other professional sports teams across Florida have received for building stadium facilities.”
  7. Elsewhere in privileged Floridian soccer news, the city of Orlando plans to use eminent domain to seize a church in order to tear it down and build a parking lot for Orlando’s new soccer stadium.
  8. WAMU’s Patrick Madden tweets that Mayor Vincent Gray has assured voters they will not be paying for soccer team D.C. United’s stadium….Voters will, however, pick up the cost of the land at $150,000,000 and then rent it back to the team for $1.00 per year. Sounds too crazy to be true? Read the terms here (to be fair, it looks to me like taxpayers will only be paying $140,000,000).
  9. Pat Garofalo writes: “In a move its protagonist, Vice President Frank Underwood, could be proud of, the studio that produces Netflix’s “House of Cards” is all but attempting to extort tax dollars out of the state of Maryland. As the Washington Post reported, Media Rights Capital has threatened to move production of its show about an absurdly corrupt Washington elsewhere if it doesn’t get a new slew of taxpayer money.”
  10. According to this report, FBI agents posed as film executives to bribe a California state senator to expand film tax credits. This sort of film subsidy corruption scandal will likely sound familiar to those in Iowa. And Massachusetts. And Louisiana. Makes you think that P.J. O’Rourke was right: “When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.”

Richmond, Calif., Eminent Domain, and the Problems of Political Privilege

Sign Of The Times - ForeclosureRichmond, California is now moving forward with a proposal to use eminent domain to acquire more than 600 “underwater mortgages” (mortgages with unpaid balances greater their properties’ market value).

Eminent domain has long been used by governments for various public uses, such as highways, roads, and public utilities.  More recently this has been extended to include shopping mallsbusiness parks, and professional sports stadiums. However, while contemplated by other cities, eminent domain has never been used for the purpose of seizing mortgages. Richmond would be the first city to actually carry out such a plan.

On its face, the plan is straightforward. The city has offered to buy these underwater mortgages at discounted rates from the banks and investors currently holding these mortgages. If the offers are rejected, the city will use eminent domain to force the sale of these mortgages to the city. The city will then write down the debt, refinancing the loans for amounts much more in line with current home values.

While the stated objective of this plan is to provide mortgage relief to homeowners hurt by the most recent housing crises, the plan is rife with opportunities for political privilege and favoritism.  Ilya Somin, a law professor at the George Mason University School of Law, has laid out several problems involved with this scheme:

  • Far from benefiting low-income people as intended, the plan will actually harm them. Much of the money to condemn the mortgages and pay litigation expenses will come from taxpayers, including the poor. Most of the poor are renters, not homeowners, so they cannot benefit from this program. But renters do indirectly pay property taxes through the property taxes paid by their landlords, a cost which is built into their rent.
  • The program would also enrich those who took dangerous risks at the expense of the prudent. It isn’t good policy to force more prudent taxpayers to subsidize the behavior of people who took the risk of purchasing high-priced real estate in the midst of a bubble. Doing so will predictably encourage dubious risk-taking in the future.
  • Prudent Richmonders will also lose out from this policy in another way. If lenders believe that the city is likely to condemn mortgages whenever real estate prices fall significantly, they will either be unwilling to lend to future home purchasers in Richmond, or only do so at higher interest rates. That will hurt the local economy and make it more difficult for Richmonders to buy homes.
  • We should also remember that eminent domain that transfers property to private parties is often used to benefit the politically powerful at the expense of the poor and the weak. In Kelo v. City New London (2005), a closely divided Supreme Court ruled that government could take private property and transfer it to influential business interests in order to promote “economic development.” As a result, multiple New London residents lost their homes for a “development” project that still hasn’t built anything on their former property eight years later. Property owners lost their rights and the public has yet to see much benefit. The Richmond policy would create another precedent to help legitimate future Kelos.

You can read Somin’s article here.

It should be noted that there is a legal challenge underway as banks and investors argue that the city’s plan is unconstitutional. However, regardless of the plan’s legality, it is clear that it will do little to support economic development, aid the housing market, or support future investment in the local economy. It seems more about using these mortgages to privilege the few at the expense of the many.