Tag Archives: Japan

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.

Fixing municipal finances in Pennsylvania

Last week I was a panelist at the Keystone Conference on Business and Policy. The panel was titled Fixing Municipal Finances and myself and the other panelists explained the current state of municipal finances in Pennsylvania, how the municipalities got into their present situation, and what they can do to turn things around. I think it was a productive discussion. To get a sense of what was discussed my opening remarks are below.

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Pennsylvania is the 6th most populous state in the US – just behind IL and in front of OH – and its population is growing.

PA population

But though Pennsylvania is growing, southern and western states are growing faster. According to the US census, from 2013 to 2014 seven of the ten fastest growing states were west of the Mississippi, and two of the remaining three were in the South (FL and SC). Only Washington D.C. at #5 was in the Northeast quadrant. Every state with the largest numeric increase was also in the west or the south. This is the latest evidence that the US population is shifting westward and southward, which has been a long term trend.

Urbanization is slowing down in the US as well. In 1950 only about 60% of the population lived in an urban area. In 2010 a little over 80% did. The 1 to 4 ratio appears to be close to the equilibrium, which means that city growth can no longer come at the expense of rural areas like it did throughout most of the 20th century.

urban, rural proportion

2012 census projections predict only 0.66% annual population growth for the US until 2043. The birth rate among white Americans is already below the replacement rate. Without immigration and the higher birth rates among recent immigrants the US population would be growing even slower, if not shrinking. This means that Pennsylvania cities that are losing population – Erie, Scranton, Altoona, Harrisburg and others – are going to have to attract residents from other cities in order to achieve any meaningful level of growth.

PA city populations

Fixing municipal finances ultimately means aligning costs with revenue. Thus a city that consistently runs a deficit has two options:

  1. Increase revenue
  2. Decrease costs

Municipalities must be vigilant in monitoring their costs since the revenue side is more difficult to control, much like with firms in the private sector. A city’s revenue base – taxpayers – is mobile. Taxpayers can leave if they feel like they are not getting value for their tax dollars, an issue that is largely endogenous to the city itself, or they can leave if another jurisdiction becomes relatively more attractive, which may be exogenous and out of the city’s control (e.g. air conditioning and the South, state policy, the decline of U.S. manufacturing/the economic growth of China, Japan, India, etc.). The aforementioned low natural population growth in the US precludes cities from increasing their tax base without significant levels of intercity migration.

What are the factors that affect location choice? Economist Ed Glaeser has stated that:

“In a service economy where transport costs are small and natural productive resources nearly irrelevant, weather and government stand as the features which should increasingly determine the location of people.” (Glaeser and Kohlhase (2004) p. 212.)

Pennsylvania’s weather is not the worst in the US, but it I don’t think anyone would argue that it’s the best either. The continued migration of people to the south and west reveal that many Americans like sunnier climates. And since PA municipalities cannot alter their weather, they will have to create an attractive fiscal and business environment in order to induce firms and residents to locate within their borders. Comparatively good government is a necessity for Pennsylvania municipalities that want to increase – or simply stabilize – their tax base. Local governments must also strictly monitor their costs, since mobile residents and firms who perceive that a government is being careless with their money can and will leave for greener – and sunnier – pastures.

Fixing municipal finances in Pennsylvania will involve more than just pension reform. Act 47 was passed by the general assembly in 1987 and created a framework for assisting distressed municipalities. Unfortunately, its effectiveness is questionable. Since 1987, 29 municipalities have been placed under Act 47, but only 10 have recovered and each took an average of 9.3 years to do so. Currently 19 municipalities are designated as distressed under Act 47 and 13 of the 19 are cities. Only one city has recovered in the history of Act 47 – the city of Nanticoke. The average duration of the municipalities currently under Act 47 is 16.5 years. The city of Aliquippa has been an Act 47 city since 1987 and is on its 6th recovery plan.

Act 47 bar graphAct 47 under pie chartAct 47 recovered pie chart

The majority of municipalities that have recovered from Act 47 status have been smaller boroughs (8 of 10). The average population of the recovered communities using the most recent data is 5,569 while the average population of the currently-under communities is 37,106. The population distribution for the under municipalities is skewed due to the presence of Pittsburgh, but even the median of the under cities is nearly double that of the recovered at 9,317 compared to 4,669.

Act 47 avg, med. population

This raises the question of whether Act 47 is an effective tool for dealing with larger municipalities that have comparatively larger problems and perhaps a more difficult time reaching a political/community consensus concerning what to do.

To attract new residents and increase revenue, local governments must give taxpayers/voters/residents a reason for choosing their city over the alternatives available. Economist Richard Wagner argues that governments are a lot like businesses. He states:

“In order to attract investors [residents, voters], politicians develop new programs and revise old programs in a continuing search to meet the competition, just as ordinary businesspeople do in ordinary commercial activity.” (American Federalism – How well does it support liberty? (2014))

Ultimately, local governments in Pennsylvania must provide exceptional long-term value for residents in order to make up for the place-specific amenities they lack. This is easier said than done, but I think it’s necessary to ensure the long-run solvency of Pennsylvania’s municipalities.

Maryland realtors fight to protect their subsidy

Image via Flickr user Images_of_Money

We’ve already explored Governor O’Malley’s proposal for the Maryland budget here and here, but recently, a perhaps unintended consequence of the budget came to light. By limiting the deduction that residents earning over $100,000 can make on their state income taxes, the proposed budget would limit the size of the mortgage interest tax deduction for many taxpayers.

I stand by my earlier argument that reducing deductions for only one group of people is not a step in the direction of fairness, but a reduction in the mortgage interest tax deduction may be a positive side effect of an otherwise bad policy. From a limited-government perspective, the obvious downside of a reduction in the mortgage-interest tax deduction is that this represents a revenue-positive change in Maryland’s tax code in a state that already has one of the highest tax burdens in the country. Overall though, I think reducing this tax expenditure is a positive change because the policy has many negative consequences.

While the causes of the financial crisis were many, by subsidizing investment in homes, the mortgage interest tax deduction played some part in the overvaluation of housing stock. Aside from the poor incentives that this tax expenditure creates in financial markets, it amounts to favoritism of suburbs over cities. In Triumph of the City, Ed Glaeser argues that the deduction leads many people to abandon renting in a city center for homeownership in the suburbs. However the Federal Reserve Bank of Boston provides evidence that the policy is more likely to lead people to buy larger homes than they otherwise would rather than trading renting for buying a home. Richard K. Green and Andrew Reschovsky write:

If one set out to design a policy to encourage homeownership, it would make sense to target the
largest subsidies to the households least likely to be homeowners, while providing little or no subsidy to
households likely to become homeowners even without a subsidy. Data from countries that do not
subsidize homeownership (such as Canada, Australia, and Japan) indicate, not surprisingly, that
homeownership rates rise with household income. This suggests that a policy to encourage
homeownership should give the largest incentives to households with modest incomes and no subsidies
to high-income households.

The MID, however, does exactly the opposite. For low- to middle-income taxpayers, the mortgage
deduction provides little financial incentive to abandon renting for homeownership. For those
purchasing modestly priced houses and facing the lowest marginal tax rate (currently 10 percent) the
benefits of the mortgage deduction are small. In fact, for households with low state income taxes, the
mortgage deduction may be of no value at all, because the mortgage deduction, even when combined
with other itemized deductions, may be smaller than the standard deduction.

For most high-income taxpayers, the tax savings resulting from the MID are a minor influence on
their decision to become homeowners; these households are likely to own a home regardless of the tax
treatment of housing. Rather than encouraging homeownership among high-income households, the
MID provides an incentive to buy a larger house and to take out a bigger mortgage. Economists have
long argued that the result is an inefficient pattern of investment, with too many resources invested in
housing and too few resources placed in more productive investments in factories and machinery (Mills,
1989; Poterba, 1992).

This analysis ignores that those at the margin of being least likely to be homeowners are likely the riskiest loan candidates and those most likely to foreclose, but they do make a strong case for why the MID leads to larger homes. Regardless of whether the deduction primarily increases homeownership or leads to larger houses, it results in a subsidy for suburban sprawl and its negative side effects of traffic congestion and demand for public services across a wider geographic area.

Unsurprisingly, the Maryland Association of Realtors is strongly opposed to a budget that would lead to lower tax expenditures on housing. The current policy directly subsidizes their industry. The Washington Post reports:

The Greater Capital Area Association of Realtors says that mortgage interest and property taxes account for almost 70 percent of total itemized deductions in Maryland, and they argue that the proposal, if passed, would further harm the area’s housing market, which has struggled to recover.

WAMU interviewed a leader among MD realtors on the issue:

Jim Scurvin, past president of the Howard County Realtors Association says it’s just wrong to jeopardize an industry responsible for 49 percent of revenue that goes to state and local government

“When someone buys a house, on the average you employ two people, and you put $60,000 into the economy right then and there,” he says. “Real estate is the lead when it comes to getting the economy moving again. We have the wind in our sails, the last thing we need is someone to knock the wind out.”

Scurvin, however, is acknowledging only the visible impact of the tax expenditure. As Frederic Bastiat artfully explained, all policies have unseen consequences. In this case, the unseen impact is that the mortgage interest tax deduction fuels malinvestment in housing at the expense of other, more productive sectors of the economy. While Governor O’Malley’s budget proposal has many negative features, the potential for reducing the state subsidy to housing could be its silver lining. Unfortunately as Maryland realtors demonstrate, eliminating tax expenditures is a painful and politically difficult process.

Japanese “Rent” Seeking

I met a man last weekend who had built a house in Japan in the 1960s. He and his wife then returned to the US for a few years while he finished graduate school. He told me that he had left the house abandoned for two years and that they had been eager to get back to it.

“Why didn’t you try to rent it?” I asked. “The law was different there,” he said.

“If I had rented it, then it might not be easy to regain possession. Even if I had signed a lease with the tenants for a defined period, I might have had to sue them in order to get them out. And the judge might have looked at my salary and at that of the tenants, and he might have concluded that they needed the house more than I.”

Curious to see if this is still the case, I Googled Japanese landlord law. I found this site which seems to indicate things have changed.  Any readers out there with more context?

In the meantime, the story nicely illustrates a few points:

  1. As first-year law students learn, property rights are best thought of as a “bundle.” One does not simply acquire all the rights to use a piece of property in any way one chooses. Instead, one acquires certain rights to use property under certain circumstances. In this framework, property rights configurations are best considered as a continuum: under some regimes, they are far more comprehensive than under others. In this case, the 1960s Japanese landlord doesn’t seem to enjoy the same level of rights as, say, a U.S. landlord today. On the other hand, I’m sure that he still retains some rights (presumably, squatters could not barge in and take over) and these were, no doubt, more comprehensive than those enjoyed by others elsewhere in the world.
  2. My Googling found that Japanese law had previously been considered quite “pro-tenant.” But that’s a relatively simplistic way to think about it. No doubt, the laws were intended to help the tenants, but there were probably many potential renters who had to either pay higher rents or sleep on their friend’s couches because of it. Moreover, a great deal of property must have gone unused—just like my friend’s house—leading to widespread underutilization of resources throughout the economy.
  3. Lastly, if I understand my friend correctly, it sounds like the judge had some level of discretion. This means that there was further waste as landlords and tenants duked it out in court to determine the use of the property. Notice that this (no pun intended) rent-seeking loss would not be present, if it were clear that property abandoned by the landlord always went to the tenant (no one would rent and no one would waste money on court battles). And those who have studied Tullock will also note that it would just be a transfer if bribing were legal and the judge were completely secure in his job. That is, the rent wouldn’t be dissipated because the litigants would just pay bribes equal to the expected value of winning the case and the value of the bribes would sum to the value of the economic rent.