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Title: A historical look at subsidizing railroads
Source:
www.csmonitor.com
URL Source: http://www.csmonitor.com/Business/G ... -look-at-subsidizing-railroads
Published: May 17, 2015
Author: Matthew E. Kahn
Post Date: 2015-05-17 11:28:09 by CZ82
Keywords: None
Views: 1723
Comments: 12
A historical look at subsidizing railroads Obama administration will invest a large sum of cash into high speed rails. Historically, how have railroad investments impacted the US economy? By Matthew E. Kahn, April 26, 2011 Jeff Roberson / AP / File Did you short shares of airlines when you read about the Obama Administration's investment in high speed rail? I didn't and it seems clear that Richard White didn't either. In this NY Times OP-ED, he makes a number of interesting points and mentions the work of one of my heroes; Robert Fogel from the University of Chicago. To quote the article; “ "Yet here we are again. The Obama administration proposed a substantial subsidy, $53 billion over six years, to induce investors to take on risk that they are otherwise unwilling to assume. Such subsidies create what the economist Robert Fogel has called “hothouse capitalism”: government assumes much of the risk, while private contractors and financiers take the profit." In the first sentence of his piece, Richard White tells you that he is a liberal who lives in California but he goes on to say that he is happy that the deep subsidies for HSR will be cut off due to federal budget cuts. White argues that the intellectual case for using public $ to subsidize such an infrastructure project is weak; To quote his historical case study: "Proponents of the transcontinental railroads promised all kinds of benefits they did not deliver. They claimed that the railroads were needed to save the Union, but the Union was already saved before the first line was completed. The best Western farmlands would have been settled without the railroads; their impact on other lands was often environmentally disastrous. For three decades California commodities could move more cheaply, and virtually as quickly, by sea. The subsidies the railroads received enriched contractors and financiers, but nearly all the railroads went into receivership, some multiple times; the government rescued others." Environmental accountants can be brought in to quantify how much greenhouse gas emissions and local air pollution will not occur if the train substitutes for driving and plane use. This should be quantified. Such externality reductions (if large enough) would provide a justification for government subsidies. Professor White understands the importance of having budget priorities. During a time of scarcity, we can't "have it all". He writes; “ "Without bond guarantees, private investors, which so far seem more prone to due diligence than the California High-Speed Rail Authority, have yet to put up money. The most astonishing thing is that even as financial problems force California to dismantle its social safety net, eviscerate its educational system, and watch its roads crumble, it has agreed on a plan for high-speed rail that demands substantial local subsidies and certainly will involve further concessions by the state to attract private investment." So, my intuition here is that HSR advocates viewed their projects as "too big to fail" and that they assumed they could rely on the federal government for more cash injections if private financing dried up. But, the Republicans sound pretty credible these days concerning their eagerness to cut off the sugar. What did Professor Fogel write about the railroads? Here is a quick overview and some references. He studied whether railroad investments had a major impact on the development of the U.S economy and he challenged the conventional wisdom that they did. Poster Comment: There are some links in the text you might want to visit.
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#2. To: CZ82 (#0)
Look back farther, to the very CREATION of railroads in America: the Pennsylvania Central and the other early major railroads, like other infrastructure projects such as the Erie Canal, were originally built by the state governments and later privatized. The transcontinental railroads were all paid for, and then some, by the federal government through massive land grants. The American railroad system was built with government money and resources, without which they never would have happen. Now, as with defense contractors today, these government assets were often handed over to private companies and private profiteers (chosen by the government - crony capitalism has always been at the very heart of American-style capitalism), but it is nevertheless true that all of earliest state central railways, and all of the transcontinental routes, and all of the canals, highways, ports and airports - were all built either directly by the government and later privatized, or were build "privately" using government assets and government grants that guaranteed a profit and removed all real risk. The government of the states and of the United States CREATED the American railway system. That we have a massive railroad network AT ALL is because of MASSIVE, continuous government subsidies since the 1830s. The same is true of the ports, and the airports, and the roads, and canals. Private enterprise, using private, at-risk capital, did not build any substantial portion of the American transport network. The roads were all built by government money and subsidies. The railroads were similarly built. The bridges, the airports, the canals, the seaports - ALL OF IT. In a similar way, the defense infrastructure of the United States, while the profits may very well be structured to pass into private hands, is also entirely built at the expense and under the direction of the United States government. To state otherwise, to try to pretend that the railroads were "built by" private capital and "messed up by" the government, is completely false. The federal and state government built the railroads directly by selling bonds and constructing the earliest ones, which were later privatized, or by massive land and cash grants that ensured profitability for decades, handed over to the best connected (Republican) tycoons - socialize the risks and costs, privatize the profits. That's the American way. And always has been. The railroad industry was CREATED BY GOVERNMENT, FROM THE BEGINNING. Parts of it were later privatized. Other parts were created privately but funded by government. Today, sewer companies may be private, but they raise money through government bonding power. The unregulated free market did not build any of the infrastructure of the United States. All of it, all the way back to the Revolution, was primarily built, funded by, maintained by, or had the risk capital and land put in by, the state and federal governments. Railroads exist in this world because governments built them. No major railway was ever built anywhere in the world primarily by private actors. All of them everywhere were funded by government. The US is no different. BECAUSE the government provided the money, land, eminent domain, cheap lending, regulatory power to clear off resisters - even bought a piece of Mexico for a railroad in the Gadsden Purchase, the railroads were built swiftly. BECAUSE it is difficult to really be profitable and maintain a road network, whether asphalt or steel, government ALWAYS has to subsidize railroads. Continental railroads cannot exist purely as private enterprise. The cost of maintenance exceeds the prices that can be charged for the goods and people that travel on them for most of the country, much like the Interstate Highway system or the postal service. And yet the small-level, overall economic activity of the areas served by roads and railroads, in the aggregate, makes them a very good investment EVEN THOUGH they cannot exist without permanent government subsidies. Roads, Railroads and Ports, and schools, and a universal postal service, and health care for the very old who do not work and cannot recover, can never be profitable. They are permanent loss leaders. They always require more expenditure than they can generate a profit, and the prices cannot be raised on the users sufficiently to keep them in operation. So, if you're going to have universal literacy, and long life expectancies, and a vibrant economy, the government must fulfill its natural role of providing permanent subsidies for the building and maintaining of an infrastructure that can never, ever, no matter what you do, itself operate at a profit. The profit from universal education comes from the fact that there's a highly educated population able to do more than farm and operate simple machines. The schools themselves NEVER produce a profit. They's a pure cost, forever, but the OVERALL AGGREGATE economic result of their existence is a lot more money than they cost. Same is true with roads, and railroads. And Medicare and Social Security. To have the biggest, most vibrant economy requires the government to constantly, permanently, spend large sums of money maintaining an expensive infrastructure whose individual pieces cannot themselves ever be profitable. If reduced to a for profit basis, the railroads would be smaller. The government would save a few billion a year. But the overall economy would decline by a trillion a year from all of the other lost activity. The decline in real estate values alone would cost more than the subsidy. And the tax on a trillion dollars is $300 billion, which dwarfs the amount of the government subsidy. As usual, the "hate the government" crowd who think everything should be done only by private industry, have their cant and their religious fanaticism, and as usual, it's economically bone stupid. Ever wonder WHY the countries that have the biggest budgets and most massive government subsidies and social insurance are ALSO the most developed countries? These things go hand in hand. Since Republicans are always spinning out they're "government is evil" nonsense, I suppose I should explain it, because they don't get it. It's because when dollars move through several hands, each transaction adds to the economy. A dollar spent 50 times is 50 dollars. So, take a piece of prairie. There's nothing there. It's inaccessible. And you can buy it really cheap. There are a few counties in America so remote that there is not even any property tax on the land. Nobody lives where the land is $100 an acre, because nobody can get there. There are no roads, no railroads. You'd need a helicopter or a horse. Now, what happens if you put in a road. Well, nobody private will put in the road, because roads cost a few millions per mile. And they cost some tens of thousands per mile to maintain, every year, with road crews and all of that. The entirety of the land through which the road is built is only worth a few hundred thousand dollars before the road is built. And once the road is built, the land value might double, or less, but thousands of acres are STILL worth less than the mile of road, and you had to build a hundred miles of road to get in there. Only over time - decades, and decades, do people move in, or businesses, along that road, in that land, one by one, two by two. There's no water or electric or gas line put in - not until there are enough people to warrant it. Some places might build suddenly - if oil or gas or gold is discovered, or a big company puts a facility there. Most areas will languish. And that road eats up all of the value of most of that land for decades. There's no return on it. Private industries do not invest for the next century. They cannot afford to. But governments are forever, and they DO. The roads and railroads push through, and EVENTUALLY the land is profitable, and built, and worth billions, and the economic activity there dwarfs the cost of the road. But the place would never be developed but for that loss-leading road, that cost millions and millions to build and maintain, without any profit, for decades or maybe a century. Government builds for forever. Businesses do not, and cannot. Government is immortal. Businesses usually don't outlive their founders. If you look at the Dow Jones Index when I was born, of the 30 companies on it then, 18 no longer exist. Bankrupt. Gone. More than half of the very largest companies in the world, the very pinnacles of industry, the titans, did not live as long as an average human lifespan. Government is immortal. And THAT is why government, not private industry, has to build the infrastructure: because government does not die out and stop maintaining it. Because government can build for the development 50 years hence, and by creating the connections, open up the land. Private industry does not have the scope. Also, government can TAX and ENFORCE. Private industry cannot. Universal literacy is probably the ultimate source of 90% of the US economy. If you removed it, and went to natural literacy rates of countries that do not have universal education, the US economy would shrink in a generation from $15 billion to probably 2 or 3 billion. But the public schools NEVER, THEMSELVES turn any profit. They are a pure, high, permanent cost. A cost that is not recouped by anybody. And yet, a cost that CAUSES the whole economy to exist. Yeast causes the bread to rise. Universal literacy causes the economy to rise. Universal literacy is a creation of government alone. It is not profitable to individuals and can never, ever be MADE profitable. Costs too much, and the consumers of the service don't have any money. Same thing with life-end health coverage: costs too much and nobody can pay. So the government pays. And BECAUSE the government pays, permanently, a trillion dollars a year for these things, the economy is fourteen times that size. Republican minds are limited and blinkered. They see only what they understand - which is small business and car dealerships and ma and pa, and maybe an innovative enterprise or two. To build a vast economy requires greater vision, to build permanent, costly infrastructure that ITSELF will always be an expense, but that through the actions it generations in third, forth, fifth, and twenty-seventh parties removed to the expense, results in an aggregate greater overall supply curve. It's not hard to see when one looks at the performance of various countries in the world. But Republicans, in their narrow economics, never see it. Which is why, whenever they actually get power, they strike at the infrastructure and regulation, cause a boom, and then generate a Depression. Because they're dumb as posts on economic matters. The greatest economic President - the one who generated the greatest wealth for America and the world, was FDR, BECAUSE he created Social Security, the TVA, the WPA, Unemployment benefits, and massive government investment in infrastructure, which ultimately transformed America into the modern state that it has become. Eisenhower was a New Deal Republican. HE got it, and continued to practice, with the Interstate Highway System. LBJ's particular contribution was desegregation, opening up a fifth of the population to greater economic opportunity. It's expensive, and will stay expensive. And the alternative - private enterprise ONLY - that's Africa. It's a total failure. Even Detroit and Baltimore, with their terrible problems, generate more net gains for the US economy than the entire economies of many African nations. Because even in Detroit and environs, everybody can read, and there is business, and transport and industry. Things are built, salaries are paid, things are bought, money is generated, and taxed. Infrastructure, physical and social, is the necessary province of government. Without it, we're Africa. It's stupid to call what is necessary by a pejorative word: "socialism". "Socialism" conjures up bad things, and makes people want to strike at it, which is like cutting out the bowels with a knife because bowels generate crap and gas, and crap and gas are ugly and smelly, so let's rid of what makes them! Makes sense! Until you die. Social insurance and infrastructure are not socialism. They are bowels. Messy, stinky, and ultimately very good and necessary things.
So you've finally fallen in love with the Whigs and the Republican railroad barons. LOL It had to happen sooner or later.
The opposite. I don't think the railroads should have ever have been privatized. The government built them, on government land with government money. The government should never have privatized them. They should have remained government property, with all profit going into the Treasury, to keep taxes low. Likewise oil, gas, coal, gold, silver, copper, diamond and all other resource exploration and exploitation on government land. The government should pay civil service prospectors civil service wages to go out and find it, and then exploit it with civil servants, and put that huge profit right into the Treasury. Arctic Preserve Oil? Sure. Establish the Federal Petroleum Co. and go get it. All profits to the people.
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#4. To: Vicomte13 (#2)
#9. To: TooConservative (#4)
So you've finally fallen in love with the Whigs and the Republican railroad barons. LOL
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