Housing Boom, Bubble and Bust

Posted by PITHOCRATES - April 15th, 2013

Economics 101

Building and Furnishing Houses creates Great Economic Activity

Central to any booming economy are healthy home sales.  For home sales unleash great economic activity.  From the first surveys of a new subdivision.  To the new sewers and water systems.  Gas and telephone.  Cable television and broadband Internet.  Concrete for basements, driveways and sidewalks.  Structural steel (that beam in the basement and steel poles holding up the house).  Rough carpentry.  Electrical work and plumbing.  Drywall, windows and roofing.  Painting, flooring, doors and hardware.  Heating and air conditioning.  Lighting and plumbing fixtures.  Brick, siding and landscaping.  Etc.

All of this takes manufacturing to make these construction products.  All these manufacturers need raw materials.  And raw material extraction needs heavy equipment and energy.  At all of these stages of production are jobs.  Extracting raw materials.  Processing raw materials.  Manufacturing products out of these raw materials.  Building this production equipment.  Interconnecting these stages of production is every form of transportation.  Rail, Great Lake freighter, river barge and truck.  Requiring even more jobs to build locomotives, rolling stock, ships and trucks.  And jobs to operate and maintain them.  And build their infrastructure.  Filling all of these jobs are people.  Earning a paycheck that will let them buy a house one day.

Then even more economic activity follows.  As people buy these homes and furnish them.  Washers and dryers.  Refrigerators, stoves, microwaves, food processors and coffee makers.  Furniture and beds.  Light fixtures and ceiling fans.  Rugs, carpeting and vacuum cleaners.  Telephones, televisions, music systems, modems and computers.  Curtains, drapes, blinds and shades.  Shower curtains, bath mats, towels and clothes hampers.  Mops, buckets, cleaning supplies and waste baskets.  Lawnmowers, fertilizers, hoses and sprinklers.  Snow shovels and snow blowers.  Cribs, highchairs, diapers and baby food.  Etc.  All of these require manufacturers.  And all of these manufacturers require raw materials.  As well as transportation to move material and product between the stages of production.  And to our wholesalers and retailers.  More jobs.  More people earning a paycheck.  Who will one day buy their own home.  And create even more economic activity.

Bill Clinton pressured Lenders to Lower their Requirements and Subprime Lending took Off

This is why governments love housing.  And try to do everything within their power to increase home ownership.  Which is why they changed the path to home ownership.  After World War II when the building of subdivisions took off there was the 3-6-3 savings and loan.  Where savings and loan paid 3% interest on savings accounts.  Loaned money to home buyers at 6%.  And were on the golf course by 3 PM.  And the mortgage was the 30-year conventional mortgage with a 20% down payment.

The conventional mortgage was the mortgage of our parents.  Who had no problem putting off their wants to save money for that 20% down payment.  They prioritized.  And planned for the future.  But the conventional mortgage has an obvious drawback.  It limits home ownership to those who can save up a 20% down payment.  Pushing home ownership further out for some.  Or just taking that option away from a large percentage of the population.  So the government stepped in.  To help those who couldn’t save 20% of the house’s price.

Mortgage Qualification Decreasing Down Payment

As we lowered the down payment amount it allowed lower-income people the opportunity of home ownership.  But it didn’t get them a lot of house.  That is, those who could afford a 20% down payment could buy more house for the same monthly payment than those who couldn’t afford it.  And a house in a better neighborhood.  Which some said was unfair.  Some in government even called it discriminatory.  As Bill Clinton did.  Who pressured lenders to lower their lending requirements to qualify the unqualified.  His Policy Statement on Discrimination in Lending helped to fix that alleged problem.  And kicked off subprime lending in earnest.  Leading to the subprime mortgage crisis.  And the Great Recession.

Conventional Wisdom was to Pay the Most you could Possibly Afford when Buying a House

But lowering the down payment wasn’t enough.  Even eliminating it all together.  The people needed something else to help them into home ownership. And to generate all of that economic activity.  And this was something the government could fix, too.  By printing a lot of money.  So banks had a lot of it to lend.  Thus keeping interest rates artificially low.  And we can see the effect this had on home ownership combined with a zero down payment.  It allowed people to buy more house for the same given monthly payment.  Even more than those buying with the 3-6-3 conventional mortgage.

Mortgage Qualification Decreasing Mortgage Rate

Falling interest rates bring in a lot more people into the housing market.  Which is good for sellers.  And good for the economy.  A lot more people than just those who could afford a 20% down payment can now buy your house.  As people bid against each other to buy your house they bid up your price.  Raising home prices everywhere.  Increasing the demand for new housing.  Which builders responded to.  Creating a housing boom.  As builders flood the market with more houses.  At higher prices.  That new homeowners move into.  And max out their credit cards to furnish.  Creating a lot of debt people are servicing at these artificially low interest rates.  But then the economy begins to overheat.  And other prices begin to rise.  Leaving people with less disposable income.  The housing boom turns into a housing bubble.  House prices are overvalued.  Those artificially low interest rates created a lot of artificial demand.  Bringing people into the market who weren’t planning on buying a house.  But decided to buy only to take advantage of those low interest rates.

Conventional wisdom was to pay the most you could possibly afford when buying a house.  For all houses gained value.  You may struggle in the beginning and have to make some sacrifices.  Say cut out steak night each week.  But in time you will earn more money.  That house payment will become more affordable.  And your house will become more valuable.  Which will let you sell it for more at a later date letting you buy an even bigger house in an even nicer neighborhood.  But when it’s cheap interest rates driving all of this activity there is another problem.  For printing money creates inflation.  And inflation raises prices.  Gasoline is more expensive.  Groceries are more expensive.  As prices rise households have less disposable income.  And have to cut out things like vacations.  And any discretionary spending on things they like but don’t need.  Which destroys a lot of economic activity.  The very thing the government was trying to create more of by printing money.  So there is a limit to the good economic times you create by printing money.  And when the bad consequences of printing money start filtering through the rest of economy the government has no choice but to contract the money supply to limit the economic damage.  And steer the economy into what they call a soft landing.  Which means a recession that isn’t that painful or long.

The Price of Artificially Low Interest Rates is Inflationary Booms, Bubbles and Great Recessions

As interest rates rise home buying falls.  Leaving a lot of newly built homes unsold on the market.  And that housing bubble bursts.  Causing home values to fall back down from the stratosphere.  Leaving a lot of people owing more on their mortgage than their houses are now worth.  What we call being ‘underwater’.  And as interest rates rise so do the APRs on their credit cards.  As well as their monthly payments.  And those people who paid the most they could possible afford for a house with an adjustable rate mortgage saw their mortgage interest rates rise.  As well as their monthly payment.  By a lot.  So much that these people could no longer afford to pay their mortgage payment anymore.  As a half-point increase could raise a mortgage payment by about $50.  A full-point could raise it close to $100.  And so on.

Increasing Monthly Payment dur to Increasing Mortgage Rate

With the fall in economic activity unemployment rises.  So a lot of people who have crushing credit card debt and a house payment they can no longer afford lost their job as well.  Causing a rash of mortgage foreclosures.  And the subprime mortgage crisis.  As well as a great many personal bankruptcies.  Causing the banking system to struggle under the weight of all this bad debt.  Add all of this together and you get the Great Recession.

This is the price of artificially low interest rates.  You get inflationary booms.  And bubbles.  That burst into recessions.  That are often deep and long.  Something that didn’t happen during the days of 3-6-3 mortgage lending.  And the primary reason for that was that the U.S. was still on a quasi gold standard.  Which prevented the government from printing money at will.  The inflationary booms and busts that come with printing money.  And Great Recessions.

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Keynesian Economics and Liberal Democrat Policies increase the Cost of Raising Children

Posted by PITHOCRATES - December 30th, 2012

Week in Review

A generation or two ago people got married to raise a family.  The husband typically earned the money.  And the wife raised the family.  On a single salary.  A time when most children grew up in a two-parent household.  Where boys grew up playing with toy guns.  But never took a real one to school.  Today it’s a lot harder to raise a family on a single income (see Cost of Raising a Child Up to $235K—Before College by Chris Wadsworth, special to USA TODAY, posted 12/24/2012 on CNBC).

According to the latest statistics released by the U.S. Department of Agriculture, parents will spend an average of $235,000 to raise a child born in 2011 to the age of 17. (And that’s not taking into account any savings for college).

Housing, food, clothing, health care, child care, schooling … the list of compulsory expenses goes on and on. Discretionary spending such as family vacations, birthday gifts, music lessons and the like are mostly extra…

The greatest share of these expenses is housing, which is 30 percent of the total. It’s followed closely by child care and education at 18 percent and food at 16 percent…

“Our day care expense for just our older son was over $1,000 a month,” Sutton says. “If we had put our younger son in day care as well, it would have been about $2,200 a month. That was more than our mortgage payment.”

We hear this all of the time.  But we never really hear the why.  Why is it that it takes two incomes to raise a family these days?  Forcing parents to pay so much for day care that they could buy another house with that money.  Why that house expense is so expensive.  And why education and food costs so much.  So let’s look at the why.  And here’s why.  Keynesian economics.  And liberal Democrats.

Liberal Democrats champion Keynesian economics as it sanctions what they want to do most.  Tax, borrow, print and spend.  When Nixon decoupled the dollar from gold the great devaluing of the dollar began.  In 2012 it took $8.21 to buy what $1 would by in 1955.  A $15,000 house in 1955 would cost about $127,000 today.  So that’s part of the reason why housing is so expensive.  The other reason is that Keynesian monetary policy.  Where the Federal Reserve (America’s central bank) kept interest rates artificially low to encourage people to buy houses.  Which they did.  In droves.  Driving up the price of housing.  Creating housing bubbles.  The last one bursting into the subprime mortgage crisis.  Giving us the Great Recession.

But it’s just not the Federal Reserve devaluing the dollar.  Gasoline cost about $0.23/gallon in 1955.  If you adjust that for inflation it would bring it up to $1.89 today.  At the end of summer 2012 the average gasoline price was $3.72/gallon.  Which is a $1.83 premium over the inflation-adjusted price.  A 96.8% increase in price.  What caused this near doubling in price?  Well, the American Left has shut down a lot of oil drilling due to environmental issues.  Raising the cost of crude oil.  Which increased the cost of gasoline refined from that crude oil.  Further, new environmental regulations have increased the cost of refining.  Requiring a plethora of blends depending on the time of year.  Further increasing the price of gasoline.

Higher gasoline prices make everything more expensive wherever gasoline is used.  On the farm.  The transportation from the farm to the food processor.  Transportation from the food processor to the food wholesaler.  Transportation from the food wholesaler to the food retailer.  Transportation from the family home to the grocery store and back.  High gasoline prices raise prices everywhere.  And consume more of the family budget.

Education is the one industry no one every blames those in control of the industry for being greedy.  No one every blames our universities for their high tuition fees.  They blame the taxpayers who don’t approve higher taxes to subsidize the high cost of education.  Which is high due to very generous pay and benefit packages for teachers, professors, administrators and support personnel.  Much more generous than those found in the private sector.  Why do they get away with this when liberal Democrats attack business owners for being greedy?  Because business owners don’t have as their primary mission to produce Democrat voters.

So what is increasing the cost of raising children so much?  Liberal Democrat policies.  They depreciate the currency, inflate the cost of housing (and cause Great Recessions), add huge regulatory costs that increase prices throughout the supply chain and create and protect a privileged class.  Consuming more and more of the family budget.  Making it ever more costly to raise children.

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Static Friction, Kinetic Friction, Wheel, Axle, Roads, Steel Wheels, Steel Track, Coefficient of Friction and Intermodal Transportation

Posted by PITHOCRATES - November 28th, 2012

Technology 101

Friction Pushes Back against us when we try to Push Something

Have you ever done any landscaping?  Buy some decorative rocks to cover the ground around your flowers and shrubs?  If you go to a home improvement store with a garden center you probably bought your decorative rocks by the bag.  And those bags are pretty heavy.  Say you have a pickup truck.  And the good people at the garden center bring out a pallet of stone bags on a pallet jack.  Placing it down next to your truck.  Before loading it in your tuck do this experiment.

Don’t really do this.  Just imagine if you did.  Squat down behind the pallet.  Place your hands on the pallet.  And push with all of your might.  What do you think would happen?  Would you send that pallet sliding across the pavement?  Or would you fall on your face as your feet slipped out from underneath you?  You’d be kissing the pavement.  And possibly giving yourself a good hernia.  Now if they had put that pallet of stone into your pickup truck and you put the truck into neutral and tried pushing that what do you think would happen?  You may still get a hernia but that truck would probably move.

A pallet of stone may be too heavy to push.  But a pickup truck with a pallet of stone in it may not be too heavy to push.  How can that be?  In a word, friction.  It’s that thing that pushes back when we try to push something.  The heavier something is and the more surface area in contact with the ground the more friction there is.  Which is why that pallet is hard to push.  The force of friction is so great that we can’t overcome it.  But something that can be almost 10 times heavier sitting on 4 rubber tires bolted onto a greased axle?  That’s a different story.

The Two Basic Types of Friction are Static Friction and Kinetic Friction

There are two basic types of friction at play here.  Static friction.  Which prevents us from pushing that pallet of stone.  And kinetic friction.  Which we would have experienced with that pallet of stones if we were able to overcome the static friction.  Kinetic friction is what we encounter when sliding something across the ground.  Static friction is greater than kinetic friction.  As it takes more effort to get something moving than keeping something moving.

Now here’s why we are able to push a pickup truck easier than a pallet of stones.  With a pallet there is 48″X40″ of surface area in contact with the ground producing a large amount of static friction to overcome.  Whereas on the pickup truck the only thing that slides are the axles in highly greased bearings.  Which offer very little static friction.  The rubber tires offer some static friction due to the immense weight of the truck pushing down on them, flattening the bottom of the tires somewhat.  Once the resistance of the flattened tires is overcome the rubber tires offer kinetic friction in the direction of travel.  While offering static resistance perpendicular to the direction of travel.  Keeping the truck from sliding away from the direction of travel.  Which works most times on dry and wet pavement.  But not so good on snow and ice.  As snow and ice offer little friction.

The wheel and axle changed the world.  Allowing people to move greater loads.  People could grow wheat and other food crops in distant areas and load them onto carts to transport them to cities.  Which is what the Romans did.  Using their roads for their wheeled transportation.  Which increased the speed and ease they could pull these large loads.  Sections of Roman roads have survived to this day.  And in them you can see centuries old wheel ruts worn into them.

Intermodal Transportation combines the Low Cost of Rail and the Convenience of Trucking

The basic wooden-spoke wheel remained in use for centuries.  From Roman times and earlier.  To 19th century America.  While we were still using the wooden-spoke wheel we began using something else that offered even less friction.  Iron wheels on iron rails.  Allowing great loads to be transported over great distances. The friction of an iron wheel on an iron track was so low that the drive wheels would slip when starting to pull a heavy load.  Or going up any significant grade.  To prevent this slip trains carried sand and deposited it on the track in front of the drive wheels.  To increase the friction of the drive wheels for starting and travelling on inclined grades.   Iron wheels and iron track gave way to steel wheels and steel track.  Allowing trains to pull even greater loads.

There is no more cost-efficient way to move heavy freight over land than by train.  Thanks to exceptionally low coefficients of friction.  And the less friction there is the less fuel they need to pull those heavy loads.  Which is the reason why so many of our roads are pocked with potholes.  Roads are only so strong.  They can only carry so much weight before they break apart.  Which is why the heavier load a truck carries the more axles they must distribute that weight over.  Putting more tires on the pavement.  Increasing the friction to overcome.  Requiring greater fuel consumption.  Which is why a lot of truckers cheat.  And try to get by on fewer axles.  Increasing the weight per axle.  Which hammers potholes into the pavement.

The reason why we use trucks to transport so much freight is that there aren’t railroad tracks everywhere.  But we can still make use of the railroad tracks that are near our shipping points.  By combining rail and truck transportation.  We call it intermodal.  Using more than one means of conveyance.  Putting freight into containers.  Then putting the containers onto truck trailers.  Then driving them to an intermodal yard.  Where they take the containers from the truck trailers and put them onto rail cars.  Where they will travel great distances at low friction.  And low costs.  Then at another intermodal yard they’ll transfer the containers back to truck trailers for a short ride to their final destination.  Getting the best of both worlds.  The low-cost of rail transport thanks to the low friction of steel wheels on steel rail.  And the convenience of truck transportation that can go where the rails don’t.

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LESSONS LEARNED #63: “There is no such thing as a monopoly in free market capitalism.” -Old Pithy

Posted by PITHOCRATES - April 28th, 2011

Even the mighty Coke-Pepsi Duopoly can’t stop People from Drinking Tap Water

Coke and Pepsi have a near monopoly in the cola market.  Or a duopoly.  They dominate.  And they’re bitter enemies.  Few brands are locked in such a bitter struggle that we call it war.  The Cola Wars.  They are archenemies.  Even though they may cooperate by alternating their discounting to limit their losses.  One month Coke may be on sale.  The following month, Pepsi.  They’re big and their powerful and when you ask for a Coke at a restaurant you’ll either get a Coke.  Or they’ll ask you if Pepsi is okay.  Or vice versa.  Because they own the market.

But do they?  There’s always another choice.  At a restaurant, we can order ice tea.  Hot tea.  Coffee.  Orange drink.  Beer.  Wine.  A cocktail.  Or even water.  Ditto at the grocery store.  Walk down an aisle and there’s more to choose than Coke or Pepsi.  RC Cola, for one.  And then there’s the un-cola (7-Up).  VernorsA&W Root BeerSquirtDr. PepperCrushSnapple.  And other name brands that aren’t owned by the Dr. Pepper Snapple Group.  Not to mention all the store brands.  And, of course, tap water.  Which I personally drink with most of my meals.  Even though there’s nothing finer than a Coke or Pepsi to wash down a greasy pizza.

Try as they might Coke and Pepsi can’t limit entry into the beverage market.  The barriers they can erect are minimal.  They can offer a special price to a store or restaurant in exchange for keeping out their hated rival, but they can’t prevent people from asking for tap water.  Or from people simply going elsewhere to get the Coke or Pepsi product they want.  Or the million other options out there.  And if they raise their prices in their ‘duopoly’, people will just seek out those other options.  Yes, they may be able to tell the difference between Coke and Pepsi in blind taste tests.  But if the price isn’t right, they’ll enjoy RC Cola just fine.  Or even the store brand cola.

Go ahead and Tax our Tea.  We’ll just drink Coffee Instead.

You see, to keep out the competition, you need the power of government.  Just ask the sugar importers.  Who would love to sell to the cola companies.  But don’t.  Because government has erected a barrier to that market.  Now, we don’t know what their highly guarded secret recipes are, but we do know that they each use the same sweetener.  High fructose corn syrup (HFCS).  They don’t use sugar.  Why?  Because Big Ag lobbied Congress to slap high tariffs on imported sugar.  Which they have.  Now the price of sugar is so high the cola companies use HFCS instead.  Though that may be changing as of late with a new round of health concerns about HFSC.  But that’s a whole other story.

To limit consumer choice, you need government to step in.  Because only government can write laws to erect market barriers.  For example, the last straw of British oppression before America’s Declaration of Independence was about a British law that erected a market barrier.  British Americans, being of British stock, liked their tea.  But they didn’t like paying the high price of East Indian Company tea.  In the Mercantile economics of the day, everything bought and sold in the British Empire shipped on British ships through British ports.  Indian opium shipped on British ships to China (via Calcutta).  The British than used the proceeds from those sales to purchase tea.  Which they shipped on British ships back to London.  Where they paid a duty on it.  And then on to America.  Where the colonists paid a tax on it.  All these markups made their tea pretty expensive.

Famine and recession caused financial problems for the East India Company.  To help alleviate their problems, British Parliament stepped in.  Said they could ship their tea directly to British North America (without going through London).  And sell it tax-free in the colonies.  Which made all other tea more expensive.  Which did not go over well with the American tea merchants.  Or the colonists in general.  This led to the Boston Tea Party.  American Independence.  And the switch from drinking tea to drinking coffee in America.  Because even when there is only one tea that is legal to drink, there is always another choice.

Rockefeller benefited Consumers.  The ICC did not.

People love Teddy Roosevelt for his trust busting.  Attacking the big robber barons.  To help the little guy.  And one of the big guys the little guys loved to hate was John D. Rockefeller.  Of Standard Oil fame.  Rockefeller was richer than most nations.  And some people just hated that.  He made his wealth by making refined oil products affordable to the consumer.  And he was a great environmentalist.  He saved the whales by replacing whale oil with kerosene.  And his relentless research and development made every bit of refined oil into a useful product.  While his competitors dumped most of their waste back into the environment.  Not Rockefeller.  He hated waste.  He even experimented in finding the least number of welds it would take to hold an oil barrel together.  He invented vertical integration (controlling industries up and down the product pipeline from the collection of raw resources to the sale of a finished product).  He not only made refined oil products cheap.  He made them plentiful.  Which made America the world’s leading economic power.  Successful corporations follow his example today.

Sure, he put a lot of his competitors out of business.  But it wasn’t because he was a monopoly.  It was because he was just that much better.  He produced refined products better and cheaper than his competition.  By the time the trust busters busted up Standard Oil, competition was coming into being on the Standard Oil model.  Which ultimately produced more refined products at lower costs.  He forced the competition to step up to his level which benefited consumers.  While the trust busters tried to bring Rockefeller down to his competitor’s level which benefited his competitors.  Not the consumers.  No, consumers did very well by John D. Rockefeller.  He created and produced at a relentless rate.  He didn’t ask for government help.  Unlike his competitors.  Who complained to the government.  (It is never a consumer that complains about predatory pricing).  Because when you can’t compete legitimately, you petition government for special favors.  Much like some of the railroads did.

Building a railroad is costly.  And takes a lot of friends in government.  At all levels.  Because you have to lay track through federal land, state land, county land as well as through cities.  Of course, everyone wanted that track to go through their land because the railroad was the way to ship goods.  And people.  So the system was ripe for corruption.  And it often was.  Once built some shippers complained about unfair shipping rates compare to what others got.  Rockefeller, for example, was highly criticized for getting better rates by far than any of his competitors.  Of course, he shipped by far more product than any of his competitors.  Which probably had a lot to do with his rates.  But the government saw that things were unfair in the railroad business.  So they stepped in.  And created the Interstate Commerce Commission (ICC).  Which was to right all the wrongs.  Which, of course, it didn’t.  It just made it easier for the big companies to fix things in their favor.  For they now had a single governing body to buy.  Which made it easier to buy political influence.

But none of this made a difference to save the railroads.  They started to die in the Fifties.  Of arrogance.  When people asked the big railroad executives what business they were in, they replied, “The railroad business.”  But they weren’t.  They were in the transportation business.  What’s the difference?  The ‘railroad’ business had only other railroads for competition.  The transportation business had cars, trucks and, eventually, planes, as competition.  So even though those who used the power of government to restrict other railroads from entering their markets, there was still competition.  The interstate highways and the automobile killed passenger rail.  And the trucking industry almost killed the freight railroads.  What saved them was realigning their operations into the transportation business.  Intermodal transportation combined container ships, railroads and trucks into a seamless and cost efficient transportation system.  Roadrailers took that concept to a higher level.  These are truck trailers that can be pulled by a locomotive without the need of a rail flatcar.  Trucks deliver these trailers to a rail yard.  They add a train bogey to the trailer.  Put it on the track.  Couple them together.  And attach them to a single locomotive.  Very little non-revenue weight.  Making it very efficient.  John D. Rockefeller would be impressed.

In a Free Market there is always a Choice

Wherever there is a market there is competition.  For any market where a profit can be made will attract others to that market.  Companies can try to restrict competitors.  But that’s all they can do.  Try.  Because if it’s a free market, it’s open to competition.  There are no barriers that a competitor can’t overcome.  Except one legislated by government.  And competitors can even crack that barrier.

And this is what it takes to make a monopoly.  Government.  Railroads had monopolies for awhile.  But creative business people found a way to crack their government-imposed monopoly.  Truckers came in and shipped at rates lower than the ICC said was fair.  Of course, fair is a relative term.  What’s fair to the railroad is not fair to the shipper.  Or the consumer.  But a trucker shipping at rate that he can cover his expenses and support his family is fair to everyone.  Except the railroad who depended on government instead of innovation for their business profits.

Coke and Pepsi can fight their cola wars but they can’t keep out competition.  There’s always root beer, ginger ale, orange drink, beer, wine, liquor, water, coffee or tea.  And even when government uses their full weight and power to create and maintain a tea monopoly, tea drinkers can simply become coffee drinkers.  For in a free market there is always a choice.  Always.

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The Obama Administration Proposes an Ambitious and Costly High-Speed Rail Plan

Posted by PITHOCRATES - February 9th, 2011

Nowadays Passenger Trains Yield the Right-of-Way to Freight Trains

I remember traveling by train with my family some 20-30 years ago.  My mom loved train travel.  She lived in the golden age of rail.  Has lots of fond memories.  But these are different times.  Even 20-30 years ago.  I remember on that trip we came to a stop on a siding.  Sat there for about a half hour.  Maybe 45 minutes.  I was starting to think there was a problem with the train.  Then a freight rumbled by on the main line.  After it passed, we started moving again.

Now if you understand railroading, you know how significant this is.  Back in the golden age, before planes and the interstate highway system, it would have been the other way around.  Passenger trains got the priority because they made more money.  Back then, freight trains pulled onto sidings.  But today, though heavily subsidized, passenger trains don’t make money.  Freight trains do.  They can pay for themselves.  And make a profit.  Therefore, passenger trains take to the sidings to get out of the way of profitable freight trains.

Freight trains make money because they can move a lot of freight cheaper and faster than other means of transportation.  Passenger trains, on the other hand, are neither the fastest nor the cheapest.  Planes are faster.  Cars are cheaper.  And this is why most passenger rail, including high-speed rail, don’t make money.  Even with huge government subsidies.  Not the same for planes or cars.  One way or another, we pay our own way with these faster and cheaper alternatives.

A Public Works Project that doesn’t End

Despite this, the Obama administration is proposing to spend billions on high-speed rail.  And it’s an ambitious plan (see GOP critic calls Joe Biden’s $53 billion high-speed rail plan ‘insanity’ by Daniel B. Wood posted 2/8/2011 on Yahoo! News).

According to the plan laid out Tuesday by Biden, the first step of the six-year plan would be to invest $8 billion to develop or improve three types of interconnected corridors:

Core express corridors would form the backbone of the national high-speed rail system, with electrified trains traveling on dedicated tracks at speeds of 125 to 250 m.p.h or higher.

Regional corridors would lay the foundation for future high-speed service, with trains traveling between 90 to 125 m.p.h.

Emerging corridors would provide travelers with access to the larger national high-speed network and travel at as much as 90 m.p.h.

During times when oil prices soar, air and truck transportation costs soar.  But not rail transportation.  Why?  Because the massive rail infrastructure costs are greater than their fuel costs.  Unlike with planes and trucks.  Trains have to buy land (or right-of-ways).  Grade the land.  Build tunnels.  Bridges.  Lay track.  Switches.  Install communication systems to control those switches.  And more.  And they have to do this everywhere a train will travel. 

Planes fly between airports.  And trucks drive on roads paid for by fuel taxes.  They don’t have the infrastructure costs railroads do.  So volatile fuel costs impact them far greater than they do the railroads.  So the plan Biden laid out won’t be cheap.  It will be very, very expensive.  And take a long time to build.  It will be a public works project that doesn’t end.

But building high-speed rail is no easy process, says Leslie McCarthy, a high-speed rail expert at Villanova University’s College of Engineering. “Whether or not a bill would or should pass is the easiest part of all this,” she says. “The bigger part of the question is purchasing the land, getting right of ways, zoning issues, environmental impact assessments, laying dedicated tracks in a reasonable amount of time.”

She says the typical US highway project can be held up anywhere from three to five years at the low end to 12 to 20 years at the high end. “Legislators and the public aren’t aware of the number of federal, state, and local laws that agencies have to comply with that can’t be gotten around,” she adds.

The plan will employ a lot of people to build these railroads.  And they will have jobs for a long time.  But it will cost us a fortune in taxes.  Will the investment pay off?  When completed, will these railroads make money? 

In fact, the very thing that makes the Northeast so attractive for high-speed rail – its population density – could also make it the most difficult place to build. “There is so much population in the Northeast corridor that I don’t know if there is even enough room for the dedicated tracks needed for high-speed rail,” says Professor McCarthy. “And if the distances you are going are not sufficient to make efficient use of the high speeds, what’s the point..?”

Critics agree. Only two rail corridors in the world – France’s Paris to Lyon line and Japan’s Tokyo to Osaka line – cover their costs, says Ken Button, director of the Center for Transportation Policy at George Mason University in Fairfax, Va.

“Both of these are the perfect distance for high-speed rail, connect cities over flat terrain with huge populations that have great public transportation to get riders to the railway,” he says, dismissing French claims that other lines make money. He says they calculate costs in ways which ignore capital costs.

Well, with only two high-speed rail lines actually paying for themselves, I guess the answer is ‘no’.  The proposed high-speed rail project will just be a sinkhole for tax money. 

High-Speed Rail:  Huge Expense with Little Benefit

All right.  So the proposed high-speed rail will never pay for itself.  And it will become a permanent sinkhole for our tax dollars.  But it will at least get cars off the road, right?  Reduce our carbon footprint?  Make the earth a greener place?  Or at least take us to our destinations faster?  Probably not (see Obama’s High-Speed Sale by Ernest Istook posted 2/8/2011 on Heritage’s The Foundry).

The “high speed” adjective invokes thoughts of bullet trains speeding at 150 mph, 200 mph or more.  The reality of Obama’s plan is—at best—the 85 mph that is the average speed of America’s fastest train, the Amtrak-run Acela.

When Obama claims his trains would reach 100 mph and more, he’s talking about peak speed reached only for short stretches, not the average.

I’ve actually traveled on Amtrak.  Not the Acela.  But we did reach speeds in excess of 60 miles an hour.  For a short period of time.  In the middle of farm country.  In a metropolitan city, for about 20 minutes or so, we crawled.  The track was so bad that speed limits were reduced.  To prevent further trains from derailing. 

City to city high-speed travel in excess of 150 mph will require new, dedicated track between point A and point B.  Until you have that you’ll never ‘average’ anything close to those high speeds.  And that will require a grand, bold and expensive plan of railroad building.  The question is, knowing that such a railroad will never pay for itself and may never move people faster (unless you build terminals outside of cities where you’ll be able to build these dedicated lines and bus people to and from these terminals), will we at least save the planet?

An exhaustive Department of Energy analysis by Oak Ridge National Laboratory concludes, “intercity auto trips tend to be relatively efficient highway trips with higher-than-average vehicle occupancy rates — on average, they are as energy-efficient as rail intercity trips. Additionally, if passenger rail competes for modal share by moving to high speed service, its energy efficiency should be reduced somewhat12 — making overall energy savings even more problematic.”

The lack of energy or pollution savings leaves us with the key problem:  Huge expense with little benefit.

So we spend a fortune for what?  Surely there must be a better way.

Rail travelers don’t pay their own way as drivers must do.  Obama’s plan would increase the rail subsidies, which already are heavily subsidized with tax money–often by hundreds of dollars a trip for each passenger–whereas the U.S. Department of Transportation reports that drivers receive no subsidy:  Drivers buy the roads through fuel taxes, and also must pay for their own car, gas, insurance and repairs.

Well, there appears to be a better way.  Cars.  And we already have them.  So wouldn’t it be cheaper and more efficient to stick with what we already have and works?

Big Infrastructure brings in Big Federal Money

Yeah, well, that’s not how politics work.  Politicians run for reelection based on how much money they’ve brought home to their districts.  And big infrastructure brings home big federal money (see High Speed Funding in President’s Budget Means More Waste of Taxpayer Dollars by Kathryn Nix posted 2/9/2011 on Heritage’s The Foundry).

Heritage’s Ronald Utt writes that a high-speed rail program would create “perpetual massive government subsidies and larger budget deficits” and “additional burdens imposed on hard-pressed state governments, which will be required to match the perpetual federal subsidies to build the system.”

And bringing home federal money to their districts will be the only benefit of high-speed rail.

Despite its cost, high-speed rail will be ineffective at achieving its goals, if Europe’s experiences are any indicator. High-speed rail is expected to reduce auto and air travel, but in Europe, the trend is actually the opposite: Despite huge government subsidies, travelers are opting more and more to take non-subsidized and less expensive forms of travel.

Per capita spending on rail alone in six European countries was comparable to the United States’ entire transportation budget, yet, says Utt, “these countries received a poor return on their money given that more than 90 percent of passengers in these countries chose other travel modes—mostly auto—despite the subsidies.” Moreover, Utt cites the U.S. Department of Transportation’s Inspector General’s finding that reducing travel time between major East Coast cities by 30 minutes would cost $14 billion but only reduce auto transportation by less than 1 percent.

Can you say boondoggle?

Passenger Rail cannot Subsist without Taxpayer Subsidies

High-speed rail will never pay for itself, it will require perpetual government subsidies, it will not reduce our energy consumption or reduce our carbon footprint.  All it will do is increase deficit spending at the federal and state levels. 

There’s a reason why government subsidizes passenger rail service in the United States.  Because the railroad companies know there is no money in it.  They can make money moving freight.  But not people.  So they move freight.  And let people fly or drive their cars when they want to travel.  Or let the government pay for those passenger trains the way only government can.  With our tax dollars.

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