Energy and Environment

November 24, 2020 2:05PM

Amtrak Continues to Lie

Amtrak is maintaining the twin fictions that subsidies from state taxpayers are “passenger revenues” and that depreciation isn’t a real cost even though its accountants list it as an operating cost on its consolidated financial statements. Based on these fictions, Amtrak claimed that it was “on track to break even financially for the first time in its history” in 2020.

The pandemic derailed that fantasy, so now Amtrak claims that it lost $801 million in fiscal year 2020 (which for Amtrak ended on September 30). Yet a close look at its unaudited end‐​of‐​year report reveals that the actual operating losses were well over $2 billion.

The end‐​of‐​year report says that Amtrak received $342 million in state operating subsidies, up $110 million from 2019. It counts these as passenger revenues even though most of the passengers on state‐​supported trains would never have ridden those trains if they were asked to pay the full fares.

Counting these subsidies as revenues allowed Amtrak to claim that its net income was minus $801 million. However, it then adds depreciation and a few other costs, bringing the loss to $1.69 billion. Depreciation in 2020 grew to $926 million, up by $50 million from 2019, suggesting that Amtrak’s physical plant is deteriorating faster than ever.

To partly offset depreciation, Amtrak adds amortized state capital subsidies of $133 million to operating revenues. Yet this is just another subsidy, not a revenue. When all state subsidies are deducted from revenues, Amtrak’s total loss in 2020 was $2.17 billion. This doesn’t count actual capital spending, which was $1.9 billion, up from $1.6 billion in 2019. Amtrak therefore cost taxpayers $4.1 billion in 2020.

Ridership and passenger miles were both approximately half of what they were in 2019. The pandemic only affected half of Amtrak’s fiscal year, but ridership during that half was just 4 percent of 2019 levels.

Amtrak continues to pitch for a $2.9 billion bailout for 2021 on top of the $2 billion it normally gets from Congress. By comparison, the airlines have asked for a $28.8 billion bailout for 2021, about ten times as much as Amtrak wants. But the airlines normally carry more than 100 times as much passenger travel as Amtrak.

Neither bailout happened this year due to Republican opposition. There is significant opposition to another airline bailout. We can only hope that opposition will carry over to Amtrak as well.

November 18, 2020 3:28PM

Governor of Vermont, Phil Scott

Vermont voters have created a unique situation in the state. People often associate it with the land of Bernie Sanders. It has higher taxes, larger government, and less freedom. Yet Vermont is headed by a Republican governor who favors restrained budgets, low taxes, and leans moderate or libertarian on social policy.

Phil Scott was just re‐​elected governor of Vermont by an impressive 69 to 28 percent margin, even though the state went for Biden over Trump 66 to 31.

Scott came to the governor’s office after serving as a state senator and Vermont’s lieutenant governor. His fiscal views probably formed during his days as a small business owner before that. He is also an active race car driver

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During his time in office, Scott has battled the state’s Democratic legislature over tax and spending restraint, and he does not hesitate to veto big‐​government bills. For example, the governor vetoed property tax increases to fund schools, proposing instead to cut school bureaucracy as a money saving move. General fund spending rose at an annual average rate of just 2.4 percent between 2017 and 2020, and Scott has focused on trimming fat from state agencies.

Protecting his citizens from unnecessary tax increases in 2018, the governor signed a bill to conform to federal changes in the income tax base while cutting state income tax rates across the board. That same year he signed a bill to legalize recreational marijuana possession, and in 2020, he allowed a bill legalizing pot sales to become law without his signature.

As a fiscal conservative in Vermont, Phil Scott is outnumbered and does not win every battle. In 2020, the legislature vetoed his attempts to defend the economy against the legislature’s proposals for carbon regulations and carbon taxes. But he is used to strong g‐​forces on the race track, and as he battles strong g‐​forces in the state capital, voters seem to have his back.

The majority‐​democrat state legislature has also overridden Scott’s veto of a bill that would create a damaging minimum wage hike in 2020. According to Scott, “Despite S.23’s good intentions, the reality is there are too many unintended consequences and we cannot grow the economy or make Vermont more affordable by arbitrarily forcing wage increases. I believe this legislation would end up hurting the very people it aims to help.”

Scott also vetoed bills that would impose a costly paid‐​leave scheme funded by a new wage tax. In a 2020 veto message, he said, “Vermonters have made it clear they don’t want, nor can they afford, new broad‐​based taxes. We cannot continue to make the state less affordable for working Vermonters and more difficult for employers to employ them—even for well‐​intentioned programs like this one.”

After his impressive reelection this year, it will be interesting to watch this fiscally conservative governor continue to take on his state’s liberal legislature. And as other states like California similarly elect left‐​leaning politicians to federal offices while rejecting their ideas about higher taxes and bigger government at the state level, it appears many electorates once thought of as purely Democrat may actually be libertarian.

November 11, 2020 4:41PM

What We Do Not Know about Climate Change and Why That Matters

The New York Times recently summarized the environmental regulatory legacy of President Trump as well as some more recent maneuvering with respect to future climate change reports. Not surprisingly the articles painted neither a pretty nor subtle picture:

… as Mr. Biden works to enact domestic climate change rules and rejoin the Paris accord, emissions attributable to Mr. Trump’s actions will continue, tipping the planet further into a danger zone that scientists say will be much harder to escape.

“Donald Trump has been to climate regulation as General Sherman was to Atlanta,” said Michael Gerrard, director of the Sabin Center for Climate Change Law at the Columbia Law School, referring to the Union general who razed the city during the Civil War. “Hopefully it won’t take as long to rebuild.”

Who should one turn to for a less heated (pardon the phrase) view of the science and policy decisions we face? The author who has informed my thinking the most about climate change is Robert Pindyck, professor of economics at MIT’s Sloan School of Management. In a recent paper, he explains clearly how little we know, why we know so little, and how that lack of knowledge matters for policy.

He first looks at the science of climate change and projections of the likely effect of carbon emissions on future temperatures. He reviews the 140 studies published since 1970 on climate sensitivity—the increase in the global average temperature that would result from a doubling of atmospheric carbon concentration. The bulk of the studies (115 of the 131) have “best estimates” between 1.5 and 4.5C. That is a wide range, and if we include the outlier 16 studies’ “best estimates,” that range expands to between 0.5 and 8C. The uncertainty in the estimates is increasing slightly over time: the standard deviation in post‐​2010 studies is 1.13 as compared to 1.03 in pre‐​2010 studies.

Why is there such uncertainty? The short answer is feedback loops: changes in the underlying physical processes arising from initial temperature increases created by growing carbon concentration. We do not know if feedback is normally distributed nor do we know its mean and standard deviation. An important article in Science argued uncertainty about climate sensitivity is in the realm of the “unknowable” and that the uncertainty will remain for decades.

What economic damages result from temperature increases? We have some sense of how higher temperatures might affect agriculture. But those estimates are from short‐​term changes in weather, not long‐​term changes in climate. The latter will occur slowly. We will adapt. Even to the extent we don’t, losses of agricultural output in some regions of the world (near the equator) might be offset by increased output in other regions (northern Canada and Russia). And agriculture is only 1%–2% of gross domestic product for industrialized countries and 3%–20% of GDP for developing countries. For the rest of the economy, economic activity is not related to temperature.

For Pindyck, the key for policy is the possibility of a catastrophic loss of GDP in the future. How much should we pay currently for carbon abatement to avoid catastrophe in the future? In Pindyck’s formulation, future generations may deeply regret irreversible environmental damage. But those generations also could find such preservation less valuable than we currently expect, in which case they would regret the irreversible expenditure that we made on preservation. He writes:

Should we hold back on emissions abatement because of the sunk cost, or should we accelerate abatement because of the irreversible environmental damage caused by emissions? And by how much should we hold back or accelerate? Sorry, but I can’t answer these questions. Why not? Because we simply don’t know enough about the climate system and about the impact of varying amounts of climate change.

Ironically, the lack of knowledge that makes “climate insurance” valuable prevents us from determining exactly how large that value is.

November 11, 2020 1:30PM

Biden Appoints Congestion Supporters

Phillip Washington, the transit executive who thinks Los Angeles isn’t congested enough, has been named the leader of Biden’s transition team in charge of the Department of Transportation and Amtrak. Washington is the CEO of Los Angeles Metro, the main transit agency in Los Angeles County.

A year ago, as Los Angeles bus ridership was collapsing due to LA Metro’s insistence on building costly light rail, Washington blamed the loss of bus riders instead on Los Angeles’ famously uncongested freeways. “It’s too easy to drive in this city,” he told the Wall Street Journal. To restore bus ridership, the city has to “make driving harder.”

“Sometimes you have to tell people what’s good for them,” Washington also told the Journal. He will clearly fit right in to Biden’s top‐​down view of how the world should work. Washington’s support for obsolete light‐​rail transit will go hand‐​in‐​hand with Biden’s support for obsolete intercity passenger trains.

In The Best‐​Laid Plans, I showed that American cities are increasingly run by a Congestion Coalition, a collection of special interest groups that benefit from increased traffic congestion. The coalition includes urban planners, transit agencies, environmentalists, builders of high‐​density housing projects, transportation contractors (especially those who build urban monuments that don’t really relieve congestion), and downtown property owners.

Few have been as explicit in stating their goals as Washington, but Biden’s transportation transition team includes several other members of the coalition. Among them are:

October 29, 2020 3:02PM

50th Anniversary of a Mistake

Today is the 50th anniversary of Congressional passage of the Rail Passenger Service Act, which created the National Railroad Passenger Corporation, later known as Amtrak. This law was based on several factual errors, the most important one being a claim that passenger trains could make money if only they were freed from the stodgy railroad executives who supposedly preferred freight over passenger service.

Early Amtrak train to San Francisco from Chicago. It took several years to repaint all of the equipment into Amtrak colors. Photo by Drew Jacksich.

Passenger train ridership had been declining since 1920 and the decline accelerated after World War II. A 1958 report from the Interstate Commerce Commission predicted that intercity passenger trains would disappear by 1970. In response, Congress passed legislation making it easier for the railroads to stop running interstate trains.

In 1968, however, a book came out called To Hell in a Day Coach by Peter Lyon. The book argued that passenger trains were actually profitable but were victims of a long‐​term conspiracy by railroad executives who believed that freight trains were even more profitable and that the passenger trains got in the way of freight‐​train profits.

As transportation economist George Hilton pointed out, the American railroad industry had a huge surplus of capacity in the 1960s, a surplus made even larger by the introduction of new technologies such as centralized traffic control. As such, the railroads would have welcomed passenger trains or any trains that covered their marginal costs in order to help use some of that capacity.

Yet many rail fans continued to believe the claim that passenger trains could make money. One, Anthony Haswell, founded the National Association of Railroad Passengers and persuaded Congress to hold hearings in September 1969, considering eight different alternative ways of rescuing passenger trains.

In his testimony at that hearing, Haswell claimed that passenger trains were more efficient than either flying or driving. “That capability of economical movement of trainloads of people is perhaps the most important reason why we should retain passenger service.”

Haswell also stated that passenger trains deserved federal capital support because airports and highways had been built with federal support. However, he added that operating subsidies “are not a fundamental solution to the economic problems of rail passenger service,” which he believed was inefficient operation by the railroads. “The inherent danger of operating subsidies is that they would pay for such inefficiencies on a continuing basis. Railroads receiving such subsidies would have little or no incentive to reduce expenses or increase revenues on their own initiative.… In short, operating subsidies have the risk of becoming permanent drains on Government revenues without commensurate public benefits,” which is exactly what happened.

Two months after the hearings, the Department of Transportation had synthesized the eight different alternatives into a single proposal for legislation creating “Railpax,” which would take over passenger service no more than 181 days after passage of the bill. The draft bill never received White House approval, but managed to find its way into Congressional hands.

Before going bankrupt, Penn Central was running Metroliners between Washington and New York in less time than any Amtrak train has ever been scheduled to take on that route.

The real catalyst for the passage of the bill was the June 21, 1970 bankruptcy of Penn Central, the largest corporate failure in American history up to that date. Even as it filed for bankruptcy, Penn Central petitioned to cancel many of its passenger trains, and rail industry leaders were quick to blame the bankruptcy on those money‐​losing trains.

While money‐​losing passenger trains were a contributor, the real problem was that the two main railroads making up the Penn Central, the New York Central and Pennsylvania, never should have merged in the first place as they were fundamentally incompatible. PRR was highly centralized; NYC was fairly decentralized. NYC was highly innovative; PRR much more traditional. On top of that, the new company’s top three executives — board chair (from PRR), president (from NYC), and chief financial officer (from a third company) — proved to be unable to work together.

In response to the bankruptcy the Senate proposed to subsidize intercity passenger trains while the House submitted a bill based on the December 1969 DOT proposal that would create a new corporation to take over passenger trains. The House bill passed and was signed by President Nixon.

Railpax was supposed to be a for‐​profit corporation requiring no federal subsidies. Railroads could divest themselves of passenger trains by joining Railpax and making a one‐​time‐​only payment equal to the amount of money they claimed they had lost on passenger service the year before the law passed. In exchange for those payments, the railroads would get stock in the new company, stock which ultimately turned out to be worthless both because the company was worthless and because the stockholders had no voting power over how the company was run.

Most railroads joined Railpax, which changed its name to Amtrak a few weeks before it took over passenger service on May 1, 1971, 181 days after passage of the law. Amtrak immediately shocked Haswell and his supporters by cutting more than half the trains running in the country.

Despite cutting all of those trains, Amtrak quickly burned through the money the railroads paid to buy their way out of the passenger business. Congress then stepped in to provide operating subsidies, leading to the perpetuation of the inefficiencies that Haswell warned about in his 1969 testimony. Congress has also provided capital subsidies for purchasing new railcars, buying the Northeast Corridor and other tracks, and improving those tracks.

Despite these subsidies, average Amtrak fares today are more than twice average airfares. Even if Haswell was right in 1969 that trains were more efficient at moving people, it is no longer true today. In 2018, Amtrak ticket fares averaged 33.1 cents per passenger mile while the airlines collected 13.7 cents per passenger mile. Driving costs about 25 cents a passenger mile, and probably less in intercity travel as autos tend to have higher occupancies for such travel. Amtrak’s high costs are partly due to the extra infrastructure required to run passenger trains but also due to the inefficiencies that come with government subsidies.

Amtrak inefficiencies are perpetuated by subsidies because there are constituencies for those inefficiencies, including unions, rail contractors, and local governments. America has more than 19,500 incorporated cities and Amtrak trains stop in only about 500 of them, but officials in many of those cities are prepared to swear before Congress that their towns vitally depend on Amtrak and so the residents of the other 19,000 cities should subsidize it.

In 2018, the average American traveled 19 miles on Amtrak compared with more than 15,000 miles by automobile, 3,500 miles by plane (including international flights), 400 miles by bus, 100 miles by urban rail transit, 100 miles on foot, and 26 miles by bicycle. Yet Amtrak supposedly deserves $1.5 billion to $2.5 billion a year in federal subsidies plus close to $250 million a year in state subsidies.

This is how government grows out of control: someone fundamentally misunderstands a problem, calls for a new government program to correct that problem, and that government program becomes self‐​perpetuating because those who benefit from the waste are louder than those who pay the cost. Even Haswell admits that Amtrak has become a “legendary boondoggle” and that he is “personally embarrassed” by what he helped create.

By coincidence, the 40th anniversary of the Staggers Act, which deregulated and revitalized the railroads, took place just two weeks ago. Penn Central’s successor, Conrail, earned its first profits a year after the Staggers Act was passed, suggesting that Congress should have passed the Staggers Act, rather than the Railpax law, in 1970. The Staggers Act shows that government can become less obtrusive, but whether government can ever terminate funding for failed programs such as Amtrak has yet to be proven.

October 28, 2020 11:32AM

Infrastructure, Federalism, and Economists

I’ve noticed many economists from Wall Street and elsewhere on cable news shows and other media claiming that more federal infrastructure spending would lift the economy.

The Wall Street Journal reported, “Goldman Sachs economists estimate that the substantial stimulus that would come with a Democratic sweep, along with longer‐​term spending increases on areas such as infrastructure and health care, would provide the economy with a boost.” Meanwhile, Penn‐​Wharton economists assume that added federal infrastructure spending under a Biden administration would be highly productive and boost GDP.

I think these economists are missing something fundamental. The federal government owns very little infrastructure. State and local governments and the private sector own 97 percent of America’s nondefense infrastructure. Just looking at public nondefense infrastructure, state and local governments own 87 percent and the federal government owns 13 percent. State and local governments, for example, own the entire interstate highway system and virtually all the nation’s commercial airports.

If additional spending on these public assets was high value, wouldn’t state and local governments increase spending themselves? If the benefits of expanding highways, airports, and urban transit systems outweighed the costs, wouldn’t the owners of these assets be in the best position to spot the opportunities and act on them?

Economists and pundits who claim federal action is needed seem to assume that federal policymakers have superior knowledge or better foresight than state and local officials and infrastructure managers. They seem to assume that the D.C. legislative process produces more efficient outcomes than state and local processes in allocating investment dollars and balancing the benefits of spending with the costs.

Perhaps the view is that the states can’t raise enough money for needed infrastructure. But that is not correct. The states have huge fiscal power to fund high‐​value projects by taxing, borrowing, or reprioritizing existing spending. If a $1 billion highway project in Texas was expected to generate $1.5 billion in benefits, then Texas highway planners would be the ones to recognize it and the Texas legislature could fund it or attract private financing to build it.

The Penn‐​Wharton modelers find that Biden’s plan to spend $1.6 trillion more over a decade on infrastructure would boost GDP substantially. Based on a prior study, they assume, “… more public capital investment raises the productivity of private capital and labor. Based on past experience, our analysis assumes that an additional dollar of public infrastructure generates over 10 cents of output per year, everything else equal. In contrast, we estimate that an additional dollar of private capital generates around six cents of output per year.”

Thus, spending another $1 billion on a government high‐​speed rail line in California will add more to the economy than, say, Intel Corporation building a $1 billion chip plant in the state. That seems unlikely. But if it were true, then the government of California or entrepreneurs in the state would be in the best place to recognize it and fund such high‐​value opportunities.

For every type of infrastructure, there is an optimal amount of spending. If governments spend too much, the marginal benefits will be less than the marginal costs, which would undermine the economy. Infrastructure advocates and economists such as the Penn‐​Wharton modelers seem to assume that we are always below the optimum, that more spending is always better. Supposedly, state and local governments across the nation routinely fail to fund marginal investments that have positive net benefits, and the federal government can swoop in and efficiently fill the void.

Trump and Biden want the federal government to spend hundreds of billions, or trillions, more dollars on infrastructure, and many economists in the media cheerlead for it. Economic models assume it will be greatly beneficial. But at the margin, why would it be?

State governments show little hesitation to increase funding of their infrastructure when they see opportunities. Just since 2013, 31 states have raised their gas taxes to fund transportation. Even if there were gaps in state funding, experience shows that federal aid would not fill them efficiently because of red tape, high costs, and pork barrel problems. This study describes why federal spending on state activities is less efficient that state spending on state activities. Greater federal intervention would undermine the efficiency of America’s infrastructure investment, not improve it.

Whichever candidate wins the presidential election is likely to push for higher federal infrastructure spending next year. I’d like to see reporters ask federal policymakers why they think state and local governments can’t fund their own assets. And I’d like to see economists re‐​think their assumption that Washington is better able to determine optimal infrastructure investment than officials in hundreds of state and city governments that own and manage the assets.

For more on America’s infrastructure, see here. To understand why the federal government fails at much of what it does, see here. To appreciate the disadvantages of federal aid for state activities such as infrastructure, see here. For studies on transportation infrastructure, see here.

October 13, 2020 4:20PM

Joe Biden’s Tired Old Infrastructure Plan

The infrastructure plan recently released by the Biden campaign is a collection of tired ideas that have consistently failed in the past. Too much of the plan is based on last year’s groupthink and not enough of the plan recognizes the new realities that have emerged from the pandemic.

A large part of the plan is based on getting people out of their cars and onto transit and bicycles. American cities have been trying to do this for the last fifty years, spending $1.5 trillion subsidizing transit, and it hasn’t worked anywhere. The plan calls for connecting low‐​income workers to jobs by building more transit, yet people can reach far more jobs by automobile than by transit while auto ownership, not transit subsidies, are the key to getting people out of poverty.

The plan is based on assumptions about transportation dollar and environmental costs that are fundamentally wrong. Transit, the plan says, saves money while cars impose a burden on low‐​income people and produce too many greenhouse gas emissions. In fact, when subsidies are included, American transit systems spend five times as much moving a passenger one mile than the average automobile. Ignoring subsidies, average transit fares are still more than the average cost of driving per passenger mile. Transit also uses more energy and emits more greenhouse gases per passenger mile.

The only token acknowledgement of the changes brought about by the pandemic is the use of the word “resilient” in the plan. But the planners seem to think that transit is resilient as it proposes “expanded public transit systems, giving more Americans an affordable, efficient way to get around without their cars.” In fact, as Hurricane Katrina, the Camp Fire, and other natural disasters have shown, highways and private motor vehicles are far more resilient than mass transit.

Just look at the current pandemic: transit agencies are in financial crises, but the highways are there when we need them, 24/7. As of August, transit ridership was still down by 65 percent, while driving was down only 12 percent. None of this is taken into account by the anti‐​auto parts of the plan.

The plan calls for electrifying cars and trains in order to reduce greenhouse gas emissions. It fails to note that most of the electricity in the country comes from burning fossil fuels so electrification doesn’t reduce greenhouse gases.

Of course, planners want to shift to renewable energy, which will cost trillions of dollars. Adding the transportation system to the electrical grid will massively increase the burden and cost of doing so. California is already suffering rolling blackouts due to its emphasis on renewable but unreliable energy; just think how bad it would be if the demand for electricity were doubled.

The plan mentions self‐​driving cars, but suggests that the government needs to spend billions on “smart cities” to make those cars work. Yet the government can’t even coordinate traffic signals in most cities; how is it going to operate and maintain so‐​called smart infrastructure? Biden apparently never got the memo that virtually all of the companies developing autonomous vehicles are designing those vehicles to rely on existing infrastructure and not to need any smart improvements in that infrastructure.

Finally, it is worth noting that the very first item in the plan is to “create good, union jobs.” Unions are among the biggest backers of the Biden campaign and this emphasis shows that Biden is just catering to his constituency. While that’s not a surprise, many of the problems with crumbling infrastructure emphasized in the plan can be traced to the high cost of union labor and union rules that makes it difficult to keep infrastructure in a state of good repair.

In the end, the Biden plan shows that government can be counted on to pick losers, not winners, and to prefer obsolete technologies and solutions that fail to recognize the changes society has made in recent months and years. Implementing this plan will waste trillions of dollars on infrastructure we don’t need and that we won’t be able to afford to maintain. This will cripple our cities and reduce the productivity of our economy.