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Nov112010

Costs and Benefits, Part 5 (Finale)

What this series is meant to do is to pull back the curtain for people who assume that, when we make investments in infrastructure, the government is ultimately getting money back -- through new income tax, sales tax, property tax, etc... -- in an amount that exceeds the cost of the project. There is a common assumption across the population that new infrastructure built in the American model we use today is an "investment" in our future prosperity, an investment that pays real, dollar returns. 

Nothing could be further from the truth.

The reality is that we are spending enormous amounts of money on an American way of living that cannot be financially sustained. At this point in our development, nearly every project we do in the current American model costs us vastly more money than we will ever recoup in added tax revenues. Our economy is stifled and, despite our extraordinary efforts, we can't revive it, largely because we're choking on an infrastructure platform that sucks wealth instead of creates it.

We've used private and public leverage and a variety of perverse incentives to create thousands of local Ponzi schemes, each providing the illusion of growth and prosperity. It is not real, and we as a people inherently know that.

This week we've looked in depth at one project, a railroad overpass in Staples, MN. Staples was awarded a TIGER II grant along with other federal and state support totaling the entire cost of the project, $9.85 million. In their TIGER II application, they detailed the costs and the benefits of the project and concluded that there is a return of 8.7 times the cost of the project. As we've shown, the costs are all real dollar costs but the returns are nominal quality-of-life benefits, largely a couple minutes of saved time, that accrues only to the people of Staples and those that pass through.

As someone who has spent years around this type of analysis, I had actually grown numb to the fraud. This is the way all of these cost/benefit analyses are performed - it was old news to me. It took an hysterical reaction by an insider to my mild critique of this project to help me realize how many advocates have actually convinced themselves, and the public, that the claims of real benefits are true.

Reality is a much different picture. In the case of this project:

Direct Financial Costs - $16,140,000

  • Project cost: $9,850,000
  • 20 years of financing of the Federal contribution: $4,600,000
  • 20 years of financing of the State contribution: $380,000
  • Lost gas tax revenue: $640,000
  • 25 years of maintenance: $670,000

Direct Financial Benefits - $0

  • None

Social Costs 

  • The opportunity costs of spending $16,140,000.

Social Benefits

  • The ability for Staples residents, and some of those driving through Staples, to allocate time currently spent waiting for a train to other activities.
  • The ability for Staples residents, and some of those driving through Staples, to save on the wear and tear of their vehicles through a modest reduction in estimated daily driving distances.
  • Enhanced public safety, primarily through the potential for increased response time.
  • Modest reduction in fossil fuel consumption, which is debatable since similar projects have historically induced increased fossil fuel consumption.

If we are honest with ourselves, the question we are asking here is whether or not the benefit to Staples residents now being able to get to where they are going without interference from the train and to have improved safety access is worth $16 million of Federal and State dollars.

That is much different, and more honest, than asking whether or not a project that has benefits that exceed the project cost by a factor of 8.7 is worth the investment.

This entire series started with us trying to explain to infrastructure advocates, economic developers and those that defend that status quo why their plans are being met with increased skepticism. We are not uniformed and we are not ignorant. The average person may not know all the details we have presented this week, but they also are not stupid. It doesn't take a lot of deep thought to understand that the current approach of spending more and more money on new infrastructure while our existing systems rot is foolish. Now that austerity is being forced upon us, there are fewer and fewer defenders of this approach willing to look the other way hoping their day for a payout will soon come.

There are a lot of issues in this series that we have not touched on, the most obvious one being "JOBS"; the notion that infrastructure spending creates jobs and is thus always good. There is also the contention that new infrastructure creates new growth and that new growth will make up for all of the financial shortcomings with this project. If these topics interest you and you do not want to wait for me to come back to them in the context of this project, you can read some past posts we have done.

We'll get back to these discussions as well as look at the land use impacts, the bad incentives that are inherent to the current system and the way we would reconfigure state and federal programs such as TIGER II so that we were building Strong Towns.

Finally, we'll end this series for now with a line from yesterday's post: 

If readers take one thing from this analysis it should be this: The way we spend money today on infrastructure responds to our preferred lifestyle choices, but provides no financial return.

If you want your town to be strong and resilient, not fragile and dependent, then you need to move towards a Strong Towns approach. This will mean confronting, at the local level, the financial realities of the current American way of growth and development, then plotting a new course where the community's collective spending on infrastructure generates a real return on the investment. 

Other posts in this series:

  • Part 1, Background on cost/benefit analyses
  • Part 2, Review of time savings benefit and distance benefit
  • Part 3, Review of safety, carbon reduction and O&M benefits
  • Part 4, Review of the project cost analysis

 

Join our conversation by leaving a comment or join us for more Strong Towns content on Facebook and Twitter. If you are interested in having the Strong Towns message brought to your community, sign up for a Curbside Chat and we'll make plans to get together in a town near you.

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Reader Comments (1)

I've been challenged here offline to account for some of the "indirect" financial benefits, the idea being that there are these magical returns that will accrue through new jobs, new property tax, new sales tax, etc.... and that these returns are the actual financial benefit from the project.

My response:

If these "indirect" financial benefits are so significant to the success of the project, why are they not included in the standard cost/benefit analysis. The reason is that they are ridiculous.

For example, if we are going to cover the $14.5 million in federal expense through new tax receipts, we would need the Staples project to create 1,900 new jobs. We calculated this based on the average wage in Staples ($30k), splitting the money into annual payments, the percent of the federal budget that comes from income and payroll taxes (81%) and the amount of the federal budget spent on infrastructure (1.5%). There is no remote way that this project will create 190 jobs, let alone ten times that amount.

If Staples is just going to get back the amount of money it needs to cover its own basic maintenance expenses ($75k annually), it needs to have this project result in $36 million in new property tax base. The average house in Staples costs less than $90,000, so what is needed is the equivalent of 400 new homes. This is also not going to happen.

Don't be deluded into thinking that, even though there is no direct benefit, there is all of this magical secondary benefit that is making us all rich. That's a hollow theory not backed up by any facts. And it is not gratuitous of me to point out the obvious: How's that working out so far?

The reality is that a project like this makes sense only if you have a very small, very short window of analysis. For the city of Staples, if they get one new business to be built due to this investment, they will be money ahead IN THE NEAR TERM. They have no money into this, so anything new is more than what they would have now.

This is the Ponzi scheme nature of our growth pattern. We trade small, near-term financial gains for tremendous, long-term financial obligations. After two generations of this pattern, we are now into the long-term of many of these investments. Our economy is choking on an infrastructure approach that sucks wealth, not creates it.

We're being forced to pay the piper for this folly, and it is really painful. Doubling down with approaches like TIGER II is just making it all worse.

November 11, 2010 | Unregistered CommenterCharles Marohn
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