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Tuesday
Mar042014

Day 2: A World Class Transportation System

The Move MN proposal to expand the transportation slush fund with the least painful, and most indirect, revenue source their coalition can agree on is missing any acknowledgement of why we are so critically short of transportation funding in the first place. That lack of acknowledgement likely stems from a lack of understanding, especially poignant since expansion of the transportation slush fund will only undermine the long term viability of Minnesota’s transportation system.

In short, more slush fund revenue is the problem, not the solution. To understand this, we need to examine the financing of America’s first great transcontinental transportation investment: the railroads.

The construction of America’s system of railroads is a complex and nuanced story full of crimes against Native Americans, the exploitation of Asian labor and the general pillaging of the countryside. I’m not trying to gloss over these aspects (I know someone is going to be upset with me for doing so regardless) but I do want to focus on the financing of this system, which would have been the same whether or not our ancestors had behaved in an enlightened manner.

The government’s initial role in the creation of the railroad system was to expropriate the land from its inhabitants (with little or no compensation) and then give it to the railroads. This government “contribution” to the effort was enormously important and the network of railroads likely could not have been built without it. There was, however, no real financial “cost” to this gift since the government owned much of the land anyway (and again, I’m not endorsing the “might-makes-right” approach that brought about this situation).

A railroad depot. Click for licensing.Once they had the land, private railroad companies then built the railroad lines. They paid the enormous capital costs by issuing bonds – borrowing the money – and then paid back those loans through a value capture mechanism. When the railroad stopped somewhere, that somewhere became a town, and the land in the vicinity of that stop became vastly more valuable. The railroad companies owned, or acquired, the land at each stop before it was built. Thus, by selling that land once the railroad line was constructed, the railroad company captured the increase in value their investment had created.

So in addition to operating the railroads, these private companies were also land developers. Without developing the land and capturing the value their investment created, few railroad lines would have ever been built.

Once the railroad was built and the capital costs recouped through sale of the appreciated land, then the private railroad company could switch to operating the line. They charged fares to move freight and people along the railroads they had built. While some borrowing costs were retired through the fare box, most of the money collected went to covering operations, maintenance and profit.

It should be pointed out here how great an investment the railroad now was. So long as the company didn’t overload the trains, the nearly frictionless tracks would stay in place indefinitely, requiring only a modest amount of maintenance. There are stories of tracks lasting over a hundred years, with replacement only coming when the company wanted to increase the weight the line could serve. That means that maintenance costs could be spread out over a very long period of time.

This system sounds great, but it didn’t always work perfectly. There were many occasions when the private railroad companies made bad investments, when they built towns and not enough people showed up to buy the land. In fact, after the U.S. Civil War, foreign money poured into the country and fueled rampant speculation in railroad-led development. When these investments got too far out in front of the market we experienced the Long Depression of the 1870’s, a very painful financial correction that forced a lot of railroads out of business. It was the speculative housing bubble of its day.

When we began to build the interstate system, in many ways we were attempting to re-create the transformative economic expansion brought about by the construction of the railroads. Only this time it would not be the private sector leading the way and taking the risk. It would be the government.

Interstate highway construction. Click for licensing.This was consistent with our evolving sensibilities on the role of government. Not only had Americans of that time lived through the Great Depression, they had also seen the awesome power and efficiency of centralization on display in America’s efforts in World War II. We can accomplish great things when we collectively focus on something of national import. FDR, Truman and then Eisenhower were great leaders that embodied this ethos.

(Note: I’m not trying to start a debate on whether or not New Deal policies were good or bad, whether the centralized, Keynesian direction our economy took at this time was necessary or not. My grandfather, a World War II veteran whose formative years were in the Great Depression, once told me that, “Without FDR, we would all be dead.” He climbed the cliffs in Nagasaki Bay after the bomb was dropped then returned to work in a paper mill for the next four decades. I’m not going to question his assessment of economic conditions in the 1930’s.)

We chose to fund this expensive national undertaking with a communal tax on gasoline. There was some logic to this; the people who bought gasoline would be using the roadways and would thus be paying for what they used. The collection costs of a more direct user charge was not really feasible at the time.

With a government-led system, politicians would decide what got built, when and where. This wasn’t a problem in the early years when there was a lot of money for building roads and very little local match was required. It was especially easy for local officials to embrace the system because highway investments created a lot of wealth locally with very little direct cost to the local taxpayer. A new highway through a cornfield would essentially print money for locals, creating enormous wealth for a class of citizen that, a decade earlier, would have been struggling to make a living growing crops.

It also dramatically improved the cash flow of local governments in the process. Maintenance costs were high – those bituminous roadways require continuous maintenance or they fall apart rather quickly – but oil (and thus asphalt concrete) was cheap, as were transportation costs. The really high maintenance expenses were a generation or more away.

Let’s pause here to contrast these two systems.

To summarize, the transcontinental railroad system connected the entire country with a transportation network that was privately built and maintained. Its expansion was directly correlated to the real financial value it created while the long term maintenance costs, paid by the users of the system, were so low they could be recovered over multiple generations. This was such a financially stable system that, as it was set up, it could have operated for centuries had technology – and government intervention – not changed the marketplace for transportation.

We replaced this stable system with the interstate highway system and all of its related state and local auto-based improvements. The expansion of this new system was not correlated with the value created, or with real demand, but with the priorities of the political system. Since expansion bestowed windfall gains on those positioned to benefit from expansion (individual landowners at first and, ultimately, major national/international corporations), as well as local governments who experienced quick and easy growth (with the costs put off a generation), there was plenty of “demand” generated within the political system for doing more. Maintenance was not funded by user fees but by a slush fund (the gas tax) that, over time, has been augmented with general taxation.

There are two travesties embodied in our current situation. The first is that our current appoach to funding transportation has no correlation between supply and demand. We all subtly pay into a giant slush fund and then we all expect that slush fund to deliver on its promise to meet our insatiable demand for growth. Members of the engineering profession have called taxpayers “whiners” for not wanting to pay more, but why would anyone pay more for something they don’t really value?

Now I acknowledge that people do value transportation, but at what price? Nobody really knows. Time and again we see that, when prices are not hidden in a slush fund but instead are paid by the user at the time of consumption, demand drops. For a government-led transportation system, a drop in demand is devastating. Put a toll on that road priced for current usage and fewer people will use it. The drop in demand forces an increase in the toll if the same revenue is to be sustained. An increase in the toll further depresses demand and on and on and on…

This fear of collapse in real demand prevents us from taking actions that would more closely reflect the costs for users. It is as if the owner of a hot dog stand loses a dollar on each dog they sell but refuses to raise prices to cover their costs out of fear that they will lose customers. In the private sector that busines would quickly fail. In a government-led system, something very different happens.

That brings us to the second travesty, the interaction between public investment and private investment. In the railroad era, private investment always led public investment. The railroads would construct the lines, build the towns and the town itself would be somewhat established before any public investments were made. In other words, the private sector bore the risk that the development would not work out. In a rough sense, this is how public and private investment would interrelate.

In the automobile era, the risk taking is reversed. For all but the most local of transportation improvements, governments front the investment capital and take the risk. This is so accepted that it is never really questioned. The interrelation between public and private investment in the automobile era is quite different.

Here’s where the perversity kicks into high gear. What happened when the private railroad companies overbuilt their system? What happened when they got out in front of market and had too much supply without enough demand? They, of course, got the painful feedback of losing money and watching their assets drop in value. Sometimes entire companies went out of business.

What happens when the government, operating in the automobile era, overbuilds? What happens when we create so much supply, so many miles of roadway, that demand can’t possibly utilize it effectively? Well, the feedback isn’t quite so direct. Budgets start to be frayed. Obligations go unfulfilled. Stuff start to decay. There isn’t enough return on these government investments and so there ultimately isn’t enough money to care for them. We often attribute these symptoms to others causes -- spoiled taxpayers, the 99%, the 1%, "those" people, lazy government, greedy corporations -- most of which appeal to our psyche more than the idea that we’ve overbuilt (no retreat).

In fact, with public sector investment now leading private sector investment, we can actually forestall the painful feedback (recession/depression) by – wait for it – making more government investments. Yes, our core transportation funding problem is that we’ve built more transportation infrastructure than we are effectively utilizing. Our solution, bizarrely, is to build more.

So long as the government has the money to avoid the hardest decisions, any uncomfortable response – land use changes, shifting from automobile trips to walking or biking or modifications to the tax code, to name just three – will remain off the table, or at least relegated to the fringe. More money doesn’t solve our problems. It just forestalls the pain of transition, compounding the imbalances in the process.

One last observation on the current approach: it has long astonished me that we culturally abhor the concept of value capture. When my hometown was bypassed, Mn/DOT made millionaires out of a number of people who had done nothing but have the good fortune to inherit land at key spots along the chosen corridor. Did we, in our desperate lack of funds, ask for even a tiny portion of that wealth back to pay for the improvements that created their good fortune? Of course not, yet when we rerouted the highway we insisted on compensation for the gas stations and other auto-dependent businesses -- located on sites previously owned by last generation's transportation lottery winners -- that would now see their traffic counts decline, as if the state’s role is to guarantee a base amount of congestion.

Without a correlation between supply and demand, without any painful feedback for bad investments and underutilized infrastructure, more money will only make our problems worse. I’m sympathetic to those of you who – as one reader emailed me – “just want a train”, or those of you that want to continue to live your current lifestyle at current prices. I’m sympathetic, but my sympathy won’t make the math work.

Tomorrow I will describe the principles upon which a comprehensive, balanced and gimmick-free approach to funding a "world class" transportation system must be based if it is to be viable over the long run. On Thursday, I’ll share my specific proposals to meet those principles. Friday I’ll try to convince you why this is better than nominally expanding the slush fund with another hidden tax.

Coming Up:

  • Wednesday: The functional priorities of a modern transportation system.
  • Thursday: Specific proposals for funding and operating a modern transportation system.
  • Friday: Winners, losers and why it matters.

These thoughts are going to be part of a broader report on transportation and mobility that we are planning to release this year. If you’d like to be kept in the loop on that project, consider becoming a member of Strong Towns. And if you’d like to support this effort, we’re looking for partners that want to make a financial contribution to bring the Strong Towns message of transportation reform to their city or state. Contact our Executive Director, Jim Kumon. to find out how you can make that happen.

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Reader Comments (12)

You might want to take a look at this book:

http://www.amazon.com/Railroaded-Transcontinentals-Making-Modern-America/dp/0393342379/ref=pd_ybh_8

After reading it I feel that the railroad tycoons were much more corrupt than the politicians that built the interstates. At least the politicians were more honest about the viability of the projects.

To be perfectly clear, I agree with your overall message that land use policies in the U.S. are absurd. Along with the silly infrastructure that gets built to support it.

March 4, 2014 | Unregistered CommenterTarah D.

Chuck,

While using the transcontinental financing system is well and good (and as you may recall, your hometown was a beneficiary of that system; Brainerd started life as a Northern Pacific maintenance yard), I'd be much more interested in railroad financing systems in the Northeast, as the settlement pattern there is older--it predates the railroad in most places, in fact--and property rights were already well-established; these make it more pertinent to our current situation than the Homestead Act windfalls.

When you look into the financing history of these railroads--companies such as the Baltimore & Ohio; Pennsylvania; New York Central; Boston & Maine; Boston & Albany; Old Colony; and the New York, New Haven & Hartford--you'll notice that large portions of their mainline alignments were often publicly constructed. Indeed, the former three all follow former canal courses.

Even by the late 1800s, entirely private capital construction of a new East Coast railroad line had become prohibitively expensive; the Baltimore & Ohio's new mainline to Philadelphia, after the Pennsylvania had taken control of the Philadelphia, Baltimore & Washington, nearly bankrupted the company. The East Coast and Midwest cities' ubiquitous mainline grade separations were often city-led capital expenditures. So while railroads led and sparked significant investment in their own right, downstream congestion problems usually devolved to local municipal issues.

I'd argue that a perusal of Eastern railroad financing history would be far more pertinent for a Strong Towns approach to transportation investments and financing; it shows that public and private investments were far more closely interrelated, with state investments often leading construction, and municipal investments needed to solve local problems. The system was highly interdependent: the railroads created massive value (only a relatively small fraction of which railroads recouped themselves) for roadside settlements, but also tended to create congestion issues the settlements usually had to solve themselves--which they did using their share of the enormous wealth the railroad brought in.

March 4, 2014 | Unregistered CommenterSteve S.

I can appreciate that my analysis of the railroad is cherry-picked from midwestern and western experiences. I did't actually start looking into it, however, until I heard Payton Chung (at CNU in Madison, I believe) talk about how Japan uses value capture to pay for their high speed rail lines. Brilliant, but then I discovered that we had done this as well.

Thanks for the feedback.

March 4, 2014 | Registered CommenterCharles Marohn

A recent accounting of expenditures from my state's DOT had the three big items at Construction (41%), Maintenance (27%), and Debt Service (22%). The Debt Service pays for past construction activities. The remaining 10% went to Program Support, Aviation, Traffic Safety, and Public Transportation. The take away that I get from this is that nearly 2/3 of the budget serves what Chuck refers to as "old economy" projects. The policy debate is usually centered around moving some of that over to public transportation but that usually fails because not only is the local government asked to make a much bigger match, the state won't contribute to the match. Whereas in the highway project, the state will take care of the match too. No local skin and some geographically well positioned land owners win big.

Perhaps we need to reduce the gas tax to the amount that it takes to maintain the current system. Get rid of the slush fund. Then any expansion project (highway or transit) will need to go out and get funding on its own merits. I know this is an over simplification, but do others think this is the direction to go?

March 4, 2014 | Unregistered CommenterTom

Tom, the outlines of your idea are extremely good, but I think you've missed one of Chuck's key points: namely, that just to pay for what we've already got would require significant--burdensome--tax increases across the board. This includes the gas tax. That's why the emergent policy outline here is a question of graceful devolving--how do we maintain our system to maximum effectiveness within the envelope established by what we're willing to pay for?

It's really a question of financial engineering, but then as a famous bridge engineer (Gustav Lindenthal, builder of the Hell Gate Bridge) once said: "Bridge engineering is easy. It's the financial engineering that's hard."

March 4, 2014 | Unregistered CommenterSteve S.

Steve, I don't think that we can know conclusively that maintaining what we've got is beyond the existing resources. There really isn't clear accounting between what is routine mainenance and what is expansion. Right now maintenance comes from the same commual slush fund that funds new projects. What I am saying is that we need to separate those. Normal maintenance: mowing, ice and snow removal, crack sealing, mill and overlay, and other pavement life extending measures need to be (and can quite possibly afford to be) taken from the gas tax revenues. Major reconstruction and expansion should need to look for its own funding source and compete with other projects so that their indivual ROI may be examined.
Of course, if even the routine maintenance can't be afforded, raise the gas tax. But I would still like to see the accounting and funding for those activities separated.

March 4, 2014 | Unregistered CommenterTom

While you are writing these posts, the National Bike Summit is in Washington DC asking for a bigger share of the federal transportation dollar. I hope that some of the people there are reading your series and re-thinking the old paradigm. Incremental changes won't get us where we want to go, only a sudden and profound change of direction will. So long as the highway trust fund, and its taxpayer bailout, exists, state DOTs will continue to expand a system that no longer works, while starving innovative cities, counties and regions of the funds needed to transform our transportation system.

March 4, 2014 | Unregistered CommenterDan Allison

I spoke at the National Bike Summit a year ago and told them as much. No shock -- did not get a return request, despite a lot of the people there getting it. Too many of the organizers make their livings peddling (perceived) access to power for their approach to change.

I did a podcast on my experience: http://www.strongtowns.org/strong-towns-podcast/2013/3/28/show-130-the-federal-connection.html

March 4, 2014 | Registered CommenterCharles Marohn

I had listened to that podcast, and even posted a response to it. I think it is indicative that in the last year I've given up on the bandaid approach to fixing funding, and now am in favor of a complete overthrow.

I've long had an unease about the way the League of American Bicyclists tries to work within the political system, and that they have a Washington DC-centric view of the world, and of course staff location. I'm a member, and a LCI, and will continue to be, but I no longer see the League as a source of ideas on funding transformation. They are doing a lot currently on making biking more equitable, bringing in women and lower income people into the conversation, and I appreciate that, but I think they've missed the boat on funding and policy.

March 4, 2014 | Unregistered CommenterDan Allison

I'm cautiously optimistic about an emphasis on value capture as a funding model. I just hope this series doesn't get too enthused about handing everything over to private entities and overlooking the historical problems associated with private transit operators. Getting a return on investment is important, but maximizing return on investment should not come at the expense of equitable considerations or positive externalities to the community. When transit systems are reducing GHG emissions, air pollution, and the negative health effects of a sedentary lifestyle, they are partially paying for themselves through indirect benefits that stand on far better ground than questionable metrics like "value of time stuck in traffic." A significant amount of government "subsidy" equal to those indirect savings is therefore entirely appropriate. Conversely, the negative externalities of driving suggest that user costs should be higher than that needed to cover simple maintenance.

March 4, 2014 | Unregistered CommenterT.E. Shaw

Thank you--this has helped clarify a lot of things that were inchoate and/or muddy in my mind. Your take here may be necessarily limited, but it is very, very helpful. THanks again.

March 5, 2014 | Unregistered Commentereric

What you nicely describe as value capture that financed the building of railroads was of course far from benign for native Americans or the environment.

And what you call "overbuilt" is somewhat offensive to the people who live in the rural regions served by highways that aren't congested and who's towns suffered tremendously when the railroad left. I do recognize that hard choices need to be made and resources are limited and I recognize that saying that is offensive to many and yet it is still true.

The biggest problem with the privately owned railroad network is it depended on the organizational health of private organizations who had monopoly positions. Companies seem to be owned and operated by either builders, looters or maintainers. If you were a town served by a railroad with crappy service you had little choice. Monopoly positions were necessary in order to earn a return on investment for the building and maintenance of the track.

State DOT's are also in a monopoly position, at least most of the time and in other states (not mine) I see evidence that this creates inefficiencies. While trucking and driving is a big free for all, the road itself is all through the state DOT and it's federal funds.

Christopher

March 5, 2014 | Unregistered CommenterChristopher Parker
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