Wednesday, January 26, 2011

The Context for the President's plans for HSR

Context is everything.  What is the context for the President's advocacy for high-speed rail in the US, where, he says, 80% of all Americans will have direct access to high-speed rail by 2035? How meaningful is such a sweeping vision?

You better read this article.  It compares the US with China.  How do the Chinese expand their infrastructure, including HSR?  How can we ever catch up with them?  Are we going about this in the most effective way?  Do the President's ambitions make sense?

This is an enormously long article, so I've pared it way back to address only the infrastructure issue, which was given a lot of attention in the President's speech.

My point here is that worrying about routes or alignments on the Bay Area Peninsula misses the basic realities of what's happening in Washington and how that will impact the California project.  Frequently a perception of a problem misses where the real problem lies, or we create a misconception for ourselves about what the problem actually is.

In this case, with a fuller understanding of the economics of infrastructure 
agendas at the  Federal  level,  we can see where the controls and decision 
points exist, and adjust our focus appropriately.  

Control over the high-speed rail project does not exist in Sacramento, it does not even exist in the White House, it now exists in Congress. High-speed rail is not a California issue; it's a geopolitical 'game' in which the United States will be a failed player.

That does not mean that there won't be a lot of harm done, beginning in the Central Valley.  But it does mean that HSR's future is far from assured.  Our national economic situation and its direction is only now starting to be understood. 

For example, our current unemployment picture is not an aberrant situation that time will rectify and return us to some prior 'normalcy.'  This is the new normalcy where the diminished manufacturing capacity in the United States is operating profitably with a permanently reduced, far more productive labor pool. And the US continues to ship jobs overseas, which in turn drives profitability at home. 

Even if the population in the US continues to grow at the current rate, who will be the market for high-speed rail?  High-speed rail may not be a part of this new direction.  That's why this is so important. 

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State Of The Union: America's ‘Sputnik' Moment is a Sick Joke


By Marshall Auerback 
Benzinga Columnist
January 26, 2011 12:41 PM

Posted in: Politics, Economics, Life

In his State of the Union Address, President Obama dealt with a lot of major issues He offered a corporate tax cut, a retooling of the tax code and an end to pet spending projects. All good. The tax code has long been used as a political plaything by Washington's mounting corps of lobbyists and special interests, so it will be interesting to see how much resistance the President will encounter if he is serious about ending this insidious form of corporate welfare.

The President also displayed his usual rhetorical flourishes, outlining what he called “a Sputnik moment” — a blueprint for spending in critical areas like education, high-speed rail, clean-energy technology and high-speed Internet to help the United States weather the impact of globalization and the challenge from emerging powers like China and India. “We need to out-innovate, outeducate and outbuild the rest of the world,” he said.

He called the rising economic power of foreign competitors such as China and India “our generation's Sputnik moment”. What he was talking about was not just threats to U.S. jobs from emerging countries. He was talking about threats to the U.S. geopolitical position in the world.

His proposals are a joke in the context of today's America.

[Edit.]

Obama called for investments in infrastructure. With government spending at the levels in the past U.S. infrastructure investment has been so low there's deterioration everywhere. Now the U.S. public has voted in the Tea Party which is going to constrict government spending at both the Federal level and indirectly at the state and local levels. Infrastructure cannot go unscathed.

How does China build its infrastructure? With command economy mechanisms that have no regard for the market. That is how. Obama talks about the U.S. becoming a leader in high speed rail. It is preposterous that the President of the United States says such a thing. China now has 8500 kilometers of high speed rail. Europe has 6600 kilometers, and Japan has 2500 kilometers. The U.S. has a mere 360 kilometers. By 2013 China will have 20,000 kilometers of high speed rail. The increase between now and 2013 in the puny high speed rail system in the U.S. will be marginal. With such a massive high speed rail system China has the internal market to make the investments in the best high speed rail equipment in the world. China can outbid everyone in the global market for high speed rail systems. U.S. state and federal government budget restrictions will result in the U.S. purchasing all of its puny future high speed rail systems from the Chinese or other foreign suppliers.

How do the Chinese do it? Through totally non-market means, which is an anathema to the U.S. political process. On one “sensible” Chinese high speed rail line from Beijing to Tianjin fares are set such that, even at 100% capacity utilization, this rail line will still be operating in the red. It is not possible to raise the fares because they are already so high that the population will choose lower fare ordinary rail service rather than high speed rail service.

That's a “sensible” high speed rail link in China. The economics of the longer rail links into the interior are much worse. For example, a rail line from Wuhan to Guangzhou has a subsidized ticket price of 490 yuan. A passenger using the high speed rail line saves five hours compared to a conventional ticket which costs 400 yuan less. For the average Chinese the difference is equal to almost one week of salary. This rail line will be underutilized and, despite all kinds of subsidies, will also lose money.

How do the Chinese build these rail lines? Through endless government intervention. The project is financed by China's Ministry of Railways and by local governments. The loans come from Chinese government directed commercial banks that provide loans at interest rates that do not reflect the financial risks. That is how.

In the end all these uneconomic investments will create economic problems within China itself. But over the next few years China will make new incursions into higher tech more capital intensive global markets. None of Obama's goals will be approached. Rather the U.S. will fall ever further back in the global tradeables war. A trade war seems inevitable. The state of the union is not good.
Marshall Auerback has 28 years of experience in the investment management business, and he is a senior fellow at the Roosevelt Institute. He is also an economic consultant to PIMCO, the world's largest bond fund management group. He writes a weekly column for Benzinga every Friday.
(c) 2011 Benzinga.com. All rights reserved. This material may not be published in its entirety or redistributed without the approval of Benzinga.

Read more: http://www.benzinga.com/life/politics/11/01/809141/sotu-americas-‘sputnik-moment-is-a-sick-joke#ixzz1CBJEstaZ