Friday, February 25, 2011

Edward Glaeser's economics of high-speed rail in 2009, Part II; a look backward

While I'm not in a position to challenge either Glaeser's equations or his numbers, his calculus tells us that rail is highly unfavorable on a quantified cost-benefit basis.  Whether one agrees or disagrees with his conclusions, he is correct when he says that unless we have solid quantification of all the possible variables, we won't know whether this is a good idea or not.

Like many HSR commenters, Glaeser talks about these trains in the completed and operating state. He by-passes the incredible impact of the construction process itself.  He neglects to factor in all the direct and indirect costs, not only regarding the train project itself, but the consequential cost impact upon the environment through which the train passes.

You could distinguish these as endogenous and exogenous construction costs and these should be based on full-cost accounting.  For example what are the direct costs on the properties immediately surrounding the rail corridor, and what are the less easily quantifiable costs like "livability," a factor to which DOT Secretary Ray LaHood frequently refers?  What is the impact on businesses in the immediate areas around the construction sites? 

The farmers in the Central Valley of California have a great deal to say about that. Endogenous factors should include variables such as insurance and interest rates as well as inflation, transportation costs for manufactured goods, and the adverse environmental impact of construction.

William Grindley and others have devoted a huge amount of energy to exactly this HSR economics problem, the financial quantification of why high-speed rail is a very bad idea.  We'll re-print his material in the near future.
Part II.

AUGUST 4, 2009, 6:00 AM
Running the Numbers on High-Speed Trains

Edward L. Glaeser is an economics professor at Harvard.

Is President Obama’s vision of hyper-fast trains racing through America a sound transportation policy or a costly boondoggle? Last week, I began a four-part series on the costs and benefits of high-speed rail. The readers of last week’s post seemed particularly eager to get to traffic congestion and the environment, but space constraints compel me to push these off until next week. Today I will get mired in the sometimes dull arcana of rail costs and direct benefits to users.

I’m going to frame the discussion around an imaginary 240-mile link between Dallas and Houston, but the basic formula for direct costs and benefit is general:

Number of Riders times (Benefit per Rider minus Variable Costs per Rider) minus Fixed Costs.

I’m simplifying, but a formula needs to be simple if interested parties can seriously debate the numbers, and the only way that America is going to get to the right answer on public investments is if numbers trump rhetoric. I will plug illustrative figures into the formula, but not only am I well aware that every number here is debatable, I am hoping for just that debate.

Last week, I cited data from the Government Accountability Office suggesting that $50 million a mile was a reasonable construction cost figure. To make this one-time cost comparable to everything else, which is an annual flow, the fixed cost needs to be converted into an annual cost, which is done by multiplying by an interest rate, capturing the opportunity cost of capital. If that cost of capital is 5 percent (as I said, everything is debatable), then the up-front capital cost is $2.5 million a mile per year, or $600 million for a 240-mile line.

The other cost that is independent of the number of riders is track maintenance. One recent European estimate puts that cost at $140,000 a mile per year for a two-track system. A feasibility study of high-speed rail in Britain came up with the considerably higher figure of $493,000 a mile for surface trains. I’ll stay closer to the lower estimate and go with $200,000 a mile per year, which brings the fixed costs of the track up to $648 million per annum.

Other train costs — rolling stock purchase and maintenance, personnel — more or less scale up or down with the number of passenger miles. Unfortunately, there is plenty of range on these cost estimates. A 12-year-old classic in this field has a number of 10.5 cents a mile (in today’s dollars), but one recent European study comes out at 50 cents a passenger mile. Amtrak’s operating expenses run at about 45 cents a passenger mile. I’ll average between 10 and 50 and plug in 30 cents a passenger mile in operating costs, which comes to $72 for a 240-mile trip.

I estimate benefits by comparing rail to air. A train going from Dallas to Houston at 150 miles an hour would take 96 minutes. Southwest Airlines takes an hour for the same route, but the need to arrive early could add on an extra hour. I’ll add on an extra 36 minutes for the driving time to the airports, which means that the train saves an hour. The per-passenger benefit from the high-speed rail line is the saved cost of the Southwest ticket ($80) plus an hour’s worth of time (let’s say $40, which seems generous), plus any added benefits from the comfort of the train (let’s say $20 more). All told, benefits per trip are $140. Since the variable costs are $72 for the trip (30 cents a mile times 240 miles), benefits minus variable costs come to $68 a trip. If these numbers were right (and I think that they are very kind to rail), then the system should be able to run a healthy operating surplus.

How many riders will take high-speed rail between Houston and Dallas? Amtrak gets about 11 million customers in the Northeast Corridor, which has four large consolidated metropolitan areas together totaling 44 million people. If that four-to-one ratio held in Texas, then the high-speed rail link could expect three million riders, and more to come as Texas grows.

But as President Obama has said one of the appeals of high-speed rail is “walking only a few steps to public transportation, and ending up just blocks from your destination.” That’s bad news for Texas. In Dallas less than 5 percent of the population takes public transportation to work, and more than 60 percent of all jobs are more than 10 miles from the city center. For these reasons, driving will continue to be extremely attractive for travelers who want to save parking fees and need cars once they arrive. I’ll go with 1.5 million trips a year (even including future growth), which would make the new rail line about as popular as all airplane flights between the two cities are today.

Now it’s just down to multiplying: 1.5 million trips times $68 a trip means $102 million for benefits minus operating costs. Annual capital costs came in $648 million, more than six times that amount. If you think that the right number is three million trips, then the benefits rise to $200 million, and the ratio between the per rider net benefits and costs drops to one-to-three. This is the cruel arithmetic faced by people, like myself, who would love to be pro-rail. One hint for train lovers who would like to make this comparison look better: make a compelling case that the interest rate should be much lower, as nothing else makes nearly as much difference. Also keep in mind that I haven’t brought in the environment or congestion. They’re up next week.
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