If You Build It...Will They Come?

By LCR Contributor Barrell Rider

When confronting the topic of government spending you are essentially opening a Pandora’s Box. You can ask 10 different ‘experts’ and you will likely get 4 or 5 different answers. Politicians are uncomfortable with the subject; they prefer to talk about taxes. There is also wide debate about the role of government. Federal and State governments share some common duties but differ in their overall role. One thing is certain, the size of government continues to grow, and so too do federal and state deficits.

One topic that has been pushed heavily in recent years is the high-speed rail system. President Obama strongly supports a nationwide network of high speed rails to connect many metropolitan areas and cities. The federal government is offering stimulus money as an attempt to get states to commit to building the proposed high speed rail system.

Two states that are among those who could potentially receive billions of dollars to begin the project are two of the most populous states: California and Florida.

The Florida Supreme Court has ruled that Florida Governor Rick Scott acted within his power when he rejected 2.4 billion in stimulus money to begin building a high speed rail to connect Orlando to Tampa.

According to U.S. transportation secretary Ray LaHood the money would have covered nearly all of the cost of the project. I’m assuming he is referring to the construction costs, or perhaps less accurately, the original government estimates of the project cost. Then there is the question as to whether or not the rail can make enough money to support itself year over year without having to annually draw tax money to subsidize operating cost, which is the case with train service between Palm Beach and Miami. The government projections of operating revenue are based on a volume of passengers nearly equal to the Boston-NewYork-Washington corridor.

In California, for example, original estimates on constructing a rail from San Diego to San Francisco increased from 33 billion to nearly 43 billion in the first year. California has also offered to put in tens of billions of dollars of its own tax money to cover the federal stimulus shortfall. All while the state is mired in one of its largest budget deficits in a generation.

For those who live in California it is common knowledge that most of the public transportation entities here do not make enough money to cover annual operating costs, even with the downsizing of services like buses and trolleys. We Californians love our cars and we have a lot of them: In California there are as nearly as many registered vehicles as there are citizens. But what makes the government insist such a rail could draw 39 million riders?

It is clear that those who support such bills cannot accurately predict the cost to build the rail system, the number of passengers who will ride on it or the cost to maintain and repair the necessary infrastructure. They are likely concerned with the temporary creation of jobs and ignore the fact that such a project will ultimately raise annual spending for states that are already short on cash. These same states are making reductions in education, police, fire and the maintenance of their existing roads, water and sewer infrastructure. San Diego County has some of the lowest rated roads in terms of quality and condition. City of San Diego is also notorious for having antiquated and dysfunctional water lines and storm drainage. The rest of California is just as bad, the California government doesn’t have the money to repair and maintain its current infrastructure, yet they can come up with billions to subsidize a rail which will inevitable increase annual government spending for a state which is billions in the hole as I type.

I haven’t even alluded to the fact that the government itself has a poor track record of forecasting. You need to look no further than their estimates Social Security and Medicare which have been updated many times in recent years due to shortfalls. Just a few years ago a government study thought Social Security would not have to dip into the so called trust fund until 2017, yet in 2010 it paid out more than it took in from payroll taxes. They were six years off in their assessment, now they have subsequently predicted that economic growth will erase that red ink by 2012.

Of course we all remember Bernanke’s famous line from the spring of 2007 regarding the housing market and broader economy:

Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages continue to perform well.”

Now really, is the government really that accurate with its forecasting???

They don’t factor in the cost of ownership with the upfront price. It also seems they tend to overestimate revenue, while underestimating long term costs. Let’s shelve the high speed rail and use stimulus money to improve existing infrastructure, one sector at a time. Imagine if the government had pumped a couple billion into the New Orleans levee system in the 1990s. The government should take a more fiduciary outlook on the appropriation of taxpayer dollars.

It’s seemingly one big race in D.C.: a race to secure funds, a race to write legislation and a race to spend funds.

Ask yourself another question…if there is such a demand for and potentially huge market for a rail system then where are the private equity investors? Google and Facebook were not spawned out of stimulus money, neither were Amazon or Apple.

More econo-news via Memeorandum.


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