The Myth of High Speed Rail

"When plunder becomes a way of life for a group of men living together in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it." — Frederic Bastiat

For the past two years I have been writing about the myth of high speed passenger rail. (See my blog from May 12, 2012 — “The Train to Nowhere, Part Deux”) In my May 12^th blog I addressed the history of rail in the United States and talked about the proposed $7 billion dollar high speed rail from Victorville, California to Las Vegas, California. Since that time the name of the project has changed from DesertXpress to XpressWest and the United States Department of Transportation’s Federal Railroad Administration has nixed the requested $5.5 billion dollar loan.

On July 17^th the Washington Post reported:

“WE’VE SEEN some bad policy ideas but not many more awful than the proposal to extend a $5.5 billion low-interest, 35-year federal loan to a West Coast start-up for a high-speed rail connection between Southern California and Las Vegas. This time, though, we are happy to report, common sense has prevailed: The Obama administration has stopped the project.

Backed by wealthy casino moguls, who in turn enjoyed the support of Senate Majority Leader Harry Reid (D-Nev.), a company called XpressWest wanted to lay tracks between Vegas and lonely Victorville, Calif., some 81 miles east of downtown Los Angeles. Several times larger than the largest amount ever loaned under the obscure federal Railroad Rehabilitation and Improvement Financing Program, the federal money would cover 80 percent of the project’s costs. The supposed public benefits were reduced carbon emissions, less auto traffic and, of course, more jobs.

What XpressWest struggled to explain was why taxpayers should bet on a proposition that private investors apparently found too risky: hordes of travelers driving to Victorville, parking their cars and then boarding the train for an 80-minute ride to Vegas — as opposed to driving the whole way, flying or taking “My Party Ride,” a limo-like bus trip for up to 30 passengers at $99 each, including food and drinks.

The whole thing had the makings of a boondoggle, for which taxpayers would eventually end up paying. Yet multiple federal and state agencies had given environmental and regulatory approvals, leaving the crucial matter of the loan up to the Transportation Department. Given the project’s political connections, DOT’s thumbs-up seemed inevitable — until June 28, when then-Secretary Ray LaHood, as one of his final acts in office, sent XpressWest Chairman Anthony Marnell II a letter saying that the department had decided to “suspend further consideration” of the loan.”

LaHood, in his June 28 letter to the company, cited "serious issues" with the application in the decision to cut the project off. He suggested the company was having difficulty ensuring that the project would be built with enough American products like U.S-made steel and iron.

Some of the letter was redacted, but LaHood also suggested concerns about the sheer size of the loan and the risk, and the company's apparent failure to submit additional documentation on other participants in the project.

"After several years of engagement with no resolution to the threshold issues addressed in this letter and the significant uncertainties still surrounding the project, we have decided to suspend further consideration of XpressWest's loan request," LaHood wrote. The request had been under consideration with both his department and the Federal Railroad Administration.

The decision is a major blow to the project, as the federal loan was expected to make up the bulk of funding for the $6.9 billion rail line.

The 185-mile line was billed as the most advanced and fastest in the U.S. According to the company, it would connect Southern California and Vegas with an 80-minute train ride.

Yet critics warned that costs could spiral and ridership projections might be too rosy, and that such a massive federal investment was not wise.

The XpressWest line is running into a wall after another project — a proposed magnetic levitation (Maglev) train with a similar route — also ran into recent problems, as state planners backed away from that project and federal funding ran dry.

Sen. Jeff Sessions, (R-Alabama), top Republican on the Senate Budget Committee, and Rep. Paul Ryan, (R-Wisconsin)., chairman of the House Budget Committee, had earlier revealed they'd been told about the department's decision on XpressWest. The two lawmakers had been among the toughest critics of the project and loan, calling it "costly, wasteful and risky."

On February 12, 2013 Laura Carroll Reported in the Las Vegas Review Journal:

“At best, it could be another 18 months before any ground is broken on the XpressWest project - the same time frame backers gave the Las Vegas Review-Journal in 2009.

The reality of a high-speed train shuttling travelers between Victorville, Calif., and Las Vegas hinges on funding of $5.5 billion from the Railroad Rehabilitation and Improvement Financing, which is administered by the Federal Railroad Administration. XpressWest's first loan application was submitted in December 2010 and is still under review.

The nearly $7 billion project will largely be financed from this loan, if approved, and the rest in private equity investment.

At Tuesday's meeting of the Las Vegas Convention and Visitors Authority board of directors, XpressWest Chief Operating Officer Andrew Mack, said it could be six months before a decision is made on the application. If approved, it would be still another year before ground is broken.

"It's really dependent on the RRIF pay," Mack said. "That's really driving the schedule.

The train would be built adjacent to Interstate 15 with service every 20 minutes and one-ways taking about 80 minutes. The average fare is less than $100, Mack said. Each train would seat between 500 and 600 passengers.

If construction eventually starts, XpressWest estimates that 80,000 direct and indirect construction jobs will be created, with a third of those going to Southern Nevadans. The estimated economic output of the rail line during its lifetime is $7.8 billion.

In Las Vegas, two potential sites have been chosen for train stations: one across from the Rio and the other across from Mandalay Bay.”

The Transportation Department later said in a statement that "XpressWest has the ability to revive its application by significantly revising its request."

The project still has a powerful supporter in Congress — Senate Majority Leader Reid, as well as Republican Nevada Sen. Dean Heller.

According to the Las Vegas Review-Journal, Reid claims the administration has not "permanently foreclosed" the possibility of an investment. He stressed Friday that he plans to keep pushing for "this vital investment." Obviously this decision is a death blow to Reid and the backers of the project — a decision I totally agree with. (See the Fox News report from March 13, 2013)

According to an August 2012 tax risk assessment by the libertarian Reason Foundation should the Victorville to Las Vegas train commercial revenues fail to pay operating costs and debt service, the project would not have enough money to repay the federal loan, resulting in a default that would make Solyndra look like small change. Taxpayers would lose up to $6.5 billion in principal and any unpaid interest, an amount that could climb to more than $7.5 billion if a full six-year deferment of repayment is granted. The Taxpayer Risk Assessment identifies a number of concerns that could result in taxpayer losses.

This Taxpayer Risk Assessment examines the financial risks to taxpayers of the proposed XpressWest high-speed rail project from Victorville to Las Vegas. There would be no need for a Taxpayer Risk Analysis without government (taxpayer) involvement. For example, if a bus company were to establish a new service between Victorville and Las Vegas, there would be no taxpayer financial exposure under normal circumstances. The company would either succeed or fail depending on its ability to cover its costs through various commercial activities. As with private loans, the ability to secure the loan depends on the bank’s assessment of its successfully pay off — a natural inhibitor of risky propositions. XpressWest is intended to be self-supporting, with the construction and financing expenses and operating expenses covered by commercial revenues, principally passenger fares. Tellingly, the project sponsors are apparently unable to arrange conventional private sector financing and seek a federal loan with a subsidized interest rate, which would pass the risks on to taxpayers if the forecasted ridership should fail to materialize. Moreover, in the event of financial difficulty, state and local taxpayers could face significant pressure to provide funding to complete the system or to subsidize its operations. Thus, a Taxpayer Risk Assessment is necessary.

This Taxpayer Risk Analysis reviews ridership, revenue and capital cost forecasts to the extent that they are available. The principal focus is on ridership, since the repayment of the proposed federal loan from taxpayers is entirely dependent upon commercial revenues, principally the fares that will be paid by riders and ancillary revenues, such as advertising.

1. A Speculative Consumer Market: The greatest risk is that the potential consumer market for the train is far smaller, in geographical terms, than is assumed in the project documentation. There is no parallel for large numbers of drivers and airline passengers to travel well outside the urban areas in which they live to connect to a train (or plane) to any destination, much less one so close to Southern California as Las Vegas. As a result, common sense finds ridership and revenue likely to be a mere fraction of forecast. This would likely make repayment of the federal loan impossible. This risk to taxpayers of an exaggerated market is “unknown, but potentially severe.”

2. Materially Changed Circumstances: Even if the consumer market were geographically as large as assumed, growth in the Las Vegas tourist market has been far below forecasts in recent years. As a result, the base ridership figures are implausibly exaggerated and need to be revised downward. The ridership and revenue risk to XpressWest from this factor is high and risks make paying the federal debt impossible, calling for a taxpayer bailout.

3. Ridership and Revenue Forecast Model Concerns: The international record indicates that rail projects tend to average approximately 39% less in ridership than forecast. Specific factors of the ridership forecast for the Victorville to Las Vegas train indicate that actual ridership is likely to be 39% to 70% less than forecasted, even after adjustment for the materially changed circumstances. These factors include an optimistic estimate of the base year market, a market growth rate greater than in pre-recession years, an optimistic assumption of attraction from cars and an optimistic bus attraction assumption. Such rosy predictions increase the likelihood that the federal loan would not be repaid.

4. Capital Cost Escalation: Capital cost escalation for rail projects has been pervasive in similar projects, suggesting that capital cost escalation is likely to occur on the Victorville to Las Vegas train, leaving the project impossible to complete and triggering a default on the federal loan. Governments (federal, state and local) would be faced with difficult decisions about whether to complete the project, at elevated costs, with public funding or to fund dismantlement of a partially completed system.

5. Likely Commercial Losses: Even if there is no capital cost escalation, it is unlikely that the business plan for this project is flexible enough to deal with all the variations discussed above without suffering either higher costs or commercial revenue shortfalls. This inflexibility could lead to a default on the federal loan with the loss paid by taxpayers. Further, political pressure to keep the train operating could lead to a federal Amtrak-style takeover with subsidies, or the train could be operated with state and/or local subsidies. The risk of taxpayer loss from this factor is evaluated at “high.”

6. Higher Cost for Highway Expansion: Use of the median of I-15 for the Victorville to Las Vegas train could preclude the most cost-effective options to expand highway capacity. This would increase costs to taxpayers and highway users. The risk of higher expansion costs on I-15 is evaluated as “moderate.”

In 1991 I was involved with the proposed Maglev line from Anaheim to Las Vegas. This was to be a cooperative venture between Transrapid (the German consortium pushing their Maglev technology), The California High Speed Rail Corporation, and Bechtel to design, build and operate a Maglev train from Disneyland to Las Vegas. The technology seemed sound but there were two major problems. One is that they could not get a permit from Caltrans to use any right of way along the I-15 corridor and two; they could not find any investors. Eventually the right of way issue was solved by an act of the California Legislature, but there still was no money coming forth.

The majority of high-speed rail lines require large government subsidies from both general taxpayers and drivers. Even with generous subsidies, traveling by high-speed rail is still more expensive than flying for 12 of the 23 most popular high-speed rail routes in the world. Evidence suggests it can only be competitive on routes that are 200 to 500 miles in length.

High-speed rail is also very expensive to build. Most new routes cost at least $10 million per mile to construct. The cheapest European rail line costs more than $50,000 per seat to operate annually. A U.S. high-speed rail line would need ridership of 6 million to 9 million people per year to break even. The high-speed Acela service, despite operating in the busy Northeast Corridor, averages only 3.4 million passengers per year.

Advocates cite other advantages for high-speed rail, but most fall apart under close examination:

Environment: High-speed rail creates more pollution than it prevents because building a high-speed rail line is very energy-intensive.

Economic development: High-speed rail does not create much new development; it merely redirects development from one area to another.

Mobility: High-speed rail is unlikely to improve mobility since most of its potential passengers already travel by air.

Choice: Customers can already choose between a low-cost bus, a fast plane or a personalized car trip.

Most countries have built high-speed rail to relieve passenger overcrowding on their existing lines. The U.S. lacks this overcrowding, which suggests consumer demand for high-speed rail may not be there. Furthermore, freight rail dominates track usage, and railroad companies are reluctant to relinquish capacity, as is evident in the discussions surrounding the proposed multimodal passenger terminal in downtown Atlanta.

Any U.S. rail operator will have to compete on the same terms that cause Amtrak to lose large amounts of money each year. Railways are subject to outdated labor laws that were enacted when railroads did not face competition. Operating a passenger railroad in the existing regulatory environment is not a profitable proposition.

Our core cities, where people are most likely to board high-speed trains, are much less dense than European or Asian cities, which also limits the potential market.

The U.S. has far higher rates of car ownership than most other countries. Gas taxes are lower, road tolls are less common, and many cities — especially in the South and West — have grown up around the automobile.

As a result, high-speed rail is best regarded as a luxury toy this country cannot afford. For far less money, we could create a world-class highway and aviation system with first-rate bus and airplane service and far more flexibility.

We’d like to think that cost and feasibility concerns ultimately derailed this crazy train, but that is not what Mr. LaHood emphasized in his letter. Rather, he faulted XpressWest for not guaranteeing that it would get steel and other manufactured goods from U.S. suppliers. We disagree with protectionist “Buy America” thinking; still, in this case it at least shows that the project’s job-creation potential was always limited by the fact that no U.S. manufacturer makes high-speed rail cars or the needed heavy steel rails and electrification systems. However imperfect his rationale, Mr. LaHood reached the right result, and that’s cause for celebration.

The Myth Of The Volt

“…every individual necessarily labors to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.” — Adam Smith

The system in which the invisible hand is most often assumed to work is the free market. Adam Smith assumed that consumers choose for the lowest price, and that entrepreneurs choose for the highest rate of profit. He asserted that by thus making their excess or insufficient demand known through market prices, consumers "directed" entrepreneurs' investment money to the most profitable industry. Remember that this is the industry producing the goods most highly valued by consumers, so in general economic well-being is increased.

One extremely positive aspect of a market-based economy is that it forces people to think about what other people want. Smith saw this as a large part of what was good about the invisible hand mechanism. He identified two ways to obtain the help and co-operation of other people, upon which we all depend constantly. The first way is to appeal to the benevolence and goodwill of others. To do this a person must often act in a servile and fawning way, which Smith found repulsive, and he claimed it generally meets with very limited success. The second way is to appeal instead to other people's self-interest. In one of his most famous quotes:

“ Man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favor, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me what I want, and you shall have this which you want, is the meaning of every such offer; and it is the manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love.”

For Smith, to propose an exchange is to attempt to show another that what you can do, or what you have, can be of use to the other. When you carry out the exchange, it means the other person recognizes that what you can do or that what you have is of value. This is why so much of a person's self-esteem is bound up in their job — a well-paid job is supposed to be a sign that others value your contribution and find it worth exchanging their own resources for.

Last week President Obama gave appeared at a campaign rally at the GM plant in Detroit where he praised the bailout and the wonders of the Chevy Volt, GM’s electric car. He claimed that after he left the White House in 2017 he would buy a Volt.

The next day GM announced it was closing the Volt line and laying-off 1,400 UAW workers. You see the $42,000 Volt is just not selling, at least to the general market.

General Motors reported Chevy Volt sales of 1,529 for the month of December. The still unimpressive number is an improvement over previous months, but the gains were mostly driven by fleet sales. According to GM, 992 of the Volts sold were to retail customers while 537 went to fleet purchasers.

GM says the fleet sales were to corporate buyers and not to rental companies. The number of Volts sold to townships receiving federal grants remains unknown. The corporate sales claim makes sense as crony company, General Electric, starts to make good on its promise to buy thousands of Volts. Of course, GE benefits by selling charging stations for the vehicles.

Another interesting statistic on Volt sales can be derived from the inventory figures and number of Chevy dealerships with available Volts. GM now claims that 2,600 dealerships across the nation have Volts for sale. Given the 992 figure for Volts sold to retail customers, we come up with an average of approximately one third of a vehicle sold by each dealership per month. It is ludicrous for GM to continue to tout Volt sales figures as a success given the fact that about two thirds of dealerships offering Volts were unable to sell even one during the month! With supply now well over 4,000 units, lack of inventory can no longer be blamed for the dismal sales figures.

It remains to be seen what type of tricks the Obama Administration and GM might have up their sleeves when it comes to fluffing Chevy Volt sales figures. Both the Administration and GM have staked a lot of credibility on the vehicle claiming that it was to be a game changer for GM as well as a "moon shot." Considering that taxpayers are subsidizing vehicles like the Volt to the tune of billions of dollars, it is understandable that critics of the vehicle want to know the truth about the projected high demand for the car that has yet to materialize. GM is sticking to its guns claiming that 60,000 Volts will be sold in 2012 after having missed 2011 sales goals by a wide margin. They have not, however, said who will be buying them.

Anyone who has observed the hype revolving around the Chevy Volt since the time preceding its rollout to now should question the credibility of sources that proclaim the vehicle a success despite evidence that indicates otherwise. A further instance of suspicious support for the Volt was evidenced when Consumer Reports (CR) recommended the vehicle, which is based on the Chevy Cruze platform, only to report that the Cruze expected reliability is well below average. In fact, the Cruze was rated the worst value for small cars by CR. And while the recommended rating for the Volt had been highly publicized, there are few internet articles referencing the worst rating for the Cruze.

How can CR recommend the Volt based on reliability expectations when such a limited number of Volts have been sold and they have such a negative opinion on a vehicle with the same platform? And why has CR changed their opinion since the time they originally proclaimed that the Volt "didn't seem to make a lot of sense?" In addition, CR has displayed a double standard regarding how it responded to battery safety issues for the Volt (CR stated the public had to adapt to a new technology) compared to how it responded to Toyota's unintended acceleration investigation when it pulled the recommended rating from Toyotas.

Speaking of suspicious activity, an interesting statistic was revealed on GM's sales conference call. Government purchases of GM vehicles rose 32% from last year. This represents yet another conflict as the Obama Administration has a vested interest in GM's success as it spends more taxpayer dollars to help support the company as 2012 elections near.

For those Volt apologists who want to celebrate the insignificant sales growth of the car, have at it. The wealthy retail purchasers of the Volt can afford the high price tag of the vehicle. The country, however, no longer can. The $7,500 tax subsidy that goes to wealthy buyers should be ended. If this car and others like the Fisker and Tesla offerings which cost close to $100,000 each are as popular as advocates say they are, taxpayers should not have to give buyers $7,500 to drive sales. And if they are not popular, then all the more reason to stop bilking taxpayers out of billions of dollars to enrich crony corporations under the guise of green initiatives.

The Chevy Volt was just given the European car of the year award at the Geneva auto show. So what. No one in the U.S. is buying the car. The market is rejecting this government sponsored vehicle. On the other hand truck and SUV sales are up. No matter how Obama touts this “green car” the people are not buying it even with gasoline at $5.00 per gallon. This is just another way of the government masterminds coercing the people to buy something they do not want.