Posts about Economics

All values are adjusted for inflation and reported in 2010 dollars. Most of the road values are from 2007 but since then, driving is down more than 15% and road user fee receipts are down as well.

Here is how each cost contributes to the total, and how I arrived at each estimates:

Direct subsidy: In 2010, Amtrak received $563 million in operating subsidies and $1 billion in capital and debt service grants while carrying passengers a total of 6.52 billion passenger miles, for a direct subsidy of 24¢ ppm. Meanwhile, in 2007 roads received a $94.6 billion (49% of $193 billion) subsidy to carry automobile passengers (including drivers) 4.24 trillion miles for a direct subsidy of 2¢ per passenger mile.

This is where a lot of people like to end the story. And doing so makes Amtrak seem like a bad deal, but if we consider all the external costs of both, it becomes a very different story.

Air pollution: According to McCubbin and Delucchi (1996), the external cost of air pollution caused by driving was $0.112 per vehicle mile traveled (VMT) in 1990 dollars. According to the Federal Highway Administration, there are approximately 1.59 passengers per vehicle. So dividing the VMT by passengers per vehicle and adjusting for inflation gives a value of $0.118 ppm.

While a similar analysis is not available for Amtrak, we do have the energy intensity ppm for passenger cars (3501 Btu ppm) and Amtrak (2398 Btu ppm) which can serve as a reasonable proxy for air pollution emissions. If anything, this ratio is unfair to Amtrak, since the bulk of its energy use (carrying Northeast Corridor riders) is electricity which produces fewer emission per BTU than gasoline does due to the use of nuclear, hydroelectric, natural gas and renewables. Using this ratio, the cost of air pollution caused by Amtrak is $0.081 ppm.

Global warming: In addition to air pollution, the burning of fossil fuels like gasoline or coal creates an assortment of greenhouse gases which have been shown to add to global warming. According to the Victoria Transport Policy Institute (VTPI), the external cost per vehicle mile of GHG creation is $0.164 in $2007 which is equivalent to $0.109 ppm in $2010. Meanwhile, Carbon Fund calculates rail travel as creating 0.42 lbs CO2 per passenger mile.

The EPA calculates that the annual emissions from a typical passenger vehicle are 5.5 metric tons of carbon dioxide. Dividing that by the 12,000 miles the average car travels in a year (also from the EPA) results in 1.01 lbs per vmt or 0.64 lbs ppm. Using the lbs ppm to create a ratio (0.42/0.64) and multiplying it by the value for cars gives us the value for rail travel of $0.072.

Parking: While some parking costs are paid by users, others are external because, for example, of tax-exempt "free" employee parking or because of municipal parking minimums. Shoup (2005) sets the external cost of parking at $0.22 $0.05-$0.14 per vehicle mile in $2005. VTPI determines a value of $0.062 pvm. Accounting for inflation and passengers per vehicle this becomes $0.151$0.041 ppm. Amtrak, on the other hand, pays for its rail yards where it parks its trains, which means its parking is covered in its direct costs. Its subsidy is $0 ppm.

Resource consumption: The external costs of resource consumption refers primarily to the cost of producing, importing and distributing petroleum that are not passed directly to users. It includes the military costs associated with protecting oil supplies, macroeconomic costs of oil dependence, uncompensated ecological costs (like loss of a species), subsidies for drilling and costs associated with depleting a non-renewable resource. VTPI prices this at 76¢ per gallon or 4¢ ppm (in 2010) for roads.

Amtrak, meanwhile, used 62 billion gallons of diesel in 2009 to carry passengers 5.914 billion miles. Which puts its resource consumption external cost at $0.008 ppm in $2010. [(62B gallons*$0.80 per gallon)/5.914 billion miles]

Damage from crashes: While some crash costs are internal to the user, like insurance premiums or personal property damage, others are external because they're uncompensated or paid by an external user, such as when a pedestrian is injured in a hit and run crash. Looking at a series of studies and estimates of the external cost of automobile crashes, VTPI determined that the external cost per vehicle mile is $0.055 in $2007 which becomes $0.037 ppm.

Miller, Douglass and Pindus' 1994 paper on railroad injuries determines that per passenger mile, train injury costs comprise only one-fifth those of cars. There's reason to believe that less of the crash cost for rail is external than it is for autos because of Amtrak's greater ability to absorb such costs than an individual motorist. External Cost of Transport: Accident, Environmental and Congestion Costs in Western Europe puts the ratio for external costs of auto vs passenger rail at a much higher 41:1, so we can safely use the 5:1 ratio, making the external cost for rail $0.007 ppm

Congestion: Traffic congestion carries a very real transport cost that consists of incremental delay, vehicle operating costs (fuel and wear), pollution emissions and stress that result from interference among vehicles in the traffic stream. VTPI estimates the cost of congestion for roads at $0.035 pvm in $2007, which becomes $0.023 ppm in $2010. Unlike the highway system, most of our rail network is below capacity (Figure 13) which means Amtrak causes very little rail congestion.

While there has been little attempt to quantify the congestion Amtrak might cause, there is plenty about how it reduces congestion on roads and at airports. A USDOT study, in fact, determined that expanded rail service would have a net positive effect on congestion. And an Amtrak study put the benefit of the reduction of airport congestion along the Northeast Corridor alone at $104 million. Therefore I've conservatively set the Amtrak congestion charge at $0.00.

Lost tax revenue: Most of Amtrak's train routes use railroads owned by freight companies for which Amtrak pays rent and the owners pay property, sales and franchise tax. If roads and highways were similarly owned by private companies, they too would pay billions of dollars in taxes. TeleCommUnity set the value of the land used for roads in America at $7.1 trillion in $2007. Taxed at the average state property tax rate of 1.38% in $2010, roads would have contributed 2.8¢ ppm to states' coffers.

Before being made exempt in 1979, Amtrak paid state and local taxes which totaled $14 million in 1979. Adjusting for inflation and dividing by total passenger miles, lost tax revenue from Amtrak is 0.64¢ ppm.

Land use: ecological impacts: Building roads and railroads has an ecological impact that also carries a cost. These land use changes can, for example, cause a heat island effect, sever and fragment wildlife habitat and result in "roadkill." VTPI puts the cost of these ecological impacts for roads at $0.03 per vehicle mile in $2007 (or $0.0198 ppm in $2010).

Using the rail and road costs ppm defined in a 2005 Swiss ARE paper (from VTPI), we can determine a ratio between road and rail which is 0.7 centimes to 0.775 centimes per passenger kilometer (1.2 per vehicle kilometer/1.59 passengers per vehicle). This means that the ecological impact of passenger rail is 92.75% the value of the one for roads ppm. Multiplying this by $0.0198 gives a value for rail of $0.0184.

Noise: Noise from roads and rail can have real and measurable impacts on nearby land values. VTPI looked at several studies of the external cost of road noise and determined a value of $0.011 pvm ($0.0075 ppm in $2010). A study by INFRAS/IWW placed the ratio of ppm passenger rail noise costs to roadway noise costs at 3.9/5.2 (page 74). Multiplying this ratio times the cost for autos gives $0.0057.

Transportation diversity: Many communities are automobile dependent. This lack of diversity can often result in inefficiency and inequity, such as when people feel the need to drive for very short trips because they can't easily walk or bike on roads that don't accommodate that kind of travel. This eliminates options, leads to less physically active (and therefore less healthy) lifestyles, and can often trap people who can't, for whatever reason, drive. VTPI determines the value of the impact of roads on transportation diversity at $0.007 pvm ($0.0044 ppm). Amtrak doesn't create the same kinds of dependency, so it's cost is zero.

I omitted some costs because adequate values were not available for both. This includes the delays, discomfort and lack of access that vehicle traffic imposes on nonmotorized modes; waste disposal; water pollution and hydrological impacts; and other land impacts such as reduced property values, reduced community cohesion, and the costs associated with sprawl. Together these constitute another 4¢ ppm for roads, with most of that cost related to sprawl.

Amtrak is unlikely to have a larger ppm cost for these factors. Amtrak isn't considered an engine for sprawl. Railroad surfaces are capable of absorbing twice as much rainwater as paved roads—and there is far less land dedicated to Amtrak rail than to roads per passenger mile. So it is reasonable to believe that the addition of these omitted values would not change the relative values between the two subsidies very much or change them to be further in favor of Amtrak.

Based on these numbers, it appears that roads are subsidized at almost 12 1¢ per passenger mile more than Amtrak. To bring the two into balance, the gas tax would either need to be raised from the national average of 48.1¢ per gallon to about $3.30 $0.96 per gallon, or the Amtrak subsidy would need to be increased from $1.565 billion to $2.348$1.630 billion.

Another way to think about this is to combine the subsidized cost with the portion paid by user fees to get a total public cost. (Drivers' user fee revenue in 2008 was $94.512 billion and miles travelled was 4.9 trillion passenger miles for an inflation adjusted contribution of $0.020.)

Total public cost, unpaid + paid
Amtrak: $0.439 + $0.318 = $0.757
Roads: $0.557 $0.447 + $0.020 = $0.577 $0.467

Which means that Amtrak users are paying 44.5% of their public costs, while drivers pay only 3.6% 4.3% of theirs.

To be clear, this does not mean that motoring is cheaper. Drivers are also paying their own internal costs (purchase and maintenance of a car and insurance) which the IRS estimates to be 51¢ per mile total (or 48.5¢ per mile, less tax). That increases the total cost of driving to $1.062 $0.952 per mile. That's without considering the travel time costs. Comparing all the costs, Amtrak becomes much cheaper than motoring.

We should not ignore the environmental, political, human and other non-obvious costs of transportation when discussing how to fund it. By focusing only on the direct costs, as many choose to do, we run the risk of making the wrong decisions. While a more thorough scholarly analysis would surely come up with different values and totals than my amateur one, it's more than possible that Amtrak is the bargain paying most of its own way, and roads are the resource-consuming boondoggle that need to have their subsidy cut.

This is a recurring argument among writers like Ryan Avent, Matt Yglesias, and Ed Glaeser. They say that the housing market suffers from a supply/demand imbalance. There isn't enough supply, and that's the reason why so many neighborhoods in so many cities are unaffordable. If only we could boost the supply of housing to meet the demand, we could bring down, or at least stabilize, rents.

This idea rests, first and foremost, on the assumption that housing is a commodity. Consider a different commodity market—wheat. If wheat prices are very high, one way to bring them down is to boost production and flood the market with more wheat. This works because wheat actually is a commodity. Every unit of wheat is more or less the same as every other unit, so the price is whatever price the market dictates.

Housing is different. There are many unique types and styles of housing, some of which are more desirable than others. When demand for housing rises in a neighborhood, rents will rise, regardless of the type or quality of the housing. A neighborhood might have century-old rowhouses, 1970s apartments, and brand new luxury buildings. If demand is rising in that neighborhood, rents for all types of these units will rise.

But what if a neighborhood doesn't have any vacant land sitting around waiting to be developed? How do you increase the supply of housing when there's no place to build new housing? Basically, you have to knock something down and replace it with higher density housing.

Let's imagine that a developer is proposing to level some not-so-great '60s-style townhouses in an urban neighborhood. In their place, the developer is going to build a multi-level apartment complex with a gym, pool on the roof, and ground-floor retail. Perhaps the developer is going to knock down 10 low-quality units and replace them with 50 high-quality units, for a net-gain of 40 housing units.

Even though the number of housing units in the neighborhood goes up, it's virtually guaranteed that the market rents for those new units are going to be higher than the rents for the old units. So the folks who might have been able to afford one of the '60s-style townhouses no longer can afford a luxury-apartment in the neighborhood.

From a developer's perspective, this is a no-brainier. The biggest cost in constructing housing is building the structure itself. The cost of making the units look cosmetically luxurious is marginal, but the price that people will pay for a "luxury unit" makes it more than worth it for developers.

For this reason, it's understandable why some people oppose development, and it's not so simple as sitting them down and saying, "Don't you get it? There's not enough supply to meet the demand in your neighborhood, and that's what's driving your rents up! Once we increase the supply of housing, everyone will be better off."

The truth is that increasing the supply of housing units in a single neighborhood might not have its desired neighborhood-level supply/demand effect, because housing isn't necessarily a commodity. But city-wide, and metro area-wide, it might actually accomplish something.

Unless a developer is going to replace 10 low-quality units with 50 low-quality units, there's going to be a change in the structure of the neighborhood housing market that's different from the impact on the metro area housing market.

Avent argues in The Gated City that homeowners often engage in NIMBYism because they are conservative, risk-averse, and are cautious out of fear that the project might fail. But it goes a bit beyond that. Renters often engage in the same behavior, not because of fear it will fail, but because they're afraid the same project might actually succeed.

Oligopolies share an important characteristic with monopolies: firms price goods and services not based simply on supply and demand, but in the way that maximizes their revenue, while taking into consideration how their competitors behave. Oligopoly industries are notorious difficult to understand, and game theory scholars have stepped into help explain why these firms behave the way they do.

In a perfectly competitive market, competition among firms brings down prices. In an oligopoly, this is also true to an extent. Consider the case of a well-known oligopoly: airlines. The air travel industry is dominated by a small number of firms and barriers to entry are extremely high. Even so, "fare wars" occasionally drive prices down and yield great deals for consumers.

Car sharing is unlike air travel in one key way: customers are screened for safe driving records, and must be a member of a given company to use its cars. In the case of Zipcar, a potential customer must submit an application that shows that they have a driver's license and have committed no serious infractions behind the wheel. If a potential customer lacks either of these, he or she is ineligible for the service.

Imagine if airlines operated similarly: Before booking a trip, you would have to buy a membership with the airline. You'd only be able to buy fares from those companies where you held a membership. Airlines would still compete for business on price, but in different ways. "Fare wars" would be a much less likely occurance.

In that sense, the market for car-sharing is more like the cell phone industry. Consumers are allowed to sign up with as many wireless carriers as they please; but most pick just one and stick with it. Rates are a major selling point, as are features like service coverage and available phones.

Even with monopoly status in many cities, and the perception of success, Zipcar is not a profitable company. In it's ten-year history, the firm has never turned a profit. Until recently, the District indirectly subsidized the company by offering choice parking spaces at below-market rates.

Arguably, Zipcar was able to pass those savings on to their customers. And with monopoly status, it became a one-stop shop for anyone looking to have access to a shared car. If, instead, the region's 800-some shared cars had been split among four companies, a customer holding a membership with only one service would have access to only a fraction of the total number of cars.

Still, competition will likely mean more total shared cars in the region, which is good from an urbanist perspective. It should benefit the consumer by forcing the industry, including Zipcar, to offer attractive rates and quality service. Just don't expect it to drive down rates significantly or drastically alter the market in the immediate future.

Davidson listed advantages and disadvantages of gentrification. Advantages included an improved use of urban land, safer inner-city neighborhoods, higher tax revenues (to provide more funding for social safety net services such as rental assistance, energy assistance, emergency food assistance, and various other forms of assistance for the city's dependent population) and more business investment.

Among the disadvantages were a displacement of residents, a loss of community identity, and a shift of financial services (from high concentrations of social service expenditures to more recreational and cultural expenditures).

From a strictly economic definition of gentrification, statistics demonstrate that as an area's ethnic identity becomes "whiter," there is a corresponding increase in median household income thus indicating the process is gaining a foothold, according to the panel. This assertion makes logical sense, but, however factually accurate or inaccurate, operates under the dangerous and loaded axiom that people of color are poor and people not of color are wealthy.

This default position often forms the fault line and negotiating position from which conversations at community meetings deteriorate into us versus them sessions leaving people to feel more dejected than they did before attending.

Although the assembled group, almost entirely African-American with a majority female, acknowledged it is "dangerous to say that gentrification is not a race issue," the consensus held strongly that gentrification more closely correlates with economics.

"We over simplify the conversation by looking strictly at a race breakdown. We clamor to define it instead of discussing how to stop it. Each neighborhood has a different story. The issue happens at a micro level, each block by each block, instead of a macro, city-wide level," said Davis, a New Jersey native, who came to DC in the mid 1990's as a student and is a homeowner in the historically middle class neighborhood of Hillcrest in Ward 7.

"Race can't be completely dismissed from the conversation. We are only one generation removed from segregation. People born after 1975 are the first cohort that grew up in a desegregated world, for all intents and purposes, and without overt racism. So really we are first generation where everyone had access to higher education and thus we are starting with higher incomes than previous generations."

Davis cited the DC government's Homestead Program in the late 1990's as a public program that incentivized gentrification. The Homestead Program awarded foreclosed, abandoned, and dilapidated homes at nominal prices in order to move the properties off of the city docket. These homes, often purchased in the U Street and 14th Street NW corridor for less than a thousand dollars, were then fixed up for less than $100,000 and subsequently assessed at $300,000.

Would this have happened naturally? The panel agreed that it would have, but this program "moved the process along faster than what you would usually see organically."

Speakers referenced demographic shifts in the history of the city. Georgetown had a reputation as a slum in the 1920's, and Anacostia was nearly 80% white up until the 1950's. Given this, there was a consensus that change is natural as people come and go between and within neighborhoods. Davis noted that there is an emerging group of middle class African Americans that are "not choosing to buy or if they buy they are typically choosing the big house in Prince George's County."

Further discussion focused on the influence of HUD and HOPE VI projects, of which DC has the largest presence of any American city other than Chicago. "HOPE VI helps the lower income people stay, but it is the middle income people who get displaced. They make too much to qualify for housing programs but they don't make enough to afford the cost of living in the city," the panel said. "These formulas look at the Adjusted Median Income, not the cost of living. We are moving to extremes where we have a city of very high income earners and very low income earners."

One of the problems is a pervasive "fear undertone" that has branded "bike lanes, cupcakes, and dog parks as code for white people," said Davis who pointed to a social component of "a lot of day cares but no pre-schools" in certain neighborhoods that have a heightened fear, alertness, and sensitivity to a real or perceived encroachment of change.

Misinformation was credited with spreading and perpetuating the "fear undertone" according to Greene. "DC has caps on how much your property tax can be raised. There are exemptions for seniors. Nearly half of the multi-family housing stock is rent controlled. Working in Prince George's County, I can tell you Maryland's property taxes are higher than DC."

"It is a polarizing word. One of the main causes is public policy," said Greene. "From that standpoint it is called revitalization. What we try to do is re-concentrate areas of poverty with more mixed income neighborhoods through the investment of public dollars. Hopefully you have positive outcomes but you have negative outcomes at the same time."

The panel and audience agreed that "large pockets of poverty have not worked" and with a movement towards mixed-use development "we try to manage displacement." However, Greene said mixed incoming housing is not a panacea as it is hard to finance by bringing together two sets of investors accustomed to very different systems. "One is used to generous tax credits and one is used to return on investment."

While the conversation was honest and refreshing, it ended back to where it started, as "DC is creating jobs that many residents are increasingly unqualified for there is a supply and demand problem that is not going to go away."

"When prices do not reflect all these costs, one mode may have a cost advantage over the others that distorts competition," writes the GAO. "As a consequence, the nation could devote more resources than needed to higher cost freight modes, an inefficient outcome that lowers economic well-being."

The report goes on to say, "If government policy gives one mode a cost advantage over another, by, for example, not recouping all the costs of that mode's use of infrastructure, then shipping prices and customers' use of freight modes can be distorted, reducing the overall efficiency of the nation's economy."

The GAO didn't make recommendations in this report but did say that policy changes that make prices align with the true costs of freight shipping would provide a great economic benefit. Less targeted changes, like charging user fees, subsidizing more efficient alternatives, or applying safety or emissions regulations—could be helpful as well. The report acknowledges that "the current configuration of transportation infrastructure can limit the shifting of freight among modes."

After all, we've been building a lot more highways than railroads lately.

Cross-posted at Streetsblog Capitol Hill.

After Tropical Storm Isabel came through in 2003, my nearby Baskin-Robbins had to throw out their entire inventory of ice cream, thousands of dollars worth. They were just one of thousands of businesses that suffered major financial losses due to the power outages from that storm.

According to the article, some customers are spending $9,400 to install natural gas-powered generators in their homes because they can no longer rely on Pepco to provide them with reliable power. If 10,000 customers do that, it's a total expense of $94,000,000 incurred by them to reduce the risks associated with outages. Unlike, say, cell phone service, customers cannot choose to switch to a different utility for their electric distribution service, so there is no competition to raise the bar for reliability.

Pepco is regulated by the public utility commissions in DC and Maryland. The simplest way to get Pepco to make improvements is for these commissions to internalize the costs of outages with a simple mechanism.

Pepco has announced that they have a 5-year plan to improve reliability. So give them the five years they claim they need. Then, starting in 2015, the PUCs should require them to reimburse customers for outages. For example, any residential customer would receive $2 per hour or portion of an hour that their power is out after the first 15 minutes.

If Pepco experiences an equipment failure that knocks out 2000 customers for 3 hours, they pay $12,000: $6 to each customer. If, after a big storm, they lose 100,000 customers for 10 hours, that's $2 million: $20 to each customer. Reimbursements to commercial customers would be on a different scale. (I'm just making up the amount of these reimbursements for illustrative purposes; the appropriate dollar amounts could be higher or lower.)

The utility commissions would build into Pepco's rate case the expected costs to the utility for achieving "average" reliability based on regional or national statistics, or to return to their own reliability rate from 2004. If Pepco exceeds that, then their investors would reap extra profit; if they fall short, their investors pay. This is fair, since the customers who are directly affected are the ones who get the reimbursements if Pepco falls short, while the customer base as a whole would pay a slight premium for increased reliability if they exceed the goals.

The commission could set the bar anywhere they like. One idea would be to expect them to achieve "average" by 2015 and then increase the reliability expectation by some percentage each year, incentivizing Pepco to continuously improve.

What about "Acts of God?" I would propose that there are no "Acts of God." It's up to the utility to prepare for big storms and other large-scale disruptions. This is, in fact, the business they are in. Hopefully the risk of enormous payments would get them to start looking more seriously at undergrounding, redundancy, smart grid and other risk abatement strategies.

Also, they could purchase re-insurance for major losses. That would be good, because the re-insurer would likely be tougher on Pepco than the PUCs, since they would be scrutinizing Pepco's actions to make sure they reduce their own risks.

This customer rebate mechanism is very simple and easy to understand. The financial incentives are exactly aligned with the desired outcomes. The utility is rewarded for exceeding its goals and penalized for falling short. It even incentivizes them to go beyond the minimum and look for creative and cost-effective solutions.

For the last five years, Pepco has gotten fat and happy while allowing its reliability to go to pot. Sure, they've had a couple of uncomfortable press conferences, but no real penalties. A mechanism like this would keep them from letting it happen again.

This camera sends tickets to speeders but also enters everyone who's not speeding into a lottery to get some of the money back. Instead of just punishing people for breaking the law, they get a chance at a bonus for following it. It also reduced average speeds by 7 km/hour in the place it was tried in Stockholm.

Let's significantly expand the number of speed cameras around the region, but mandate that they work just like this one.

Tip: Teyo.

While the new southern entrance was conceived as a bank of elevators that would connect the Red Line and future Purple Line, it would also serve as a second entrance to the Red Line, regardless of whether or not a transit rider is transferring. Therefore, its construction is not dependent on Purple Line groundbreaking.

A new entrance would immediately benefit Red Line riders the day it opens. This has made the county interested in financing the new entrance on its own, independent of the Purple Line's engineering process.

Because escalators need to be periodically rebuilt, the single-escalator bottleneck situation in the Bethesda Metro station was largely unavoidable. Realistically, the other escalator that goes between the mezzanine and the platform will need to be rebuilt at some point in the future. And then Bethesda will be right back to being cramped and frustrating.

Like Medical Center, Bethesda only has one escalator bank that connects the mezzanine and the surface. I shudder to think what would happen if there were some sort of emergency down on the platform when one of the mezzanine escalators is under repair.

The slow and cramped conditions on the one escalator would turn into something much worse. Because every escalator eventually needs to be rebuilt, there will be many points in the future where the Bethesda Metro station would be crippled in an emergency situation than under normal conditions.

Because of the ongoing global credit crunch, interest rates remain historically low. Part of the cost of any project is the cost of obtaining financing. As anyone with a mortgage knows, a lower interest rate lowers the monthly payments to service the construction bond.

Montgomery County should issue the construction bonds as soon as possible. Not only will they improve safety and ridership in one of Montgomery's most celebrated pieces of infrastructure, they'll get a good price doing so.