Wednesday, July 29, 2009

Economic illiteracy

Ed Glaeser wrote a piece this week for the Economix blog in which he took a skeptical view of the benefits of high-speed rail. Basically Glaeser made the point that when you run the numbers that rail frequently doesn't make a lot of sense:
The founders of transportation economics, like John Meyer and the deeply missed John Kain, found that the benefits of passenger rail rarely exceeded the costs.

Their views were caricatured by generations of Harvard graduate students as “Bus Good, Train Bad.” Is money really better spent on fast trains than on educating our children?

I would be delighted to share the president’s optimism about high-speed rail, but if benefits do not exceed the costs, then America will just be living through a real-life version of “Marge vs. the Monorail,” where the residents of the Simpsons’ Springfield were foolishly infatuated with a snazzy rail project oversold in song by Phil Hartman’s character.

Economics doesn’t have any inherent opinion on trains, but it does strongly suggest the value of cost-benefit analysis, which may be the best tool ever created for evaluating public investments.
Predictably, this generated a lot of teeth-gnashing among train enthusiasts who quickly rose to the defense of high-speed rail in the comments section. With disturbing regularity, however, these posts betrayed a real lack of economic literacy that I would like to point out, as I doubt that these people are alone in their sentiments.

Here is one example:
I disagree. Economics doesn’t capture all of the ‘value’ of a good - just the economic value of it. Can’t a democratic people decide together that some good is worth paying for and subsidizing, even if it doesn’t strictly make economic sense? Of course, we shouldn’t then pretend it does make economic sense. But I will not agree that only accounting can solve this debate, at least not until it captures all the things that people actually value. These go well beyond just the value of goods and services produced in a given economy.
The problem here is that economics actually does a very good job at establishing what people actually value. I can tell you all day what a fan I am of something, but if I don't spend any money on that good or service you are probably not very likely to believe me. What people spend their money on -- which is a type of voting -- gives us an extremely good insight into what they value.

So, for the train example, if people really value trains then they should be willing to spend the money on train tickets to support such a system. If, however, after insisting how desirable trains are they choose to spend their money on a car or some other transportation then their claims will ring hollow.

The fact that Amtrak, for example, manages to lose money is indicative that people have voted with their dollars to send the company out of business. That it continues to operate simply reflects that those who enjoy it have exerted sufficient pressure on Congress to take taxpayer dollars -- mostly from people who evidently don't like the service -- to fund it.

Then there's this:
Some economists say that for a recovery it would be beneficial to pay some people to dig holes and pay others to fill those back up again. Why not use that energy for something worthwhile? Infrastructure like HSR would enrich our common-wealth. You need only visit a relatively small city like Munich, Germany and see the massive advantages they have in public transport options/wealth over anything we have on this side of the ocean.
I can't think of anyone who advocates paying people to dig holes and fill them back up. To do so means taking money from the taxpayers, either through taxation or borrowing, to fund an activity that accomplishes nothing. It's a great way to make society poorer. Similarly, if we put the government's money to work in a fashion that produces a lower rate of return -- which is probably most of it -- then we are also poorer.

Meanwhile I wonder by what relative standard that Munich, Germany with a population of 1.3 million in the city limits and 5 million in the greater area -- making it Germany's third largest -- is small.

And then we have this post:
Instead of questionable cost-benefit analyses, which can be biased by changing a single component of the formula, how about applying common sense. Transporting several hundred people between cities on one well-defined rail line offers many “benefits” that may not be apparent, including the opportunity to for those same people to use their time productively rather than steering a car, or more dangerously talking on a cell phone or texting. Freight is a no-brainer, and until we give U.S. companies all the capacity they need they will be at a disadvantage. But as long as we maintain artificially low motor fuel prices, the numbers won’t add up for rail.
Contrary to what is stated the benefits are actually very apparent, and it is up to consumers to decide if they are worthwhile. If a consumer, after weighing the prices -- which reflect the cost of scare resources -- decide to take the plane over a train then the apparently benefits such as talking on the cell phone aren't worth it.

Meanwhile, I have no idea what the commenter means by artificially low motor fuel prices given that I am unaware of any subsidies for them. In fact, it would seem that most motor fuel prices in the world are artificially high given the significant tax burden placed on them in many other countries.


Paradigm Shifter said...

Colin points out the sheer ignorance of the greens in the daily decision I face being an actual bus user in the Pacific Northwest. I value reading - blogs on my iPhone, books and magazines on my Kindle - and thus love riding the bus. But that forces me to get up at 5 AM. Sometimes I want to sleep in until 5:45, and thus pay the greater monetary cost of driving my car to save time on the commute. Or sometimes I want to get up at 5 and workout in the morning and thus can't make my bus and have to drive in. This is a daily evaluation for me, that reflects itself in whether I pay for the gas to power my car, or pay for the rider fee on the bus.

I was introduced to Colin's analogy of "things are only worth what people actually pay for them" when I was in junior high. I was collecting basketball cards, and every month I would run to the card shop to get the latest Beckett's to see the quoted value of my cards. I would then excitedly tell my father how much my Shaquille O'Neal rookie card had appreciated in the last month. He then asked, "So, how much has the card store paid you for the card?" My reply was, "Well, I haven't sold it to them yet because I think it will keep going up in value." Dad would respond, "Okay, how much would they pay you now?" I would explain, "Well, 50% of what Beckett's says it is worth, because they need to be able to make a profit when they re-sell it in their store." And my father would respond, "So, what is it really worth right now then?" I got very frustrated at my card being worth less than what Beckett's said, but I couldn't change the fact it was only worth what someone would pay me, regardless of what anyone said.

Notice what my father didn't say. He didn't gripe about the little guy getting screwed on the price of his card, although he did lead me to a way to evaluate my money invested vs. what I would get at the 50% of Beckett's rates. He didn't call for a national investigation, or some plan setting a minimum percentage of Beckett's list price that I should get paid. He just taught me the lessons of value being linked to the price someone will actually pay for something, and encouraged me to determine if those potential payments were worth the cost of the cards and the less quantifiable experience of collecting them.

Colin said...

Thanks for sharing.