Government accounting. From a commenter:
I read an interview with an Amtrak exec in the early 80's, I think it was the CEO of the time, Graham Claytor, but can't be sure. In any case, at the time, Amtrak was doing reasonably okay, and there was demand for more new routes that could have been profitable. But Amtrak, being a good government agency, didn't see them as profitable. Why?The explanation had to do with that old bugaboo, marginal accounting. Any private business would look at an opportunity, calculate that if it would cost X dollars to run a train, and generated X+Y dollars in revenue, that would be profitable. Not Amtrak. They insisted on including a percentage of the corporate overhead in assumptions for any new business. If Amtrak were to run 50% more trains, they would want to cover a 50% increase in administrative overhead.... before even considering whether to run the route.
Of course, this accounting artifice eventually leads to no investment at all, and the lack of service is the true shame of having rail run by a government agency, not the money wasted.
In any case, our rail system is obsolete at this point, and there's no way to run true high-speed trains on the existing infrastructure. Even the Acela trains only beat the 1930's steam schedule by about 10%-15%. Any new solution has to built from the ground up. There's plenty of private capital out there, the political challenge is figuring out how to unleash it.
Obviously, I don't have the interview to hand, but this sounds right. Government accounting is ridiculous. Harken back to PJ O'Rourke detailing how the forest service accounts for the lumber it sells (as far as I know, this hasn't changed since the 1980s, but even if it has, the point stands). The forest service got to keep any revenue from selling its lumber as extra, on top of its budget. Thus a tree that cost $100 to grow might be sold for $2. In a private entity, this would be a $98 loss. For the Forest Service, it was a $2 profit.
Again, this is not a necessary feature of "government"; it is a pernicious feature of our government.
Wait...how does a tree cost $100 to grow? Isn't this a public use issue? The trees just grow. Nobody needs to plant them or to maintain them, they occur naturally. So the costs of the trees is just extraction. The same with whaling, you don't pay the costs of raising a whale, or oil you don't pay the price of putting hydrocarbons under pressure for a billion years. Please explain, because the caffeine hasn't hit my system yet.
It's an example, not an exact figure, but trees in lumbering areas don't just grow. There's a great deal of maintenance--cutting back the underbrush to give them room to grow, watching for pest infestations and fires, building roads, etc.
Actually, if you leave the forest alone, it will eventually grow a fine dense hardwood stand of lumber. But it takes a loooooong time. Say, centuries. If you want it to move faster, you have to maintain it. It still takes decades, though - thus the cost.
As someone who lives in a logging area (Well was a logging area before protesters and a decade of lawsuits finally caused the government to stop re-issuing lawsuits), I can refute your logging example.
While I agree government accounting is terrible, I do not agree with the story to illustrate it using the conclusion that the government should have dramatically increased the fees for timber permits in order to make their balance sheet work.
The forest service does to a lot of maintenance. But if you think they are maintaining even 1/10 (1/100th?!?!) of the wilderness areas, you're, well probably someone that lives back east and has no experience out west in remote areas where logging is likely to take place.
The loggers I know had cut timber in a rotational pattern that allowed the seedlings to grow up faster. So within a 20 years of rotation they were back cutting in areas that were already harvested. And the forest was healthier. As long as rotational timber cutting is done where some of the all trees are left, and most of saplings are left (in a spread out pattern with room to grow) the forest actually grows better.
The sad story is after the loggers were forced to leave, lightning struck (literally) and one of the densely packed, with dead wood, debris, scrub oak areas caught on fire and burned thousands of acres and burned the whole place down. Oddly enough, a similar forest, 70 miles to the north that loggers were kicked out of was completely decimated by beetles not long after logging stopped. Thinning out the forest and making way for new young growth is healthy for the forest.
There's a reason why the BLM actually pays, yes pays, private ranchers to clear out large sections of forest areas (not tall timber, but smaller, but still substantial sized trees.)
Megan,
Who was the commenter?
Jesus, wise up! Or at least do even the tiniest bit of research. The Republicans and their oil company clients hate public transit. Always have, always will, for obvious reasons. They've been trying to kill Amtrak for decades.
In the early '80s Ronald Reagan made up stories relentlessly about how Amtrak was a complete waste of money, etc, etc. The accounting issue you mention wasn't the cause, it was the bullsh*t rationale Reagan's appointees used to try to build support for defunding.
How long has this railroad example been around? 50 years ago, I could have pointed to some big corporations that assessed investment opportunities like that.It is only about 30 to 40 years ago that the British Government changed its ways. British Government accounting is still terrible, but it is only about fifteen years out of date. I decline to believe that US Government accounting is stuck more than twice as far in the past.
P.S. I have some sense of how to admire a forest, but no idea of how to manage one. However, a lot of land seems to be healthier being moderately cropped or grazed(Are loggers grazing nomads or crop cutters?). And they say nowadays that a forest putting on weight fast is what fixes most carbon dioxide.
Answering my own question- it was BobK.
"trees in lumbering areas don't just grow"
Well, trees in forest do "just grow". No maintenance required. I would question what sort of maintenance the forest service spends making trees grow. I am willing to wager that the forest service's efforts are in fire prevention and not making trees grow. Fire prevention isn't for the health of forests, forest fires are a natural part of the lifecycle of a forest. It is how many pine trees reproduce. Quelling forest fires causes underbrush to accumulate and leads to the superfires that destory everything. Forest fire prevention is a service provided for local landowners and not the forest itself. I don't think you really thought your example through at all.
For a non-profit business, the purpose of the business is to pay for the administrative overhead. If the new business doesnt cover an expansion of the administration, it serves no purpose from the view point of the administration.
Megan got the P.J. O'Rourke anecdote wrong.
He stated essentially that in order to cut down a tree, the US Forestry Service had to take site surveys, write environmental impact statements, build a road, and hire someone to cut down the tree. All that costs them $100, and then the tree sells for $2. For a private business, that would be a $98 loss. For the Forestry Service, its a $102 increase in their budget, because they can go to Congress and claim they need their funding increased to do the $100 worth of infrastructure.
I don't know if that's true. But that is essentially how P.J. O'Rourke recounted it.
American rail sure does suck in contrast to German rail. To get American public transit rail up to German standards would require just a few modest changes to our lives.
First, tax fuel for motor vehicles at a punitive 60 to 70 percent rate in order to drive the white trailer trash off the roads and exterminate them from the countryside. Owning and operating a motor vehicle should only be left to those with sufficient wealth to afford that luxury.
Next, introduce proportional representation and a parliamentary form of government. That'll castrate political opposition, rendering it useless. It'll also permit quick, responsive, activist government for whatever program our rulers want to foist upon us. It'll also silence the backwoods rubes who bitch unceasingly at having to pay taxes through the nose so the urban jet-set can choose between driving, flying, or, er, railing from urban center to urban center.
Third, coddle railway unions and offer them gracious public pensions, early full retirement, a say in governing the railroads, and a national monopoly for a public corporation so as to keep out anyone capable of competing on costs.
Finally, opaquely spend vast fortunes of tax money on buying rail systems from national champions like GE (or Siemens in Germany). Interminably jawbone reforms for decades while the public railway corporation rejiggers its books more frequently than the prime minister changes his undies.
It's a formula for success unmatched since Stalin used gulag slave labor to build the Moscow underground.
"Quelling forest fires causes underbrush to accumulate and leads to the superfires that destory everything."
Forest fires occur naturally every 50 years or so in the wild. Unfortunately, many forest fires are not started naturally they are started by people. In San Diego it's not that the fires are that horrible, but that they occur with such frequency that the area does not recover properly afterwards. The second part of this is that homes are built in the forest areas, and we don't want to just let them burn down.
I guarantee that a couple hundred years ago there was massive building up of undergrowth and forest fired burned millions of acres. It's just that there wasn't a city in its path at that time.
Or instead of burning down the forest to promote new growth, releasing all the deadly C02 into the atmosphere (cough, gag, wheeze, no that's not C02 you're chocking on it's ash and other particulates) we could thin the forest out through environmentally responsible logging, which:
Employs people
Raises tax revenue
Reduces the price of Lumber
And therefore makes construction costs cheaper
Or we can save the forest for the once every 10-20 year fire that will have a worse effect than logging while:
Increasing tax expenditures
Increasing lung related illnesses, especially among children in surrounding areas
Decrease tax revenues
Decreasing unemployment
Raising timber prices
Protecting the animals for a limited time period, only when "times up" most of the animals die, rather than just relocating.
Speaking of government failings, I've noticed that people have taken an interest in methods to save fuel. Many dig up outdated and wrong information or infromation of unkown origin from government sites.
This is one reason I can't advocate a carbon tax or cap; first, we need to get good information out (and get lights timed properly and appropriate speedlimits set).
Most sources suggest accelerating slowly to improve efficiency, despite that we know that the opposite is true (this even before considering the benefit on traffic if this behavior were to become normal).
I've also seen people suggest slowing down (to 55mph on the freeway!). The graph usually sited is of unknown origin and not likely representative of the current vehicle fleet (Cars are more aerodynamic, engines are better, and cars are geared differently that back in the 70s. I know fuel economy for me doesn't really drop off until after 80mph).
"The second part of this is that homes are built in the forest areas, and we don't want to just let them burn down."
Bingo. That doesn't really change the cost of growing trees now does it? Of course this is moot since Mark Langsdorf clarified the quote and the government policy issue on pricing.
Gee, Spud, I guess you aren't a Reagan fan. I didn't vote for him either, but I agree that Amtrak is just a boondoggle for rail buffs, people afraid to fly, and tourists (except for N.E. Corridor) Look, every passenger train occupies at least one "slot" that could be used for a freight train. Each freight train lost represents 50 or more truckloads that are diverted to the interstates. On the other hand, each passenger train represents about 5 or 6 Greyhound bus loads. Recently, Greyhound was running at about 50% capacity. So each Amtrak train is putting 50 or more pollution-spewing, traffic-clogging trucks on the road in order to remove 3 buses. Not a good deal for the environment, the motorist, or the taxpayer.
I'm missing something here:Any private business would look at an opportunity, calculate that if it would cost X dollars to run a train, and generated X+Y dollars in revenue, that would be profitable. Not Amtrak. They insisted on including a percentage of the corporate overhead in assumptions for any new business.
Why is it wrong to include corporate overhead when calculating costs? IOW, why shouldn't the X dollars required to run the train include the overhead associated with running the train?
Actually, if you leave the forest alone, it will eventually grow a fine dense hardwood stand of lumber. But it takes a loooooong time. Say, centuries.
Depends on the forest. Over vast swaths of the Rocky Mountains, the climate doesn't support hardwood trees, so instead, there's a circular cycle between the pines and the aspens.
Actually, pure marginal accounting can lead you down the primrose path as well. There's no substitute for estimating the *actual* amount of new overhead involved in the venture, as opposed to making the old business more profitable by absorbing punitive overhead.
Does anyone even know Amtrak's marginal costs so that some informed policy decisions can be made regarding growing Amtrak?
I have e-mails out to different people, and the amount of Diesel fuel it takes to drive the Hiawatha train from Chicago to Milwaukee appears to be a closely-guarded state secret. This question has bearing on whether trains are good for the environment or for energy independence.
Likewise, California has this "Global Warming Office", and I have been waiting for months for an answer of how much fuel it takes to drive the Surfliner from LA to San Diego, which could answer how effective trains are in combatting CO2. No one can tell me.
If Amtrak doesn't know how much gas their trains use, I don't think they know the marginal cost of anything over there.
Here is the most recent (2002) data from the Bureau of Transportation Statistics on federal subsidies for various modes of passenger transportation:
Net Federal Subsidies per Thousand Passenger-Miles by Mode:
Highway: -$1.00
Commercial Aviation: $6.18
Railroad: $210.31
Anyone care to explain why it makes sense for the government to subsidize rail passengers by $210 for every $6 in subsidies to airline passengers?
As shown above, the highway "subsidy" is negative. Far from subsidizing highway users, the federal government actually makes a profit from them.
Meghan!!!!
Can you please do an interview with some wonk from the Bureau of Transportation Statistics?
Oh, and they need to start a blog.
So much usefull info.
Mixner:
Let me offer some insight into thinking on the subsidies question from the train advocate circles.
The $210/1000 passenger-mile subsidy (about 20 cents/mile) is unmistakable in that you take the Amtrak appropriation of a cool billion+/year and divide by their 5 billion passenger miles per year, and voila. That means someone taking an Empire Builder vacation from Chicago to Glacier Park and back is getting a $400 grant from the Federal government, it is a real thing, and the train advocacy people get all red and huffy when this is brought up.
Your $6/1000 flight miles is derived from taking the shortfall in the FAA budget not covered by ticket tax and aviation fuel tax and relating to the approximate 500 billion passenger miles (100X Amtrak) carried by plane. The airlines may even challenge you on that because they argue they pull their weight compared to their General Aviation brethern. The train people counter that there are all manner of other subsidies to airlines, the 9-11 bailout, and perhaps the Air Force budget. It had been argued that commerical aviation has lost money since its inception and that only thing keeping it afloat are generous financing terms from the jet engine makers, and the advanced state of jet engine tech is driven by military needs.
As to the $1/1000 passenger miles profit of the highway system, there are broader considerations. Again, I telling you what the train people say, not saying it is right, and it is hard to convince train people regarding these things.
The gas tax is raised on all transportation gas and Diesel use, on the city streets paid out of property taxes ranging to those Interstate Highways. Mind you, we need city streets even if we revert to trains, but that is the reasoning.
It is argued that the marginal cost of new Interstate lanes is so high that it may be more cost effective to build high-speed train lines instead. I think I have to agree with them that with the shape society is in with EIS's and NIMBY's and BANANA's, building new highway lanes is a lot more costly in constant-dollar terms than when the Interstate routes were rammed through, but then again, the same factors affect HSR.
One argument train people make, "If you had to pay the toll rate to write down the capital cost of new Interstate lanes, people would be switching to rail." Well, indeed they may. This is a libertarian-sympathetic Web site, and I say, lets use RFID Speedpass toll technology and build toll roads with congestion pricing, etc, etc. I think that cars offer enough in the way of convenience and flexibility that you would get enough people paying those tolls.
As to the cross-subsidy argument, the notion runs, there is so much cross subsidy of motorists everywhere paying for the expensive new stretches of Interstate lanes somewhere, why can't "we" (train advocates) get any of that money to cross-subsidize trains or high-speed trains.
I guess I am more of a communitarian-Conservative than a strict Libertarian, and I say, put it to a vote. Find out whether motorists want their gas tax moneys spent so they can park their car someplace and take a high-speed train. They have floated such referenda in Florida and are doing it in CA. And when the people express what they want, the train advocates should abide by the consequences and stop whining about the Bush Administration hating Amtrak and the tentacles of the Concrete Lobby and accept the voice of the peope.
My sympathies are with trains, I am a bit of a train enthusiast, and I hang out with train advocates as part of my communitarian doctrine of conservatism, but the Bush-bashing, whining, and carping of these people is starting to wear on me. In light of what I just said, what arguments should I take to them on the subsidy question, or should I take my wife's advice and stay home from the meetings if these people get me that upset.
Paul Milenkovic,
The "arguments" of "the train people" you describe make little or no sense, as you seem to recognize. For example, the per passenger-mile value of the post-9/11 airline bailout cannot possibly make up for more than a tiny fraction of the cumulative difference in federal subsidies between rail and air.
If "the train people" seriously claim that the vast disparity in federal subsidies for rail vs. air vs. highways are justified on the grounds of hidden subsidies for air/highways, or externalities, or anything else, then they need to make a serious, quantitative case to support that claim. Vague allusions to bailouts and military spending won't cut it.
Mixner,
I'd further add that if military spending has made commuter airplane tech more available/economical, who cares! It's not like we should hold it against air transport that everyone in the US considers air power an important component of our national security.
When the military starts driving high speed trains into battle and train technology abounds, I'm all for building trains using this new technology....
That necessary and helpful spending in one area has had a multitude of benefits for the US citizen is not a valid argument for not cashing in on the investments the military has made.
I don't have my "history of the American railroad" library handy, but haven't railroads always been subsidized? I remember in high school American history class being staggered by the amount of land the government gave to railroads early on. It was an example of corruption and of cozy business/government relations at the expense of the little guy--and absolutely necessary.
AMTRAK was created by the Nixon adminstration
Some railroads were subsidized: The Eire and the Union Pacific. The Great Northern was not. Some got land grants but the government got reduced freight rates. They all needed political influence to be built and probably had to subsidize the politicians.
Much of the land the government gave to the railroads was almost worthless land that the government could barely give away through the homestead program - until the railroad connected it to the rest of the country. You could take up a homestead hundreds of miles from civilization and make a bare living as a subsistence farmer, assuming the original inhabitants didn't come back and kill you, but you couldn't make money from farming alone to buy luxury goods, nor necessities like farm tools, salt (the only way of preserving meat at the time), and gunpowder either. Shipping food a few hundred miles by horse-drawn wagon cost more than the food was worth. Back-country farmers all needed some sort of sideline such as fur trapping or distilling whiskey to provide themselves with a small quantity of goods valuable enough to be worth hauling to town - and after putting in many hours of work on these goods, and spending weeks traveling to where they could be traded, the part-time trapper or distiller would have to sell his product at a low price and buy at a high price, because the storekeeper had to maintain margins high enough to pay for shipping.
Put in a railroad and that changed suddenly. Land that people weren't even interested in taking for free suddenly became valuable town lots if the railroad built a stop nearby. Land within a day's horse and buggy trip of the railroad was still farmland, but from these farms you could sell your corn, potatos, etc. at a good price and use the money to buy factory-made goods at a fair price. Farmhouses acquired glass windows. Where farm wives had made cloth by hand from locally grown fiber and then sewed clothes from it, now they could order ready-made clothes from Sears, or order a treadle sewing machine to speed up the job of sewing their own. Farmers bought machines that helped them plow, sow, and harvest ten times the acreage as before.
So where the market value of unimproved land was essentially zero before (the government gave it away), now it was worth something, and the whole increase in value was due to the railroad. If I understand correctly, the usual railroad land grant was alternate sections adjoining the railroad right of way. The government kept the other alternate sections, and I'll bet that now that it had significant market value, it was only available for cash sale. Thus the railroad and the government split the value added to the land within one mile.
@RWB (June 19, 2008 5:15 PM): The myth of the railroad land grants was debunked decades ago. However, it continues to be cited, because it's been repeated often enough that it's now established "fact." Basically, your textbook is exaggerated roughly by a factor of 10, because the land grants are so small that they would not show up on a map if the map were drawn to scale.
The Amtrak long-distance trains exist to ensure political support in the Senate where California counts as much as Nebraska. If you're looking for $400 subsidies here, then you're missing the point. They don't exist to move passengers, they exist so that trains can move passengers elsewhere, like in the Northeast where there simply is no more capacity left on I-95.
If you want to attack this sort of inefficiency, don't go after Amtrak -- go after the US Constitution's system of per-state representation. Once you get rid of that, then lots of other inefficiencies drop out automatically -- like counterterrorism money being allocated to states like South Dakota which, we all know, are at high risk of being attacked by Al Qaeda.
The original post sounds like an urban legend to me. It's more fun to pick out neat "examples" of government inefficiency than dig for the real truth -- like those $900 Pentagon screwdrivers we've all heard about, which were probably just hasty covers for some black ops.
I can't imagine any rail route that, in the 1980s when gasoline cost less than $1 a gallon, could possible have been bottom-line "profitable." Railroading is a capital-intensive business. Even today, the Northeast Corridor for example, makes an above-the-line profit (covers all its direct and allocated costs, including overhead), but a below-the-line loss (after depreciating down the capital). Even the much-lauded European trains make only an above-the-line profit -- the difference is that their subsidy is hidden because their infrastructure companies are separated from their operations companies.
I know I am late to post this where anyone will actually read it but....
It is not just governmental accounting.
Verizon wanted to buy AirTouch and offered $45 billion and Wall Street threw up all over it because it would be 'dilutive' since they had to use purchase accounting.
Vodaphone bid $54 billion and was able to use 'pooling of interest' accounting. Wall Street liked it.
Verizon then tried to come up with a $55 billion offer using 'pooling of interest' accounting. Wall Street thought it would have been a good deal for Verizon.
Now, to make things really simple. Verizon offered to pay $10 billion more for the exact same assets and Wall Street thought it would be a better deal than paying $10 billion less.
What kind of idiot thinks that saving $10 billion on a purchase is a bad idea?