Civitas Review

The True Costs of "Free" Federal Rail Funds


Sunday's N&O offered up a thoughtless attack on HB 422, and its most vocal proponent, Rep. Ric Killian (R-Mecklenburg).

Perhaps it's a tea-party moment, who knows? But Charlotte state Rep. Ric Killian seems to be taking an ideological stance against more federal spending on railroads even though the $461 million coming to North Carolina in federal stimulus funds would benefit his own constituents. It also would employ, a representative of general contractors in the state says, 13,000 to 15,000 people in "direct and indirect jobs."

But Killian is against better railroads and more routes and less road congestion and pollution and faster trains connecting areas of the state to one another.

Actually, Killian is not against those things at all. Supporters of HB 422 recognize that there is no such thing as a free lunch, and accepting federal funds for high speed rail will certainly come at a cost. That the N&O editors wish away these costs and can visualize only the benefits shows they once again fail the centuries-old litmus test seperating a good economist and a bad economist – taking into consideration not only the seen but the unseen effect of an economic act.

First the N&O overlooks the highly likely scenario that these rail projects will incur significant cost overruns. Government-funded rail boondoggles often do, and being from Mecklenburg County, Killian is all too familiar with that scenario. Supporters of HB 422 are concerned about North Carolinians being forced to finance these overruns. That's one price we may have to pay for this "free lunch."

But what about those jobs?

But there are many thousands of people in North Carolina who have no job at all right now, whom it might help. And these "temporary" jobs would be fairly long-lasting, give the time needed to finish such projects.
Here the N&O editors fall prey to the conventional wisdom of "vulgar Keynseniasm" – that segment of Keynesian economic thought that overlooks the hetergeneous nature of resources like labor, machinery and other inputs. Indeed, many North Carolinians are out of work. But how does the N&O know that the $152 million worth of rail projects in the Charlotte area  will "create" jobs in perfect concert with the nature of those unemployed in Mecklenburg County? Unemployed roofers, realtors and investment bankers won't be of much use laying track.
Thoughful analysis suggests that the jobs "created" by the high-speed rail projects across NC won't just absorb those who are currently unemployed, because those who are unemployed are very specific in nature regarding their location and skillset.
No, there is no free lunch, and these rail projects will divert labor and other resources away from other uses. This is known as the "crowd out" effect, where productive private investment is bid away toward politically chosen endeavors. I have previously written about a Harvard study that concluded states receiving federal dollars for government projects are worse off economically, because there is less private sector investment.  Additionally, the federal projects bid up the price for inputs they use – making them too expensive for some private entrepreneurs and further depressing private investment and job growth.
Moreover, even in the cases that the rail projects do employ people or other resources currently not being utilized, there still is no free lunch. These workers and inputs will be tied up completing the rail project, making them unavailable for private entrepreneurs seeking to start or expand their business during the recovery – thus putting the recovery further off.
Therefore, another cost of the "free" federal rail projects is slower economic and job growth.
But what about the private sector jobs the N&O believes will abound due to development around rail stops and "more development and more industries that need rails for transportation"?
Any development that does spring up around rail stops will only come at the expense of development elsewhere. North Carolinians won't become richer overnight and have the purchasing power to support new shops or apartments both around the rail stops and in other parts of the state.  And which industries exclusively "need" rail for transportation? Rail is but one option companies can use to ship goods. Any savings realized by companies using the new rail lines are more than offset by the massive amounts of taxpayer subsidies required to construct and operate the lines. There is no free lunch.
Killian is right to emphasize private sector jobs, and the N&O editors are thoughtlessly transfixed by their government-funded rail fetish and combining it with economic ignorance.

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