Wednesday, February 23, 2022

Do you have a big grain of salt? The new proposed Amtrak line to connect Nashville with Atlanta is projected to generate a combined $464 million in annual economic impact in the region.

by Rod Williams, Feb. 23, 2022- Amtrak says a new proposal for a rail line connecting Nashville with Atlanta is projected to generate a combined $464 million in annual economic impact in the region. 

Okay.  How did they arrive at that number? In calculating that impact did the study subtract the negative impact caused by the fewer people who will be driving and flying? 

Passenger revenues cover only 55 percent of operating costs of Amtrak and none of the trains earn a profit (link). What is the opportunity cost of that massive subsidy if those funds were left for the public to spend on things individuals desire? 

The Federal government spends more money than it collects in taxes so the spending to build the line and to cover the operating cost is borrowed money or money created out of thin air. If borrowed, then that pulls money out of the economy.  That is money not available for business expansion and homebuilding. If created, that inflates the money supply and contributes to inflation. 

I take all studies that show if a certain action is taken or project build that it will have a tremendous impact with a grain of salt.  Anyone who has served as a member of a legislative body such as the Metro Council, School Board, or State legislature has seen those studies that say if you spend this amount of money on this project, the return will be widely enormous.  The message is that only a fool would not support a project with this kind of return. The project may be building a new road, a new bypass, or bridge, building a fixed rail mass transit project, building an industrial park, developing a water project, improving traffic control, building a park or greenway, building a new health clinic, financing a new sports stadium, or anything.  Always, the return will be enormous.  

If you have not served in government but work in a sector, non-profit or for-profit, that is trying to get funding from government or maybe funding from United Way or some big philanthropy organization that dispenses money, your organization may have produced such cost-benefit analysis reports or paid an outside consultant to produce them for you.

Researchers at St. Ann's College have studied this issue and have found that cost-benefit analyses underpin most public investments and that they cannot be trusted.  They find that cost-benefit analyses are highly inaccurate and biased. The benefit tends to be inflated by 50 to 200 percent according to this study.

The bottom line is that most cost-benefit analyses are BS. The benefit is highly inflated and based on an opinion that cannot be proven or disproven.  Also, the cost is often understated. Cost overruns are almost the norm on public projects.  Also, cost-benefit analysis rarely calculates the opportunity cost.  Such studies should ask if this project is not funded what will be the benefit of letting the public keep the money and spend that money to buy homes, buy cars, send their kids to college, and fund retirement accounts.  Money not spent on the subject project does not just disappear or sit idle. It gets used for something else and that something else may have an even greater return. If you should read a news story stating a cost-benefit analysis for a certain project, take it with a grain of salt.  Assume it is most likely fantasy. 

Would train service be nice to have? Yes, if money were no object.  I have traveled in other countries and enjoyed traveling by train and travel by bus. However, there are reasons why it works in other countries and not here.  Part of it is geography. Trains work better when cities are closer together.  And they work well if when you arrive you do not need a car once you are there.  A major part of why it works better there than here is that we are a richer country and Americans own cars. 

This pie-in-the-sky tendency to pull fantastic numbers out of the air when stating a cost-benefit evaluation of a project reminds me of this story: 

A growing company needed to hire someone in management to help with the companies finances. The CEO interviews three candidates, a mathematician, an accountant, and an economist. He interviewed them separately and after all of the questions about credentials and experience asked each the same final simple question. 

"What is two plus two?" he asked the mathematician. "That's easy," the mathematician replied. "It is four."

Next, he interviewed the accountant and asked, "What is two plus two?"  The accountant said, "There is a 99 percent probability that it is four with a plus or minus factor of .2."

Then he interviewed the economist. "What is two plus two," the CEO asked.  The economist, glanced both directions, leaned forward, lowered his voice, and said, "What do you want it to be?"

Substitute "consultant" for "economist."  The consultant will never tell the person for whom he is consulting that the project is not worth funding. If an agency creates its own cost-benefit analysis it will never conclude the project does not deserve funding. 

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