Tuesday, August 24, 2010

MARTA Service Cuts - an Example for Cincinnati

The print edition of the Economist has a good article about the Metropolitan Atlanta Rapid Transport Authority (MARTA), which runs the buses and trains for Atlanta and is often held up as an example of rail success. Facing a huge budget shortage next year, MARTA is eliminating 40 of its 131 bus lines, raising fares, cutting rail service by 14.2%, and laying off 300 people. Besides the revenue shortfall, MARTA faces problems with feuding local governments and restrictions on its Operating/Capital Budget distribution.

Whether or not you support rail spending (and MARTA appears to be one of the better functioning systems out there), a big drawback of rail is that it is much more capital intensive than buses. If you want to expand bus coverage, you just buy a new bus at a relatively low capital cost and start opperating it on a line. If you want to expand streetcar coverage, you spend $128 million in capital on a 4 mile line. Advocates often point out that streetcars have a lower operating expenses. However, counting the debt payments on this $128 million, they have a much higher ongoing cost than buses and so are more expensive to city (much more expensive per passenger mile).

Besides the price, the other problem with this capital intensity is that this budget structure is much less flexible than that of buses, as over half of its funds are tied up in debt payments. The Economist states that budget shortfalls are common now with "around 160 urban or regional transport systems in America cut service, raised fares or did both in 2009 or 2010." If, as happened recently, a budget cut is mandated - we may have to cut 10% of bus service in a bus only system. But an equal percentage budget cut to a streetcar system may require a 30% cut in service, as debt payments to cover the large capital expense cannot be cut (unless the city wants to default).

With buses and rail planned to be unified under Metro, I worry about budget problems being solved by deep cuts to bus service because that's what can be cut on an ongoing basis. That's how MARTA fixed it's operating budget - a 30% cut in bus routes. This will really hurt the large number of people who regularly depend on buses to get around.

Tuesday, August 3, 2010

Ohio Democrats' bizarre war on Wall Street

In the past, I discussed that the Ohio Democratic Party puts off an especially reactionary message, and that this has a terrible effect on the business climate and economic growth prospects of the state. Every commercial I see from Ohio Democrats complains about New York, Banks, and especially foreigners who are "taking our jobs".

Fortunately, Ted Strickland can't run on "outsourcing" in 2010 since he is now the incumbent. So, as far as I can tell Strickland's reelection campaign wants to sidestep his destructive policies and term as governor, and instead focus on the fact that John Kasich used to work for Lehman Brothers in Ohio. Presumably, Strickland is trying to distort facts (Kasich worked in Ohio... and as far as I can tell, was not a senior risk manager for the firm) and play on some prejudice of Ohioans against easterners and especially bankers. Needless to say, I find this creepy and especially provincial. Unfortunately, it bas been a successful election strategy for that bunch the last few years (while also being a terrible governing strategy).

So, I get some joy out of seeing this in the Enquirer:
The Ohio Republican Party released a list of $1.5 million in campaign contributions to Gov. Ted Strickland from financial advisers, including $25,000 from the Lehman family.
The Strickland campaign is claiming these donations came from another branch of the family. But that there is no connection between these investments in the Strickland campaign and Lehman's investment banking seems unlikely. I'll update if there is more info or that it comes out that Kasich convinced Dick Fold to go heavy into Mortgage-backed Securities. Until then, here's some tragic comic Ohio Democratic Party television adds:

Sherrod Brown complains about free trade with foreigners:

The Cleveland Democratic Party:

Friday, July 16, 2010

Cincinnti Business Enviroment Continued

This post if a follow up to yesterday's post on how a better business climate leads to growth. This isn't always an obvious relationship. Increasing taxes and regulation don’t necessarily have a huge impact on growth right away. Proctor and Gamble will not move suddenly because of poor government, even if state taxes increase 30% tomorrow. But, they may start to shift jobs out of town. Yet, in the short-run, bad policies really tend to stifle innovation and make it harder for entrepreneurs who are competing nationally and internationally. Remember when there used to be a bunch of tech start-ups in Over the Rhine? Not any more; the business environment in Cincinnati is becoming less conducive to that type of start-up.

...When people get angry about offices moving to West Chester, they should stop and consider why that's taking place - economic policies more encouraging of growth. Why else would you move out to the boondocks?

In the long-run, bad tax and regulatory policies will also have a big effect when companies are making strategic decisions. NCR’s recent move from Dayton to Georgia was based on expected improved productivity in their new location. When companies are merging you can see this also. Cinergy/Duke and Star Bank/US Bank both decided during mergers to move their headquarters out of Cincinnati. They've both moved to states with better business and regulatory environments. Fifth Third is often mentioned as a merger target. Cincinnati should be very worried about that possibility and potential job shock. Better yet, they should try to turn Cincinnati into the obvious choice for new headquarters. Unfortunately, local policies are causing a significant loss of good jobs and talented workers in Cincinnati, contributing to a brain drain.

Ohio is stuck with some institutions that will continue to be a drag on growth (legacy unions and the labor laws they have pushed through). No doubt also contributing to Ohio's poor business climate, was the 2006 election of Ted Strickland (who favors the U.S. leaving the World Trade Organization) as governor, and the perceived anti-market attitude of his administration. However, stuck though it is in Ohio, Cincinnati can do some things to improve competitiveness.

According to Chief Executive Magazine, business leaders most highly prize low tax rates and perceived attitudes toward business, followed by living environment considerations, such as real estate costs and education. These are considerations that ultimately lead to better business productivity. In the long-term, more productive companies are more successful, grow, and hire more people. This is how a region grows economically.

Based on the concern of this study (and also my biased perspective), if the city wants to grow, it's priorities should be:

1.) Improve local education
2.) Reduce and improve regulation (UrbanCincy has a great post on this today)
3.) Rationalize the transportation system
4.) Improve public safety and perceptions of safety
5.) Improved the perceived attitude of city council towards business
6.) Maybe even reduce taxes.

I would say the top three issues handled by Cincinnati City Council in recents years have been:
1.) The police layoffs.
2.) The issuance of significant debt to pay for a 3.9-mile streetcar system / cuts in bus service.
3.) Kroger executives being yelled at by city council for the seemingly obvious business decision of closing an unprofitable store.

It's simple to set the right goals on what the city should be doing. The politics of making it happen is the tough part. The general move right now appears to be further in the wrong direction, contributing to Cincinnati's relative decline along with the state.

Thursday, July 15, 2010

Ohio's Business Climate and Growth Prospects

Chief Executive Magazine publishes yearly rankings of the Best and Worst States for Business. This study surveys over 600 CEOs for their views on a wide range of criteria. Ohio has been on a slide in recent years and is now down to 44th in this year's ranking. According to the authors, CEOs most value low tax rates and perceived attitudes toward business, followed by living environment considerations, such as real estate costs and education.

Predictably, business environment appears to be very a good predictor of population and economic growth for states. Texas ranked as the best state for business in this survey, while New York and California were at the bottom of the list. The authors of the study explain that Texas has also had the biggest net gain in population of any state over the last ten year while California lost 1.5 million and New York had a net loss of over 1.6 million - the highest of any state. Also, "High-tax, big-government New Jersey ranked fourth (in population loss), with a net loss of almost 460,000."

I wanted to see how well this trend holds up. So, below I've put together the changes in population of the top ten states and the bottom ten from these rankings.*

The Best States for Business:

The Worst States for Business:

As you can see, there's a strong correlation between business climate and growth. The data show that every one of the states in the top ten for business climate has outperformed every state in the bottom ten. I find California's mediocre performance particularly startling. The state has everything going for them, with amazing real-estate, the Silicon Valley cluster (!), and even significant immigration due to their position on the border. Nonetheless, California had been outperformed due outmigration from the state, largely due to the hostile business climate.

Here is a summary of the overall trend:

So, the ten states with the best business climate have seen the bulk of the United States' growth in the 2000s.

The authors argue simple out-migration trends actually underestimate the significance of business climate: “The political elites in the states that dismiss out-migration trends overlook the radical demographic adjustment underway. As higher-income earners leave, they are more often replaced by those with lower incomes and lower skills, many needing public assistance. Gone too are the entrepreneurs and risk-takers, off seeking regions where their job creating abilities are rewarded.”

I'm planning a follow up post to explore this problem a little more. But for now, let me say that I believe the most important challenge for Ohio today is to move up on this type of list.

*Note: I used the overall change in population not the net migration that Chief Executive used. This is simply because census population numbers were simply easier to find in a usable form.

Friday, July 2, 2010

Friday Links

Here's my semi-regular post on a few notable links that I've flagged but decided not to turn into full posts:

1. As Cincinnati is now dealing with these regulations, here's Flex Salmon on Why do minimum parking requirements still exist? He's at a loss to come up with a good reason. But, here's a good quote from Tom Vandebilt:
“[I]f all of the vehicles in the county were removed from garages, driveways, and all of the roads and residential streets and they were parked in parking lots at the same time, there would still be 83,000 unused spaces throughout the county.”
We don't see all the costs on these parking regulation, but "everyone, even those who don’t drive, pays for it in one form or another, whether the invisible parking surcharge is built into retail prices or the various costs associated with parking-lot storm-water runoff" and also worse architecture... This is a needless and destructive regulation. Cincinnati is wisely rolling it back, but thus far only for those who are lucky enough to own land within 600 feet of the proposed streetcar route.

2. An underreported but very important ongoing development - "The most recent survey by the Consumer Reports National Research Center found that five-year-old vehicles had about one-third fewer problems than the five-year-old vehicles we studied in April 2005." The rate of problems in cars falling by a third in five years in huge. Robin Hanson comments:
"Most people are surprised to hear that the world economy doubles roughly every fifteen years; when they think back fifteen years, the world doesn’t seem that different. Besides a few big changes, most things seem pretty similar. But this is illusory – most change happens behind the scenes. In fact, one of the reasons why change can be so fast is that most of it happens behind the scenes."
I view this as a relevant point for Cincinnati's streetcar plans. Streetcars are less efficient than auto alternatives right now. But, technology also keeps improving and at a faster rate than we realize. So, it's a mistake to lock in a bad 30 year transportation plan. And, this will become much more 5-10 years from now when we are still paying the bill for the streetcar capital investment, while buses are increasingly more reliable and efficient.

3. Our Conservative Democratic Governor Ted Strickland signed new casino rules legislation. The simple thing to do on gambling would have been for the state just to legalize it with certain regulations. Then anyone could conceivably open a casino if they met certain requires. We would have equal rights and an efficient allocation of casinos. Instead, there are by legislation exactly four pieces of land in the state that can house a casino and certain people granted the privileges to develop that land - A rather questionable set up. So, it's not entirely unexpected that the government created Casino special interests, slipped into the rules an income tax deduction for gambling losses. This is expected to cost the state $60 to $80 million in taxes per year.

To put it another way, the state just passed a $60 to $80 million gambling subsidy. ...This is just bad government. Try to remember it when you vote this November.

4. Reason Magazine has a rather hackish post on the Cincinnati Streetcar, which I nonetheless link to. An outsider's opinion is valuable. They don't see the streetcar turning Cincinnati into another Portland. ...Maybe another Cleveland.

5. The Business Courier informs us that Washington Park was apparently built on top of a cemetery. They include a list of people who are still buried under the park, incuding William Lytle and James Findley. Creepy...

Update 7/6 - Quimbob informs that at least some people have been relocated. No need to fear being haunted by early Cincinnatians now.

Enjoy your 4th of July Weekend.

Monday, June 21, 2010

Experiences with Commuter Rail

I've been making the case lately that rail transit systems are very much a net loss for cities (except those with a high population density, like New York). Increasingly, I think trains are more expensive/less efficient than other forms of transportation, less flexible (locking cities into long-term decisions that they may soon regret), and in sum make a city less productive and as a result marginally poorer.

While admiting that they are a less efficient form of transporation than buses, supporters have argued that streetcars cause development to occur along the line. Others, including myself, have pointed out that this is just reshuffled development (It's like offering P&G a tax incentive to move from 5th to 13th Street and then asserting the tax incentive created a $175 Billion company). As this development is created inefficiently and very expensively, the project is a net loss to the city (especially considering the other more efficient uses for those funds).

Unfortunately, lacking from Cincy Streetcar discussions is evidence of how rail transit has actually performed in comparable cities. This post is my limited attempt to measure performance.

To create a group of peer cities to compare to Cincinnati, I took Wikipedia's list of the ten largest cities in the Midwest and then added any cities within 250 miles of Cincinnati with a population greater than 300,000 that weren't already included (Pittsburgh and Nashville). I compared changes in population since 1990. Population, in addition to being easily available, is a good proxy for economic performance and the overall job market. The change since 1990 is a good measure of a city's long-term growth and fortunately there are several comparable cities who have had train systems for this full period. I put this information into a table, along with some notes on the transportation systems of each city.

My theory going in is that rail transit is a much more expensive way to transport people than buses. Since it is relatively inefficient (except in dense metro areas), rails should be a long-term drag on the economic performance of a city. So, empirically you would expect cities with rail transit to perform worse than those with buses in the long-term. Here's what I found:
Here are the totals for all cities with and without rail:

These results were more or less what you would expect, although the trend is stronger than I anticipated. Chicago, an outlier in the Midwest with much higher density, does alright with rail. The other cities who have built passenger rail systems have all performed very poorly in the long run. On the other hand, those cities who have relied on bus transportation over the last 30 years have on average grown by 10%. Unfortunately Cincinnati has been the worst performer of the bus group, but is still doing better than every city with rail transit except Chicago.

I can anticipate a couple critiques of this data: First, these cities all have their own issues and transportation systems are not responsible for all variances (Detroit would still have issues with any system). It may be the case that cities that are likely to build rail systems are also likely to be poorly governed or just in relative decline already - So, correlation, not necessarily causation. I think there is some truth to this point, however transportation is still relevant (otherwise, why are we spending on it?) Another objection could be that the Cincinnati Streetcar Plan is different from those discussed here. There's some truth to this also, but this data seems to show that the more similar the transportation system to the one proposed in Cincinnati, the worse the city's performance.

Thus, my conclusion from looking at this information is that it is further good evidence that rail transportation is not a valuable investment for a city like Cincinnati. There are very strong relationships in the region between rail transit and stagnation. This is consistent with my view that rail transit (except in high density cities) is an inefficient waste that turns out to be a drag on a city's long-term performance. So, I confirmed my opinion going in... Finally, I would just encourage more tracking of actual performance of projects of this type (For example, a lot more could be done to measure performance outside of the Midwest). I have seen a disappointing lack of evidence that rail transit has or can perform well in a city like Cincinnati, only assertions that it will do exceptional things (countered by convincing evidence that it is inefficient waste). I'm open to such evidence, but suspect the lack of it is a sign that it doesn't exist.

Tuesday, June 15, 2010

Why Do People Like Streetcars?

I have become increasingly convinced that the streetcar project is a major misstep for the city. However, there is significant support for the streetcar plan among those who are knowledgeable about local issues in Cincinnati.

Streetcars were a smart form of transportation (and actually profitable for companies to run) in the old days when the internal combustion engine had a very low efficiency. I suspect this nostalgia for the old days is one of the reasons they receive some popular support. But now streetcars have all of the problems of buses with none of the advantages (Some argue that it’s an advantage that the system is inflexible and people know the routes cannot quickly change. However, if you think this is important why not try to propose an amendment to the city’s constitution that locks in bus routes? I’d say because that’s not a very good idea. All else equal, it’s better to have a flexible system that can adjust to changes in development and transportation needs).

The city’s current plan is to spend $30 million per mile constructing a streetcar system that will lose about 60% ongoing (and thus never pay back any of the capital). Throw in the significant budget deficit the city already faces and I think the financial argument against streetcar spending is overwhelming. Yet, if the city insists on spending the money - We live in a world of tradeoffs, so they must consider the alternatives uses of those funds. I can think of many, but the obvious alternative is another transportation option: Buses. With the capital costs, streetcars are much more expensive than additional bus service.

As streetcars are an inferior technology, the persistence of public support is a small puzzle. As far as I can tell, there are a few reasons people prefer streetcars to buses. The first is nostalgia. There seems to be a view that a streetcar will make Cincy more popular with tourists. But, I don’t see this being much of a factor as every other city seems to be sinking money on streetcars. They simply don't differentiate the city and aren't a tourist attraction like SF cable cars.

Another further reason for support is offered up by Megan McArdle at the Atlantic:
The streetcars I'm most familiar with are Philadelphia's… so let me offer my take on why people (read: affluent, especially white people) like streetcars: they don't have so many poor people on them.

Streetcars are developed in a fixed area and not frequently expanded. They have a high capital cost. This means the area along the lines gentrifies. Thus, when you get on a streetcar, it normally has a lot of other affluent people on it. By contrast, when you get on a bus, it normally has a lot of poor people who have been sitting on it for an hour, patiently waiting to get to work. The association builds between streetcars and affluence, busses and poverty, in one's mind.
Even though streetcars may help gentrify a neighborhood, that doesn’t mean they’re a good investment. Sinking a bunch of the city’s money into a loser investment may be good for the effected neighborhood, but is still a net loss for the city.

Economic growth is fundamentally about productivity improvement. Streetcars are a move in the opposite direction and make the city a little poorer. The streetcar project is not as bad as say spending funds on a monorail, but it’s still a waste. Streetcars wouldn’t make Cincinnati the next San Francisco or Portland. They’d make Cincinnati more like St. Louis and Cleveland - poorer versions of Cincinnati with light rail.