Tuesday, September 23, 2008

Prop 1A as Economic Stimulus

NOTE: We've moved! Visit us at the California High Speed Rail Blog.

One of my most consistent arguments for high speed rail has been that it will provide a significant economic stimulus to our state at a time when we badly need it. Yesterday's Los Angeles Times put some flesh on that argument by examining the impact of the 2006 infrastructure bonds, which are just beginning to turn into actual projects on the ground:

Without this money, "the construction industry would be out of business," said Rich Gates, president and general partner of Silva Gates Construction in Dublin, Calif. "This is kind of the drip of the IV to keep us going."

The governor's decision to turn on the bond money tap allowed Silva Gates to bid successfully for three freeway projects in the Sacramento and San Francisco Bay areas.

Every $1 billion in public works spending creates approximately 18,000 jobs, according to a formula developed by the Commerce Department.

By that formula Prop 1A alone would create around 180,000 jobs. The California High Speed Rail Authority has been more conservative in its estimates, giving a figure of 160,000 construction jobs.

Schwarzenegger's spending plans, though substantial, won't do more than soften the blow to construction that's left thousands of houses half-built in abandoned tracts up and down the state, said Stephen Levy, director and senior economist at the Center for the Continuing Study of the California Economy in Palo Alto.

"This is one of the few things that state and local government can do to help in the short run" and to invest in improvements that will be in place once the economy turns around, he said. But, "if you're down by a dollar, and this helps by a penny or two, you don't want to overstate its magnitude."

I don't disagree with that, and I don't want to overstate the matter. Prop 1A isn't going to lift the state out of recession single-handedly. But it WILL help matters and create jobs at a time when we need as many jobs as we can get - a state with a 7.7% unemployment rate isn't in a position to turn down 160,000 jobs.

Those jobs have a catalyzing effect on the economy, by the way:

Getting money quickly through the transportation planning and approval process helps the construction industry, business in general and the state as a whole because of California's need for more roads and less traffic congestion, said Dan Dunmoyer, the governor's cabinet secretary and a key liaison to industry. "It's very useful now, but we would be doing this even if our economy was roaring," he said.

"Construction jobs are what you'd call high-powered jobs," said Jack Kyser, chief economist at the Los Angeles County Development Corp. Highway projects not only pay good wages to carpenters, ironworkers and operating engineers but also create a ripple effect for a slew of people working for companies that supply building materials, heavy equipment and related goods and services, he said.

These are jobs that cannot be easily outsourced. HSR's long construction schedule is a plus for these companies, from haulers to contractor wholesalers, as well as for their employees. They all get a stable source of money that will keep them in business for many years. That in turn makes them more likely to spend on other services, from a restaurant to home furniture to a weekend vacation here in our Golden State.

Up in Washington State the rule of thumb was that one Boeing job created three jobs in the community, from waitresses to mechanics to hairstylists. Whatever the actual number here in CA, these jobs sustain small businesses and help keep money within the community and the state, which then generates more tax income - something California can't exactly afford to turn down either.

HSR has many other benefits alongside economic stimulus - providing an alternative form of travel that's environmentally friendly, reduces carbon emissions, isn't dependent on ever-rising oil prices, easing congestion on roads and airports. But the economic stimulus IS a significant part of the picture, something that Californians should find quite compelling.


Car-less in San Diego said...

Last night on the evening news I watched local covereage of the proposed 241 Toll Road in Orange County. I am opposed in every way to this toll road but there were hundreds of construction workers who showed up to a hearing in support of the jobs and economic impact this project would have in the region.

I feel that jobs alone are an invalid reason for constructing a project and I think you have stated that well. Just because we need jobs we should not construct a project that is unnecessary or environmentally damaging such as the proposed 241.

I agree that the CAHSR would create a much needed economic injection for the state but that is merely a bi-product of a project that will provide long term benefits in so many other ways.

Anonymous said...

No one is disupting that construction bonds create jobs.

However, that is not the question before voters with 1A. 1A is ab out whether voters should approve nearly $10 billion in bonds for a specific probject.

The project itself is the issue and it is a potential boondoggle of massive proportions. It will be California's version of Alaska's "bridge to nowhere." There is no priate or federal match, the nearly $10 billion cost is only a fraction of the projected cost, etc.

If we're going to spend $10 billion, then let's use it on real project like regional mass transit, not on this boondoggle.

Rafael said...

@ anon @ 9:45am -

San Francisco, San Jose, Fresno, Los Angeles, Anaheim, Sacramento, San Diego (among others) are all destinations comparable to Gravina Island, Alaska (pop. 50)? That strikes me as pretty insulting to around 85% of the state's population.

If HSR is built, it will provide literally tens of millions of California residents, business travelers and tourists with a clean, affordable alternative to flying and driving around the state in each and every year of operations. The price tag may be high, but the result will be a useful asset with a lifespan measured in decades.

As for private and federal matching funds, it was always clear that those would not materialize before the state commits funds. After all, this is a project for and by the state of California. By contrast, the infamous "bridge to nowhere" was essentially a congressional earmark.

Moreover, the entire $9.95 billion HSR bond is subject to an annual appropriations process. This will subject CHSRA to quality assurance in its project-level planning, its tendering process and especially, its success in raising matching funds.

Compare that to the BART extension to Santa Clara, currently estimates at a cool $300 million/mile. It will not be required to attract any private funding. So much for "real" regional transit projects.

For reference, HSR comes in at $57 million/mile for the whole network - high by international standards, but what else is new in California.

Anonymous said...

From the Orange County Register Editorial page:

Tuesday, September 23, 2008
Editorial: Prop. 1A a fast track to bankruptcy
Selling bonds to fund a high-speed rail project gives boondoggles a bad name.

An Orange County Register editorial

Proposition 1A on the November ballot would authorize the issuance of $9.95 billion in general-obligation bonds as a small down payment for a high-speed passenger train between Los Angeles and San Francisco. To call this project a boondoggle would be an understatement. At a time when California state government is operating at a substantial deficit – despite the Band-Aids recently applied that may or may not reduce it much – it would be irresponsible to take on a debt of this magnitude, especially given that the total cost of the train would be many tens of billions of dollars more.

It is not difficult to understand the romantic appeal of a high-speed train that would make traveling up and down the state easy and fast. But a remotely realistic set of projections for this project indicates that California taxpayers would be on the hook for decades, for benefits that would be much less than advertised.

If a high-speed train were economically feasible – that is, if revenue from anticipated operations were projected to be higher than capital and operating costs – private investors would be lining up to put money into it. The fact that our legislators want taxpayers to pony up means that even the project's supporters know it is an economic dog.

The Los Angeles-based Reason Foundation (www.reason.org) has issued what it calls a due diligence report on the California High Speed Rail Authority projections of cost, ridership and other factors. The report's authors are far from being anti-train diehards. Wendell Cox served on the L.A. County Transportation Commission, where he authored a proposition that established funding for the light rail and Metro lines. Joseph Vranich, former president of the California High Speed Rail Association (CHSRA), has long advocated public-private partnerships to build high-speed rail systems. But they agree that this proposal fails the laugh test on almost every measure.

Costs? In 1999 the CHSRA estimated that it would cost $30.3 billion to build a much more extensive high-speed system – serving San Diego, Orange County, the East Bay and Sacramento. By 2008 the cost projection just for a Los Angeles-San Francisco train had risen to $45.4 billion. Since construction costs almost always increase after construction begins, Messrs. Cox and Vranich project that a realistic cost would be upward of $80 billion.

The CHSRA report anticipates another $9 billion from the federal government, though there is no current federal program to provide such funding, and the federal government is operating at deep deficits that are likely to increase as taxpayers bail out the U.S. financial system. Hopes for private investment of $7.5 billion are probably pie-in-the-sky, and even if all the state, federal and private investments materialized, they are short of CHSRA's low-ball cost estimates for construction.

The CHSRA report estimates 65.3 million intercity riders by 2030. On a passenger-miles-per route basis, this is dramatically higher than ridership on somewhat similar systems in Europe and Japan, which have higher concentrations of population, decades of experience and a more established train culture. The Reason report suggests that 31.1 million riders is more realistic.

The CHSRA may achieve its high ridership estimates by projecting a base fare of $70 for the L.A.-San Francisco route. Fares for similar-length trips in Japan and Europe are in the range of $135-$140. Raising fares to come closer to covering operating costs would probably reduce ridership.

A high-speed rail system connecting Northern and Southern California is a nice dream, but the proposed project ventures into fantasyland territory. If the bond measure is approved, however, the in-for-a-penny-in-for-a-pound mentality is likely to take hold, and more billions will be poured down this rat hole.

Better to nip it in the bud and wait for a project that can attract private investors. Please, vote NO on Prop. 1A.

Joel said...

In response to Anonymous,
I thought I read somewhere that private investment would follow once the infastructure funding was approved by voters. Also, there is a good chance, although no guarantee, that federal funding is in the works, with pieces of legislation now introduced by several Senators, one bill bi-partisan.

davisgrad said...

@ joel,

With an Obama-Biden ticket in the white house, you can't ask for a much better pair for rail. McCain-Palin would be a disaster, though I'm sure Palin could scrounge up some earmarks. Wasilla HSR anyone?

@ robert-
I agree 100%. While jobs in themselves are not enough to justify HSR, they are a great bonus. This also invalidates the deniers mantra of unaffordability. Government stimulus which works best when times are tough, despite that budgets are in deficit and revenue is lacking. Trying to hire thousands of worker when there is near-full employment and "the state can afford it" will only raise costs and benefit fewer unemployed.

Rafael said...

@ anon @ 11:11am -

a) please consider getting yourself a Google handle, any handle. You don't need to reveal your secret identity.

b) also consider embedding hyperlinks to articles published elsewhere and adding only your own comments.

c) The following statements strike me as incorrect:

"In 1999 the CHSRA estimated that it would cost $30.3 billion to build a much more extensive high-speed system – serving San Diego, Orange County, the East Bay and Sacramento. By 2008 the cost projection just for a Los Angeles-San Francisco train had risen to $45.4 billion."

Afaik, the $45.4 billion number does refer to the entire system, including the spurs to Sacramento, Anaheim and San Diego.

The spur from San Jose to Oakland was relegated to an "HST/commuter rail overlay". On the other hand, the decision to route trains via Tehachapi pass rather than the shorter Grapevine was taken in 2004, in part for geological and environmental reasons. Therefore, the system as costed in 1999 is indeed not identical to the one being considered in 2008, but in different respects than stated by the OC Register.

The current projected cost of the starter line, which has been extended to Anaheim to placate OC politicians, should be on the order of $30-35 billion. We'll have to wait until CHSRA publishes its updated business plan for an exact number. The Authority claims the work is being held up by the lack of agreement on the state budget, which would make the necessary funds available. I can't tell if this claim is spurious.

In 1999, CHSRA projected a funding requirement of roughly $26.2 billion. If that has risen to $45.4 billion by 2008, it reflects a construction inflation rate of roughly 6.3%. That is well above cumulative retail inflation for the period, but then construction materials and logistics are especially energy-intensive.

無名 - wu ming said...

the fact that a lot of the construction will be in the endemically depressed and currently cratering central valley is especially key. the line will run through some of the areas worst hit by the housing bust.

unlike throwing money at bankers, that kind of economic stimulus will go a long way towards reducing the depth of our recession and thus budget shortfalls.

無名 - wu ming said...

additionally, anon 9:45 (please, for the love of the FSM, pick a pseudonym!) the bay area and LA are "nowhere"? what's your frame of reference, tokyo-yokohama?

Spokker said...

So how do I apply for a job building this thing. I've got a shovel. I'm ready to go.

Rafael said...

Newsflash: Governor signs $145 billion California budget

@ wu-ming -

your point is well taken, but remember that ground won't be broken on HSR before 2012 - assuming various NIMBYs and UPRR don't succeed in dragging this thing out in the courts. The one exception might be exploratory tunneling, e.g. in Tehachapi Pass and Soledad Canyon.

Meanwhile, many of the smaller highway projects approved in 2006 are now close to breaking ground. It is these that will tide construction workers over in the near term, hopefully allowing many of them to stave off foreclosure on their homes.

Btw: anyone who cannot avoid that fate should talk to their lender about a foreclose-to-rent deal. The lender may prefer having a tenant on a lease to being stuck with an asset that isn't performing at all, while the tenant can avoid eviction even if the property changes hands. Bankers aren't set up to be landlords.

Anonymous said...

This may be moot now, with more and more support for no votes on Prop 1A coming out everyday.

However,how many noted that SB-53 (Ducheny) was passed by the legislature and on Sept 17th was sent to the Governor. (unanimous votes)

The law could take the CHSRA into a new state agency along with other transit entities.

(from SB-53)

(1) The State of California needs to ensure efficient and
environmentally responsible movement of rail passengers and goods for
all Californians. Currently, the Public Utilities Commission, the
Business, Transportation and Housing Agency, the Department of
Transportation, the California High-Speed Rail Authority, the
California Transportation Commission, and local government entities
all have responsibility for different aspects of the system for
overseeing and regulating railroad activities in California.

(3) Issues the Legislature should consider if legislation is
introduced to consolidate any, or all, of the functions,
responsibilities, or activities of the five state agencies with
jurisdiction over rail-related matters into one or more state
agencies, commissions, or departments.

Tony D. said...

Robert or anyone,
Any latest polling #'s for Prop. 1A? I haven't been around for awhile. As for anon 11:11, the BS from the naysayers never cease to amaze! The Orange County Register disapproves of High Speed Rail? I guess we should all vote no this November (LOL).

davisgrad said...

@ rafael-

"your point is well taken, but remember that ground won't be broken on HSR before 2012"

Not to be pessimistic, but the economy may not be fully recovered by then. I think the parallel is a Japanese scenario, with little growth for 5years or more as housing weighs on the economy. But this is just speculation.

What kind of things make for such a long delay? Legal issues? ROW?

Robert Cruickshank said...

Haven't seen any recent polling, unfortunately. And the Register's opposition is hilarious. I'll be responding to them later today.

Rafael said...

@ davisgrad -

the "lost decade" of stagflation in Japan was the result of non-performing loans to corporations, leading to a prolonged credit squeeze. However, afaik there was much less risk of outright bank failures, which can wreak systemic havoc. The current crisis in the US will either be over much sooner or end up much, much worse.

It basically depends on sharply reducing the rate at which residential real estate markets are burdened by traditional foreclosures. Converting non-performing mortgages to rental leases is one way to keep these assets off the market and avoid a sharp decline in valuations. The latter matter a great deal for general consumer confidence and associated spending. Tepid spending equals limited opportunity for banks to extend the solid fresh loans they need to repair their balance sheets.

As for your other question: at this stage, CHSRA still needs to compile what it calls project-level EIR/EIS. These involve securing the ROW and negotiating specific structures incl. grade separations with the communities along the chosen route. Some additional engineering work will be needed to ensure technical and financial feasibility of the alternatives, e.g. where the mid-peninsula station will be sited.

Actual construction contracts will be put out to tender as design/build projects, i.e. winning bidders will be on the hook for completing the engineering work and the integrity of the structures based on it.

In addition, CHSRA cannot award any construction contracts until matching funds from non-state sources have been secured for the segment in question.

Morris Brown said...


Haven't seen any recent polling, unfortunately. And the Register's opposition is hilarious. I'll be responding to them later today.

Is the NO on Prop 1 position by the San Diego Union Tribune also hilarious?

Spokker said...

"Is the NO on Prop 1 position by the San Diego Union Tribune also hilarious?"

The San Diego Union Tribune editorial makes House Party 2 look like House Party 1.

Francis said...

I read the San Diego Union Tribune everyday, its a good paper. Especially the sports section where they fill their pages with stories about ridiculous things when the Padres and Chargers aren't in season. They also have ridiculous editorials every so often.

SD Union Tribune:
"Or consider the fact that the initiative is being sold as a great way to reduce congestion and pollution even though backers’ own absurdly optimistic estimates show the high-speed train network only carrying a tiny fraction of the billions of long trips Californians take each year."

A small fraction of the billions of trips Californians take each year? Say 3 Billion trips, and 5% of intercity trips for HSR = 150 million trips each year.


The budget is 145 Billion, so if we paid for this in one year it would be 7% of the budget. But since we are paying for this over at least 12 years that means that the budget increases by .5% a year. Even if California ends up spending 20 Billion as its states in the anti-HSR ballot arguments that means a 1% increase and in return we get a HSR system. I think its quite a deal.

Glen said...

Morris ..what kind of BS lies are you going to be whining about tonight?

Anonymous said...

The San Diego paper is a Copley newspaper..huge Republican Rag ...Gee a NO on 1A shocking

Spokker said...

Any spending on transit is bad spending to some of these people. I like that the opposition argument for prop 1 in the voter information guide mentions that we are better off spending the money on transit we already have.

Okay, so when the next big transit project in Los Angeles or the Bay Area comes up, I wonder who is going to oppose it. That's right, Tom "local governments should build more freeways" McClintock.

These people hate public transit in any form. To them, buses are illegal alien shuttles and rail is a new-age boondoggle pipe dream.

Yet their beloved highways and airports are failing. Give me a break.

davisgrad said...

@ rafael-

I agree that the crisis will end when housing starts performing better. I like your proposal to convert people's loans into rentals. There will still be losses, as in many of the bubble areas rents were much lower than mortgage equivalents. (This is one potential indicator of a bubble, similar to a price-earning ratio). It's much better than foreclosures though, where everyone loses.

But housing still has a long way to go, especially in California where it will be a drag on the economy for several years.(Several reports out today regarding California's economy).

Thank you for the information regarding HSR breaking ground, always useful.

Robert Cruickshank said...

The U-T editorial page is almost as right-wing as the Register. Their opposition to 1A was a foregone conclusion.

Rafael said...

To some extent, the good people of San Diego - and those in Sacramento, too - are simply upset that they are not part of phase one. This isn't just because CHSRA has de facto told them they will have to wait until the late 2020s before they can easily enjoy infrastructure they will be paying their share of from day one.

Current plans also call for their respective spurs to be funded entirely with fresh non-state debt obtained on the basis of demonstrated operating surpluses. Those depend critically on actually achieving high ridership and, on keeping a tight lid on cost escalations during the construction of the spine. That means project risk is higher for the spurs.

Robert Cruickshank has consistently argued that the spine needs to be built first because that is where most of the ridership and hence operating revenue will be.

The alternative would be to start at all four end points and work toward the middle later. In Southern California, that would mean Anaheim-LA-Ontario-San Diego. Up north, it might be San Francisco-Gilroy plus Sacramento-Bakersfield (since Pacheco has been confirmed). The ridership study suggests plenty of demand for HSR in each of these regional segments, even if they are disjoint. In principle, the language of prop 1A would still permit this approach.

Note that major maintenance could still be performed in a single yard near Atwater. Some trainsets would simply be towed there and back by freight locomotives. Hooray for standard gauge.

Even so, I doubt CHSRA will abandon its preference for constructing the mountain crossings early on. Perhaps they are concerned that it might prove too hard to fund tunnel construction there without public money or, that it would take too long to complete the entire network. Perhaps politicians care more about relieving pressure to expand SFO and LAX than they do about including everyone from the outset to ensure easy passage of prop 1A.

Whatever the reasons, the order in which the network gets built is a choice - one that only exists if prop 1A actually passes. We don't yet know how the Wall Street debacle plus the delay in getting this year's budget signed have affected voter disposition toward the HSR bond. It ain't over until the fat lady sings, so CHSRA would be well advised to quietly prepare a plan B for its phasing strategy just in case public support weakens.

The HSR-as-economic-stimulus argument won't hold much sway in Sacramento and San Diego counties unless the stimulus happens there well before the 2020s. At the end of the day, all politics is local.

Anonymous said...


You write:

It ain't over until the fat lady sings, so CHSRA would be well advised to quietly prepare a plan B for its phasing strategy just in case public support weakens.

Excellent commentary. However, in several conversations with state legislators, I was told, if Prop 1A fails, HSR won't be coming back to the table for a very long time.

I would take that to mean, 10 years or more. So establishing a Plan B wouldn't seem to make any sense.

YES on PROP1A!! said...

Prop1A is not going to fail ..as much as the anti-hst is hoping to project...Its a BIG blue state..
prop1a will probally pass close to
Obamas numbers..of course not all Democrats will vote for 1a..but then there is the Valley Mccain voters that will vote yes..Esp in Fresno-Barkersfield.The far north does not matter as they have small voting populations..San Diego will be close,maby a loss, but not enough to out vote LA-SF-SJ..we only need 51percent!!!!

無名 - wu ming said...

not sure if you're counting the 2-3 million between sac and fresno as "far north," anonymous.

the argument i'll try to make in the coming week or two is that even without the spur to sac being done at the beginning, this still holds significant benefit for the capital region of the sacramento valley. it would be nice if our branch was coming sooner, and it's possible (although not part of the proposition language) that a democratic white house and congress might be able to speed up that segment, but even if it's only the SF-LA that's built, connecting HSR with the san joaquins to sac would make things far faster to LA than is currently the case.

without the sac spur, sac to SAF would be a wash, and improving the capitol corridors would make more of a difference for us there.

Robert Cruickshank said...

Which just goes to prove my point all along, Morris (or is it Martin? why are you so scared of putting your name to your words?), which is that you folks really are out to kill high speed rail dead.

You don't want this to come back in 2, 4, or 10 years. You want it dead. The compelling arguments for it, every last one of which you have ignored these last six months, don't mean anything to you because all you care about are your property values.

YES on1a said...

I meant WAY North..like Eureka.
And which I read an onlineEureka paper anti-rail comment..Gee from someone in Menlo Park!! what Gall!


Robert Cruickshank said...

Yeah, the Menlo Park people are taking the shotgun approach, writing letters to the editors at as many papers as they can. I'm sure voters in Eureka really care about property values in Menlo Park...

Anonymous said...


Yeah, the Menlo Park people are taking the shotgun approach, writing letters to the editors at as many papers as they can. I'm sure voters in Eureka really care about property values in Menlo Park...

You really think voters in Eureka want their tax dollars going for a luxury train that will pass no closer than about 300 miles from them?

davisgrad said...

"You really think voters in Eureka want their tax dollars going for a luxury train that will pass no closer than about 300 miles from them?"

Not everyone is completely selfish and short-sighted, Morris.

Spokker said...

"You really think voters in Eureka want their tax dollars going for a luxury train that will pass no closer than about 300 miles from them?"

Considering only 25,000 people live there, who cares?

However, if I lived in Eureka and ever hoped to get the hell out to see the rest of the state, I would probably vote yes on it. If I were a hermit crab I'd vote no. Simple as that.

Rafael said...

@ anon @ 4:03pm -

maybe I wasn't clear enough: the plan B I had in mind would be used iff needed to ensure passage of prop 1A in 2008. Afaik, there is still a majority for HSR based on phasing plan A (construct an SF-Anaheim spine first). I was just suggesting some belts and suspenders to make sure.

We're all in agreement here that HSR will either go ahead this year or, it will be shelved for a very long time. You and I just hold diametrically opposed views on what we would like the outcome to be.