Transportation Costs Too Much.
Tue, 11/22/2011 - 11:53am | by dlevinson
When I was growing up (in suburban Maryland), there was an ad on local TV from Crown Books. Founder Robert Haft asserted "books cost too much", which led him to create Crown Books, and helped put independent booksellers out of business decades before Amazon became villain #1 among the literati.
Transportation costs too much.
Yet unlike independent booksellers, we weep not for the independent contractors and businesses that charge so much for transportation infrastructure, equipment, and operations.
- Signalized intersections (~$175K),
- buses (~$400K),
- roundabouts (~$300K),
- loop detectors (~$5K),
- diamond interchanges (~$9M),
- bridges to nowhere Houlton, Wisconsin (~$668M),
- light rail lines (~$1.4B),
- high-speed rail lines (~$100B), etc.
are just some of the all quite pricey elements of transportation in early 21st century America. It sure seems like we should be able to build this cheaper. Think about it, $175K for 12 lightbulbs on a timer. What's going wrong?
I have several hypotheses (please add others in the comments):
- Standards have risen. Our obsession with safety, features, environmental protection, and quality drive up the cost. Engineering design is often 20% of project costs. If only we would tolerate a few more deaths, a bus without AC, pollution, and frequent breakdowns, our initial costs would be lower. But when do reasonable investments become gold plating? Does the firetruck really need to do a 360 degree turn on the cul-de-sac, or can it back out?
- Principal-agent problem. Public works agencies are spending Other People's Money, and so are less motivated to get value for dollar than an individual consumer on their own. This principal-agent problem prevails in lots of organizations, but especially so in public works where the bias is not to have a failure. There was an old saying in business, no one ever got fired for buying IBM. The same holds in public works, where rocking the boat with new or innovative technologies is not sufficiently rewarded.
- Thin markets. There is no Amazon.com or eBay for public works. I cannot go on Amazon and buy a transit bus or an interchange. The internet has not driven down prices in this field the way it has in so many others. As a result a few vendors can collude or orchestrate higher prices than would be faced in a more competitive market.
- There are in-sufficient economies of scale. When everything is bespoke, there is no opportunity for standardization and economies of scale. While many rail against cookie-cutter design, it is only with cookie-cutters that we get lots of cookies.
- Projects are scoped wrong. We have investments that don't match actual demands. And this is not just for megaprojects. We have big buses serving few passengers. We have overgrown highways. We have a fear of building too small and having congestion or crowding so we build too big.
- Benefits are concentrated, costs are diffuse. As a result, the known beneficiaries lobby hard for projects, but not just to build it, but to build it in a way that is expensive. Costs are diffuse, it is seldom worth the taxpayer's time to oppose a project just because of its costs, which are spread among millions of other taxpayers.
- Decision-makers are remote. Remote actors cannot have precise information about local conditions, and in the absence of a free market in transportation (there is generally one buyer, who is generally a government agency), prices are not clear. As a result these remote actors misallocate because they are misinformed. This notion derives from the Economic calculation problem and Hayek's Fatal Conceit.
- No one actually does B/C analysis. A recent headline in the San Jose Mercury News says:
""Talk to any business person about not having a benefits-vs.-cost discussion and they'll say, 'Duh, you mean you don't do that?' " said the commission's executive director, Steve Heminger. "They insist on it, but in the transportation profession it is not all that common. ... This levels the playing field.""
Heminger was appointed executive director in 2001 and hired in 1993, and only *now* they are doing benefit/cost analysis. At any rate, looking at the ratios presented in the story, they are clearly doing it wrong. Whether it is common or not I will leave to politicians or political scientists, however it has been the textbook procedure for a very long time. I suppose it is progress to at least acknowledge using B/C analysis even if the implementation is flawed
We are simultaneously spending too much and not spending enough. Because we mis-prioritize where the money is spent, we have inadequate resources for other things. We cut corners.
My favorite example is the bus stop sign which says "bus stop". While this is better than no bus stop sign, or one that said "Buses Don't Stop Here", it is still quite uninformative, it doesn't say which bus stops here, when it stops, where it is going, what is the frequency, when it operates. Why don't we have better bus service operations? In part because the scarce resources that could be devoted to that are instead spent on expensive new capital investments that serve a much smaller fraction of the population.
We can all think of things that we would like the transportation system to do, that are technically feasible, but it doesn't, because resources are scarce. They are scarce because of misallocation.
The costs of gold plating are several. Money spent on project X cannot be spent on project Y. This is the monetary opportunity cost of misallocation. Land devoted to project X cannot be devoted to project Y. More land also means greater distances to traverse. This is a spatial opportunity cost.
There is a tension between the risk of gold plating (focus on benefits to the exclusion of cost) and of corner cutting (focusing on costs to the exclusion of benefits). But there is available to us a balance, building something which maximizes the difference between benefits and costs, not just looking at benefits or costs. Insufficient attention is placed on the trade-off, too much on the ends by advocates of one side or the other.
When we are out-of-balance, people distrust that their tax money is wisely spent. If people see lots of examples of mis-expenditure, they will cut how much they are willing to allocate to transportation. Mis-expenditure thus causes the system to deteriorate in two ways. First it reduces inputs to the system, money that could be spent. Second it allocates money away from genuine public needs (starting with adequate maintenance and operation of existing facilities) and towards unnecessary wants, thereby increasing unmet needs.
We need to break this cycle of distrust if we want to adequately fund transportation needs (not wants). This requires institutional changes in how transportation services are provided. Asking the same people for more money is unlikely to be very successful. As has been mis-attributed to Benjamin Franklin: Insanity: doing the same thing over and over again and expecting different results.