High Speed Rail and Hothouse Capitalism in the New York TImes

Stanford historian Richard White discusses Obama’s high speed rail plan in the New York Times, likening federal commitment to high speed rail to the Pacific Railway Act of 1864. He concludes that the Railway Act saddled the Feds with decades of debt:

As more astute members of Congress came to recognize, the subsidies were a mistake. One described the major drawback of a proposal for the government to guarantee bonds: “If there be profit, the corporations may take it; if there be loss, the government must bear it.”

After 1872, the country turned against the subsidizing of large corporations. It was a little late. Fraud and failure left a legacy that would lead to four decades of government attempts to get back what had so carelessly been given away. In the 1890s, Congress was still trying to recover money from the Pacific Railway.

White is a historian, so he has a specific story to tell, but the point he makes here really describes the basic conundrum of infrastructure finance and privately funded infrastructure. Private investors are looking to make profits and minimize risks. Governments can manage both of those, but they need resources to do it. If profitable parts of the system have to go to investors, governments have to look to taxpayers for money for any guarantees. The possibility arises–more often than not–the governments are then left with bill for capital costs and shut out of the user fees (in this case, ticket money) they can then use to retire any bond debt.

White comments on how foolish the state of California has been in not dealing with these fiscal realities:

Without bond guarantees, private investors, which so far seem more prone to due diligence than the California High-Speed Rail Authority, have yet to put up money. The most astonishing thing is that even as financial problems force California to dismantle its social safety net, eviscerate its educational system, and watch its roads crumble, it has agreed on a plan for high-speed rail that demands substantial local subsidies and certainly will involve further concessions by the state to attract private investment.

He also comments on the tendency of the industry to overpromise benefits:

Proponents of the transcontinental railroads promised all kinds of benefits they did not deliver. They claimed that the railroads were needed to save the Union, but the Union was already saved before the first line was completed. The best Western farmlands would have been settled without the railroads; their impact on other lands was often environmentally disastrous. For three decades California commodities could move more cheaply, and virtually as quickly, by sea. The subsidies the railroads received enriched contractors and financiers, but nearly all the railroads went into receivership, some multiple times; the government rescued others.

HT to Frank Popper