Hammond’s Soviet-style rail policies
1 December 2010
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20 December 2010
Government and Institutions
When Transport Secretary Philip Hammond announced last week that the government would procede with three big rail projects – High Speed 2, Crossrail and Thameslink – it was a bit like a Soviet commissar boasting how many new tractors he would be sending to favoured collective farms.
These schemes are almost entirely state-directed: taxpayers will pay for the infrastructure and officials will determine the details of the routes. And like so many socialist grands projets, the returns on the “investment” are likely to be negative, since taxpayers will in all likelihood have to provide substantial operating subsidies to support the new train services (as has been the case with High Speed 1). In addition to these direct costs, there will also be significant deadweight losses resulting from the associated taxation.
As well as imposing enormous costs on taxpayers to fund uneconomic rail schemes, it is also telling that the government has actively prevented major private-sector investment in new transport capacity through its airports policy and its prohibition of Heathrow expansion.
Students of Austrian economics will not be surprised that the misallocation of resources by the state is endemic in the transport sector. Transport is subject to a very high degree of central planning by politicians and bureaucrats, with new rail schemes representing just one example. And Austrians have explained why central planning authorities are incapable of making efficient resource allocation decisions.
In particular, central planners are hampered by the absence of relevant market prices and therefore find it very difficult to calculate accurately costs and outputs (see Mises, 1949, p. 696). While there are prices on Britain’s railways, these are severely distorted as a result of huge government subsidies, the regulation of many fares, the imposition of an artificial structure on the industry, planning controls and so on. A scheme that appears to have positive economic benefits may only do so as a result of other layers of harmful state intervention.
Moreover, since government decision-makers do not own the capital they are allocating they have less incentive to act responsibly or show initiative. They lack the “commercial mindedness” of entrepreneurs (see Mises, 1935). It is also worth mentioning the insights of public choice theory on the behaviour of politicians and bureaucrats – in particular how decision-making processes tend to be captured by concentrated interest groups such as the rail lobby at the expense of dispersed taxpayers.
If the government wishes the UK to have an efficient and competitive transport sector that does not burden taxpayers and which fosters prosperity by lowering the costs of trade, it should reject the central planning mentality, remove distortions, and shift the supply of infrastructure to the private sector.
These schemes are almost entirely state-directed: taxpayers will pay for the infrastructure and officials will determine the details of the routes. And like so many socialist grands projets, the returns on the “investment” are likely to be negative, since taxpayers will in all likelihood have to provide substantial operating subsidies to support the new train services (as has been the case with High Speed 1). In addition to these direct costs, there will also be significant deadweight losses resulting from the associated taxation.
As well as imposing enormous costs on taxpayers to fund uneconomic rail schemes, it is also telling that the government has actively prevented major private-sector investment in new transport capacity through its airports policy and its prohibition of Heathrow expansion.
Students of Austrian economics will not be surprised that the misallocation of resources by the state is endemic in the transport sector. Transport is subject to a very high degree of central planning by politicians and bureaucrats, with new rail schemes representing just one example. And Austrians have explained why central planning authorities are incapable of making efficient resource allocation decisions.
In particular, central planners are hampered by the absence of relevant market prices and therefore find it very difficult to calculate accurately costs and outputs (see Mises, 1949, p. 696). While there are prices on Britain’s railways, these are severely distorted as a result of huge government subsidies, the regulation of many fares, the imposition of an artificial structure on the industry, planning controls and so on. A scheme that appears to have positive economic benefits may only do so as a result of other layers of harmful state intervention.
Moreover, since government decision-makers do not own the capital they are allocating they have less incentive to act responsibly or show initiative. They lack the “commercial mindedness” of entrepreneurs (see Mises, 1935). It is also worth mentioning the insights of public choice theory on the behaviour of politicians and bureaucrats – in particular how decision-making processes tend to be captured by concentrated interest groups such as the rail lobby at the expense of dispersed taxpayers.
If the government wishes the UK to have an efficient and competitive transport sector that does not burden taxpayers and which fosters prosperity by lowering the costs of trade, it should reject the central planning mentality, remove distortions, and shift the supply of infrastructure to the private sector.
7 thoughts on “Hammond’s Soviet-style rail policies”
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Thank goodness the government wasn’t responsible for ‘planning’ the railways from the very beginning; ditto hospitals, ditto schools. It always seems to be easier ‘taking over’ assets that others have established.
Perhaps the IEA should open a book on which of the three transport schemes will make the biggest losses. My money’s on High Speed 2.
I would also put money on HS2 producing by far the biggest losses. To try to prevent this, the government could perhaps introduce an incentive scheme for transport ministers and senior civil servants at the DfT. As often applied to contractors, their pay would be reduced if projects suffered from delays, overruns etc. Perhaps they would then think twice before approving schemes that shunt such costs onto taxpayers.
For various reasons, I doubt if such an ‘incentive’ scheme would work. For a start, I believe these people lust after power rather than cash. And unless the scheme were carefully calibrated, ‘unexpected’ problems could easily produce a negative salary! Also, once you started down this road, might one end up rewarding a minister, say, who helped land the Olympic Games for London with a higher salary? Moreover, by the time a transport scheme was up and limping, the minister who approved it would almost certainly have moved on — indeed, another party might then be in office.
All these objections suggest that perhaps I should have sought a career as a Sir Humphrey.
“If the government wishes the UK to have an efficient and competitive transport sector … it should reject the central planning mentality, remove distortions, and shift the supply of infrastructure to the private sector.”
Hear, Hear. And the biggest distortions relate to roads. Motorways and arterials should be financed totally by tolls. All other roads should be funded by a combination of tolls and distance user charges levied at the petrol pump. No road funding from local rates or other taxes. Where on-street parking is permitted, the owners of the road concerned should levy parking charges sufficient to ensure a normal occupancy rate of 65 to 85%.
If competition is to be truly reflective of the relative costs of the different modes, then of course all subsidies through the provision of infrastrcture by the public sector should be provided at the market value. Has there been a study that compares inter urban travel costs on a per person basis, with regard to road and rail? Let’s leave aside the externalities at this point.
Interesting subject.
Not certain about “inter urban” travel costs, but if you are willing to consider “intraurban” travel costs this may possibly give you a lead. Try: . There are some diagrams giving relative costs of various modes, streetcar/light rail, trolleybus, BRT, commuter rail and selected cars. There is a reference to the author which you may wish to follow up.
Trams and trolleybuses come out well in his calculations.
I believe there are many others, but this one comes instantly to mind – received the original email today before reading your post!
Further to the previous, this is the author reference: “Patrick Condon is a professor at the University of British Columbia and holds the James Taylor Chair in Landscape and Liveable Environments.”
And in the blog of the referenced article, ‘Kris’ has asked if “the up-front capital costs indexed to the longest lasting system?”. He points out that if they are not, the capital costs for the Prius should be multiplied by about five to make them consistent with the longevity of Skybus.