Tory Gattis runs the smart blog, Houston Strategies. In this post, Tory notes Metro’s less-than-robust rail ridership figures (see this earlier post) and then describes litigation that Metro could be facing in the near future if Metro’s ridership trends continue.
Great. Add litigation attorneys as another interest group favoring misguided rail plans. ;^)
The economic lunacy of light rail has been an occasional topic on this blog (here, here, here, and here). However, blogHouston.net has a much more impressive archive of insightful posts over the past year on the foibles of the Houston Metropolitan Transit Authority, which has completely redesigned Houston’s public transit system over the past decade from a flexible one based primarily on bus transit to an inflexible one based primarily on light rail.
Well, as this Anne Linehan post from today points out, that inflexible light rail system is turning out to be a rather expensive one, too. This Chronicle story reports the shocking news:
Metro wants to spend an additional $104 million on its Main Street light rail line to almost double the number of trains and fix costly problems it blames on construction errors.
Metropolitan Transit Authority president and CEO Frank Wilson laid out his wish list to the agency’s board Thursday, shortly after releasing statistics that show surging rail ridership but decreased numbers of bus riders and overall customers.
The cost Metro estimates for the improvements would raise the bill for what Metro calls its Red Line ? the 7.5-mile route from downtown to Reliant Park ? by about a third.
At the same time, the agency is seeking federal money to help build four light rail extensions with a combined price tag of $1.7 billion.
The Chronicle goes on to report that, although light rail ridership has increased, the total number of people using Metro mass transit (i.e., light rail and buses) has declined by 3% over the past year.
Not exactly the return on investment that one would wish for after plunking down $325 million to build the 7.5 mile light rail system.
At any rate, Ms. Linehan uses her skill in translating Metro-speak to explain why Metro officials believe that spending another cool $104 mil on the existing light rail line is a good idea:
“We cut corners building the 7.5 miles of downtown light rail; we have dismantled bus and trolley service in order to feed the light rail; we don’t have a consistent method for collecting fares so we can’t talk about ‘paid ridership;’ we are bleeding passengers systemwide even though Houston’s population has increased; and now we’d like an extra $100 million to help fix our mess.”
Thus, the scam of this publicly-financed rail system continues to eat money voraciously with no end in sight. The economic benefit of light rail is actually highly concentrated in only a few interest groups, such as elected officials who enjoy touting their political “accomplishment,” environmental groups who seek to gain political influence, construction-related firms who can soak the public till, and real estate developers who enjoy the increase in the value of their property along the rail line. Inasmuch as none of these reasons for mass transit are particularly appealing to the vast majority of the electorate, the interest groups disguise their goals behind disingenuous claims that rail lines will reduce traffic congestion, curb air pollution, or — the one I like best — make a city “world class.” In reality, rail transit has never been an efficient means to reduce either congestion or air pollution, and a rail line has certainly never made a city “world class.”
On the other hand, the costs of such systems are widely dispersed among the local population. Thus, the many who stand to lose will lose only a little while the few who stand to gain will gain a lot. As a result, it is usually not worth the relatively small cost per taxpayer for most citizens to spend any substantial amount of time or money lobbying against even an uneconomic rail system. With political leadership more interested in shiny toys than pro forma operating statements, the publicly-financed rail systems continue to infect metro areas like a bad virus, and the cost of treating this civic virus grows larger each month.
Finally, the foregoing analysis does not even count the cost associated with this carnage.
Where is the Lord of Regulation when you really need him? ;^)
As noted earlier here and here, University of Houston economics professor Dr. Barton Smith is the leading expert on the regional economics of the Houston metropolitan area. Dr. Smith is also the director of the UH Institute for Regional Forecasting, and his report on the local real estate market that he gives a couple of times a year to the Houston real estate business community is always one of the most well-attended luncheons in the Houston business community.
All in all, Dr. Smith views the Houston economy to be in a small but steady growth mode that is largely dependent on what happens in the exploration and production sector of the oil and gas industry. While Houston’s housing market is not overinflated, Dr. Smith believes that it is currently suffering from oversupply, although not close to the extent of the dreaded days in the Houston real estate market of the mid-to-late 1980’s. Dr. Smith reminded the audience that high energy prices alone are not enough to create a booming economy in Houston anymore, and noted that, while upstream energy grew at nearly 5 percent last year, the overall regional economy grew only 0.9 percent. Dr. Smith pointed out that this is the result of such factors as slow growth in downstream energy (including refining and petrochemicals) and in non-energy sectors of the regional economy.
This Angry Bear post provides a good overview of the probable impact of current oil prices on the American economy, which segues nicely to this recent Wall Street Journal ($) interview with ExxonMobil CEO Lee Raymond, in which he observes the following:
WSJ: What do you think of ChevronTexaco’s decision to acquire Unocal?
Mr. Raymond: I can never remember an industry consolidating at high prices. But I can remember an industry consolidating at low prices.
WSJ: Some people think prices will keep going up.
Mr. Raymond: Maybe. I’ll bet they’ll be lower at some point.
Let me go back to the last time we went through something like this, which started when the shah of Iran was around. [The shah went into exile in 1979.]
A lot of people don’t remember, but we went through a period of relatively high oil prices, which by today’s standard would be very high oil prices, that lasted for almost five years. It was at that time that we got into our first stock-buyback program.
As today, we had very strong cash flows. There were a lot of people that were talking about buying other companies. Although we didn’t say it directly at that time, we had a view that the price structure could not last — that it was fundamentally unstable, and that it was just a matter of time. And so we concluded that the cheapest oil we could buy was our own. But because of the stock-buyback program, we were roundly criticized on Wall Street. There were no opportunities. We were liquidating the company. All that kind of stuff.
But the facts are that, behind the scenes — we were not going to say it publicly, obviously — we just felt that the price structure couldn’t persist. And, come along December of 1985, it just collapsed. Went from $28 to $10 in two weeks. So when people ask today, what are you going to do with the money, my answer is: We’re not going to do anything stupid. We’re going to manage it like we’ve managed everything else.
WSJ: What is Exxon planning to do with all its cash?
Mr. Raymond: First of all, we’ll sort through it. And secondly, why in the world would we ever tell anybody in advance what we were going to do with it anyway?
The fluctuation of oil prices is a common topic on this blog, and prior posts on the topic can be reviewed here.
Oil prices are a common theme of many posts on this blog, and this interesting Forbes magazine graph does a great job of placing current oil prices in historical perspective over the past 145 years.
Though some grades of crude have recently set record price highs on New York and London futures markets, the Forbes graph shows that, when adjusted for inflation, the price of oil is still only 60% as expensive as it was in 1980.
Traditionally, the NY Times views high energy prices as a failure of the government to regulate the oil barons properly. Thus, when the Times starts talking about a possible bubble in energy prices, take note.
This Jonathon V. Last-Daily Standard article reviews Edward Jay Epstein’s new book, The Big Picture (Random House 2005), which examines the fascinating and ever-changing economics of moviemaking. To give you an idea of what’s going on in Hollywood economics, consider this:
In 1947, Hollywood sold 4.7 billion movie tickets. The studios were hugely profitable movie factories.
Times have changed. . . Television came to compete with the movies, as did home video. And despite a population boom, movie-going fell out of favor. In 2003, only 1.57 billion tickets were sold, a third the number 56 years earlier, while the real cost of making movies increased some 1,600 percent.
It wasn’t just production costs that exploded. Today the average movie costs $4.2 million to distribute and nearly $35 million just to advertise. (The comparable 1947 figures, adjusted for inflation, were $550,000 and $300,000.) Such peripheral costs, Epstein explains, have grown so large that “even if the studios had somehow managed to obtain all their movies for free, they would still have lost money on their American releases.”
How did Hollywood respond? Epstein observes that Hollywood transformed itself from a factory for making movies into a clearinghouse for intellectual property, which is at least as profitable as making movies used to be. The result?
The truth is that, even with terrible movies, the studios have to try hard not to make money. In this way, today’s Hollywood is very much like the studio system of old. The two business models are so favorable that the quality of the product is beside the point. The difference, of course, is that the movies from the studio era were often quite good.
Read the entire review. Hat tip to EconoLog for the link to this review.
Alex Tabarrok over at Marginal Revolution points out that students at at Austin High School in Austin have given school administrators a lesson in the economics of “candy” prohibition:
When Austin High School administrators removed candy from campus vending machines last year, the move was hailed as a step toward fighting obesity. What happened next shows how hard it can be for schools to control what students eat on campus.
The candy removal plan, according to students at Austin High, was thwarted by classmates who created an underground candy market, turning the hallways of the high school into Willy-Wonka-meets-Casablanca. . .
During the prohibition, one student, who asked not to be identified, said that he sold candy at the school and made as much as $50 in a day.
“It’s all about supply and demand,” said Austin junior Scott Roudebush. “We’ve got some entrepreneurs around here.”
The Austin High administration, which won’t elaborate on how much or little it knew about the candy black market, has since replenished the vending machines with some types of candy.
Before moving to Houston 33 years ago, I was born and raised in Iowa City, Iowa where my late father was a longtime University of Iowa Medical School faculty member.
As with most young folks who grow up in Iowa City, I became immersed in the rather remarkable culture of the University of Iowa Hawkeye sports programs, particularly the football and basketball programs. From 1960 through 1971, I attended virtually every Iowa home football and basketball game. Although I have not found much of a market for my services in this area, I remain one of the relatively few experts on those Iowa programs from that era.
What brings all this up is an interesting situation that has been playing out with regard to the Hawkeye basketball team over the past week. Pierre Pierce, who has started something like 82 or 84 games during his three season career at Iowa, was dismissed from the team because of a squabble with a girlfriend that has resulted in a police investigation. Pierce has not been charged with a crime, but the probable reason that Pierce was dismissed from the team rather than suspended pending the outcome of the investigation is that he had been effectively suspended for a season (i.e., red-shirted for a season) a couple of years ago after copping a plea bargain in connection with aggravated sexual assault charges that had been leveled against him.
In this post, Professor Ribstein — from Hawkeye arch-rival, the University of Illinois — makes the point that markets were already making the UI athletic administration’s job somewhat easier in dismissing Pierce:
It must be tough to drop such a player. A team’s success has huge financial implications for a big-time sports school. But it is, still, a school, and discipline of misconduct is an important part of the educational mission. So there’s a conflict of interest at all management levels (not just the coach), because of conflicting criteria for judging their performance. This sounds to me a lot like the corporate social responsibility debate — profits vs. society.
But I’ve argued that markets sort out these conflicts in the corporate area, and markets seem to be working here, as many at Iowa were expressing displeasure with the school’s failure to act against Pierce.
Professor Ribstein is correct in his analysis, although it is just part of the story. Attendance at Hawkeye basketball games — which has been a tough ticket in Iowa for over 50 years — has diminished to the lowest levels in decades this season, despite the fact that the Hawkeye team is a Top 25 team and, as Professor Ribstein mentions in his post, took number one ranked and undefeated Illinois into overtime last week before losing a close game. As with most markets, a variety of factors is contributing to the declining attendance at Hawkeye basketball games, but no one who knows anything about the Hawkeye culture doubts for a second that the primary reason for the decline is many Hawkeye fans’ disdain for Pierce and his primary supporter, Hawkeye basketball coach Steve Alford. The fascinating element to this is that the Hawkeye fans’ disdain may be as much based on Coach Alford’s limitations in evaluating Pierce’s playing ability as it is on Pierce’s apparent character flaws.
Coach Alford was hired at Iowa six years ago with the promise that he was going to take the traditionally very good Iowa basketball program to the “elite” level of college basketball programs. Unfortunately for Coach Alford, the program has actually gone in the other direction during his tenure, and the latest chapter in the Pierce saga is probably going to be the straw that breaks the camel’s back in pushing the UI administration to buyout his contract and bring in a new coach.
Regardless of whether Coach Alford’s decision to support Pierce was based on alturistic “everyone is entitled to a second chance” principles or more grizzled “the team really needs him” principles, the market for Iowa basketball has firmly rejected Coach Alford’s decision. And interestingly, the market is at least partly rejecting Coach Alford’s competence as an evaluator of basketball talent because, as this excellent analysis points out, the reality is that Coach Alford overrated Pierce as a basketball player and Iowa’s team is likely not going to miss him much:
Pierre Pierce was clearly the focal point of Iowa’s offense through its first seven conference games. Since he scored in such an inefficient fashion, his absence in the offense probably won’t be the crisis some are making it out to be. The team going forward will be more balanced and made up of more efficient scorers, so they should be able to pick up the slack from the fallen star.
Stated simply, Pierce is like the .300 hitter in baseball whose on-base average is only .310 and whose slugging percentage is only .320. Because the non-experts in player evaluation believe that a .300 batting average equates with good hitting, the general public is deceived into thinking that the player is a good hitter despite the fact that the less well known but more important on base average and slugging percentage statistics reflect that the player is far below average. Pierce has a relatively high scoring average because he shoots frequently, but his poor shooting percentage and high turnover rate hurt the team more than his high scoring average contributes to it.
So, not only does the Pierce story intersect, as Professor Ribstein points out, the business of college sports and university corporate governance, it also points to the rather remarkable power of markets in effecting change in the entertainment business. The market for Hawkeye basketball recognizes that Coach Alford’s decision to make the overrated Pierce the focal point of the Hawkeye team reflects his limitations as a coach who will be able to fulfill the market’s expectation that the Iowa program remain at least the traditionally very good program that it has been over the past 50 years. That market is demanding a new (and hopefully better) coach, and it will likely get it.
Meanwhile, the market for Hawkeye football is quite strong as Hawkeye Coach Kirk Ferentz has just hauled in a top recruiting class on the heels of three straight major bowl appearances and Top Ten finishes. Interestingly, Coach Ferentz’s turnaround of the Hawkeye football program has been performed essentially by following the football model of the Super Bowl champion New England Patriots, which emphasizes teamwork and making no player the focal point of the team. Call it the “low risk with high upside” model of building a football program.
Yes, markets truly are in everything.
When Milton Friedman writes about economic history, people listen. Writing in today’s Wall Street Journal ($), Professor Friedman observes the following:
To summarize: After World War II, opinion was socialist while practice was free market; currently, opinion is free market while practice is heavily socialist. We have largely won the battle of ideas (though no such battle is ever won permanently); we have succeeded in stalling the progress of socialism, but we have not succeeded in reversing its course. We are still far from bringing practice into conformity with opinion.