The "Double Dip" Recession, Foreign Oil, and a National Rail Network
By Jake Huneycutt
The Upward Society Blog
Economist Nouriel Roubini recently advanced the proposition that higher oil prices, rising government debt, and a lack of job growth will throw us right back into recession once we finally start to escape from the current one. Roubini labeled this potential phenomenon a “double-dip recession.” In essence, it’s a giant “Catch-22” --- we can’t have continued prosperity without cheap oil and we can’t have cheap oil without a bum economy. This unfavorable scenario presents itself to us precisely because American policymakers over the past few decades have ignored our nation’s most pressing concern: the energy crisis.
Undoubtedly, we’re all aware of America’s massive reliance on foreign oil. Instinctively, we all realize this is most likely a detrimental thing. Yet, very few people have ever laid out much in the way of a comprehensive plan to deal with the crisis. There have been some attempts, however.
In 2009, oil magnate T. Boone Pickens unveiled his “Pickens Plan,” which called for the US to develop its wind power and natural gas capacity and increase the usage of more fuel efficient automobiles. It was a noble package and I do believe that American needs to increase usage of cleaner energy sources such as wind and natural gas, but we also need to address some of the underlying infrastructural problems with the American economy.
If we want true energy independence, we have to disentangle the American economy from foreign oil. There is no easy cure that will solve our problems over night. There is, however, a major way to reduce our reliance our dependency on oil while improving America’s infrastructure by increasing the availability of rail transportation and expanding public transit systems. What we truly need is an integrated National Rail Network.
The Eisenhower Interstate System: An American Success Story
Before touching upon a national transit network, however, we should examine one of America’s greatest success stories over the past century: the Eisenhower Interstate System. In a piece about lessening our dependence on oil, you might find it odd that I would bring up the Interstate Highway System. Yet, there’s an important reason to look at the system in order to understand our current dilemma.
The Eisenhower Interstate Highway System was one of the greatest public policy successes in American history and the largest public works project in history. It stands alongside the Roman aqueducts and the Great Wall of China in the pantheon of public works triumphs. It is precisely because of America’s well-developed road system that Americans have become so mobile. The system has also been one of the major factors driving America’s commercial prowess over the past five decades.
The Interstate Highway System was originally conceived as a defense network. President Eisenhower remembered travelling over America’s disjointed and confusing road network as a young man and became a great admirer of the German Autobahn. He wanted the United States to have a similar functioning road system to the Germans. In the five decades since Eisenhower’s presidency, America has never been invaded by a foreign power, but the Interstate Highway System has become a vital link in promoting commerce.
The great beauty of the American road network is that if you live in New York, you can hop on the Interstate and be in Virginia within a number of hours. All you have to do is own a car and gas up. Gassing up, as it turns out, was an important foundation behind the system. Instead of funding the Interstate Highway System through general income tax revenues or through a series of tolls, policymakers implemented a gasoline tax that would theoretically pay for the system. While the link was technically indirect, the heaviest users would, for the most part, pay the most while the lightest users would pay the least.
Why the Road System Works
The secret behind the success of the Eisenhower Interstate Highway System and indeed, the entire American road system, is that it has become a highly integrated network that can be used to travel nearly anywhere in the nation without incurring heavy expense.
This might seem like common sense, but the reasons why the road networks work are often taken for granted. Envision an alternate America where instead of the highly integrated, mostly toll-free road network we have, we instead had to rely on a disjointed, confusing, and not-always-connected series of roads.
Imagine if on a particular trip, you had to (1) get on a free local highway for 30 miles, (2) transfer to a dirt road for 20 miles, (3) get onto a out-of-the-way toll road for 20 miles, (4) take another out-of-way free highway for another 25 miles, (5) get on a local road for about 10 miles, (6) take a toll highway for 10 miles, (7) travel on another dirt road for 10 miles, (8) etc, (9) etc, (10) etc.
The reason why Americans travel the Interstate system in droves is because the ease, connectivity, and inexpensive nature of the system.
If Americans had to endure the scenario presented above in order to get to point A to point B, many Americans might not even bother owning a car. Yet, the alternate reality I presented was more typical of the early American road network. The only reason the automobile has become a way of life in America is because of policymakers’ dedication to expanding, upgrading, and integrating the road network.
A Distortive Funding System
Rather than the energy crisis being a result of the failure of the American road network, in a sense, it is a product of the system being too successful. As a result, policymakers have neglected other forms of transportation in favor of constantly expanding the road network. However, there are several problems with this approach:
(1) The system has become so “overdeveloped” that expansion is more of a hindrance than a benefit
(2) The functioning of the road network is completely dependent upon the availability of cheap oil
(3) The system’s original financing design has been undermined.
Issue #1 is debatable, but it’s difficult to make a case contrary to #2 and #3. While the Interstate Highway System was originally designed to be fully supported by gasoline taxes and a few tolls, in reality, the system has drifted into a different state as policymakers have refused to increase gasoline taxes to match highway expenditures.
At this point in time, roughly 70% of the funding for the highway system comes from gas taxes and tolls, while the remaining 30% comes from public debt, property taxes, sales taxes, and general income taxes. On the Federal level, about 93% of the funding comes from gasoline taxes, but on the state level, things are more skewed, as only 60% of the funding comes from gas taxes. The reason I bring these statistics up is to make a point: the road network that Americans use so frequently is now subsidized heavily via general taxes.
This is an important stat because it displays that the system might very well be distortive, forcing users to favor driving, when they’d much prefer to use alternate means of transportation. Indeed, public transit usage hit a 5-decade high last year as the market (i.e. the collection of American consumers) seems to be screaming out “WE WANT MORE MASS TRANSIT!” Meanwhile, despite record ridership, public transit agencies across the country are being forced to cut routes. The Washington Metro system is one of the best examples, being forced to make nearly $170 million in cuts.
Rail, Public Transit, and the Missed Opportunity
While statistics show rapidly increasing usage of public transit and road transportation systems becoming increasingly congested, it might make sense that policymakers would consider shifting funding towards public transit and away from road building. However, not only has this not occurred, it seems to be almost the complete reverse.
Earlier this year, President Obama and the Congressional Democrats led the charge to pass a $788 billion stimulus package. For months, this package had been premised on the idea that it would both (a) give a boost to the American economy and (b) achieve much needed infrastructure development. Unfortunately, as it turned out, only about 17% of the package was truly dedicated to infrastructure building activities. A sizable chunk of the infrastructure portion went to more highway building activities. A paltry $14.9 billion went to public transit. While this is better than nothing, we can do a lot better.
Ironically, the DC Metro system, which utilizes both rail and bus transportation, is one of the most severely underfunded systems in the nation and has been forced to make deep cuts at a time when there is record ridership. The system barely scraps by every year as lawmakers never dedicate much resources to it, expecting it to “break even” while competing on grossly unequal terms with the auto system. Yet, very little has been done by the Feds or the Maryland or Virginia state governments to improve the system.
Congress could have thrown a lot money at various public transit projects around the nation in the stimulus package and I personally believe that this would have been a much more productive infrastructure investment than the one we received; I’d rather see more comprehensive reform in our transportation system. Just like Eisenhower saw the need for the Interstate Highway system, it’s time for policymakers to realize the need for a National Rail Network
The Benefits of a National Rail Network
Transportation is one of only a handful of areas that the public sector is better suited to handle than the private sector. Transportation systems need centralized planning and design to function properly and they also need gobs and gobs of land to work. It is unlikely that a private actor will ever have the capability of building an efficient transportation system, unfortunately.
All the same, a nation’s transportation system is its livelihood. Without such a system, commerce would be primitive and practically non-existent.
Much of America’s prosperity of the past century would not be possible without our strong transportation systems, but we need to prepare for the future. Oil is becoming increasing expensive to extract. This trend is not going to reverse any time soon, especially as China and India continue their marches towards becoming world powers.
What happens to our current system when gas creeps over $5 per gallon permanently? It will still be there, of course, but it will increase the costs of everything we do and everything we buy. Moreover, the system has become so overburdened at this point, that it’s safe to say that more and more opportunity costs are being incurred each year due to lost time. Our goal should be to minimize costs.
The Eisenhower Interstate System has been a great boon to America, but a National Rail Network would also be a boon to commerce. It would increase the availability of transportation to all Americans. It would increase economic efficiency by taking more cars off the roads. It would also save many families considerable money, as they would need fewer automobiles to sustain their livelihood. Certainly, the fact that rail transportation is much more environmentally cleaner is a positive, as well, but from a sheer economic perspective, it makes sense. What’s more --- the entire system can be funded without costing the American taxpayer all that much if it’s implemented properly.
A Funding Model for a National Rail Network
The initial idea behind the Eisenhower Interstate System is that it would be self-sustaining/self-funding via the gasoline tax. Unfortunately, that assumption has been undermined as politicians have refused to increase the taxes to match the level of road and highway spending. This has created an issue where our road system is substantially subsidized by general taxes.
One benefit that the National Rail Network (NRN) might have over the highway system is that it can be run more like a business. Indeed, for anyone who frequently rides one of the nation’s many public transit systems that should be obvious. Unlike the highway system where customers pay their “dues” in an indirect fashion (via gasoline taxes), public transportation largely operates via user fees. In this sense, public transit system are much more accountable and sustainable systems because there are managers and executives who have to decide what fees are necessary to fund their operations.
Just like the Eisenhower Interstate System, a National Rail Network could be self-funded via usage fees. Unlike the Interstate System, there shouldn’t be quite as large issues with the “self-funding” requirement being significantly undermined. For this very reason, a National Rail Network is not only achievable, but economically feasible. In the short-run, it will require up-front costs. In the long-run, a properly-designed NRN should not significantly contribute to national or state debt. In fact, by creating greater economic efficiencies, it might bring a greater return on capital since greater wealth will raise tax revenues.
The Formulation of a National Rail Network
The Eisenhower Interstate System, in a sense, didn’t originate in the 1950’s. It originated much sooner, as road and highway systems were built across America in the decades preceding the Eisenhower Administration. Eisenhower took the pieces already in place, built some more pieces, and integrated everything into one network. Once the network was in place, Federal and state legislators became dedicated to it and viewed it as a vital link for the promotion of commerce.
Here in America, we already have many public transit systems, particularly in the larger cities. The biggest hurdle to creating a National Rail Network is the need to build a high-speed rail network across the United States. Just as the Interstate System was not built overnight, this high-speed rail system would probably have to be slowly pieced together and integrated with existing public transit systems.
To a limited extent, we have an integrated rail system, but it does not function very well. The design of it is flawed, the technology is poor, the resources dedicated to it are meager, and Amtrak simply does not work very well as it is currently modeled. At the same time, Amtrak is experiencing record ridership even in spite of a terribly flawed model which exposes the need for greater passenger rail in the United States.
The primary elements that are needed for a true, well-functioning National Rail Network are:
(1) High-speed rail for inter-city travel
High-speed rail is absolutely vital to making a National Rail Network a reality. Without it, our rail system is effectively a series of isolated entities. A national high-speed rail network would not only create a new transportation for Americans, but it would also connect our disjointed public transit systems throughout the nation into one grand network, comparable to the Interstate Highway System. Our rail system would immediately become more competitive with the auto system and air travel and the labor costs of operating the trains would decline on a per mile basis.
(2) An Integrated design
In order to achieve this goal of a National Rail Network that serves as a viable transportation option, integration is absolutely vital! The reason many people preferred passenger rail to automobile transportation in the early part of the 20th Century was precisely because the road and highway infrastructure was so thoroughly disjointed, as to make its usefulness limited.
Automobile travel expanded in the 1920’s, 30’s, and 40’s, but it was only after Eisenhower integrated the system in the 1950’s that automobile transportation became the dominant form of transportation in the United States for both short trips and long trips. Passenger rail will only succeed when it becomes similarly integrated and convenient for the American consumer.
(3) Expanded public transportation in major metropolitan areas
Outside of New York City, the public transportation infrastructure in most major American metropolitan areas is relatively bare bones. This is particularly true with rail transportation. Even the Metro system, the public transit network in the nation’s capital, does poor job of providing coverage for the metropolitan area it services. I hope to explore this topic further in future articles.
(4) A dedicated system
Part of the problem with public transit in America is that the systems were put together almost as an afterthought. Political support has been weak and the systems function in a half-ass way. On the other hand, the highway system is a very dedicated system.
We need to become dedicated to developing (or perhaps I should say “re-developing”) public transit systems in America. Amtrak, as it is currently modeled has numerous flaws which I hope to explore more in-depth in future articles. For this article, however, I will mention the two most notable flaws are the lack of high-speed rail and the fact that Amtrak trains are required to share the same rail lines as freight trains. Both of these flaws make Amtrak a much slower transportation option than it should be and drive up costs (particularly labor-related costs, which is one of the major reasons why air travel is only slightly more expensive than Amtrak.
Until we begin to view passenger rail as a primary form of transportation, with resources dedicated exclusively to it, the system will suffer. It’s absolutely paramount that if we want a NRN, we build a rail system that is exclusively dedicated to that purpose, rather than throwing passenger rail on the exact same lines as freight trains.
(5) Reasonable pricing
Finally, the last hurdle comes in the form of “reasonable pricing.” Rail transit suffers from the fact that pricing on many systems is too high. Alternatively, one could argue that rail transit suffers because the pricing on competing systems is too low; that is to say, state subsidies of the highway/road system and air travel cause those forms of transportation to appear less expensive than they truly are to American taxpayers. Hence, it might be time to reformulate our transportation funding model and find a way to create a system more in tune with market realities. In such a system, the price of rail transit would be more reasonable than in the current system.
The National Rail Network and Staying Competitive
An integrated and dedicated National Rail Network (NRN) will expand transportation options for most Americans and provide a net benefit over the long term. Just like the Eisenhower Interstate System, it will help facilitate commerce. It will create greater economic efficiencies by helping to de-clog the highways, lowering oil consumption, and decreasing the costs of transportation. The NRN will also create many infrastructure-related jobs and help lower the amount of pollutants released into the environment. If designed properly, the system should be predominantly self-funded over time.
The most important thing the NRN would provide America with is a safety valve. The American commercial system is largely dependent on highway and road transportation. This in turn creates a huge dependence on foreign oil, which leaves the American economy highly susceptible to increasing oil prices. If gasoline prices drift upwards of $4 - $5 per gallon once again, American industry will be hurt and economic growth will be severely limited. The NRN will allow the United States to limit its exposure to rising gasoline prices and prosper economically in spite of oil prices. For this reason, building a National Rail Network should be considered a much higher priority amongst policymakers.