Caltrain is a painfully slow train that connects San Francisco to Stanford to San Jose. This double decker train stops every mile and cruises at a speed of about 25 miles per hour. Here is a photo of this bus on rails. This train could move faster if the rails are improved. Who should pay for this project? The NY Times believes that the people of Iowa should pay. I believe that local land owners and Silicon Valley workers should pay for their own train.
The NY Times has published an angry editorial (and this earlier piece) arguing that obstructionist Republicans are blocking a $650 million dollar Federal transfer for improving Caltrain. The editorial hints that Silicon Valley's productivity will be hindered if this investment is not made.
Permit me to make a few points;
1. There are 40 million people in California. If we all pay for this “key project”, then we will pay a one time fee of $16 dollars to invest in this durable capital. This is the immediate proof that California could fund this improvement on its own.
2. If the main beneficiaries are Silicon Valley workers, who will have a faster commute — why don't Silicon Valley firms pay for this themselves? Why don't the commuters pay a higher fee for the train? They can work away inside this sardine box and Facebook and Google's profits rise as their productive workers make progress.
3. In truth, a simple Ricardian model of land would predict that the main beneficiaries will be land owners 10 to 15 miles from Silicon Valley whose land is close to the Caltrain stations. As the train becomes faster, these suburbs will enjoy a sharp growth in housing values. A simple theory of land value capture would say that these land owners should be taxed and the collected revenue can pay for the train. Why do the Federal tax payers get a bill while the local land owners of the land near the now faster train stations get a $ profit windfall as their asset appreciates in value?
You might say; ”Well federal subsidies are merited because if the train isn't built, all of these commuters who would take the train will be driving the highways contributing to congestion and pollution.”
So, this is the theory of the second best. If there was road pricing and pollution pricing, then there would be much less of a justification for subsidizing the “green activity”. Since, we are mis-pricing the roads and the commons, this justifies another federal subsidy? While I acknowledge there is some truth to this last statement, you must agree that the logic is fuzzy at best.
Silicon Valley is a rich region. Why on either equity or efficiency grounds does it merit federal transport subsidies? If this project is so valuable, why hasn't the local region figured out a local funding strategy? My theory is simple. Since the local political leaders thought that Hilary Clinton would be elected President, they chose to delay the project until her team agreed to provide the subsidy. The temptation of waiting for other people's money caused an inefficient delay in launching a productive project (the faster train). Now a game of “chicken” is playing out . I'm sure that speeding up the train is a good public policy. Now, there is a fight over who pays for it. The winners from the local public good improvement should pay!
The New York Times will become a more important newspaper if it is more honest about the cross-subsidies embodied in so many government programs.
Let's end with some arithmetic. Suppose that a magic genie tells you that she will pay 33% of any bill that you face. While you used to buy goods whose benefits > costs, now that the genie is paying for part of your bills, you will buy any good such that benefits > .67*costs (because the genie is paying the remainder). Do you see that you will make inefficient purchases, such as paying $10 for a good that you value at $9? (why? The genie is paying $3.3 of the cost), since 9>6.7 (your cost), you buy the good. Subsidies distort decisions!