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High-Speed Rail Math

I’m not the type to talk politics on my blog, but I want to make a few comments on the logistics of canceling Wisconsin’s commitment to high-speed rail, as governor-elect Scott Walker has vowed to do.

Here are the facts:

1. As part of the federal stimulus package, $800 million was set aside for the development of high-speed rail in Wisconsin.

2. Out-going governor Jim Doyle’s office has stated that it would cost $7.5 million (possibly less) annually for the state to maintain and operate the rail lines. This annual cost is the source of Gov.-Elect Walker’s objection to following through with the project.

3. If we refuse the money, it will not go back to the tax-payers who payed for the stimulus, but will rather be given to another state, such as New York, California, or Illinois.

4. If we refuse the money, the state will be required to pay for the work that has already been done on the rail line, which amounts to approximately $100 million.

Source: NPR

Argument I: The Plan to Reject the Funds is Actually More Expensive

1. Using simple math, and ignoring inflation and the time-value of money, it would take just over 13 years for the $7.5 million annual cost to exceed the $100 million penalty. If we make a pie-in-the-sky assumption that the rail line will operate in perpetuity, it seems as if running the rail line is more expensive.

2. Now let us consider the time-value of money. Let’s take the $100 million we would need to spend to get out the project and invest it in the stock market. The “real” inflation-adjusted rate-of-return on a 15-year investment in an S&P500 index fund is 6.3% (Source: The Brookings Institute). This means that the $100 million would produce $6.3 million (in today’s dollars) per year. This cuts the actual “loss” of operating the rail line down to $1.2 million per year.

3. In the scenario in (2), we still keep our initial $100 million stake. With a cost of $1.2 million per year, it would take over 80 years for the cost of keeping the rail project to exceed the cost of dumping it. That number is not adjusted for inflation, so let’s be conservative and say 50 years as a reasonable crossover point.

4. If, after 50 years, the high-speed rail system is still relevant, then it must be an amazing project. If it isn’t relevant, simply discontinue it after 50 years and you will break even with the cost of canceling the project. And, let us not forget, you will have actually gotten those 50 years of rail service!

5. Although it is not clear since internal data is not given on the calculation of the $7.5 million annual cost of running the service, it seems fair to speculate that some of that money will be wages given to Wisconsin citizens. Beyond the general goal of creating more jobs, those people will be paying income tax. This might extend the break-even point even further.

6. Therefore, it is appears that proceeding with the high-speed rail project will be cheaper than stopping the project, assuming it has a reasonable lifetime of 50 years or less and the current cost estimates are steady over that period.

Argument II: It Would Be Better to Defer Rail-Related Costs

1. I don’t think I need to provide a source to state that we are currently in the midst of a major recession.

2. Wisconsin faces a 2-year budget deficit of $3 billion (Source: Milwaukee Journal-Sentinel)

3. It is reasonable to predict that budget deficit problem will become smaller in the long-term future. This is not only based on the idea that we will eventually exit this recession, but also on the practical matter that it is not possible for states to run deficits in the way the federal government does.

4. Wisconsin’s state Constitution requires a balanced budget (Source: NCSL). Therefore any additional costs related to the rail must either (a) be cut out of other programs in the budget or (b) taxes must be raised.

5. If we can expect to have a less difficult deficit in 5-10 years, then it should be easier to absorb $7.5 million (or $1.2 million) per year rail-related costs over the extended future than have to add an additional $100 million of cuts into the massive existing deficit.

6. Conclusion: If paying for the rail’s operating costs allows us to defer the cost over a long period rather than dealing with cutting an additional $100 million from the existing budget (or raising an extra $100 million in taxes), it seems prudent to do so.

According to my reasoning, it will be cheaper and fiscally easier to go through with the rail project. The project should also bring several important benefits that I’ve only touched on: $800 million going into Wisconsin’s economy should fund many new jobs. There’s also the small matter of the existence of the high-speed rail system being worthwhile to its passengers.

This looks like a win-win situation to me; or, if Scott Walker follows through with his threats, lose-lose.

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